The federal government revealed Wednesday that its investigation into foreign buyers using high-end U.S. real estate as a means to launder money found that potentially illicit activity is behind a “significant” portion of the cash transactions in Manhattan and Miami, and plans to expand the investigation into several other areas.
Earlier this year, the Treasury Department’s Financial Crimes Enforcement Network stated that it was “concerned about illicit money” being used to buy luxury real estate, and planned to begin identifying and tracking the previously unknown buyers who used shell companies to hide their identities.
At the time, FinCEN issued a “Geographic Targeting Order” that required title insurance companies in Manhattan and Miami-Dade County to identify the actual person behind shell companies used to pay all cash for high-end residential real estate in those two areas.
In a call with reporters on Wednesday, a FinCEN official stated that more than 25% of transactions covered in the initial inquiry involved a “beneficial owner” that is also subject of a “suspicious activity report,” which is an indication of possible criminal activity.
“In particular, a significant portion of covered transactions have indicated possible criminal activity associated with the individuals reported to be the beneficial owners behind shell company purchasers,” FinCEN said in an associated release.
FinCEN said that the findings of the initial investigation corroborate its concerns that all-cash transactions are “highly vulnerable to abuse for money laundering.”
According to FinCEN, it will soon require all U.S. title insurance companies to reveal the individual behind all-cash, high-end real estate transactions in the following areas:
All boroughs of New York City
Miami-Dade County and the two counties immediately north – Broward and Palm Beach
Los Angeles County, California
The three counties comprising part of the San Francisco area – San Francisco, San Mateo, and Santa Clara counties
San Diego County, California
Bexar County, Texas, which includes San Antonio
“By expanding the GTOs to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course,” El-Hindi said.
The monetary thresholds for each area are different, and reflective of the real estate market in the area.
In Manhattan, for instance, title insurance companies will be required to reveal the individual behind a cash transaction on all sales of $3 million and above, while in the San Antonio area, the threshold for reporting is $500,000.
Click the image below for a look at the dollar threshold for all of the metro areas that are a part of the expanded investigation.
On the call with reporters, a FinCEN official stated that there are various reasons why those six areas were selected, including: the prevalence of shell companies used in all cash transactions in each area; whether the luxury market in that metro area is attractive to foreign buyers; and information provided by law enforcement.
SAN ANTONIO — The San Antonio Police Department has issued multiple arrest warrants for a man accused of stealing tens of thousands of dollars from a would-be homebuyer.
Chris Hinojosa, 29, remained on the loose Thursday, two days after SAPD issued warrants accusing him of acting as a broker without a license and securing execution of a document by deception.
According to SAPD, a woman told investigators in January that she responded to an “owner to owner” real estate sign at the corner of SW Military Drive and Zarzamora Street, and after meeting with Hinojosa, agreed to buy a home in the 3600 block of Candlehead, near Kirby.
The woman made two separate payments to Hinojosa totaling close to $20,000, only to later discover he was neither a real estate agent nor owned the property in question.
An arrest warrant for Hinojosa states “at no time did the victim sign a real estate title or any document recognized by the Texas Real Estate Commission”.
The TREC confirmed to SAPD investigators that Hinojosa does not have a Texas real estate license.
“He fleeced this person,” SAPD Sgt. Jesse Salame said Thursday. “It’s probably best not to respond to a sign on the side of the road. Look up licensed realtors.”
Salame added that this is among the many dangers of trying to purchase real estate without involving a licensed agent.
Buyer beware! He doesn’t have a website, and he’s not on Zillow:
A Yorba Linda man is suspected of stealing more than $500,000 in a real estate fraud scheme and police believe there may be other victims, authorities said.
Authorities arrested Andres Pacheco, 39, on Tuesday after making an appearance at an Orange County courthouse for an unrelated case, said Cpl. Anthony Bertagna of the Santa Ana Police Department.
Pacheco is charged with multiple felony counts for grand theft, non-sufficient funds with intent to defraud and enhancements for aggravated white-collar crime over $200,000 and $500,000.
Pacheco is a real estate broker and owner of Santa Ana-based Franklin Equity Corporation/Signature Escrow. On July 1, 2015, a victim told detectives he had been defrauded by Pacheco.
An investigation revealed that the company failed to return $186,000 in escrow it was holding pending the completion of a real estate transaction, Bertagna said. When the transaction was canceled, the money was never returned.
Authorities found eight more victims who gave Pacheco $540,000 in earnest deposits for short-sale transactions. That money was never returned either, Bertagna said.
Calls to the Franklin Equity Corporation were not returned.
He is being held in Orange County jail on $540,000 bail. His next court appearance in Wednesday.
The new guy named Jeremy wandered into the discussion about short-sale fraud the other day, and found that long-time readers here don’t take kindly to scams – and scammers. But we’ve seen how short-sale fraud has run unabated, and that it has practically become a badge of honor among realtors. Nobody in the industry is motivated to stop it either.
Here are a few examples:
At the top of the last article, Jeremy’s friends were filing notices that mortgages were paid off when they weren’t, which is outright fraud. But the second half of the article mentioned the typical example of short-sale fraud, where a straw buyer purchases the property at a below-market price, and then spoons it to a waiting buyer who pays retail. The banks who got shorted on the first sale might have caught the fraud with better appraisals, or if they just had a strict policy. I’ll never forget the one case where the perpetrator caught wind of his own story here on the blog and left a his comment. He said they included in their contract to flip the house immediately to the shorted bank. They then flipped their short-sale buy on the SAME DAY to a retail buyer for a $100,000+ profit. If the banks have knowledge and turn their head, then it’s on them.
A short-sale that’s fully furnished. The seller makes the furniture sale mandatory so he can squeeze some cash out of the deal – he sells the ‘furniture’ to the buyer for $50,000 to $100,000 outside of escrow, in exchange to agreeing to a low-ish sales price for the house. Usually these are cash sales only.
Listing agent twists seller’s arm to take his buyer, rather than one of the two higher cash offers. I turned this one into VP of Fraud at the Bank of America, who said that because the lower price was still within their acceptable range, he’d let it go.
There were the investors who approached naive listing agents and insisted on negotiating their own deal with the bank. If they could get the price approved low enough to flip immediately, they’d complete the purchase.
Both short sale and REO investors engage in ‘reverse staging’ to make a property appear in worse condition than it is, including the removal of kitchen-cabinet doors, garbage left lying around the home, and sometimes old fish hidden behind refrigerators to create pungent scents. Sometimes BPOs include false property stigmas such as high crime rates, or claim the home was a meth lab that would need to be entirely gutted.
Parents buying their child’s over-encumbered house as a short-sale. A favorite among realtors themselves.
Thankfully most of these are in the rear-view mirror!
They nailed these guys for fraud….but only 18 months in jail? This is more than your standard short-sale fraud, and I’m surprised this doesn’t happen more often. They just sent in a forged bank reconveyance showing that the mortgage had been paid (when it wasn’t), and then sold the property.
A Carlsbad real estate broker and his brother were sentenced Monday to prison terms for their roles in a fraudulent “debt elimination” scheme that purported to eliminate the mortgages on several million-dollar homes in Del Mar, La Jolla and San Diego.
U.S. District Judge John Houston sentenced Adel Afkarian, 43, of Carlsbad, to 18 months in custody and Atef Afkarian, 41, of Slidell, Louisiana, to 13 months. In addition to the time in custody, the brothers were both ordered to pay more than $5.5 million in restitution to the victims of the scheme.
To implement the scheme, the Afkarians identified underwater homeowners — including themselves — and began a process to make it appear as though the homeowners’ debts had been satisfied.
To do so, they recorded fraudulent deeds that purported to extinguish the large mortgage loans encumbering each property.
Working through entities known as The Better Mortgage Company and Elite Coast Realty, the defendants then sold the properties to innocent purchasers, deceiving the buyers into paying the full purchase price to the Afkarians or their co-conspirators. The mortgage lenders, unaware of the fraudulent documents recorded on title or unable to prevent the sale in time, were left unpaid.
With regard to their own underwater home, the Afkarians pretended that $1.4 million in mortgage debt had vanished, prosecutors said.
The defendants used the “debt elimination” method to successfully arrange the fraudulent sale of four properties, generating more than $4.3 million in proceeds which went directly into bank accounts of the brothers and their co-conspirators.
In some cases, the brothers sold the fraudulent “debt elimination” program to existing clients of their mortgage business, according to prosecutors.
In addition to the “debt elimination” scheme, the Afkarians also conspired to arrange fraudulent short sales for underwater clients through a simultaneous “double escrow” scheme.
Rather than selling an underwater home at a pre-approved short sale price, the defendants arranged two simultaneous sales of the same property at two sale prices, using a straw buyer as the intermediary and purported seller in the second transaction.
That way, the short sale lender would believe that the property was being sold for the initial first escrow price, rather than the higher second escrow price. The defendants and their co-conspirators would then pocket the difference, diverting money from the lenders.
The Afkarians each pleaded guilty in September 2013. As part of their pleas, they also agreed to forfeit a home on Santa Fe Canyon Place in Torrey Santa Fe, which they had purchased using about $715,000 in proceeds from the fraud, and an additional $388,000 recovered from bank accounts where they had transferred proceeds.
The numbers are staggering: Annually, $1 trillion is stolen by corrupt officials from countries around the globe.
That money needs to be spent, or laundered, and much of it goes into big, anonymous real estate deals in the United Kingdom, which is seeing $1.5 billion in unrecorded capital inflows per month.
The main source of that money? Russia.
From Russia with Cash, a new documentary that aired at the Newseum in Washington, D.C., on December 15, focuses squarely on the phenomenon. It examines up close British real estate agents’ willingness to overlook a deal’s potential illegality in the hopes of a big commission.
Wearing hidden cameras, Russian government minister “Boris” and his blond girlfriend “Nastya” tour five palatial apartments in central London, accompanied each time by a different real estate agent.
The movie captures the interactions. We watch Boris buttonhole each realtor to confide that he is a government minister with a “very small salary,” adding, “Needless to say, the money for this flat comes straight out of the Russian budget.” He explains that his name cannot be connected to the property in any way.
Despite having just heard that their client is a crook, the agents invariably continue the deal. Several refer him to a lawyer; one says, “You shouldn’t be telling me anything about any of these things,” but doesn’t cut the conversation short.
In the United States, that behavior is fine: real estate agents in the United States aren’t obligated to report on clients whose legality is in question. But in the United Kingdom, an agent who thinks a potential client might be laundering money illegally is required by law to file a Suspicious Activity Report (SAR) with the country’s National Crime Agency.
In the film, the agent showing the ritziest apartment—an ornate, five-bedroom flat selling for £15.8 million (and potentially fetching a £315,000 commission for the agent)—does seem to have second thoughts after Boris’s speech; there’s a moment where it looks like he might turn the Russian down. But then he says, “No one will find your name on this,” and proceeds to explain how that can work.
None of the deals go far beyond the initial conversation, but the film is a powerful, if repetitive, illustration of how corruption flourishes. Corrupt officials from around the world need safe places to park their money, and real estate deals are currently the vehicle of choice—as long as the bureaucrats’ and oligarchs’ names can’t be traced to the purchases.
The long-time readers of this blog remember back when the financial crisis was imploding, and how we followed the ensuing mortgage-industry collapse. People from Jim Grant to the FHFA were gathering on-the-street intel from this blog, and we had an audience on Wall Street.
Michael Lewis worked at Solomon Brothers during that time, and he wrote the book called, ‘The Big Short’. The movie version comes out next month.
Thanks to Susie for sending in this story of everyday realtor fraud – committed by the third-highest-producing agent team in the country – and an agent who just couldn’t be a do-gooder and turn them in. He tried to extort $800,000 from them instead:
As well as being outspoken, Tomlinson had earned a reputation as a whiz with an online database known as the Multiple Listing Service, which can only be accessed by brokers and Realtors, and supplies the data for web services such as Realtor.com.
He alleged that when the Jills couldn’t sell a home, they would sometimes hide it from other users of the MLS. That could mean, for example, changing the address of a mansion on North Bay Road so that it would appear to be located in Allapattah, where few high-end brokers would think to look.
To the untrained eye, it looked as if the Jills were better at selling homes than their actual record suggested. And even more important: the scheme prevented other brokers from offering their services to clients whose listing were expiring on the database. Realtors only have exclusive rights to sell a home for as long as their contract with the owner lasts. Once the listing expires, the home is fair game for competitors.
In his complaint to the board, Tomlinson cited 51 instances where the Jills had hidden homes.
Esther Percal, a top broker at EWM Realty International with nearly four decades of experience, blasted the Jills’ conduct.
“The Jills broke the rules. They have a near monopoly on the top of the market because they’ve branded themselves so well,” Percal said. “They say they’re the best and they can bring the best prices, but they don’t have a magic wand. Their listings can expire like everybody else.”
In a response to Tomlinson’s complaint — now evidence in the criminal case — the duo admitted using “poor judgment,” but said they never realized “the consequences” of the data jiggering. And they denied their conduct actually broke Realtor association rules.
About five years ago, the Jills explained, they got a call from an “irate client” whose property had not sold. The client had gotten “a barrage of unsolicited calls” from other Realtors looking to snag business as his listing had just expired.
The Jills said that a staffer — unnamed in the document — overheard the call and “indicated that, in the future, a client’s property could be kept off a list known as the ‘Hot Sheet,’ ” which Realtors scoured for new business. From then on, the Jills acknowledged, they would “from time to time” keep other unsold properties off the collection of the expired listings, according to the response.
