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

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

“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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40 comments

  1. Bill Smith

    Aren’t millions of these Fincen reports filed annually? Banks/CUs file them on just about anything for CYA. They get filed for anything to do with even newly legal drugs. Other industries file them also.

    And they include fraudulent use of Social Security Number. So anyone who wasn’t properly documented who needed to use a Social Security Number on a financial document would get swept up here?

    So how big a deal is it to find that 30% where named in a previous suspicious activity report?

    “Fact is, the industry loves this influx of opaque money.”

    More accurate would likely be “Fact is, the industry doesn’t care about opaque money.”

      1. Lil'D

        But it is still required in most states. Efficacy isn’t the issue. Simply an entrenched rent that’s a minor parasitical hit on the transaction

        1. readerOfTeaLeaves

          ‘Clear title’ ensures that there are no prior claims or liens on the property in question.
          It is a service like a legal research service.

          ‘Rent’ is unearned.
          Title agents are actually supposed to ensure the title is clear, and if it is not they bear liability.

          1. Vince Snetterton Lewis

            Just because title insurance might be a good idea does not mean it is worth paying for. Especially if legislators have been bribed by the title insurance companies to fix prices.

    1. Tanska

      I think what you mean is that if you pay all cash, you don’t need private mortgage insurance. You will still want a title search and insurance that the title search uncovered no outstanding liens or other claims against the property, if you ever want to sell the property again in the future.

  2. Arizona Slim

    This isn’t limited to high end markets. I can point to an example of foreign money laundering in my central Tucson neighborhood.

    Does FinCEN have a reporting hotline?

    1. oho

      FBI is the best bet. ideally your local office has a related case open on that neighborhood.

      FinCen is more akin to an information gathering agency.

      1. Arizona Slim

        This house is being occupied by a group of Chinese people who look like they could be college students. It is being offered for sale at a price that is far more than what houses go for around here.

        Methinks that this flip attempt will flop.

  3. PlutoniumKun

    Its gotta be remembered that its not just cash buyers who are potential launderers. Sometimes taking out large mortgages and then quietly paying them down quickly is a more subtle way of using property as a way of laundering cash.

    1. Bill Smith

      Seen that on a small scale. A young couple bought a house in a new neighborhood of middle to high end houses. They bought the cheapest model with no options. Not even a refrigerator. They went and paid cash for a really nice stuff. Then they finished the basement, added a really nice deck and screened in porch, hot tub, etc. Paid cash – not even using a check.

      Ended up they were dealing on a relatively small scale on the side.

      They eventually moved away to another newer, nicer neighborhood.

  4. ambrit

    Couldn’t setting up a REIT and using it to ‘cleanse’ some dodgy funds work as well? We are still trying to figure out why prices for housing in the lower echelons is so high relative to the median income. The “aspirational prices” phenomenon is alive and well across all levels of the housing market. We also noticed how “high” the cut off for price levels to be investigated was. Doesn’t that skew the results? Around here, in the Deep South, a million dollars can buy a nice big house with acreage; the pony is thrown in for ‘free.’

    Either way one ‘cuts it,’ this faux wealth effect degrades the quality of life of the “lower orders.” Good for El-Hindi and his team.

  5. George Phillies

    The scheme will not, however, work for long, namely in cities with modern short title records the bank may want title insurance but for people engaged in these schemes the insurance is unlikely to be significant. There is no legal requirement to have title insurance. If I buy a house at an absurd price to move the cash someplace, the objective was moving the cash not having the house.

    1. Corey

      Silly. Title insurance protects the buyer against receiving an impaired title in the property transaction. Essentially, the title company makes sure the seller can deliver clear title, and will do make-good in case of a defect is revealed in future. Read your policy. A mortgage company requires title insurance because they are not going to lend against a property unless they know they can take clear title to it in the event of default. And you are not going to fork over $3M in cash for a property without credible assurance that you are getting actual ownership and – most importantly for money laundering purposes – can re-sell it on to the next buyer (whose title insurance company will conduct their own title-chain research) in order to merge the funds into the legitimate financial system. The object of money laundering is not to “move cash” into impaired assets. May as well stay home and feed the money into a shredder.

      1. Eric

        adverse possession proved title insurance useless. they (title company) put their hands up and said “not our problem.”

        this was repeated by 2 different lawyers.

        This was for land attached to the home, not the home itself.

        1. philnc

          Not likely or common in well-settled, high density, areas like Manhatten island or even suburbs like Nassau and (on the other side of the river) Essex counties. In those jurisdictions property lines haven’t changed in generations, and there’s little opportunity for significant instances of adverse possession, especially where lenders require surveys and title searches as a matter of course or that closing attorneys order them up because it’s considered a best practice. That’s more a characteristic of rural counties where informal easements for access and outright taking by fencing and other means morph over decades into adverse possession. Not impossible though. In areas of rapid urbanization where title insurers traditionally didn’t require surveys some surprises are probably going to show up when that first survey in 20 or 30 years comes in.

      2. Tanska

        What Corey said. Adverse possession requires 10 years in most jurisdictions and the possession must be open “notorious” and unchallenged by the actual owner during that time. The chances of that happening in NYC, SFO, Miami-Dade or Austin are vanishingly small.

  6. Peter Pan

    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.”

    Isn’t it typically the mortgage company or whatever entity is lending the money to buy property that requires title insurance? Do all cash transaction buyers of homes typically buy title insurance for their own protection? Especially foreigners who may not understand why title insurance may be needed.

    I suspect that FinCEN may only realize the size of the tip of the tip of the iceberg in this case.

    1. bob

      Yup. Title insurance is to protect the bank holding a mortgage.

      I also wonder about their high limits to trigger investigation. Plenty of low rent property (most?) is all about money laundering. Duplex’s etc. Rent monies on the back (clean) side

      1. lyle

        Actually there are two title policies issued for a loan transaction, 1 for the mortgage company and 1 for the owner, because defects of title could affect both. If you own a house and someday a notice is posted that someone else has got a court decision and now owns the place because of a defect in title in the past, (for example a sale that did not have all the required signature etc). Now how significant this is depends on the state in questions statute of limitations on title actions. For example in Tx after a chain of title good for 25 years, no earlier issues can arise other than claims that the state owns the property.

        1. bob

          First, I’d suggest that any semblance of title insurance for the owner was lost in 2008 and the mess that followed.

          The banks call the shots. The ‘owners’ are along for the ride, having no ability to assess any of what a “title search” is. In reality, it’s used by the banks to make sure that the ‘homeowner’ can be tossed, legally, from the property if they stop paying the mortgage. You can’t foreclose on what you don’t own. Which brings up the question of ‘ownership’, which is just about stretched as far as it can handle…..

          Second, WRT duplexes and rentals being used for money laundering, via a cut out. What if the ability to prove you own something is not in the interest of the person who wants to “own” the income stream? They recoup their initial investment within a few years of rents. Then can either stick around, collecting rents, or walk, knowing no one can prove they own it.

          In other words, if you’re using a rental property to launder money, you wouldn’t order a title search.

  7. diptherio

    Surprised to see how low the cut-off in the Bay Area is. Isn’t 2 mil about the median price for homes in SF now?

  8. BeliTsari

    Remember joking about our 19yr old cartel & tong slumlords in Fontana, CA. & Portland, OR. back in 2009. As with cops using asset forfeiture to legally steal & “auction” whichever Q7, X5 or Cayenne you want, I’m picturing FinCen to be some scam, straight outa Goodfellas… more likely, “The Gangs of New York?” Cui bono… DWS?
    Make America an empty EZ Credit, Bail Bonds, Party Store, Rent2Own, Recruitment Center strip mall again!

  9. Synoia

    1. Have an attorney inspect an abstract of title, for all cash transactions. No title company involved.
    2. Move the money through the Attorney’s trust account to protect privacy.
    3. Buy the property with a Trust. Most really high end home are owned by trusts, to protect the asset from a lawsuit.

    All the rich need is a lawyer.

    1. lyle

      on Number 3 if the property is a rental, then rather than a trust you make each property an independent LLC (does mean a lot of tax work but…).
      In Tx at least with its unlimited homestead exemption, no need for a trust, since the home is totally protected in bankruptcy, if you live there.In other states more reason since homestead exemptions are less.

  10. dejavuagain

    And Art Auction House. Not only a good way to launder, but a great way to provide kickbacks and bribes, with a commission to the auction houses for their services. I have a $10,000 painting that I will place at an auction house. You can bid $100,000 and buy it. The auction house say takes 20% or less. Leaving $80K, and you have now cleanly paid $70,000 to me. I have held the art for over the cap gains period, so my taxes are reasonable and I have perfectly “clean” money. Oh yes, and Sales Tax may take a cut as well. All “legit.” Oh yes. Now the “market price” of the art has been artificially raised. You can then turn around and sell it at auction in a few years and thet maybe $80,000 – also clean.

    1. wilroncanada

      Canadian University professor R T Naylor wrote about money laundering, and the scams that bring in the wealth, in several books, including “Crass Struggle.” The article is about real estate, the previous post mentioned expensive art, but there are other high-end products which are also used in money laundering and the financing of scams and swindles. They include gold, diamonds and other gems, antiquities, coins and stamps, trophy hunting and exotic pets. Even supposed consumables are not exempt: for example, luxury seafood, wines, cigars and cigarettes.

  11. Kris Alman

    Is this happening in Commercial Real Estate?

    The headquarters of Regence BlueCross Blue Shield in Portland Oregon flipped twice since 2013. The first time was a “bargain and sale” sale deed to CalSTRS (California State Teachers’ Retirement System) for ~$49M. In October 2016, they sold the building for nearly double the price (~$94M) to WealthCap, a German company.

    Washington Regence BlueShield (also a subsidiary company of the parent, Cambia Health Solutions Inc.) went through similar flipping of their Seattle building in 2011 and 2013. Sale price skyrocketed from $76.5 M to $150 M. Talon Private Capital (one of the partners for that deal), boasts: “They strive to be a ‘first mover,’ identifying future opportunity, entering the market when others are still timid, securing deals when competition is weak, and exiting acquisitions when the ‘herd’ follows, pushing prices to unacceptable levels.” The ‘herd’ that acquired that building: Chicago-based Heitman America. Heitman is a global real estate management company with $27.8 billion in assets under management.

    Here’s another building. The Pacwest Center sold for $170M–the highest price in 2016. It’s the fifth-tallest building in Portland and had been owned by The Ashforth Company and an institutional investor. It appears to me that the buyer is a hedge fund: Tr Citadel Manager LLC.

    The central figure in the Oregon deals is John Russell. He is on the Oregon Investment Council, which invests all State of Oregon funds, including the Oregon Public Employees Retirement Fund and the State Accident Insurance Fund.

    Russell is also the General Partner of 200 Market Associates in a limited partnership with Cambia/Regence BCBS of Oregon. He was Partner and President of the PacWest Center, acting as development agent, management and leasing agent.

    I complained to the Oregon Ethics Commission because he did not disclose his relationship with the lobbyist Cambia/Regence. They dismissed it in a letter to me saying, “It does not appear that there is a lobbyist associated with 200 Market Associates.” Right…

    There is a bill to change how property taxes are collected because a 3% cap at which property can increase in value is based on a 1995 valuation. These commercial buildings in downtown Portland have a huge gap between “real” market value and the maximum assessed value.

    You can bet that 200 Market Associates LP will be (secretly) lobbying against any effort to raise property taxes on the property they co-own with Cambia/Regence BlueCross BlueShield: 200 Market St. SW in Portland.

    This building is the hub of big business in Oregon. Current tenants:

    Regence BCBS/Cambia Health Solutions – Reception 14th Floor
    Russell Development Company – Suite 1720
    German Consulate – Suite 1775
    Portland Business Alliance – Lobby Level
    Oregon Business Association – Lobby Level
    Oregon Business Institute – Lobby Level

  12. Aaron Layman Properties

    Harris County Texas please! Developers and builders have made no bones about catering to rich foreign “investors”. If there was ever a GTO with vast opportunity, this is it. I find it hilarious that they flagged Bexar county, and did not include Harris County as well.

      1. epynonymous

        Seriously, there is a Harris, Sarris, & Farris real estate companies right here in Chemlsford, MA.

        Long Story.

  13. readerOfTeaLeaves

    This should have happened 20 years ago.
    They can’t expand this to Washington state soon enough.

  14. epynonymous

    I watched a Twitch stream (live-gaming and commentary with an audience), it was Zelda 2… 89′ NES I belive.

    He never explained the final step, as a professional streamer for an audience of 8… but he explained how you *could* tip just about anyone using your credit card, should you have a credit card to burn. Right through PayPal.

    Hmmmm.

    Long-time fan of your Wolf.

  15. templar555510

    I suspect as a UK resident with previous experience of the UK housing market that the same is true for residential hotspots here as well , notably in central London. One only has to drive along streets of immaculate empty houses in Kensington and Chelsea for example and casually wonder where the life is in these places and check on some property price index website to see the quite astronomic prices of the houses in the best and not-so-best streets to realise that this isn’t a functioning domestic market where the most expensive properties bear some relation to all the others . The top end has been fuelled IMHO by the channeling of laundered money, but so far those same opaque ownerships have not been the subject of any serious scrutiny . Why ? Again IMHO because the politicians are still wedded to this idea that these foreign owners add something to the ‘ economy ‘ . Say no more.

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