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GFI Comment Submission to FiNCEN on ANPRM to Curb Illicit Financial Flows in the US Real Estate Sector

Global Financial Integrity (GFI) appreciates the opportunity to submit comments to the Financial Crimes Enforcement Network (“FinCEN”) of the United States (U.S.) Department of the Treasury (Treasury) in response to the advance notice of proposed rulemaking (“ANPRM”) regarding “Anti-Money Laundering Regulations for Real Estate Transactions.”

Global Financial Integrity (GFI) is a Washington, DC-based think tank focused on illicit financial flows, corruption, illicit trade, and money laundering. Through high-caliber analyses and fact-based advocacy, GFI works with partners to increase transparency in the global financial and trade system, and address the harms inflicted by trade misinvoicing, transnational crime, tax evasion, and kleptocracy.

GFI has worked tirelessly for a decade advocating and promoting the importance of beneficial ownership and financial transparency measures in various asset classes, including real estate. Of note is GFI’s following work and analysis:

The last few years have seen civil society groups, journalists, and governments expose a veritable avalanche of real estate money laundering (REML) cases that span the globe, including in the U.S. These cases have exposed the ease with which kleptocrats, criminals, sanctions evaders, and corrupt government officials choose the U.S. real estate market as their preferred destination to hide and launder proceeds from illicit activities.

In August 2021, GFI published a report titled, “Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat’s Dream” and found that more than $2.3 billion was laundered through U.S. real estate in cases reported between 2015 and 2020. Eighty-two percent of those cases involved foreign sources of money, and well over 50% involved politically exposed persons (PEPs). This high influx of foreign and corrupt money poses a serious threat to U.S. national security and underscores the need for comprehensive regulations tackling the money laundering risk in the U.S. real estate sector.

Weaknesses of the current Geographic Targeting Orders approach

The current U.S. regulatory approach of using GTOs which are temporary and location specific were valuable in its inception. However, the GTOs policy has several shortcomings, including limitations inherent to a temporary, location specific order. For the reasons outlined below the GTOs cannot act as a substitute for a comprehensive rule that tackles the risk of money laundering in the U.S. real estate sector.

  1. The limited geographic reach of the GTOs presupposes where real estate money laundering takes places. As evidenced by GFI’s research, the majority of real estate money laundering cases between 2015 – 2020 were not concentrated in luxury residential real estate markets but involved properties located outside of the GTO geographic scope.
  2. The current GTO threshold of $300,000 is arbitrary and ignores the fact that money laundering schemes can occur through the purchase and sale of multiple properties with lower values.
  3. The GTOs only apply to all-cash purchases made by specific legal vehicles, and simply require title insurance companies to report beneficial ownership information of the buyer. The narrow scope of the GTOs ignores typologies that utilize trusts, the use of natural persons as third parties, typologies such as overvaluation and undervaluation, and schemes initiated by the seller.
  4. The GTOs’ emphasis on title insurance companies as the sole gatekeepers responsible for the record keeping and reporting of high-risk real estate transactions enables criminals to easily circumvent AML checks.
  5. The GTOs only apply to residential real estate, leaving the commercial sector completely opaque and vulnerable to money laundering activity.

Summary of GFI’s recommendations to inform new Anti-Money Laundering Regulations for Real Estate Transactions
Given the weaknesses of the current regulatory system, GFI welcomes the readiness of FinCEN to issue a permanent rulemaking. This will provide much needed reform to an opaque sector rife with money laundering risk and ensure that the U.S. is in line with other allies in curtailing the use of the U.S. economy as a safe haven for illicit proceeds. The most effective way to address the problem of real estate money laundering would be to promulgate general and traditional AML/CFT requirements for persons involved in real estate transactions by using FinCEN’s authority under 31 U.S.C. 5318(h)(1)-(2) and 31 U.S.C. 5318(g)(1), including the full suite of Customer Due Diligence (CDD) obligations and the filing of Suspicious Activity Reports (SARs). The second option before FinCEN would be to create a reporting requirement under 31 U.S.C. 5318(a)(2). If FinCEN opts to promulgate a rule under the latter BSA provision, such proposed rule should at a minimum remedy the shortcomings of the GTO approach and include the following elements:

  1. A permanent and nationwide regime.
  2. No monetary reporting threshold for transactions.
  3. Application to both residential and commercial real estate
  4. A cascading reporting obligation for multiple real estate professionals, including title and escrow companies and agents, real estate agents and brokers, and real estate attorneys to ensure that a reporting requirement falls on at least one entity in the real estate transaction.
  5. Application to both transactions by legal entities and natural persons.
  6. Requirement to submit beneficial ownership information of both the buyer and the seller, as well as information on source of funds, identification of PEPs, and other key pieces of information of the transaction.

GFI through its comment provides language and recommendations that can strengthen any proposed rule. Below is a short summary of some of the key issues that GFI would like to bring to FinCEN’s attention and are dealt with in greater detail throughout this comment.

  1. A cascading reporting rule that accounts for evasion tactics used 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.
  2. The rule should cover transfers of ownership that do not constitute a sale: The current real estate GTO defines ‘Covered Transaction’ to only refer to 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.
  3. The rule should cover transactions by trusts: The GTOs, except for a singular non-public GTO,1 have failed to address the ownership risks associated with trusts.2 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. 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.
  4. 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 example, would the purchase of 100 ‘one to four family’ property units by a corporate entity within one building 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.
  5. FinCEN should not limit its focus to ‘non-financed’ transactions: The GTOs currently are restricted to all-cash transactions. However, GFI recommends that the term ‘non-financed’ should not be treated as a synonym for ‘all-cash’ transactions. The term ‘financing’ in real estate transactions does not only include conventional loans provided by financial institutions that are regulated under BSA, but it also means financing provided by private lenders, foreign financial institutions, online marketplaces like Zillow, private equity, bond issuance etc. that are not subject to AML/CFT requirements. Therefore, it is recommended that FinCEN define the term ‘financed ‘and narrow it to exclude mechanism that do not have robust due diligence and reporting mechanisms.