How to Avoid Becoming a Money Laundry

In response to an influx of Limited Liability Companies – also known as LLC’s, or shell companies – paying cash for pricey apartments in New York City, the U.S. Treasury Department passed a regulation requiring title companies to divulge the names of individuals who pay more than $3 million cash for co-op and condo apartments in Manhattan and Miami.

“The Treasury was concerned about money laundering," attorney David Berkey, a managing partner at Gallet Dreyer & Berkey, says of the crackdown on cash purchases. “It’s a way of taking money gained in ill-gotten ways. Once the property is sold, they have good money.”

Condo boards have another line of protection against buyers with unsavory money – the “right of first refusal,” stated in the bylaws, which allows a condo board to buy an apartment for the same price agreed to in a contract. Bylaws typically require the board to waive the right within 20 or 30 days. If they fail to do so, the sale goes through. Some boards worry that they’ll face legal action if they fail to waive the right of first refusal.

"Normally boards feel compelled to issue the waiver, even in a situation where they might not want to," attorney Ian Brandt of the firm Wagner Berkow tells Brick Underground. "Still, in these cases, my advice is not to issue the waiver, even though it goes against conventional wisdom."

Here’s why: "When a board receives that request for the waiver, the question becomes, what can they do if they think the transaction is a sham? The answer is that in every bylaw provision I've ever seen, there's a sentence that says something to the effect of that the board can make a 'reasonable request' for information to determine whether the transaction is bona fide. You can interpret that to mean that the board can look to make sure it's a legitimate transaction."

Article 7 in most bylaws gives boards the right to ask for “reasonable” information about the buyer’s financials. While the request might generate some grumbling from the buyer, it’s not likely to produce a lawsuit. "If it's a sham,” Brandt says, “they're never going to sue you. Criminals don't start lawsuits."