The Financial Crimes Enforcement Network, a bureau of the U.S. Treasury Department, recently issued geographic targeting orders in Miami-Dade County and Manhattan that will require certain insurance title companies to identify and report the "all cash" buyers of high-end residential real estate.
FinCEN issued the orders after growing concerned over the last year that criminals — corrupt foreign officials, narcotics traffickers and others — have hidden behind anonymous limited liability companies and cash purchases of high-end real estate to launder dirty money. The orders will be in effect from March 1 to Aug. 27. I explore why FinCEN likely felt compelled to issue the orders, what to expect will happen next and who should consider retaining legal counsel.
Why FinCEN ActedFinCEN's stated mission is "to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis and dissemination of financial intelligence and strategic use of financial authorities." Although the risk of money laundering through purchases of residential real estate is not new, the last year saw a renewed focus on this risk. For example, last year the New York Times published a widely read series, "Towers of Secrecy: Piercing the Shell Companies," that analyzed multimillion-dollar real estate purchases in Manhattan's Time Warner Center overlooking Central Park. After examining a decade of ownership, the series found more than 200 shell companies had been used to buy the Time Warner Center condominiums. The buyers were increasingly wealthy foreigners, several of whom were government officials and/or the subject of government investigations. In response to the series, FinCEN said the potential abuse of the real estate sector was a "fundamental priority."
Last spring, FinCEN Director Jennifer Shasky acknowledged the historic risk posed by real estate-based money laundering and even made pointed reference to the "wild, narcotics-fueled days of the 1980s" that led to "the endemic use of narcotics proceeds to fund the purchase of luxury real estate in Miami."
Observing that the past is often prologue, Shasky said corrupt politicians, drug traffickers and other criminals are currently using cash-only purchases in the names of LLCs to obfuscate the identities of true owners. Money launderers use LLCs to buy real estate because many states do not require LLCs to disclose the identity of the beneficial owner, thereby providing the anonymity that criminals seek. Other gaps in the law also make money laundering through real estate attractive to criminals who are flush with cash. For example, although real estate purchases involving a mortgage are subject to certain anti-money laundering and due diligence requirements, purchases that are 100 percent cash are not.
What To Expect NextTitle insurance companies that must produce beneficial owner information to FinCEN will likely want to retain legal counsel. Legal counsel can advise the company how to proceed with FinCEN, they can help manage the production of documents, and they can field any questions or follow-up requests from FinCEN. Significantly, legal counsel can also conduct a privileged internal investigation and advise the company of any potential criminal or civil legal exposure to the company or its employees under the protection of the attorney-client privilege.
Once FinCEN compiles the identities of the beneficial owners behind the LLCs, that information will likely be used by the U.S. Attorneys' Offices in Miami and Manhattan to generate potential leads for investigations. To build those cases, prosecutors will issue grand jury subpoenas to banks, real estate brokers, title insurance companies, and others for testimony and/or the production of documents. Subpoenaed entities or individuals should seek legal counsel to advise them of their rights and have legal counsel respond to law enforcement request for information.
Real estate professionals who facilitated real estate transactions are unlikely to be the targets of the government's investigations, unless there is evidence that a broker, lawyer or other real estate professional knew (or willfully avoided learning) that the properties were purchased with dirty money.
Instead, law enforcement will likely focus on bringing criminal money laundering charges against the beneficial owners and will seek to forfeit the tainted properties to the United States. Prosecutors can charge a property buyer with money laundering if the buyer purchased a property with what he knew were illicit funds for the purpose of concealing or disguising the nature, source, ownership or control of the illicit funds. Of course, any buyer who becomes the target of a government investigation would be wise to immediately retain legal counsel.
Seizure And ForfeitureAfter compiling the data sought by FinCEN's orders, law enforcement will likely cross-reference the names of beneficial owners against other law enforcement databases to identify matches and look for patterns. One database that law enforcement is sure to check is the specially designated nationals list kept by Treasury's Office of Foreign Assets Control.
That list contains the names of individuals and companies that have been tied to terrorism and narcotics trafficking. U.S. citizens are prohibited from dealing with people or companies on the list. Any person on the OFAC list who owns property in the United States should expect to see their property seized and subject to forfeiture.
Law enforcement will also review suspicious activity reports and currency transaction reports, which are commonly filed by financial institutions such as banks. The government uses those reports to generate leads for investigations and to trace criminal proceeds.
In some cases, the government may use its civil forfeiture powers to take ownership of the property tied to criminal activity. A civil forfeiture lawsuit is an action in rem, meaning it is brought against the property, known as the res, not against a natural person.
The government will also likely share the information it obtains from FinCEN with foreign governments that have filed requests for assistance in gathering evidence pursuant to mutual legal assistance treaties and other international compacts.
Finally, if the geographic targeting orders reveal what FinCEN suspects — a strong link between high-end, cash residential real estate purchases and money laundering in Miami and Manhattan — you can expect FinCEN to address the regulatory gaps that allowed real estate to become an attractive vehicle for money laundering.