FinCEN Seeks Public Opinion to Reduce Real Estate Market’s Vulnerability to Money Laundering | Holland & Knight LLP

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The Financial Crimes Enforcement Network (FinCEN) issued a Regulatory Proposal Notice (Notice) on December 9, 2021, seeking public comment on ways to improve transparency in the national real estate market nationwide in order to better combat against money laundering, while minimizing the burden on affected businesses. The specific issue the Notice focuses on concerns real estate transactions that do not involve loans or other funding from regulated financial institutions, such as banks, since these institutions are already subject to federal anti-credit rules. money laundering (AML) and required to report suspicion activity to FinCEN.

As stated in FinCEN’s press release announcing the Notice: “[W]When real estate is purchased without such financing, it can be almost impossible to trace the beneficial owners behind the shell companies that are often used to purchase real estate. As a result, corrupt officials and criminals engaged in illicit activities can exploit the US real estate industry to launder their ill-gotten wealth. “

Highlights of the Notice are set out below.

Fund

Regulatory efforts by FinCEN leading to publication of the notice. The Federal Banking Secrecy Act (BSA) authorizes the Secretary of the Treasury to require any financial institution, including “persons involved in property fences and settlements”, to report any suspicious transaction related to a possible violation of the law or regulation (via a “suspicious activity report”, or SAR), and requires each financial institution to establish a program to combat money laundering / currency and foreign transactions (AML / CFT requirement) . The secretary has delegated this responsibility to FinCEN.

In 2002, FinCEN temporarily exempted “persons involved in property fences and settlements” and “loan and finance companies” from the AML / CFT requirement. In 2003, it issued an advance notice of a regulatory proposal seeking public comment on “the risks of money laundering in property closures and settlements, how to define ‘those involved in property closures and settlements”, whether people involved in closures and real estate 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 the settlements people in the real estate industry. This opinion did not, however, lead to the adoption of a definitive rule.

Subsequently and until 2012, FinCEN focused its regulatory and enforcement efforts on the 80% of real estate transactions financed by a loan from a regulated institution. From 2012, however, FinCEN started processing the remaining 20% ​​of real estate transactions. In the final rules adopted in 2012, 2014 and 2020, respectively, it 1) removed the temporary exemption from the AML / CFT requirement for non-bank mortgage lenders and originators; 2) extended requirements similar to the AML / CFT requirement for government sponsored businesses (GSEs) related to housing; and 3) extended the AML / CFT requirement to banks that are not regulated by a functional federal regulator.

In addition, FinCEN began in January 2016 to issue Geographic Targeting Orders (GTOs) requiring title insurance companies to file reports and keep records regarding cash purchases of residential real estate exceeding a certain threshold in certain cases. United States metropolitan areas (GTO real estate). . Real estate GTOs initially required some of the largest title insurance companies in the United States to report “beneficial ownership” and information on “legal entities” used to purchase “residential real estate” in Manhattan and the United States. Miami in GTO-covered transactions. On several occasions thereafter, the real estate GTOs have been renewed and extended to cover more transactions in more metropolitan areas and to require more information about these transactions.

The final decrees mentioned above, as well as the information obtained by FinCEN following the real estate GTOs, helped to prepare the ground for the publication of the opinion.

Severity of the problem. The Opinion cites several published reports detailing the seriousness of the problem of money laundering in the real estate industry. These reports include 1) a report published in January 2007 by the Financial Action Task Force (FATF), the global watchdog body for money laundering and terrorist financing, highlighting the scale of the problem of money laundering in the real estate sector and making recommendations to deal with it. ; 2) The 2016 FATF Mutual Evaluation Report on the United States, in which the FATF identified numerous money laundering vulnerabilities in the US real estate sector, noting that “buyers often use legal persons to owning real estate and the opacity of legal persons… is a vulnerability that can be exploited by illicit actors ”; and 3) a November 2021 report released by Sentry, a non-governmental organization, “detailing the use of real estate purchases in the United States and elsewhere by [politically exposed persons] launder the proceeds of political corruption … [using] a network of shell companies to move funds overseas and buy millions of dollars in real estate… “

Scope of the problem

The Notice focuses on residential and commercial real estate purchases and transactions that are 1) not financed by a loan, mortgage or other similar instrument provided by a bank or non-bank residential mortgage lender or originator, but are the place ; 2) paid, at least in part, using currency, currency substitute value (including convertible virtual currency), checks (including cashier’s, certified, traveler’s, personal and business checks) , money orders and / or money transfers. This type of transaction or purchase is referred to in the Notice as an “unfunded purchase”, “unfunded transaction”, “all-cash purchase” or “all-cash transaction”.

As for residential transactions, according to figures released by the National Association of Realtors (NAR) in 2020 and 2021 and the Census Bureau in 2021, respectively, around 19% of existing residential home sales and 4.4% of sales of new homes were not funded operations. Based on NAR estimates of total home sales and median selling prices, this suggests that around 1.21 million residential real estate transactions, worth roughly $ 463 billion, likely went without any AML declaration obligation.

FinCEN says in the notice that, for a number of reasons, the problem may be even worse in the commercial real estate market. According to FinCEN’s estimate, the commercial real estate market “is both more diverse and complicated than the residential real estate market and presents unique challenges for applying the same requirements or reporting methods as residential transactions.” These challenges include: “[P]the possible payment structures are more complex than in the residential real estate market ”; “Lawyers, accountants and individuals in private equity fields – all positions with minimal or no AML / CFT obligations under the BSA – often facilitate commercial real estate transactions, working at different stages of the process. transaction and operating with different amounts of beneficial ownership and financial information relating to buyers and sellers ”; and “Commercial real estate transactions also often involve specially designed legal entities and chains of indirect ownership, as the parties create bespoke commercial entities to acquire or invest in a way that limits their legal liability and financial exposure.”

Information requested

The notice invites public comment on the following topics:

  • General information on the real estate market
  • What are the risks of money laundering in real estate transactions?
  • What real estate transactions should the FinCEN rule cover?
  • Who should be required to report information about real estate transactions to FinCEN?
  • What information should FinCEN require regarding real estate transactions covered by a proposed regulation?
  • What are the potential charges or costs of implementing a possible FinCEN regulation?
  • Should FinCEN promulgate general AML / CFT record keeping and reporting requirements for “persons involved in building fences and regulations”?

Under each of these topics, FinCEN asks a series of detailed questions – 82 in all. The deadline for submitting comments is February 7, 2022.


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