On January 13, 2016 the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued Geographic Targeting Orders (GTOs) requiring reporting by title insurance companies and their subsidiaries and agents on certain high-value real estate transactions starting on March 1, 2016. The GTOs require reporting on “all-cash” residential real estate deals made through shell companies in Miami Dade County, Florida and the Borough of Manhattan in New York City.
The reporting is temporary, lasting for 180 days beginning March 1, 2016 and continuing until August 27, 2016 (unless extended). During that time, title insurance companies will have to identify and report natural persons who are the true “beneficial owners” behind shell companies acquiring residential estates over $1 million in Miami-Dade County and over $3 million in New York City where the purchase is made exclusively by means of cash. Cash includes certified checks, cashier’s checks, traveler’s checks or money orders. A beneficial owner is any individual who owns directly or indirectly 25 percent or more of the equity interests of the entity that bought the property. Title insurance companies will have to obtain documentation identifying the “beneficial owners” (such as a copy of the passport or driver’s license) and retain the information obtained for five years and make it available to FinCEN or any other law enforcement authority when requested.
The GTO comes as a reaction to government concerns regarding the use of shell companies such as limited liability companies and trusts to invest in luxury real-estate in the United States where the structures enable the true beneficial owners to avoid disclosing their identities. While sometimes these shell companies have legitimate privacy or business motivations, they also can help hide criminal property. Recent reports have found that a large percentage of residential properties over $5 million in the United States are purchased using shell companies, with many of these closed through all-cash deals, i.e. without external financing.
FinCEN has long viewed real-estate as a risk industry for money laundering and regulates a variety of traditional financial institutions providing financial services to the industry. In addition, FinCEN imposes anti-money laundering program and reporting requirements on non-bank residential mortgage companies and mortgage brokers. In a May 2015 statement, FinCEN noted that anti-money laundering requirements were applicable to real estate purchases that are financed by mortgages but acknowledged that they did not extend to the larger category of “persons involved in real estate closings and settlements,” thereby indicating that it was looking to extend reporting and compliance requirements to entities beyond mortgage companies and brokers. In November 2015 FinCEN identified title insurance companies as being important to the residential estate closing process.
Those involved in the real-estate industry and potential real estate investors should keep a close watch on the evolving regulatory landscape and monitor for any possible expansion of the GTOs.