Curbing the Flow of Illicit Foreign Money into US Real Estate
Joon Yoo Vol. 37 Associate Editor Vol. 38 Executive Editor
Across the United States, the recent trend among many wealthy foreigners interested in luxury U.S. real estate is the use of limited liability companies, or LLCs, in purchasing high-end properties in total secrecy and anonymity. For the last several years, “nearly half the residential purchases of over $5 million were made by shell companies rather than named people” and in 2014, over 80 percent of the units of a landmark luxury property in New York City were sold to shell companies. In terms of dollar amount, roughly “$8 billion is spent each year for New York City residences that cost more than $5 million each.” The problem with allowing shell companies like LLCs to purchase real property without requiring them to disclose any names of individuals is that foreign money involving illicit gains or sources can be safely hidden from the reach of official investigations and scrutiny of other countries. While today’s federal banking guidelines instruct banks to make reasonable efforts to avoid giving aid to those who try to move corruption money, there is no identical guideline or legal obligation imposed on transactions involving foreign money coming into the U.S. via shall companies for purchasing luxury real property. The real-life implication of the absence of any legal oversight or guideline is that “on many deeds [of luxury properties], the line for the buyer’s signature is left blank…or is signed by a lawyer or other representative. Phone numbers are registered under lawyers’ names…tax statements are addressed to the L.L.C.s.” Not surprisingly, many foreigners of questionable backgrounds have invested in luxury properties in the U.S. For example, at least 16 foreign nationals who have some form of ownership interest in a landmark luxury property in New York City “have been the subject of government inquiries around the world… The cases range from housing and environmental violations to financial fraud. Four owners have been arrested, and another four have been the subject of fines or penalties for illegal activities.” The question remains as to what to do with the current state of legal vacuum in luxury real property purchases by LLCs with foreign money. Doing nothing is hardly an option: the U.S. Department of Justice “has found that foreign officials often use shell companies or immediate family members to move large amounts of money to United States real estate,” and not addressing this problem leaves the U.S. in a very vulnerable position when urging other countries to cooperate with the U.S. in curbing the use of offshore tax havens. On the other hand, imposing through background checks on real property purchases might adversely affect the real estate market and thereby the national economy, according to real estate and legal professionals. One possible solution is to amend the law to require disclosure of names–for example, of the individual members or owners of the LLC that is making the purchase–in real property purchases that are (1) by LLCs and (2) paid for full in cash. This solution, inspired by the U.S. Treasury’s recent announcement on tracking down luxury real estate purchases by foreign money involving LLCs, satisfies the need to address the current problem of the flow of illicit money and, at the same time, does not place a heavy burden of background checks on those who use LLCs for legitimate purposes such as privacy or tax benefits. The crucial difference between the Treasury’s initiative and this article’s proposed solution is that, while the Treasury’s current effort is limited to New York City and Miami-Dade markets for only several months, this article’s proposal is for a codified law or a regulation at the federal level without an expiration date.
 Louise Story & Stephanie Saul, Stream of Foreign Wealth Flows to Elite New York Real Estate, THE NEW YORK TIMES (Feb. 7, 2015), http://www.nytimes.com/2015/02/08/nyregion/stream-of-foreign-wealth-flows-to-time-warner-condos.html?rref=collection%2Fnewseventcollection%2Fshell-company-towers-of-secrecy-real-estate.  See Id.  Id.  See Id.  Id.  Id.  Id.  Id.  See Id.  See Louise Story, U.S. Will Track Secret Buyers of Luxury Real Estate, THE NEW YORK TIMES (Jan. 13, 2016), http://www.nytimes.com/2016/01/14/us/us-will-track-secret-buyers-of-luxury-real-estate.html?_r=0.  See Id.