The Financial Crimes Enforcement Network (FinCEN) just announced revised Geographic Targeting Orders (GTOs) that require U.S. title insurance companies to identify the natural persons behind shell companies that are used to purchase high-end residential real estate in targeted transactions. The Orders apply to seven specifically designated metropolitan areas. A GTO is an order issued by FinCEN under the Bank Secrecy Act that imposes additional recordkeeping or reporting requirements on financial institutions or other businesses in a specific geographic area. FinCEN is revising the GTOs at issue in light of the recent enactment of the Countering America’s Adversaries through Sanctions Act in an effort to broaden the range of transactions subject to their reach.
Interestingly, FinCEN data indicates roughly 30 percent of transactions subject to the GTOs involve a beneficial owner or purchaser representative that was the subject of a previous suspicious activity report (“SAR”). In other words, nearly one-third involve parties whose prior conduct or transactions prompted a SAR filing under Bank Secrecy Act regulations. This data underscores FinCEN’s concerns about transactions in which shell companies are used to buy real estate—particularly luxury real estate—in “all-cash” transactions that may attempt to avoid traditional AML measures.
Perhaps in light of this data, the expansion of the GTOs was not particularly unexpected. In fact, the revised GTOs build on GTOs issued in January 2016 requiring U.S. title insurance companies report beneficial ownership information on legal entities, including shell companies, used to purchase certain luxury residential real estate in Manhattan and Miami. Those GTOs were reissued by FinCEN in July 2016 and February 2017 to extend their coverage to New York City, additional counties in the Miami metropolitan area, counties in California, and one Texas county.
In conjunction with the revised GTOs, FinCEN also issued an Advisory to provide information about the money laundering risks associated with real estate transactions—again, particularly focusing on those involving high-end property purchased through shell companies without traditional financing. “Such transactions,” FinCEN warns, “are vulnerable to abuse by criminals seeking to launder illegal proceeds and mask their identities.” The Advisory provides the following background and some insight into the government regulator’s views (and perhaps enforcement trends to come):
Real estate transactions and the real estate market have certain characteristics that make them vulnerable to abuse by illicit actors seeking to launder criminal proceeds. For example, many
real estate transactions involve high-value assets, opaque entities, and processes that can limit transparency because of their complexity and diversity. In addition, the real estate market can be an attractive vehicle for laundering illicit gains because of the manner in which it appreciates in value, “cleans” large sums of money in a single transaction, and shields ill-gotten gains from market instability and exchange-rate fluctuations. For these reasons and others, drug traffickers, corrupt officials, and other criminals can and have used real estate to conceal the existence and origins of their illicit funds.
This money laundering risk in the real estate market was a principal driver of FinCEN’s decision to issue GTOs, which, as described below, have provided greater insight into illicit finance risks in the high-end real estate market. FinCEN’s analysis of BSA and GTO reported data, law enforcement information, and real estate deed records, as depicted by the case studies in this advisory, indicates that high-value residential real estate markets are vulnerable to penetration by foreign and domestic criminal organizations and corrupt actors, especially those misusing otherwise legitimate limited liability companies or other legal entities to shield their identities. In addition, when these transactions are conducted without any financing (i.e., “all-cash”), they can potentially avoid traditional anti-money laundering (AML) measures adopted by lending financial institutions, presenting increased risk.
FinCEN also specifically warned that shell companies are, in its view, particularly susceptible to being used as a vehicle of choice for criminal money laundering:
Shell companies can often be formed without disclosing the individuals that ultimately own or control them (i.e., their beneficial owners) and can be used to conduct financial transactions without disclosing their true beneficial owners’ involvement. Criminals abuse this anonymity to mask their identities, involvement in transactions, and origins of their wealth, hindering law enforcement efforts to identify individuals behind illicit activity.
See our prior blogs, Foreign-owned domestic disregarded entities: The new reporting requirements, FinCEN’s Bank Secrecy Act/Anti-Money Laundering Rules Drive Compliance with FATCA for information regarding new reporting obligations that may impact such companies and their foreign owners.
Anti-money laundering (AML) safeguards have been established in the real estate sector to protect the U.S. financial system. More specifically, covered financial institutions—including depository institutions, loan or finance companies, and housing government-sponsored enterprises like Fannie Mae and Freddie Mac—generally have obligations to establish AML programs, report suspicious activity to FinCEN using Suspicious Activity Reports (SARs), and to understand their customers and their source of wealth. In addition, many financial institutions will soon be required to implement new customer due diligence obligations and collect beneficial ownership information about their legal entity customers who open accounts. See our prior blog on Foreign-owned domestic disregarded entities: The new reporting requirements. While some real estate brokers, escrow agents, title insurers, and other real estate professionals are not currently required to voluntarily report suspicious transactions involving real estate purchases and sales, FinCEN has nonetheless encouraged such persons to do so.
Suspicious Activity Reports
A covered financial institution is required to file a SAR if it knows, suspects, or has reason to suspect a transaction conducted or attempted by, at, or through the financial institution involves funds derived from: illegal activity, attempts to disguise funds derived from illegal activity, is designed to evade regulations promulgated under the BSA, lacks a business or apparent lawful purpose, or involves the use of the financial institution to facilitate criminal activity. 31 C.F.R. §§ 1020.320, 1021.320, 1022.320, 1023.320, 1024.320, 1025.320, 1026.320, 1029.320, and 1030.320.
Form 8300
Those involved in real estate closings and settlements, like all U.S. persons engaged in trade and business, are also required to file reports (a Form 8300) with respect to transactions in currency and certain monetary instruments involving more than $10,000. See our prior blog, The Form 8300 Filing Requirement and Associated Penalties. They also may be required to annually report on foreign bank and financial accounts they own or control, report the transportation of currency across the U.S. border, and keep associated records, as well as respond to FinCEN-issued GTOs. 31 CFR §§ 1010.350 (FBAR), 1010.340 (CMIR), 1010.430 (recordkeeping), and 1010.370 (GTO). See our prior blogs on FBAR issues:
- Non-US Residents May Still Be Subject to FBAR Reporting Guidelines
- How the FBAR’s “Willfulness” Element Has Recently Evolved
- Foreign Bank Account Reporting–The FBAR
- Litigating FBAR Penalties: The Burden of Proof and the Meaning of Willfulness
White Collar Defense Attorneys
Freeman Law represents companies, executives, and individuals in regulatory and white-collar government investigations and prosecutions. We employ a proactive approach to defend vigorously and strategically position our clients. White-collar matters often involve parallel regulatory and civil proceedings. Freeman Law can navigate the complexities and collateral consequences of multiple proceedings. And when it comes to the court of public opinion, we employ ethical and strategic tactics to manage publicity. Schedule a consultation or call (214) 984-3410 to discuss your allegations and investigations concerns.
