February 2, 2016
Luxury Real Estate and Transparency
Law360 quoted me in Atty-Client Privilege At Stake In Real Estate Bill (behind a paywall). It opens,
The push to reveal the individuals involved in anonymous real estate deals has moved from title insurers to attorneys and real estate agents, but lawyers say requiring them to reveal the names of clients they help set up limited liability companies and other vehicles could weaken attorney-client privilege.
Reps. Carolyn Maloney, D-N.Y., and Peter King, R-N.Y., plan to reintroduce legislation this week that would require states to collect the beneficial ownership information for limited liability companies and other vehicles used in real estate transactions, or to have the U.S. Department of the Treasury step in if states are unable to meet the requirement, in order to prevent criminals, corrupt government officials and terrorists from using real estate purchases to launder funds.
Doing so would close a loophole that allows attorneys to advise clients without meeting the same reporting requirements as banks and would help prevent potentially illicit funds from making their way into real estate markets, Maloney said. But it also has the potential for putting attorneys in the uncomfortable position of reporting clients to the government in cases where there may not be a criminal violation, said Marc Landis, the managing partner of Phillips Nizer LLP.
“This will certainly be an area where client confidentiality and attorney-client privilege will be weakened in ways that they have not been previously,” he said.
Lawyers in real estate transactions came under renewed attention after the transparency advocacy group Global Witness and the CBS News program “60 Minutes” released a blockbuster report Sunday night that showed several New York law firms providing information to an individual posing as an adviser to a minister from an African government who was looking to buy a Gulfstream jet, a yacht and a New York brownstone without the money being detected.
According to the report, which used hidden cameras, 12 of 13 lawyers provided assistance when asked how to set up shell companies and other vehicles to avoid attaching a name to the purchases. One of those 12 later said he wouldn’t participate in the transactions.
The Global Witness report found that the attorneys — none of whom signed the group’s investigator as a client — broke no laws in providing the advice they did. And that’s a problem that Maloney wants to address.
“This is unacceptable, criminal, scandalous, and it has to stop,” she said on a conference call with reporters.
The New York Democrat’s solution to the problem is to require states to force attorneys, real estate agents and other advisers on a transaction to include the name of the beneficial owner of an LLC or trust on forms submitted to the state. If the state will not or cannot implement such a system, the Treasury Department, through the Financial Crimes Enforcement Network, would require that disclosure.
In a similar move, FinCEN last month announced that title insurers would temporarily be required to provide the names of beneficial owners of LLCs that high-net-worth individuals use to purchase luxury real estate in Miami and Manhattan without mortgages.
Maloney’s bill, which she is introducing for a third time, will expand such reporting and make it permanent.
“We’re going after the loophole. We’re going after the real estate transactions. We’re going after the realtors and some lawyers that are setting these things up,” she said.
According to Brooklyn Law School professor David Reiss, Maloney’s bill, the Incorporation Transparency and Law Enforcement Assistance Act, has struck a good balance between giving law enforcement the power to root out illicit funds in high-end real estate and not infringing too much on attorney-client privilege.
“The attorney-client privilege is one of the oldest of the privileges recognized by courts, and in the aggregate it provides great benefits to society because it promotes open communications between clients and their lawyers. The privilege is not a shield for illegal behavior, though,” he said.
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