FinCEN Seeks Public Input to Reduce Vulnerability of Real Estate Market to Money Laundering
- An Advance Notice of Proposed Rulemaking (Notice) recently issued by the Financial Crimes Enforcement Network (FinCEN) requests public comment on ways to enhance the transparency of the domestic real estate market nationwide as a means to better combat money laundering, while minimizing the burden on affected businesses.
- The focus of the Notice is on real estate transactions that do not involve loans or other financing by regulated financial institutions, such as banks, since those institutions are already subject to federal anti-money laundering (AML) rules and required to report suspicious activity to FinCEN.
- The deadline to submit comments is Feb. 7, 2022.
The Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (Notice) on Dec. 9, 2021, requesting public comment on ways to enhance the transparency of the domestic real estate market nationwide as a means to better combat money laundering, while minimizing the burden on affected businesses. The specific problem on which the Notice focuses concerns real estate transactions that do not involve loans or other financing by regulated financial institutions, such as banks, since those institutions are already subject to federal anti-money laundering (AML) rules and required to report suspicious activity to FinCEN.
As indicated in FinCEN's press release announcing the Notice: "[W]hen real estate is purchased without such financing, it can be nearly impossible to trace the beneficial owners behind shell companies that are often used to purchase the real estate. As a result, corrupt officials and criminals engaging in illicit activity can exploit the U.S. real estate sector to launder their ill-gotten wealth."
Highlights of the Notice are set forth below.
FinCEN Regulatory Efforts Leading to Publication of the Notice. The federal Bank Secrecy Act (BSA) authorizes the Secretary of the Treasury to require any financial institution, including "persons involved in real estate closings and settlements," to report any suspicious transaction relevant to a possible violation of law or regulation (via a "suspicious activity report," or SAR), and requires each financial institution to establish an Anti-Money Laundering/Currency and Foreign Transaction program (AML/CFT Requirement). The secretary delegated this responsibility to FinCEN.
In 2002, FinCEN temporarily exempted "persons involved in real estate closings and settlements" and "loan and finance companies" from the AML/CFT Requirement. In 2003, it published an Advance Notice of Proposed Rulemaking seeking public comment on "the money laundering risks in real estate closings and settlements, how to define 'persons involved in real estate closings and settlements,' whether any persons involved in real estate closings and settlements should be exempted from the AML/CFT Requirement, and how to structure the AML/CFT Requirement in light of the size, location, and activities of persons in the real estate industry." This notice, however, did not lead to adoption of a final rule.
Thereafter and until 2012, FinCEN focused its regulatory and enforcement efforts on the 80 percent of real estate transactions that are financed by a loan from a regulated institution. Beginning in 2012, however, FinCEN began to address the other 20 percent of real estate transactions. In final rules adopted in 2012, 2014 and 2020, respectively, it 1) eliminated the temporary exemption from the AML/CFT Requirement for nonbank mortgage lenders and originators; 2) extended requirements similar to the AML/CFT Requirement to the housing-related Government Sponsored Enterprises (GSEs); and 3) extended the AML/CFT Requirement to banks that are not regulated by a federal functional regulator.
In addition, FinCEN in January 2016 began issuing Geographic Targeting Orders (GTOs) requiring title insurance companies to file reports and maintain records concerning all-cash purchases of residential real estate above a certain threshold in select metropolitan areas of the U.S. (Real Estate GTOs). The Real Estate GTOs initially required some of the largest title insurance companies in the U.S. to report "beneficial ownership" and information on "legal entities" used to purchase "residential real property" in Manhattan and Miami in transactions covered by the GTOs. On multiple occasions thereafter, the Real Estate GTOs were renewed and expanded to cover more transactions in more metropolitan areas and to demand more information about those transactions.
The final orders mentioned above, together with the information obtained by FinCEN as a result of the Real Estate GTOs, helped set the stage for publication of the Notice.
Seriousness of the Problem. The Notice cites several published reports detailing the seriousness of the problem of money laundering in the real estate sector. Among these reports are 1) a report published in January 2007 by the Financial Action Task Force (FATF), the global laundering and terrorist financing watchdog, highlighting the scope of the money laundering problem in the real estate sector and making recommendations to deal with it; 2) FATF's 2016 Mutual Evaluation Report of the United States, in which FATF identified numerous money laundering vulnerabilities in the U.S. real estate sector, noting that "purchasers often use legal persons to hold real estate and the opaqueness of legal persons … is a vulnerability which can be exploited by illicit actors"; and 3) a November 2021 report published by the Sentry, a nongovernmental organization, "detailing the use of real estate purchases in the United States and elsewhere by [politically exposed persons] to launder proceeds from political corruption … [using] a network of shell companies to move funds abroad and purchase millions of dollars of real estate …"
Scope of the Problem
The Notice focuses on residential and commercial real estate purchases and transactions that are 1) not financed through a loan, mortgage or other similar instrument provided by a bank or non-bank residential mortgage lender or originator, but instead are; 2) paid for, at least in part, using currency, value that substitutes for currency (including convertible virtual currency), checks (including cashier's, certified, traveler's, personal and business checks), money orders and/or funds transfers. This type of transaction or purchase is referred to in the Notice variously as a "non-financed purchase," a "non-financed transaction," an "all-cash purchase" or an "all-cash transaction."
With regard to residential transactions, according to figures published by the National Association of Realtors (NAR) in 2020 and 2021 and the Census Bureau in 2021, respectively, approximately 19 percent of existing residential home sales and 4.4 percent of new home sales were non-financed transactions. Based on NAR estimates of total home sales and median sale prices, this suggests that approximately 1.21 million residential real estate transactions, with an approximate value of $463 billion, likely proceeded without any AML reporting obligations.
FinCEN indicates in the Notice that, for a number of reasons, the problem may be even worse in the commercial real estate market. In FinCEN's estimation, the commercial real estate market "is both more diverse and complicated than the residential real estate market and presents unique challenges to applying the same reporting requirements or methods as residential transactions." Among these challenges are the following: "[P]ossible payments structures are more complex than in the residential real estate market"; "Lawyers, accountants, and individuals in the private equity fields—all positions with minimal to no AML/CFT obligations under the BSA—often facilitate commercial real estate transactions, working at different stages of the transaction and operating with differing amounts of beneficial ownership and financial information related to buyers and sellers"; and "Commercial real estate transactions also often involve purpose-built legal entities and indirect ownership chains as parties create tailored corporate entities to acquire or invest in a manner that limits their legal liability and financial exposure."
The Notice solicits public input on the following topics:
- General information regarding the real estate market
- What are the money laundering risks in real estate transactions?
- Which real estate transactions should FinCEN's rule cover?
- Which persons should be required to report information concerning real estate transactions to FinCEN?
- What information should FinCEN require regarding real estate transactions covered by a proposed regulation?
- What are the potential burdens or implementation costs of a potential FinCEN regulation?
- Should FinCEN promulgate general AML/CFT recordkeeping and reporting requirements for "persons involved in real estate closings and settlements"?
Under each of these topics, FinCEN asks a series of detailed questions – 82 in all. The deadline to submit comments is Feb. 7, 2022. For more information regarding the Notice, or for assistance in submitting comments, contact the author.
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