Compliance officers, beware: the Financial Crimes Enforcement Network’s increasingly aggressive push to combat money laundering has entered a new phase, and this time it has its sights on high-end real estate transactions.
FinCEN, the Treasury Department’s AML enforcement agency, issued Geographic Targeting Orders (GTO) on Jan. 13 that will temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in Manhattan, New York and Miami-Dade County, Florida. The GTOs apply to those “covered transactions” with a total purchase price in excess of $3 million in Manhattan and $1 million in Miami.
“The information gathered from the GTOs will be made available to law enforcement investigators as part of FinCEN’s database and is expected to advance law enforcement’s ability to identify the natural persons involved in transactions vulnerable to abuse for money laundering,” according to a client alert from law firm Steptoe.
FinCEN said it’s concerned that all-cash purchases (i.e., those without bank financing) may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures. FinCEN will require certain title insurance companies to identify and report the true “beneficial owner” behind a legal entity involved in certain high-end residential real estate transactions in Manhattan and Miami-Dade County.
With these GTOs, FinCEN said it’s proceeding with its risk-based approach to combating money laundering in the real estate sector. Having prioritized anti-money laundering protections on real estate transactions involving lending, FinCEN’s remaining concern is with the money laundering vulnerabilities associated with all-cash real estate transactions. This includes transactions in which individuals use shell companies to purchase high-value residential real estate, primarily in certain large U.S. cities.
“We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money,” FinCEN Director Jennifer Shasky Calvery said in a statement. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering, but cash purchases present a more complex gap that we seek to address.”
Calvery added that the GTOs will “produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector.”
Under specific circumstances, the GTOs will require certain title insurance companies to record and report to FinCEN the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing. They will report this information to FinCEN where it will be made available to law enforcement investigators as part of FinCEN’s database.
FinCEN is covering certain title insurance companies because title insurance is a common feature in the vast majority of real estate transactions. “Title insurance companies, thus, play a central role that can provide FinCEN with valuable information about real estate transactions of concern,” FinCen said.
The GTOs will be in effect for 180 days beginning on March 1, 2016. They will expire on Aug. 27, 2016, although record retention requirements continue for five years after the expiration date.
“Although these orders are purportedly temporary, they are likely just the first steps in a broader initiative of law enforcement scrutiny of real estate transactions,” Jonathan New, a partner at law firm BakerHostetler, wrote in a client alert.
“Undoubtedly, the results of these geographically limited initiatives will be used by FinCEN to fashion broader, permanent, nation-wide disclosure requirements,” New wrote. “Accordingly, individuals and companies that invest in, finance, or otherwise participate in high-end real estate transactions in the United States should consult with counsel now to ensure future compliance and to evaluate the effects of these regulations on potential transactions. Failure to comply with the GTOs could result in substantial criminal and civil penalties.”
What’s clear is that FinCEN now has its sights on high-end real estate transactions involving the purchase of properties with cash, likely resulting in more investigations and enforcement actions in this area.