The New York Times recently broke a story about the U.S. Treasury Department’s concern regarding illicit money flowing into the luxury real estate market. In response, a new initiative scrutinizing high-end, full-cash sales in Manhattan and Miami is being enacted. Though full-cash deals are often made by legal shell companies, they often end up concealing the identities of the real purchasers. Going further, a buyer can create new shell companies atop existing ones to make layers from which to hide beneath. The Treasury’s main concern is that these sales are often made with dirty money from worldwide criminal elements.
This will be the first time, according to the Times, that the Federal government will require real estate companies to disclose the names of those behind full-cash transactions. Title insurance companies involved in sales will have to discover the identities of buyers, make copies of driver’s licenses or passports and then pass the individuals’ names to the Treasury Department.
The initiative comes after a series of Times stories in 2015 about the emerging use of shell companies used by foreign buyers who sought safe havens for their money in North America. It was learned that, especially in the luxury segment, real estate brokers don’t know very much about their buyers who pay in cash. Many high-end brokers readily admit going through foreign attorneys and other legal representatives, all of whom protect the identities of their clients.
One possible major reason that all of this is occurring now is the value-in-use issue that has emerged with these cash transactions. “A top Treasury official [and director of the Financial Crimes Enforcement Network], Jennifer Shasky Calvery, said her agency had seen instances in which multimillion-dollar homes were being used as safe deposit boxes for ill-gotten gains, in transactions made more opaque by the use of anonymous shell companies,” reported the Times. They go on to write that after the purchase of some of these $20-30 million-dollar homes, no one uses them for years. Thus, the value-in-use idea might have been one of the major red flags that allowed these new investigations to occur.
John Maynard Keynes, the early 20th century economist who conceptualized use-it-or-lose-it, would have been surprised that his idea could be carried this far. But he probably never thought about passion investing, or if he did, he never wrote about it. One percenters buy things they love and know will only increase in value—whether it be art, horses, wine or jewelry—and lately buying high-end properties in cities like New York, San Francisco and London has spiked in popularity. By using their millions for homes, they are able to create safe havens for their children to go to school, avoid further taxation in their home countries and have various retirement and vacation sanctuaries. But now, things are changing and for the first time, a passion real estate investment may be looked at in a far more dispassionate way.
At the level of wealth we’re dealing with—knowing how elusive and anonymous people can be—it may take much more than passport identification to discover the source of dirty money, prove that it was used to purchase a high-end residence and figure out whether the home was used in an unsavory way. But that’s a problem for the Treasury to figure out.
