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I'm a business journalist and a fiction author. My novel Mute is available now from Silver Leaf Books.

Monday, April 18, 2016

The Panama Papers: Money laundering loopholes are nothing new

No one who’s been paying attention to the real estate or financial markets should be surprised over the off-shore tax havens and money laundering schemes uncovered by the release of the Panama Papers. World governments have been aware of these loopholes for years.

The only question: Will the publicity storm prompt the United States and other governments to stop the flow of dark money?

Hundreds of journalists around the world [sadly, not including me] worked through the International Consortium of Investigative Journalists to comb through about 11.5 million leaked documents from the Panamanian law firm and corporate register Mossack Fonseca. Among the 214,000 offshore companies it listed, some were used to conceal from the public and from governments that politically connected individuals, known criminals and people who had no apparent sources of wealth controlled significant amounts of money. In some cases, these offshore companies owned real estate, including in Miami.

Of course, not all of these companies were registered offshore. States like Delaware, Nevada and Wyoming also allow LLCs to be registered without listing a managing member.

The fact that this is going on isn’t news. The Panama Papers made headlines because it named names.


Hey, how did that hair dresser from South America buy a $1 million condo on Brickell? You can't ask those questions if you don't know who's really buying.
Law enforcement has known since the 1980s that dirty money found its way into Miami real estate through shell corporations. Watch the documentary “Cocaine Cowboys” to see how drug money built much of this town. In 2013, I wrote the story “Condos, Cash, and Criminals” in the South Florida Business Journal addressing the concerns of many experts that dirty money was contributing to the surge of cash real estate deals.

Politicians and law enforcement have known this was a problem for decades. And yet, it has persisted. Who knows who really owns our real estate? Many people would rather not know, as long as they're making money off it.

Having covered both banking and real estate in South Florida, I can tell you that I often run into companies with no clear path of ownership. Sometimes they’re registered in Delaware, or offshore in places the Isle of Jersey or the British Virgin Islands.

Other times, they’re Florida-registered LLCs but the managing member clearly isn’t the owner. There’s no requirement that Florida LLC’s list the owner, only a person to handle the company’s affairs. Sometimes this is innocent, such as a famous athlete who makes his attorney the manager of the LLC because he doesn’t want to be bothered at his home.

It could also be used by money laundering drug dealers to set up straw managers to buy real estate through. There’s really no way I can tell that the LLC isn’t funded by terrorists, drug dealers or corrupt officials.

Some homes are bought by trusts. It’s extremely difficult for the public to know who controls them. You just have to trust that the lawyers who set them up did their due diligence.

As we saw in the Panama Papers, there’s a temptation for incorporation law firms to think money first, due diligence second. Plus, law firms don’t face the strict “know your customer” and “source of funds” rules that banks must comply with.

U.S. authorities could ask more of incorporation law firms. Federal and local governments could take measures to require ownership disclosure for LLCs. Authorities have started asking title companies to disclose the LLC owners in $1 million-plus deals in Miami and $3 million-plus deals in Manhattan

Until authorities start taking aggressive measures to promote disclosure, it’s clear they aren’t serious about addressing this problem.

It’s not so easy, though. Miami, New York and many other international cities are enjoying windfalls of foreign cash that have spurred building booms. That’s created jobs and increased property taxes, although some argue it’s also made real estate less obtainable for working families. I have a feeling that some, or perhaps most, Miami condo projects would fall apart if these loopholes were closed.

Should we start turning money away because we don’t trust the source? Or do we turn a blind eye?