Feds seek to enlist real estate agents in fight against corruption

the Financial Crimes Network, or FinCEN, is proposing an anti-money laundering rule that could impose reporting mandates on a wide range of professionals in the residential real estate market, including real estate agents, brokers, lawyers, insurance companies securities and settlement agents.

FinCEN’s proposed rule, described in an “advance notice of proposed rulemaking” published in the Federal Register, seeks to create general recordkeeping and reporting mandates – now permitted under the Bank Secrecy Act – for those involved in all-cash real estate transactions. FinCEN is a law enforcement arm of the US Treasury Department responsible for protecting the country’s financial system against illicit activities, such as money laundering.

“To address money laundering concerns, it may be necessary to ensure that a record keeping and reporting requirement applies to an entity involved in each unfunded transaction,” the regulatory notice states. proposed by FinCEN. “FinCEN is also seeking comments on whether and how to assign a reporting obligation to any or all of the following entities: title insurance companies, title or escrow companies, agents or brokers real estate, real estate attorneys or law firms, settlement or closing agents.”

In addition, the proposed rule also contemplates potentially requiring mandatory reporting for trusts – defined, by FinCEN, as a “legal relationship in which a person holds title to property subject to an obligation to maintain or use property for the benefit of another”.

“FinCEN notes that recent high-profile enforcement actions by the Department of Justice – including a forfeiture action to recover an alleged $3.5 million in corruption proceeds laundered through the purchase of a mansion from Potomac, Maryland, through 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 reads.

the National Association of Realtors (NAR) said in a statement that 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 matter and will respond to FinCEN’s advance notice of the proposed rulemaking in the coming weeks,” the group said. “NAR believes that continued education and awareness on this subject is essential, and last year NAR reissued its ‘Voluntary Anti-Money Laundering Guidelines for Real Estate Professionals’ to assist practitioners in the industry to understand and assess key risks.

“The NAR will continue to work with law enforcement, regulators and other industry stakeholders to resolve this issue.”

The currently proposed rule is the result of a related, long-standing effort to curb criminal actors who hide behind shell companies. FinCEN has been issuing so-called “geo-targeting orders” (GTOs) since 2016 to help address the issue, according to a recent White House report outlining the US anti-corruption strategy. These GTOs, according to the White House report, ultimately encompassed a dozen U.S. metropolitan areas and were aimed at title insurance companies — requiring them to identify the “natural persons behind the legal entities.” [shell companies] used in cash purchases of residential real estate over $300,000.

Title insurance companies are required to report transaction information, including the price and address of the property purchased. In addition, GTOs require disclosure of beneficial ownership information for certain legal entities, or shells, involved in a real estate transaction, such as name, social security number, identification number and type.

“There have been reports of the success of geo-targeting orders, which have required securities companies to report to FinCEN,” said Daniella Casseres, partner at Michael Sandler, a women-owned law firm serving the financial services industry. “This is partly responsible for the proposed expanded rules.”

FinCEN spokesman Stephen Hudak said at the time the first GTOs were initially issued in January 2016 — targeting shell companies in Manhattan and Miami — that more than a quarter of transactions covered by orders in those two metropolitan areas involved “a beneficial owner or buyer’s representative”. which was also “the subject of a suspicious activity report”. FinCEN then issued a notice in 2017 that estimated that about 30% of transactions covered by GTOs “related to…suspicious activity,” according to the agency’s recent advance notice of proposed rulemaking.

The potential scope of expanding FinCEN reporting requirements for all-cash real estate transactions is quite broad. Using NAR figures for 2020 and 2021, FinCEN estimates that 18.5% of all US existing home sales involve “all cash” transactions. The agency also pointed to US Census Bureau estimates indicating that 4.4% of all new home sales involve unfinanced transactions.

“Based on NAR estimates of total home sales and median sale prices, this means that approximately 1.21 million residential real estate transactions, worth approximately $463 billion, are likely taking place without any obligations. anti-money laundering reporting system,” FinCEN said in its Notice of Proposed Rulemaking. “…. Given the vulnerability of the U.S. real estate industry to money laundering and other illicit activities, FinCEN believes that additional regulatory measures may be needed to ensure consistent reporting nationally.

Casseres said implementing an anti-money laundering program will be “a significant hurdle for newly covered entities,” such as real estate agents, brokers or settlement agents, as they “n ‘probably don’t have the in-house expertise to run such programs’.

“Entities should implement procedures to detect suspicious activity, and training would be required for entities and staff to identify the risk,” Casseres added. “In advising lending institutions, I have found that the success of anti-money laundering programs depends on training employees to recognize suspicious activity and how to report it.

“The reporting process inherently relies on human detection, even though you have a clearly documented process and controls.”

FinCEN officials declined to comment for this story. The public comment period for FinCEN’s proposed anti-money laundering rule covering all-cash real estate transactions is open until February 2, 2022.

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