Establishing a limited liability company to anonymously purchase property was a method to launder illegal money until recently. A new law passed last year, the Corporate Transparency Act, closed loopholes. But new legal requirements could impact and delay real estate transactions.
LLCs, in many cases, prevented investigators from finding the source of real estate purchases. Funds used for acquiring property could be two or three times removed from financial crimes. Celebrities and politicians, however, used LLCs to legitimately hide their identities for personal safety.
Over 200 shell corporations owned condominiums in the Time Warner Center a high-rise mixed-use project in Columbus Circle in New York City, according a 2015 New York Times investigation. Some units were owned by corrupt businesspeople from Greece and China along with a former Russian senator denied entry into Canada because of suspected organized crime connections. Almost half of the most expensive residences in this country, according to the Times, were purchased through shell corporations.
Following this report, the U.S. Treasury’s Financial Crimes Enforcement Network issued regulations in 2016 to uncover the anonymity of expensive real estate transactions. A 2018 Federal Reserve Bank report showed that the number of all-cash purchases of luxurious real estate across the county, a common technique of buyers seeking anonymity, dropped 70 percent.
Corporate Transparency Act
The Treasury regulations became law in Dec. 2021 under this bi-partisan act. It will take effect in Jan. 2022 to allow time for drafting regulations for buyers and brokers. Willful violations include fines up to 10,000 and up to two years imprisonment although unintentional violations are not punishable.
This law will close loopholes. It also makes buyers intending to own over 25 percent of a property to release their names to law enforcement and other banks and other financial institutions which are required to report suspected money laundering. LLCs used to purchase real estate in this county must meet disclosure requirement even if they were formed in another country.
Attorneys are concerned about invasion of privacy and media leaks. Complicated paperwork could slow down transactions.
The new law, according to the Real Estate Roundtable, may burden small business with compliance requirements. It recommended a balance approach that would block illegal money laundering activity but not burden the real estate industry with unnecessary costs and legal requirements.
However, purchasers should begin collecting required information because of the pending effective date. An attorney can help parties comply with this and other legal requirements governing real estate transactions.