The Feds Crack Down on Dirty Money in Miami Real Estate

If you work in real estate, you know the importance of tenant screening and rental credit checks. What you might not realize is there is another issue in real estate, and it’s a big one. It’s money laundering, and it’s hit Miami in a big way.

  • Monday, September 4, 2017

  Florida   Tenant Credit Checks   Tips   

If you work in real estate, you know the importance of tenant screening and rental credit checks. What you might not realize is there is another issue in real estate, and it’s a big one. It’s money laundering, and it’s hit Miami in a big way.

In fact, it’s such a problem that federal regulators have stepped in to stop it. Let’s take a look at how money laundering works in real estate, and what the federal government is doing to stop it.

Money Laundering and High-End Real Estate

The high-end real estate market is the perfect mark for people who need to wash their money. Wealthy investors from overseas snatch up expensive real estate to clean their money and put it back on the books. This is relatively easy to do in Miami and other U.S. markets because agents and brokers do not have to perform due diligence over buyers.

It’s made even easier with the use of shell companies.

Shell corporations have a singular purpose. They create anonymity for their owners. Not all shell corporations engage in illegal activities. In fact, it’s relatively common for CEOs and celebrities to use shell companies so they can purchase real estate anonymously.

However, it’s also becoming increasingly common for criminals to use them as a means to hide their true identities. 

Take the case of Isaias 21 Property. In 2011, this shell corporation paid $3 million in cash for a condo in Miami. No one knew who really owned the property. Of course, there were public records, but those records traced the company back to one registered in the British Virgin Islands, where company heads can remain anonymous. 

The Miami Herald ended up getting some confidential files about this shell corporation, and it was soon determined that Paulo Octavio Alves Pereira owned the condo. He was under indictment in his country.

That’s just one example of criminals funneling their money into high-end real estate.

Criminals use various tactics when laundering money through real estate transactions. The simplest is the cash transaction. This is a very common method of laundering money. A criminal buys property and pays for it by making a single cash purchase. He or she might also split up the cash purchases to make it look less suspicious.

Indirect payments are also common. With this method, the money launderer gets someone else to buy the property, but the money launderer is the actual owner of the property.

Money launderers also use loans and mortgages to wash money. This is considered a much safer method. The person applies for a loan and buys the property, but then he or she settles the mortgage after a short period of time passes. For example, the person might make a few months of payments and then pay it off completely.

Successive selling is another popular method used by money launderers. With this method, the criminal sells the property over and over again to confuse the trail. It goes from one member in the carnal enterprise to the next.

Then, there’s parking the property. This is the process of buying it, holding on to it for a while, and then selling it at a higher value. The person typically sells it well over the market value when this happens.

This might come as a surprise, but money launderers also hold onto property and then lease it out as a form of cleaning their money. The rental funds help them wash their money.

These are just some of the ways that people can launder money through real estate. Right now, the federal government is most interested in cash payments made by shell companies.

New Rules for Potentially Dirty Markets

The feds are looking into several real estate markets that receive high-dollar cash transactions. This started in 2016, when the federal government imposed a temporary measure on Miami-Dade County and Manhattan. The measure required that shell companies report the true owners to the Financial Crimes Enforcement Network (FinCEN) when buying expensive real estate with cash. The hope was this new regulation would stop criminals from using luxury real estate to launder money. Referred to as the FinCEN initiative, it is technically a geographic targeting order that was designed to take on weak transparency rules.

The measure was set to expire in February, and there were questions about whether pro-business President Trump would let it lapse.

He didn’t, though, and instead, the regulation was extended for another six months.

Then, another big change happened in August.

Extended and Expanded

In August, the U.S. Treasury Department made a big announcement. It wasn’t just going to extend the initiative. It was going to expand it.

Previously, the rules were so narrow that they only applied to a few hundred of the countless luxury real estate deals that took place in the affected markets. Now, however, the rules cover all high-ticket cash deals by shell companies. The transactions are monitored in seven major markets, including Miami.

If you sell high-value real estate, you need to pay attention to this rule. You also need to understand what cash is under the regulation.

What Is Cash?

When the rules were first announced in 2016, they only applied to what is widely considered to be less common forms of cash payments. Transactions that were paid by personal checks, money orders, or hard currency had to be reported. That meant that people could still pay with wire transfers and fly under the radar.

Now, though, the rules have been expanded to include wire transfers, as well. In Miami, any cash deal of $1 million or higher has to be reported. With luxury condo prices in Miami sitting at just under $1 million, one can reasonably expect lots of reports to be made.

What This Means for Miami Real Estate

While Miami is just one of the markets impacted by the deal, it is expected that it will have the most trouble with it. Sales were already suffering in Miami, and this will make them worse. There was already an overbuilding epidemic in Miami, and foreign buyers haven’t been flocking to the region as they did in the past. That means that there are too many condos for sale and not enough buyers. Now that people cannot hide behind shell companies, the market could get even worse.

Reporting Suspicious Activity

This federal regulation is just one piece of the puzzle when trying to stop money laundering. Brokers, agents, and lawyers are encouraged to report any suspicious activity when dealing with clients. This will help the government crack down on money laundering even further.

There are several warning signs that those in real estate should consider.

First, if someone is willing to pay more or lose money on a property, he or she might be involved in illegal activity. It’s also suspicious if a person has no interest in negotiating the price. If he or she is willing to pay the list price immediately with cash, one has to wonder what is going on.

It’s also suspicious if someone buys a property sight unseen or has no interest in the property’s location or condition.

If the buyer asks for a high level of secrecy, that is also suspicious. In addition, real estate professionals are encouraged to contact law enforcement if someone asks for records to be altered.

Professionals should also make sure that the purchase matches up with the person’s wealth. If someone says that he delivers pizza and then buys a condo for $1 million, that is very suspicious.

It’s also strange if someone buys a property, and then immediately resells it for significantly more or less than the purchase price. This type of activity is often used to launder money.

In addition, it sets off alarms when a buyer brings physical cash to the closing. Most people don’t have hundreds of thousands of dollars on them. If they do, you have to wonder why.

Mitigate Your Risk

If you are a real estate professional, you want to mitigate your risk of being involved in money laundering schemes. There are several things you can do to lower your risk.

Do Your Due Diligence

The best thing you can do is to do your due diligence when working with someone. Obtain as much information about the person as possible, including the driver’s license and passport information. This will help you verify the person’s identity.

You should also take measures to identify the head of a shell company. While this is not necessary for purchases under $1 million, it is still a way for agents to protect themselves.

In addition, file Form 83000 if you receive more than $10,000 in cash for a transaction. That also includes two related transactions. This information report is required by the IRS and includes cashier’s checks, money orders, bank drafters, and cash.

Finally, report all suspicious activity.

Are Landlords Safe?

Landlords might feel safe from money laundering, but scams can go on under their noses, as well. Some landlords let tenants pay in cash and don’t try to verify their identity or anything. The tenants can move other tenants in and take their money as if they own the property. This is just one way that tenants have been known to scam landlords.

Of course, this can be avoided through proper tenant screening. Even if you aren’t concerned that a tenant might try to launder money, you still need to protect yourself. It is important that you know who is inside of your property at all times.

Real estate is more complicated than it was in the past. Handshake deals have gone by the wayside, and now, Realtors, agents, brokers, and landlords have to protect themselves. Everyone should do his or her due diligence when completing a real estate transaction. Your reputation and your livelihood depend on it.


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