Money laundering is shaping US cities

Money laundering is shaping US cities
Money laundering is shaping US cities

In a little-noticed statement, the Treasury bureau responsible for investigating financial crimes shared a remarkable money laundering statistic last month.

Thirty percent of the cash purchases of high-end real estate by shell companies in six major cities involved a suspicious buyer, according to an investigation conducted by the Financial Crimes Enforcement Network to find out who was behind the deals.

In other words, money laundering plays a significant role in shaping U.S. cities.

But money laundering is only one reason that foreign investors might pour money into luxury condos and exclusive addresses. Foreigners also prize expensive real estate because it allows them to evade taxes in their home countries or escape government restrictions on using their own money.

All that money being poured into U.S. real estate is contributing to affordability difficulties for middle-class families and to the loss of vitality in many of the country’s richest neighborhoods, which have seen an influx of cash but not necessarily actual residents. Even so, the U.S is mostly in the dark about the quantity of such investment or the investors behind it.

The Treasury effort

The best hope for transparency in luxury real estate markets is the probe undertaken by the Financial Crimes Enforcement Network, commonly referred to as FinCEN.

FinCEN was created in 1990 by President George H.W. Bush’s Treasury to manage anti-money laundering efforts, and the Patriot Act gave it bureau status. Over the years, FinCEN has entered the spotlight for efforts such as investigating money laundering by drug dealers and probing possible terrorist use of bitcoin, at times earning criticism from privacy advocates.

Early last year, the bureau announced that it would begin investigating money laundering through real estate in New York City and Miami. Under authority given to the bureau by the Patriot Act, it can require all financial institutions in an area to report on big transactions, for a limited period of time.

For real estate money laundering, however, requiring reports from banks wouldn’t help. The prevalence of all-cash purchases, carried out by shell companies on behalf of buyers, means that banks are often not involved.

So FinCEN instead placed the reporting requirement on title insurers, who are involved in almost every transaction.

The bureau began with shell company purchases of high-end real estate in New York City and Miami, two popular destinations for foreign investment. After initial success getting new information about the actual buyers, they expanded the requirements last summer to include four other cities: Los Angeles, San Francisco and Silicon Valley, San Diego and San Antonio.

Currently, a “handful” of FinCen’s 325 employees pore over the data provided by the title insurers, according to a spokesman for the bureau. The program is authorized through late August, and title insurers expect that FinCEN will seek to turn it into a permanent regulation.

The prevalence of shady investors came as a surprise. The 30 percent figure was “certainly higher than we thought we were going to see when the industry first had to do this,” said Steve Gottheim, senior counsel for the American Land Title Association.

Previously, authorities could only guess about who was buying what.

No reliable public dataset on the foreign share of real estate purchases is available, because the widespread use of local shell companies makes those statistics meaningless.

A more reliable estimate might come directly from industry sources, such as real estate agents or title insurers. The New York Times estimated in 2015, based on figures from the property data service First American Data Tree, that nearly half of purchases of residential real estate over $5 million in past years were made by shell companies.

But that figure doesn’t break down how many shell companies are working on behalf of foreign owners. After all, Americans might have their own reasons for using shell companies. Even in the case of an identifiable foreign owner, it’s not possible to know that owner’s reason for buying anonymously — whether it’s a legitimate purpose or something illegal.

The FinCEN statistic, however, is one clear datapoint. It covers some of the markets of greatest interest to the public, including the very high ends of the markets in Manhattan (sales above $3 million), Miami (sales above $1 million) and elsewhere.

Under authority given to the bureau by the Patriot Act, the Treasury Department can require all financial institutions in an area to report on big transactions, for a limited period of time. (AP Photo)

And it covers cash transactions, which are a major slice of the deals in some of the markets. For properties priced above $2 million in Manhattan, for instance, about four-fifths of sales have been made in cash in recent years, said Jonathan Miller, president and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm.

Those are the most rarefied real estate transactions, but also the ones viewed most suspiciously by law enforcement. “There’s an automatic assumption that it’s the potential fruit of criminal activity or terrorist activity,” said Konrad Motyka, a former FBI agent who worked on money laundering cases and who has advocated legislation to mandate more transparency. Actually, Motyka said, cash transactions are more likely to represent tax evasion or capital controls evasion.

Safe Deposit boxes

A perfect storm of events led to a boom in ultra-expensive real estate as an investment in the wake of the financial crisis, Miller said.

All over the world, investors rocked by the crisis sought safe real estate assets they could pour money into. At the same time, wealthy individuals in countries such as Russia and Venezuela increasingly faced the threat that they would lose the ability to move money out of the country because of controls imposed by their own government or sanctions levied by other governments.

Cities such as New York and Vancouver could supply assets that couldn’t be taken away in the form of buildings and condos. The more expensive, the better: Higher prices meant more money protected in each transaction.

“They were building the world’s most expensive safe deposit boxes,” Miller said.

Investors’ motivations for buying those safe deposit boxes vary from city to city. For example, in Silicon Valley and the West Coast generally, the buyers are more likely to be wealthy Chinese individuals aiming to stay one step ahead of authorities who could appropriate their funds. In Miami, buyers are more likely to be from South America.

Michael Repka, the CEO of DeLeon Realty in Silicon Valley, said that over the years he has seen an influx of Chinese investors seeking to move money out of China before the government imposed rules meant to curb inflation. He also saw an uptick in Russian buyers following the collapse of the ruble in 2014 as Russia was hit with new sanctions for its actions in the Ukraine.

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