No more anonymous home buyers: New law requires shell companies to name their owners
A new federal law is putting an end to anonymous shell companies used to launder dirty money through high-priced real estate, automobiles and works of fine art.
Until this year, limited liability corporations — known as LLCs — enabled property buyers to block their identities from the view of the public and law enforcement.
The new law will require domestic and foreign LLCs doing business in the U.S. to disclose “who is the real, natural person (aka beneficial owner) who owns and controls an entity at the point of formation,” as well as update the information if the company changes ownership. The information will be stored in a federal database accessible to banks and lawenforcement agencies but not available to the general public.
Violators of the law can face penalties and jail time.
LLCs — often referred to as shell companies — have legitimate business purposes that include limiting owner liability in case of an accident such as a slip-andfall. LLCs are also used by businesses for tax purposes and grouping subsidiaries under one name. But their cloaking properties also offer an opportunity to launder and stash illegal money without consequences.
“This is a big step in combating money laundering,” said Ville Rantala, an assistant professor of finance at the University of Miami Herbert Business School. “It’s notable that other countries such as Germany and British Columbia in Canada have recently passed similar regulation targeting the beneficial owners of shell companies buying or owning real estate. If the U.S. had not acted now, there is a risk that we would have become a safe haven for real estate buyers who wish to remain anonymous.”
A WIDER REACH
The law, known as the Corporate Transparency Act, is part of the $740 billion National Defense Authorization Act.
Criminal activity conducted by shell companies in real estate transactions has been the focus of an anti-money laundering initiative by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) since 2016. The government’s interest in secret offshore money was fueled in part by the Pulitzer Prize-winning Panama Papers series, which showed how dirty money was fueling South Florida’s luxury home market. The Miami Herald contributed to the series.
But the initial probe — which required cash buyers using LLCs to report their true owners to title insurance companies involved in the sale — focused primarily on real estate sales over $1 million.
By 2018, the FinCEN probe dropped the price threshold to cash transactions of $300,000 and higher.
The FinCEN probe had an immediate impact on the local real estate market. According to a research paper co-written by Rantala and financial economist Sean Hundhofte in 2018, Miami-Dade saw a drop of 95% in the amount of cash that shell companies spent on homes during the first two years of the new requirements.
But the new law goes beyond FinCEN requirements to include all LLCs. The identities of the shellcompany owners will be stored in a federal database accessible to banks and law-enforcement agencies.
“I’ve represented defrauded creditors chasing Ponzi schemers who tend to operate out of South Florida,” said Larry Kellogg, founding partner of the Miami-based Levine Kellogg Lehman Schneider + Grossman. “Trying to find their assets can be difficult, especially when they are hiding dark or stolen money in an LLC. This law will make tracing that money much easier.”
According to The Associated Press, the new law also incentivizes whistle-blowers to provide evidence of financial criminal activity by rewarding them with 30% of the total amount of money seized if their information leads to legal action.
But even with ever-tightening requirements, experts say white-collar criminals will continue to find a way to carry on with their shady business.
“Undoubtedly, ‘dark money’ buyers will try to look for potential loopholes in the regulation,” Rantala said. “One concern is straw buyers. It can be difficult for U.S. authorities to get information on foreign persons listed as property owners or beneficial owners behind the shell companies. One risk is that some shell companies try to report beneficial owners who are not the true owners. We may also see other legal arrangements that try to circumvent the reporting requirements.”