• Black Money, US Real Estate & Shell Companies
    The Jig’s Soon Up

    By Virginia La Torre Jeker J.D.


    By now just about everyone is aware of the latest (and largest to date) offshore data leak – the Panama Papers.

    Panama Papers, Banking Loopholes and Shell Companies

    Revelation of the Panama Papers has opened a veritable Pandora’s Box for the rich and powerful around the world. The leak released detailed information about more than 214,000 offshore companies listed by a renowned Panamanian corporate service provider Mossack Fonseca. The Panama documents provide the curious (and nefarious) with the identities of shareholders and directors of the companies, some of whom include world leaders who are now in the embarrassing position of explaining why they have used dummy corporations to hold their wealth. So far, American names have not been uncovered. This is most likely because Panama has been under intense US government scrutiny for many decades, making it an unlikely destination for an American to illicitly stash his cash. The Internal Revenue Service (IRS), however, is reportedly chomping at the bit to get to the Papers and is urging Americans to come clean before it’s too late and they read the Papers. Once the IRS discovers the unreported offshore assets, the taxpayer is not eligible to join a voluntary disclosure program.

    Customer Due Diligence Rule on the Way

    As a result of the New York Time’s investigation into the purchase of US real estate by shell corporations, discussed more fully below, the US government was made more keenly aware of a banking loophole that may soon be closing. The Times’ report (with added fuel from the Panama Papers leak) has now helped push reform in the shape of the “customer due diligence rule”, proposed by the Financial Crimes Enforcement Network (FinCEN). This due diligence rule has been in the FinCEN pipeline for over four years. The final step in the process is approval by the Office of Management and Budget. This step is set to begin soon and normally takes three months or less.

    The “customer due diligence rule” will require banks to identify owners of shell companies in a bid to flush out the secretive financial shenanigans that were thrust into the spotlight earlier this month with the leak of the Panama Papers. Under existing US rules, financial institutions with branches in the United States must “know their customers” who open accounts. These rules lack any bite, however, since the institutions have not been required to know the underlying identity of the beneficial owners who set up accounts in name of shell companies. The proposed “customer due diligence rule” will require banks to learn who the owners are. They must determine the identities of any individual with ownership of 25 per cent or more of any corporate entity that opens a bank account, as well as any individuals exercising control over those entities.

    Black Money & Real Estate

    Apparently, in response to an in-depth NY Times investigation,the FinCEN started to look more closely at anonymous cash buyers of prime US real estate. On January 13, FinCEN issued so-called Geographic Targeting Orders (GTO) to certain US title insurance companies that will temporarily require them to identify the natural persons behind companies that are used to pay “all cash” for high-end residential real estate in Manhattan (New York City) and Miami-Dade County, (Florida). The GTO’s have been in effect since January and will run for 6 months. More GTOs might be issued in other jurisdictions if the information gleaned from these initial GTOs is juicy enough.

    FinCEN is concerned that real estate purchases made without bank financing through shell companies (which, under current US laws, are bulwarks of complete anonymity) provide an ideal mechanism for money laundering and other crimes. In order to obtain information to further examine this problem, FinCEN’s GTOs will require certain title insurance companies to identify and report the true “beneficial owner” behind a legal entity involved in high-end residential real estate transactions in Manhattan and Miami-Dade County.

    What is a GTO?

    A Geographic Targeting Order is an order issued by the Secretary of the US Treasury requiring any US financial institution or nonfinancial trade or business that exists within a specific geographic area to report on certain types of transactions. GTOs are defined in the Bank Secrecy Act (yes, this is the same law that mandates the filing of FBARs) at 31 USC Section 5326(a). A GTO does not have an indefinite lifespan. A GTO will last only for a limited period of time, currently, up to 180 days.

    FinCen’s GTOs

    In the case of the Manhattan and Dade County real estate GTOs, the requirement will run from March through August 2016. If the data collected reveals there are numerous sales involving suspicious money, FinCEN has made clear it will develop permanent reporting requirements across the entire United States.

    “We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium US real estate to secretly invest millions in dirty money,” said FinCEN Director Jennifer Shasky Calvery. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address. These GTOs will produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector.”

    The focus of the GTOs will be on sales that are both paid for entirely with cash and that are effected using shell companies (typically a so-called “limited liability company” or LLC). The GTO will require title insurance companies, which are involved in virtually all sales, to discover the identities of the true buyers and submit the information to FinCEN, which will input the information into a law enforcement data base. In Manhattan, the initiative will require reporting of buyers in luxury sales of more than $3 million to be reported; in Miami-Dade County, it requires reporting on sales of more than $1 million. In Manhattan, 1,045 residential sales cost more than $3 million in the second half of 2015, worth some $6.5 billion in aggregate, according to PropertyShark, a real estate data company.

    Real Estate: An Effective Way to Hide Money

    Real estate (as well as precious metals and stones, artwork and the like) can serve as an effective mechanism to hide wealth – whether or not that wealth was legitimately obtained. Untaxed dollars funneled into real estate purchases can be used to launder money or to hide from the taxman. Interestingly, for example, US individuals directly owning real property in foreign countries are not required to report that ownership to the US government unless the property has generated income (e.g., rental income or, capital gain on sale). See, e.g., Form 8938 – currently, foreign real estate held directly by an individual is not treated as a “specified foreign financial asset”. Let’s see how long that exception stays in place. Similarly, real property is not reportable on a so-called FBAR.

    Americans owning foreign real estate should make sure they do not need to file Form BE-10, however. This Form is not a US tax form; it is required by the Bureau of Economic Affairs. The Form BE-10 was largely ignored until just last year.

    Things are on a roll. With the proposed ”customer due diligence rule”, FinCEN’s push to address the issues surrounding cash purchases of luxury US properties by anonymous US corporations, and the fallout from the latest Paper Chase, the jig may soon be up.

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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

Virginia La Torre Jeker J.D.

Virginia La Torre Jeker J.D., is based in Dubai. Virginia has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has over 30 years of experience specializing in the international aspects of US tax, including FATCA. She has been quoted in the New York Times and Newsweek, and is regularly quoted in many local news articles and publications."

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