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

From Wolf Street, by Wolf Richter

Answers trickle in. Tough luck for New York, San Francisco, Miami…

“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.


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.

Categories: Economy

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