FinCEN Proposes Expanding Residential Real Estate Anti-Money Laundering Rules

On February 16, 2024, the Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking, which would require certain real estate professionals to report certain transaction information to FinCEN in connection with non-financed transfers of residential real estate to legal entities or trusts. The proposed rules dovetail with the Corporate Transparency Act, as their purpose is to enhance transparency in the residential real estate market by exposing illicit actors hiding behind anonymous shell companies. While the proposed rules would impose reporting obligations, they would not establish anti-money laundering program requirements in the real estate area.

Background

The Treasury Department has long recognized that residential real estate transactions pose a risk of money laundering. And yet, FinCEN has historically excluded persons involved in real estate closings and settlements from Bank Secrecy Act (BSA) obligations, including the obligation to maintain an anti-money laundering/countering the financing of terrorism (AML/CFT) compliance program.[1]

But FinCEN has slowly been integrating real estate stakeholders into the U.S. AML/CFT regulatory regime. In 2012, FinCEN issued a rule requiring non-bank residential mortgage lenders and originators to establish AML/CFT programs. In 2014, these requirements were extended to housing-related Government Sponsored Entities. Since 2016, FinCEN has used Geographic Targeting Orders (GTOs) to require title insurance companies to report certain information about non-financed purchases of residential real estate in certain targeted metropolitan areas. For more information about FinCEN’s regulation of real estate stakeholders, please refer to our 2021 client alert.

If finalized, the proposed rules would replace the current residential real estate GTOs.

Reporting Requirements

The proposed rules would impose reporting requirements on entities and individuals (“Reporting Persons”) performing certain closing or settlement functions for non-financed sales or transfers of residential real property[2] to an entity or trust. This obligation would apply regardless of the purchase price and would capture, for example, a gift of real property. Certain transfers, such as those resulting from a death of the property owner or a divorce, would be exempt.

The proposed rules would apply only where the recipient of the residential real property is a legal entity or trust (each, a “Recipient”). The proposed rules detail what types of Recipients would exempt a transaction from reporting, including, for example, where the Recipient is one of several regulated entities, such a bank, insurance company, securities exchange, or securities reporting issuer.

A Reporting Person would need to report the following information, in what FinCEN describes as a modified Suspicious Activity Report and calls a “Real Estate Report”:

1. Information about the Recipient and the individual signing on behalf of the Recipient, including names, addresses, and unique identifying numbers.
2. Beneficial ownership information for the Recipient, including names, addresses, and unique identifying numbers. The beneficial owner of a legal entity would be defined to align with FinCEN’s definition of a beneficial owner under the beneficial ownership reporting rules. The proposed rules offer a different definition for beneficial owners of trusts.
3. Information about the Reporting Person, including a name and business address.
4. Information about the property being sold or transferred, including its address, if any, and a legal description of the property (e.g., the section, lot, and block).
5. Information about the transferor, whether an individual or legal entity, including a name, address, and unique identifying number.
6. Information about payments made by or on behalf of the Recipient, such as the amount and payment method, and information on the bank account or payor name. 
7. Information about any credit extended by a person that is not a covered financial institution under the BSA.

The Reporting Person would have to file a Real Estate Report electronically with FinCEN within 30 days of a property transfer and retain the report for five years.

Reporting Persons

Although real estate transfers involve multiple parties, under the proposed rules, only one entity would be responsible for filing a Real Estate Report per transaction. The proposed rules identify two ways to determine the Reporting Person. The default “cascade method” provides a list of seven functions involved in the sale or transfer of residential real estate property, applying the reporting obligation to the business performing the function appearing highest on the list, which is the agent on the closing or settlement statement.[3] An alternative method would allow the real estate businesses performing the activities on the cascade list to enter into a written agreement designating a professional to file the report. FinCEN expects the reporting obligation would fall on settlement agents, title insurance agents, escrow agents, and attorneys.

The Bigger Picture

Since the passage of the Anti-Money Laundering Act of 2020, FinCEN has been exceedingly active in fulfilling its mission to combat illicit financial activity. The proposed rules further expand the U.S. AML/CFT regulatory regime. According to FinCEN, it would not only deter bad actors from hiding money in U.S. residential real estate but would also prevent distorted real estate prices caused by criminal actors dumping dirty money into the real estate market. The proposal came only days before FinCEN issued a separate proposed rule that would extend BSA requirements to investment advisers, including the requirement to establish an AML/CFT program and comply with reporting and recordkeeping obligations. As FinCEN continues to expand its reach, businesses beyond those involved in real estate or investment advisement would do well to consider what AML/CFT controls they have in place.

[1] 67 FR 21110, 21111 (Apr. 29, 2002).

[2] The proposed rules would require reporting in connection with transfers of “(i) Real property located in the United States containing a structure designed principally for occupancy by one to four families; (ii) Vacant or unimproved land located in the United States zoned, or for which a permit has been issued, for the construction of a structure designed principally for occupancy by one to four families; or (iii) Shares in a cooperative housing corporation where such transfer does not involve an extension of credit to all transferees that is: (A) Secured by the transferred residential real property; and (B) Extended by a financial institution that has both an obligation to maintain an anti-money laundering program and an obligation to report suspicious transactions” under the BSA. 

[3] The proposed “cascade” of Reporting Persons, in order, is: (i) the closing or settlement agent for the transfer listed on the closing or settlement statement; (ii) the person that prepares the closing or settlement statement for the transfer; (iii) the person that files the deed for recording; (iv) the person that underwrites the Recipient’s owner’s title insurance policy; (v) the person that disburses the greatest amount of funds in connection with the transfer (including from an escrow account, trust account, or lawyers’ trust account); (vi) the person that provides an evaluation of the status of the title; or (vii) the person that prepares the deed or other instrument of conveyance.