Client Alert

FinCEN Looks to Regulate the Real Estate Market

15 Dec 2021

On December 6, 2021, the Financial Crimes Enforcement Network (FinCEN) announced an Advance Notice of Proposed Rulemaking (ANPRM) to solicit comments in preparing a proposed rule that would increase transparency in the U.S. commercial and residential real estate markets to combat illicit financial activity. In particular, FINCEN seeks comment on extending Bank Secrecy Act (BSA) requirements to collect, report, and retain information on certain persons participating in real estate transactions involving non-financed purchases of real estate. Comments are due by February 7, 2022.

Background

The ANPRM was released on the same day the White House issued the first-ever U.S. Government Strategy on Countering Corruption (the “Strategy”), which addresses the government’s efforts to fight corruption under five pillars, one of which is the effort to curb illicit finance. The Strategy specifically highlights the risk of anonymous purchases of U.S. real estate, and announces that the U.S. Department of Treasury (“Treasury”) will issue regulations that include reporting requirements for specific real estate transactions.

FinCEN has long recognized that real estate transactions are vulnerable to abuse by bad actors, given the stable investment that U.S. real estate offers, and the lack of industry regulation for all-cash transactions, which have limited transparency. These risks were also highlighted in Treasury’s 2020 National Strategy for Combating Terrorist and Other Illicit Financing and a recent Congressional Research Service Report. Globally, the Financial Action Task Force has been warning about real estate sector risks since 2007, and these risks have been the focus of many other regulatory bodies and jurisdictions.

GTOs

In January 2016, FinCEN issued its first GTO, which temporarily required certain U.S. TICs to identify and report the natural persons behind companies paying all cash for expensive properties in New York City and Miami Dade County. Since first introduced, the GTOs have been renewed and expanded, most recently in October 2021. Today, TICs must file Currency Transaction Reports on non-financed purchases of residential real estate above $300,000 in nine different U.S. metropolitan areas within Texas, Florida, New York, California, Hawaii, Nevada, Washington, Massachusetts, and Illinois. Specifically, TICs are required to report information about: (1) the transaction, such as the price and address of the real estate purchased and the date of closing; (2) beneficial ownership information, including a name and identification document copy for the natural person(s) behind any legal entity buyer in the transaction; and (3) information about the reporting TIC.

In the past, FinCEN has focused specifically on the need for transparency in all-cash purchases of residential real estate by shell companies. This is a particularly high-risk area since all-cash purchases sidestep financial institutions, which are subject to anti-money laundering (AML) rules. To address this concern, FinCEN has been issuing Geographic Targeting Orders (GTOs) since 2016 (see box). Although GTOs have proven useful, FinCEN has stopped short of imposing the full scope of BSA obligations on title insurance companies (TICs), or regulating other stakeholders in the real estate market.

The BSA

FinCEN is now considering not only expanding the range of affected entities to other stakeholders, e.g., persons involved in the commercial real estate market, but also widening the scope of its regulations to impose BSA requirements in the real estate market. Under the BSA, the Secretary of the Treasury may require a financial institution to: (1) report suspicious transactions that may involve violations of law; (2) develop an AML/counter-financing of terrorism (CFT) program; and (3) collect and report certain information to guard against illicit finance. A “financial institution” is defined by the BSA to include “persons involved in real estate closings and settlements”[1] (“RE Persons”), but FinCEN regulations implementing the BSA do not currently require RE Persons to file suspicious activity reports (SARs) or establish AML/CFT programs.

The ANPRM

In the ANPRM, FinCEN considers promulgating either a specific reporting requirement similar to the GTO requirements,[2] or broader regulations[3] that would require RE Persons to file SARs and establish AML/CFT programs, complete with the five program pillars: appropriate policies and procedures, a designated compliance officer, tailored training, independent testing of the program, and risk-based customer due diligence. These rules would apply to certain persons participating in transactions involving non-financed purchases of real estate in both the commercial and residential sectors.

To assist FinCEN in drafting these rules, the ANPRM contains a whopping 82 questions for stakeholders, organized into the categories listed below. Note that Sections C–E request information to address the imposition of more specific regulations that would mirror the current GTOs, while Section G solicits input on a scenario in which FinCEN would draft more expansive BSA regulations, requiring, for example, AML/CFT programs.

  1. General information regarding the real estate market. Among other things, FinCEN requests information on typical real estate and commercial transactions, the products, services, activities, affiliations, and professionals involved, related costs, standard due diligence procedures, and how payment is tendered.
  2. What are the money laundering risks in real estate transactions? FinCEN solicits information on, for example, existing AML safeguards and which real estate activities and services present the highest and lowest risks.
  3. Which real estate transactions should FinCEN’s rule cover? Input is welcomed on factors for FinCEN to consider in making its determination, whether to include commercial or farmland transactions, how to define related terms, a recommended geographic scope, and a preferred reporting threshold.
  4. Which persons should be required to report information concerning real estate transactions to FinCEN? A number of professionals are listed as options, including real estate lawyers and their firms, real estate agents, brokers, or settlement agents, title and escrow agents and companies, and real estate development or property management companies, among others. FinCEN is also interested to know who is in the best position to report certain information, like the source of funds or the natural person who owns the legal entity purchaser. FinCEN would consider creating a cascading hierarchy for reporting requirements, similar to the one used for the Internal Revenue Service Form 1099-S.
  5. What information should FinCEN require regarding real estate transactions covered by a proposed regulation? The questions in this category address, for example, whether to request information on the seller, the real estate, or the financial institution involved in the transfer of purchase funds, what information to request, and how to avoid overly burdensome and/or duplicative requirements.
  6. What are the potential burdens or implementation costs of a potential FinCEN regulation? Among other things, stakeholders are asked about related costs, burdens, and benefits, how the requirements might be integrated into their current compliance programs, the effect of different reporting thresholds, and alternative methods FinCEN may consider in combating money laundering in the real estate market.
  7. Should FinCEN promulgate general AML/CFT recordkeeping and reporting requirements for RE Persons? FinCEN asks stakeholders, if the agency takes an all-encompassing approach and imposes the full gamut of BSA requirements, how should RE Persons be defined, what factors should FinCEN consider in determining the scope of these rules, whether different requirements could adequately address the existing money laundering risks, and whether customer due diligence requirements should be imposed, among other questions.

Looking Ahead

While FinCEN acknowledges that money laundering safeguards may already exist, and even though FinCEN has pursued and declined to impose BSA requirements on RE Persons in the past, the agency’s regulation of the real estate industry appears inevitable, and the question is not whether regulations will be imposed, but to what extent.

A History of FinCEN’s Real Estate Market Regulation

In 2002, FinCEN formally temporarily exempted RE Persons, along with loan and finance companies, another type of financial institution, from the AML/CFT program requirement. FinCEN’s hesitation was due to the concern that many of these institutions were small businesses, for whom regulation would be unduly cumbersome. In 2003, FinCEN issued an anticipated notice of proposed rulemaking to impose the AML/CFT program requirement on RE Persons, but after receiving comments, did not propose regulations. Then, in 2012, FinCEN issued a rule requiring loan and finance companies, defined as non-bank residential mortgage lenders and originators, to file SARs and establish AML/CFT programs. In 2014, similar requirements were extended to the housing-related Government Sponsored Enterprises: Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. While FinCEN has taken these small steps to regulate the real estate market in the past, the ANPRM casts a much wider net than FinCEN has previously thrown.

Whatever their ambit, the rules will undoubtedly have a significant impact on the real estate industry, and stakeholders may soon face increased compliance costs and unforeseen enforcement exposure. FinCEN recognizes that, as in the banking sector, the unique features of different companies—whether focused on residential or commercial activity, and their varying sizes, locations, and activities—will need to be considered in framing appropriate rules. Nevertheless, stakeholders should familiarize themselves with the ANPRM and provide their comments and input into the development of the forthcoming rules. To further prepare for what may be groundbreaking compliance obligations, persons involved in the real estate industry might consider reviewing their current compliance practices and formulate plans for anticipated changes.


[1] 31 U.S.C. 5312(a)(2)(U).

[2] This would be authorized under 31 U.S.C. 5318(a)(2), as amended by Section 6102(a) of the Anti-Money Laundering Act, which authorizes the secretary to “require a class of domestic financial institutions . . . to maintain appropriate procedures, including the collection and reporting of certain information as the Secretary of the Treasury may prescribe by regulation, to . . . guard against money laundering, the financing of terrorism, or other forms of illicit finance.”

[3] As authorized, respectively, by 31 U.S.C. 5318(g)(1) and 31 U.S.C. 5318(h)(1)–(2).

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