The U.S. government’s aggressive push to combat international money laundering is entering a new phase by focusing on real estate investments. On January 13, 2016, the Financial Crimes Enforcement Network (FinCEN), the U.S. Department of Treasury’s lead anti-money laundering agency, issued temporary geographic targeting orders (GTOs) that require title insurance companies to identify the natural persons behind companies used to pay all cash for high end residential real estate in the borough of Manhattan in New York City and Miami-Dade County in Florida. Because the threshold for reporting cash purchases is so low in the target markets – indeed, just $3 million in Manhattan – many real estate buyers’ identities and sensitive information will now be reported to FinCEN and included in its law enforcement database. Although these orders are purportedly temporary, they are likely just the first steps in a broader initiative of law enforcement scrutiny of real estate transactions.
The Focus on Title Insurance Companies
The impetus for the GTOs is FinCEN’s concern that all-cash purchases – i.e., those that lack bank financing – may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures. FinCEN believes that corrupt foreign political officials, drug traffickers, and suspected criminals may be using premium U.S. real estate to secretly invest billions of “dirty money.”
FinCEN is targeting title insurance companies because it recognizes title insurance as a common feature in the majority of real estate transactions. Title agents are part of and indeed often manage the closing process. The GTOs will require title insurance companies to record the true “beneficial owner” behind a legal entity involved in all-cash residential real estate transactions of at least $1 million in Miami and of at least $3 million in Manhattan and report that information to FinCEN. Reuters reported that the majority of real estate purchases of at least $1 million in Miami-Dade and Broward Counties are made through shell corporations. The information reported by title insurance companies will be available to law enforcement investigators as part of FinCEN’s database.
FinCEN’s Regulation of the Real State Finance Area
In 2015, FinCEN Director Jennifer Shasky Calvary commented on the need for transparency in certain luxury real estate deals and signaled FinCEN’s readiness to demand greater transparency in the area of beneficial ownership of corporate entities. In May, Calvary pointed to recent controversies involving shell companies used to purchase condominiums at New York’s Time Warner Center that media reports linked to suspected organized crime members and corruption. She reminded the real estate community that FinCEN had issued an advance notice of proposed rulemaking in 2003 regarding whether to issue rules for persons involved in real estate closing and settlements, and it had just been waiting to better identify the money laundering risks and activities involved.
In November 2015, Calvary noted that FinCEN’s current regulatory structure captures about 78 percent of United States real estate purchases because these purchases are financed with some kind of mortgage, financial institutions involved in real estate transactions have anti-money laundering obligations under the Bank Secrecy Act, and recent FinCEN regulatory initiatives cover non-bank lenders and originators, as well as government-sponsored entities that issue mortgage-backed securities. Some of the remaining 22 percent of real estate purchases – the all-cash purchases above $3 million in Manhattan and above $1 million in Miami-Dade – will now be covered by the GTOs, as least temporarily, as the GTOs will be effective for 180 days, from March 1 through August 27, 2016.
With the announcement of the GTOs, FinCEN has taken decisive action that will impact all purchasers of high-end Manhattan and Miami-Dade County real estate, the real estate community, financial institutions, and title insurance companies, among others. The information reported to FinCEN will be available to federal law enforcement agencies that routinely use FinCEN’s databases to conduct investigations of potential civil and criminal law violations. Undoubtedly, the results of these geographically limited initiatives will be used by FinCEN to fashion broader, permanent, nation-wide disclosure requirements. Accordingly, individuals and companies that invest in, finance, or otherwise participate in high-end real estate transactions in the United States should consult with counsel now to ensure future compliance and to evaluate the effects of these regulations on potential transactions. Failure to comply with the GTOs could result in substantial criminal and civil penalties.