In the post financial crisis era, when anti-fraud units from various law enforcement agencies stepped up activity to prosecute real estate related crimes; real estate continues to be a vehicle for scammers and fraudsters. Although mortgage fraud and identity theft have been the mainstay, money laundering through real estate has not received the same attention. That is until this year, when a pilot program was initiated to identify money laundering in residential real estate. The program was ordered through the Financial Crimes Enforcement Network of the US Department of the Treasury (FinCEN), which is tasked with the protection of our financial system by primarily combating money laundering (fincen.gov).
FinCEN’s concern is the laundering and/or structuring of money through all cash deals into luxury real estate, primarily through shell companies. Through the use of LLC’s or other business structures, individuals can hide assets anonymously. According to FinCEN, “Money laundering” is the disguising of funds derived from illicit activity so that the funds may be used without detection of the illegal activity that produced them.”
A 2008 FinCEN report (Money Laundering in the Residential Real Estate Industry: Suspected Money Laundering in the Residential Real Estate Industry; April 2008) found that suspicious activity reports (SAR) remained steady through 2002. However, began to increase in 2003, and sharply rose through 2005; the increase was significantly more than the rapidly expanding real estate market at that time. Findings of the report indicated that over 75 percent of those engaging in money laundering activities were unaffiliated with the real estate industry.
The program to identify money laundering in residential real estate seemed to be the next logical step in a series of investigations. As a result, FinCEN announced Geographic Targeting Orders (GTO) on January 13th of this year. The GTO was enforced from March 1st, 2016 through August 27th, 2016. And required title companies to report the individuals behind the companies buying high end real estate without financing (all cash deals), located in Manhattan and Miami-Dade County.
In an April 12th FinCEN news release, former FinCEN director Jennifer Shasky Calvery stated “The analysis and DOJ forfeiture cases continue to show 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.”
On July 27th, FinCEN announced the expansion of the GTO, beginning August 28th and lasting for 180 days. The geographic areas were expanded to include: New York City; Miami-Dade, Broward and Palm Beach counties; Los Angeles County; San Francisco, San Mateo, and Santa Clara counties; San Diego County; and Bexar County, Texas.
Increased scrutiny of money laundering in residential real estate compelled the National Association of Realtors® to issue Anti-Money Laundering Guidelines for Real Estate Professionals (realtor.org; November 15, 2012). The voluntary guidelines state that the real estate agent’s exposure is generally “mitigated” because most real estate transactions involve financing and mortgages (which are regulated). However, when encountering risk factors that fall outside the norm, NAR encourages due diligence and reporting of suspicious activity.
By Dan Krell
Copyright © 2016
Original published at https://dankrell.com/blog/2016/08/05/money-laundering-and-real-estate/
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.