The Financial Crimes Enforcement Network, or FinCEN, is floating a proposed anti-money laundering rule that could impose reporting mandates on a broad swath of professionals in the residential real estate market, including real estate agents, brokers, attorneys, title insurance companies and settlement agents.
FinCEN’s proposed regulation, outlined in an “advanced notice of proposed rulemaking” published in the Federal Register, seeks to create general recordkeeping and reporting mandates — now authorized under the Bank Secrecy Act — for persons involved in all-cash real estate transactions. FinCEN is a law enforcement arm of the U.S. Treasury Department charged with safeguarding the nation’s financial system against illicit activities, such as money laundering.
“To address money laundering concerns, it may be necessary to ensure that a recordkeeping and reporting requirement attaches to some entity involved in every non-financed transaction,” FinCEN’s proposed rulemaking notice states. “FinCEN also solicits comments on whether and how to assign a reporting requirement to any or all of the following entities: Title insurance companies, title or escrow companies, real estate agents or brokers, real estate attorneys or law firms, settlement or closing agents.”
In addition, the proposed rule also envisions potentially requiring mandated reporting for trusts — defined, by FinCEN, as a legal “relationship in which one person holds title to property subject to an obligation to keep or use the property for the benefit of another.”
“FinCEN notes that recent high-profile Department of Justice enforcement actions —including a forfeiture action to recover an alleged $3.5 million in corrupt proceeds laundered through the purchase of a Potomac, Maryland, mansion via a trust — indicate that consideration of any proposed rule should also include the risks presented by U.S. and foreign trusts,” the agency’s proposed rule states.
The National Association of Realtors (NAR) said in a statement the industry group “is aware that money laundering and terrorist financing in real estate remains a major challenge and threat to the real estate industry.”
“NAR also understands FinCEN’s renewed focus on this issue and will respond to FinCEN’s advance notice of proposed rulemaking in the coming weeks,” the group said. “NAR believes that ongoing education and awareness on this topic is key, and last year NAR reissued its ‘Anti-Money Laundering Voluntary Guidelines for Real Estate Professionals’ to help industry practitioners understand and assess key risks.
“NAR will continue to work with law enforcement, regulators, and other industry stakeholders to address this issue.”
The current proposed rule is an outgrowth of a long-running related effort to rein in criminal actors hiding behind shell companies. FinCEN has issued what are known as “geographic targeting orders” (GTOs) since 2016 to help address the issue, according to a recent White House report outlining the U.S. strategy for countering corruption. Those GTOs, the White House report states, ultimately encompassed a dozen U.S. metro areas and were directed at title insurance companies — requiring them to identify the “natural persons behind legal entities [shell companies] used in all-cash purchases of residential real estate exceeding $300,000.”
Title insurance companies are required to report information about the transaction, including the price and address of the real estate purchased. In addition, the GTOs mandate reporting of information on beneficial owners of certain legal entities, or shells, involved in a property transaction — such as name, social security number, and ID number and type.
“There have been reports regarding the success of geographical targeting orders, which imposed the requirements for title companies to report to FinCEN,” said Daniella Casseres, a partner at Mitchell Sandler, a women-owned law firm serving the financial-services industry. “This is partially responsible for the proposal on expanded rules.”
FinCEN spokesperson Stephen Hudak said at the time the first GTOs were initially issued in January 2016 — targeting shell companies in Manhattan and Miami — that over a quarter of the transactions covered by the orders in those two metro areas involved “a beneficial owner or purchaser representative” that also was “the subject of a suspicious activity report.” FinCEN later published an advisory in 2017 that estimated some 30% of transactions covered by the GTOs “have a nexus to … suspicious activity,” according to the agency’s recent advanced notice of proposed rulemaking.
The potential sweep of FinCEN’s expansion of reporting requirements for all-cash real estate deals is quite broad. Using figures from NAR for 2020 and 2021, FinCEN estimates that 18.5% of all existing-home sales in the U.S. involve “all-cash” transactions. The agency also pointed to U.S. Census Bureau estimates indicating that 4.4% of all new-home sales involve non-financed deals.
“Based on the NAR estimates of total home sales and median sale prices, this means that approximately 1.21 million residential real estate transactions, with an approximate value of $463 billion, likely proceed without any anti-money laundering reporting obligations,” FinCEN states in its notice of proposed rulemaking. “…. Given the vulnerabilities of the U.S. real estate sector to money laundering and other illicit activities, FinCEN believes that additional regulatory steps may be needed to ensure consistent reporting on a nationwide basis.”
Casseres said implementing anti-money laundering program will be “a significant hurdle for newly covered entities,” such as real estate agents, brokers or settlement agents, because they “likely do not have in-house expertise to lead such programs.”
“The entities would need to implement procedures to detect suspicious activity, and training would be required for the entities and staff to identify the risk,” Casseres added. “In counseling lending institutions, I have seen the success of anti-money laundering programs hinge on employee training on suspicious activity detection and how to report.
“The reporting process inherently relies on human detection, even if you have a clearly documented process and controls.”
FinCEN officials declined comment for this story. The public comment period for FinCEN’s proposed anti-money laundering regulation covering all-cash real estate transactions is open until February 2, 2022.