By Robert L. Nessen
Huge fortunes have been invested in prime real estate throughout the United States. Too often, however, we do not know who is doing the investing and whether the investments are being made for legitimate reasons.
As the New York Times recently reported, the true beneficial owners remain undisclosed, and it is difficult to come up with legitimate reasons for such nondisclosure other than, perhaps, to hide your property from a profligate spouse. But there are lots of illegitimate reasons such as evading taxes, parking money for future laundering, and hiding money of corrupt foreign leaders so they can have funds available to maintain their lifestyle once they are thrown out of office. In fact, it could be argued that there should be a presumption of illegality when the “true” ownership of real estate is not disclosed. This would be similar to a presumption that, if you have cash in your safety deposit box, you are hiding it from the IRS.
In the case of real estate, there may be a practical way to force disclosure of beneficial ownership.
In every state, in order to protect legal title to real estate, the ownership has to be recorded. If you want to assert legal claims to the real estate, you have to show this recorded or registered title. The problem remains that legal title can be in the name of a “strawman” or dummy corporate or partnership entity. As a result, actual beneficial ownership can remain hidden. But what if the identities of these beneficial owners also had to be recorded on the public record in order allow these beneficiaries to have any legal rights, remedies, or claims with respect to the real estate? For example, if a tenant defaulted on the payment of rent, only the beneficial owner would have the right to assert a claim for the arrearages. If a disputed lien were placed upon the property, only if you were a disclosed beneficiary could you enter or claim a defense against the lien.
Another advantage to this approach is that, with recording systems already in place in every state, this heightened disclosure of beneficial ownership could be implemented on a state-by-state basis, even if the federal government was unable or unwilling to be involved. If New York state invoked a requirement t0 disclose beneficial ownership, the fact that there was no similar federal requirement would not impede New York. There is no way that you can avoid the New York requirement by moving your real estate to another state.
One other way to “force” voluntary disclosure of beneficial ownership could be through the tax system. What if only the holders of the title to real estate or the disclosed beneficial owners were entitled to the tax benefits often attached to real estate investments? For example, if you were an undisclosed beneficial owner, you would not be allowed to take advantage of tax credits, or even interest and depreciation deductions (particularly to the extent those deductions exceeded the income from the real estate). Under these circumstances, you might have second thoughts about avoiding disclosure.
Enforcement of beneficial ownership disclosure can take the form of denying governmental protection – the courts, for example – to those who do not or will not admit to being the true economic owners.
It is time to take disclosure seriously. It is in our national interest that those who want the protections afforded by the United States make their identities known.
Robert Nessen is an attorney, adjunct professor of law at the Boston University School of Law, and principal of Nessen Associates, an advisory firm to non-profit organizations.
