LLCs, Luxury Real Estate and Secrecy: A Survey of Efforts to Increase Shell Company Transparency – N.Y.U. Journal of Legislation & Public Policy

By Alex Jonlin

December 6, 2022

I. Introduction

In the summer of 2020, I moved across the country to New York City. Because of the pandemic, I could not fly across the country before moving to look at apartments, so I had to search remotely. Once I had narrowed it down to a place that I liked and talked to a rental agent representing the property, I became nervous – what if I was getting scammed? I decided to do some research into the building’s ownership to confirm that it was legitimate.

The rental agent worked for a third-party company, so he could not provide clues as to who owned the building. Instead, I searched through New York City property records, which showed that it was owned by a limited liability company (LLC) with an odd name that did not own any other property. I searched for the company in New York City business license records and found that the only person associated with it was a lawyer, who appeared to just be an agent of the owners. However, records showed that the company was registered to a particular address in southern Brooklyn that was home to a large, recently renovated single-family house where at least a dozen separate LLCs were registered, each of which owned a different apartment building.

In the end, although I had located the probable home address of the owners of my building, I was never able to identify who they were, as the house itself was owned by an LLC. I took a chance and signed the lease, and when I arrived in New York, the apartment worked out. However, my experience led to a larger question: why was it so common in New York for a building to be owned by an anonymous LLC?

II. Background

A. The Rise of the LLC

LLCs are type of business association authorized across the country under state law, providing an alternative to the traditional business forms of corporations and partnerships.¹ Corporations offer owners or shareholders limited liability — if the business fails, creditors can only go after corporate assets, while the owners’ personal assets are protected.² However, corporate profits are taxed twice: the corporation itself pays taxes, then the owners pay taxes on the share of the profits that they receive.³ Partnerships are subject to “pass-through” taxation, in which the partnership itself does not pay taxes, but rather passes profits directly to the owners, who are subject to tax.⁴ While a partnership offers owners a reduced tax liability, this comes at the cost of increased liability: partners are personally responsible for paying debts incurred by the partnership in the event of default.⁵

LLCs combine these forms, giving owners both the limited liability of a corporation and the pass-through tax benefits of a partnership.⁶ While LLCs did not exist in any state until the late-1970s, every state and the District of Columbia had adopted statutes authorizing them by the mid-1990s.⁷

B. LLC Secrecy

LLCs offer their owners an additional benefit: secrecy.⁸ In the United States, an LLC is legally an autonomous entity, and people wishing to own assets without letting others know who they are often set up such entities to make purchases, leaving the business as the owner of record while hiding the identity of the true “beneficial owner.”⁹ Such entities that have no real business operations are often called “shell companies.”¹⁰ Prior to the introduction of the LLC, Americans wishing to create such structures could end up subjecting themselves to significant tax penalties as each entity could be taxed on its own. The LLC allows people to put assets into a shell company without incurring additional tax liability.

LLCs are often promoted as a means to own assets or run businesses anonymously. ¹¹ While most states require LLCs to disclose some ownership information, four states, including Delaware, allow entirely anonymous LLCs, and owners can register their LLCs in those states even if their assets are located elsewhere.¹² Often, even if local law requires entities to reveal their direct owners, people will set up multiple layers of shell companies to prevent competitors, the public, or even governmental authorities from discovering who truly controls the company.¹³

C. LLCs in Real Estate

LLCs have become popular for making large real estate purchases. This trend began not long after states across the country adopted statutes authorizing LLCs in the 1990s.¹⁴ By 2015, a New York Times investigation of expensive real estate purchases across the United States found that “nearly half the residential purchases of over $5 million were made by shell companies rather than named people.” An investigation by BuzzFeed News uncovered that at least 20 percent of residential condo units in Trump-owned buildings, including up to 77 percent in one Lower Manhattan building, were purchased all in cash by anonymous shell companies, most of which were LLCs.

Real estate ownership has traditionally been a matter of public record.¹⁵ Therefore, the anonymity provided by LLCs can be a boon for celebrities trying to avoid paparazzi or government officials protecting their families’ security.

D. The Perils of LLC Secrecy

The use of LLCs to anonymously own property can provide cover for illicit or illegal activity. The New York Times, through extensive research, uncovered the true owners of hundreds of LLCs that had acquired condominiums at Time Warner Center, a luxury residential building on Columbus Circle in Midtown Manhattan. The owners included government officials from foreign countries suspected of corruption, businesspeople accused of fraud, the owner of mining company accused of attempting to cover up severe environmental pollution on multiple continents, and others.

Expensive real estate transactions provide abundant opportunities for money laundering, as they allow buyers to move large sums of money with little regulation.¹⁶ LLCs facilitate this by allowing money launderers to hide their identity while using money derived from criminal activity to acquire property.¹⁷ Activists who went undercover to consult with several prominent attorneys in New York found many who were willing to provide advice on laundering money through real estate LLCs.

Real estate money laundering often involves foreign government corruption. In 2012, the US government seized a condo in Manhattan and a house in Virginia bought through a shell company by the former president of Taiwan with money that prosecutors said was derived from bribes. In 2016, the Department of Justice asserted that real estate in New York and Los Angeles worth $150 million, in addition to famous paintings and other investments totaling over $1 billion, was bought by the Malaysian Prime Minister and his associates to launder funds plundered from the Malaysian treasury.

Shell companies can be used by terrorist organizations and dictatorships under international sanctions to avoid scrutiny. In 2013, federal prosecutors seized a Manhattan skyscraper that a court found was owned by a front for the Iranian government, violating sanctions. A truck that ended up in the hands of Islamic State militants in 2014 and luxury cars used by North Korean dictator Kim Jong-Un are suspected to have been acquired using layers of shell companies.¹⁸

LLCs can enable tax evasion by allowing people to control assets that are not under their own names.¹⁹ By directing income to LLCs and using them to purchase real estate, people can avoid reporting income for tax purposes.²⁰ Even when shell companies do not break the law, they often facilitate technically legal forms of tax avoidance. In New York City, finance officials expressed concern in 2015 that wealthy people could buy real estate through anonymous LLCs to avoid paying high city and state income taxes by claiming to live elsewhere.

The ownership of real estate by LLCs has led to more localized problems as well. Small municipalities in Upstate New York have found it difficult to enforce local building code ordinances when they cannot identify the owner of a property found to be in violation.²¹ Tenant advocates want access to information on the true identities of landlords so that tenants can become eligible for state rental assistance during the COVID-19 pandemic.

Finally, some policymakers have expressed a desire for LLC ownership transparency for its own sake. As State Senator James Skoufis, prime sponsor of the 2019 New York state legislation, said, “Neighbors have a fundamental right to know who owns the home next-door to them.” The Russian invasion of Ukraine sparked calls to expose anonymous LLCs that Russian oligarchs, some of whom are under sanctions, use to purchase luxury property in New York.

III. Policy Responses

A. 2015 New York City Finance Department Rules

In 2015, the New York City Department of Finance announced new rules for real estate purchases in the city. The rules require shell companies engaging in real estate transactions to report the names of all the “members,” or immediate owners, of the company to city officials, whereas previously only one member had to be named. By forcing LLCs and other shell companies buying residential property to reveal their owners, the City hoped to make it easier to conduct audits to determine whether people claiming out-of-state status are actually New York City residents. The data would be available only to Finance Department officials, and would not be subject to public disclosure.

Real estate interests protested, with a leader of the Real Estate Board of New York telling the New York Times that it was unfair to impose such a rule on all buyers and sellers when only a small number of real estate investors were engaging in illegal activity. Other people expressed skepticism that the rule would succeed in identifying true beneficial owners and preventing tax evasion. While the 2015 rules require shell companies to divulge the names of all their members, the beneficial owner is often not a member at all, instead controlling the company through a multilayered web of companies.

B. 2016-2022 U.S. Treasury Department Actions

In January 2016, the U.S. Treasury Department began scrutinizing high-value real estate transactions in Manhattan and Miami-Dade County that involved shell companies and were conducted all in cash. The Department’s Financial Crimes Enforcement Network (FinCEN) began requiring title insurance companies to verify the true beneficial owners of shell companies buying properties worth over $3 million in Manhattan and over $1 million in Miami and to submit that information to a federal government database.

The initial FinCEN requirement, known as a “geographic targeting order,” only extended for six months, but it was renewed and expanded towards the end of that period. When FinCEN began scrutinizing all-cash real estate purchases that used anonymous LLCs in certain areas, it found that up to 30% involved suspicious activity.

Since that time, FinCEN has continued to renew and expand the geographic targeting order every six months. The most recent expansion brings the program to at least thirteen metropolitan areas and scrutinizes all-cash residential real estate purchases by shell companies of over $300,000. The program has provided prosecutors with valuable insights into transactions that could involve money laundering or other illegal activity, and data suggests that it has resulted in a significant decline in the overall volume of luxury real estate purchases by shell companies.²²

C. 2019 New York State Legislation

In September 2019, responding to concerns that anonymous real estate LLCs were preventing local governments from addressing building code violations, Governor Andrew Cuomo signed landmark legislation to require additional transparency in real estate transactions across New York State. The act amended the state tax and administrative codes to require LLCs buying or selling certain property to disclose the names of all their members to the state. The rules applied only to transactions involving one- to four-unit residential buildings.

IV. Limits to Early Policies

The 2015 New York City rules and the 2019 New York State legislation have left large loopholes. For instance, both required LLCs to divulge only their members. However, the true owner of an LLC is often not technically a member, making the disclosure requirement ineffective at identifying true beneficial ownership for the purposes of auditing residency or conducting code enforcement.

While the New York City rules covered all shell companies, the New York State legislation four years later explicitly applied only to LLCs. While real estate buyers are deprived benefits of anonymity offered by the LLC, they could still set up a different type of shell company, such as a limited partnership or a corporation. Indeed, law firms quickly recommended that their clients simply buy property using other structures such as limited partnerships or trusts to maintain anonymity, as the law explicitly applied only to LLCs. The state legislation also applies only to a limited subset of small residential properties and exempts condominium units (although they remain covered by New York City’s earlier regulations).

Despite the passage of the state LLC transparency law, it is unclear whether the public will have access to LLC ownership data. Although bill sponsor Senator Skoufis had hoped the bill would allow the general public to learn who owns the house next door, soon after the bill’s passage, the Cuomo administration rejected Freedom of Information Law (FOIL) requests for the data. The tax department claimed that, despite the new law, information on LLC ownership was confidential and could not be turned over to members of the public or the media.

FinCEN’s geographic targeting orders require disclosure of the beneficial owner and cover all shell companies, rather than just LLCs. However, the orders have a number of drawbacks, including geographical limits on the program’s applicability and its reliance on title insurance companies that some buyers may choose not to use.²³

In addition, both the geographic targeting orders and the New York City and State policies apply only to residential real estate transactions. This allows would-be money launderers to evade disclosure by purchasing commercial real estate or other high-value assets instead. Indeed, some of the most high-profile incidents of money laundering through shell companies in the last two decades have involved non-residential assets, including the discovery that an office building in Manhattan was owned by the Iranian government in violation of international sanctions and the purchase by Malaysian officials of valuable works of art in addition to residential real estate.

V. Recent Policies Closing Loopholes

A. Federal Reforms

In 2020, Congress passed the Corporate Transparency Act as part of the annual defense authorization bill. The Act, initially introduced by Rep. Carolyn Maloney (D-NY) in 2010, requires the Treasury Department to collect information on the true beneficial owners of shell companies, including LLCs, in states that did not already do so.

The Corporate Transparency Act goes farther than previous state and local efforts by identifying true beneficial owners rather than just LLC members. It enables the nationwide expansion of the geographic targeting orders that FinCEN has been issuing biannually since 2015, while also encompassing all shell companies rather than just those making real estate transactions, with few exceptions.²⁴ While some had hoped that the information gleaned from the new disclosure requirements would become public record, the bill limited access to law enforcement.

FinCEN in December 2021 released an advance notice of proposed rulemaking (ANPRM) for systematic real estate transaction reporting regulations under the Bank Secrecy Act (BSA). The ANPRM envisions such regulations replacing the geographic targeting orders and potentially expanding coverage to commercial real estate, as well as addressing other gaps not covered by existing regulations. FinCEN also released a notice of proposed rulemaking (NPRM) for regulations that would implement the new requirements under the Corporate Transparency Act. Transparency advocates have hailed the proposed rule as “a powerful step in the fight against corruption.”

B. 2022 New York Legislative Proposals

To address loopholes left in previous New York State LLC transparency efforts, State Senator Brad Hoylman of Manhattan and Assemblymember Emily Gallagher of Brooklyn introduced legislation in March 2022 to require all LLCs to report their true beneficial owners to the state, as the Corporate Transparency Act would do at the federal level. Like the Corporate Transparency Act, the bill would not only apply to real estate transactions, instead requiring beneficial ownership information to be disclosed whenever an LLC is formed or transferred. Unlike previous transparency efforts, the bill is intended to make LLC ownership information available upon request from members of the public, although it would not entail the creation of a searchable public database.

The bill was motivated by several new concerns, in addition to those underlying previous LLC disclosure efforts. In the wake of the Russian invasion of Ukraine, media attention focused on the ownership of luxury real estate in Manhattan by Russian oligarchs close to the Putin regime. Filed just days after the invasion, the bill was promoted as a means of unmasking such property owners and potentially facilitating the seizure of property from sanctioned individuals.

The bill’s sponsors also noted that anonymous real estate LLCs created problems for renters seeking state assistance during the COVID-19 pandemic. New York State’s Emergency Rental Assistance Program (ERAP) went into effect during the pandemic with the promise of providing rent relief to low-income families while reimbursing their landlords. However, ERAP requires tenants to have their landlords, rather than property managers, fill out paperwork, and some tenants have had difficulty identifying their actual landlords because their buildings are owned by LLCs. By making records of real estate ownership publicly available, this legislation would give tenants a way to find out who owns their building.

VI. A More Transparent Future

More recent efforts at the federal and state levels could largely resolve the issues with earlier LLC transparency policies, broadening their reach and eliminating loopholes. The 2020 Corporate Transparency Act and its associated FinCEN rulemakings, as well as the 2022 proposed New York State legislation, require reporting of beneficial ownership of LLCs rather than just the nominal members. While the New York legislation still applies only to LLCs, the new federal law covers all shell companies, preventing people from simply using an alternative business structure to avoid transparency.

Perhaps more dramatically, these policy efforts would expand transparency requirements beyond just residential real estate to commercial real estate and other types of assets. The state law would require reporting of beneficial ownership of every LLC incorporated or doing business in New York, and the federal law would do so for all shell companies, while exempting companies that have legitimate business operations.

One of the thorniest questions throughout the development of LLC transparency policy has been the degree to which this information should be made public. At first glance, many of the goals that policymakers have sought to achieve through disclosure requirements would not appear to support full public transparency. For instance, the prosecution of illegal activity like money laundering and tax evasion presumably only requires that ownership information be made available to law enforcement.

However, other policy goals more clearly support making LLC and other shell company ownership information public. New York’s desire to ensure tenants know who their landlord is could be achieved by just requiring landlords to disclose their identity to their own tenants, but a centralized, publicly accessible registry could be less vulnerable to non-compliance. Similarly, a public database could help small, cash-strapped municipalities with code enforcement by making it so that neighbors, as well as city officials, could pursue violations through nuisance lawsuits.

Even from the standpoint of the law enforcement-related goals, public disclosure could be justified. A central theme of media reporting on shell companies involved in luxury real estate in Manhattan has been that developers, real estate agents, attorneys, and others involved in such transactions simply do not care where their clients’ money was coming from. Public disclosure of the true owners of LLCs and other shell companies could push real estate professionals to behave more ethically in order to protect their reputations.

Finally, the argument in favor of transparency for its own sake has merit in this arena. While LLCs are new, transparency in the world of real estate is not – real property ownership has been a matter of public record since long before the rise of modern shell companies. Part of this is for practical reasons, but it also helps ensure that the public is aware of the distribution of wealth, much of which is tied up in land. Wealthy and famous people have many reasons for wanting to stay anonymous, most of which are far more innocuous than those covered here. However, that desire should not necessarily trump the public’s right to know about the extent of inequality in this country.

Alex Jonlin, J.D. Class of 2023, N.Y.U. School of Law.

Suggested Citation: Alex Jonlin, LLCs, Luxury Real Estate and Secrecy: A Survey of Efforts to Increase Shell Company Transparency, N.Y.U. J. Legis. & Pub. Pol’y Quorum (2022).

1
See Larry E. Ribstein, Statutory Forms for Closely Held Firms: Theories and Evidence from LLCs, 73 Wash. U. L. Q. 369, 372 (1995).
2
Susan Pace Hamill, The Limited Liability Company: A Catalyst Exposing the Corporate Integration Question, 95 Mich. L. Rev 393, 394 (1996).
3
Id.
4
Id.
5
Id. at 394-95.
6
Id. at 394.
7
Id. at 404.
8
See Vineet Chandra, Ending Corporate Anonymity: Beneficial Ownership, Sanctions Evasion, and What the United Nations Should Do About It, 42 Mich. J. Int’l L. 177, 178-79 (2020).
9
Id.
10
Jacob Azrilyant, Shell Game: How the Corporate Transparency Act Aims to End the Illicit Use of Shell Companies, Where It Fails, and What to Do About It, 51 Pub. Cont. L.J. 1, 5 (2021). Standard corporations can act as shell companies in addition to LLCs.
11
See, Considerations When Setting Up An Anonymous LLC, Electronic Money Company, https://electronicmoneycompany.com/blog/considerations-with-anonymous-llc/ [https://perma.cc/MK6C-XXDV] (“Anonymous LLCs are the perfect choice for landlords who don’t want to be contacted by tenants (especially those landlords who have property managers), famous individuals who want to conduct business privately, abused victims who wish to prevent their aggressors from looking them up, and business leaders who prefer a level of privacy and separation from their personal lives.”).
12
See Anonymous LLC States: Everything You Need to Know, Upcounsel, https://www.upcounsel.com/anonymous-llc-states [https://perma.cc/PK4T-HWWF].
13
Id.
14
See, e.g., Law Keeps Identity of Landowners a Secret, Las Vegas Sun (Apr. 29, 2005, 5:31 AM), https://lasvegassun.com/news/2005/apr/29/law-keeps-identity-of-landowners-a-secret/ (finding that most of a tract of land near the Las Vegas airport sold by the federal government in 1998 ended up in the hands of LLCs).
15
See Charles Szypszak, Real Estate Records, the Captive Public, and Opportunities for the Public Good, 43 Gonz. L. Rev. 5, 5 (2007).
16
See Carl Pacini, et al., An Analysis of Money Laundering, Shell Entities, and No Ownership Transparency That Washes Off and On Many Shores: A Building Tidal Wave of Policy Responses, 30-FALL Kan. J.L. & Pub. Pol’y 1, 13-14 (2020).
17
Id. at 23-24.
18
Chandra, supra note 8 at 196.
19
Carl Pacini & Nate Wadlinger, How Shell Entities and Lack of Ownership Transparency Facilitate Tax Evasion and Modern Policy Responses to These Problems, 102 Marq. L. Rev. 111, 118–19 (2018).
20
See Id. at 119–20.
21
See N.Y. State S. Comm. on Investigations & Gov’t Operations, Final Investigative Report: Code Enforcement in New York State 69, 95–96 (2019), https://www.nysenate.gov/sites/default/files/article/attachment/final_investigative_report_code_enforcement_senator_skoufis_igo_committee.pdf.
22
Christopher P. Lauer, Note: Belt and Suspenders: Two Key Changes to Reduce Money Laundering Through Residential Real Estate, 70 Case W. Res. L. Rev. 1225, 1244 (2020).
23
Id. at 1245-53.
24
Michael A. Bamberger & Gary A. Goodman, The Corporate Transparency Act: Mandatory Beneficial Ownership Disclosure, 38 No. 2 Prac. Real Est. Law. 57, 58 (2022).