A ‘WORKING BILLIONAIRE’ KIND OF PLACE

Feds expand hunt for laundered money to pricey San Francisco Bay Area homes

By Kathleen Pender

San Francisco Chronicle
August 13, 2016

The federal government is expanding to the Bay Area its hunt for people who hide cash by purchasing expensive homes through shell companies.

Many rich and famous people purchase homes through shells, usually limited liability companies, for privacy and other legal reasons. But they are also used by money launderers, tax evaders and other criminals.

In January, the government started requiring title insurance companies to identify the people behind shell companies that purchase high-priced homes in Manhattan and Miami-Dade County in all-cash deals. They also must report information from the true owner’s passport or driver’s license to the Treasury Department’s Financial Crimes Enforcement Network.

The geographic targeting order was supposed to end in late August, but it yielded so much useful information, Treasury extended it temporarily and expanded it to include more areas.

Starting Aug. 28, title insurance companies must identify the people behind shell companies that purchase homes worth $2 million or more without a mortgage in San Francisco, San Mateo, Santa Clara, Los Angeles and Orange counties.

The dollar threshold is different in other areas subject to the order: $3 million in Manhattan, $1.5 million in other New York City boroughs, $1 million in three Florida counties and $500,000 in the San Antonio area.

The program is now supposed to end Feb. 23, but it’s likely to be expanded and extended again.

When most people buy homes, their names are listed on the deed filed with the county recorder, which is public information.

Many high-end home buyers hide their identities by purchasing through shells. They might do so for legitimate reasons, such as to maintain privacy or shield their other assets if someone gets hurt on their property and wins a lawsuit. Or they might do it to launder or hide money.

Banks and other financial institutions are required to know their customers, including those behind shell companies, and report suspicious transactions to the network. These laws were strengthened under the Patriot Act. Mortgage companies, mortgage brokers, Fannie Mae and Freddie Mac are required to provide suspicious activity reports to the network, said Steve Hudak, a spokesman for the crimes agency.

But homes purchased through shell companies without a mortgage are largely exempt from such scrutiny and have become good places to stash tainted cash.

The main targets of the new order are “tax evaders, foreign corrupt officials, drug dealers and arms traffickers,” said Sanford Millar, a Los Angeles tax lawyer.

The order won’t help journalists or nosy neighbors because the real owner’s name still won’t go on the deed. It will go into the network’s database of Bank Secrecy Act information, which is not accessible under the Freedom of Information Act, Hudak said.

The program is designed mainly to help law enforcement “follow the money” of suspects, said Steve Gottheim, senior counsel for the American Land Title Association. “One place they can trace it to is real estate. This helps them uncover where the money is, who might be involved in the criminal activity, and potentially try to obtain that property in a forfeiture action later on.”

About one-fourth of the Miami and Manhattan home buyers identified under the order already had suspicious-activity reports filed with the network, Hudak said.

Yet the order still has loopholes.

It does not apply to purchases made entirely by wire transfer. The law that created geographic targeting orders does not allow the government to request wire transfer data, although “legislation is pending that could change that,” Hudak said.

Although many high-end cash buyers use wire transfers to close a deal, if they used a check to make an earnest money deposit, it would trigger the reporting requirement, Gottheim said.

Buyers also could avoid the order by going without title insurance. Lenders require title insurance, but all-cash buyers can forgo it if they are willing to bear the risk of a challenge to the title.

The order requires title companies to report identities of the person signing the deed and anyone who owns 25 percent or more of the shell company. A buyer could get around this by having family members each own less than 25 percent.

Buyers also could avoid the order by purchasing a home outside the target area or commercial real estate, said Steve Wilson, an attorney with Withers Bergman.

The order could depress luxury home sales and prices in affected counties if a material number of cash buyers were trying to avoid detection. “To the extent these markets are overheated and you are taking away the irrational buyer,” it could have an impact, said Ed Mills, a financial policy analyst with FBR & Co.

Gottheim said that in Manhattan and Miami-Dade, title companies “are finding that customers are willing to provide this information without prompting.”

Jordan Levine, an economist with the California Association of Realtors, does not think the order will have an impact. In the five California counties subject to the order, only 5 percent of combined home sales last year exceeded $2 million — and most of those had mortgages, he said.

In San Francisco and San Mateo counties, however, about 13 percent of homes and condos sold last year cost at least $2 million, and in Santa Clara County, almost 8 percent did, according to CoreLogic. About 38 percent of the $2 million-plus sales in those three counties combined appeared to be all cash.

Patrick Carlisle, Paragon Real Estate Group’s chief market analyst, doesn’t think the order will have an impact in San Francisco. “We have plenty of billionaires, just very few of the expatriate, money-laundering kind. We’re a ‘working billionaire’ kind of place.”