Feds to require buyers’ ID
Move targeting all-cash real estate deals in L.A. County and elsewhere aims to crack down on purchases using stolen money and made through LLCs
Los Angeles has long attracted wealthy individuals willing to spend millions of dollars for a sprawling estate in the chaparral hills above the city or along its fabled coast.
But in addition to movie stars, financial executives and foreign billionaires, Los Angeles real estate has also attracted criminals seeking to launder ill-gotten gains by purchasing its tony megamansions.
Amid heightened concern that such individuals are using shell companies to hide stolen funds, the federal government is cracking down.
On Wednesday, the U.S. Treasury Department announced it will require buyers of luxury homes in Los Angeles and other California counties with pricey real estate to reveal their identities when laying out cash to purchase homes through secretive shell companies.
The move is an expansion of the government’s effort to learn more about possible money laundering in the luxury market. Earlier this year, the Treasury Department mandated similar requirements in Manhattan and in Miami-Dade County in Florida.
The federal government’s concerns over money laundering tied to limited liability companies could be seen just last week, when the Justice Department accused Malaysian officials of using shell companies and bank
accounts located across the globe to launder at least $1 billion stolen from a public development fund.
Federal prosecutors alleged that among the assets purchased with the stolen funds were a stake in the 2013 film “The Wolf of Wall Street,” a Beverly Hills hotel and four posh L.A.-area homes.
The houses include the former estate of the late TV star Ricardo Montalban, a property that was acquired for $40 million in 2012, as well as 1201 Laurel Way in Beverly Hills, an extravagant hillside home surrounded by a moat that sold for $31 million in 2014.
Both homes were purchased by limited liability companies, or LLCs, through multimillion-dollar wire transfers, according to court records.
Los Angeles, San Diego, San Francisco, San Mateo and Santa Clara counties will now be covered by the rules, in addition to several other major metropolitan areas across the country, including all boroughs in New York City.
The requirements for additional disclosure are temporary and are meant to provide guidance for possible permanent rules. The requirements take effect in late August and run through late February.
In California counties covered, they apply to allcash transactions of $2 million or more.
Thresholds elsewhere vary from $500,000 in San Antonio’s Bexar County to $3 million in Manhattan.
The initial requirements in the Miami area and Manhattan have already helped law enforcement discover potential criminal activity, according to the Treasury Department’s Financial Crimes Enforcement Network.
Twenty-five percent of the reported deals in those two markets, for example, had a buyer that previously was involved in suspicious financial activity, aspokesman for the enforcement network said.
“By expanding the [requirements] to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course,” enforcement network Acting Director Jamal El-Hindi said in a statement.
In California — and in states across the country — owners can set up LLCs without telling state officials who they are.
That secrecy has turned shell companies into a important tool for criminals to hide their money gained from misdeeds and has stymied law enforcement investigations, said Heather Lowe, legal counsel for Washington advocacy group Global Financial Integrity.
“You are giving them a license to use the company for pretty much anything,” Lowe said. “They are used for tax evasion and any form of money laundering -- drug money, human trafficking and fraud.”
Using a shell company to purchase real estate, however, is not illegal and by itself does not mean criminal wrongdoing.
One of the main reasons such companies were created was to provide a legal separation between a business and the personal assets of an investor.
Celebrities also use LLCs to buy houses to make it more difficult for the public to find their address.
The new rules specifically require title companies to report to the Treasury Department the true owners behind shell companies that use currency, checks and money orders to purchase luxury homes.
Title companies must also obtain copies of a buyer’s driver’s license, passport or similar identifying documentation and provide that information to authorities upon request.
The names of true owners, as well as their documents, will be available only to regulatory and law enforcement authorities, not the general public, enforcement network spokesman Stephen Hudak said.
If a buyer or title insurance company provides false information, they would be subject to criminal penalties. The rules don’t apply to properties financed with a mortgage, because lenders already are required to report suspected money laundering, Hudak said.
The new rules won’t catch everything, however. They do not cover wire transfers, because current law does not allow for it, he said.
“There is legislation pending that would include wire transfers in the future,” Hudak said in an email. “However, if any part of the transaction is conducted with a check, the entire transaction is considered covered.”
An enforcement network official said that the expansion of the rules to Los Angeles and other areas were based on several factors.
Those include “information provided by law enforcement,” the heavy use of shell companies in all-cash purchases and a luxury market that’s attractive to foreign buyers.
Wayne M. Stanley, spokesman for the American Land Title Assn., said the rules already in effect in Miami and Manhattan required additional training and effort, but were “doable.”
“We support the Treasury’s efforts to weed out illicit activity in the real estate market,” Stanley said, adding that the association wants permanent regulations to be developed in the “most cost conscious way possible.”