BY RYAN MUMMERT
One of the most significant barriers to Chinese investment on Guam is the currency controls placed on citizens by the Chinese government that make it next to impossible to get money out of China…legally anyway.
If you plan on transacting real estate with a Chinese citizen or company, an important question to ask is, “where is the money coming from?” Chinese citizens are only allowed to transfer $50,000 per year without government approval, and they must sign a statement indicating that they will not be using funds to purchase real estate.
The stringent currency controls now in place have evolved over the last three or four years to prevent additional capital flight out of China that would accelerate devaluation of the Yuan already under pressure from Trump’s trade war and a cooling Chinese economy. The difficulty in moving capital has brought about some “creative” solutions, some of which can be problematic for a variety of reasons.
One method that can cause significant problems is a practice that entails having friends or associates transfer money to the buyer to facilitate the purchase. Usually the amounts transferred are in increments under $10,000 (to escape U.S. and Chinese government scrutiny). The “significant problem” this causes can be jail time because the practice has been illegal since 1986.
Commonly called “structuring” or “smurfing,” the buyer in a transaction enlists multiple parties (the “smurfs”) to transfer money to the buyer under false pretenses in order to avoid government detection. Structuring is essentially illegal in every country as it is designed to conceal the true remitter and purpose of the money being transferred, which facilitates money laundering and tax evasion.
Another method that, while not perilous to your freedom can be perilous to your net worth, is agreeing to exchange funds outside of escrow in Yuan. In this scenario, the buyer finds a seller who will accept funds in China for the purchase. First and foremost, because the value of the consideration paid must be stated in U.S. dollars, the potential for loss exists for the entire escrow period because the value of currencies is always in flux.
Second, you expose yourself to liability from the Foreign Investment in Real Property Tax Act. Under FIRTPA, all non-citizen property owners are required to pay a tax when property is sold. The buyer in a transaction, where the owner is not a U.S. citizen, is responsible for withholding and paying 10% of the purchase price to the government of Guam. In the event the buyer fails to pay the withholding and the seller fails to pay the tax, the buyer becomes responsible for the seller’s tax, inclusive of penalties.
Lastly, the issue of a disconnected closing arises because it is difficult to align the transfer of title and the transfer of funds when there are no coordinated escrow providers, creating potential instances in which title is transferred but the funds are not, or funds are transferred and title is not.
Understanding some of the complicated issues that arise when transacting with non-U.S.
buyers and sellers can help you avoid wasting precious time in a hot market on a buyer who can never close and prevent you from suffering serious financial and criminal repercussions down the road. mbj
— Ryan Mummert is the general manager at Title Guaranty of Guam. He can be reached at [email protected].