On Feb. 7, The New York Times published the first of five installments on foreign ownership of U.S. real estate, attempting to pierce the secrecy of more than 200 shell companies owning condos at the Time Warner Center (TWC), an iconic building alongside Central Park. Of the 192 condos at the TWC, nearly two-thirds are owned through shell companies.

The series will likely trigger federal scrutiny of the need for additional government regulation and enforcement of existing rules affecting foreign beneficial owners. Similar focus in the 1970s resulted in a labyrinth of tax and reporting rules that applied to foreign owners and sellers of U.S. real estate. Real estate investors and their advisors need to monitor developments in this area closely, as well as review their tax and legal compliance under current rules.

The Times spent more than a year unraveling the ownership of shell companies with condos in the TWC, connecting the dots from lawyers or relatives named on deeds to the actual buyers. In some cases it was nearly impossible to establish the source of money behind shell companies.

The Times series highlights the legal veil obscuring ownership: “Behind the dark glass towers of the Time Warner Center looming over Central Park, a majority of owners have taken steps to keep their identities hidden, registering condos in trusts, limited liability companies or other entities that shield their names … The foreign owners have included government officials and close associates of officials from Russia, Colombia, Malaysia, China, Kazakhstan and Mexico,” as well as individuals embroiled in legal investigations, the series notes.

Purchasers registered shell companies in the names of accountants, lawyers or relatives and made acquisitions on behalf of groups of investors or family members, further obscuring the source of funds and tax implications. Moreover, ownership of shell companies is shifted for legal purposes with no indication in property records. The shell game by real estate owners will likely raise questions in the minds of revenue authorities. In many cases, it seems direct and indirect ownership transfers by foreign persons or estates should trigger Internal Revenue Service (IRS) compliance. Income tax and withholding issues might also come into play.

Almost issuing a challenge for new federal regulation, the Times observed that investors “have been able to make these multimillion-dollar purchases” and transfers “with few questions asked because of United States laws that foster the movement of largely untraceable money through shell companies.”

Concern about foreign investment in U.S. real estate resulted in the enactment of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), as well as related reporting. Congress and the states became concerned in the 1970s about foreigners buying up huge tracts of land. More recently, foreign acquisition of landmarks such as the Empire State Building and Pebble Beach Golf Course, and Dubai Ports World’s proposal to acquire U.S. shipping facilities, focused public attention on the issue. Prior to 1981, foreign persons (nonresident, non-citizen individuals and non-U.S. corporations) often were exempt from U.S. tax on the sale of U.S. real estate. Congress passed FIRPTA to require foreign persons to pay tax on dispositions of any interests in U.S. real estate and introduce new disclosure mechanisms.

In recent years, there have been attempts to promote business transparency, piercing the veil of anonymous companies. According to the times, “in many countries, there is no public information available on the shareholders and directors of a company … you just simply can’t find out anything on who’s behind a company. This includes places that people equate with secrecy such as Caribbean islands, but it also includes places such as Delaware, which is equally secretive. ”

In light of the Times’ investigative report, U.S. Treasury and the IRS will likely review enforcement strategies and the need for additional legislation to implement federal policy. The rule of “Caveat Emptor” applies to foreign investors in U.S. real estate. Strategies that may have worked in the past to acquire U.S. real estate and obscure ownership may not work in the future. Foreign investors should anticipate greater IRS scrutiny of real estate transactions and beneficial ownership changes.