For years, the American luxury real estate market has been a favorite place for kleptocrats from around the world to stash their fortunes.
From the Iranian government to Equatorial Guinea’s despotic first family to ousted Haitian dictators, regimes ransacking their domestic populations have long hidden their wealth in Manhattan high-rises, Miami condos, or Malibu beach-fronts, often using anonymous shell companies to mask their ties.
But a new program, launched two years ago under the Obama administration’s Treasury Department, may be helping beat back some of the anonymous, ill-gotten billions that have flooded America’s major metropoles — mainly by forcing transparency, and deterring anonymous investments along the way.
The program, known as Geographic Targeting Orders (GTOs), is overseen by Treasury’s Financial Crimes Enforcement Network (FinCEN) and focuses on certain jurisdictions favored by shell companies making luxury purchases on behalf of anonymous buyers.
Aimed at a handful of prime real estate markets — including Miami, New York, Honolulu, and San Antonio — the GTOs forced title insurance companies to identify the ultimate, beneficial owners behind the shell companies and LLCs making certain luxury purchases. It wasn’t for all property purchases, per se: just the types of million-dollar pick-ups that foreign kleptocrats had found so appealing, and that they’d tried to hide from their domestic populations back home.
And the GTOs couldn’t have come a moment too soon. The Financial Times found last year that over $32 billion per year flowed into the U.S. that met the threshold for now identifying buyers — purchases that, until 2016, “could be conducted anonymously.” Meanwhile, a significant portion of these purchases — all of which help jump taxes and costs of living for locals alike — remain empty throughout the year, effectively gutting city centers and local businesses dependent on foot traffic.
Now, two years on, there’s some concrete evidence that the GTO program might actually be working. Such is the conclusion from a new paper from the Federal Reserve Bank of New York’s Sean Hundtofte and University of Miami’s Ville Rantala.
The findings from the paper are staggering. Looking at the locations targeted by the GTOs, the researchers have found that Treasury’s program may be more effective than even the most optimistic projections.
Among the paper’s top-line conclusions is the estimate that anonymous purchases from corporate entities — the types of shell company purchases loved by dictators and arms dealers alike — had comprised roughly 10 percent of the total dollar amounts of housing purchases in the areas surveyed pre-2016. Since the implementation of GTOs, though, these types of purchases have fallen by a remarkable 70 percent.
In Miami-Dade County, one of the case studies examined, the findings were likewise stark. As the authors write, “In Miami-Dade’s case, where cash purchases by LLCs form a greater portion of the total purchases (more than 1/4 of total purchases in 2015), there is even a noticeable decline in total purchase volumes after the new FinCEN policy in 2016.”
High-end house prices have likewise dropped by over 4 percent since the new policy went into effect, totaling billions of dollars lopped off the top of the luxury housing market since 2016. All told, the authors estimate that since the implementation of the policy there’s been “an annualized drop in volume of approximately $45 billion” in the areas targeted by GTOs. (The researchers weren’t able to include data from Honolulu, which has only recently been targeted.)
Of course, given that the GTOs are limited to only a handful of locales across the U.S. at the moment, it may simply be that kleptocrats and extremist networks are funneling their money to high-end properties in less-than-spectacular venues, like Dallas or Wyoming. But the findings give new ammunition to those trying to track down illicit funds, as well as to pro-transparency groups trying to unwind the U.S.’s role as one of the leaders in global financial secrecy.
Wow! When @USTreasury started asking for names behind #AnonymousCompanies used for cash property buys in #NewYork & #Miami-Dade, purchases fell by 70% ($45bn) & house prices dropped 4.2%. What do they have to hide? Findings from @NewYorkFed @univmiami via https://t.co/Kj8QNUxv29
— Global Witness (@Global_Witness) June 19, 2018
Aside from real estate agents complaining about a decline in their own income, there’s little reason these GTOs shouldn’t be expanded across the country — or that the U.S. shouldn’t encourage other countries to implement their own, similar programs. Of course, given that President Donald Trump’s companies continue to rely heavily on shell companies — some 70 percent of domestic real estate sales from Trump companies have gone to shell companies over the past two years — the White House will likely not offer much support.
But between the findings and Delaware’s recent about-face on anonymous shell company oversight, there’s a sudden momentum for pro-transparency advocates in the U.S. Expanding GTOs won’t be a panacea for changing America’s reputation as a massive offshore haven, but it would be a big step forward — especially given recent evidence showing how much of an effect it’s had on cleaning up skylines from Manhattan to Miami.