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Feds target luxury real estate wire transfers in money laundering investigation

Nearly one-third of cash sales tied to "illicit activity"

The federal government is again expanding its investigation into whether foreign buyers are using shell companies to buy luxury U.S. real estate to launder money after its investigation found that potentially illicit activity is behind more than 30% of cash purchases from foreign buyers in select markets.

Last year, the Treasury Department’s Financial Crimes Enforcement Network launched an investigation into unknown buyers using shell companies to buy high-end real estate in Manhattan and Miami-Dade County, because it was “concerned about illicit money” being used in the deals.

The results of that initial investigation showed more than 25% of transactions covered in the initial inquiry involved a “beneficial owner” who is also the subject of a “suspicious activity report,” which is an indication of possible criminal activity.

The initial investigation led FinCEN to expand the investigation to include all of New York City, Los Angeles, San Francisco and several other areas.

Earlier this year, FinCEN said that it planned to continue the investigation past its initial end date because of the number of questionable transactions reported to the agency.

Now, FinCEN is expanding its investigation again, and will now target what some are calling a “gaping loophole” in its initial investigation – wire transfers.

The expanded investigation involves the issuance of “Geographic Targeting Orders,” which require title insurance companies in the designated areas to identify the actual person behind shell companies used to pay all cash for high-end residential real estate.

Previously, title insurance companies were required to report a cash purchase above a certain dollar threshold if the deal involved the use of currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, or a money order in any form.

Now, title insurance companies will be required to report certain cash purchases involving wire transfers, as well.

Additionally, FinCEN announced that it is expanding its investigation to include the city and county of Honolulu, Hawaii.

Previously, cash deals in New York City, Miami, Los Angeles, San Francisco, San Diego, and Bexar County, Texas, which includes San Antonio, were included in the investigation.

The monetary thresholds that trigger the required reporting are different in each area, and reflect of the real estate market in the area.

In Manhattan, for example, title insurance companies are required to reveal the individual behind a cash transaction on all sales of $3 million and above, while in other boroughs of New York City (Brooklyn, Queens, Bronx, and Staten Island), the reporting threshold is $1.5 million.

For Honolulu, FinCEN said the reporting threshold is $3 million and above.

FinCEN said that within the “narrow scope” of its initial investigation, approximately 30% of the reported transactions involve a beneficial owner or purchaser representative who was also the subject of a previous suspicious activity report, which necessitates expanding the investigation even further.

“This corroborates FinCEN’s concerns about this small segment of the market in which shell companies are used to buy luxury real estate in ‘all-cash’ transactions,” FinCEN said in its announcement.

“In addition, feedback from law enforcement indicates that the reporting has advanced criminal investigations,” FinCEN continued. “The expanded GTOs will further help law enforcement and inform FinCEN’s future efforts to assess and combat the money laundering risks associated with luxury residential real estate purchases.”

While the burden of identifying the actual buyers behind these cash deals falls on title insurance companies, FinCEN again said that title companies are not the target of the investigation, and added that it appreciates the title companies’ continued assistance.

“Through this advisory and other outreach to the private sector, FinCEN, industry, and law enforcement will be better positioned to protect the real estate markets from serving as a vehicle to launder illicit proceeds,” FinCEN Acting Director Jamal El-Hindi said. “FinCEN also thanks Congress for its modification of the Geographic Targeting Order authority, the first use of which will enable FinCEN to collect further information to combat the potential misuse of shell companies to purchase luxury real estate.”  

Here’s a full breakdown of the reporting requirements by area, via FinCEN’s announcement:

Cash deals with a total purchase price of:

  • $500,000 or more in the Texas county of Bexar
  • $1,000,000 or more in the Florida counties of Miami-Dade, Broward, or Palm Beach
  • $1,500,000 or more in the Boroughs of Brooklyn, Queens, Bronx, or Staten Island in New York City, New York
  • $2,000,000 or more in the California counties of San Diego, Los Angeles, San Francisco, San Mateo, or Santa Clara
  • $3,000,000 or more in the Borough of Manhattan in New York City, New York
  • $3,000,000 or more in the city and county of Honolulu in Hawaii

In a statement, Michelle Korsmo, the chief executive officer of the American Land Title Association, said that the group’s members recognize the importance of their role in the FinCEN investigation.

“Since January 2016, ALTA members have collected this essential information to help FinCEN identify money laundering schemes and the illegal purchase of real estate,” Korsmo said.

“So far, the data collected has helped the government identify suspicious transactions and advanced criminal investigations,” Korsmo added. “FinCEN continues to recognize the essential role title insurance companies play in providing information about real estate transactions of concern. We will continue to work with our members and FinCEN to collect the needed information as efficiently as possible.”

For much more on the FinCEN investigation, click here and here.

[Update: This article is updated with a statement from the American Land Title Association.]

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