In 2016 the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) implemented its Geographic Targeting Orders, or GTO (January 2016 announcement here)!
What was the purpose of this 2016 reporting rule that required title insurance companies in specific high-end residential real estate markets around the United States, to drill down and find who the actual owners of an LLC were when it was being used to purchase residential real estate for all-cash?
‘…Concerned about illicit money flowing into luxury real estate, the Treasury Department said Wednesday that it would begin identifying and tracking secret buyers of high-end properties.
The initiative will start in two of the nation’s major destinations for global wealth: Manhattan and Miami-Dade County. It will shine a light on the darkest corner of the real estate market: all-cash purchases made by shell companies that often shield purchasers’ identities.
It is the first time the federal government has required real estate companies to disclose names behind all-cash transactions, and it is likely to send shudders through the real estate industry, which has benefited enormously in recent years from a building boom increasingly dependent on wealthy, secretive buyers.
The initiative is part of a broader federal effort to increase the focus on money laundering in real estate. Treasury and federal law enforcement officials said they were putting greater resources into investigating luxury real estate sales that involve shell companies like limited liability companies, often known as L.L.C.s; partnerships; and other entities.
Officials said the new government efforts were inspired in part by a series last year in The New York Times that examined the rising use of shell companies as foreign buyers increasingly sought safe havens for their money in the United States…‘ (Source)
Have The GTO’s Had The Desired Impact Stemming The Tide Of All-Cash Transactions In An LLC For Residential Real Estate In Specific Locales (Anti-Money Laundering)?
Prior to the implementation of GTO in 2016, all-cash residential real estate purchases into an LLC accounted for approximately 10% of dollar volume.
Post-implementation of GTO, the dollar volume in this transaction category fell significantly. Is this drop merely a function of the declining state of the high-end real estate market, or can it specifically be tied to this ant-money laundering edict?
As statistics can at times be used to tell a variety of different stories with differing conclusions, I provide some of my takeaways from the report issued May 28, 2018 by the Federal Reserve Bank of New York titled ‘Anonymous Capital Flows and U.S. Housing Markets‘
To read the report in its entirety please click on the title in the prior sentence.
‘Figure 1 (above) shows that purchases by corporate entities nationwide fall significantly after the first announcement of FinCEN policy, while there is no immediately noticeable similar drop in total purchase volumes. That is to say, all-cash corporate acquisitions start off at approximately 10% of total purchases by dollar volume, then they fall to approximately 2.5% of total volume. At the same time, there is no visually discernible change in total volume. While the demand from corporate buyers falls, it is possible that other buyers may replace them, and some anonymityseeking buyers may start buying in their own name or utilize alternative methods to hide their identity. Later, we test if there is evidence of substitution through buying lower priced properties, avoiding title insurance, or using trusts. We will find some evidence of (short-lived) substitution to avoid contact with the US regulatory system.’
‘The evidence on the whole suggests that anonymity-preferring buyers made up the majority of corporate cash purchases in the US prior to the policy change.’
‘Given the large estimated magnitudes of changes we find around the initial policy announcement, it appears that capital flows into U.S. residential real estate through anonymous shell companies were largely turned off after the change in FinCEN’s regulatory stance. Some buyers may purchase in their own name instead, others may choose to invest elsewhere or in alternative asset classes.’
‘Our findings indicate a significant change in anonymous capital flows into the US housing markets after a new policy is introduced to identify owners of LLCs purchasing high-end properties with cash. When buyers are not able to hide their identity from US authorities, these anonymous capital flows mostly disappear and are accompanied by coincident declines in premium housing prices.’
‘Our findings indicate that the market value of luxury properties has decreased by billions of dollars, and particularly in the areas most affected by regulation.’
Michael Haltman, President
Hallmark Abstract Service
Phone: (646) 741-6101