How Much Money Laundering is Going On in the Housing Market? A Lot

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Answers trickle in. Tough luck for New York, San Francisco, Miami…

“I am shocked – shocked – to find that money laundering is going on in here!” – Borrowed and twisted from Casablanca.

The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced on Thursday that it would extend for another 180 days a “temporary” program that was due to expire on Thursday, and that it had originally kicked off in January 2016 and expanded in July, to identify and track secret homebuyers who hide behind shell companies and “other opaque structures” for the purpose of money laundering.

And it has already gleaned some insights.

The US housing market has been a perfect platform to launder large amounts of money, no questions asked. Brokers, banks, and other industry professionals played along. There were no reporting requirements. Everyone in the world knew it. And they came to launder their cash by buying expensive homes.

But FinCEN, via its evocatively named Geographic Targeting Orders (GTO), wants to know who these opaque homebuyers are. To find out, the GTOs “temporarily require US title insurance companies to identify the natural persons behind shell companies used to pay ‘all cash’ [i.e. without bank financing] for high-end residential real estate in six major metropolitan areas.”

FinCEN is soliciting the help of title insurance companies “because title insurance is a common feature in the vast majority of real estate transactions,” and these companies can provide “valuable information about real estate transactions of concern.”

In its July announcement, when the program  was expanded from two metros – Manhattan and Miami Data – to six metros, FinCEN Acting Director Jamal El-Hindi wouldn’t say to what extent money laundering was involved, but he did throw in a tantalizing tidbit: “The information we have obtained from our initial GTOs suggests that we are on the right track.”

This time around, FinCEN gave a number, a percentage of “suspicious activity”:

FinCEN has found that about 30% of the transactions covered by the GTOs involve a beneficial owner or purchaser representative that is also the subject of a previous suspicious activity report. This corroborates FinCEN’s concerns about the use of shell companies to buy luxury real estate in “all-cash” transactions.

30%!




El-Hindi, still Acting Director, added:

“These GTOs are producing valuable data that is assisting law enforcement and is serving to inform our future efforts to address money laundering in the real estate sector.”

“The subject of money laundering and illicit financial flows involving the real estate sector is something that we have been taking on in steps to ensure that we continue to build an efficient and effective regulatory approach.”

So they might actually try to do something about it.

Apparently he had the permission of his new boss at Treasury, former real estate-magnate and former Sears Holding Director Steven Mnuchin, and Mnuchin’s boss, real-estate magnate President Trump, to extend the program. So this doesn’t look like one of those Obama things that is getting chopped.

Here are the cities where this information-gathering on secretive buyers is in effect (and the minimum purchase price that will trigger it). Several of them are among the biggest destinations of global wealth:

  • New York: Manhattan ($3 million); Brooklyn, Queens, Bronx, and Staten Island ($1.5 million)
  • Florida: Miami-Dade County, Broward County, and Palm Beach County ($1 million).
  • Bay Area: San Francisco, San Mateo County, and Santa Clara County ($2 million)
  • Southern California: San Diego County and Los Angeles County ($2 million)
  • Texas: Bexar County, which includes San Antonio ($500,000).

This effort to get a grip on money laundering – it’s not even a crackdown yet since there are no enforcement actions – is already helping to put a chill on these markets. In the top three markets on the list above, along with some others, sales and prices in the luxury segment have already taken a hit.

Fact is, the industry loves this influx of opaque money. Money launderers don’t mind paying a little extra. Their priorities are different. So luxury home prices soared, which made everyone happy, including government entities that extract property taxes. And these higher prices trickled down to the rest of the market. But that trend at the high end has now started to turn south.

And it sounds like FinCEN will actually come up with some regulations to crack down on money laundering in the overall US housing market. If that future system has teeth, it would surely be a very unwelcome blemish for the industry – and a further handicap for the luxury segment of the housing market because a whole layer of buyers would lose interest.

Here’s why a real estate insider thinks the era of “aspirational pricing” is over. Read…  Luxury Home Listings “Overpriced by a Third?”




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  53 comments for “How Much Money Laundering is Going On in the Housing Market? A Lot

  1. FreeThinker
    Feb 24, 2017 at 1:31 am

    Can the limits not be circumvented. For e.g., in SF bay area instead of buying a $2million house buy 2 houses for ~ 1 million each

    • Feb 24, 2017 at 8:17 am

      Yes, there are many ways to get around this. And FinCEN is just picking up information at this point. So people can still do all these things without consequence, at this point.

    • RD Blakeslee
      Feb 24, 2017 at 8:27 am

      The “rich” will find ways, new and old, to stay “rich” (“rich” is defined as those who have a lot of “money”, what’s “money” and how much is “much”? Don’t ask. Are there other forms of “richness” that are independent of “money”? Also, don’t ask. It’s ALL ABOUT MONEY.)

      The particulars of the ways found to stay “rich” are of no interest to this peon.

  2. Mike G
    Feb 24, 2017 at 2:01 am

    So FinCEN having publicly announced their targets, money laundering will simply shift to other big cities. That’s one way to spread the wealth/loot around, I guess.

    • Feb 24, 2017 at 8:20 am

      This is just an effort to gather information and figure out how to write regulations on it. Then they’ll roll it out nationwide – that’s what that announcement seems to say.

      • RD Blakeslee
        Feb 24, 2017 at 8:29 am

        …whereafter the regulations will be circumvented.

  3. Maximus Minimus
    Feb 24, 2017 at 2:49 am

    There is nothing illegal about money laundering when it clearly is aided and abetted by the government of the host countries.

    • NotSoSure
      Feb 24, 2017 at 1:10 pm

      Exactly. But what do you expect? Western governments are so corrupt and most of all hypocritical.

      And of course there’s the new Western business mantra first popularized by Silicon Valley: “Move fast. Break things. Apologize later.”

      Where the hell is that darn Earthquake?

      • kitten lopez
        Feb 25, 2017 at 10:37 am

        Amen.

  4. Adam
    Feb 24, 2017 at 4:09 am

    It might also push the activity to lower tiers of the real estate market. Instead of buying one $5 Million house, they might buy 5 $1 Million houses. The additional cost of purchasing and managing the properties will simply be the cost of doing business. If actually 30% of the transactions fall into this suspicious activity category, then this might actually increase the prices of RE in the lower tiers in many markets.

    • Feb 24, 2017 at 8:23 am

      See my reply to Mike G. It provides some clarification.

    • Maximus Minimus
      Feb 24, 2017 at 11:42 am

      Watch how the small suitcase market is doing for an indication of that activity.

  5. Thomas Bohlmann
    Feb 24, 2017 at 7:33 am

    All cash purchases should follow the banking Know your Customers requirements.

    Bank statements or US investment account statements in US dollars.

    It is not just the over $500k, the $35-$100k in cash Pruchase too.

    Any cash Purchase.

  6. Lars
    Feb 24, 2017 at 10:00 am

    I was just thinking two days ago, what could possibly be the next Bush Real Estate Scam !! (as I had been running a whole bunch of my writings thru spell-check the day before)

    It looks like you have figured it out, Wolf !!! It’s money laundering !!!

    The first two Scams are under analysis below.

    The Bush I Real Estate Scam : During Bush I a large number of real estate properties were allowed, by the criminal actions of the Appraisers, who were instructed by higher-ups to make ridiculously high valuations on certain properties, and many other properties in general as well so as to mask the certain properties involved, and all of these properties became subsequently over-indebted with unrealistically large loan amounts. When the general real estate market began to decline after The Fed raised interest rates and the economy slowed, Government Regulators declared certain of the Savings & Loans ‘technically insolvent’, specifically the ones which were criminally allowing the appraisal overvaluations and subsequent enormous loans. This allowed the criminal element within our Government to declare them bankrupt. Then the FDIC stepped in and began the foreclosure process, using the newly formed RTC (Resolution Trust Corporation) to handle the ‘rigged sale’ of the ‘cherry picked’ premier properties to ‘insiders’, who made a fortune acquiring great properties at ‘nickels-on-the-dollar’, with the remainder being auctioned off at dimes-on-the-dollar to the ‘regular insiders’, and We The People footed the bill for the entire mess, which was to the tune of several hundred Billion dollars.
    They set it up by overvaluing the properties with criminally phony appraisals at a select few Savings & Loans, then grabbed the institutions involved with an insolvency action, and sold the spoils to their insider friends, and bilked the taxpayers for the ‘loss’.

    The Bush II Real Estate Scam : Under Bush II they criminally allowed the borrowers to be overvalued in their creditworthiness and to be given mortgage loans that were ridiculously too large, and on properties that were priced too high as well, due to the real estate market bubble’s “irrational exuberance”, and the political agenda of ‘everyone should own their own home’, no matter how little they earn or how expensive the average home is now priced. This seriously over-indebted the borrowers, who soon became ‘underwater’ on their property’s ‘loan to value’ ratio, and especially so after the 2008 mortgage crisis hit. Foreclosures became rampant, but this time the financial insiders will scoop up millions of 3-4-5 bedroom residential properties for nickels on the dollar, rather than on the mostly large commercial properties under the Bush I Real Estate Scam, and the taxpayers will again pick up the tab. And again, the orders, this time to ‘overvalue’ the borrower’s creditworthiness, came from ‘on high’.

    • harry
      Feb 24, 2017 at 1:58 pm

      I knew it. Bushes fault of course.

      • i1
        Feb 24, 2017 at 8:48 pm

        Yes, that would be the Bush-Clinton cartel. Instrumental in drug running as well.

  7. Petunia
    Feb 24, 2017 at 10:01 am

    This effort is just pathetic. They might as well do nothing, than be seen as doing nothing on purpose.

    • Maximus Minimus
      Feb 24, 2017 at 11:58 am

      Pathetic by design. Let’s see if I can shed some light on the scheme.
      Stage 1: Offshore your industry at random cheap locales by your “entrepreneurs”.
      Stage 2: Scoop up the profits that the locals produce by allowing them to launder the money in your country.
      Take payoffs from “entrepreneurs” and screw the population all the way.

  8. MaxDakota
    Feb 24, 2017 at 10:05 am

    I’ve always found it a little weird that foreigners can buy and own property in the US. For example, if a foreign owner fails to pay property taxes, how do you go after them?

    • Feb 24, 2017 at 10:17 am

      Put a lien on the property. And if nothing happens for years, they can go through legal procedures to auction off the property, take the past-due taxes, any fees, and legal expenses out of the proceeds of the sale and let the owners/creditors have what’s left over, if anything.

      Tax authorities have TEETH.

      • Mark B
        Feb 24, 2017 at 12:48 pm

        You’re right about the tax authorities having teeth. I attended a foreclosure auction in Phoenix a few years back. I didn’t find any deals I was interested in, but you could basically obtain a property by paying the back taxes on it. If there were still tenants, you had to go through the eviction process yourself, no help from the county. One of the reasons I wasn’t interested. But it was an interesting experience, a lot of big players there buying up properties in bulk.

    • Nimrod Herkimer Ramses XII
      Feb 26, 2017 at 5:11 am

      You don’t have to, you grab the property.

  9. Kam
    Feb 24, 2017 at 10:58 am

    Dirty money pushes out honest money- pricing housing out of reach for locals. And politicians are in the mud up to their dirty eyeballs.

  10. JimTan
    Feb 24, 2017 at 11:02 am

    Is it a coincidence that US Treasury’s FinCen reports 30% of large ‘all cash’ transactions for luxury housing in major metropolitan areas are suspected of money laundering, and the last line of this post links to the article “Luxury Home Listings “Overpriced by a Third”?
    :-)

  11. Feb 24, 2017 at 11:23 am

    I suppose they could buy with say 50% cash and 50% mortgage, then immediately pay off the mortgage, to avoid scrutiny.

    • VegasBob
      Feb 24, 2017 at 12:01 pm

      The problem with the mortgage approach is that the buyer usually has to supply a lot of personal financial information to qualify for the mortgage.

    • Feb 24, 2017 at 12:17 pm

      The process of getting a mortgage would instantly supply all the info needed, even if paid off right afterwards. That info – including who the real buyer is – would remain available forever. So you could still do that, but you would no longer be hidden.

      • Sporkfed
        Feb 24, 2017 at 1:45 pm

        Straw buyers then a short sale to an offshore corporation.

      • Nimrod Herkimer Ramses XII
        Feb 26, 2017 at 5:14 am

        Even if the loan comes from yet another shell corporation?

        I mean really, ShellCorp X loans ShellCorpY the money to buy the property, X’s security interest is recorded on the deed, no longer a cash deal.

        You don’t need to be a bank or financial institution to finance a mortgage. Seller-financed mortgages happen all the time.

        • d
          Feb 26, 2017 at 4:11 pm

          “I mean really, ShellCorp X loans ShellCorpY the money to buy the property, X’s security interest is recorded on the deed, no longer a cash deal.”

          Most bigger deals are done that way, it also means Y can claim tax relief, on interest, he never pays.

  12. TheDona
    Feb 24, 2017 at 2:07 pm

    Looks like Houston is becoming another target area according to my ‘boots on the ground’ there.

    • TJ Martin
      Feb 24, 2017 at 2:57 pm

      Denver has been for quite some time as well .

  13. A
    Feb 24, 2017 at 2:29 pm

    Hi,

    I have a question about the current housing bubble in comparison to the one that crashed around 2008. I’ve been reading your blog for a while and really enjoy the content overall, but I haven’t found an article that compares the risks to the overall economy of the two bubbles. Some articles I’ve read say that today’s bubble is not as severe and not as risky as the one from 2006. What do you think? What’s your perspective? Would you consider writing about this or pointing me to some information that includes a comparison?

    Thanks :)

    • william
      Feb 24, 2017 at 11:35 pm

      The media are not comparing the two RE bubbles, 2008 vs current, because they differ quite a bit. 2008 was nationwide but the current one is not. Today’s new home sales are still at a rate less than half of 2008’s rate of new home sales. The percentage of U.S. households owning homes is much lower now.

      All of today’s bubbles are lower than those of the past, except for the student loan bubble and the car debt bubble.

  14. Lee
    Feb 24, 2017 at 3:35 pm

    It appears that Chinese purchases of units/condos/apartments in Tokyo have been falling as a result of the crackdown on Chinese funds outflow…………….

    Maybe the Chinese government will take care of part of the ‘money laundering’ problem for the USA:

    “Hayato Jo has a wall full of notices of apartments for sale, with a 20 percent increase in the number of people looking to sell in the area in the past year.

    Prices in the neighborhood, which surged 25 percent since Tokyo won the right to hold the games in 2013, have started to fall from their peak.

    Elsewhere, more cracks are appearing.

    The number of unsold new apartments in the city reached the highest level in seven years last year.

    Inquiries from Chinese investors, who helped fuel property market gains, have halved since August 2015, according to Noboru Takimoto, senior manager of overseas residential sales at Jones Lang LaSalle K.K., as the world’s second-biggest economy slowed.

    The average price of a newly-built three-bedroom apartment in Tokyo rose 24 percent in January from a year earlier to ¥69.1 million ($612,000), the highest since the Real Estate Economic Research Institute started compiling data in 2000. ”

    And if the USA shoots itself in the foot just just Vancouver did by increasing the tax on foreign real restate purchases with any new rules and/or regulations, I hope that some of the hot money would come to Australia because, as I posted a long time ago, that the banks and the government here would be the ones to instigate the actions that would major impacts on real estate purchases and prices, it appears that there is going to be a major shift in the real estate market here as a result of property valuations.

    Real Estate holdings here are subject to taxes just as in other jurisdictions. Here there are four basic types of taxes:

    1. Capital gains: everything but your principal place of residence (PPR) is subject to them. There is no inheritance tax here on any capital asset though.

    2. Stamp duty – basically a transaction tax and with few exceptions everyone has to pay (those on pensions are exempt of tax for the first A$350,000 here in Victoria and ‘first home buyers’ also get part of an exemption). Foreign buyers also get hit with a higher rate as well. This tax is one of the biggest reasons that people are reluctant to sell a high value property and downsize to a cheaper house. A million dollar property will cost you around A$50,000 in tax for the buyer here in Victoria.

    3. Rates – plain old real estate property taxes to you yanks. They used to be reasonable, but with the greedy local councils pushing up rates year after year and the huge increase in values they have soared. In ten years the property taxes on my house have tripled. Last year the State of Victoria finally put a cap on how much local councils could increase rates. This is now limited to around the rate of inflation or 2.5% a year.

    4. Land Tax – This is a tax placed on property if you own more than one property and the value of those properties is over a certain threshold, Here in Victoria there is no land tax on your PPR regardless of the value.

    The threshold is now A$250,000 and it is a progressive tax with huge increases as the value goes up. Last year was a revaluation year and with the huge increases in land values here in Melbourne the amount of tax on these revalued properties has skyrocketed.

    This is going to have a huge impact on cash flow and valuations and cause major problems for the commercial/investor markets…………

    “Landlords have been hit by steep land tax increases from soaring property values, in some cases more than doubling tax bills and making investments uneconomic.

    In another case, an elderly 90-year-old woman who owns a Swanston Street shop and lives off the income with a full-time carer, has seen her most recent tax bill jump from $6095 to $40,950.

    A Toorak rental property’s bill rose from $16,915 to $31,725.”

    SEE:

    Japan

    http://www.japantimes.co.jp/news/2017/02/24/business/economy-business/realtors-say-tokyos-housing-boom-fading-sales-chinese-slow/

    Australia:

    http://www.theage.com.au/business/property/bill-shock-for-landlords-as-land-tax-skyrockets-20170224-gukiya.html

    • Maximus Minimus
      Feb 24, 2017 at 10:15 pm

      Nobody said Chinese property buyers were stupid.
      Nobody said the crooked operators who took their money are stupid.
      Tokyo is in range of NK nuclear missiles.
      And you Australia, take as much hot money as you want. Good riddance.

  15. Bill Lumberg
    Feb 24, 2017 at 5:25 pm

    Hi Wolf,

    Do you have a source for the quote “FinCEN has found that about 30% of the transactions covered by the GTOs involve a beneficial owner or purchaser representative that is also the subject of a previous suspicious activity report. This corroborates FinCEN’s concerns about the use of shell companies to buy luxury real estate in “all-cash” transactions?”

    Google searching that phrase only turns up this webpage. Thanks!

    • Feb 24, 2017 at 8:18 pm

      Yes, it’s the gov document linked in the first paragraph.

      The reason you couldn’t find it on Goggle with quotes around it is because I changed “30 percent” to “30%” as I always do.

      • Bill Lumberg
        Feb 24, 2017 at 8:25 pm

        Thanks Wolf. I never doubted you!

  16. JB
    Feb 24, 2017 at 6:22 pm

    what’s the big deal now? this has been going on for years. Some salient points :
    1.) NAR actively lobbied not be subject to AML rules per ZH post .
    http://www.zerohedge.com/news/why-nar-will-never-be-prosecuted-facilitating-money-laundering

    2.) Here is the federal exemption code for title insurance companies.
    https://www.law.cornell.edu/cfr/text/31/1010.205
    3.) foreign sellers are subject to FIRPTA however
    a.) this automatic deduction of withholding
    from the sale proceeds (buyers
    responsibility) .

    seems foreigners have more rights than US citizens . transfer 10 grand from your bank account and the transaction is reported to feds.
    Carry 10 grand cash in your vehicle and it can be seized via civil forfeiture laws. where did we go wrong ?

    • Feb 24, 2017 at 8:22 pm

      The “big deal” is that the government is starting to go through the steps needed to close those exemptions. First they want info … how big a problem is it? Then they want more info from more cities… including how to get the industry to cooperate… then they’ll pass regulations.

      In the process, they’re scaring money-launders away, for the first time ever.

      • JB
        Feb 24, 2017 at 9:42 pm

        understood , my opening comment was sarcastic reflecting upon the time it took to re mediate a potential problem. Perhaps the new current regime is using executive powers to quickly curtail abuses as opposed to the legislative process which could get mired. Regardless, foreign money has exasperated the real estate bubble.

      • d
        Feb 24, 2017 at 10:09 pm

        “Apparently he had the permission of his new boss at Treasury, former real estate-magnate and former Sears Holding Director Steven Mnuchin, and Mnuchin’s boss, real-estate magnate President Trump,”

        “Employ crook’s, To catch crook’s.”

        The US may have inadvertently done something correct in this area.

        Those two crook’s know all the dirty trick’s in the book and a lot of others that aren’t even in it yet..

        • realist
          Feb 25, 2017 at 12:06 am

          It is fortunate that the President and Treasury Secretary are highly familiar with chicaneries of real estate, as they might better be able to prevent off-shore money laundering from becoming the dominant industry in certain American cities, as is the case in Vancouver, BC.

        • junior_kai
          Feb 25, 2017 at 6:31 pm

          Trump has probably lost some deals in the past due to competition from people/consortiums/countries with funny money. Hes had to play by a different set of rules and you know what they say – payback is a b!tch!

        • d
          Feb 25, 2017 at 8:23 pm

          Trump inherited his grandfathers and fathers “Connection’s”.

          That’s why his demolition and construction project’s in NY. Happened, faster than average joe’s multi year wait, just to get a demolition permit.

          So yes, he has always played by a different set of rules, much easier one’s, than what the average Joe gets to play by.

  17. mean chicken
    Feb 24, 2017 at 7:40 pm

    So nothing has been done over the past 8 years, we were promised change?

    • JB
      Feb 24, 2017 at 9:44 pm

      thanks for reply mean chicken . exactly my point (JB)

  18. Paul
    Feb 26, 2017 at 8:04 pm

    I have several Chinese friends that tell me the situation in China is worse. Flat’s that cost $3 million US are renting for $4,000 a month. There are thousands of vacant units.

    There is A LOT more money coming in. I was asked if I knew anyone selling a dairy farm in the $150 – $200 million dollar range. This is chump change for the, Chinese investors are looking here In colombia as well as the rest of S. America, They’ve already flooded western Canada. Prices can go up for a long long time.

  19. chinese friends
    Feb 27, 2017 at 12:34 pm

    I have several Chinese friends that tell me it’s all borrowed money.

  20. Ed peters
    Feb 27, 2017 at 9:00 pm

    What about Boston? Significant influx of chi-com money; $3m apartments in downtown are the norm. The PLA sends their kids to Boston University and find the exotic car dealers along Comm Ave in Boston. They pay all cash for a $1m condo. Driving out locals, and young families…

    • Beantown Pete
      Mar 1, 2017 at 1:29 pm

      Close contacts in the sales business tell me it’s all borrowed cash.

  21. Feb 28, 2017 at 1:48 pm

    Yes, foreigners want to “bank” some of their wealth and hedge their home country bets using US real estate since those assets are not yet required to be reported to their home governments (like China). (Don’t forget, the US requires its citizens to report foreign bank accounts as well.) However, because of really punitive estate taxes in the US on non US citizens, foreigners are well advised to set up cheap corporate shells to hold their real estate. Putting US real estate, stocks or bonds in a personal name would be a financial disaster for beneficiaries if a foreign owner dies. This is a real issue for some of our clients. While there are money launderers out there, I bet most foreign investors are legit and very smart about protecting themselves from the controls of governments.

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