U.S. House, New York State Target Shell Companies

By Penny Zhou

Anonymous shell companies are becoming a target for state and federal lawmakers. The House and New York State both recently passed bills that require disclosure of shell companies’ real owners.

‘Shell companies’ are typically limited-liability companies (LLC’s) that are often registered to hide the identity of the true owners. But that privacy may not be enjoyed in New York’s real estate any longer. A new law now requires the owners’ information be made public.

The law was intended to crack down on those who use the practice to avoid enforcement on things like illegal conversion of buildings.

But it has unintended consequences for New York’s real estate market, and has surprised industry insiders.

“It could be a concern,” Real Estate Broker of Compass Michael J. Franco told NTD.”and it could be a reason why somebody may not buy a place in New York.”

A Wall Street Journal analysis found that 12% of all condos and 5% of all houses in the city are owned by LLCs.

And for the luxury-condo market, the rates are so much higher. “That’s incredibly common,” Franco said.

Some buyers use it to limit liability in lawsuits and protect their assets.

“It limits the owner of the LLC to be exposed only to the extent of the property, Broker Martin Eiden of Compass said, “In other words, if you are having a party at $1,000,000 property and a guest falls out the window and dies, you would be exposed only to the $1,000,000.”

“Anybody who’s buying an investment property, I would say 90% of those people, if they’re being properly advised are going to put it in an LLC or buy it in the name of an LLC,” Franco said.

And for privacy purposes – most people don’t want others knowing the location and value of their properties.

“This happened to me before as well with buyers where I’ve had to sign a nondisclosure agreement.” Franco said, “Sometimes brokers are required and all the parties that are involved in the transaction are required to sign a nondisclosure agreement.”

He said it remains to be seen how they actually implement the law, because people really went to great lengths in this case.

“I’ve had clients who used multi-layer LLCs,” Franco said, “so that somebody can then go to the department of buildings website, and see who the owner of the LLC is, because the owner of that LLC could be another LLC.”

A 2015 New York Times report found that apart from celebrities and executives, wealthy owners in Manhattan also included people like a former Russian senator who was banned from entering Canada, a former Chinese official whose company builds consulates and embassies for the Chinese regime, and a Greek businessman with a record of arrests.

Federal lawmakers have always worried that shell companies can be used for money-laundering or other crimes.

This week, U.S. House of Representatives passed a bill that requires shell companies to disclose owner’s information to the government, though not the public.

The White House commended the bipartisan measure, which will need a pass in the Senate and the President’s signature to become law.