During early August 2017, the Treasury Department extended the rules of the LLC Disclosure, known as Geographic Target Order (“GTO”), originally launched in March 2016, to deals that involve wire transfers in transactions higher than $3 million dollars in Manhattan and $1.5 million dollars in other areas of New York City; Miami; Broward and Palm Beach counties in Florida; Los Angeles; San Francisco; San Diego; San Antonio, Texas; and Honolulu, Hawaii. Under this revised GTO, such transactions will require title insurance companies to disclose the identity of buyers who purchase luxury real estate through LLCs. Previously, the GTO was applicable only to real estate deals involving cash, checks, and money orders.

This measure was a response from the Treasury Department to the increase in money laundering in real estate deals. According to FinCEN, about 30 percent of all transactions covered by the GTO involve a buyer who has been the subject of suspicious activity [1].

Although purchasing real estate through LLCs is a completely legitimate and legal practice, money laundering is a reality in the business, which authorities could no longer ignore or deny. According to the Realtors Confidence Index Survey Report and the Economists Outlook, as of January 2017, 23 percent of residential sales were cash sales; 59 percent of the buyers were investors and 57 percent international [2].

Whether the expansion of the GTO will translate into an effective measure against money laundering in real estate transactions remains uncertain among industry experts. Many have expressed the lack of impact it will have, considering that the Treasury Department’s database of buyers will not be made public, hinting at no additional retributions beyond the restrictions already in place. In addition, some claim the regulations still has loopholes. A major loophole being that it requires only U.S. title insurance companies to reveal the identity of the LLC owner, but in many cities, such as NYC, title insurance is not mandatory, according to the Government Department site of Financial Services, and therefore if the buyer elects not to purchase title insurance, the transaction would not be subject to the GTO. [3]

On the other hand, others have expressed concern that the new rules may cause a slowdown in investment in real estate by international investors on the targeted areas and possibly even dissuade buyers altogether.

The objective of the Treasure Department, nonetheless, is clear: to “unmask” those who are purchasing luxury real estate and crack down on those who are using this system as a way to launder money. If successful, it is likely more regulations will be rolled out.

SOURCES

[1] https://therealdeal.com/2017/08/22/treasury-department-finally-adds-teeth-to-llc-disclosure-rule/

[2] http://economistsoutlook.blogs.realtor.org/2017/03/02/all-cash-sales-23-percent-of-residential-sales-in-january-2017/

[3] http://www.dfs.ny.gov/insurance/ogco2005/rg050617.htm