A new system to fight money laundering and financial abuse comes weeks after the introduction of a new system that will require millions of companies to submit reports to the U.S. government about who ultimately owns and controls them. Initiatives are starting from the Ministry of Finance. This time we will focus on residential real estate sales.
Corporate filing requirements, known as the Corporate Transparency Act (CTA), went into effect on January 1, 2024, when the U.S. Treasury officially began accepting beneficial ownership information reports. The CTA was designed “to prevent and combat money laundering, terrorist financing, corruption, tax evasion and other illegal activities.”
Residential real estate transactions are currently attracting attention. Similar to CTAs, the purpose is to promote transparency. Specifically, the regulation aims to increase transparency and strengthen the fight against money laundering and tax fraud. Sound familiar?
In other words, the aim is to stop dirty money. Transaction and related reporting ensures that dollars are properly reported and taxed. Once “dirty” money, or money that comes from illegal sources, is reported, it becomes more difficult to circulate and exchange for “clean” money.
Proposed real estate reporting rules
Proposed regulations released this week by the Treasury Department's Financial Crimes Enforcement Network (FinCEN) would require real estate professionals to report to the agency information about nonfinance residential real estate sales to corporations, trusts, and shell companies. . This rule does not require sales reporting to individuals.
According to authorities, cash purchases of residential real estate are considered to pose a high risk of money laundering.
“Illegal actors are exploiting America's residential real estate market to anonymously launder and conceal the proceeds of serious crime, while law-abiding Americans “They are paying the cost of home price gouging.”
Gucki said this is an “important step not only to curb abuse in the U.S. residential real estate sector, but also to protect our economy and national security.”
There are many similarities between the CTA and the proposed rule, including the terminology used (such as BOI and reporter). However, FinCEN is quick to distinguish between the proposed rule and the CTA, stating that “this proposed rule is a transaction-specific This guarantees the reporting of Basics. “
The proposed rule would require firms, including attorneys, that perform certain closing or settlement functions to collect and report information to FinCEN. This information includes the identity of the reporting person, the corporation or trust to which the residential property is being transferred, the beneficial owner of the corporation or trust, the person to whom the residential property is being transferred, and the identity of the property being transferred. included. along with certain transaction information regarding the transfer.
Reporters must submit their reports within 30 days of the termination date.
The rule applies to the sale of residential real estate, including single-family homes, townhouses, condominiums, cooperatives, and apartment complexes designed for one to four families. It also applies where there is a commercial element, such as a single-family home above a commercial enterprise.
Reportable transactions are within the United States, defined as states, the District of Columbia, Indian lands (as defined in the Indian Gaming Control Act), and U.S. territories or possessions.
There is no purchase price criterion for the transfer. Transfers are reportable regardless of the purchase price. This means that transfers of ownership, such as gifts, where no consideration is exchanged must also be reported.
Exempt transfers include easements, the death of the property owner, the result of divorce, or transfers to a bankruptcy estate.
For a transfer to be reportable, it must be non-financing. This means that it does not include extensions of credit secured by transferred assets and extended by financial institutions that are subject to existing reporting requirements. Transfers financed by private financial institutions that do not have specific existing reporting requirements must also be reported.
And, like the CTA, there will be exceptions primarily for things that are already reportable. That is, the proposed rule would be effective against, for example, U.S. government authorities, issuers of securities reports, certain banks, credit unions, depository holding companies, money services businesses, securities brokers or dealers, and securities exchanges. or clearinghouse or other securities laws. Registered entities, insurance companies, state-chartered insurance companies, Commodity Exchange Act registered entities, public entities, financial market entities, registered investment companies, and Owned legal entity. any of those entities.
Real estate and money laundering
Interest in real estate is increasing in the United States, which is one of the world's largest and most valuable markets, reaching a value of $47 trillion in 2023.
There is evidence that real estate can be easily used for money laundering and other illegal activities due to holes in reporting requirements. The Treasury Department reports that “the financial portion of the U.S. real estate market is well regulated,” citing banking and related regulations. However, FinCEN also noted that 20% to 30% of residential real estate purchases in the United States are unfinanced and not necessarily subject to reporting requirements. They say this leads to “significant vulnerabilities”.
In a recent example cited by FinCEN, a Delaware man was sentenced to 45 years in prison for money laundering conspiracy, cocaine distribution conspiracy, and various other drug and money laundering charges. The man and his wife were accused of using their company, Zemi Property Management, to buy real estate in Delaware and Pennsylvania and launder more than $1 million in drug proceeds. They deposited drug funds into several different bank accounts, asked friends and family to do the same, and used the funds to purchase checks to purchase real estate. (You can read my previous article about this arrest here.)
Another area of concern is foreign ownership of U.S. property, particularly with respect to certain types of property such as agricultural land. Like the federal government, states are also pursuing strict agricultural reporting requirements. Last year, the Committee on Foreign Investment in the United States (CFIUS) proposed rules that would affect real estate ownership near military bases. CFIUS has the authority to review, renegotiate, enforce, and impose terms on transactions involving real estate acquisitions that may affect the national security of the United States. Lawmakers have sought to expand CFIUS' authority as foreign investors from some countries buy up land.
Although FinCEN has not suggested that the proposed rules are aimed at curbing foreign ownership, the link between money laundering and foreign criminals has grown stronger in recent years. In 2022, FinCEN issued the following warning:[s]Dissent from Russia's elites and their proxies may seek to evade sanctions by buying and selling commercial or luxury residential real estate. And the agency notes that real estate is “high in value, can increase in value, and can be used to create wealth because layered and opaque transactions can be used to obscure the ultimate beneficiaries of the property.” “This could be an attractive means for storing illegal profits and laundering illegal profits.”
This proposed rule was drafted in response to advance notice of proposed rulemaking regarding anti-money laundering regulations for real estate transactions. The current proposal is for a “streamlined reporting framework designed to minimize unnecessary burden while increasing transparency.”
If you have a response to the proposed rule, FinCEN is seeking written comments. Comments will be accepted for 60 days after publication in the Federal Register on February 16, 2024.
The text of the proposed rule can be found here.
