Anti-Money Laundering Update
The U.S. Treasury Department is gearing up to expand oversight of real estate deals for cash.
The Treasury Department has issued notice, through its Financial Crimes Enforcement Network (FinCEN), of a proposed rule to deal with money laundering. A specific target of the Biden administration’s anti-corruption drive is the purchase of real estate for cash. This will likely mean more reporting requirements for the real estate industry — and possibly rules of the type that banks have had to follow. At this time, FinCEN is beyond whether and where additional anti-money-laundering (AML) and suspicious activity reports (SARs) are needed.
Read on for the fuller story, and a call for public comment.
Why Are All-Cash Purchases Being Targeted for Special Scrutiny?
In fact, most home purchases are screened for hallmarks of money-laundering. When there’s a mortgage, lenders comb over the sources of funds that the buyer brings into the deal.
Banks, following the Bank Secrecy Act, must adhere to federal reporting rules. All other home mortgage companies, including those in the government-backed and conventional loan areas, must submit suspicious activity reports, and must have AML and anti-terrorism policies in place to review the movement of funds from their origins into the home loan products.
When a home buyer pays for a home in cash, though, there may be no way for the government to trace the movement of ill-gotten gains into real estate assets. In most areas, businesses involved in an all-cash purchase need not adhere to Bank Secrecy Act reporting provisions (putting aside separate IRS reporting rules for large cash transactions).
This is a key reason some $2.3 billion has been laundered through property deals in the United States in the five-year period from 2015 to 2020, FinCEN says.
Who Is Laundering Money Through U.S. Home Purchases?
Many upmarket homes in the United States are purchased by legal entities such as LLCs rather than in a personal name. World leaders have long been known to buy New York properties under company names. Their habits were scrutinized recently by the International Consortium of Investigative Journalists. The result was the Pandora Papers: millions of documents exposing who has bought what, sometimes though questionable methods. Even where the methods are legal, they allow massive wealth to go untaxed. The whole issue is surrounded by calls for transparency.
Accordingly, FinCEN says its proposed rulemaking is being done to “enhance the transparency of the domestic real estate market on a nationwide basis and protect the U.S. real estate market from exploitation by criminals and corrupt officials.”
FinCEN’s announcement came as the Biden administration issued its “U.S. Strategy on Countering Corruption” on December 6.
Today, Cash Purchases in 12 Cities Get Federal Scrutiny
What has the Financial Crimes Enforcement Network done so far? In 2016, FinCEN initiated Geographic Targeting Orders (GTOs). These involve areas around specific cities where title companies must report the identities of buyers.
The GTO regime started off by requiring title insurers in New York City and Miami Dade County to submit information on all-cash home purchases made in the name of companies, whenever a home’s sale price exceeds $300,000. FinCEN has expanded this regime several times from 2016 through 2021. To date, the other U.S. cities regulated by this reporting provision are metropolitan Boston, Massachusetts; Chicago, Illinois; Dallas-Fort Worth and San Antonio, Texas; Honolulu, Hawaii; Las Vegas, Nevada; Los Angeles, San Diego, and San Francisco, California; and Seattle, Washington. In all of these cities, the title companies have to disclose the names of individuals who use LLCs or other businesses to buy the homes. When filling out Currency Transaction Reports, GTO title insurers must:
- State details about the cash purchase, including address, price, and closing date.
- Document the identity, social security information, etc. pertaining to the people behind the business purchasing the real estate, whether those people are U.S. citizens or the citizens of other countries.
- Supply information about the title insurer itself.
And that might not be all. On top of making these disclosures mandatory, FinCEN may demand more data if it has reasonable grounds under the Bank Secrecy Act.
The federal government considers the GTO regulations successful in addressing money laundering. (FinCEN’s rulemaking proposal states that at least 30% of the transactions reported in the GTOs turn out to involve individuals who have been named in Suspicious Activity Reports.) But so far, the federal government has not required title insurers to apply the same level of scrutiny that banks must apply, and it hasn’t applied similar reporting duties on other actors in the industry. Should it?
That’s where we are now, in this rulemaking process. The new proposal is titled the 2021 Anti-Money Laundering Regulations for Real Estate Transactions (ANPRM). It’s on the table now. And it’s time for those with interests in the real estate industry to weigh in.
Your Comments Are Requested
The question now is whether and how the Financial Crimes Enforcement Network will expand the reporting requirement. Will this spread from the 12 major city areas, to cover the country as a whole? FinCEN is also deliberating on whether to apply reporting rules to cash purchases of commercial properties. Of most interest to real estate professionals, FinCEN could also place responsibility on actors that have never had to comply with federal AML compliance. These actors could be property developers or managers, financial advisers, real estate agents and brokers, escrow companies, auction houses, closing agents, appraisers and inspectors, and real estate investment firms. Notably, the new rules would cover even partial cash payments, so the scope of ANPRM’s coverage is broad.
So, FinCEN needs public comments on the geographic scope of new regulations, what data should be submitted and kept, and how best to limit the time and resource costs to real estate professionals. Who needs to report and maintain these stores of information? Another question is how much a property needs to be worth to trigger the regulation — is $300,000 reasonable? FinCEN may be looking at removing the minimum so properties of any price are subject to the new rule.
Comments should be written according to these instructions, and be received on or before Feb. 7, 2022. In addition to commenting, those most likely to face new compliance responsibilities might decide to build informational bridges to title companies where reporting is already required, and prepare to establish their own AML compliance guidelines. As noted by Florida Realtors®, “having good recordkeeping and a strong culture of compliance will help to ease the transition to whatever approach FinCEN eventually adopts.”
31 U.S. Code § 5326: Records of Certain Domestic Coin and Currency Transactions (2011).
31 U.S. Code § 5318: Records and Reports on Monetary Instruments Transactions – Compliance, Exemptions, and Summons Authority (2011).
National Archives, Federal Register. Anti-Money Laundering Regulations for Real Estate Transactions. A Proposed Rule by the Financial Crimes Enforcement Network on Dec. 8, 2021.
White House Briefing: Background Press Call by Senior Administration Officials on the U.S. Government Strategy on Countering Corruption (Dec. 6, 2021).
Richard Vanderford for the Wall Street Journal Risk and Compliance Journal: U.S. Weighs New Rules for All-Cash Real-Estate Deals (Dec. 6, 2021).
Katie Wermus for Newsweek.com: Treasury Wants to Regulate All-Cash Real Estate Deals to Crack Down on Money Laundering (Dec. 6, 2021; citing reporting by the Associated Press).
Press Release: FinCEN Launches Regulatory Process for New Real Estate Sector Reporting Requirements to Curb Illicit Finance (Dec. 6, 2021).
Jonathan H. Canter, et al. for KramerLevin.com Client Alerts: FinCEN Considers New Anti-Money Laundering Reporting Requirements For All-Cash Real Estate Transactions (Dec. 15, 2021).
Gina M. Parlovecchio et al. for FloridaRealtors.org: New FinCEN Reporting Could Include Brokers, Agents (Dec. 13, 2021).