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FinCEN escalates crackdown on shell companies

Joe Mont | August 25, 2017

The Financial Crimes Enforcement Network has announced revised Geographic Targeting Orders that require U.S. title insurance companies to identify the natural persons behind shell companies used to pay for high-end residential real estate in seven metropolitan areas. 

Following the recent enactment of the Countering America’s Adversaries through Sanctions Act, FinCEN is revising the GTOs to capture a broader range of transactions and include transactions involving wire transfers. The enforcement arm of the Treasury Department also expanded the GTOs to include transactions conducted in Honolulu, Hawaii.

The GTOs requiring Covered Businesses to collect and report information about certain residential real estate transactions in the following jurisdictions: all boroughs of New York City; Miami-Dade County and the two counties immediately to the north (Broward and Palm Beach); Los Angeles County, California; three counties comprising part of the San Francisco area (San Francisco, San Mateo, and Santa Clara counties); San Diego County, California; the county that includes San Antonio, Texas (Bexar County); and the city and county of Honolulu in Hawaii.

FinCEN expects a covered business to implement procedures reasonably designed to ensure compliance with the terms of the GTOs, including reasonable due diligence to determine whether it (or its subsidiaries or agents) is involved in a covered transaction and to collect and report the required information. In complying with the terms of the GTOs, a covered business may reasonably rely on information provided to it by third parties, including other parties involved in covered transactions.

FinCEN also published an advisory to provide financial institutions and the real estate industry with information on the money laundering risks associated with real estate transactions, including those involving luxury property purchased through shell companies, particularly when conducted without traditional financing. These transactions, it says, are vulnerable to abuse by criminals seeking to launder illegal proceeds and mask their identities. The advisory provides information on how to detect and report these transactions to FinCEN.

In January 2016, FinCEN issued GTOs to require U.S. title insurance companies to report beneficial ownership information on legal entities, including shell companies, used to purchase certain luxury residential real estate in Manhattan and Miami—specifically, luxury residential property purchased by a shell company without a bank loan and made at least in part using a cashier’s check or similar instrument. 

In July 2016 and February 2017, FinCEN reissued the original GTOs and extended coverage to all boroughs of New York City, two additional counties in the Miami metropolitan area, five counties in California (including Los Angeles, San Francisco, and San Diego), and the Texas county that includes San Antonio.

Within this narrow scope of real estate transactions covered by the GTOs, FinCEN’s data indicates that about 30 percent of reported transactions involve a beneficial owner or purchaser representative that was also the subject of a previous suspicious activity report. This corroborates concerns about this small segment of the market in which shell companies are used to buy luxury real estate in “all-cash” transactions. 

A set of “frequently asked questions” accompanied the Aug. 22 GTO announcements.

What does the term “residential real property” mean?

For purposes of the GTOs, “residential real property” means real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from one to four families.

To what extent must a covered business verify information about the beneficial owner of a purchaser?

The GTOs require a covered business to collect and report certain identifying information about the beneficial owner(s) of the purchaser in a covered transaction.   

For purposes of the GTOs, a “beneficial owner” means each individual who, directly or indirectly, owns 25 percent or more of the equity interests of the purchaser.

The GTOs provide that the covered business must obtain and record a copy of the beneficial owner’s driver’s license, passport, or other similar identifying documentation. The covered business may reasonably rely on the information provided to it by third parties involved in the covered transaction, including the purchaser or its representatives, in determining whether the individual identified as a beneficial owner is in fact a beneficial owner.

Who is considered a covered business’ “agents” for purposes of the GTOs?

A covered business’s “agents” refers to people or entities that are authorized by the covered business, usually through a contractual relationship, to act on its behalf to provide title insurance underwritten by the covered business (or its subsidiaries).

FinCEN notes that the recordkeeping and reporting requirements under the GTOs are triggered only when a covered business (or its subsidiaries or agents) is involved in a covered transaction by providing title insurance underwritten by that covered business (or its subsidiaries) in connection with the covered transaction.

FinCEN also recognizes that a person or entity may be an independent agent of a covered business, and thus may act on behalf of multiple title insurance companies. A covered business is responsible for the recordkeeping and reporting requirements under the GTOs only when such agents are acting on its behalf in connection with a covered transaction.

What methods of payment are covered under the GTOs?

Section II.A.2.iv. of the GTOs, which lists one of the four criteria that triggers a covered transaction, provides: “Such purchase is made, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, or a money order in any form, or a funds transfer.”    

Accordingly, payment of at least part of the purchase price using one of these methods, such as a wire transfer, a cashier’s check (sometimes referred to as a “bank check,” “official check,” or “treasurer’s check”), a personal check, a business check, or a certified check, triggers a covered transaction, assuming the other three criteria listed in Section II.A.2. are met.

With respect to information required to be reported in Field 29 of the Form 8300, the covered business should include the total amount of the purchase price, if any, that was paid using currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, or a money order in any form. With respect to information required to be reported in Field 31, the covered business should include the total purchase price, if different from the amount included in Field 29

Is there a de minimis exception regarding the methods of payment covered under Section II.A.2.iv. of the GTOs?

No. If any part of the purchase price was made using a method of payment specified in Section II.A.2.iv. of the GTOs, then the transaction is considered a covered transaction (assuming the other three criteria listed in Section II.A.2. are met).

FinCEN expects a covered usiness to take reasonable steps to determine whether any part of the purchase price was made using a method of payment specified in Section II.A.2.iv. of the GTOs. FinCEN recognizes that in some instances a small percent of the purchase price of a residential real estate transaction may be held by a third party, such as a real estate agent holding an earnest money deposit. A covered business may reasonably rely on information provided to it by such third parties.

Who is the “individual primarily responsible for representing the purchaser”?

The “individual primarily responsible for representing the purchaser” means the individual authorized by the entity to enter legally binding contracts on behalf of the entity.

How long must a covered business retain records relating to compliance with the GTOs?

Consistent with the general recordkeeping provisions of the regulations promulgated under the Bank Secrecy Act, a covered business must retain all records relating to compliance with the GTOs for at least five years from the last day that the GTOs are effective (including any renewals thereof).