A trial programme launched by the US Department of the Treasury will affect "all-cash" purchasers of US$million residential real estate in Manhattan and Miami-Dade County.
On 13 January 2016, the United States Department of the Treasury issued Geographic Targeting Orders (GTOs) that will temporarily require US title insurance companies to identify the natural persons behind companies used to pay "all-cash" (no financing) for high-end residential real estate in Manhattan, New York and Miami-Dade County, Florida.
RATIONALE FOR THE GTOS
The US Government is concerned that these all-cash, high-end residential purchases may be conducted by individuals attempting to hide assets as part of money laundering or other fraudulent schemes. The expectation is that this disclosure requirement will assist law enforcement with combating money laundering in the real estate sector. By establishing the natural persons involved in these targeted transactions, the Treasury is hoping to identify individuals engaged in illicit activities who would otherwise be hidden behind the entities utilised for these acquisitions.
NARROW FOCUS
There has been a large volume of high-end condominium purchases by foreign buyers using a limited liability company, limited partnership, S corporation or other single purpose entity that enables the actual ownership to remain undisclosed. While most of these transactions involve purchasers who simply like the stability of US real estate and are not involved in fraud or money laundering, there has been significant media focus on flight capital where the investments are from questionable sources.
The GTOs form a 180 day pilot programme that launched on 1 March and is initially confined to Manhattan and Miami-Dade County as these are two major markets for high-end residential properties. Depending on the results of this initial programme, the duration, geographic scope and class of real estate covered by the GTOs could all be expanded in the future.
RATIONALE FOR CARVE OUTS FROM REPORTING
The reporting is to be done initially by title companies. Since all-cash transactions do not require the purchase of title insurance, it is conceivable that many transactions, previously undertaken with title insurance, will be completed without title insurance. While this is not something that we would recommend, it is an option for purchasers who do not want their transactions reported.
The reporting is currently confined to all-cash transactions, which are defined in the GTOs as a transaction without a bank loan or other third party financing, when payment of any portion of the purchase is made by cash, cashier's cheque, certified cheque, traveler's cheque or money order. Wire transfers are not considered as all-cash for the purposes of the GTOs. The thinking, as articulated by the Treasury, is that banks are already able to monitor wire transfers and lending transactions through existing reporting requirements.
The covered class of assets is residential real estate costing US$3 million and over if located in Manhattan, and US$1 million and over if located in Miami-Dade County, as this asset class has received the most attention as a conduit for illicit investment. This means lower cost residential and commercial transactions are not currently subject to the new reporting requirements. As this is a trial programme, however, conceivably the scope may change after the 180 day trial period.
INFORMATION TO BE DISCLOSED
For those transactions that are subject to the reporting requirements under the GTOs, the title companies will be required to obtain and record certain information about the representatives and/or owners of the purchaser. For the individual primarily responsible for representing the purchaser, and each beneficial owner of the purchaser, this information includes a copy of their driver's license, passport or other official identifying documentation.
A beneficial owner is defined under the GTOs as each individual who, directly or indirectly, owns 25 per cent or more of the equity interests of the purchaser. Additionally, if the purchaser is a limited liability company, the name, address and taxpayer identification number of all its members must be disclosed by the title companies on the forms filed with the US Government under the GTOs.
IMPACT
Most transactions of this nature are undertaken with these opaque, single purpose entities to provide privacy and confidentiality for perfectly legitimate reasons. The purchaser of a high priced residence may have valid reasons for keeping that acquisition private and free from disclosure to the general public. For these law-abiding real estate purchasers, there should not be cause for concern regarding the new reporting requirement under these GTOs.
FinCen Takes Aim At Real Estate Secrecy In Manhattan And Miami
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