The U.S. Treasury Department's Financial Crimes Division has launched a long-awaited plan to stop the flow of dirty money through residential properties across the country.
The rule, proposed by FinCEN on February 7, aims to increase oversight of the sector by catching bad actors who buy real estate for cash through trusts and other secret entities.
“For decades in the United States, illegal actors have anonymously hidden and laundered funds through non-financing residential real estate transactions,” FinCEN officials said.
“All-cash transactions are a favorite tool of criminals because they avoid scrutiny from banks and other financial institutions, which are subject to extensive anti-money laundering measures, and allow them to operate under the radar. is.”
If the new rules are finalized, they will require certain real estate professionals to file “real estate reports” similar to suspicious activity reports (SARs) filed by financial institutions, and will require FinCEN to file these “high-risk” transactions. is required to be flagged.
The report will identify the beneficiaries of the entities and trusts to which the assets will be transferred, and that information will be stored in a private database accessible to law enforcement and national security agencies.
This is a really necessary step taken by the Treasury to combat dirty money in our system.
— Erika Hanichak, Director of Government Affairs, FACT Coalition
FinCEN officials said the reporting requirements are “harmonized” with the agency's beneficial ownership registry established under the Corporate Transparency Act, but serve a narrower purpose.
“The Corporate Transparency Act serves to provide a snapshot of a company's ownership at any given time,” said Erica Hanichak, director of government affairs at the FACT Coalition. “But it doesn't really give us any insight into whether a company is involved in other types of risky transactions.”
The FACT coalition and other transparency advocates have long called for reforms that would close loopholes that exempt professionals involved in real estate closings and settlements from anti-money laundering obligations under the Bank Secrecy Act.
Although the law imposes compliance programs on financial institutions, the decades-long carve-out problem in the real estate sector has only recently been addressed through a patchwork of short-term measures.
“This is a really necessary step taken by the Treasury Department to combat dirty money in our system,” Hanichak said.
“Significant vulnerability”
According to the Treasury Department, the U.S. real estate market is one of the largest in the world, expected to reach $47 trillion by 2023.
Its long-term stability makes it popular with criminals and unscrupulous foreign investors looking to launder money and accumulate wealth. This distorts real estate prices and limits supply to legitimate buyers.
“Many of these fraudulently purchased properties remain vacant for years, and some large cities are suffering from a housing crisis,” FinCEN officials said.
While all-cash offers can exceed market value and are generally preferred by sellers for their speed, investment vehicles such as trusts and limited liability companies obscure the identity of the true owner and can The problem has been highlighted in multiple ICIJ investigations.
In 2021, the Pandora Documents identified 206 U.S.-based trusts with combined assets of more than $1 billion associated with 41 countries. Nearly 30 of the trusts were linked to individuals or companies accused of fraud, bribery, and human rights abuses.
Most recently, Cyprus Confidential, which was sanctioned for its business ties to a Russian oligarch, saw tenants in a New York apartment building face rising rents after selling the apartments to Cypriot financial fixers through shell companies. He revealed that he was kicked out.
The Treasury Department's 2024 National Money Laundering Risk Assessment found that 20% to 30% of residential real estate purchases in the U.S. are made unfinanced and therefore not subject to anti-money laundering checks by mortgage lenders. It is estimated that
The report described real estate professionals as “significantly vulnerable” as many were found to “act as knowing or unwitting participants in money laundering schemes”. ing.
Under the draft rule, title insurance companies, attorneys, and other companies involved in real estate transactions would continue to be exempt from the BSA's compliance program.
Instead, FinCEN proposed a “streamlined” reporting framework in which one person would be responsible for reporting and record-keeping throughout the property transfer chain.
“Not every transaction comes with an escrow agent or a title insurance agent,” said Gary Kallman, executive director of Transparency International US.
“We see [the proposed reporting heirarchy] as a way to close potential loopholes and circumvent the rules. ”
Mr. Cullman praised several aspects of the draft rule, including that it is permanent, applies nationwide, and is not limited to purchases above a certain price threshold. However, he said FinCEN should clarify how beneficiary information will be verified.
Since 2016, FinCEN has been testing similar reporting requirements for title insurance companies in a handful of U.S. jurisdictions through so-called “geographic targeting orders.”
The American Land Title Association, which represents title insurance agents across the country, said in a statement that its members will continue to work with the agency to provide advice to ease the compliance burden on businesses.
“We are still reviewing the proposed rules and are working to avoid unnecessary duplication and to provide clarity on all real estate obligations, particularly under the new beneficial ownership rules. “We will work to ensure that FinCEN takes into account information that is subject to the political party's rules,” ALTA said.
next step
The Treasury Department acknowledges that commercial real estate is also exposed to illicit financial risks, and since Russia's invasion of Ukraine in 2022, Russian elites, their families, and proxies have exploited vulnerabilities in the sector to impose sanctions. We have repeatedly warned that they may try to avoid this.
FinCEN officials confirmed that the agency is considering regulatory options to increase transparency in commercial real estate transactions, but did not provide a deadline for potential rulemaking.
Currently, the public has 60 days to submit written comments on the draft regulations for the residential real estate sector. The rule includes “single-family homes, townhouses, condominiums, cooperatives, and multifamily dwellings designed for one person.” There are 4 families. ”
“One of the things that you might hear from people who are against this rule, who are trying to undermine it, either out of a lack of understanding or perhaps a little maliciously, is that what does this rule do? It's going to make it harder for the average American to buy a car. Go home,” said Hanichak of the FACT coalition.
He pointed out that the majority of Americans do not buy homes through associations or with cash.
“[By] “Reducing the supply of dirty cash may actually increase the likelihood of affordable housing,” she says.
