Anti-Money Laundering Regulations for Real Estate Deals
The USA PATRIOT Act of 2001 (the PATRIOT Act) requires that all “financial institutions” must establish anti-money laundering programs. The term “financial institution” includes “persons involved in real estate closings and settlements.” Another provision in the PATRIOT Act requires all financial institutions to affirmatively check business relationships against the lists of terrorists and other specially designated individuals and entities maintained by the Treasury Department’s Office of Foreign Asset Control (OFAC).1 The problem for real estate companies is that the term “persons involved in real estate closings and settlements” has never been defined.
On April 10, 2003, the Treasury Department’s Financial Crimes Enforcement Network (FinCen), which will enforce the anti-money laundering provisions of the PATRIOT Act, issued an advance notice of proposed rulemaking seeking public comment on regulations covering “persons involved in real estate closings and settlements.”
The issues for comment include:
- What are the money laundering risks in real estate closings and settlements?
- How should “persons involved in real estate closings and settlements be defined?
- Should any persons involved in real estate closings and settlements be exempted from the regulations?
- How should anti-money laundering programs for persons involved in real estate closings and settlements be structured?
As stated in the FinCen notice, the National Institute of Justice has reported that “real estate transactions offer excellent money laundering opportunities,” including opportunities to “legitimate and repatriate illegal funds.” In addition, the American Land Title Association has identified numerous “red flag” situations involving real estate transactions.
According to the notice, the “guiding principle” in defining “persons involved in real estate closings and settlements” will be to include “those persons whose services rendered or products offered in connection with a real estate closing or settlement that can be abused by money launderers.” FinCen also intends to include “those persons who are positioned to identify the purpose and nature of the transaction” or “suspicious conduct.” Another factor will be “involvement with the actual flow of funds . . .” Persons who may be covered by the definition include: real estate brokers; attorneys who represent the purchaser or seller; banks, mortgage brokers, or other financing entities; title insurance companies; escrow agents; appraisers; and such investment vehicles as real estate investment trusts, real estate limited partnerships, or entities commonly referred to as “syndicates” of real estate investors. Interested parties have until June 9, 2003, to make comments to FinCEN.
The PATRIOT Act does not require a “one-size-fits-all” anti-money laundering program for real estate entities. The notice of proposed rulemaking provides the real estate industry an opportunity for input on how anti-money laundering program requirements should be tailored or customized to address the unique needs or aspects of the real estate industry.
This notice of proposed rulemaking covering the anti-money laundering program component of the PATRIOT Act, will not affect the separate provision requiring all financial institutions to check the OFAC lists before engaging in transactions. That requirement is in effect now. In addition, Executive Order 13224 continues to prohibit all U.S. persons, including those in the real estate industry, from engaging in transactions with parties identified on the OFAC list. These provisions are enforced through significant civil and criminal penalties, including substantial fines and potential prison terms.
 All US companies are also covered by Executive Order 13224, which prohibits any dealings, directly or indirectly, with any individual or entity on the OFAC list.