Geographic Targeting Orders for Luxury Real Estate Purchases

The GTOs require US title insurance companies to provide detailed information about the beneficial owner when a legal entity purchases residential real estate without a bank loan and using cash or any kind of check. A beneficial owner includes any person who, directly or indirectly, owns 25% or more of the legal entity purchasing the real estate.

The GTOs also require information about the person representing the corporate buyer. The latest GTOs went into effect on August 28, 2016, and last for 180 days.

FinCEN's latest announcement builds upon previously announced GTOs that covered the borough of Manhattan in New York and Miami-Dade County in Florida. The US Department of Justice has identified the newly covered areas as key destinations for illicit funds into the real estate market and include the remainder of New York's boroughs (Brooklyn, the Bronx, Queens, and Staten Island); Los Angeles; San Diego; the San Francisco Bay Area (San Francisco, San Mateo, and Santa Clara counties); San Antonio, Texas (Bexar County); and the Miami metropolitan area (Broward and Palm Beach counties).

Just the First Step Toward Increased Enforcement

The new regulations preview increased enforcement. FinCEN Acting Director Jamal El-Hindi emphasized that the GTOs will allow the agency to “learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”

But the first step will likely be further revision to the new regulations. Several gaps in the GTOs are already evident. Most notably, the GTOs apply only to title insurance companies, rendering their requirements inapplicable to purchases without title insurance.

Title companies are also not required to report all-cash purchases below certain thresholds — $3 million in Manhattan, for example — or any such purchases in cities outside of those specified. Many purchase structures will similarly skirt the GTOs because only beneficial owners of 25 percent or more of a legal entity purchasing real estate need to be identified. The new regulation also exempts purchases made entirely via wire transfer and purchases of co-ops.

Buyers (and Their Agents) Beware

FinCEN's latest effort targets a specific area of growing concern for the US government, but the preliminary nature of the new regulations should not disguise their true meaning: The luxury real estate market — long an industry spared traditional anti-money laundering scrutiny — is coming under the spotlight of federal law enforcement.

Vasu B. Muthyala and Beau D. Barnes are lawyers with Kobre & Kim, based respectively in the New York City firm's Hong Kong and Washington, DC offices. They may be contacted at [email protected] and [email protected], respectively. The views expressed here are the author's own.

NEW YORK CITY—In an effort to curtail money laundering and track down ill-gotten gains, the US Treasury Department has imposed new rules requiring title companies to identify and disclose the beneficial owners of any corporate entity behind high-value, all-cash purchases of residential real estate in certain highly desirable metropolitan areas across the country.

The new regulations by the Financial Crimes Enforcement Network (FinCEN), a division of the Treasury Department, target the approximately 22% of real estate transactions that are not subject to existing anti-money laundering requirements because they take place without mortgages and the heavily regulated financial institutions that provide them. While the precise impact of the reporting requirement remains to be seen, the creation of a new repository of information on luxury real estate purchases forebodes increased enforcement efforts against buyers of luxury real estate and the need for increased due diligence on the part of the real estate agents, lawyers, bankers, and LLC formation agents who arrange such purchases.

A Spotlight on Luxury Real Estate Purchases

FinCEN's effort is a shot across the bow of the luxury real estate industry — the US government has identified it as an area of concern for money laundering. In announcing the recent geographic targeting orders (GTOs), FinCEN noted that all-cash purchases of high-value residential real estate “are highly vulnerable to abuse for money laundering.” In fact, FinCEN officials have acknowledged that the new GTOs targeting luxury real estate purchases were “inspired in part” by a 2015 investigation by The New York Times that found that almost 50% of residential real estate in the United States worth more than $5 million is purchased via a legal entity — in other words, by a corporation or LLC, not a person.

Geographic Targeting Orders for Luxury Real Estate Purchases

The GTOs require US title insurance companies to provide detailed information about the beneficial owner when a legal entity purchases residential real estate without a bank loan and using cash or any kind of check. A beneficial owner includes any person who, directly or indirectly, owns 25% or more of the legal entity purchasing the real estate.

The GTOs also require information about the person representing the corporate buyer. The latest GTOs went into effect on August 28, 2016, and last for 180 days.

FinCEN's latest announcement builds upon previously announced GTOs that covered the borough of Manhattan in New York and Miami-Dade County in Florida. The US Department of Justice has identified the newly covered areas as key destinations for illicit funds into the real estate market and include the remainder of New York's boroughs (Brooklyn, the Bronx, Queens, and Staten Island); Los Angeles; San Diego; the San Francisco Bay Area (San Francisco, San Mateo, and Santa Clara counties); San Antonio, Texas (Bexar County); and the Miami metropolitan area (Broward and Palm Beach counties).