Green Sometimes Raises Red Flags When It's Cash - Banker & Tradesman (2024)

Green is the gold standard when it comes to buying houses these days. When a buyer offers all greenbacks, aka cash, the seller doesn’t have to worry about the buyer’s financing falling through at the last minute. All-cash deals also tend to close more quickly.

But paying cash sometimes raises a red flag: a concern that someone might be laundering ill-gotten gains by purchasing property and then selling it a short time later – turning money that was obtained illegally into funds that are difficult, if not impossible, to trace.

That’s why Uncle Sam is considering expanding the rules around such deals. Currently, title companies in 12 metropolitan areas are required to identify individuals who make cash purchases of residential real estate through shell companies when the transaction exceeds $300,000. The dozen metros are: Boston, Chicago, Dallas-Fort Worth, Honolulu, Las Vegas, Los Angeles, Miami, New York City, San Antonio, San Diego, San Francisco and Seattle.

But a potential regulation posted late last year by the Financial Crimes Enforcement Network, or FinCEN, could expand reporting requirements on all-cash deals – no matter where they take place or how large or small the amount.

When real estate transactions involve loans or other financing from a regulated financial institution, such as a bank, they are less susceptible to money laundering because those lenders are required to report suspicious activity to FinCEN. But when houses are acquired without the need for a mortgage, no such warnings are raised.

Millions of Deals Unexamined

According to one estimate, roughly 1.21 million residential real estate sales over the last five years, with a total approximate market value of $463 billion, were likely processed without any money laundering reporting obligations. FinCEN wants to put a dent in that figure.

A little-known bureau within the Treasury Department, FinCEN collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing and other financial crimes. Right now, FinCEN is in the initial stages of considering the best way to focus its regulatory attention on both residential and commercial real estate transactions. Specifically, it has asked stakeholders, as well as the public, to voice their thoughts on what kind of record-keeping and reporting should be required, who should be subject to those rules, the geographic scope and monetary threshold of covered transactions, and the types of entities that should be covered.

According to a spokeswomen for the bureau, both federal and state law enforcement agencies have told FinCEN that its reports have provided greater insight regarding assets held by persons of investigative interest, have resulted in asset forfeiture actions and have helped generate leads and identify new subjects for investigation.

The bureau is keenly aware of the potential burdens that new reporting and record-keeping may place on businesses, the spokeswomen told me in an email, adding that the agency is likely to focus initially on residential transactions. The commercial sector would follow, “as well as any other regulatory gaps than may exist with money laundering vulnerabilities involving real estate,” she wrote.

While the value of laundered commercial properties are markedly higher, residential properties tend to account for the bulk of the cases involving laundered funds. And since real estate agents are about the only players not now required to report all-cash transactions, any new rule will probably cover them and their brokers.

Signs of a Shady Buyer

According to a recent Government Accountability Office report, homebuyers who are not on the up-and-up often use shell companies – defined as outfits which hold funds and manage transactions but are not legitimate businesses – to conceal assets.

Sometimes money launderers layer shell companies by creating one whose real ownership is split among many others across foreign jurisdictions, making the investigative process that much more complex. And criminal groups have increasingly been using money laundering networks that engage in sophisticated laundering strategies.

Most often, though, they use third-party professionals such as lawyers and accountants to do the dirty work. In 2018, for example, Luke Fairfield, a San Diego CPA, was sentenced to 21 months in prison for his role in an international laundering operation. He admitted to creating shell companies to hide criminal proceeds for his drug-trafficking client.

Sometimes realty professionals are involved, too. That was the case not long ago in Illinois, where a licensed real estate broker structured cash deposits from a suspected drug trafficker to purchase houses. To conceal the true name of the buyer, he used his own name and submitted fictitious proof-of-funds letters at closing. He earned thousands in commissions – plus 14 months in prison.

It can be nearly impossible to trace the money behind real estate deals when the buyer is not specifically named. That’s why criminals and corrupt officials can exploit the sector. A report (detailed in this column last fall) by Global Financial Integrity, a Washington-based think tank that studies the flow of illicit finances, said a “broad array” of gatekeepers – including realty agents – enable the bad guys, “either through willful blindness or direct complicity.”

Which is why agents and their brokers are likely to be called upon to speak up if they see something fishy. After all, real estate sales made anonymously are among the most significant money laundering channels, the Treasury Department has said.

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.