FinCEN seeks to regulate the real estate market | Morrison & Foerster LLP

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On December 6, 2021, the Financial Crimes Enforcement Network (FinCEN) announced a Regulatory Proposal Advance Notice (ANPRM) to solicit comments on the preparation of a proposed rule that would increase transparency in the US commercial and residential real estate markets. in order to combat illicit financial activities. . In particular, FINCEN is seeking comments on the extension of the requirements of the Banking Secrecy Act (BSA) to collect, report and maintain information on certain persons participating in real estate transactions involving purchases of unfunded real estate. Comments are due by February 7, 2022.

Fund

The ANPRM was released the same day the White House released the very first US government’s anti-corruption strategy (the “Strategy”), which addresses the government’s efforts to combat corruption under five pillars, one of which is the effort to combat illicit financing. The Strategy specifically highlights the risk of anonymous real estate purchases in the United States and announces that the United States Department of the Treasury (“Treasury”) will issue regulations that will include reporting requirements for specific real estate transactions.

FinCEN has long recognized that real estate transactions are vulnerable to abuse by bad actors, given the stable investment offered by US real estate and the industry’s lack of regulation for cash transactions, which have limited transparency. These risks were also highlighted in the Treasury report. 2020 national strategy for combating terrorism and other illicit financing and a recent report from the Congressional Research Service. Globally, the Financial Action Task Force has been warning about risks in the real estate industry since 2007, and those risks have been at the center of many other regulators and jurisdictions.

GTO

In January 2016, FinCEN released its first GTO, which temporarily required certain US ICTs to identify and report the natural persons behind businesses paying cash for expensive properties in New York City and Miami Dade County. Since their introduction, GTOs have been renewed and extended, most recently in October 2021. Today, TICs are required to file currency transaction reports on unfunded purchases of residential real estate over $ 300,000 in nine different US metropolitan areas in Texas, Florida and New York. , California, Hawaii, Nevada, Washington, Massachusetts and Illinois. More specifically, TIC are required to report information about: (1) the transaction, such as the price and address of the property purchased and the closing date; (2) information on the beneficial owner, including a name and a copy of the identification document of the natural person (s) behind any purchasing legal person in the transaction; and (3) information on the reporting ICT.

In the past, FinCEN has focused specifically on the need for transparency in cash purchases of residential real estate by shell companies. This is a particularly risky area since cash purchases escape financial institutions, which are subject to anti-money laundering (AML) rules. To address this concern, FinCEN has been issuing geographic targeting orders (GTO) since 2016 (see box). While GTOs have proven to be useful, FinCEN has refrained from imposing full BSA obligations on Title Insurance Companies (TICs) or regulating other players in the real estate market.

The BSA

FinCEN is now considering not only expanding the range of relevant entities to other stakeholders, for example those involved in the commercial real estate market, but also expanding the scope of its regulations to impose BSA requirements on the building. estate market. Under the BSA, the Secretary of the Treasury may require a financial institution to: (1) report suspicious transactions that may involve violations of law; (2) develop an AML / counter-financing of terrorism (CFT) program; and (3) collect and report certain information to guard against illicit financing. A “financial institution” is defined by the BSA to include “persons involved in property fences and settlements”[1] (“RE Persons”), but FinCEN regulations implementing BSA do not currently require RE Persons to complete Suspicious Activity Reports (SARs) or establish AML / CFT programs.

ANPRM

In the ANPRM, FinCEN plans to promulgate either a specific reporting requirement similar to the GTO requirements,[2] or broader regulations[3] which would require RE people to file SARs and establish AML / CFT programs, with the five pillars of the program: appropriate policies and procedures, a designated compliance officer, tailored training, independent testing of the program, and risk-based client due diligence. These rules would apply to certain persons participating in transactions involving unfunded real estate purchases in the commercial and residential sectors.

To help FinCEN write these rules, the ANPRM contains 82 questions for stakeholders, organized into the categories listed below. Note that CE sections request information to address the imposition of more specific regulations that would mirror current OMTs, while Section G invites comments on a scenario in which FinCEN would draft more extensive BSA regulations, requiring, for example, AML / CFT programs.

  1. General information on the real estate market. Among other things, FinCEN requests information on typical real estate and business transactions, products, services, activities, affiliations and professionals involved, associated costs, standard due diligence procedures and how payment is made.
  2. What are the risks of money laundering in real estate transactions? FinCEN requests information on, for example, existing anti-money laundering safeguards and the highest and lowest risk real estate activities and services.
  3. What real estate transactions should the FinCEN rule cover? Comments are welcome on the factors FinCEN should take into account in making its decision, whether to include commercial or agricultural transactions, how to define related terms, a recommended geographic scope and a preferred reporting threshold.
  4. Who should be required to report information about real estate transactions to FinCEN? A number of professionals are listed as options, including real estate attorneys and their firms, real estate agents, brokers or settlement agents, securities and escrow agents and firms, and development firms. real estate or property management, among others. FinCEN is also interested in knowing who is best placed to report certain information, such as the source of funds or the natural person who owns the legal person buyer. FinCEN would consider creating a cascading hierarchy for reporting requirements, similar to that used for Internal Revenue Service Form 1099-S.
  5. What information should FinCEN require regarding real estate transactions covered by a proposed regulation? Questions in this category relate, for example, to whether to request information about the seller, real estate or financial institution involved in the transfer of purchase funds, what information to request and how to avoid overly burdensome requirements. and / or redundant.
  6. What are the potential charges or costs of implementing a possible FinCEN regulation? Among other things, stakeholders are asked about the associated costs, burdens and benefits, how the requirements could be incorporated into their current compliance programs, the effect of different reporting thresholds and alternative methods. that FinCEN may consider to combat money laundering in the real estate market. .
  7. Should FinCEN promulgate general AML / CFT record keeping and reporting requirements for RE persons? FinCEN asks stakeholders, if the agency takes a holistic approach and imposes the full range of BSA requirements, how should RE people be defined, what factors should FinCEN take into account in determining the scope of these rules, whether different requirements could adequately address the risks of money laundering, and whether customer due diligence requirements should be imposed, among other issues.

Look ahead

Although FinCEN recognizes that safeguards against money laundering may already exist, and although FinCEN has pursued and refused to impose BSA requirements on RE people in the past, the agency’s regulation of the real estate industry appears to be. inevitable, and the question is not whether regulation will be enforced, but to what extent.

A History of FinCEN Real Estate Market Regulation

In 2002, FinCEN formally temporarily exempted RE people, as well as loan and finance companies, another type of financial institution, from the AML / CFT program requirement. The reluctance of FinCEN was due to the fear that many of these institutions were small businesses, for which the regulations would be unduly burdensome. In 2003, FinCEN issued an advance notice of a regulatory proposal to impose the AML / CFT program requirement on RE persons, but after receiving comments, did not propose any regulations. Then, in 2012, FinCEN issued a rule requiring loan and finance companies, defined as non-bank residential mortgage lenders and originators, to file SARs and establish AML / CFT programs. In 2014, similar requirements were extended to government-sponsored housing-related businesses: Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. While FinCEN has taken these small steps to regulate the property market in the past, ANPRM casts a much wider net than FinCEN has done before.

Whatever their scope, the rules will undoubtedly have a significant impact on the real estate industry, and stakeholders may soon be faced with increased compliance costs and unanticipated exposure to law enforcement. FinCEN recognizes that, as in the banking sector, the unique characteristics of different businesses, whether residential or commercial-oriented, and their different sizes, locations and activities, will need to be taken into account in developing appropriate rules. Nevertheless, stakeholders should familiarize themselves with the ANPRM and provide their comments and contributions to the development of the next rules. To better prepare for what can be revolutionary compliance obligations, those involved in the real estate industry may consider reviewing their current compliance practices and formulating plans for anticipated changes.


[1] 31 USC 5312 (a) (2) (U).

[2] This would be permitted under 31 USC 5318 (a) (2), as amended by section 6102 (a) of the Money Laundering Act, which authorizes the secretary to “require a class of institutions national financial institutions. . . maintain appropriate procedures, including the collection and communication of certain information that the Secretary of the Treasury may prescribe by regulation, to. . . guarding against money laundering, terrorist financing or other forms of illicit financing.

[3] As authorized, respectively, by 31 USC 5318 (g) (1) and 31 USC 5318 (h) (1) – (2).

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