Home ownership is a quintessential part of the American dream. Now, nearly a decade after the housing market crash this dream for many Americans is still just that: a dream. Housing costs are rising far faster than wages—burdening renters. Residential properties are becoming prohibitively expensive—forcing out residents who may have called them home for decades.
To add insult to injury, the loss of affordable housing has been spurred by the use of anonymous shell companies. Bad actors or rich speculators use these companies to bid up prices on properties and then use them as a “bank” rather than a home—all without identifying who they are or where the money came from to purchase the property.
Housing has long been a preferred vehicle for money laundering mostly for its effectiveness. Illicit cash used to purchase luxury real estate becomes legally acquired capital after the property is sold. The real trick is to mask where the money comes from initially. So, criminal networks set up anonymous companies shielding themselves from any connection to the purchase of the property and, when the property is sold, the money is clean.
While families are increasingly unable to keep up with payments to stay in their homes, a substantial number of shell-owned properties go unoccupied. This problem affects housing prices from coast-to-coast. In Miami’s beachfront properties—Bal Harbour, Miami Beach, and South Beach—half are unoccupied. In Manhattan, there are eight blocks from Lenox Hill to Central Park that are nearly 40 percent unoccupied. In California, cities like San Francisco and Los Angeles are facing similar vacancy rate issues, but San Diego has struggled the most with half the homes in the Oceanside neighborhood left vacant.
Currently, real estate professionals—like brokers and agents—are exempt from the due diligence requirements of others in the finance sector. The lack of accountability sent a signal to those wishing to launder illicit money that the U.S. real estate market was open for business. While those who sought to exploit the U.S. financial system streamed in, average renters and homeowners struggled.
According to the U.S. Census nearly half of all renters in the U.S. are rent burdened (spending more than 30 percent of their monthly income on rent). It’s no surprise either; from the housing crisis in 2008 through early 2016 rent rose an average of 22%—nearly twice the rate of inflation. The real estate market has mostly recovered since the crash, but incomes have not—adding to the burden. This strain has left people trapped in a cycle, paying exorbitant housing prices while subsequently being undercut in the market by anonymous shell companies.
In 2013, an alleged leader of a drug gang from Spain was accused of laundering $26.4 million in drug money into real estate in Miami. The properties were purchased by funneling money through LLC’s. Similarly, in Tucson, Arizona, nine people were arrested in connection to a cocaine smuggling ring. During the arrest, eight properties were seized due to ties to the drug money. The properties were estimated at $2.5 million.
Thanks to anonymous shell companies, the Iranian government effectively evaded sanctions for over a decade while profiting from a New York highrise. It was only last year, after years of known criminal money laundering, that the US government was able to execute a civil forfeiture of the property.
The dangers of secret buyers are not limited to passive distortions in market values—they can be very active. Criminals use anonymous companies to steal homes. They use tax liens to foreclose on properties, others trick homeowners into signing away deeds, and still, others blatantly forge signatures and steal deeds. Regardless of how the fraud is conducted, the result is the same: Innocent people are robbed of their most personal and important assets and left homeless with no answers and no hope for recourse—unable to pierce the veil of corporate anonymity.
In an effort to track potentially illicit purchases and combat money laundering in real estate, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) administered Geographic Targeting Orders (GTO’s) requiring title insurance companies to collect beneficial ownership information (i.e. the true people who own and control a company) for high end real estate purchased through anonymous companies using cash in seven key housing markets. In an encouraging sign, these orders were recently renewed, though are still limited. Without permanent rules with national scope, the problem of illicit finance hidden in real estate will continue.
It is a tragedy that, while people are pushed out of homes and neighborhoods they may have lived in for decades, just up the street an anonymous buyer is shielding sources of illicit capital in residential properties they will never call home. With stagnating wages and a steep rise in housing costs, the burdens placed on American families are already great, we should not exacerbate them by opening ourselves up to be a haven for illicit capital.
Congress has an opportunity now to pass bipartisan legislation that will peel back the veil of secrecy and end the abuse of anonymous companies. They should seize the opportunity to protect American homeowners and families.
Claire Coleman is an advocacy intern with the FACT Coalition.