Tuesday, September 22, 2015

NYC Requires LLC Disclosure After Investigation by The New York Times Shows Concealed Ownership by Questionable, Corrupt and Criminal Foreigners

New York City’s luxury real estate market has become less and less transparent and increasingly alluring for foreign buyers, many of whom remain invisible behind limited liability companies. CreditTodd Heisler/The New York Times 
Seeking to increase transparency in the luxury real estate market, the de Blasio administration has imposed new disclosure requirements on shell companies buying or selling property in New York City.
The changes will help remove a “veil of secrecy” surrounding high-end real estate sales by requiring that the names of all members of a shell company buying or selling property be disclosed to the city, the finance commissioner, Jacques Jiha, said.
Mr. Jiha said he was spurred to make the changes partly by a series of articles in February in The New York Times that examined the growing use of limited liability companies in real estate transactions, particularly in high-end real estate in New York, a market that has become less and less transparent and increasingly alluring for foreign buyers. A number of the apartments examined by The Times were bought, using shell companies, by international buyers who have been the subject of government inquiries around the world, either personally or as heads of companies.
In all, more than half of New York condominium sales above $5 million last year were to limited liability companies, which can be established in many states without disclosing the names of the actual, or “beneficial,” owners.
The primary intent of the new rules is fairly narrow: to help identify real estate owners who may be avoiding city income taxes by claiming legal residency outside the city or even the country. An estimated 89,000 of the city’s condos and co-ops — valued at $20 billion based on city tax assessment data but with an actual estimated fair market value of $80 billion — are owned by people who claim to be nonresidents of the city.
Even so, the new rules, which went into effect in May, come as longstanding concerns about the use of limited liability companies to hide the identity of real estate buyers have percolated to the top of debate among regulators. The director of the Treasury Department’s Financial Crimes Enforcement Network, Jennifer Shasky Calvery, cited the Times articles in a recent speech in California.
“In short,” she said, “greater transparency of beneficial ownership information would make it more difficult for criminals to hide their purchases of luxury real estate through the use of shell companies.”
City officials said they were not aware of any other jurisdiction with similar reporting requirements. Yet while the new rules could be a tool for law-enforcement officials tracing tainted assets, they will not address many of the problems cited by The Times, which found that real estate brokers, building managers and condo boards gave little scrutiny to the backgrounds of buyers or the sources of their money. The disclosures will not be a matter of public record, so only the Finance Department will be privy to the information. Nor does the disclosure form require the name of the beneficial owner, who in some cases might not be among the company’s members.
Some prominent players in the city’s real estate industry questioned the necessity of the new requirements.
Jay Neveloff, a lawyer and member of the board of governors of the Real Estate Board of New York, the city’s leading industry trade organization, said that in its desire for more information, the city was forcing some buyers to give up their privacy rights simply because a few bad actors had made secret purchases.
“I think it’s an unfair, inappropriate position for the Department of Finance to say to people who invest in real estate, ‘Gotcha’ ” Mr. Neveloff said. “There’s no doubt there are bad people who buy real estate with money they’ve gotten from criminal activities. It’s got to be a tiny minority.”
Mr. Neveloff said he was not officially speaking for the real estate board, but a spokesman for the organization said it wanted more information from the city about the new requirements. “We’re seeking to get a better understanding of the new rules’ goals and assess whether it’s necessary and assess just how burdensome it would be for taxpayers and the industry,” the spokesman, Jamie McShane, said.
Others questioned whether the rules went far enough. Douglas A. Kellner, a Manhattan lawyer who specializes in identifying and returning stolen assets, said that because the form did not require disclosure of beneficial owners, they could omit their names from the limited liability companies and add another layer of ownership — such as an offshore limited liability company or trust — to conceal their identities.
“They’re just inviting another layer in order to conceal it,” Mr. Kellner said. “It doesn’t solve the problem.”
In advertising pitches, some real estate companies have promoted the use of limited liability companies as a way to conceal the identities of buyers so they can avoid residency audits, which can be costly and time-consuming.
Timothy P. Noonan, a lawyer who represents clients undergoing audits, said those who wanted to remain “low profile” with the city had previously bought property through limited liability companies. “Really it’s an issue of whether or not you’re going to be on their radar screen,” Mr. Noonan said. “Even if someone has a good case, the audits are really difficult and they’re expensive and intrusive.”
By law, those who have apartments and stay in New York City more than 183 days are considered legal residents and required to pay city income taxes.
The new rules affect a form known as NYC-RPT Real Property Transfer Tax Return, which is filed with the city when property ownership is transferred and identifies both the seller and the buyer of the property. Previously only one member of a limited liability company had to be identified, and frequently that member was a nominee who did not have a real interest in the property. Under the new rules, all members of a limited liability company must be identified, along with their taxpayer identification numbers.

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