Case Highlights Confidentiality of BSA Reporting and Continued Focus on Real Estate as Money Laundering Tool

The Northern District of California granted summary judgment to the Financial Crimes Enforcement Network (“FinCEN”) in a Freedom of Information Act (“FOIA”) case pertaining to an attempt by a group of investigative journalists to obtain information reported to FinCEN on the beneficial owners of high-end real estate.  This case clearly indicates that the Bank Secrecy Act (“BSA”) will continue to prevent efforts by journalists to seek, via FOIA, sensitive and protected information reported to FinCEN.  Of course, and as the world has witnessed, journalists still can turn to leaks and data hacks to obtain and distribute such information.  This case also reminds us that the use of real estate as a potential vehicle for money laundering remains a hot topic not only for regulators and enforcement personnel, but also for journalists and watchdog groups.

In The Center for Investigative Reporting, et al. v. United States Department of the Treasury, the Court held that FinCEN was not required to produce documents indicating the “real human owners” of residential real estate purchased with cash that had been requested by The Center for Investigative Reporting (“CIR”).  The Court’s ruling – affirming the confidentiality protections that are critical to the effectiveness of financial institution reporting under BSA – comes at pivotal moment, as journalistic agencies such as the International Consortium of Investigative Journalists (“ICIJ”) and BuzzFeed News reported less than six months ago on leaked documents referred to as the “FinCEN Files,” describing alleged transactions valued at over $2 trillion U.S. dollars and reported by financial institutions to FinCEN through Suspicious Activity Reports (“SARs”). Under the BSA, it is illegal to reveal the decision to file or not file a SAR to the subject of the SAR.  The ICIJ also played a key role in the release of the notorious Panama Papers, which detailed an alleged web of international money laundering and tax evasion obtained through a massive data leak.

The GTO Reporting Regime

FinCEN acquired the information that CIR sought to obtain through Geographic Targeting Orders (“GTOs”), which require U.S. title insurance companies to identify the natural persons behind legal entities used in certain purchases of residential real estate performed in specified geographic areas without a bank loan or similar form of external financing.  We frequently blog about GTOs.  The stated purpose of the GTOs is to close loopholes in the current AML regime, and identify bad actors who may be laundering money and concealing their identities through the use of legal entities, such as shell companies, and avoiding the BSA/AML systems of banks by conducting all-cash real estate deals with no loans.

FinCEN has issued many GTOs since January 2016, when it first issued a GTO “requiring U.S. title insurance companies to identify the natural persons behind all-cash purchases of residential real estate” exceeding one million dollars in the Borough of Manhattan and Miami-Dade County.  Each GTO has been effective for a period of six months.  On November 5, 2020, FinCEN issued its most recent GTO.  The current monetary reporting threshold has been lowered to $300,000.  Further, GTOs now broadly cover purchases involving virtual currency as well as “fiat” currency, wires, personal or business checks, cashier’s checks, certified checks, traveler’s checks, a money order in any form, or a funds transfer.  Nine jurisdictions are currently covered by the GTOs.

FinCEN must share GTO reports with state and federal regulators and intelligence agencies upon request.  However, the BSA also stipulates at 31 U.S.C. § 5319 that “a report and records of reports” are exempt from public disclosure under FOIA.

The CIR Complaint

CIR initially attempted to obtain information associated with FinCEN’s GTOs by filing a FOIA request seeking:

the addresses of all residential real estate purchased with cash, where FinCEN was aware; the amount of money transferred; the name and address of the true, human owners behind each residential real estate purchase; the name of the person responsible for purchasing the property; and the individuals responsible for representing the purchasers.

CIR explained its motivation for seeking this information, noting a statistic from a 2017 FinCEN news release that all-cash transactions have come to account for a quarter of all residential real estate purchases, “totaling hundreds of billions of dollars nationwide.”  When CIR filed another FOIA request in July 2019, FinCEN responded that it could neither confirm nor deny the existence of the materials and cited to the BSA.  CIR then appealed the request, lost, and appealed again.  Interestingly, FinCEN ultimately informed CIR in early 2020 that it had identified over 115,000 pages of responsive documents, which provides some insight into how much information FinCEN is collecting through the GTOs.

On December 9, 2019, CIR initiated this lawsuit by filing a complaint arguing that FinCEN had “no lawful basis for declining to release the records” under FOIA.  The Court disagreed, finding that “Exemption 3” of FOIA was sufficient to conclude that that FinCEN was not required to disclose the requested information.

Exemption 3 of FOIA, at 5 U.S.C. § 552(b)(3), states that the statute does not apply to material that is:

specifically exempted from disclosure by statute (other than section 552b of this title), if that statute—


(i) requires that the matters be withheld from the public in such a manner as to leave no discretion on the issue; or

(ii) establishes particular criteria for withholding or refers to particular types of matters to be withheld; and

(B) if enacted after the date of the enactment of the OPEN FOIA Act of 2009, specifically cites to this paragraph.

The Court’s conclusion that FinCEN was not required to provide the requested information rested on the BSA’s provision that “a report and records of reports” are absolutely exempt from disclosure under FOIA.  The Court held that the BSA “specifically exempt[s] disclosure within the meaning of Exemption 3, and both reports and “records of reports” submitted under the BSA fall within that exemption.”  Given this categorical prohibition against disclosure, FinCEN did not have to show any foreseeable harm from disclosure.  The fact that FinCEN took information from GTOs and incorporated that information into a new internal document created by FinCEN did not change the outcome; the new internal report was still a “record of report” protected from disclosure by Section 5319.  The Court also noted that every other court to consider the issue has reached the same conclusion, citing to cases from the Eastern and Southern Districts of California as well as the District Court for the District of Columbia.

Finally, CIR failed to show that the information was amenable to disclosure under the public domain doctrine because it had “submitted no evidence to show that any information actually collected by FinCEN overlaps with information actually placed in the public domain” under state and local laws in Philadelphia, New York, and the District of Columbia, as well as foreign laws in the United Kingdom, Ireland, and Ukraine, which purportedly require disclosure of beneficial ownership of real estate in some circumstances.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.  Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.  If you would like to read more on money laundering and real estate, please see this detailed article from Ballard Spahr here.