Increased Commercial Real Estate Regulation’s Potential Impact on Transaction Velocity

Main Point: The Treasury Department seeks public comments by February 7, 2022, on a potential regulatory approach to the real estate market, which it sees as vulnerable. Only 12 metropolitan areas require title insurance companies to file reports on people who buy all-cash residential property through shell companies if the deal exceeds $300,000. By increasing transparency in the real estate sector, corrupt officials and criminals will have fewer opportunities to launder their wrongful gains via the U.S. real estate market.  

Main way money laundering is done real estate: The majority of real estate money laundering schemes use anonymous shell corporations. Due to a lack of human resources, the government has a difficult time tracing down the money through those shell businesses. This is why forming public-private partnerships with financial institutions, real estate actors, and all other parties involved in shell business transactions is critical. Without such collaborations, government agencies would be unable to gather all of the information needed to initiate and carry out money laundering investigations. 

Socio-economic effects of the financial flows on legal economy and society: 

  1. distortions in resource allocation from high-yielding investments to investments that run a low risk of detection 
  1. distortion of prices, notably in the real estate sector 
  1.  unfair competition, risks of supplanting licit activities, negative impact on direct foreign investment, corruption, risks of real sector volatility, and strengthening of skewed income. 

How money laundering affects the roles of real estate professionals and the potential for it to be overseen:  

Real estate professionals may have different roles in different transactions that affect their exposure to money laundering. Some professionals may be directly involved in marketing and structuring a real estate deal and are thus able to identify all relevant parties to the transaction. Other participants may have business roles that may not be customer-facing or may focus specifically on the details of the property without any knowledge of the financing (or lack thereof), and therefore are not in a position to identify parties for recordkeeping and reporting purposes. Finally, it may be relevant to identify those financial institutions or nonfinancial trades or businesses that are primarily involved in the transfer and presentation of purchase funds in exchange for title or other rights. In commercial real estate, possible payment structures are more complex than in the residential real estate market. For example, while the line between financed and non-financed transactions is relatively well-defined in the residential real estate market, this is not necessarily the case with commercial real estate transactions. An entity may, for example, finance the purchase of a large commercial property via the issuance of bonds. It is unclear whether such a transaction would be viewed to be a cash transaction from the point of view of the entities required to report such a transaction. A commercial real estate “transaction” may also involve many transactions. In some cases, such as the development of a large commercial real estate project, many transactions may be involved in the development and conveyance of a commercial real estate property over months or years. 

How money laundering affects the market and people:  

Money laundering in real estate’s negative effects encompasses adverse effects on asset and property prices, displacement of residents from and within major metro areas, and other negative consequences for local communities and the national economy. Distortions of real estate costs and the attention on limited sectors might also have an effect past those regions and result in increases in actual property expenses, thus pricing people with criminal assets or funds out of the marketplace. riding up the expenses of real property reduces affordability, something that has been witnessed in both advanced and developing countries. 

This impacts not only the people trying to purchase buildings but also renters. In both cases, this could have an effect on choices about where to stay, amongst other elements, resulting in a trade of neighborhood and the associated displacement of less prosperous families. 

How it will probably affect the market after things are more regulated:  

Obviously, slow down real estate markets because they’re cracking down on all of the laundering going on until there is a way for launderers to find a loophole. 

Example of laundering happening:  

For example, in February 2015, The New York Times published a series of articles entitled “Towers of Secrecy” on the use of shell companies to purchase high-value residential real estate in New York City. The Times also found that shell companies purchased nearly half of the most expensive residential properties in the United States. The articles identified a specific set of real estate transactions as a high potential money laundering risk: The use of shell companies to pay for residential properties in cash at the time of closing, without a corresponding mortgage. 

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