Last year, FinCEN started to look more closely at anonymous cash buyers of prime US real estate. The agency's concern was that real estate purchases made without bank financing through shell companies provide an ideal mechanism for money laundering, tax evasion and other crimes. In January 2016 FinCEN issued so-called Geographic Targeting Orders (GTO) to certain US title insurance companies, temporarily requiring them to identify the natural persons behind the shell companies that were used to pay "all cash" for high-end residential real estate in Manhattan (New York City) and Miami-Dade County, (Florida). The title insurance companies were required to identify and report the true "beneficial owner" behind the legal entity involved in the specified real estate transactions.
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 (which as you may know, 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 earlier GTO's were in effect for 6 months, ending in July this year. Obviously, the information gleaned from these initial GTOs was juicy enough to prompt FinCEN to dig deeper and to expand its search. The hunt is on!
On July 27, FinCEN announced the issuance of similar GTO's for an additional six major US geographical areas. FinCEN Acting Director Jamal El-Hindi stated: "The information we have obtained from our initial GTOs suggests that we are on the right track." "By expanding the GTOs 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."
To build on the useful data generated thus far, the GTOs recently announced by FinCEN include the following major US geographic areas: (1) all boroughs of New York City; (2) Miami-Dade County and the two counties immediately north (Broward and Palm Beach); (3) Los Angeles County, California; (4) three counties comprising part of the San Francisco area (San Francisco, San Mateo, and Santa Clara counties); (5) San Diego County, California; and (6) the county that includes San Antonio, Texas (Bexar County).
If a monetary threshold is reached in a real estate transaction and there is no external financing, then the title insurance company must obtain siginficant information about the entity-purchaser and the beneficial owner of the entity. The monetary thresholds for each geographic area can be found in this table.
As for the type of information the title insurance company must obtain, by way of example, it must obtain and record a copy of the beneficial owner's driver's license, passport, or other similar identifying documentation. A "beneficial owner" is one who, directly or indirectly, owns 25% or more of the equity interests of the entity-purchaser. It must provide information about the real estate transaction and so on. For further detail, please see a sample GTO issued by FinCen which became effective on August 28, 2016 and continues for 180 days. It is available here.
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.
The day of reckoning and full financial transparency seems destined to arrive at some stage in the not too distant future. With the newly enacted "customer due diligence rule", FinCEN's latest push to address the issues surrounding cash purchases of luxury US properties by anonymous US corporations, and the fallout from the latest leak of the Panama Papers, hiding places become more and more difficult to find.Back to Articles Back to Virginia La Torre Jeker J.D.
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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