As of January 1, 2021, H.R.6395, the National Defense Authorization Act (NDAA) for Fiscal Year 2021, became federal law. The law includes the budget and policies for the U.S. Department of Defense for 2021, but this $740 billion bill also includes legislation to help strengthen anti-money-laundering initiatives, which may have a direct impact on the ways that some organizations purchase real estate. President Trump vetoed the bill after it passed both the House and Senate, but Congress acted to override the veto. The NDAA addresses the issue of real estate and other expensive items being purchased through shadow corporations.
Solving the problem of shell companies
Real estate has long been used to launder money by some unscrupulous individuals and organizations. Using ill-gotten gains to purchase real estate through a shell company turns bad money into a tangible asset. For those who need to transfer a lot of money, this has become a popular strategy.
The Department of the Treasury Financial Crimes Enforcement Network (FinCEN) has sought to curb the problem through Geographic Targeting Orders, which require title insurance companies to report some cash purchases of residential real estate by shell companies in areas where money laundering is a particular problem, such as New York City and Miami. The most recent FinCEN orders cover Boston, Chicago, Dallas-Fort Worth, Honolulu, Las Vegas, Los Angeles, Miami, New York City, San Antonio, San Diego, San Francisco, and Seattle. The rules require that title companies identify the people behind all-cash real estate transactions over $300,000.
Inside the NDAA is another piece of legislation, the Anti-Money Laundering Act of 2020, which also contains the Corporate Transparency Act. It requires that FinCEN maintain a registry of the owners of businesses in the U.S. This includes LLCs, which can be used to hide the owners of real estate transactions. The data would not be open to the public but can be accessed by request.
In October 2020, while the bill was being voted on by the Senate and the House, a group of real estate organizations that included the National Association of Realtors, the American Escrow Association, the American Land Title Association, the CRE Finance Council, and the Real Estate Services Providers Council Inc. sent a letter urging Congress to keep the rules on money laundering in the legislation.
What this could mean for real estate
While the immediate benefit of eliminating shell companies is obviously a positive, another issue will be the complexities in reporting companies that are created for development or multifamily syndication. The new registry would require firms to disclose information about their beneficial owners.
Pillsbury Law published a comprehensive alert explaining that sponsors and developers may have to update their standard operating agreements to comply with new regulations as they emerge. Right now it's still not clear what the requirements will be, and it may take some time for that to be fully sorted out. Setting up a corporation in the U.S. is relatively easy, and there are more corporations formed here than in any other country. The rules of establishing a corporation also vary greatly by state.
As Gothamist reported, the new rules are probably particularly bad news for high-end New York condominium developments, which are often popular purchases among those looking for hard assets unlikely to lose their value over time. One study found that between 2008 and 2014, as many as 30% of luxury New York condos were purchased through foreign investors or LLCs. A 2016 report by the Miami Herald on money laundering in South Florida found that in 2015, 25% of homes purchased in Miami-Dade were sold to foreign investors compared to 4% nationwide.
A large amount of foreign investors doesn't necessarily mean that money laundering is taking place, but the Miami Herald report showed that a variety of investors from Brazil were also under investigation for corruption charges. An influx of deep-pocketed purchasers has caused prices to rise in these markets as well as contributing to the development of luxury buildings.
It will take some time for the full impact of this new legislation to be felt, but it does throw up significant roadblocks for people using real estate to hide funds. Overall this is a beneficial move toward closing what has long been a backdoor way for bad actors to exploit U.S. laws for their own benefit.