Commentary by Michael Kosnitzky, Daily Business Review
March 7, 2016

The South Florida real estate community is heading for a train wreck if it doesn’t take the recent federal government mandate for transparency in real estate purchases more seriously.

The government’s announcement on Jan. 16 required title companies, starting March 1, to disclose the ultimate ownership of entities that are used to buy high-end properties in an all-cash type purchases in Miami-Dade County exceeding $1 million.
The purpose of this rule is to root out money launderers with the theory being that if they use a mortgage to purchase a property, then banks will weed out bad actors under their well-established regulatory scheme that forces the banks to know all about their customers and the source of their funds.
These rules are obviously circumvented when people can purchase a properties for all cash without ever using a U.S. bank.

This so-called geographical targeting order, or GTO, issued by U.S. Treasury’s Financial Crimes Enforcement Network, also known as FinCen, requires that title companies in Miami-Dade County disclose the ultimate owners of entities purchasing properties costing more than $1 million. In Manhattan, the other targeted area, the threshold is $3 million.

These rules will undoubtedly require due diligence by everyone involved in the purchase and sale of expensive real property so that the title company will be able to rely on the people with the direct contact and the most knowledge of the buyer.

The obligations of the participants and required certifications will presumably be similar to the regimes currently in place for banks and other financial institutions and those imposed on tax withholding agents.

Those of us who experienced the previous implementation of similar rules in the nonreal estate context know that the government isn’t fooling around here and that, after some period of allowable training and acclimation to the new rules, FinCen will make examples of those who fail to comply by hitting them with financial penalties and other potential civil and criminal sanctions.

Even in the banking industry where due diligence and governmental compliance have always been part of normal operating procedures, many community banks failed to comply, either intentionally or because of negligence. These institutions were fined and subjected to consent decrees that restricted their businesses and placed them under heightened regulatory scrutiny sometimes for many years.

Unlike the banking industry, the real estate industry in South Florida is like the Wild West with no history of strong regulatory compliance or the requisite internal controls in place.

So when I hear well-respected members of the South Florida real estate community speak in terms of circumventing these rules to protect the identities of their clients or that they will bend the rules because they know that their clients are honest people and they cannot remain competitive with their real estate industry peers if they comply, I see a perfect storm brewing on the horizon.

Real estate professionals and the lawyers who practice in this industry have to understand that they cannot conduct business as usual or they will be flirting with disaster. They must immediately start to develop the proper regulatory mind set an internal controls.
If they think they can conduct business as usual, then they should be prepared to suffer various forms of financial and other sanctions. As Winston Churchill said, “Those who fail to learn from history are doomed to repeat it.”