Treasury Urged to Scrutinize Foreign Real Estate Buyers for Money-Laundering Risk

In a broad show of support for increased scrutiny of foreign real estate buyers in the United States, 17 nonprofit organizations on Tuesday urged the Treasury Department to require that the real estate industry verify the identities of buyers and screen them for potential money-laundering risk.

The request, contained in a letter sent to the Treasury Department’s Financial Crimes Enforcement Network, asked for the repeal of a 2002 temporary exemption from provisions of the Patriot Act that had been granted to the real estate industry.

As signed into law in 2001, the Patriot Act would have required real estate brokers and others involved in real estate closings and settlements to conduct due diligence checks on their customers. After heavy lobbying by the industry, the industry was exempted from the final regulations. The letter, signed by a coalition of 17 diverse groups including Transparency International, Global Integrity and Global Witness, cited a recent series in The New York Times, Towers of Secrecy, which documented how wealthy international buyers, including politicians and those who have been the targets of government inquiries, had used shell companies to purchase luxury New York condos.

The letter said that The Times articles “demonstrate the lack of due diligence by the real estate industry into buyers’ identities, backgrounds or the source of their funds.” Shruti Shah, a vice president for one of the organizations, Transparency International-USA, said in a telephone interview,

“The U.S. should not be providing a red carpet for dirty money.” Responding to the letter, Steve Hudak, a spokesman for the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, said in an emailed statement that the agency agreed with the concerns expressed in the letter, calling potential criminal abuse of the real estate sector a “fundamental priority.” Even as the United States has urged other countries to help it crack down on Americans hiding money abroad, recent Justice Department cases and congressional reports have said that foreign money tied to corruption has been found in United States real estate, moved into the country using shell companies.

The letter, for example, cited a 2010 report by the United States Senate Permanent Subcommittee on Investigations which showed how corrupt foreign officials and their associates had undermined anti-money-laundering controls, using ill-gotten money to purchase real estate in the United States. The real estate industry has said it adheres to its own voluntary guidelines in performing background checks on purchasers. In the series, which focused on condominium purchases overlooking Central Park at the Time Warner Center.

The Times quoted several people involved in luxury real estate transactions who acknowledged performing few background checks on buyers beyond determining their financial wherewithal to purchase luxury condos worth tens of millions of dollars. More than half the time, the condos are purchased under the names of limited liability companies that mask the identities of the true owners. Current law in a number of states, as well as offshore jurisdictions, does not require disclosure of the identities of the beneficial owners of these entities.

The letter also asked for the strengthening of rules proposed in August 2014 requiring banks and other financial institutions to increase scrutiny of “legal entity customers” which include these limited liability companies. In its statement, FinCEN said the agency was “currently engaged in a rule-making to require banks and other financial institutions to collect beneficial ownership information to help address the misuse of legal entities in the financial sector as a whole.”

As for imposing Patriot Act requirements on the real estate sector, the agency said, “We also continue to explore which requirements imposed on which actors in the real estate sector will best add to transparency beyond what can be obtained via existing and proposed requirements on other financial institutions, and via traditional law enforcement methods.” Currently, while banks are required to “know customers,” there is no obligation for financial institutions to determine the identity of the beneficial owners of such legal entities, a loophole that may permit them to bypass normal bank scrutiny. The group also called for registries that enable law enforcement organizations and the public to look up the beneficial owners of limited liability companies and other corporate entities.


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