The U.S. Treasury Department announced proposed rules to curb the use of shell companies and laundering of illicit money through American real estate.
Once enacted, one of the rules would require companies to declare their beneficial owners — individuals or entities with 25% or more controlling interest in the companies — to the Financial Crimes Enforcement Network (FinCEN), the Treasury agency responsible for monitoring potential illicit corporate activity.
The rule would apply to most limited partnerships, limited liability companies and business trusts that are registered in the United States and foreign corporate entities that do business in the country.
“Few jurisdictions in the United States require legal entities to disclose information about their beneficial owners — that is, the people who actually own or control a company — or the persons forming them,” FinCEN said in a public statement. “This creates opportunities for corrupt actors, criminals, and terrorists to remain anonymous while facilitating illicit activity through legal entities in the United States.”
American real estate, especially in places like South Florida and New York, have long been an attractive option for bad actors to park illicit cash. Currently, real estate deals involving mortgages are scrutinized and reported to FinCEN by the banks involved. However, gaps remain. For instance, smaller non-conventional lenders are often not equipped to do thorough due diligence.
All-cash transactions, moreover, are subject to very little regulation besides FinCEN’s Geographic Targeting Orders. GTOs require title-insurance firms to report all-cash residential real estate transactions of over $300,000 in a dozen large U.S. counties (including Miami-Dade, Broward and Palm Beach).
FinCEN on Monday issued a request for public comment to address how best to curb corrupt practices in the real estate market. Some options the agency is considering include not having any minimum threshold for reporting under the GTOs and bringing commercial non-residential real estate transactions under its purview.
“Increasing transparency in the real estate sector will curb the ability of corrupt officials and criminals to launder the proceeds of their ill-gotten gains through the U.S. real estate market,” said Himamauli Das, acting director of FinCEN.
The proposals announced earlier this week come in the aftermath of an array of news investigations, including the Panama Papers, the FinCEN Files and more recently, the Pandora Papers, all of which uncovered how networks of financial institutions and lawyers aid the rich and sometimes corrupt to hide and move their assets around the world.
The proliferation of gleaming residential towers in South Florida has partly been powered by cash, sometimes illicit, flowing in through anonymous shell companies. As the high-end market booms, developers focus on luxury condos to meet the demand of these wealthy investors, pushing home prices beyond what most people can afford and increasing the wealth-gap between the have-nots and the haves.
In March this year, Florida Republican Sen. Marco Rubio reintroduced a bill that aims to “combat illicit finance in foreign real estate investment and increase affordable housing investment.”
It is yet unclear what effect these rules would have on the corporate world in general, if at all, but instances in other countries perhaps provide a clue: Scotland has a legal vehicle called Scottish Limited Partnerships designed for farmers. The number of SLPs mushroomed around 2013 and they were being used to move all kinds of illicit cash, according to multiple investigations by British news agencies, including the Guardian. In the aftermath of the Panama Papers, when the United Kingdom required SLPs to publicly declare their owners in 2017, the number of SLPs plummeted.
Corporate accountability advocates welcomed the moves by FinCEN.
“We warmly welcome this proposed rule and will continue to engage with FinCEN to ensure a beneficial ownership database that is comprehensive, verified, and accessible to law enforcement and tax authorities, consistent with the law’s intent,” said Ian Gary, executive director of the financial transparency advocacy group FACT Coalition.
“Effective regulations for the real estate sector should not only get behind who is the true owner of an anonymous company purchasing real estate, but should also include due diligence requirements for those facilitating transactions.”
The proposed rules are part of a broader effort to curb corruption that the Biden administration announced Monday and come roughly a year after federal legislators passed the Corporate Transparency Act, the culmination of nearly a decade-long effort by financial transparency advocates and lawmakers to update money-laundering laws in the country.
