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Anti-money laundering rule deemed a success in Miami, could expand nationwide

by Andrew Morrell

A federal crackdown on suspected money laundering in Miami’s high-end real estate market was found to be a success, according to a recent working paper authored by economists at the Federal Reserve Bank of New York and the University of Miami.

By zeroing in on anonymous cash buyers of luxury homes in the Miami area, the number of transactions thought to be linked to criminal money laundering activity dropped by 95 percent, the paper found. At the same time, the researchers found negligible effects on the overall luxury home market, hinting that the effort could be effective on a national scale.

Miami real estate has long been a hub for cash transactions, the bulk of which are legal. All-cash residential property deals are twice as common in Miami compared to the national average. In May 2018, for example, they comprised 39 percent of all home sales tracked by the Miami Association of Realtors. In March 2016, that trend motivated federal officials in the U.S. Financial Crimes Enforcement Network (FinCEN), a branch of the Treasury Department, to use Miami as a test case of sorts for a new anti-money laundering effort.

When the rules took effect in early 2016, any business entity buying residential property in Miami-Dade County in an all-cash transaction greater than $1 million would be required to identify who owned the company. Since this is not a requirement elsewhere in the U.S., it is considered a loophole that may be exploited for the purpose of money laundering.

In theory, buyers who earn money illegally or wish to avoid taxes could simply funnel cash through an overseas shell corporation that would then buy a property, effectively “cleaning” illicit earnings while maintaining anonymity. FinCEN’s enforcement action closed this loophole in Miami as well as in New York City, the most common U.S. destination for anonymous cash buyers.

Almost immediately following the implementation of FinCEN’s rule, researchers found that all-cash residential property transactions by corporations fell by 70 percent nationally, even though the rule was only active in two cities at first. The paper’s authors also found that after the rule took effect, luxury home prices in Miami did not rise as fast as in similar cities. That result was seen again among 12 other cities where FinCEN launched similar enforcement efforts a few months later. High-end real estate price growth rates were around 4.2 percent lower, on average, in cities targeted by the anti-money laundering rule.

The Miami Herald reported that FinCEN’s enforcement of the rule has become more broad and complex since its introduction two years ago. In line with the working paper’s findings, federal regulators say the initial rollout of the disclosure requirement in Miami and New York may have been enough to scare off attempts to launder money through cash transactions all over the U.S. That lends credence to the idea that the rule be implemented nationwide, with a few modifications, to seriously impede the ability to shelter illicit profits while keeping real estate prices in check.

It stands to reason that real estate agents would hesitate to support a rule that could slow price appreciation in their markets. However, the Herald found few Miami real estate professionals were complaining about the rule, since the city has enjoyed a continually thriving market regardless.

“If anything, I’ve seen an increase in cash purchases,” Douglas Elliman Florida CEO Jay Parker told the Herald.

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