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REPORTED DECLINE OF MIAMI REAL ESTATE CASH SALES NOT NECESSARILY PROOF OF MONEY LAUNDERING

Decline in cash sales and purchase by LLCs

REPORTED DECLINE OF MIAMI REAL ESTATE CASH SALES NOT NECESSARILY PROOF OF MONEY LAUNDERING

October 8, 2018 – There’s been much debate in the Miami real estate market in regards to money laundering, cash sales and the government Geographic Targeting Orders regulations (GTOs) aimed at absentee foreign investors. Just this week, President Donald Trump was accused of a lifetime of tax evasion and money laundering in a New York Times exposé.

In 2016, the U.S. Treasury Department set out to curb potential corruption and money laundering and enacted regulations that required cash buyers of high-end real estate to reveal their true identities. The Financial Crimes Enforcement Network (FinCEN) first used these GTOs to focus their crackdown specifically in Miami and New York City. Let’s be clear, it has always been common for foreign buyers to purchase residential properties using limited liability corporations or shell companies, as opposed to taking ownership in their personal name.

CASH SALES AND LIMITED LIABILITY COMPANY (LLC) PURCHASES DON’T ALWAYS EQUATE TO ILLEGAL OR SUSPICIOUS ACTIVITY

While almost everyone agrees that a portion of these cash sales likely involved less than scrupulous acts of money laundering, there are also many legitimate reasons for a buyer to remain anonymous. There are various legal, estate, and income related tax reasons to purchase through a corporation, including protecting assets from issues of divorce, bankruptcy or other lawsuits. For some foreign buyers, many who face a great deal of government corruption, using an LLC is a way to protect and conceal their purchases from authorities back home. During the financial crisis in Venezuela, caused mainly by a drop in oil prices, the government turned to printing more money, causing inflation rates to reach as much as 83,000%. As the Venezuelan Bolivar was rapidly declining in value, investors scrambled circumvent the government and get their cash out of the country, many by way of real estate purchases.

Since the establishment of GTO’s, statistics for all-cash purchases by limited liability corporations and other corporate entities showed a decrease from 10% of total sales to just 2.5%. All cash sales of luxury properties showed a drop by at least 4 percent. Miami numbers showed the biggest drop among all markets: corporate purchases of residential properties took a nosedive from 29 percent to just 2 percent.

REDUCTION IN RECORDED CASH SALES A RESULT OF MORE FACTORS THAN JUST GTOs

Some analysts and government regulators are touting the success of the program as a “we told you so,” considering it proof that a majority of these transactions taking place had some level of illegal activity. What they aren’t publicly taking into consideration is that there is more than one way to close a real estate deal, and there are many other factors that likely caused changes in purchase patterns.

Just because these regulations require identity disclosure, buyers are still purchasing Miami real estate, just potentially through different avenues: GTOs do not apply for Miami purchases under $1M; GTOs require the property to be purchased with 100 percent cash; up until last year, wire transfers were explicitly excluded from this “cash” definition because the Bank Secrecy Act of 1970 (on which GTOs regulations are based) doesn’t cover wire transfers; as well as numerous other alternatives for purchasing.

There are also two compelling and legitimate tax planning reasons why so many foreign buyers purchase Miami real estate in the name of a LLC and/or offshore trust. First, they do not want to deal with the delays and major headaches associated with the IRS and FIRPTA withholding taxes. I can attest first hand that these situations are painful, costly, cumbersome and can ultimately result in IRS delays of two or more years from the date of sale to refund the foreign seller the balance of the withholding taxes. Second, there can be serious estate tax consequences for foreign buyers if they do not structure the ownership of the property in a domestic LLC and offshore trust. How would you like it if the US government took up to 46 percent of the property value from the inheritance you had planned for your children, as foreign owners would face in the event of their death?

Additionally, there have been several other market changes in the past years since the introduction of GTOs. We’ve seen drastic supply and demand swings in Miami’s condo market; U.S. political and immigration policies have reached unprecedented turmoil; there have been drastic changes in emerging market currencies as compared to the U.S. dollar, and local economic factors in Miami’s investor feeder markets including Brazil, Argentina, Colombia and Venezuela.

There has also been much debate as to whose responsibility it is to discover and report potential illegal activity. Currently, much of that responsibility falls on banks and title insurance companies, which are required to know who they are dealing with. Developers, brokers and agents are not tasked with determining where their buyer acquired the money from, as long as they don’t have specific knowledge of illegal activity.

WHO SHOULD BE RESPONSIBLE FOR IDENTIFYING ILLEGAL ACTIVITY?

This issue has recently come up for discussion because of a purchase made at Sunny Isles Beach’s new Porsche Design Tower.  Federal prosecutors are seeking to seize one of the units because its purchase is tied to an alleged scheme thought to have used laundered money out of Venezuela’s state-run oil company, PDVSA. The complicated purchase trail involves the unit being purchased in the name of the wife of the Venezuelan Ministry of Oil, then transferred to the wife of an expected money launder and then moved under direct control for the alleged launderer. Developer Gil Dezer, despite claiming that he personally knows the majority of his buyers, states that he did not have knowledge about the entities behind this $5.3M cash sale. Citing the Fair Housing Act and other laws that “require us to sell to buyers that have the ability to sign a contract and send a deposit. We are precluded by these laws from conducting background searches or any action that would be deemed as discriminatory. We simply live in a society where we cannot choose our neighbors.”

PROS, CONS AND FUTURE OF GTOs

As with most new attempts at regulation, there are upsides and downsides. Certainly, a reduction of money laundering and illegal activity is a good thing, but it also must be remembered that there are many legitimate reasons for a buyer to remain anonymous or purchase a property in corporate title. Some worry this might negatively affect property tax revenue while others see this as leveling the playing field for local buyers and investors.

GTO regulations have now spread to cover other “hotbed” markets throughout the U.S. and it’s expected the specific rules will continue to adapt and change in coming years. Whether these rules prove to curtail what they set out to do is yet to be seen. What is certain is that the changes in current all cash purchase statistics are not solely a result of these regulations and are influenced by the many other factors at play.

 

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