On January 13, 2016, the United States Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a Geographic Targeting Order, or “GTO”, covering the Borough of Manhattan. The GTO was ostensibly issued in response to the media blitz around the use of shell companies to launder money via the purchase of real property.
The GTO applies to “Covered Transactions”, which are defined as transactions in which a purchaser buys Manhattan residential real property for more than $3,000,000.00 in an all-cash deal (i.e., one not involving a lender) using any of the following: (a) currency (cash), (b) a cashier’s check, (c) a certified check, (d) a traveler’s check or (e) a money order. There is no exception for low amounts when it comes to any of the above payment methods; so, strangely enough, a certified check for $1.00 will render the GTO applicable to the entire transaction if all other requirements are met. The order applies to all such Covered Transactions from March 1, 2016 through August 27, 2016.
The GTO requires title companies involved in Covered Transactions to file a report with FinCEN detailing, among other things, the identity of each “Beneficial Owner” of the purchaser entity – that is, each individual owning at least 25% of the equity interests in the entity. Title companies must conduct an investigation into the identities of all Beneficial Owners – and the officers, directors, employees and agents of the title companies that do not comply are faced with the prospect of civil or criminal penalties.
This means, in effect, that purchasers interested in the privacy afforded by the use of a trust or a limited liability company (LLC) when buying a home will have that privacy invaded, at least by their title company and the U.S. Treasury.
Unless, of course, a purchaser chooses to exploit one of the gaping loopholes the government left when creating this GTO.
Perhaps the most egregious error occasioned by the GTO is the omission of wire transfers from the methods of payment covered by the order. Seemingly, a purchaser wishing to circumvent the GTO and therefore maintain his or her anonymity simply needs to have the purchase price, all title company charges and any condominium or co-op fees wired. This requires some prior planning and a little patience at the closing table while the wires are processed, but it can easily be accomplished.
One might think this means that final adjustments or last-minute, power-play demands at the closing table would foil the would-be GTO-evader. However, this is not the case: uncertified personal checks also fall outside the umbrella of a Covered Transaction. It seems that the purchaser can wire the principal amounts required by the transaction and not be derailed when the seller holds out for that extra $121.53 in common charges his or her attorney insists is due at the table.
FinCEN even acknowledged these shortfalls in the Frequently Asked Questions addendum it published on February 1, 2016 in connection with the GTO: a “method of payment not specifically enumerated in [the GTO’s] Section II.A.2.v. (e.g., a wire transfer or an uncertified personal check) would not, in and of itself, qualify as a Covered Transaction.”
The recent release of the Panama Papers and the increased media focus on the use of shell companies for illicit purposes mean that FinCEN’s Manhattan real estate GTO is unlikely to be the last governmental attempt to monitor the use of LLCs and trusts in connection with real estate acquisition. But, given how this GTO was engineered, perhaps the biggest takeaway is that one should never underestimate a government’s ability to fall asleep at the wheel.