For those who are laundering ill-gotten gains via real estate transactions, regulators are about to make life much, much harder.
Geographic Targeting Orders (GTO) are temporary regulations put in place by the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). The overall point of the orders is to understand and curtail money laundering, tax evasion, and terrorism financing on certain types of transactions. “Geographic” means the orders target specific areas versus the entire country.
On Nov. 15, FinCEN expanded a GTO on residential real estate transactions purchased in cash (actual cash, various checks, and virtual currencies) by foreign shell companies and domestic LLCs mostly. This latest expansion now includes the Dallas-Fort Worth area along with 11 other metros – Boston; Chicago; Honolulu; Las Vegas; Los Angeles; Miami; New York City; San Antonio; San Diego; San Francisco; and Seattle.
The GTO requires Title Companies to not only report on the transaction, but the actual selling price and the identity of the beneficial owner of the property (person with over 25 percent ownership of the LLC) and the person representing the LLC. Identities are verified via copies of passports, driver’s license, or other government-issued I.D. The country of origin of the LLC or shell company is immaterial with reporting required regardless of the LLC’s incorporation location. Why title companies? They’re a common element in real estate transactions and so act as a clearing house for information.
You may recall in January 2018, the UK government instituted an “unexplained wealth order” to delve into suspicious real estate transactions. The quickly went after and seized the real estate assets of the wife of an Azerbaijani banker imprisoned for a £2.2 billion bank fraud.
In prior FinCEN orders, the number of metropolitan areas was fewer and the threshold of reporting was set per metro and were typically transactions above $1 million – except San Antonio where it was $500,000. The latest GTO sets the limit at $300,000 and above regardless of metro area. Tightening the noose, I’d say – especially in high-priced areas like Manhattan, Hawaii, and California metros where a $300,000 floor equates to pretty much all transactions.
FinCEN estimates that around 20 percent of all U.S. residential real estate transactions for properties housing between one to four families are purchased through a shell company or LLC. In February 2017, FinCEN said that within that 20 percent, “… about 30 percent of the transactions covered by the GTOs involve a beneficial owner or purchaser representative that is also the subject of a previous suspicious activity report.” This is obviously a huge hole for criminals to wash the proceeds of criminal enterprises.
On May 24, 2016, Jennifer Shasky Calvery, Director FinCEN testified before the House Financial Services Task Force investigating Terrorism Financing:
“The money laundering risks posed by real estate are not theoretical. Analyses by FinCEN and the Department of Justice regarding asset forfeiture cases continues to reveal corrupt politicians, drug traffickers, and other criminals using shell companies to purchase luxury real estate with cash. We see wire transfers originating from foreign banks in offshore havens where shell companies have established accounts, but in many cases we also see criminals using U.S. incorporated limited liability companies to launder their illicit funds through the U.S. real estate market.”
The first real estate GTOs appear to have begun in 2015 and initially included the boroughs of New York City and the counties surrounding Miami. In 2016, the order was expanded to include Los Angeles and San Diego counties, the counties surrounding San Francisco, and San Antonio’s Bexar County. Each order lasts six months, but since they’ve been introduced for real estate transactions, they’ve only been renewed and expanded. No metro area appears to have fallen off the list of tracked locations and the dollar amount has shrunk precipitously.
The effects of this order will be interesting to see in Dallas real estate and DCAD.
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