The Financial Crimes Enforcement Network (FinCEN), the arm of the Treasury that administers and enforces the U.S. anti-money laundering laws (AML), has issued geographical targeting orders (GTOs) that will temporarily require certain U.S. title insurance companies to identify the beneficial owners in "all cash" high-end residential real estate purchases in Manhattan and Miami. The GTOs take effect on March 1, 2016 and will expire – unless extended – on August 27, 2016.
It is probable that FinCEN will follow the current GTOs with ones for other major metropolitan areas in the coming months. The data gathered by FinCEN from these (and possibly other) GTOs will help FinCEN identify transactions vulnerable to money laundering and may form the basis for additional and more comprehensive regulation of the real estate industry.
Reporting Threshold. The GTOs require certain title insurance companies (each defined as a "Covered Business"), which will be named individually by FinCEN prior to March 1, 2016, to report information on the following "Covered Transactions":
- Purchases of residential real estate property located in
- The Borough of Manhattan, New York City, for a purchase price of over $3 million; and
- Miami-Dade Country, Florida, for a purchase price in excess of $1 million;
- That are made
- Without a bank loan or similar external financing; and
- Using, "at least in part," currency, cashier's check, a certified check, a traveler's check, or any form of money order; and
- By a "Legal Entity," defined to mean a corporation, limited liability company, partnership, or other similar business entity, regardless of jurisdiction (U.S. or non-) of formation.
What Must Be Reported. The Covered Business (the named title insurance company) must file a FinCEN Form 8300 within 30 days of closing on a Covered Transaction. The Form 8300, titled "Report of Cash Payments Over $10,000 Received in a Trade or Business," defines "cash" the same as the GTOs (U.S. and foreign currency, cashier's check, money order, bank draft, or traveler's check). The GTOs change the Form 8300 reporting directions for purposes of reporting Covered Transactions by requiring:
- Identifying information about the individual "primarily responsible for representing the Purchaser" (when the purchaser is a Legal Entity), including a copy of this individual's passport or driver's license;
- Identifying information about the "Beneficial Owner(s)" of the Purchaser:
- Each individual who, directly or indirectly, owns 25% or more of the equity interests of the Purchaser, and
- If the Purchaser is a limited liability company, then the Covered Business is to give the names, addresses, and taxpayer identification numbers of all of the LLC's members not already identified as a 25% owner.
- Specific information about the Covered Transaction (date of closing, total amount paid by monetary instrument, and address of the real property).
- Identifying information on the Covered Business (where the recipient of the cash would normally put its information, Part IV of Form 8300).
- Either REGTONYC, if the property is in Manhattan, or REGTOMIA, if in Miami.
The named title insurance companies must retain records relating to compliance for five (5) years from the date the applicable GTO expired and make the records available to FinCEN upon request.
Background. FinCEN has been edging toward additional AML controls on residential real estate transactions for a number of years. The current GTOs and their requirements rely on the fact that, in all cash transactions, neither mortgage lenders nor originators are involved; the only "third-party constant" in the transactions is the title insurance company. Beginning in 2009, FinCEN issued a series of incremental regulations bringing residential mortgage lenders and originators into the AML compliance world. These regulations are based on a series of studies dating from 2006 detailing suspected and, later, identified fraud in the residential mortgage business.
Then, in 2012, the Financial Action Task Force (FATF), an international body that sets standards and promotes implementation of laws combating money laundering and terrorist finance, adopted specific recommendations (R. 24 & 25) that its members (36 countries, including the United States) require financial institutions to identify the beneficial owners of customers.
This was followed by FinCEN's publication of a Notice of Proposed Rulemaking, "Customer Due Diligence Requirements for Financial Institutions," on August 4, 2014 (79 Fed. Reg. 45151). The proposed rule, not generally applicable to the real estate industry, will require the identification of individuals who are beneficial owners (25% and over) and a control individual.
The European Union has already adopted a similar rule, the Fourth EU Anti-Money Laundering Directive, which was ratified on June 8, 2015. EU members have two years from its effective date, June 26, 2015, to implement its several requirements, including one to set up registers to record the ultimate, individual, beneficial owners of businesses. These registers will be available to "investigative journalists" and others who can show a "legitimate interest" in gaining access to the information.
Considerations for the Real Estate Industry. The GTOs (and any subsequent ones) are likely to have a significant impact on the real estate industry. In addition, the GTOs point to the possibility of additional AML requirements for the real estate industry. Potential implications include:
- Title insurance companies that receive the GTOs will need to implement due diligence, reporting, and recordkeeping policies and procedures. Even title insurance companies that are not subject to the GTOs will need to determine whether to voluntarily follow the requirements for all cash transactions (wherever located).
- Real estate sellers and title insurance companies not named in a GTO should scrutinize high-value real estate transactions for suspicious activity and possible attempts to evade the GTO reporting requirements (such as by forgoing title insurance).
- Builders, brokers, investors, attorneys, and other players in the real estate industry should prepare for additional scrutiny. Although "persons involved in real estate closings and settlements" have been exempted from FinCEN requirements since 2002, the GTOs and the international push to identify beneficial owners suggest that the exemption may not last forever.