Expect a greater focus on the use of real estate holdings as a vehicle for money laundering, Jennifer Shasky Calvery, director of the Treasury Department’s Financial Crimes Enforcement Network, said during a speech Wednesday in San Francisco.
A series of articles published by The New York Times in February uncovered the use of shell companies to purchase high-value real estate at the Time Warner Center in New York City. In response, a coalition of non-profit organizations, among them Transparency International, wrote to the Treasury Department in March, urging the repeal of a 2002 temporary exemption from certain provisions of the Patriot Act for the real estate industry. Those requirements would have forced real estate brokers and others to conduct due diligence checks on their customers.
Calvery said this flavor of money laundering “is not a new issue.” As a former prosecutor with the U.S. Department of Justice, focusing on transnational organized crime, investigations often focused on cases where foreign criminal organizations used their ill-gotten proceeds to purchase property. Many of the residences they purchased remained vacant. “Through our analysis of BSA reporting and other information, FinCEN continues to see the use of shell companies by international corrupt politicians, drug traffickers, and other criminals to purchase luxury residential real estate in cash,” she said.
To add perspective to the problem, in fiscal year 2014, the Justice Department sold more than 450 forfeited or seized properties for more than $92 million.
FinCEN’s regulatory initiatives established AML requirements for non-bank lenders and originators as well as the government-sponsored entities that issue mortgage-backed securities. “We have not issued rules for the broader category of ‘persons involved in real estate closings and settlements,” Calvery said. “As a result, real estate purchases that do not involve a mortgage issued by a bank or non-bank lender are not subject to BSA requirements, although such transactions may be covered by criminal money laundering statutes.”
FinCEN has considered whether to issue rules for persons involved in real estate closings and settlements. In April 2003, it issued an advance notice of proposed rulemaking to solicit public comments on appropriate AML requirements and who they should cover. It stated that any rules were unlikely to cover settlement and closing attorneys and agents, appraisers, title search, insurance companies, escrow companies, and possibly mortgage servicers and corporate service providers. Based on comments from the advance notice, it decided not to proceed at the time.
“FinCEN's ongoing task is to define the money laundering risks associated with certain persons involved in real estate closings and settlements, and consider appropriate initiatives to address these risks, Calvery said. In the meantime, there is a focus on gaining greater transparency of beneficial ownership of corporate entities. This “would make it more difficult for criminals to hide their purchases of luxury real estate through the use of shell companies.”
Calvery also updated the audience on the use of virtual currency in money laundering schemes. The previous day, she said, FinCEN announced its first civil enforcement action against a virtual currency business, Ripple Labs, for failing to register as a money services business and implement an adequate anti-money laundering program. Then, after Ripple created and registered a subsidiary, that entity – XRP II – also failed to have an effective AML program and report suspicious financial transactions.
Ripple and its subsidiary consented to FinCEN’s $700,000 penalty and agreed to:; take all necessary steps to implement and maintain an effective AML program with required internal controls, training programs, and risk assessments; and conduct a three-year “look-back” review of their records to identify and provide overdue reports of suspicious activity. The company and subsidiary are both required to retain external independent auditors to review their compliance measures every two years, up to and including 2020.