Are Foreign Investors Laundering Money in U.S. Real Estate?

It appears that a group of U.S. nonprofit organizations believe this is happening and they are urging the Treasury Department to look closer at foreign buyers to see if they are laundering money in the U.S. real estate market.

A request from 17 nonprofit organizations, contained in a letter sent to the Treasury Department’s Financial Crimes Enforcement Network, asked for the repeal of a 2002 temporary exemption from provisions of the Patriot Act that had been granted to the real estate industry.

As signed into law in 2001, the Patriot Act would have required real estate brokers and others involved in real estate closings and settlements to conduct due diligence checks on their customers. After heavy lobbying by the industry, the industry was exempted from the final regulations.

The letter, signed by a coalition of 17 diverse groups including Transparency International, Global Integrity and Global Witness, cited a recent series in The New York Times, Towers of Secrecy, which documented how wealthy international buyers, including politicians and those who have been the targets of government inquiries, had used shell companies to purchase luxury New York condos.

The letter said that The Times articles “demonstrate the lack of due diligence by the real estate industry into buyers’ identities, backgrounds or the source of their funds.”

Shruti Shah, a vice president for one of the organizations, Transparency International-USA, said in a telephone interview, “The U.S. should not be providing a red carpet for dirty money.”

Responding to the letter, Steve Hudak, a spokesman for the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, said in an emailed statement that the agency agreed with the concerns expressed in the letter, calling potential criminal abuse of the real estate sector a “fundamental priority.”

Even as the United States has urged other countries to help it crack down on Americans hiding money abroad, recent Justice Department cases and congressional reports have said that foreign money tied to corruption has been found in United States real estate, moved into the country using shell companies.

The letter also asked for the strengthening of rules proposed in August 2014 requiring banks and other financial institutions to increase scrutiny of “legal entity customers” which include these limited liability companies.

Currently, while banks are required to “know customers,” there is no obligation for financial institutions to determine the identity of the beneficial owners of such legal entities, a loophole that may permit them to bypass normal bank scrutiny.

What do you think?  Should the government take actions to ensure money-laundering isn’t taking place in the RE market? We’d like to hear from you.

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