by Peter Hardy, Richard Andreano, Jr., Michael Robotti, and Nikki Hatza

On December 6, FinCEN announced that it was issuing an Advanced Notice of Proposed Rulemaking (“AMPRM”) to solicit public comment on potential requirements under the Bank Secrecy Act (“BSA”) for certain persons involved in real estate transactions to collect, report, and retain information.  If finalized, such regulations could affect a whole new set of professionals and one of largest industries in the U.S.—an industry which, heretofore, has not been subject to the requirements of the BSA, with limited exceptions.

The ANPRM envisions imposing nationwide recordkeeping and reporting requirements on specified participants in transactions involving non-financed real estate purchases, with no minimum dollar threshold.  Fundamentally, FinCEN highlights two alternate, proposed rules.  One proposed option, promulgated under 31 U.S.C § 5318(a)(2), would involve implementing specific and relatively limited reporting requirements, similar to those currently required of title insurance companies in the non-financed real estate market.  This rule would require covered persons to collect and report certain prescribed information, such as, presumably, beneficial ownership.  Alternatively, FinCEN is considering imposing more fulsome Anti-Money Laundering (“AML”) monitoring and reporting requirements, including filing Suspicious Activity Reports (“SARs”) and establishing AML/CFT programs under 31 U.S.C. § 5318(g)(1) and 31 U.S.C. §§ 5318(h)(1)-(2).   This latter option would require covered persons to adopt adequate AML/CFT policies, designate an AML/CFT compliance officer, establish AML/CFT training programs, implement independent compliance testing, and perform customer due diligence.  Notably, FinCEN suggests that any new rule may cover attorneys and law firms, along with other client-facing participants.  FinCEN also is considering regulations applicable to both residential and commercial real estate transactions.

As we discuss, real estate and money laundering has been a long-simmering issue.  We repeatedly have blogged on AML and real estate, and previously published a detailed chapter, The Intersection of Money Laundering and Real Estate, in Anti-Money Laundering Laws and Regulations 2020, a publication issued by International Comparative Legal Guides.  FinCEN’s ANPRM appears to represent the culmination of an inevitable march towards the issuance of regulations under the BSA regarding real estate transactions, following years of increasing focus by the U.S. government and others on perceived AML risks in the real estate industry.

Introduction to the ANPRM

The ANPRM states that its goal “is to implement an effective system to collect and permit authorized uses of information concerning potential money laundering associated with non-financed transactions in the United States real estate market.”  The ANPRM defines the terms “non-financed purchase,” “non-financed transaction,” “all-cash purchase,” and “all-cash transaction” as referring to “any real estate purchase or transaction that is not financed via a loan, mortgage, or other similar instrument, issued by a bank or non-bank residential mortgage lender or originator, and that is made, at least in part, using currency or value that substitutes for currency (including convertible virtual currency (CVC)), or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, a money order in any form, or a funds transfer.”  The ANPRM concedes that its potential applicability is vast:  in 2020, and putting aside the amount of commercial deals, there were almost 6.5 million residential real estate transactions in the U.S.

In prefatory comments, the ANPRM describes U.S. and international reports and findings regarding perceived money laundering risks in the real estate industry.  According to the ANPRM, “[s]everal key factors contribute to the systemic vulnerability of the U.S. real estate market to money laundering. Those factors include, but are not limited to, lack of transparency, attractiveness of the U.S. real estate market as an investment vehicle, and the lack of industry regulation.”  Referring to voluntary guidelines issued by industry trade organizations, including the National Association of Realtors and the American Bar Association, the ANPRM states that although such guidelines are “a positive step and indicative of the commitment of the vast majority of real estate professionals to protecting the U.S. real estate sector from illicit activity,” such guidelines “are not mandatory or subject to oversight or enforcement and may therefore be avoided by illicit actors.” 

Commenting upon the commercial real estate industry in particular, the ANPRM states that, “[b]roadly speaking, FinCEN has serious concerns with the money laundering risks associated with the commercial real estate sector.”  The ANPRM further observes that “[t]he commercial real estate market is both more diverse and complicated than the residential real estate market and presents unique challenges to applying the same reporting requirements or methods as residential transactions.”  FinCEN regards such complexity as a reason to develop and impose regulations:

In part due to such added complexity and opacity, the risks and vulnerabilities associated with the residential real estate sector covered by the [Geographic Targeting Orders] may be compounded in transactions involving commercial real estate, as there are additional types of purchasing options and financing arrangements available for parties seeking to build or acquire property worth up to hundreds of millions of dollars. Lawyers, accountants, and individuals in the private equity fields—all positions with minimal to no AML/CFT obligations under the BSA—often facilitate commercial real estate transactions, working at different stages of the transaction and operating with differing amounts of beneficial ownership and financial information related to buyers and sellers. Commercial real estate transactions also often involve purpose-built legal entities and indirect ownership chains as parties create tailored corporate entities to acquire or invest in a manner that limits their legal liability and financial exposure. The result is an opaque field full of diverse foreign and U.S. domiciled legal entities associated with transactions worth hundreds of millions of dollars that makes up one of the United States’ most lucrative industries.

The ANPRM’s Context: Background on Real Estate and BSA/AML Concerns

The ANPRM did not emerge in a vacuum.  In 2012, FinCEN issued a final rule requiring non-bank residential mortgage lenders and originators, or “RMLOs,” to maintain a BSA/AML compliance program and file SARs.  FinCEN extended this requirement in 2014 to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.  To date, that has been the extent of final BSA regulations directly imposed on the real estate industry.

Importantly, however, as noted above, FinCEN also has authorized since 2016 Geographic Targeting Orders (“GTOs”), which impose certain requirements on title insurance companies for transactions occurring in particular locations around the U.S. that are not financed by loans from financial institutions. These transactions represent approximately 20 percent of real estate transactions. Since then FinCEN has extended the GTOs every six months.  Under the GTOs, U.S. title insurance companies must identify the natural persons behind legal entities used in purchases of residential real estate performed without a bank loan or similar form of external financing. The monetary threshold for these transactions is $300,000 and the GTOs cover purchases involving virtual currency as well as “fiat” currency, wires, personal or business checks, cashier’s checks, certified checks, traveler’s checks, a money order in any form, or a funds transfer. The current GTO applies to nine districts. The government has been analyzing information obtained through the GTOs and using the data not only for initiating and assisting investigations, but also to build a case for permanent regulations applicable to the real estate industry—as the ANPRM reflects. 

In August 2017, FinCEN issued an “Advisory to Financial Institutions and Real Estate Firms and Professionals” (the “Advisory”), which again indicated FinCEN’s growing concern with money laundering risks in the real estate industry. Although the Advisory created no legal obligations, it did suggest practices of which it expected real estate industry members to be aware.  Further, the U.S. Department of Treasury’s 2020 National Strategy for Combating Terrorist and Other Illicit Financing (“2020 Strategy”), in part, was designed to combat money laundering relating to real estate transactions and gatekeeper professions in general, such as lawyers, real estate professionals and other financial professionals.  The document highlighted the money laundering risks of real estate transactions and anonymous companies or straw purchasers, which have the ability to purchase high-value assets that maintain relatively stable value. The risk, according to this document, is both domestic and foreign and is especially significant for all cash purchases.

Finally, the Combating Russian Money Laundering Act, passed in conjunction with the Anti-Money Laundering Act of 2020, in part, requires the Secretary of the Treasury to submit by the end of 2021 to the U.S. House of Representatives and Senate a report that “shall identify any additional regulations, statutory changes, enhanced due diligence, and reporting requirements that are necessary to better identify, prevent, and combat money laundering linked to Russia,” including steps related to (1) “strengthening current, or enacting new, reporting requirements and customer due diligence requirements for the real estate sector, law firms, and other trust and corporate service providers[,]” and (2) “establishing a permanent solution to collecting information nationwide to track ownership of real estate.”  Although this report is nominally targeted to activity linked only with Russia, its findings presumably will be applied to the entire real estate industry.

The ANPRM: Scope of Potential Regulations

The ANPRM explains that FinCEN is contemplating the following potential regulations:

Specific vs. General Recordkeeping and Reporting Requirements

As noted at the outset of this post, FinCEN highlights two alternate, proposed rules, and is seeking comment as to which method most effectively would address money laundering concerns while minimizing burdens on those covered.  One proposed option, promulgated under 31 U.S.C § 5318(a)(2), would involve implementing specific reporting requirements, similar to those currently required of title insurance companies in the non-financed real estate market.  This rule would require covered persons to collect and report certain prescribed information to guard against illicit finance.

Alternatively, FinCEN is considering implementing more general monitoring and reporting requirements under the BSA, including filing SARs and establishing AML/CFT programs under  31 U.S.C. § 5318(g)(1) and 31 U.S.C. §§ 5318(h)(1)-(2).   This option would require covered persons to adopt AML/CFT policies, designate an AML/CFT compliance officer, establish AML/CFT training programs, and implement independent compliance testing. 

Who Would the Proposed Rule Cover

At present, and courtesy of the GTOs, title insurance companies are the only group subject to specific data collection and reporting requirements in the non-financed real estate transaction arena.  The proposed rule contemplates imposing similar requirements on other key players in these types of real estate purchases, such as real estate brokers and agents, attorneys, closing agents, appraisers, and property inspectors, among others.

FinCEN is seeking comment as to which transaction participants would be best situated to identify and report on the identity of the buyer, other parties to the transaction, and the nature of their involvement.  For instance, those directly involved in marketing and structuring the real estate deal, as well as those involved in the transfer of purchase funds, may be more exposed to money laundering and better able to collect and report relevant information.  On the other hand, those with non-customer-facing roles, or property-focused roles, may have no knowledge of the financing and therefore be unable to collect requisite data for reporting.

To ensure at least one entity involved in every non-financed real estate transaction is responsible for the relevant reporting, while avoiding duplicative or overly burdensome requirements, FinCEN is considering implementing a hierarchical, cascading reporting system, similar to the IRS’s regulation for Form 1099-S. This approach recognizes that different transactions involve different parties.  In the event that the type of entity assigned the primary reporting responsibility is not involved in a given transaction, the reporting responsibility would fall on another party involved.  FinCEN is seeking feedback on how the reporting hierarchy should be structured among title insurance companies, title or escrow companies, real estate agents or brokers, real estate attorneys or law firms, and settlement or closing agents, among others.

Geographic Scope and Transaction Threshold

FinCEN’s proposed rule would be national in scope, in order to provide consistency and predictability to businesses with reporting responsibilities.  A national rule would also avoid pushing money laundering activities into non-regulated jurisdictions.  The rule would also depart from the current GTOs transaction threshold of $300,000, and instead include no minimum transaction amount.  According to FinCEN, this would prevent money launderers from structuring deals to avoid reporting requirements.

Purchases by Certain Entities

The proposed rule likely will cover legal entities engaged in real estate purchases for cash because of the well-known use of shell companies in money laundering schemes.  Additionally, FinCEN is considering, and seeks comment on, whether the rule should also cover trusts and natural persons, such as nominees or so-called “straw-man” purchasers. 

Residential and Commercial Real Estate

Notably, FinCEN is not limiting the rule to residential real estate transactions.  Rather, it seeks to extend reporting requirements to both residential and commercial real estate transactions, to the extent that the risks in non-residential real estate justify the burden of reporting requirements.   FinCEN also indicated a willingness to create two separate rules because of the important distinctions between the residential and commercial markets.

Specific Requests for Comment

In light of the above, the ANPRM sets forth 82 specific questions seeking comments and feedback.  These questions fall into the following seven general categories:

• General information regarding the real estate market.
• Identification of the money laundering risks in real estate transactions.
• Which real estate transactions FinCEN’s rule should cover.
• Which persons should be required to report information concerning real estate transactions to FinCEN. Here, FinCEN presents the options as:  (i) Real estate lawyers and law firms; (ii) real estate agents/brokers/settlement agents; (iii) title insurance companies; (iv) title and escrow agents and companies; (v) real estate investment companies; (vi) real estate development companies; (vii) real estate property management companies; (viii) real estate auctions houses; (ix) investment advisers; (x) private money lenders; and/or (xi) money service businesses.
• What information should FinCEN require regarding covered real estate transactions.
• What are the potential burdens or implementation costs of a potential FinCEN regulation.
• Whether FinCEN should promulgate general AML/CFT recordkeeping and reporting requirements for “persons involved in real estate closings and settlements.” If so, how should that term be defined, and what are the potential benefits and costs to including real estate brokers and agents, title agencies and/or insurance companies, or real estate attorneys in the definition.

These questions, and the entire ANPRM, raise numerous complex issues potentially affecting a broad array of stakeholders.  Written comments are due within 60 days of the ANPRM (February 4, 2022).

Peter Hardy, Richard Andreano, Jr., and Michael Robotti are partners, and Nikki Hatza is an associate, at Ballard Spahr LLP. This post originally was published on Ballard Spahr’s Money Laundering Watch blog.

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