Instead of looking at due diligence issues that potential buyers need to investigate in real estate transactions, this post will look at the due diligence that real estate brokers and attorneys may have to do on their own clients.
If you’re reading this blog, you’re probably familiar with the New York Time’s story that came out over the weekend looking at foreign investment in New York real estate and the use of LLC’s to hide the identity of the buyers. If you’re not familiar with it, it is an interesting article and well worth a read.
The practice of using a limited liability company in a real estate transaction has taken off in recent years. The use of LLCs in real estate purchases is perfectly legal and can protect anonymity and the liability of the client. However, they can also be used to hide illicit funds from victims of fraud or from a foreign government who has a legitimate claim on them.
The issue isn’t with run of the mill purchasers who would like to keep their names out of publicly available records. The issue instead is with people using high-end real estate to launder money or to hide proceeds of corruption – things that are possible with apartment sales in excess of $100 million. Banks are required to “take all reasonable steps to ensure that they do not knowingly or unwittingly assist in hiding or moving the proceeds of corruption.”
While real estate brokers and attorneys currently do not have any compliance responsibilities, it is a distinct possibility that they will be required to perform due diligence investigations of their customers in the future. What would those investigations look like? If it looks like the investigations banks have to perform, would real estate brokers or attorneys have the same sort of liability as banks? While it is unclear what actions will be taken, if any, to limit the amount anonymous money flowing in to the US through real estate transactions, it bears watching because it could major effects on real estate attorneys.