A recent study conducted by economists at the Federal Reserve Bank of New York and the University of Miami indicate a 95% decrease in home purchases by shell companies and other corporate entities in Florida's Miami-Dade County, according to an article by Nicholas Nehamas and Rene Rodriguez for the Miami Herald.
In 2016, the Treasury Department’s Financial Crimes Enforcement Network launched an investigation into anonymous buyers using shell companies to purchase high-end real estate in Manhattan and Miami-Dade County, because it was “concerned about illicit money” being used in the deals.
The 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 alludes to possible criminal activity.
FinCEN mandated that cash deals with a total purchase price of $1 million or more in the Florida counties of Miami-Dade, Broward or Palm Beach required government review. The total has since been lowered to $300,000, which has notably increased the number of reports.
Significantly, the government is now seeing a large decrease in purchases made by shell companies and unknown buyers, especially in the Miami-Dade luxury real estate market.
The study, Anonymous Capital Flows and U.S. Housing Markets, is the first attempt to measure the effect of FinCEN's rule. The study examined millions of home sales in 17 states between 2010 and 2017 and recorded information on both mortgages and corporate involvement, according to the article.
The study insinuates that although anonymous cash buyers are refraining from home purchases, they have discovered different methods to evade regulators.
From the article:
In Miami-Dade, the first-of-its-kind study found a 95% drop in how much cash shell companies and other corporate entities spent on homes. The decline began immediately after the rule took effect in March 2016.
Regulators “shined the spotlight and at the very same time these buyers have scurried away back into the shadows,” said Sean Hundtofte, one of the co-authors of the study, which analyzed millions of home sales nationwide collected from local property appraisers and other sources by the online real estate firm Zillow.
The staggering fall in transactions may give ammunition to federal officials who argue that secretive real estate deals allow criminals to launder stolen money into the condos and mansions sprouting up around South Florida. Those officials want to see the rules made permanent and expanded nationwide. But the study also reveals the difficulties regulators face in catching those determined to worm their money into the U.S. financial system: Money launderers are skilled at evading the latest traps set by authorities.
The article states that the county's real estate market is still thriving, suggesting that buyers who use shell companies are now “substituting” new ways to buy property.
This illustrates the lengths that some buyers will go to conceal their identity, validating the theory that anonymous real estate transactions using cash are often perpetrated by launders, corrupt public officials, drug lords and white-collar criminals, according to the article.
However, the article states that privacy concerns, protection, tax benefits and limiting legal liability are legitimate reasons to why some people use shell companies, which may also explain the decline in anonymous purchases.
Nevertheless, FinCEN buyer disclosure regulation is a temporary tool used to gather information. As it stands, it appears that implementation of the regulation has reduced the rate of suspicious buying activity in Miami.