On January 13, 2016, the Treasury Department issued a release on new Geographic Targeting Orders (GTOs) for Miami and Manhattan- the focus- luxury real estate. FinCEN is looking to obtain information on entities buying luxury real estate for cash- the reason- money laundering!
If someone wants to “clean” large quantities of cash- there is no better way than investing in “dirt”- or in this case- luxury real estate. The buyer, usually a shell company, pays cash for the acquisition, holds the property for a time, and then sells it. The resulting profits are now neat and tidy. The shell companies can often have very complicated structures with off-shore entities and trusts in various countries around the world.
In order to mitigate the potential for money laundering, FinCEN has announced that it will require Fidelity National, First American, Old Republic and Stewart- the Big Four of the title underwriting world- to identify and report the true “beneficial owner” behind the legal structures and layers often created to preserve anonymity. FinCEN acknowledges that its efforts to step up monitoring and crack down on corrupt foreign officials or transnational criminals is the next step in the process- mortgage markets were first and have been subject to disclosures which make fraud more difficult to pull-off.
The American Land Title Association, the advocacy organization for the title industry in which the title companies, and law firms and lawyers, etc. participate, is meeting with FinCEN to establish the rules by which reporting would work. This will lead to spill-over with the attorneys and realtors who represent the buyers and sellers on these transactions. There are questions pending as to the level of scrutiny for the entities, the costs associated with such research and the effects on the luxury real estate market- will it chill the buying and selling of luxury property?
The reporting from the title companies on the beneficial ownership of the entities to FinCEN would then be passed along to law enforcement for review and input into myriad databases. The GTOs will become effective beginning March 1, 2016 through August 27, 2016. A copy of the FinCEN release is attached.