May 15, 2003

Real Estate Industry Has Until June 9 to Respond to New Money Laundering Rules Tied to USA Patriot Act

4 min

WASHINGTON (May 15, 2003) -- The Sept. 11, 2001 terrorist attacks may take yet another toll on the American economy if the Treasury Department’s advance notice of proposed rulemaking under the USA Patriot Act leads to regulations that may impose onerous anti-money-laundering compliance requirements and constraints on the multi-trillion-dollar real estate industry, warns the real estate practice of law firm Venable LLP.

The notice, which deals with "persons involved in real estate closings and settlements," represents the last portion of financial institution counter-terrorism reforms to require compliance with the federal Patriot Act, originally passed in October, 2001. The Treasury’s Financial Crimes Enforcement Network (FinCEN) issued the new money-laundering notice on the real estate industry on April 10, after a year of delays. The notice is open to a 60-day public comment period, which closes June 9.

FinCEN states that the real estate industry could be vulnerable to illicit or terror-supported money laundering because high value assets are involved. FinCEN points to a 1996 report prepared by the National Institute of Justice stating that "real estate transactions offer excellent money laundering opportunities."

However, Kevin Shepherd, co-chair of Venable’s real-estate practice, says that FinCEN’s findings lack sufficient data to support proposed rules in this area. "Other than citing four appellate decisions involving money laundering in real estate, FinCEN does not offer any compelling arguments that the industry is rife with the kind of financial abuse that would demand such a potentially expensive and burdensome set of anti-money laundering regulations, in either the residential or commercial property contexts" Mr. Shepherd said.

The Venable attorney also chairs the USA Patriot Act Task Forces of both the ABA Section of Real Property and the American College of Real Estate Lawyers.

"If regs are adopted in this area, an investor who buys and sells a handful of inner-city row homes for $30,000 may have the same compliance and audit obligations as a multi-billion-dollar real estate investment trust," Mr. Shepherd said, adding that every buyer and seller of commercial real property may be affected, as well as other types of real estate transactions, such as commercial leases. "There is a reason why commercial real estate transactions, which involve illiquid and most visible of assets, have not been a haven for money launderers," he added.

Mr. Shepherd has written an article discussing Treasury’s new notice, designed to comply with the USA Patriot Act’s requirement that all financial institutions establish anti-money laundering protocols. Among the questions Treasury seeks input on are the following:

  • What are the money-laundering risks in real estate closings and settlements?
  • How should persons involved in real estate closings and settlements be defined?
  • Should any persons involved in real estate closings or settlements be exempted from coverage under Section 352?

Because the potential scope of regulations in this area are so broad, with possible vague or contradictory definitions of terms, Mr. Shepherd says that various options should be considered to give better focus on potential problems:

  • Create a dollar amount threshold for real estate transactions that might lead to exemption from compliance;
  • Designate a due diligence party for all transactions;
  • Limit the regulations to "financial intermediaries" – i.e., those who actually transmit or receive funds.
  • Require participants to complete a minimum number of transactions before the regulations kick in.

"This issue is most acute with real estate attorneys, who run the risk of breaching ethical obligations to comply with a federalized real estate regulatory regime," Mr. Shepherd said. "The requirements may chill the attorney-client relationship with marginal benefit to the fight against money laundering and terrorism financing."

To speak with Mr. Shepherd, or to receive a copy of the article, "Federalizing Real Estate Transactions: Another Surprise Under the USA Patriot Act" (which appeared in the April 25 issue of The Daily Record in Baltimore), please contact us.

One of the American Lawyer’s top 100 law firms, Venable LLP has attorneys practicing in all areas of corporate and business law, complex litigation, intellectual property and government affairs. Venable serves corporate, institutional, governmental, nonprofit and individual clients throughout the U.S. and around the world from its headquarters in Washington, D.C. and offices in California, Maryland, New York and Virginia.