FinCEN Considers New Anti-Money Laundering Reporting Requirements For All-Cash Real Estate Transactions

The Financial Crimes Enforcement Network (FinCEN) of the Treasury Department announced last week an Advance Notice of Proposed Rulemaking (ANPRM)^[1] to solicit public comment on a proposed rule that would address the vulnerability of the U.S. real estate market to money laundering and other illicit activity.^[2] FinCEN plans to apply more scrutiny to all-cash real estate transactions as part of the Biden administration’s broader efforts to fight corruption.^[3] These anti-corruption efforts also include FinCEN’s Notice of Proposed Rulemaking to implement beneficial ownership reporting requirements as set forth in the Corporate Transparency Act, also announced last week and discussed in a separate client alert.

Typical real estate transactions involving mortgages are scrutinized by the financial institutions involved, which are subject to anti-money laundering rules and are required to report suspicious activity to the government.^[4] However, real estate purchases made in all-cash transactions are presently subject to minimal reporting regulations.^[5] According to FinCEN, this may present a significant money laundering vulnerability, as it is extremely difficult to trace the true source of funds when real estate is purchased by legal entities not involving financing provided by regulated institutions.

A senior official at a White House press conference on countering corruption stated, “For too long, the U.S. real estate market has been susceptible to being manipulated and used as a haven for the laundered proceeds of illicit activity, including corruption. Our real estate market is a relatively stable store of value. It can be opaque, and there are gaps in industry regulation. As a result, criminals and corrupt officials are able to exploit real estate far too often.”^[6]

From 2015 to 2020, an estimated $2.3 billion was laundered through U.S. real estate transactions. More than half of these transactions involved “politically exposed persons” — senior foreign political officials or their close associates.^[7] A 2015 article by The New York Times reported that nearly half of the most expensive residential properties in the United States were purchased by legal entities rather than named individuals.^[8]

FinCEN has not previously imposed the Bank Secrecy Act’s general reporting requirements on businesses involved in non-financed real estate transactions; but it has imposed more specific transaction reporting requirements, mandating that title insurance companies in select metropolitan areas — including New York City — file reports concerning legal entities’ all-cash purchases of residential real estate for more than $300,000.^[9] These rules were issued under 31 U.S.C. § 5326, which allows FinCEN to impose additional reporting or recordkeeping requirements on institutions or businesses in a geographic area for a limited period of time, if FinCEN has reasonable grounds to conclude that the requirements are necessary to carry out the purposes of the Bank Secrecy Act. Instead of resorting to these limited rules, FinCEN could impose an ongoing and expanded reporting requirement through 31 U.S.C. § 5318(a)(2). The ANPRM seeks to solicit feedback on whether FinCEN should impose such a rule that would apply on a nationwide basis and expand the efforts to commercial properties.

New regulations could include the imposition of controls and reporting requirements akin to those in place for financial institutions, such as anti-money laundering regulations and suspicious activity report requirements.^[10] The scope of who would be subject to the reporting requirements is still undefined, but would likely include title insurance companies and other persons involved in non-financed real estate closings and settlements.^[11] The proposed rule would “enhance the transparency of the domestic real estate market on a nationwide basis and protect the U.S. real estate market from exploitation by criminals and corrupt officials.”^[12]

The ANPRM seeks comment on the approach to both residential and commercial real estate sectors and seeks to gain insight into potential burdens or challenges that such a reporting requirement might present. FinCEN is asking for public input on the types of real estate purchases that should be covered in the proposed rule, the geographic scope, what information should be reported and retained, the appropriate dollar-value threshold for reporting, and the key players who should be subject to reporting and recordkeeping requirements. Written comments must be received on or before Feb. 7, 2022.^[13]

^{[1] Anti-Money Laundering Regulations for Real Estate Transactions, 86 Fed. Reg. 69589 (Dec. 8, 2021) (ANPRM), https://www.federalregister.gov/documents/2021/12/08/2021-26549/anti-money-laundering-regulations-for-real-estate-transactions.}

^{[2] FinCEN Launches Regulatory Process for New Real Estate Sector Reporting Requirements to Curb Illicit Finance (Dec. 6, 2021) (FinCEN Press Release), https://www.fincen.gov/news/news-releases/fincen-launches-regulatory-process-new-real-estate-sector-reporting-requirements.}

^{[3] See United States Strategy on Countering Corruption (December 2021), https://www.whitehouse.gov/wp-content/uploads/2021/12/United-States-Strategy-on-Countering-Corruption.pdf. Released on Dec. 6, 2021, the U.S. Strategy on Countering Corruption “outlines a whole-of-government approach to elevating the fight against corruption. It places particular emphasis on better understanding and responding to the threat’s transnational dimensions, including by taking additional steps to reduce the ability of corrupt actors to use the U.S. and international financial systems to hide assets and launder the proceeds of corrupt acts.” Fact Sheet: U.S. Strategy on Countering Corruption (Dec. 6, 2021), https://www.whitehouse.gov/briefing-room/statements-releases/2021/12/06/fact-sheet-u-s-strategy-on-countering-corruption/.}

^{[4] See ANPRM at 69592 (Under the Bank Secrecy Act, FinCEN has the authority to impose reporting requirements on financial institutions. “The Currency and Foreign Transactions Reporting Act of 1970, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (‘USA PATRIOT Act’), the Anti-Money Laundering Act of 2020 (‘AML Act’), and other legislation, is the legislative framework commonly referred to as the [Bank Secrecy Act]. The Secretary of the Treasury . . . has delegated to the Director of FinCEN the authority to implement, administer, and enforce compliance with the [Bank Secrecy Act] and associated regulations.”).}

^{[5] See id. (“FinCEN’s regulations implementing the [Bank Secrecy Act] require banks, non-bank residential mortgage lenders and originators . . . and housing-related Government Sponsored Enterprises . . . to file [suspicious activity reports] and establish [anti-money laundering/countering the financing of terrorism] programs, but FinCEN’s regulations exempt other persons involved in real estate closings and settlements from the requirement to establish [anti-money laundering/countering the financing of terrorism] programs, and the regulations do not impose a [suspicious activity reports] filing requirement on such persons.”).}

^{[6] Background Press Call by Senior Administration Officials on the U.S. Government Strategy on Countering Corruption (Dec. 6, 2021) (White House Briefing), https://www.whitehouse.gov/briefing-room/press-briefings/2021/12/06/background-press-call-by-senior-administration-officials-on-the-u-s-government-strategy-on-countering-corruption/.}

^{[7] ANPRM at 69591 (citing a study published by Global Financial Integrity); see also Richard Vanderford, U.S. Weighs New Rules for All-Cash Real Estate Deals, Wall Street Journal (Dec. 6, 2021), https://www.wsj.com/articles/u-s-weighs-new-rules-for-all-cash-real-estate-deals-11638827425.}

^{[8] ANPRM at 69591 (citing Louise Story and Stephanie Saul, “Stream of Foreign Wealth Flows to Elite New York Real Estate,” N.Y. Times (Feb. 7, 2015), https://www.nytimes.com/​2015/​02/​08/​nyregion/​stream-of-foreign-wealth-flows-to-time-warner-condos.html).}

^{[9] ANPRM at 69594-95 (“Geographic Targeting Orders” require title insurance companies to file reports and maintain records concerning all-cash purchases of residential real estate above a certain monetary threshold in specific metropolitan areas of the United States. The information they are required to report includes information about the transaction, including the price and address of the real estate purchased, as well as beneficial ownership information, such as the name and Social Security number of the beneficial owners of the legal entities purchasing the property.)}

^{[10] ANPRM at 69597; see also Vanderford, supra.}

^{[11] See ANPRM at 69597.}

^{[12] FinCEN Press Release.}

^{[13] See ANPRM (the comment period is open for 60 days from the date of publication on the Federal Register).}