The Money Laundry Is Closed

Co-op and condo boards love it. Developers hate it. It’s the new regulation issued by the U.S. Treasury Department that cracks down on anonymous owners of Limited Liability Companies (LLC) – also known as shell companies – who pay for pricey Manhattan apartments with cash.

Aimed at preventing money laundering by foreign buyers, the new regulation requires title companies to divulge the names of individual buyers paying cash for condos and co-ops valued at $3 million and more.

These foreign owners in New York have been spiking. The Real Deal reports that in 2014 foreign-born owners acquired 54 percent of all properties in Manhattan worth $3 million or more.

Leni Morrison Cummins, a New York-based attorney and partner at Cozen O’Conner, says the regulation plays out differently for new construction as opposed to established condos and co-ops.

“If you’re on the sponsor side and your goal is to sell out, you hate this rule,” Cummins says. But Cummins has been telling established co-op and condo boards, “You’ll love this rule because it provides another opportunity for the board to have control and knowledge of who the owners of units are.”

In the past, anonymous ownership could be a thorn for condos and co-ops. If the unidentified owner was organizing raucous parties or renting their units on Airbnb to strangers, boards didn’t know “whom to go after to hold someone accountable,” Cummins says. If the board knows who the owner is, she adds, “it holds the key to the castle and can go after the owner, in addition to chasing after the LLC.”

Attorney David Berkey, a managing partner at Gallet Dreyer & Berkey, notes that the new regulation pertains to acquiring $3 million properties in cash, money order or traveler’s checks – not personal or bank checks. “The Treasury was concerned about money laundering, even though it’s only a small percentage of sales that might be used to launder money,” Berkey says. “It’s a way of taking money gained in ill-gotten ways. Once the property is sold, they have good money.”

When an LLC tries to acquire an apartment in a building other than new construction, Berkey advises the co-op board to “obtain information regarding the finances of the LLC principals. They must guarantee the financial obligations of the LLC.” Condo boards have less leverage and don’t have to power to reject a buyer just because it’s an LLC, he adds.

Esen Edip, president of Titles of New York, a title insurance company, says the U.S. Treasury has targeted title insurers to identify foreign buyers because these companies “are licensed and trained to do a thorough review of corporate (documents) and follow the chain of title. Title agencies are drafting transfer tax documents, which contain the authorized members’ information.”

Penalties for title companies that violate these laws are severe, including criminal penalties of up to five years in prison and $250,000 in fines, and civil violations of up to $100,000 and loss of the value of transaction.

In hundreds of deals that Edip has supplied title insurance for, she can recall only two where she suspected the buyer might be involved in shady activities. One buyer turned out to be legitimate. Most buyers seek privacy and “prefer the LLC to keep it private,” she says. “They don’t need paparazzi outside of their residence.”

But the regulation’s effectiveness at reducing money laundering is probably not a big concern for most co-op and condo boards. Ultimately, Cummins says, this new regulation gives boards the tools to “get information to identify owners of units. That’s the takeaway.” And it’s not a small thing.