Last month, the Miami Herald reported that an effort to crack down on money laundering through real estate purchases in Miami-Dade County could be expanded nationwide. In a July 31 statement made to McClatchy and the Miami Herald, Florida Senator Marco Rubio announced a proposal to the U.S. Treasury Department that would do just that. If enacted, every cash purchase of residential real estate worth more than $300,000 would need to list the identity of the buyers, rather than remain obscured behind a corporate entity. The effort could have unintended consequences for the real estate sales industry, even for agents who closely follow the letter of the law.
“Does it stop money laundering? Probably, yes,” Jeff Morr, luxury real estate broker for Douglas Elliman, told the Miami Herald in reference to the potential new law. “Is it good for the real-estate market? Probably, no.”
Studies of similar rules enacted in Miami and other markets found that luxury home prices declined after enforcement began — falling 4.2 percent lower than the average in cities without these rules in place. In Miami alone, corporate cash transactions accounted for around one-third of all home sales in Miami-Dade County, according to the Miami Herald, before enforcement began. Afterward, those types of purchases declined by 95 percent.
In 2016, the Treasury’s Financial Crimes Enforcement Network (FinCEN) began a pilot run of new owner disclosure regulations on certain property transactions. Specifically, it targeted all-cash home and condo purchases made by corporate entities. In Miami as well as New York City, any all-cash residential transaction of $1 million or more in which the buyer was a corporation was required to disclose the identity of the corporation’s owners to FinCEN, a requirement that was not previously in place.
As a result, researchers found that these types of transactions became exceedingly rare, not just in the test cities, but all over the U.S. within a year. This was significant because luxury real estate can be used as a conduit through which illicit earnings are laundered. By establishing a shell corporation, a buyer could theoretically remain anonymous while investing in real estate, only to sell a sort time later for a quick profit or at least an easy way to hide illegal earnings.
With the pilot program seeing success and after expanding it to several other cities, regulators assumed it could soon be taken nationwide. FinCEN also began tweaking the criteria used to to trigger the disclosure requirements. In the latest version of the rule, any cash purchase of at least $300,000 would be subject to revealing the identities of the buyers if they were not already known. Sen. Rubio’s proposal would use that same threshold if the rule were to expand to the entire U.S.
“Shell companies involved in shady activities are a big problem, especially throughout South Florida,” Sen. Rubio said in a statement to McClatchy and the Miami Herald. “With this provision, a study would be conducted to look at requiring all shell companies that make cash transactions, regardless of their area, to disclose their identities.”
Agents who spoke to the Herald said despite the potential impact on luxury prices, they still supported the proposal to take the disclosure rule national, if only to erase the stigma against Miami and level the playing field.
“If someone is determined to launder money, they can pick anywhere in the country to do it, from the smallest city in the Midwest to Miami or New York City,” Ron Shuffield, president and CEO of EWM Realty International, told the Herald. “It’s only fair that every area have to report. Otherwise, the rules could be scaring people away from certain markets.”