BELT AND SUSPENDERS: TWO KEY CHANGES TO REDUCE MONEY LAUNDERING THROUGH RESIDENTIAL REAL ESTATE.

• Author: Lauer, Christopher P.

CONTENTS INTRODUCTION I. DEVELOPMENT OF AML LAW IN THE UNITED STATES II. MODERN DEVELOPMENTS: USING GTOS TO REQUIRE TITLE INSURANCE COMPANIES TO PERFORM REPORTING AND RECORDKEEPING FUNCTIONS III. LIMITS TO ENLISTING TITLE INSURANCE COMPANIES IN THE QUEST TO PREVENT REAL ESTATE-BASED MONEY LAUNDERING A. Narrow Geographic Reach B. High Beneficial Ownership Requirement C. Properties Without Title Insurance D. Failure to Cover Trusts E. Limitation to Residential Real Estate IV. LEGISLATIVE SOLUTIONS INTRODUCTION

Until a jury convicted him for conspiring to launder money and for money laundering in July 2011, (1) Alvaro Lopez Tardon enjoyed an opulent lifestyle replete with "fancy cars, seaside condos, designer jewelry, and expensive leather goods." (2) As "the alleged leader of Spain's Los Miami drug gang," (3) he trafficked an estimated 7,500 kilograms of cocaine from South America to Spain and "launder[ed] more than $14 million in illegal drug proceeds in the United States." (4) Lopez Tardon purchased more than a dozen Miami condos between 2001 and 2006, using cashier's checks to purchase the properties directly from developers. (5) Relying on illicit funds, Lopez Tardon bought real estate "under the name of a shell company or straw buyer, including 11 purchases" at two high-end Miami condominium complexes. (6)

Lopez Tardon allegedly laundered money by importing cocaine into Spain, then sending the proceeds to the United States using either couriers or wire transfers to dummy accounts. (7) Then, using straw buyers and shell companies, he purchased, among other things, luxury real estate in and around Miami. (8) The FBI estimated that, between 2004 and 2011, Lopez Tardon brought more than $26,000,000 in drug proceeds into the United States. (9)

In many ways, Lopez Tardon's actions are textbook money laundering. (10) After obtaining proceeds from the sale of cocaine, he arranged to move the illegally obtained funds from Spain to the United States. (11) He concealed the origin of the funds through a series of transactions that gave his wealth a patina of legitimacy--specifically, he associated his ill-gotten wealth with a luxury car dealership and a gourmet shop in Madrid. (12) Ultimately, Lopez Tardon integrated his illegal funds into the licit financial system through seemingly legitimate, if extravagant, transactions. (13)

Despite the volume of his internationally financed luxury real estate purchases, Lopez Tardon's empire was unraveled not by an analyst combing through spreadsheets to detect abnormal transactions--like one man purchasing thirteen luxury condominiums--but through the cooperation of his associates and confidantes. (14) The Los Miami gang's scheme began to unravel when authorities apprehended Lopez Tardon's Santeria priest, Vincente Orlando Cardelle, smuggling cash through Miami International Airport. (15) Prosecutors relied on testimony from Lopez Tardon's "one-time partner ... to establish[] that Lopez Tardon was involved in drug trafficking." (16) Lopez Tardon's ex-girlfriend, who pled guilty to money laundering charges related to the Los Miami drug gang, "acknowledged investing [Lopez Tardon's] drug profits in Miami's soaring condominium market." (17) Ultimately, identifying and flipping members of Lopez Tardon's inner circle, not the movement of millions of dollars in international wire transfers through anonymous shell companies, proved instrumental to bringing down the Los Miami gang. (18)

United States District Judge Joan Lenard sentenced Lopez Tardon to 150 years' imprisonment. (19) "After his conviction, federal agents seized [Lopez Tardon's] illegally obtained assets, 'including a fleet of luxury cars and [thirteen] condos.'" (20) At sentencing, Judge Lenard described Miami as "replete with people who utilize illegal funds and live a luxurious, unbelievable lifestyle." (21) Since the so-called "Cocaine Cowboys" era in the 1980s, (22) money launderers like Lopez Tardon have helped spur demand for luxury Miami real estate. (23)

Miami real estate is attractive to homebuyers for many reasons. The warm weather, sandy beaches, glamorous nightlife, metropolitan atmosphere, thriving international commerce, distinctive architecture, and syncretic culture are among the many legitimate reasons people choose to purchase high-end real estate in Miami. (24) Although Florida is the most popular state for foreign buyers who seek to purchase U.S. real estate, (25) five states--Florida, California, Texas, New York, and Arizona--account for 53% of total foreign-buyer residential real estate purchases. (26)

Nothing is inherently wrong with attracting customers from overseas. In the aftermath of the housing bubble that spurred the 2008 financial crisis, Miami's luxury real estate market flourished despite Florida's high overall foreclosure rate. (27) Non-U.S. residents, who constitute a large proportion of Miami real estate purchasers, (28) are more likely than other buyers to purchase real estate through all-cash transactions. (29) In some markets, such as Florida's Miami-Dade County, all-cash transactions have, in some years, constituted roughly half of all residential real estate sales. (30) These characteristics also make Miami a popular destination for potential abuse. As FinCEN's Advisory to Financial Institutions and Real Estate Firms and Professionals noted, "[m]any all-cash transactions are routine and legitimate, [but] they also present significant opportunities for exploitation by illicit actors." (31)

All-cash transactions--those conducted "without a mortgage or other credit financing," pose an extremely high risk from an anti-money laundering (AML) perspective. (32) This is because the U.S. Bank Secrecy Act and other AML requirements do not effectively cover parties to all-cash transactions. (33) In many instances, American "[r]eal estate agents, brokers and developers, lawyers, and accountants and others involved in the buying and selling of real estate are not covered by anti-money laundering laws, and therefore are not required to conduct due diligence on customers." (34) Unlike real estate transactions financed through traditional loans, in which lenders who are subject to AML reporting requirements must collect and maintain detailed records about transacting parties, all-cash transactions had, until recently, entailed no comparable requirements on the professionals who conduct real estate transactions. (35)

For money launderers, real estate is an ideal laundering mechanism. (36) Through commercial and residential real estate, money launderers can obscure the illicit origins of their funds or use real estate to operate "legitimate front businesses, particularly if they are cash intensive." (37) Once money launderers acquire real estate, that property "can readily serve as collateral in further layering transactions." (38) Historically, money launderers have bought and sold real estate "under false names [using] shell corporations." (39) Shell companies afford numerous advantages to their beneficial owners, including preferential tax treatment, estate planning advantages, limited liability, and anonymity. (40)

The United States does a particularly poor job of regulating shell companies. A 2011 World Bank report concluded that, with respect to obtaining identifying information regarding beneficial ownership, the United States was "[b]y far the worst performer of the countries reviewed." (41) In the United States, most company-registration services providers "did not ask for any proof of identification" for nonresidents who attempted to use their services, despite the fact that company-registration service providers are required to obtain a valid employer identification number for nonresidents. (42) Some states' company-registration service providers are especially accommodating to nonresidents: "[S]ome providers in Wyoming and Nevada actually offered to use their employees' Social Security numbers to spare clients the need to obtain an [employer identification number]." (43) The identification challenge is compounded "[b]ecause so little information is collected on U.S. companies, [making it] impossible to tell how many are shell companies and not operational companies." (44) Nevertheless, "U.S. law enforcement consistently has indicated that the number is high enough to cause grave concerns." (45) Money launderers value the anonymity shell corporations afford them because that anonymity enables them to avoid detection. (46)

The risks associated with money laundering through real estate are significant. Laundered money is used to finance terrorist and human trafficking organizations, circumvent economic sanctions, trade in illegal drugs, and promote political corruption. (47) The United Nations estimates that the "amount of money laundered globally in one year is 2-5% of global GDP, or $800 billion [to] $2 trillion in [2017 U.S.] dollars." (48) The Financial Action Task Force, an intergovernmental AML organization, identified real estate "as a clear area of vulnerability," noting that "[r]eal estate accounted for up to 30% of criminal assets confiscated" between 2011 and 2013. (49) As Lopez Tardon recognized, real estate is an especially attractive vehicle for money laundering. In addition to providing criminals with living space, social capital, and bases from which to conduct illicit activities, the sale of real estate can lend the appearance of legitimacy to laundered money. (50) As a result, "the purchase of real estate is a common outlet for criminal proceeds." (51)

The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, is responsible for "safeguard [ing] the financial system from illicit use and [combating] money laundering." (52) In recent years, FinCEN has taken steps to reduce anonymity in real estate transactions. Since 2016, FinCEN has required title insurance companies to report identifying information about...