The Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury Department, wants your help in deciding how to bring more of the real estate industry under the Bank Secrecy Act (BSA). In the December 8, 2021 edition of the Federal Register, FinCEN published an Advanced Notice of Proposed Rulemaking (ANPRM) - Anti-Money Laundering Regulations for Real Estate Transactions. The ANPRM asks for comments on “…potential requirements under the [BSA] for certain persons involved in real estate transactions to collect, report, and retain information.”
What Does FinCEN Want to Know?
The ANPRM contains 82 questions divided into six subject areas. The subject areas are:
- General information regarding the real estate market
- What are the money laundering risks in real estate transactions?
- Which real estate transactions should FinCEN’s rule cover?
- Which persons should be required to report information concerning real estate transactions to FinCEN?
- What information should FinCEN require regarding real estate transactions covered by a proposed regulation?
- What are the potential burdens or implementation costs of a potential FinCEN regulation?
What is the Problem?
The basis of the ANPRM is recognition by FinCEN and many AML experts that the “systemic money laundering vulnerabilities presented by the U.S. real estate sector…threatens U.S. national security and the integrity of the U.S. financial system.” FinCEN identifies several key factors underlying this threat – “lack of transparency, attractiveness of the U.S. real estate market as an investment vehicle, and the lack of industry regulation.”
FinCEN identifies one root cause of the risk in real estate transactions as use of shell companies and other structures to obscure the true beneficiaries of the transactions and their source of funds.
What is the Focus?
The focus of the ANPRM is risks presented by “non-financial transactions.” FinCEN defines these transactions as a:
- Real estate purchase or transaction that is not financed with a loan, mortgage, or other similar instrument, from a bank or non-bank residential mortgage lender or originator, and
- Is made, at least in part, using currency or a substitute for currency, or any form of check, money order, or funds transfer.
What Has Been Done in the Past?
FinCEN has issued some prior rulemaking regarding real estate, but those rules have primarily tinkered at the edges of the risk, rather than taking it on directly. The only previous major focus was their issuance of Geographic Targeting Orders (GTOs) focused on all cash real estate transactions. The GTOs require title insurance companies to file reports and maintain records about all-cash purchases of residential real estate in select metropolitan areas of the United States; the GTOs have been renewed several times since their initial issuance and the transaction threshold has been lowered. The ANPRM notes that all-cash transactions represent about 20% of real estate sales.
Due to the diverse transaction structures and complexity, FinCEN has not imposed similar recordkeeping and reporting obligations on to all-cash commercial real estate transactions.
Is the Problem New?
In reviewing the money laundering risk posed by real estate, the ANPRM notes that the risk was called out in the Treasury Department’s 2020 National Strategy for Combating Terrorist and Other Illicit Financing.
It also reviews numerous other reports about this risk, including a 2007 report and various guidance from the Financial Action Task Force (FATF). The ANPRM also notes that in FATF’s 2016 Mutual Evaluation Report of the US, it found the United States’ failure to regulate real estate transactions in line with the FATF standards to be a significant deficiency in the U.S. AML/CFT regime. In looking at other jurisdictions, the ANPRM recognizes that the EU has regulated real estate as part of its AML/CFT process since 2001.
Why Should You Comment?
The money laundering vulnerabilities in real estate are among the largest gaps in the US AML/CFT regime, along with unregistered investment funds and art. FinCEN’s focus on real estate is an important step forward.
The public comment process gives members of the financial crimes compliance community the opportunity to help shape the thinking of the FinCEN staff members who will prepare the proposed regulations. Your knowledge and in depth, on-the-ground experience, are critical elements to having an effective and practical regulatory proposal. Closing this gap in the US AML/CFT regime is a long-standing problem, your comments will be part of the solution.