On January 1st, Congress passed a measure to end the secrecy around shell companies that has fueled a boom in high-priced New York condominiums. The new law could discourage the flow of international capital into Manhattan real estate, while giving investigators powerful new tools to detect money laundering and other financial crimes.
The National Defense Authorization Act, passed over a veto by President Donald Trump, empowers the Treasury Department to create and maintain a registry of the “beneficial” or true owners of most businesses created in the United States, including limited liability companies. LLCs are a popular vehicle for purchasing real estate, in part due to the secrecy they confer.
In the 2010’s, neighborhoods like West Chelsea and “billionaire’s row” south of Central Park were transformed as developers rushed to meet international demand for swanky apartments — many of them purchased by buyers paying full-price, using shell companies.
“After the financial crisis, investors were looking for higher returns, they wanted hard assets. And that was the ‘go’ sign for a tremendous amount of development,” Jonathan Miller, CEO of Miller Samuel, an appraisal firm, told Gothamist.
When an LLC buys a property without a mortgage (commonly described as an “all cash” transaction) there is no requirement that suspicious activity be reported. Because no money is being lent, the know-your-customer rules that banks must abide by do not apply.
For years, law enforcement officials have warned that this situation presents an attractive loophole for criminals looking to launder the proceeds of their crimes. In 2018, Manhattan District Attorney Cyrus Vance, Jr., called for a national register of beneficial owners, similar to the one created under the regulations Congress just approved.
“All too frequently, an anonymous incorporation record spells the end of the road for our investigations,” Vance said, in prepared remarks to a conference of certified public accountants. “We routinely collaborate with foreign law enforcement agencies to shut down cross-border threats. It is detrimental to these partnerships, and frankly embarrassing, when we have to tell international law enforcement that we can’t assist them in taking down U.S.-incorporated criminal enterprises, because information about the owners of entities formed in our states is beyond our reach.”
In 2006, Vance’s predecessor as DA, Robert Morgenthau, discovered that a large Midtown office building, 650 Fifth Avenue, was partly owned by an Iranian bank, which was a sponsor of the country’s missile program and the Revolutionary Guard. The bank’s ownership stake in the profitable building had been obscured by a shell company. The building was eventually seized by the federal government.
In 2012, the federal government seized a Manhattan apartment purchased by the family of the former president of Taiwan. The money to pay for the apartment had come from a bribe delivered to the president’s residence in fruit boxes.
Following a New York Times series on anonymous money in New York real estate, the New York City Department of Finance began requiring that beneficial ownership information be reported on transfer records when a property changes hands. (The information is not publicly available but can be obtained through a freedom of information request.)
The following year, the Treasury Department adopted a “geographic targeting order” monitoring all-cash purchases in Manhattan and Miami. An academic paper found an immediate and dramatic dropoff of about 70% in the aggregate dollar value of anonymous transactions. The program has been renewed and expanded to include the outer boroughs, Chicago, Los Angeles, San Francisco, and several other cities.
The information collected in Treasury’s new database will include the beneficial owner’s name, address, date of birth, and a driver’s license or other government ID number. In a move that disappointed transparency advocates, Congress decided to make the information available to investigators and prosecutors, but not to the public. A similar registry in Britain, Companies House, is free for anyone to search.
Sam Chandan, the dean of NYU’s Schack Institute of Real Estate, said the economic impact of the new law may not be immediately apparent, even in the high end of the real estate market. He said the market for super-luxury homes has already been battered by unfavorable tax changes like the trimming of the state and local tax deduction in the 2017 tax code overhaul, and New York’s “mansion tax”, adopted in 2019.
“Overall, this is a segment of the market that has slowed, and where we are not seeing as much enthusiasm to bring new developments online,” Chandan said.
It is an irony that a law stripping shell companies of their anonymity should be passed in the final days of the Trump administration, over Trump’s veto.
Trump Tower was one of the first Manhattan buildings to sell large numbers of units to anonymous LLCs. Buzzfeed reported in 2018 that more than 1,300 units in Trump buildings had been sold to unnamed buyers. Trump’s former campaign chairman, Paul Manafort was convicted in 2018 of failing to report foreign income to the IRS — money he used to purchase a Brooklyn townhouse and a downtown Manhattan apartment. And when Trump needed to buy the silence of Stormy Daniels in the final weeks of the 2016 campaign, his then-ally Michael Cohen arranged the payment through a Delaware LLC: Essential Consultants.