Title insurance companies are being unceremoniously deputized by the Federal Government to catch criminals who attempt to hide their ill-gotten gains through cash purchases by shell companies. This ostensibly temporary and geographically limited action by The Financial Crimes Enforcement Network (FinCEN) is, nonetheless, an ambitious leap into the real estate sector to close an awkward gap in anti-money laundering enforcement. The immediacy of this action makes it imperative that title insurance companies rapidly learn how to manage their new duties within a regulated environment to which they are historically unaccustomed.
Wealthy buyers of high-end real estate may have reason to think twice about purchasing luxury homes in Manhattan and Miami. FinCEN, the arm of the U.S. Treasury Department leading the battle against money laundering, has just deployed Geographic Targeting Orders (GTO), which will be in force from March 1st through August 27th of this year, requiring certain U.S. title insurance companies to discover and report the identity of individuals who own 25 percent or more of the equity in entities that purchase high-end residential properties for cash without bank financing.
FinCEN has been focusing on the real estate sector, refining its risk-based approach especially in connection with lending activities. Alerted to the particular dangers of money laundering in all-cash real estate purchases by a series of New York Times articles last year, the agency is launching a preliminary investigation into this elite market to understand the extent to which corrupt foreign officials and transnational criminals may be investing their dirty money in premium U.S. real estate.
The real estate industry has largely been spared the burdensome regulations associated with enforcement of the anti-money laundering (AML) laws. This FinCEN initiative is the first time that title insurance companies will be required to disclose to FinCEN the names of all individuals having a substantial interest in shell companies that are commonly (and legally) the nominal purchasers. The information collected will be made available to law enforcement authorities through the FinCEN database.
By nature, a GTO is a temporary action that results from a finding by the Treasury Department that reasonable grounds exist for requiring additional recordkeeping and reporting to preventevasions of the AML laws in a specified geographic area. This particular GTOis limited to transactions over $3 million in the Borough of Manhattan in New York City and over $1 million in Miami-Dade County in Florida.
It is unclear where this GTO will lead. In the event FinCEN discovers that all-cash purchases through shell companies regularly camouflage the involvement of corrupt and criminal elements, we would expect the GTO to set in motion a formal rulemaking process that would be broader in its coverage. As a portent of things to come, the FBI just created a new AML unit with special focus on real estate and is on record as advocating extension of the timing and geographic reach of the GTO.
FinCEN explains that it is aiming its GTO at title insurance companies because title insurance is a common feature in most real estate transactions. Although FinCEN has taken pains to reassure it has no negative view of title insurance companies, the fact remains that these companies are being drawn into a complex realm that is wholly unfamiliar to them. Although banks and other types of financial institutions are historically structured to deal with regulatory supervision and compliance, title insurance companies will need to learn quickly how to communicate effectively with FinCEN. Failure to act cooperatively and comply with the demands of FinCEN and other federal financial agencies will expose a company to potentially severe fines and penalties.
Walter Donaldson, FGIS & Joseph Salerno, FGIS