Selling to shells

NEW YORK—Last fall WORLD (Nov. 29, Dec. 13) showed how oligarchs around the world steal from their own people and put ill-gotten gains into secret bank accounts—and how the United States and other countries are trying to make anonymous hiding harder. But money launderers are flexible: In February The New York Times showed how corrupt leaders from abroad now buy expensive Manhattan condos as investments, rarely if ever living in them, and keep their ownership secret by using a chain of shell companies to do the purchasing.

This is not only a New York story. Shell corporations—legal entities that have no products and serve only as anonymous vehicles for business transactions—purchase most eight-figure homes in Miami, Las Vegas, and other fashionable cities. Realtors follow laws that allow them never to meet buyers (some honest, some criminal) who wire tens of millions of dollars or have agents drop off suitcases crammed with cash. Financial alchemy turns billions in rubles, yuan, and other currencies into master-of-the-universe steel and glass abodes.

And yet, Manhattan remains ground zero. Former New York Mayor Michael R. Bloomberg said, “If we could get every billionaire around the world to move here, it would be a godsend.” His theory: Buyers would pay high taxes but not use expensive city services such as schools and hospitals. The reality is different: Few buyers pay U.S. or local income or sales taxes, and special deals such as New York’s infamous 421a (see sidebar) even allow them to avoid most real estate taxes. And is it a godsend, or the opposite, if some of those foreign billionaires have stolen from their own people?

With RealtyTrac, the influential national real estate newsletter, reporting an “International Home Buyer Invasion,” this issue may pop up in the coming year’s presidential campaigns: To reduce money laundering, should KYC (know your customer) regulations followed by banks and stocks-and-bonds firms be applied to realtors? New York legislators are already debating new proposals that would levy new taxes on rich foreign buyers.

The debate feeds into demagogic attacks on “the 1 percent” as well as anti-foreigner bias, but it also raises legitimate questions. Should the United States be a haven for thieves? Should government underwrite the building of beautiful homes that stay empty most of the year and raise housing prices for the middle class? It also creates an opportunity: Might conservative Christians who are rightly immovable on Bible-based social issues find common ground with secular liberals on a few issues involving governmental transparency and equitable taxation?

So, please follow me as I take you on a tour of some high-end homes and the policy issues that surround them. The exploration was not easy because realtors, since the New York Times coverage, are in a lockdown mode regarding reporters. Happily, I have a landowning friend from the Balkans whom I could legitimately represent as a potential buyer: Mentioning her existence and offering some general description (but never being asked for a name) got me entry into places hard for the slim-walleted to see.

FROM CONDO 70B high up in the Time Warner Center, across from the southwest corner of New York’s Central Park, the view is spectacular: west to the Hudson River, east to buildings and streets, ballfields and playground, pond and gardens. Features inside include warm Norwegian wood walnut paneling and flooring, automated solar shades, and custom millwork, lighting, and sound systems. Switchable glass in the three bathrooms—translucency for privacy, transparency to bathe while looking out at the park—is a nice touch. Sadly, 70B’s inhabitants had that view only three times in the past year: For 362 days of the year, no one’s home. A realtor told me the owner is “happy to keep it as a good place to have his money.”

That’s typical at Time Warner, where last year shell-companies-without-products bought more than four out of five condos that sold at prices like the $27 million 70B seems likely to fetch. Among the owners of condos from the 68th through 78th floors, according to diligent dot-connecting research by the Times: Dimitrios Contominas, arrested a year ago in a Greek corruption sweep; Vitaly Malkin, a Putin crony who allegedly plundered Angola; Andrey Vavilov, a Russian reformer turned oligarch; Anil Agarwal, a mining magnate under fire in Zambia and his native India; and Kabul Chawla, who allegedly misused the life savings of New Delhi residents.

One other owner, well-connected Wang Wenliang, is typical of Chinese buyers, described to me by another realtor as those who “buy something and they don’t come for years. They’re literally just putting their money there.” Other realtors—I’m giving them anonymity to protect their jobs—said, “If your people are wanting to be incognito, that’s a positive,” and “This building is not inhabited by full-time people.” Business Insider in February noted that 16 foreign owners of Time Warner condos are the subjects of government investigations: “They could not have chosen a better place to stash their wealth—from the unadorned hallways to the multiple entrances, this was a high-rise built for anonymity.”

The condo building/hotel across from the southeast corner of Central Park, The Plaza, seems too famous to allow anonymity: Cary Grant sips cocktails there at the beginning of Alfred Hitchcock’s North by Northwest, and The Plaza figures prominently in The Great Gatsby, Eloise children’s books, Home Alone II, and The Princess Diaries. But when I viewed two Plaza condos near my $20 million price point, a realtor told me only 30 percent of the condos are occupied at any given time. One resident said, “First time in a week someone’s been on the elevator with me.” I asked, “Do you like that?” He said, “I like the privacy.”

If you’re shopping, I can recommend a good realtor who will show you high ceilings, floors of walnut-bordered herringbone parquet designed to reflect original mosaic patterns found in The Plaza’s lobbies, and kitchens with Nero Marquina stone countertops and mosaic Calacatta marble-tiled backsplashes. Even though one Plaza selling point speaks of being next to “Russian billionaires when you sashay into the large, glamorous marble lobby on Central Park South,” one realtor was more realistic: “So many people just put their money in New York City. They buy apartments and don’t even use them. They just keep them to have them in their portfolio. That’s real estate in New York. It’s a big safety deposit box.”

Realtors showed me condos in other newly famous buildings, but everywhere their message regarding these stash pads was the same: “Purchase through shell corporations is standard operating procedure in New York. … You create your LLC [limited liability company] and transact. … With banking regulations getting tighter, it’s art or apartments.” When I insinuated that the Balkans friend I was representing might have problems with her government, the regular response was, “We can sign a confidentiality agreement, no problem.” What if I brought money in a suitcase? “Most purchases at this price point are all cash.”

Realtors hyping mid-Manhattan townhouses said their five-floor buildings were better than high rises: Doormen at the elite towers, although well-paid and generally discreet, might take bribes, but a townhouse would have separate ground floor apartments in which to house security personnel, drivers, and housekeepers. As one realtor said while showing me a $20 million townhouse’s 1,000-bottle wine cellar, “This is the grand master of the universe living … all of the services … complete privacy.”

Overall, it seems that a New York magazine cover is no exaggeration: “New York Real Estate Is the New Swiss Bank Account: Foreigners are flooding the market to stash, hide, and sometimes launder their money.”

IF MY BALKANS FRIEND gets in trouble with her government, it will not be because of misconduct on her part but misconduct in the government, and there might be a time she doesn’t want officials to find her. But advocating secret transactions for that purpose is like praising the tenure system at American universities because occasionally it protects Christian or conservative professors: For the most part tenure protects dug-in radicals. For the most part shell corporations protect those seeking secrecy for reasons far from heroic.

Last year a study led by University of Utah law professor Shima Baradaran showed how 7,000 companies around the world that offer incorporation services were usually ready to create limited liability companies for groups with potential terrorist connections without ever asking for documentation. Surprisingly, firms in places long thought to be ideal for international money laundering, like the Cayman Islands, did ask questions: The easiest place to set up an untraceable shell company was Kenya, but the United States came in second, with Delaware and Nevada displaying “abysmal” practices.

The money route can be like this: An agent for a Hamas terrorist puts money in a bank account in Liechtenstein. It goes to a trust on the Isle of Man, then to a Nevada LLC, then to a Delaware shell company. Such “layering” might have more steps, but eventually the cash ends up in the office of a New York realtor and pays for one of the condos I visited.

Under the 2001 Patriot Act, U.S. banks cannot accept proceeds from foreign corruption: They must scrutinize private banking accounts opened for senior foreign political figures and their associates. But Washington lobbyists in 2002 won for real estate and escrow agents handling real estate closings an exemption from Patriot Act anti-money-laundering regulations.

In 2010, though, the Senate Permanent Subcommittee on Investigations, with now-retired Sen. Tom Coburn, R-Okla., keeping it honest, produced a bipartisan recommendation that Congress enact legislation “requiring persons forming U.S. corporations to disclose the names of the beneficial owners of those U.S. corporations.” The Senate subcommittee also wanted the National Association of Realtors to “issue guidance to their members prohibiting use of any financial account to accept suspect funds.” For five years Washington real estate lobbyists have derailed reform.

A smaller version of that same story has been on display in New York City and Albany, much to the chagrin of the New York Post and others who complain about “sweetheart tax abatements” that a panel on public corruption was investigating until Gov. Andrew Cuomo disbanded it. Preet Bharara, U.S. Attorney for the Southern District of New York, is investigating massive tax breaks given to the new One57 condo building just south of Central Park that allow owners there to avoid 94 percent of standard real estate taxes. But shell corporation purchases by foreign buyers are major drivers of the Manhattan housing market, and lobbying power plus campaign contributions have so far stopped reform attempts.

New York legislators now are reviewing a proposal by which non–New York residents who own condos worth more than $5 million would be taxed more. The left-leaning Fiscal Policy Institute estimates that such a tax would generate $665 million a year in revenue for New York City. The FPI, of course, would want city officials to use that money to promote causes it favors, but Christian conservatives who want homes to be more than safety deposit boxes could support such a change if the money would go to middle-class tax relief.

Last year’s most colorful New York headline was, “How Dirty Money Moved From a Taiwanese Fruit Basket to a Chelsea Condo.” Next year’s could be different.

Sweetheart zones

Many New York City new housing developments with three or more units on land previously vacant or underused can receive a 421a 10-year exemption from paying the increase in property taxes that would otherwise result from the new construction. For example, if vacant land has a $10 million value and the new property after construction is worth $100 million, the property owner will not be taxed for the $90 million increase.

Developers within a Manhattan “exclusion zone” between 14th Street and 96th Street were supposed to receive exemptions by purchasing “negotiable certificates” from developers building low-income housing elsewhere in New York, usually in the Bronx. In theory, creation of four or five expensive units leads to the building of one inexpensive unit that is rent-stabilized for a decade. In practice, according to the Pratt Center for Community Development, the certificates have generally sold for $12,000 or so, “far below the value of the property tax exemption provided to the market-rate developer over 10 years.” Fewer than 7 percent of units subsidized through the program have been available to low- or middle-income families.

This works out wonderfully in practice for some builders, sellers, and buyers of Manhattan’s most expensive addresses. At the beginning of this year the One57 building (at 157 W. 57th St., close to Carnegie Hall) was the priciest, with a $100 million penthouse taxed as if it cost only $6 million. The New York Post compared the $18,000 tax bill for the penthouse to what the owner of a nearby $1 million condo at 224 E. 52nd St. pays: $24,000. —M.O.