Are luxury condo purchases hiding dirty money?

The US Treasury Department is investigating the possibility that large amounts of dirty money coming into the United States from overseas may be used to purchase luxury real estate in some of America's largest cities.

Rickey Rogers/REUTERS
The setting sun reflects off of the twin towers of Time Warner Center in the Manhattan borough of New York City, November 22, 2015.

It's about to get a lot harder for wealthy buyers to anonymously purchase multi-million dollar homes in at least two US cities.

Federal authorities announced Wednesday that they will begin identifying secret buyers of expensive properties in New York City and Miami-Dade County. The anti-money laundering crackdown will target foreign buyers who use shell companies to purchase high-end properties as a way to hide dirty money.

“We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium US real estate to safely and secretly invest millions in dirty money,” Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network, a unit of the Treasury Department running the initiative, said in a statement. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address.”

The new, temporary policy, which runs from March through August, will require title insurance companies to identify buyers' identities and report those names to the federal government. The names of buyers will not be made public. The requirement applies to buyers who pay $1 million or more in cash for homes in Miami-Dade and $3 million or more in cash for homes in New York.

It comes as unwelcome news to the real estate industry, which has profited enormously from a network of secret, ultra-wealthy buyers.

This marks the first time the federal government has required anyone to disclose names behind all-cash transactions, and it reflects growing concerns that multi-million dollar properties in the US are being used as safe deposit boxes for dirty money from abroad.

"Purchase of luxury real estate in cash seems to be the new '$5 million mattress,'" says Jessie Allen, assistant professor of law at the University of Pittsburgh School of Law. "The obvious concern here is money laundering and are people using luxury real estate to avoid the reporting required when a large cash deposit is made." 

An investigation conducted by The New York Times in 2015 revealed that nearly half of homes that sold for more than $5 million across the country were purchased by shell companies. That figure would probably be higher in high-end real estate markets like New York and Miami.

In fact, using shell companies, or limited liability companies, to hide a buyer's identity is actually relatively common, and legal. But the practice could drive up real estate prices in some markets, and contribute to real estate booms.

Federal authorities are also concerned that the practice enables foreign buyers to easily find a safe haven for illicit money in American real estate.

At the Time Warner Center near Central Park in New York, for example, dozens of owners shielded by shell companies were actually found to be under investigation by the government. Among them were former Russian senators and a businessman tied to the Malaysian prime minister, according to the Times' investigation.

“We are concerned about the possibility that dirty money is being put into luxury real estate,” Ms. Calvery said. “We think some of the bigger risk is around the least transparent transactions.”

But Professor Allen says the new regulations could raise privacy concerns.

"Anytime government requires more reporting on something that hasn’t been reported, privacy concerns are raised ... we should remember that the whole idea of private property is to create some limit where the government cannot step."

Nonetheless, as it stands, the new policy doesn't appear to overstep bounds.

"This particular context doesn’t raise big constitutional red flags to me, but I can see if you move the bar further down the same road it might eventually become problematic.”   

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