Tuesday, September 22, 2015

LLCs and Corruption: "Cash, condos & criminals: The big loophole for money laundering" -- SOUTH FLORIDA BUSINESS JOURNAL

Cash, condos & criminals: The big loophole for money laundering
Aug 30, 2013, 6:00am EDT Updated Sep 3, 2013, 11:59am EDT
Brian Bandell
Senior Reporter
South Florida Business Journal
‘The regulation of real estate transactions for financial crime and money laundering is worse than Swiss cheese for all the holes it’s got,’ Charles Intriago says.
Alvaro Lopez Tardon needed to launder tens of millions of dollars in proceeds from selling thousands of kilograms of cocaine trafficked from South America to Europe, so he turned to Miami condos, federal authorities say.
Lopez Tardon, the alleged leader of the Los Miami drug gang from Spain, is facing a trial in Miami on charges of laundering $26.4 million in drug money into real and personal property here. Among the items were 14 condo units bought from 2001 through 2006. All but two were purchased directly from developers – including four units in The Mark on Brickell and seven units in One Miami – all affiliates of The Related Group. Most were held in limited liability companies (LLCs), including a penthouse unit at South Beach’s Continuum, where Lopez Tardon resided.
Former drug traffickers interviewed in the 2006 ‘Cocaine Cowboys’ documentary said that drug money built many of the high-rises in Miami in the 1970s and 1980s.
There’s nothing intrinsically wrong with LLCs, which are common in real estate, but a Business Journal investigation has found they create an easy way to launder money. A typical scenario: Ill-gotten cash is put in a foreign bank, an LLC is formed to buy property and the money is supplied in a cashier’s check or wired in for a cash closing.
The Miami Association of Realtors says lawyers and title agents – not developers – are the ones that are supposed to ensure sources of funds are legitimate.
Some experts, however, worry that cash deals in general are creating a new condo bubble.
Attorney: ‘Unprecedented theory’
Lopez Tarden’s attorney, Richard Klugh, said his client is actively contesting the government’s “unprecedented theory” of money laundering prosecution.
“Mr. Lopez’s ownership of real estate was done openly, purchased under his own name or corporations in which his financial interest and his family’s financial interest was fully disclosed,” Klugh said. “He paid for the properties with certified bank funds relying on reputable law firms to close the transactions.”
Court records show Fabiani Krentz purchased five units, then transferred them to companies owned by Lopez Tardon through quitclaim deeds. The information filed with her 2012 guilty plea describes how Krentz purchased and managed properties in Miami on behalf of the Spanish drug gang so earnings from the cocaine trade would look legitimate.
The obvious question should have been: How did a UPS manager such as Krentz afford to spend more than $2 million on condo units? But that didn’t stop the real estate professionals in the deals from taking the money, or a handful of banks from issuing her mortgages.
The story might sound like a flashback to the “Cocaine Cowboys” days of the 1970s and 1980s, as former drug traffickers in the 2006 documentary stated that drug money built many of the high-rises in Miami.
“The regulation of real estate transactions for financial crime and money laundering is worse than Swiss cheese for all the holes it’s got,” said Charles Intriago, president of the Miami-based Association of Certified Financial Crime Specialists, which trains professionals to spot money laundering, and a former assistant U.S. attorney. “Real estate is one of the most ripe areas for the hiding of the proceeds for financial crime and the laundering of those proceeds.”
Experts shocked by pace of construction
Peter Zalewski, a principal with Bal Harbour-based Condo Vultures LLC, said he’s astounded that, only two years after the first post-recession condo broke ground in South Florida, there are 152 towers planned, including 70 taking deposits and 32 under construction.
“That’s one hell of a pace,” Zalewski said. “I joke that they are 500 percent sold out in an hour.”
Zalewski is taken aback by the pricing. A Condo Vultures study of 46 projects found prices averaged $725 a square foot, and 16 were asking more than $1,000 a square foot. (There are still unsold units from the bust available for less.)
“The average prices for these units are mind-boggling,” Zalewski said. “Some developers are arguing that preconstruction prices are what prices in the market will be two years from now. … At this point, statistically, it’s kind of shocking to me.”
Zalewski doesn’t know of any developers that are concerned about the people behind the LLCs, only that they aren’t selling to flippers. Even then, developers often have no way of knowing if the LLC ownership is transferred, he said.
Unlike the last boom, when down payments were 10 to 20 percent, many developers are now asking for upward of 60 percent down – so depositors mostly fund buildings.
Such an arrangement isn’t acceptable to most domestic buyers, said Lewis Goodkin, president of Miami-based Goodkin Consulting, who has done many studies on the condo market and predicted the real estate meltdown years in advance. Now, he said, foreign cash buyers appear to be overpaying and distorting the equilibrium of the marketplace.
“I can say with absolute certainty, based on all of my experience, that if these people are paying these prices, they will have to find other people like themselves to get them out because it won’t be the domestic buyer who does it,” Goodkin said.
It’s especially a problem when it’s illegal money, because those buyers don’t care if they overpay and drive properties out of reach for legitimate buyers, Goodkin said. Even relying on legitimate sources of foreign cash is a dangerous game, he added.
“You have real wealth and also people where you don’t know who the hell they are,” Goodkin said. “That’s one thing that is disturbing because it’s not really real. The market is so dependent on a source you can’t even qualify. You don’t know: How deep is this market?”
Three-fourths of sales are cash
Goodkin is also surprised with the high volume of cash resales in the condo market, which he called unprecedented. In the first half of 2013, 73 percent of condo resales by dollar volume were cash deals, according to the Miami Association of Realtors. Nearly 90 percent of condo buyers were foreign in 2012, and that trend continued this year.
Buying condos for cash while mortgage rates are low is risky, Goodkin said, because when rates rise, it decreases borrowers’ buying power and could negatively impact prices.
“If you look at our past sales and see what a relatively small percentage of these sales were cash, and now all of these buildings are going up, predicated on buyers’ cash,” Goodkin said. “It would seem to me that that is a phenomenon that I’m surprised the FBI isn’t really cognizant of. This is a flood.”
The increase in cash sales in Miami doesn’t prove there is money laundering going on, but it increases the potential for money laundering because of the lesser regulation in the cash market, said Josh Burdett, head of Jensen Beach-based financial consulting firm TMP Risk and a former compliance officer for national banks. Real estate professionals should do more due diligence on customers, especially those who use shell companies, seek to close too quickly or use multiple cashier’s checks, he said.
Miami Association of Realtors Chairman Natascha Tello said most international condo buyers are looking for second homes.
Some purchases are done remotely without viewing a unit, or by simply looking at a developer’s floor plan online, she said. Most foreign buyers use accounts in the U.S., but Tello said it’s up to the title agents and real estate attorneys to check the source of funds.
“A real estate agent would be out of their scope to source those funds,” she said.
Gary Saul, a Greenberg Traurig shareholder who has done legal work for condo developers including Related and Terra Group, said it’s often difficult to tell who the person behind an LLC is, especially when a group is trying to quietly assemble properties.
“There are high-profile individuals who would rather others not know who they are,” he said. “Certain people from Latin American and certain European countries would rather not have their U.S. holdings disclosed.”
Some developers want to know the identities of preconstruction buyers to ensure they haven’t committed too many units to a single person, which could create a problem if that person can’t close, Saul said. Developers routinely check the Office of Foreign Assets Control (OFAC) list to see if clients are flagged as banned individuals or entities, he added.

Since developers are asking for so much cash up front, they often aren’t checking the buyer’s source of income, Saul said.
“Most of them aren’t concerned with source of funds,” he said. “It’s so easy to move money that, as soon as you come up with one precautionary measure, there’s just another way to do it. I don’t know that you would ever have enough protections to find the ultimate sources of dollars.”
Intriago said there’s much less regulation for putting cash into real estate transactions than for opening a deposit or securities account, which makes real estate a go-to target for people with lots of dirty money to move.
“The developers don’t know who’s behind it, and I don’t think they care,” he said. “They want to make sales, regulations be damned.”
Loopholes with LLCs
The ownership privacy protections of LLCs have made it more difficult to verify ownership. Organized criminal groups often use LLCs to buy real estate and conceal their identities because most states don’t require LLCs to list beneficial owners or changes in ownership, said Michael McDonald, an international money laundering consultant with Wellington-based Michael McDonald & Associates and a former IRS criminal investigator.
“They can form a corporation and bury you so no one ever knows who you are,” he said. “You have criminal groups outside the U.S. trying to park money here. One of the best ways to do it is to buy real estate because no one asks who you are.”
While closing agents often run company and managing member names through the OFAC list, it’s easy for terrorists and drug traffickers on the list to control the LLCs secretly, McDonald said. He noted that the list doesn’t cover other types of criminals, such as corrupt politicians and Ponzi schemers.
A plan for improving transparency
In June, the White House published an action plan for improving transparency of company ownership and control as part of a G8 movement to combat tax dodging and money laundering. It requires legislation.
A developer that accepts illicit money without knowing it was dirty usually wouldn’t have to return it. However, anyone who collects money from someone on the OFAC list must forfeit the funds and pay a $50,000 fine for each transaction, regardless of whether they were aware of it or not.
Another developer nightmare would be if a buyer fronting an illegitimate company files bankruptcy and has its assets seized.
Despite the dangers, McDonald believes most developers aren’t motivated to uncover dirty money.
“If illegitimate activity was behind a portion of the sales, it makes an impact. It can cause artificial inflation of the real estate market,” he said. “Realtors don’t want to hear it because they are running to the bank. Developers want to sell their units. It will generate additional real estate tax revenue for the municipalities. ... If you want the drug money problem to go away, are you OK with reduced revenue to your restaurant or auto dealership?”
What real estate professionals should know about money laundering
Financial Crimes Enforcement Network (FinCEN) spokesman Steve Hudak said mortgage brokers and bankers are required to file suspicious activity reports (SARs), but real estate agents and title insurers do not, so it’s not typical to get SARs from all-cash property deals.
However, the National Association of Realtors posted an article on its website that lists voluntary guidelines to prevent money laundering. It noted that transactions not involving banks and mortgages could be more vulnerable to money laundering. Agents can voluntarily file SARs if they have concerns.
Best practices and red flags for spotting money laundering in real estate deals include:
The money comes from a country known for weak anti-money laundering laws, terrorism or political corruption.
An LLC or partnership is used to obscure the identity of the person who controls the property without a legitimate explanation. Know your customer, including the person or corporation behind the buying entity.
Names and jurisdictions should be run through the OFAC list.
The deal significantly undervalues or overvalues the property, and your party isn’t interested in negotiating a more favorable price.
Actual cash is brought to the closing. A Form 8300 must be filed for cash transactions of more than $10,000.
The buyer pays all cash, although it doesn’t match their personal characteristics, occupation or income.
The funds used in the deal come from an unrelated third party or business that doesn’t take an interest in the property.
The buyer immediately resells the property.
The buyer doesn’t view the property, or isn’t interested in its features.
For more information, go to www.realtor.org/articles/anti-money-laundering-guidelines-for-real-estate-professionals.
Brian Bandell covers real estate, transportation and logistics. Get the latest news with our free daily newsletter. Click here to subscribe.

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