In what is beginning to become a real concern for high-end real estate prices in the US, the Treasury Department confirmed that 30% of high-end real estate transactions that were brought under the new Watchdog program involved “suspicious activity”. The fact that the program has now been extended should see a significant increase in the number of transactions investigated by the authorities.
Confirming ownership
Under the US watchdog, title insurance companies are required to clarify the underlying owners of LLC’s and shell companies which have been used to acquire property. This has been a common tool amongst many in the real estate market effectively allowing people to buy property while remaining anonymous. There are obviously money-laundering and tax avoidance issues to consider which is why the US government recently tightened regulations and gave more bite to the US watchdog.
Those transacting all cash real estate deals will be subject to the new regulations in New York City, Miami, Dade, Broward, as well as Palm Beach counties, San Diego, San Francisco, Bexar and the Bay Area. The specific rules cover cash purchases of more than $3 million in Manhattan, $1 million in southern Florida locations and $2 million in California and Hawaii.
High-end deals matched with suspicious individuals
The US government has a list of “suspicious individuals” who have come onto their radar when looking at money-laundering and other criminal activities. The reporting of all cash real estate transactions, historically a useful vehicle for money-laundering, allows them to match the underlying owners with their “suspicious individuals” list. Alarmingly, to date around 30% of the transactions reported to the US watchdog involved those who have been the subject of a previous suspicious activity report. That is not to say they are guilty of any crime but they have come to the attention of the US government in the past.
The US is not the only country forced to tackle money-laundering and criminal activity with new powers and new regulations. Historically, many in the criminal fraternity have used criminal proceeds to acquire real estate which integrates criminal proceeds into the “system”. These properties are often sold fairly quickly which turns “dirty money” into “clean money” leaving a bona fide trail.
Overseas investors
The new Watchdog powers will inevitably lead to a reduction in cash transactions towards the higher end of the US real estate market. There was a loop hole which exempted wired transactions but this has been closed and they will now be treated the same as all cash purchases. It will be interesting to see the impact this will have on the market because reduced competition for properties will ultimately mean reduced prices. As a consequence, many US real estate agents are becoming more concerned about their future business and profitability.
Summary
It is common knowledge that real estate has historically been used as a means of laundering money and reintroducing it into the system. These new watchdog powers in the US will place a greater focus on “suspicious activity” with those using illicit proceeds likely to think twice before doing all cash US real estate transactions. We saw a similar attack on money-laundering and illicit proceeds in India earlier this year, where certain banknote denominations were replaced overnight, and this did have a major impact upon market activity and prices.