Regulating ‘Acres of Money Laundering’: Time for FinCEN to craft a robust rule for transparency in the real estate sector
By Kaisa de Bel, February 22, 2022
On December 6, U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) published an Advance Notice of Proposed Rulemaking (ANPRM) to solicit public comment for Anti-Money Laundering regulations in real estate transactions.
These regulatory efforts are long overdue. The avalanche of high-profile cases over the last several years have shown that kleptocrats, corrupt politicians, organized criminals, and sanctions evaders all choose U.S real estate as their destination to launder money. GFI’s own research found that more than US$2.3 billion was laundered through U.S. real estate in cases reported between 2015 and 2020. 82 percent of those cases involved foreign sources of money, and more than 50 percent involved politically exposed persons (PEPs). Treasury’s current approach of temporary Geographic Targeting Orders (GTOs) are woefully inadequate to deal with the risk that this high influx of dirty money poses to U.S. national security and global democratic norms.
Real estate money laundering also has devastating consequences to the everyday lives of Americans. As the U.S. Strategy on Countering Corruption notes, money laundering through real estate “negatively impacts average citizens in the United States, tilting the economic playing field against working Americans, […] perpetuating growth-dampening inequality, and contributing to pricing out families from home ownership through real estate purchases.”
Through this ANPRM, FinCEN has embarked on an effort to create a robust regulatory framework. If incorporated into a final rule, it will finally address the systemic vulnerabilities presented by the U.S. real estate sector. GFI’s full comment is available here, and below is a summary of the key recommendations.
Highlights from GFI’s comments
- A full AML/CFT framework
Since the enactment of the PATRIOT Act in the aftermath of 9/11, FinCEN has had the authority under the Bank Secrecy Act (BSA) to apply the full suite of AML/CFT monitoring and reporting requirements to the high-risk real estate sector. However, a two decade long ‘temporary exemption’ for real estate professionals has since blocked any movement on regulatory efforts, creating many of the vulnerabilities that facilitate illicit financial flows in the sector today. In line with international best practices, GFI recommends that FinCEN uses its BSA-authority to impose a comprehensive AML/CFT regime on real estate professionals.
- An alternative approach: tailored reporting requirements
Outside the full AML/CFT framework, FinCEN also has the authority to create requirements that expand the information to be collected, verified and reported to FinCEN by real estate professionals. GFI recommends that any proposed rule should at a minimum remedy the shortcomings of the GTOs and include the following elements:
- A permanent and nationwide regime;
- No monetary reporting threshold for transactions;
- Application to both legal entities and natural persons;
- A cascading reporting obligation covering title companies, escrow agents, attorneys and real estate agents;
- A requirement to submit key information on both the buyer and seller, including on beneficial ownership as defined under the Corporate Transparency Act, source of funds, and PEP identification.
To strengthen this proposed rule, GFI recommends that FinCEN takes the following key issues in consideration.
- A cascading reporting rule accounts for evasion tactics by money launderers: Each U.S. state has its own laws and customs regulating the real estate sector. A rule that would only cover one type of real estate professional would therefore provide money launderers with an easy evasion tactic to exploit. Instead, FinCEN should adopt a reporting obligation for multiple real estate professionals in a cascading order to ensure the requirement falls on at least one U.S.-based entity involved in the transaction.
- The rule should cover changes of ownership that occur without a sale: The current real estate GTO defines ‘Covered Transaction’ only as purchases of residential real property by a legal entity. However, numerous cases of real estate money laundering simply involve the transfer of ownership or creation of equitable interest in the property without an actual sale. FinCEN should expand the types of transactions covered under any new rule to include direct/indirect transfers of ownership or creation of equitable interest in the property.
- The rule should cover transactions by trusts: An increasing proportion of housing is now owned by legal entities and arrangements, including trusts. In cities like LA, 23% of rental units are owned by trusts. The GTOs failed to address the ownership risks associated with trusts, and both foreign and some domestic family trusts are excluded from the purview of the Corporate Transparency Act. Yet these types of legal arrangements are used by PEPs to purchase real estate. GFI therefore recommends that transactions by all different classes of legal entities and legal arrangements be included in any prospective rule.
- FinCEN should provide a usable definition of ‘residential’ and ‘commercial’ real estate: Under the GTOs, FinCEN clarified the term ‘residential real property’ to mean ‘property designed principally for the occupancy of from one to four families.’ However, there appears to be a fair amount of confusion within the industry as to what is covered by this classification. For instance, it is unclear if the purchase by a corporate entity of 100 ‘one to four family’ property units within one building should be treated as residential or commercial. FinCEN should clarify and restrict the definition of ‘residential real estate’ to cover only individual purchases of residential property. Commercial real estate, on the other hand, should cover properties acquired with the purpose of generating income, including the (mass) acquisition of apartments, nursing homes and student dwellings.
- FinCEN should not limit its focus to ‘non-financed’ transactions: The GTOs currently are restricted to all-cash transactions. FinCEN is now looking to regulate ‘non-financed transactions’, but GFI recommends that this term is not simply treated as a synonym for ‘all-cash’ transactions. Financing of real estate transactions does not only happen through conventional mortgages provided by BSA-regulated financial institutions. It also includes financing provided by private lenders, foreign financial institutions, online marketplaces like Zillow, private equity and many more which are not subject to AML/CFT requirements. Therefore, FinCEN should define the term ‘non-financed’ to include financing mechanisms that are not subject to robust due diligence and reporting mechanisms.
GFI is hopeful that the recommendations provided in the comment can assist FinCEN in creating a strong rule that balances the risk to U.S. national security with ongoing practices within the real estate sector. GFI looks forward to continuing to engage with FinCEN to deliver on this vital commitment as outlined by the Biden-Harris administration.