Beneficial Ownership Disclosure Mandates and the Legitimate Privacy Interest in Anonymously-Owned Real Estate

In a forthcoming article in the Notre Dame Law Review, Professors Reid Weisbord of Rutgers Law School and Stewart Sterk of the Cardozo Law School examine the trade-offs posed by requiring the public disclosure of the beneficial owners of real estate. While promoting real estate ownership transparency and curbing criminals’ ability to use anonymously-owned real estate, there are clear disadvantages to making the home addresses of all citizens public, the recent murder of a federal judge’s son at the family home by a disgruntled litigant who found their address online the most patent.

As Professors Weisbord and Sterk explain, a common law trust is one way citizens can keep their home address private, but as they also say, the Pandora Papers shows how easy it is for corrupt officials and criminals of all kinds to use a trust to thwart law enforcement. As Congress considers legislation to end trust abuses, the two urge lawmakers not to lose sight of the downsides of requiring the unrestricted public disclosure of the home addresses of all citizens.  At GAB’s request, Professor Weisbord summarized the relevant portion of their article for GAB readers. The Notre Dame article and an earlier article by Professor Weisbord prompted by publication of the Panama Papers should be required reading for those struggling with how to ensure criminals cannot hide from law enforcement through the use of anonymous corporations, trusts, and other “offshore vehicles,” while protecting judges, victims of domestic or sexual abuse, or others with a legitimate need to keep their home address private.

On October 3, 2021, the International Consortium of Investigative Journalists (“ICIJ”) published the findings of a massive worldwide investigation that painstakingly reviewed nearly 12 million confidential financial documents, a collection now known as the Pandora Papers. In keeping with its prior bombshell investigations, including the Panama and Paradise Papers, the ICIJ has once again exposed a trove of secret financial transactions by a global cohort of world leaders, politicians, and billionaires who have offshored assets by covertly acquiring or storing property in foreign countries. There can be legitimate reasons for individuals to secretly acquire property abroad, but such transactions are also notoriously used to launder money and defraud creditors or tax collectors by evading the jurisdictional reach of the individual’s domestic legal system.

After the ICIJ published the Panama Papers in 2016, I urged policymakers in the United States to look beyond the immediate scandal in Panama and shine a critical light on features of U.S. law that have turned the American legal system into a haven for offshore transactions. At the time, it was possible to acquire property in the United States anonymously by using a trust or a shell corporation that concealed the identity of the beneficial owners from both the general public as well as federal regulators. I argued that the privacy protections afforded by trust and corporate entity laws were sometimes at odds with the governmental interest in investigating criminal activity and prosecuting financial misconduct.

Over the last five years, the United States has made laudable progress in tightening several loopholes that had allowed beneficial owners to conceal their identity from the government. In 2016, for instance, the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Treasury Department, implemented the first of several Geographic Targeting Orders (“GTOs”) to address growing concerns about financial crimes in connection with the anonymous ownership of high-end real estate. The GTOs imposed a requirement on title insurance companies to disclose to FinCEN, but not the general public, the identities of all-cash real estate buyers who took title in the name of an anonymous shell entity. The new reporting requirement was a major step in the right direction, but the orders were temporary (though repeatedly renewed) and failed to close all loopholes. For example, the GTOs did not apply to cash transactions in which buyers declined to purchase title insurance or to transactions in which the buyer took title in trust. But in the years following FinCEN’s introduction and expansion of the GTO program, cash transactions involving anonymous shell entities declined dramatically, an outcome that suggests beneficial ownership disclosure mandates may be a potent deterrent against financial crimes.

In December of 2020, a veto-proof majority of Congress enacted the Corporate Transparency Act (“CTA”), a major legislative achievement that imposed new beneficial ownership reporting requirements for owners of shell entities known as “reporting companies.” The CTA requires individual owners of covered entities to reveal their identities annually to FinCEN. Whether this disclosure mandate will be as effective as GTOs in deterring money laundering remains to be seen, especially given the CTA’s reliance on compliance by individuals rather than financial institutions. At the very least, it is fair to say that wrongdoers for whom the CTA’s reporting violation penalties are salient will now regard the United States as a less desirable playground for financial crimes involving anonymous shell entities.

Somehow though trust law has slipped through the cracks of the beneficial ownership transparency reform movement. The Pandora Papers once again confirm the reputation of U.S. as an international haven for offshoring anonymously-owned assets under the generous protections of trust secrecy laws. The ICIJ found that South Dakota, Florida, and Delaware have emerged as among the most successful states in the jurisdictional race to attract a cottage industry of secret foreign-owned trusts.

Despite the gaping loophole for anonymous trusts under the current anti-money laundering regulations, there are indeed legitimate reasons for homeowners to invoke the privacy protections of trust law to anonymize their ownership of real property. As Professor Stewart Sterk and I explain in our upcoming article, “The Commodification of Public Land Records,” Notre Dame Law Review (forthcoming 2022), homebuyers who record title in their own name now implicitly consent to the commercial sale of their name and home address in the booming market for Big Data in which residential property ownership information is a valuable online commodity. Land records have always been available for public inspection in the U.S., but, until the recent proliferation of property ownership information on the internet, public access to home address information from paper records archived by local deed recorders was cumbersome and time-consuming (a status of public access sometimes described as “practical obscurity”). While some local deed recorders initially opposed the bulk sale of property ownership information on privacy grounds, county governments later embraced the commercialization of their data as a way to subsidize the enormous cost of digitizing vast archives of public land records. United States District Judge Esther Salas, whose family was brutally attacked at their New Jersey home by a lone gunman, believes that the assailant who murdered her son and critically wounded her husband obtained their residential address from one of several online companies that profit from the bulk electronic purchase and publication of personally identifiable information from local deed recorders.

Law-abiding homebuyers who believe that the online commodification of property ownership information represents an invasion of privacy can take steps to record title without revealing their identity. To obtain the benefits of titling property anonymously, however, those precautions must be taken at the time of purchase. For existing homeowners, re-conveying title to an anonymous entity will not conceal home address information previously published online and, once published, the data is nearly impossible to remove from the internet.

Shell entities, such as limited liability companies, are especially effective at prospectively preventing the public disclosure of beneficial ownership information, and the owner’s identity must now be reported to FinCEN under the CTA and, if applicable, a GTO. LLCs are relatively inexpensive to establish under state law, but they are only useful for anonymizing property ownership for all-cash buyers because LLC ownership violates the underwriting criteria for practically all conventional mortgage lenders.

Trust law, in contrast, offers an attractive alternative for the vast majority of Americans who cannot afford to purchase a home without a mortgage. Some banks will approve a conventional mortgage for homebuyers who wish to record title anonymously in the name of a third-party trustee so long as the borrower satisfies the lender’s rigorous requirements for trustee-owned property, which Professor Sterk and I summarize in our article. The mortgage, in turn, subjects the homebuyer to long-standing anti-money laundering disclosure rules (e.g., Bank Secrecy Act, Patriot Act, etc.) that require financial institutions to document and disclose (non-publicly) their customer’s identity to federal regulators, notwithstanding the use of a trust. Thus, the current system allows homebuyers with a mortgage to invoke trust law to avoid commercial online exploitation of their name and home address information while, at the same time, banking regulations ensure that the government receives the beneficial ownership information it needs to investigate financial crimes. For homeowners who do not need a mortgage, however, the current anti-money laundering rules preserve a gaping loophole for wealthy buyers who take title anonymously in the name of a third-party trustee because all-cash transactions involving a trust escape the federal disclosure mandates under the Bank Secrecy Act, the Patriot Act, the GTOs, and the CTA.

At this point, it both implausible and impossible for lawmakers to put the toothpaste back into the tube: Online public land records are here to stay; we will never be able to restore the practical obscurity maintained by the paper-based archiving of public land records that existed in the past. But lawmakers can, and, in my view, should, make it easier for future homeowners to maintain the privacy of their name and home address. The attack against Judge Salas’s family offers a tragic reminder that, in the modern age of Big Data, the desire for privacy is a legitimate concern and homeowners have good reason to be troubled by the recent online commodification of property ownership data. The privacy protections afforded by trust law can play an important role in prospectively preventing the unwanted disclosure homeownership data. But the benefits of trust privacy should not exempt all-cash real estate transactions from the mandatory non-public regulatory disclosure of beneficial ownership information, a reform enacted in more than 100 other countries, but not in the United States.

2 thoughts on “Beneficial Ownership Disclosure Mandates and the Legitimate Privacy Interest in Anonymously-Owned Real Estate

  1. Professors Weisbord and Sterk do a fine job of highlighting the potential tensions between the legitimate desire for privacy on the one hand and how criminals exploit anonymity. As this piece makes clear, there are legitimate uses for trusts in preserving privacy. I would suggest, though, that we need to do more to target trusts that obscure ownership and abet various forms of lawbreaking. One possibility might be, as the article suggests, an expansion of GTOs. Another might be a U.S. version of unexplained wealth orders that would force trusts, settlers, and beneficiaries to reveal the origins of suspect wealth to law enforcement.

    • I, too, enjoyed reading this piece and thought that both Professors clearly articulated the tensions in this current system. Trust law in this realm seems to leave a gap for those who would be the ones to abuse the system – those making large cash payments. Especially after the attack against Judge Salas, and as technology continues to make it easier to access public data, I think homeowners need to be protected. Regarding disclosure, I initially thought it would be reversed; those who were taking out mortgages wouldn’t need to disclose while individuals making the larger cash payments would. As Professor Weisbord and Sterk stated, the benefits of trust privacy should not exempt all-cash real estate transactions from the mandatory non-public regulatory disclosure of beneficial ownership information. I like your idea about unexplained wealth orders. In addition to your suggestions, I wonder if a scheme could be created where those making cash payments at least have to disclose to the government. They would then be afforded some protection (non-public disclosure) but also wouldn’t be completely obscured.

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