Are Proposed AML Regulations for Real Estate Closings and Settlements Soon to Follow?

The Financial Crimes Enforcement Network (“FINCEN”) announced on November 15 that it has renewed and revised its Geographic Targeting Orders (“GTOs”) that require U.S. title insurance companies to identify the natural persons behind legal entities used in purchases of residential real estate performed without a bank loan or similar form of external financing.  The new GTOs extend through May 15, 2019.

Notably, the list of covered geographic areas has expanded, and the monetary threshold has been reduced significantly to $300,000, so that it now no longer applies only to so-called “high end” real estate purchases.  Further, purchases involving virtual currency are now included within the reach of the GTO — an expansion which is consistent with prior expansions which extended the GTOs’ reach to transactions involving wires and personal and business checks.  Currently, the GTOs broadly apply to any purchases made using currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, a money order in any form, a funds transfer, or virtual currency.

A “legal entity” subject to the GTO reporting regime is defined as “a corporation, limited liability company, partnership or other similar business entity, whether formed under the laws of a state, or of the United States, or a foreign jurisdiction.”  The “beneficial owner” who must be identified is defined as “each individual who, directly or indirectly, owns 25% or more of the equity interests of the Legal Entity purchasing real property in the Covered Transaction.”  This definition tracks the Beneficial Ownership rule issued by FinCEN in 2016 for customer due diligence by covered financial institutions for new legal entity accounts by focusing on 25% or more ownership percentage, but it differs from the Beneficial Ownership rule by not including a “control” prong in its definition of a beneficial owner.

The press release issued by FinCEN for the new GTOs summarizes things well and is set forth here:

The purchase amount threshold, which previously varied by city, is now set at $300,000 for each covered metropolitan area. FinCEN is also requiring that covered purchases using virtual currencies be reported. Previous GTOs provided valuable data on the purchase of residential real estate by persons implicated, or allegedly involved, in various illicit enterprises including foreign corruption, organized crime, fraud, narcotics trafficking, and other violations. Reissuing the GTOs will further assist in tracking illicit funds and other criminal or illicit activity, as well as inform FinCEN’s future regulatory efforts in this sector.

Today’s GTOs cover certain counties within the following major U.S. metropolitan areas: Boston; Chicago; Dallas-Fort Worth; Honolulu; Las Vegas; Los Angeles; Miami; New York City; San Antonio; San Diego; San Francisco; and Seattle.

FinCEN appreciates the continued assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors.

The reporting is done through a special Currency Transaction Report, or CTR; the template for GTO reporting is here. Covered entities must retain relevant records for five years from the last effective day of the Orders (i.e., May 15, 2024) and must make them available to FinCEN and upon appropriate requests by law enforcement. FinCEN continues to maintain FAQs regarding the GTOs.

The latest GTOs represent a sustained scrutiny of the real estate market by FinCEN which began almost three years ago, and which has been expanded through repeated six-month increments.  The initial GTOs were issued in January 2016 to only certain title insurance companies for certain purchases only in the Borough of Manhattan and Miami-Dade County.  Clearly, FinCEN finds the data gleaned from GTOs to be very useful; FinCEN previously has claimed that it “about 30 percent of the transactions covered by the GTOs involve a beneficial owner or purchaser representative that is also the subject of a previous suspicious activity report.”

These sustained and expanding GTOs are also clearly part of the ongoing scrutiny by regulators across the globe regarding the issue of beneficial ownership and its role in potential money laundering schemes, as well as a similar global focus on money laundering through real estate and the general role of third party professionals who may facilitate money laundering.  As we have blogged, both FinCEN and the Financial Action Task Force (“FATF”) have focused for years on the AML risks inherent in real estate. For example, the December 2016 FATF Mutual Evaluation Report on the United States’ Measures to Combat Money Laundering and Terrorist Financing repeatedly highlighted the need for U.S. regulators and the real estate industry to do more to address money laundering and terrorist financing risks.  The FATF report’s executive summary asserted that “Residential Mortgage Lenders and Originators [RMLOs] . . . do not seem to have a good understanding of [money laundering] vulnerabilities in their sector or the importance of their role in addressing them.” The body of the FATF report elaborated that, “although banks have reasonably good AML/CFT programs overall, the same cannot be said of RMLOs, whose programs are still in the early implementation stage . . . .”

Future AML Regulation for Real Estate Closings and Settlements?

FinCEN’s press release states that the new GTOs “will inform FinCEN’s future regulatory efforts in this sector.” Presumably, FinCEN is using the data collected over the last three years to prepare to propose regulation which will formalize FinCEN’s scrutiny of the residential real estate market.  Indeed, the website for the OMB’s Office of Information and Regulatory Affairs currently states that, by the end of 2018, “FinCEN will issue an [Advance Notice of Proposed Rule Making] soliciting information regarding various businesses and professions, including real estate brokers that could be covered by the BSA as persons involved in real estate closings and settlements[,]” with the comment period to extend through to December 2019.  Over 15 years ago, in April 2003, FinCEN issued a similar advanced notice of proposed rule making regarding AML program requirements for persons involved in real estate closings and settlements — but of course never issued a final rule.  Now, given the data from years of GTOs, coupled with the heightened global scrutiny of the real estate industry, such regulations finally may become a reality.

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The Conference of State Bank Supervisors (CSBS) announced last week that seven states have agreed to a multi-state compact that, according to the CSBS, “standardizes key elements of the licensing process for money services businesses (MSB).”

The seven states consist of Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas and Washington.  The CSBS expects other states to join the compact.  Under the compact, if one participating state has reviewed key elements of a company’s operations in connection with the company’s application for money transmitter license (IT, cybersecurity, business plan, background check, and compliance with the federal Bank Secrecy Act), the other participating states will accept that state’s findings.

The CSBS describes the compact as “the first step among state regulators in moving towards an integrated, 50-state system of licensing and supervision for fintechs.”  It is expected to significantly streamline the MSB licensing process.

As we have blogged, 18 U.S.C. § 1960 makes it a crime to operate a money transmitter business without an appropriate license in a State, and/or without having registered with FinCEN as a MSB under 31 U.S.C. § 5330.

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