Shady business: How the rich stash their cash

Yahoo Finance By

<Original Source>

The global mega rich are invading New York City. Foreign investors are pouring billions of dollars into pricey real estate all through the façade of shell companies.

According to a lengthy New York Times investigation, big investors are setting up limited liability companies or LLC’s that act as a front for investors to remain anonymous. Almost half of the most expensive real estate in the country is purchased anonymously through these shell companies.

Yahoo Finance senior columnist, Michael Santoli says the super wealthy see these real estate buys as a safe investment. “We have this class of global mega rich with a lot of money to stash places. They want a safe place for it. If they can’t get a return they want it to hold its value.”

The Times reports that only a third of the owners actually live in the condos. “It’s really not a place to live. It turns out its places for people to put a lot of money. Who knows where they made the money? The laws here allow them to remain completely in the dark or almost completely secret in terms of the identity of the buyer,” says Santoli.

Often times the LLC is registered in the names of relatives, lawyers, accountants and others. The properties are bought on behalf of the group, further clouding where exactly the money is coming from. These investors are considered nonresidents and avoid paying city taxes while receiving some pretty generous property tax breaks in the process.

Santoli says buying under the LLC allows investors to bypass money laundering hurdles and compliance issues. “The buyers are kind of executing a little bit of a regulatory arbitrage or opportunism. It’s not easy to put actual cash here and it’s not easy to buy stocks, but somehow because of local laws and other things it’s easy enough to buy a hard asset like a condo.”

Several sales are made in cash, eliminating paper trails like mortgage statements. Real estate agents say anonymity is key to recruiting and maintaining clients. “The real estate agents think of themselves as shielding their wealthy clients the way private bankers do,” says Santoli. As long as they are receiving the cash, there’s little incentive for them to investigate where it’s actually coming from.

The ultra wealthy have also long adored the secrecy of Swiss banks for stashing their cash. Documents leaked by a former HSBC (HSBC) employee and analyzed by the International Consortium of Investigative Journalists exposed how HSBC used its Swiss private banks to help some high profile customers avoid taxes and hide more than $100 billion. Mentioned in the documents are actor Christian Slater, model Elle MacPherson and fashion designer Diane von Fürstenberg. Some of the world’s most dubious leaders also show up in the leaked docs- former Egyptian president Hosni Mubarak and current Syrian ruler Bashar al-Assad.

[Get the Latest Market Data and News with the Yahoo Finance App]

Santoli says the comprehensive leak brings to light questions of who exactly the bank is in business with. “It’s not just about taxes when it comes to the Swiss banks. It’s kind of a no questions asked about how you made your money and there are a lot of dictators from around the world, some people with some potential criminal dealings so that to me is one issue.” In 2012, HSBC paid $1.9 billion to the U.S. government to settle money-laundering charges associated with Mexican drug cartels, Iran and Sudan.

Santoli says extremely wealthy people are looking for new ways to keep their money safe. “You have this super elite mega rich with billions and billions and they look around the world and there are no easy returns to be had anywhere. You can’t just put it in bonds and get a good return so you might as well go to extra lengths to keep it safe somehow.”

HSBC says they’ve reformed their Swiss banking policies and implemented new systems to discourage tax evasion and money laundering. “I do think we have a little bit of wealth-shaming going on when it comes to the media and the regulators and everybody who is saying what is actually being done to accommodate these people who want all this money kept hidden, “Santoli says.

Santoli thinks big money will always find a way to hide. “I do think there will be a change. I don’t think they are going to go away. People are always going to try and find a way to cover their tracks when it comes to big wealth.”

More from Yahoo Finance

Battle of 2015: U.S. economy vs. the world

3 ways to make your home worth more

C-suite execs are in demand in these two fields