By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.
Last week, one day before the Financial Accountability and Corporate Transparency Coalition (FACT Coalition) published a major study discussing the failed status quo and efforts thwart money laundering, Treasury’s Financial Crimes Enforcement network (FinCEN) renewed and (slightly) extended modest measures targeting shell companies purchasing luxury properties in seven major metropolitan areas.
The juxtaposition of the magnitude of the money laundering problem– discussed in the FACT report– and FinCEN’s limited, almost laughable measures– which target luxury real estate transactions undertaken by shell companies– caught my eye. Regular readers are of course well aware of the efforts made by Trump and his minions to thwart and roll back financial regulation– as I discussed in this previous post– Financial Regulatory Rollback Proceeds.
But it’s worth repeating a point I’ve made many points before. FinCEN’s initial limited measures were drafted not on his watch, but on that of his predecessor– in January 2016– and have been renewed twice since then. So the inadequacy of this reporting framework cannot solely be laid at the feet of Trump’s administration– which in February, did renew the extant regulations. And this week, FinCEN yet again renewed and ever-so-slightly extended the measures. So this is an area where regulation has increased– albeit marginally– under Trump.
The renewal came as a bit of a surprise to some, as it targets luxury real estate transactions– which, as everyone knows, is a sector Trump knows well (and was central to the development of his business reputation and portfolio).
In the interests of keeping this post short and focussed, I intend to focus on the FinCen measures. I encourage readers interested in the broader issue of money laundering to look at FACT’s study– which makes for sobering and depressing reading.
FinCEN Measures
First, some more background, as reported in this Housing Wire account, Feds target luxury real estate wire transfers in money laundering investigation:
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.
The FinCEN investigation led it to draft limited reporting requirements. The initial measures– as implemented in 2016 and subsequently renewed twice– were limited. In addition to their circumscribed geographic scope, they only triggered reporting requirements for real estate transactions made using hard cash, money orders, and personal checks, that were higher than specific thresholds set for each targeted market, ranging from $500,000 for the Texas county of Bexar, and topping out at $3 million for Honolulu and Manhattan, according to Housing Wire.
Allow me to turn to the Miami Herald’s account– Feds widen hunt for dirty money in Miami real estate for more on this score:
The rules, previously so limited in scope that they applied only to a few hundred deals, will now cover every big-ticket cash transaction by shell companies in seven major markets. They are the South Florida counties of Miami-Dade, Broward and Palm Beach; all five boroughs of New York City; San Antonio, Texas; Honolulu (included in the order for the first time); and Los Angeles, San Diego and San Francisco.
Incredibly, wire transfers were excluded from the reporting requirements, as FinCen lacked authority to monitor wire transfers. Congress plugged that gap earlier this month when it passed legislation that provided the necessary authority.
Over again, over to the Miami Herald:
John Tobon, who leads a team of Department of Homeland Security investigators in South Florida, said the move is a crucial first step in allowing law enforcement to monitor funds moving electronically. After the first order, his agents observed home buyers immediately come up with “countermeasures” to avoid the disclosure requirements, including the use of wire transfers, Tobon said.
“Wire transfers were wide open” for abuse by criminals, “and no one was looking at them,” he said. “Now, we’re going to be able to identify companies and individuals that we had no idea about in the past.”
Scope for Expansion
Some, such as this account in The Real Deal, Treasury Department finally adds teeth to LLC disclosure rule, have applauded FinCen’s decision to close what it called a “gaping loophole”, e.g. the exclusion of wire transfers from the reporting requirement.
Well, yes.
There’s obviously considerable scope for further expansion of these measures– with other loopholes begging to be closed.
How about, for example, extending the reporting requirements to apply nationwide, rather than confining them to a few– albeit popular– markets? For it’s immediately apparent that the current still-limited FinCEN measures– if effectively implemented and monitored– may merely direct dirty money away from the targeted geographic areas, to other luxury real estate investments elsewhere.
And, how about making them permanent? Even the current rabidly anti-regulatory Congress saw the merit behind these measures when it passed the bill allowing FinCEN to include wire transfers, so why continue to rely on temporary, vulnerable renewals? The current rules take effect in September and expire next March.
And further, how about– as the watchdog group Global Witness suggests– requiring Treasury to rescind:
a temporary exemption that allows the real estate sector to bypass “Know Your Customer” due diligence requirements under 2001 PATRIOT Act provisions. Treasury must initiate a rule to require the real estate sector to do anti-money laundering checks on their clients and to turn away business if the funds are suspect. This needs to include identifying the beneficial owners of companies purchasing property and reporting this information to FinCEN.
These are just some immediate suggestions– I’m sure close perusal of the FACT report (and further thinking) would generate others.
Bottom Line
Neither FinCEN’s current measures nor the extensions I have suggested will not in themselves drain the black money sewers, but they at least will close some of the obvious loopholes that continue to exist.
