Here’s Why Feds Are Targeting Cash Buyers in Miami-Dade Luxury Home Sales

What’s become routine in Miami’s cash-happy luxury housing market is now getting federal scrutiny with the U.S. Treasury Department peeling back a layer of secrecy on $1 million deals with no names attached.

The department’s Financial Crimes Enforcement Network issued orders Wednesday requiring title companies to disclose the names behind the limited liability companies making the big-dollar deals for residential real estate in two places — Miami-Dade County and Manhattan.

The rate of cash deals in Miami is twice the national average primarily due to the volume of international buyers, according to the National Association of Realtors. About 27 percent of all U.S. housing sales were made in cash compared to about 55 percent of Miami housing sales in November 2015. About two-thirds of Miami condominium and 40 percent of single-family home sales were cash.

“We are seeking to understand the risk that corrupt foreign officials or transnational criminals may be using premium U.S. real estate to secretly invest millions in dirty money,” FinCEN Director Jennifer Shasky Calvery said in a statement. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address.”

Local real estate professionals say the order may do more than scare away dirty money. It may scare off South Florida’s top investors.

Closing a luxury residential transaction using an LLC is the standard route most international buyers are advised to take for a variety of reasons from tax planning to shielding ownership, said William Hardin, director of the Florida International University Hollo School of Real Estate.

“This is a very normal transaction, especially if you are a foreign resident,” he said. “It’s a very legitimate use of an LLC.”

Luxury broker Ben Moss with ONE Sotheby’s International Realty said many of his Latin American clients buying under an LLC’s protective shield have legitimate security concerns.

“Even though they’re coming to South Florida, they still feel they need to shield who they are,” he said. “Some of these people are targets in those countries. They don’t want anyone to know when they’re here or where they live when they’re here.”

Seasoned high-end buyers have learned to completely keep their name off the record by listing an attorney or accountant as a registered agent on state Division of Corporations LLC paperwork and no corporate officers, Moss said. Delaware corporations also hide ownership interests.

“Some people are just very private,” he said. “I would imagine that they’ll keep trying to find ways to get around this.”

The FinCEN orders will require title insurance companies to record and report the identities of cash buyers in Miami-Dade County and Manhattan from March 1 to Aug. 27. The Miami real estate community agreed it’ll have to wait and see whether the transaction volumes drops during that period.

Joseph Hernandez, a partner and chair of the real estate group at Weiss Serota Helfman Cole & Bierman in Coral Gables, said a few of his Brazilian clients struggle to move their money out of the country, and the new regulation is bound to make it tougher.

Legitimate buyers with money from legitimate sources shouldn’t have a problem, but it’s too soon to tell if this will have a chilling effect on legitimate buyers who prefer anonymity, Hernandez said.

Although Realtors require buyers to show proof of funds before a closing, they don’t necessarily track where those funds came from.

Moss said most Miami brokers have probably run into a situation where a thought crossed their minds: “How does this person have this kind of money?”

Serious Look

“In the long run, it’s a positive thing to have transparency,” Hardin said. “I would argue that transparency is an important thing for any real estate market.”

That’s the goal — find out who truly owns these properties, he said. FinCEN emphasized in its announcement that it chose to target title insurers because they are involved in most real estate transactions, not because of any suspicion that the companies are complicit in fraud.

“To the contrary, FinCEN appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors,” the statement read.

But the new rules could hinder business for title insurance companies, Miami attorney Andrew Ittleman of Fuerst Ittleman David & Joseph said.

“If I’m the title company, I’m taking a really serious look at how much of my business this all-cash transaction is,” he said. “If I really want to keep it, I have to make a decision as to whether I’m willing to take on the enhanced risk of a transaction that is subject to a high level of government scrutiny.”

Ittleman represents clients who are targets of money laundering investigations and advises financial institutions and other businesses on anti-money laundering compliance. He noted the geographic targeting order, or GTO, is the third in the past year that FinCEN placed on Miami, likely due to its reputation as the “Silicon Valley of fraud.”

Last summer, FinCEN ordered check-cashers to look more closely at tax refund checks, and before that another order was issued for Miami businesses that export computer parts to Latin America.

What Took So Long?

Regardless of how FinCEN’s geographic targeting order is enforced, national media coverage has already put doubts in the minds of would- be cash buyers who value their privacy, Ittleman said.

“It’s as high-profile as it gets,” he said. “Even without any enforcement of the GTO, the GTO has an impact. The GTO has a chilling effect on these transactions. That’s already happened.”

But Marcos Jimenez, a McDermott Will & Emery partner and former Miami U.S. attorney, said proper enforcement will count for a lot when it comes to making a dent in money laundering.

Although FinCEN did not release details about how the new orders would be enforced, Jimenez said enforcement would probably be similar to the process retailers use to report cash sales above $10,000 and banks’ currency transaction reports for large deposits and withdrawals.

Title insurance companies will be required to submit a form identifying the beneficial owner, and the preparer could face a federal felony charge for a violation.

Jimenez said the big question about FinCEN’s order was, “What’s taken them so long?”

“I know that people in the banking and financial world have been wondering about this for probably decades, at least 20 years,” he said.

“It’s something that I think U.S. business has looked the other way about for a long time because the more money that comes in here, obviously the better it is for our economy.”

Former federal prosecutor Theresa Van Vliet agreed, saying shell companies concealing beneficial owners have been an obstacle to law enforcement investigations for years.

“Folks who have proceeds of crimes to hide have been using front people or shell companies, whether they’re in the U.S. or offshore companies, since the dawn of time,” said the Genovese Joblove & Battista attorney, who focuses her Fort Lauderdale practice on white- collar litigation and civil and compliance matters.

The focus on title insurers is a “no-brainer,” she said, and setting the threshold at $1 million will help weed out clean-money transactions. But it’s important to remember the reporting requirements are just a first step in a potential investigation.

“Just because someone pays all cash doesn’t mean they’ve done something wrong,” Van Vliet said.

The only downside to the order is it’s temporary, she said.

“I’d be surprised if after 180 days they don’t come up with different rules that make it a little bit longer-standing,” she said. “It’s very difficult to say you’re going to cast a net but you’re only going to leave it in the water for this long. It kind of invites people to just not go swimming for that amount of time.”

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