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Government expands crackdown on money laundering in real estate

  • The Treasury Department said 30 percent of high-end real estate deals that were subject under a new watchdog program involved "suspicious activity" and potential money-laundering.
  • That program has been expanded and extended.
  • Also a loophole has been closed that means real estate purchased via wire transfers is subject to the same scrutiny as that an all-cash deal receives.

The Treasury Department said that 30 percent of high-end real estate deals that were subject under a new watchdog program involved people who had been targeted by the government for "suspicious activity" and potential money laundering.

Treasury this week expanded and extended a program targeting luxury real estate deals in New York, Miami, Los Angeles and other big markets to prevent the use of real estate for money-laundering by overseas buyers. The program was designed to prevent buyers from using shell company's or LLC's to hide the identities of the real buyers.

Many expected the program to be killed under the Trump administration, given President Donald Trump's ties to the real estate business. Yet the program was extended in February and is now being expanded to close loopholes. It also added the city and county of Honolulu.

Real estate experts say the expanded program could put pressure on high-end real estate markets that are already under some pressure from slower overseas buying and uncertainty in Washington over taxes. Analysts say the biggest impact could be in Miami and southern Florida, which has been suffering from a glut of new high-end condos and has relied heavily on buyers from Latin America — some of whom have come under scrutiny for corruption or money laundering.

"This could have a chilling affect," said Nela Richardson, chief economist for Redfin. "That very high end of the market is the most vulnerable to these issues. If a lot of foreign buyers were parking their money in high-end real estate and that much of it is tainted, this rule will have an impact."

The way the program works is that title insurance companies are required to determine the true owners of LLC's or shell companies doing all-cash deals to buy real estate above a certain price in New York City, Miami, Dade, Broward and Palm Beach counties, San Diego, San Francisco, San Diego and the Bay Area, as well as Bexar county in Texas. Treasury then determines whether those beneficial owners are on its lists of suspicious activity — or people who have been flagged for potential money laundering, corruption or other financial crimes.

The rules cover properties purchased for more than $3 million in Manhattan, properties over $1 million in the southern Florida locations, over $2 million in the California locations and more than $3 million in the Hawaii locations.

Treasury said that among the transactions covered by the rules over the past year "about 30 percent... involve a beneficial owner or purchaser representative that was also the subject of a previous suspicious activity report."

The most important part of this week's rule was closing a massive loophole involving wire transfers. Brokers say that ever since the rules were first imposed in 2016, buyers could easily avoid them by using wire transfers. Now, wire transfers will also be subject to the rule — closing the loophole.

"Through this advisory and other outreach to the private sector, FinCEN, industry, and law enforcement will be better positioned to protect the real estate markets from serving as a vehicle to launder illicit proceeds," said FinCEN Acting Director Jamal El-Hindi.

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Correction: The rules cover properties purchased for more than $3 million in the Hawaii locations. An earlier version misstated the figure.