Crackdown On Money Laundering In Real Estate Is Expanding

August 11, 2016Articles Law360

Matthew D. Lee authored the Law360 article, "Crackdown On Money Laundering In Real Estate Is Expanding." 

The U.S. Treasury Department’s Financial Crimes Enforcement Network recently announced a substantial expansion of enhanced reporting requirements imposed on U.S. title insurance companies that require the identification of the individuals behind shell companies used to purchase real estate in “all-cash” transactions. Earlier this year, FinCEN issued geographic targeting orders (GTOs) placing greater scrutiny on such transactions taking place in two geographic markets: Manhattan and Miami-Dade County. Based upon the valuable information apparently generated as a result of those GTOs, FinCEN has expanded their reach to six major metropolitan areas in the United States. This latest action confirms that FinCEN remains concerned about the risk of money laundering when individuals attempt to purchase high-end real estate in all-cash deals through limited liability companies or similar structures.

Background Regarding Geographic Targeting Orders

A GTO is an administrative order issued by the director of FinCEN requiring all domestic financial institutions or nonfinancial trades or businesses that exist within a geographic area to report on transactions any greater than a specified value. Authorized by the Bank Secrecy Act, GTOs were originally only permitted by law to last for 60 days, but that limitation was extended by the USA Patriot Act to 180 days. Historically, FinCEN’s issuance of a GTO was not publicized, and generally only those businesses served with a copy of a particular GTO were aware of its existence.

Over the course of the last three years, FinCEN — the primary agency of the U.S. government focused on anti-money laundering compliance and enforcement — has aggressively exercised its GTO authority frequently throughout the United States in areas of money laundering concern. Recent, publicly announced GTOs have focused on shipments of cash across the border in California and Texas, the fashion district of Los Angeles, exporters of electronics in South Florida, and check cashing businesses in South Florida. In each of these examples, FinCEN publicly announced the issuance of the GTO and its terms, and expressed concern that the industries or regions in question were vulnerable to money laundering.

Prior Efforts to Prevent Money Laundering in Real Estate Transactions

For several years, FinCEN has sought to ensure financial transparency and combat illegality in the real estate market. In February 2015, The New York Times published a series of articles focused on the use of shell companies to purchase high-value real estate in New York City.[1] In a November 2015 speech, FinCEN’s then-director disclosed that through analysis of Bank Secrecy Act reporting and other information, FinCEN has observed the frequent use of shell companies by international corrupt politicians, drug traffickers and other criminals to purchase luxury residential real estate in cash. In particular, FinCEN uncovered fund transfers in the form of wire transfers originating from banks in offshore havens at which accounts have been established in the name of the shell companies. The perpetrator will typically direct an individual involved in the settlement and the closing in the U.S. to place the deed to the property in the name of the shell company, thereby obscuring the identity of the owner of the property.

The Bank Secrecy Act established anti-money laundering obligations for financial institutions, including institutions involved in real estate transactions. By including these businesses in the definition of “financial institution,” Congress recognized the potential money laundering and financial crime risks in the real estate industry. In the USA Patriot Act, Congress mandated that FinCEN issue regulations requiring financial institutions to adopt AML programs with minimum requirements, or establish exemptions, as appropriate. Since that time, FinCEN has implemented AML requirements for certain real estate businesses or established exemptions for others consistent with the Bank Secrecy Act.

The Original Manhattan and Miami-Dade GTOs

In January 2016, FinCEN issued what are believed to be the first-ever GTOs focused on real estate transactions. Effective March 1, 2016, these GTOs require certain title insurance companies to identify the natural persons behind companies used to pay all cash for luxury residential real properties located in the borough of Manhattan and Miami-Dade County. All-cash transactions exceeding $3 million in Manhattan, or exceeding $1 million in Miami-Dade County, must be reported to FinCEN with an identification of the “beneficial owner” behind the transaction.

The enhanced reporting required by the GTOs apply to “covered transactions,” which are defined as transactions in which (1) a legal entity (2) purchases residential real estate either in the borough of Manhattan or Miami-Dade County (3) for a total purchase price of excess of $3 million (Manhattan) or $1 million (Miami-Dade) (4) without a bank loan or other similar form of external financing and (5) using, at least in part, currency or a cashier’s check, certified check, traveler’s check, or money order. “Legal entity” is defined as a corporation, limited liability company, partnership or other similar business entity, whether domestic or foreign.

If a title insurance company is engaged in a transaction that meets all of the requirements for a “covered transaction,” it must report said transaction to FinCEN within 30 days of the closing using a designated form entitled “FinCEN Form 8300.” On the Form 8300, the title insurance company must identify (1) the purchaser; (2) the purchaser’s representative, if any; and (3) the beneficial owner, which is defined as each natural person who, directly or indirectly, owns 25 percent or more of the equity interests of the purchaser. The title insurance company must obtain and copy the driver’s license, passport, or other similar identification for each beneficial owner.

Expansion of GTOs to Six Other Major Metropolitan Areas

With the original Manhattan and Miami-Dade GTOs set to expire on Aug. 27, 2016, FinCEN recently announced a significant expansion of its efforts to combat money laundering in real estate transactions with the issuance of six more GTOs. Effective on Aug. 28, 2016, the latest GTOs cover the following geographic areas: (1) all boroughs of New York City; (2) Miami-Dade County and the two counties immediately north (Broward and Palm Beach); (3) Los Angeles County, California; (4) three counties comprising part of the San Francisco area (San Francisco, San Mateo, and Santa Clara counties); (5) San Diego County, California; and (6) the county that includes San Antonio, Texas (Bexar County). The monetary thresholds for each geographic area vary.[2]

Implications of FinCEN’s Latest GTOs

The initial GTOs focused on Manhattan and Miami-Dade were initially met with skepticism by some in the real estate industry as to whether they would be effective in curbing money laundering. In particular, it was thought that would-be money launderers could simply avoid their reach by purchasing real estate in other jurisdictions or by using wire transfers from offshore accounts, rather than cash, to acquire real estate. It appears, however, that FinCEN’s early efforts have produced valuable leads for law enforcement.

According to a FinCEN press release announcing the six new GTOs, the initial Manhattan and Miami-Dade GTOs are helping law enforcement identify possible illicit activity and informing future regulatory action. The press release noted that a significant portion of “covered transactions” have revealed possible criminal activity associated with the individuals reported to be the beneficial owners behind shell company purchasers, confirming FinCEN’s suspicion that high-end real estate transactions pose money laundering risks.[3] FinCEN Acting Director Jamal El-Hindi added, “[t]he information we have obtained from our initial GTOs suggests that we are on the right track. By expanding the GTOs to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”

During a conference call with reporters announcing the latest GTOs, FinCEN officials revealed that more than 25 percent of the transactions subject to the initial GTOs involved a beneficial owner who was also the subject of a “suspicious activity report,” which are required to be filed by financial institutions when they suspect customers may be engaged illicit activity. FinCEN also reported that financial institutions are filing more suspicious activity reports as a result of the increased attention the GTOs have brought to the potential for money laundering through real estate.

Beyond expanding their geographic reach, the six new GTOs contain two significant changes from the original Manhattan and Miami-Dade GTOs. First, the earlier GTOs defined “cash” transactions to include money orders, cashier’s checks, certified checks, and traveler’s checks. The newly-issued GTOs will also apply to personal and business checks, thereby expanding the types of transactions that will be subject to enhanced reporting. Notably, however, none of the GTOs apply to real estate transactions conducted solely using wire transfers, an area that FinCEN currently lacks authority to regulate. As noted previously, critics of the real estate GTOs have frequently pointed out that money launderers could exploit this gap in the regulatory scheme by using wire transfers from offshore banks to finance their luxury real estate purchases.

Second, the new GTOs apply to all U.S. title insurance companies, instead of the few title companies originally selected. As a result, all title insurance companies handling transactions occurring in the six geographic regions covered by the latest GTOs must immediately familiarize themselves, and their employees and agents, with the obligations imposed by these latest GTOs. Title insurance companies would be well-advised to implement training programs so that they are prepared to address these new compliance obligations when they take effect later this month. Companies that fail to comply with the reporting and record-keeping requirements of these GTOs, and their employees, may face civil or criminal penalties.

While the terms of each GTO currently last for only six months, FinCEN will almost certainly extend the duration of each GTO for an additional six months. In addition, given the valuable information that the Manhattan and Miami-Dade GTOs have produced to date, and that the new GTOs are expected to generated, it is likely that FinCEN may well make permanent this type of enhanced reporting for real estate purchases, without geographic limitation, through further regulatory action.

[1] See “Towers of Secrecy,” The New York Times (Feb. 8-12, 2015), available at http://www.nytimes.com/2015/02/08/nyregion/the-hidden-money-buying-up-new-york-real-estate.html?_r=0.

[2] The New York thresholds are as follows: the Borough of Manhattan - $3,000,000; the Borough of Brooklyn - $1,500,000; the Borough of Queens - $1,500,000; the Borough of Bronx - $1,500,000; and the Borough of Staten Island - $1,500,000. The Florida thresholds are as follows: Miami-Dade County - $1,000,000; Broward County - $1,000,000; Palm Beach County - $1,000,000. The California thresholds are as follows: San Diego County - $2,000,000; Los Angeles County - $2,000,000; San Francisco County - $2,000,000; San Mateo County - $2,000,000; Santa Clara County - $2,000,000. The Texas threshold is as follows: Bexar County - $500,000.

[3] See FinCEN Press Release, “FinCEN Expands Reach of Real Estate ‘Geographic Targeting Orders’ Beyond Manhattan and Miami” (July 27, 2016), available at https://www.fincen.gov/news_room/nr/html/20160727.html.

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