The real estate sector looks to be coming under increased scrutiny from government regulators and enforcement agencies for its compliance with anti-money laundering and reporting obligations
Recently proposed regulatory changes and legislation indicate that the United States is seeking to upgrade its anti-money laundering (AML) regime, and that the real estate sector in particular almost certainly needs to prepare for new requirements and reporting obligations under the Bank Secrecy Act (BSA).
The Financial Crimes Enforcement Network (FinCEN) launched an Advance Notice of Proposed Rulemaking (ANPRM) in December 2021 to solicit public comment on potential requirements under the BSA for certain individuals and entities involved in real estate transactions. Coupled with recently introduced legislation in the Senate, the Kleptocrat Liability for Excessive Property Transactions and Ownership (KLEPTO) Act, the developments indicate that the US real estate industry and those involved in the sector should proactively reevaluate their risk appetites and update their compliance processes. The KLEPTO Act would build on the Corporate Transparency Act (CTA), implemented in January 2021, which requires private companies at their inception to disclose their beneficial owners to a national registry.
Real estate money laundering in the US
Money laundering through US real estate purchases by individuals and business entities alike continues to be a prime layering mechanism that facilitates concealment of illicit assets. For example, between 2015 and 2020, at least $2.3 billion was laundered through US real estate, but that number is almost certainly much higher, according to a recent report from the Washington, DC think tank, Global Financial Integrity (GFI).
In April, FinCEN renewed its geographic targeting orders (GTOs) — the agency’s response to significant money-laundering risks in the real estate sector — that since 2016 have required title insurance companies to identify the natural persons behind shell companies used in real estate cash transactions. This 12th renewal of the GTO expands the requirements to additional jurisdictions in the United States to include parts of Washington, DC, Northern Virginia, and Maryland, as well as additional Hawaiian Islands and the city and county of Baltimore.
The GTOs have proven a useful tool for law enforcement, giving agencies the ability to compare GTO-reported legal entities with suspicious activity reports (SARs) filed by banks and financial institutions. In its Advisory to Financial Institutions and Real Estate Firms and Professionals in 2017, FinCEN noted that more than 30% of the real estate transactions reported under the GTOs involved a beneficial owner or purchaser representative that had been the subject of unrelated SARs filed by U.S. financial institutions. Although title agents and real estate professionals are not required to file SARs, this advisory emphasizes their importance in efforts to combat criminal activities, providing a possible additional justification to impose BSA reporting requirements on the real estate sector.
The current GTOs, which must be renewed every six months, are limited to residential real estate, and apply to only 13 jurisdictions in the United States are only part of the battle against the use of the real estate sector to hide and launder assets. The proposed FinCEN regulations and possible additional legal measures pending in Congress will almost certainly help close the loopholes that allow malign actors to access and exploit the US financial system. Other additional measures include:
- Possible changes proposed in FinCEN’s ANPRM include removing reporting thresholds, expanding reporting requirements to all-cash transactions nationwide, and including commercial real estate in the reporting requirements.
- Approximately $463 billion in 2021 residential real estate transactions will “likely proceed without any [anti-money laundering] reporting obligations,” according to FinCEN, leaving “a substantial portion of the real estate market” unprotected from the risks posed by potential money launderers. To mitigate the problem, FinCEN could apply AML reporting obligations to all segments of the real estate sector.
Further, the Financial Action Task Force (FATF), which sets global standards and recommendations for combatting money laundering and terrorist financing, recommends that countries “assess the risks of misuse of legal persons for money laundering or terrorist financing, and take measures to prevent their misuse,” ensuring that registries are up-to-date and accurate.
The Tax Justice Network this year designated the United States as the world’s most secretive jurisdiction, which will likely prompt Congress to boost FinCEN’s resources to enhance the agency’s ability to mandate additional transparency and reporting, provide funds for additional staff, as well as create and manage the CTA registry.
Acting FinCEN director Him Das recently testified before the House Committee on Financial Services that many of the agency’s staffing requests remain unfunded, despite being mandated by the Anti-Money Laundering Act of 2020, including personnel needed to implement the beneficial ownership framework under the CTA, enforcement personnel, and others.
Although new FinCEN regulations and resources almost certainly will help mitigate money laundering in real estate, the lack of infrastructure in the sector to handle new AML requirements presents a challenge. Leading trade organizations, the American Land Title Association (ALTA) and the National Association of Realtors, recently revealed that most of their thousands of members and member organizations would not have the investigative tools or resources to comply with AML/CFT regulations under the BSA.
ALTA members spend between $45 to $250 per transaction to research the beneficial owner(s) in compliance with the current GTOs — a cost that is usually passed on to the customer, according to the group, which also noted almost two-thirds of title companies have five or fewer employees, and 94% have fewer than 20 employees. ALTA stated that imposing AML requirements that are similar to financial institutions onto title companies would be unnecessarily costly and burdensome.