My Neighbor Is a Shell Company

If you live in a major city, chances are your rent is pretty high. If you live in San Francisco, New York City, Miami, Vancouver, London, Hong Kong or Tokyo, housing costs probably eat up more than half of your paycheck. While a booming tech sector and housing shortages have dominated the conversation as reasons why the market is out of control, dirty money and foreign ownership should be part of the discussion.

As long as there have been taxes, there have been people who do their utmost to avoid them. Real estate is particularly popular with tax avoiders because prices are relatively stable and generally increase in value over time. It is also immune to sanctions that could cripple tax haven countries like Bermuda or Cayman Islands. And, it’s functional; the property can serve as a second home or generate rental income – that’s a much better return than an index or hedge fund can offer! Also, real estate tends to be subject to far less scrutiny than stocks or financial institution-based offerings that are heavily regulated.

How big is the problem? According to the Rental Housing Finance Survey from the Census Bureau and the Department of Housing and Urban Development, about 15 percent of all rental properties in the U.S. were owned by LLCs or limited partnerships – usually a front for foreign investors. A New York investigation showed 30 percent of condos in Manhattan developments were sold to foreign investors or LLCs between 2008 and 2014. When the Treasury Department started tracking high-end real estate purchases in high-value markets Manhattan and Miami-Dade County in 2016, over a quarter of all the cash purchases of luxury apartments were suspect.

While tax evasion represents a parasitic relationship between an entity and the state it operates through, it’s not just government tax revenue that’s impacted. Foreign money drives up prices by reducing the supply available for locals and often, foreign-owned buildings sit empty – the same New York investigation above found that about 30 percent of the apartments between 49th and 70th Street and Fifth and Park Avenues are empty at least 10 months of the year.

The lack of property ownership transparency makes real estate a haven for funneling dirty money and indeed, a large percentage of foreign investors and LLC shell companies that own these properties do so in order to launder money. Several high-profile cases have made recent headlines including the indictment of Paul Manafort, President Trump’s former campaign chairman who laundered $18M through real estate and Jho Low and Roger Ng, former Goldman Sachs managing directors and the alleged masterminds behind a $4B fraud scheme including hundreds of millions in property purchases.

So, what can governments do to enforce tax liability and ensure property purchasers aren’t using the holding to wash dirty money? There are several easy steps:

Enforce transparency: Ownership of property should be transparent. It’s not enough to list a trust fund or an LLC as the owner, that company/fund needs to be tied back to a human entity who can be held liable for the taxes due and explain where the money came from to make the purchase. Moreover, governments should prohibit the formation of companies with opaque structures to make it easy to ascertain who the people involved in the organization are.

The U.S. is already taking its first steps to increase transparency through the Counter Terrorism and Illicit Finance Act introduced into the Senate in January 2018 that would create a nationwide consolidated database that standardizes the information collected by financial institutions and makes it widely available to relevant parties. Now, imagine if this database were global or sharable among financial institutions, criminals wouldn’t be able to exploit changing geopolitical tides to funnel money through blind spots or countries with fewer anti-money laundering resources.

Connect the dots: A wealth of public data exists between tax records, property, insurance and asset registries that can be combined to paint a comprehensive picture of an individual’s or corporation’s assets. This goes one step beyond creating a national database, to link that information with other publicly available records to find unexpected activities. For example, if an individual has low income but makes high-value purchases, it’s not a hard leap to figure out that this person is getting money from somewhere off the books and should be investigated further.

Tougher regulation: Implement aggressive time limits for owners to come forward and require they do so before a sale is made to stop the transfer of dirty money in the first place. Mandate that law firms and real estate agents get this information and make it an offense not to comply so someone is liable if dirty money is found to have been used in the transaction.

Another approach is implementing the equivalent of the U.K.’s Unexplained Wealth Order, which signed into law in January 2018, allows assets over £50,000 to be seized from suspected criminals and places the burden of proof on the owner to show that the property was legitimately obtained. The first target of this order is Zamira Hajiyeva, the wife of the former chairman of the International Bank of Azerbaijan convicted for embezzlement.

The U.S. already requires financial institutions to file Suspicious Activity Reports (SAR) within 30 days of a suspected incident of money laundering, but going one step further to target those assets for seizure would go a long way in keeping dirty money out of large transactions. In fact, it’s important to not just apply this framework to real estate – the luxury goods market (cars, boats, art, antiques, etc.) is a hot bed for money laundering and the more pressure is applied to real estate the more activity will move to alternate routes. We don’t want to shuffle illicit activity to new sectors, we want to remove the channels altogether.

By focusing on transparency, standardizing information collection and sharing, and tightening regulation on high-value assets, governments can make a huge impact on the amount of dirty money that is able to flow through real estate and ensure locals aren’t priced out of their own neighborhoods due to foreign and illicit money.


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