On March 1, 2016, new U.S. anti-money laundering measures aimed at addressing secrecy in the luxury residential real estate market will take effect. The requirements have caused a stir, in part due to a recent undercover exposé (covered by The New York Times and CBS's 60 Minutes) that highlighted the role of attorneys in facilitating transactions that result in the introduction of illicit proceeds into the U.S. financial system. 1 As a result, while the new measures most directly impact title insurance companies, other firms and individuals who may represent purchasers of real estate in the affected areas (for example, non-U.S. law firms, accounting firms, brokers or other professional services firms) would be well-advised to understand the requirements and consider taking prudent steps to protect themselves against potential scrutiny from U.S. law enforcement authorities.
The requirements, issued by the U.S. Department of Treasury's Financial Crimes Enforcement Network ("FinCEN") on January 13, 2016 by way of two so-called Geographic Targeting Orders ("GTOs"), will require reporting and recordkeeping by title insurance companies in relation to cash transactions involving real estate purchases made in the name of certain types of legal entities.' In this case, FinCEN has targeted two real estate markets that are among the most popular destinations for investments by wealthy investors from outside of the United States: New York's Manhattan and Florida's Miami-Dade County. By their nature, GTOs are limited to transactions within a specified geographic area and expire after 180 days.
However, past practice indicates that FinCen will use the GTOs as an information-gathering tool and, depending on the data collected during this period, may extend the initial period and/or use the information collected as the basis to impose more permanent requirements.
In November 2015 remarks, FinCEN's Director, Jennifer Shasky Calvery, commented that "analysis continues to show corrupt politicians, drug traffickers, and other criminals using shell companies to purchase luxury real estate," emphasizing that FinCEN has not yet imposed reporting or recordkeeping requirements targeting the real estate sector (with the exception of relatively recent regulations affecting non-bank lenders).3 Shasky Calvery also observed that approximately 22% of real estate transactions are "all cash" (i.e. do not involve a lender). Shasky Calvery's comments, together with the issuance of the GTOs, suggest that the new requirements may portend an effort by FinCen to craft broader, more permanent regulations addressing a perceived gap in the U.S. government's efforts to combat money laundering -- real estate purchases made in cash or cash-equivalents that sidestep the reporting obligations of the traditional banking or mortgage lending system.
WHAT IS COVERED?
The GTOs require reporting by title insurance companies with respect to purchases of "residential real property" located in Manhattan or Miami by a "Legal Entity" where the total purchase price is greater than $3 million (if located in Manhattan) or $1 million (if located in Miami).4 Most significantly, purchases are reportable where made "at least in part, using currency or a cashier's check, a certified check, a traveler's check, or a money order in any form" and do not involve "a bank loan or similar form of external financing." FinCEN has clarified that transactions involving wire transfers or personal checks, often considered "cash" transactions, are not required to be reported under the GTOs. This is presumably due to the fact that such transactions necessarily pass through the U.S. banking system in ways that are already subject to FinCen requirements, such as those that require the filing of SARs, or Suspicious Activity Reports, by U.S. financial institutions.5
Under the GTOs, the term "Legal Entity" is defined as "a corporation, limited liability company, partnership or other similar business entity, whether formed under the laws of a state or of the United States or a foreign jurisdiction." Thus, while the reporting requirements are intended to extend broadly across a variety of different legal entities, they do not appear to require reporting with respect to transactions in which other types of corporate vehicles are the purchaser, including domestic and foreign trusts. This is consistent with FinCEN commentary relating to other recently proposed rules in which FinCEN has used an identical definition of "Legal Entity" and confirmed that the definition applies to "entities that are formed by a filing with the Secretary of State (or similar office), as well as general partnerships and unincorporated nonprofit associations" and, therefore, will not generally include trusts.°
REPORTING AND RECORDKEEPING REQUIREMENTS
The GTOs take effect on March 1, 2016 and expire on August 27, 2016, although as noted that timeframe could be extended. During this period, title insurance companies will be required, within thirty (30) days of closing, to report the following information on each reportable transaction: (i) identification of the individual primarily responsible for representing the purchaser, defined as an "individual authorized by the [Legal Entity] to enter legally binding contracts on behalf of the entity"; (ii) identification of the Legal Entity purchasing the property; (iii) identification of each individual "who, directly or indirectly, owns 25% or more of the equity interest of the" purchasing [Legal Entity] or, if the entity is a limited liability company, the identity of each of its members (i.e., "beneficial owners"); and (iv) transaction details including the date of closing, the amount transferred in the form of a monetary instrument, the total purchase price and the address of the real property.
In addition to reporting this information to FinCEN, title insurers also must retain a copy of the "driver's license, passport, or other similar documentation" of the individual primarily responsible for representing the purchaser and for each identified ultimate beneficial owner of the purchasing Legal Entity. These records must be maintained for a period of five (5) years from the expiration of the GTOs. During that period, the records must be made available "upon request" to "FinCEN or any other appropriate law enforcement or regulatory agency."
While it seems that FinCEN is considering permanent regulations targeting the real estate sector, it is not yet clear what shape those regulations will take. However, under the circumstances, any proposed regulations will almost certainly be broader in geographic scope than the current GTOs and also may require reporting by a wider range of individuals and legal entities involved in real estate transactions.
More immediately, given the attention this issue has garnered, reported transactions likely will be subject to close scrutiny both by FinCEN and the broader law enforcement community. As such, both title insurance companies and individuals and firms representing entities that purchase reportable real estate should expect that they may receive inquiries regarding particular transactions and that they themselves may be subject to scrutiny regarding any potentially incomplete, false or misleading information provided to FinCen. Among other things, title insurance companies and individuals and firms representing entities involved in reportable transactions (including, for example, non-U.S. law firms, accounting firms, brokers or other professional services firms) may wish to consider taking the following steps:
- Prepare and provide full disclosure to clients with respect to the information which will be collected, reported to FinCen and maintained;
- Obtain sufficiently broad waivers and consents which may be required to permit the sharing of such information under foreign laws;
- Incorporate appropriate due diligence measures into their compliance policies and procedures in order to comply fully with the GTOs, including enhanced due diligence measures, where appropriate, to follow-up on any potential "red flags" that may suggest any indicia of money-laundering;
- Train their personnel on both the GTO reporting requirements and the importance of identifying and escalating any "red flags" that may suggest any indicia of money-laundering; and
- Implement enhanced record-keeping procedures with respect to the reportable information.