Over the past decade, numerous government reports and media investigations have warned about the US real estate sector’s vulnerability to money laundering. Global Financial Integrity estimates that in the past five years more than $2.3 billion has been laundered through US real estate transactions. Recent developments involving the Pandora Papers exposed potential gaps in Anti-Money Laundering (AML) compliance and highlighted the increased use of shell companies to launder money in the sector. Despite calls for more regulatory scrutiny, from both domestic1 and international stakeholders2, real estate professionals do not currently have AML compliance obligations under the Bank Secrecy Act (BSA).
It appears that this is about to change. On December 6, 2021, the Biden administration issued an Advance Notice of Proposed Rulemaking (ANPRM), seeking comments on proposed requirements that could further close the gap in the US BSA/Anti-Money Laundering (AML) regime and target specified real estate entities and transactions.
As written, under the BSA and USA PATRIOT Act, persons involved in real estate closings and settlements are covered financial institutions, which could require them to implement AML programs, file Suspicious Activity Reports (SARs), and adhere to record-keeping requirements3. However, in 2002 the Financial Crimes Enforcement Network (FinCEN) granted them an exemption. FinCEN’s reasoning for the exemption was that it needed to study the impact of AML requirements on the industry and to consider the extent to which AML program requirements should be applied, taking into account specific characteristics of the entities defined as “financial institutions” under the BSA.
FinCEN’s efforts to analyze possible laundering through real estate has been done largely through the establishment of Geographic Targeting Orders (GTOs) issued by FinCEN. Pursuant to 31 CFR § 1010.370, FinCEN has the authority to impose certain additional record-keeping and reporting requirements on one or more domestic financial institutions or nonfinancial trades or businesses in a specific geographic area. The GTO on title insurance companies (Real Estate GTO) was first issued on January 13, 2016. It required title insurance companies in certain cities at higher risk of money laundering through real estate to identify and report via Currency Transaction Reports, Legal Entities4 and their beneficial owners of residential real estate purchases. FinCEN continued to focus on the real estate industry as it renewed the Real Estate GTO on November 1, 2021, which is its 11th renewal. Over the years, the renewals have changed the parameters of “Covered Transactions”5 to include additional monetary instruments such as virtual currency, new geographic locations, and a modified reporting transaction threshold.6
From data obtained from the Real Estate GTOs, FinCEN found that a significant number of the beneficial owners of the legal entities engaged in non-financed real estate purchases reported had a nexus to reported suspicious activity. The overlap between subjects of the Real Estate GTOs and SARs, FinCEN argues, suggests a link between all-cash purchases of residential real estate and individuals determined by financial institutions to have been engaged in suspicious activity. FinCEN notes that the usefulness of the Real Estate GTO reporting data to law enforcement suggests that a regulatory requirement to ensure consistent reporting on a nationwide basis would facilitate law enforcement and national security agency efforts to combat illicit activity in this sector.
In seeking comment for the ANPRM, FinCEN considers two different approaches in addressing money laundering in the US real estate sector for non-financed transactions across the residential, as well as the commercial, real estate sectors. FinCEN is seeking input on how it should implement such a system, consistent with the BSA, to maximize benefits while minimizing burdens on reporting financial institutions and nonfinancial trades or businesses. Given the complexities and nuances of the real estate industry, Guidehouse believes that FinCEN might incorporate a combination of these two broad approaches outlined below.
FinCEN is seeking comment on removing the exemption for real estate entities involved in real estate closings and settlements as covered financial institutions under the BSA. Notably, FinCEN is also seeking comment, on application of the fifth pillar requirement (CDD Rule) to these entities, which typically has only been a regulatory requirement for a limited number of financial institutions.7
FinCEN is also seeking comment on establishing a national record-keeping and reporting requirement to include certain financial institutions and individuals not covered under the BSA’s general requirements. Such a specific reporting requirement may be imposed under 31 U.S.C. 5318(a)(2), as amended by Section 6102(a) of the AML Act, which authorizes the Treasury secretary to “require a class of domestic financial institutions . . . to maintain appropriate procedures, including the collection and reporting of certain information as the Secretary of the Treasury may prescribe by regulation, to . . . guard against money laundering, the financing of terrorism, or other forms of illicit finance.” FinCEN seeks comment on whether to include the following elements in a national record-keeping and reporting requirement:
Whether or not the potential requirements outlined in the ANPRM are implemented, the mounting attention and focus by the media, regulators, and legislators indicates that real estate professionals need to be prepared. Guidehouse continually reminds its clients that it is a criminal offense to facilitate laundering the proceeds of crime, whether or not there is a regulatory requirement to have a compliance program. An adequate and effective compliance program is a factor that the Department of Justice uses to determine whether to bring charges, negotiate pleas, or other agreements. Therefore, Guidehouse can help real estate firms assess their compliance programs to prepare for regulatory updates and to mitigate risks, including developing updates to operations, policies, procedures, controls, and technology.