On December 6, 2021, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (ANPRM) seeking public comment on how FinCEN should regulate “all-cash” residential and commercial real estate transactions in the United States to address money laundering risks.
The ANPRM coincided with the publication of the Biden administration’s US Strategy on Countering Corruption, which highlights the real estate sector’s vulnerability to money laundering, particularly in regard to proceeds of foreign corruption. The Strategy also suggests the White House could work with Congress to adopt new regulations for other financial “gatekeepers” such as lawyers, accountants, and trust service providers who may facilitate transactions involving illicit property.
FinCEN’s ANPRM acknowledges that most US financial companies that offer mortgages and real estate financing—which account for an estimated 80 percent of all US real estate transactions—are already required to adopt anti-money laundering and counter-terrorist financing (AML/CTF) programs and file Suspicious Activity Reports (SARs) pursuant to regulations adopted under the Bank Secrecy Act (BSA), as amended. However, FinCEN regulations do not generally apply to participants in non-financed transactions, such as real estate brokers and agents, title company representatives, closing agents, and attorneys.
A prior ANPRM, in 2003, considered whether FinCEN should adopt an AML/CTF program requirement for “persons involved in real estate closings and settlements,” which are defined as US financial institutions under the BSA. Following public comments, FinCEN opted not to adopt the requirement and focused its efforts instead on financed real estate transactions by financial institutions, non-bank residential mortgage lenders and originators, and Government Sponsored Enterprises (i.e., Fannie Mae, Freddie Mac, and the Federal Home Loan Banks). Thus, most persons involved in real estate closings and settlements have not been subject to FinCEN obligations to implement AML/CTF compliance programs, policies, and procedures, appointment of a compliance officer, education for personnel, and independent testing.
Additionally, since January 2016, FinCEN has issued Geographic Targeting Orders (GTOs) requiring title insurance companies to maintain records and file reports of certain all-cash purchases of residential real estate in select metropolitan areas of the United States valued over certain specified amounts. The GTOs require the reporting of beneficial ownership information on legal entities used to purchase residential property, but they do not require title insurance companies to adopt AML/CTF programs or file SARs. The GTOs exclude commercial real estate transactions and do not apply outside of the twelve designated metropolitan areas (Boston, Chicago, Dallas-Fort Worth, Honolulu, Las Vegas, Los Angeles, Miami, New York City, San Antonio, San Diego, San Francisco, and Seattle).
Elements of the Proposed Rulemaking
Among other topics, the ANPRM seeks comments on: (i) the persons who should be subject to the rulemaking; (ii) the types of real estate purchases that should be covered; (iii) information that should be recorded and reported by covered persons; (iv) the geographic scope of the requirement; (v) and any dollar-value reporting threshold. FinCEN also seeks comments on the potential burdens and implementation costs of new regulations regarding collection, storage, and reporting of information on real estate transactions.
The ANPRM states that “FinCEN believes that any proposed regulation should require certain persons to collect, report, and retain information about specified non-financed purchases of real estate.” Furthermore, the rule could take the form of a nationwide “specific reporting requirement” adopted pursuant to 31 U.S.C. § 5318(a)(2), as amended, which authorizes the Secretary of the Treasury to “require a class of domestic financial institutions . . . to maintain appropriate procedures, including the collection and reporting of certain information as the Secretary of the Treasury may prescribe by regulation, to . . . guard against money laundering, the financing of terrorism, or other forms of illicit finance.” Alternatively, the rule could impose a general requirement (pursuant to 31 U.S.C. § 5318(g)(1) and (h)) for covered persons to adopt AML/CTF programs and file SARs. AML/CTF programs adopted under FinCEN regulations typically consist of four elements: policies and procedures, designation of an AML/CTF compliance officer, a training program, and independent testing. The ANPRM also seeks comment on whether a fifth AML/CTF program element – customer due diligence rules containing beneficial ownership requirements that currently cover only certain US financial institutions regulated by FinCEN – would affect the real estate industry.
The types of individuals and entities identified in the ANPRM that could be subject to the proposed rulemaking include, among others, title insurance companies, title or escrow companies, real estate agents or brokers, real estate attorneys or law firms, settlement or closing agents, real estate development companies, real estate property management companies, investment advisers, and private money lenders. The ANPRM suggests that FinCEN could adopt a “hierarchical, cascading reporting obligation on different entities depending on which are involved in a particular covered transaction,” as a means of avoiding burdensome and duplicative reporting. The ANPRM also seeks comment on the types of legal entities whose purchases should be covered by the rulemaking, and FinCEN specifically seeks comment on whether trusts should be included within the reporting requirement.
The ANPRM states that FinCEN could take an “iterative approach” to the rulemaking, beginning with residential transactions, “given the complexities and differences between different market sectors and the potential burdens that new reporting and recordkeeping requirements may have for businesses.” The ANPRM observes that FinCEN has “serious concerns” with the commercial real estate sector, adding that commercial real estate may present even greater money laundering risks and vulnerabilities than residential real estate, in part because commercial real estate transactions are often more opaque and complex.
Written comments in response to the ANPRM may be submitted to FinCEN until February 7, 2022.
For more information on how these developments may apply to your organization, contact a member of Steptoe’s Anti-Money Laundering practice team.