Building on early successes, the Financial Crimes Enforcement Network (“FinCEN”) announced new rules targeting buyers of high-end real estate properties. (Here).
Earlier this year, FinCEN adopted rules focusing on high-end buyers of real estate in Miami and New York City. The new rules required title companies to report the beneficial owners of limited liability companies and shell companies which use cash to purchase high-end real estate to six additional markets: all boroughs of New York City; Broward and Palm Beach counties in Florida; Los Angeles County; San Francisco, San Mateo and Santa Clara counties in the California Bay Area; San Diego County; and Bexar County (including San Antonio) in Texas.
FinCEN’s new rules are aimed at high-worth individuals who have used LLCs and shell companies to purchase expensive real estate in cash in order to conceal their identities and avoid the need to disclose background information in a mortgage application. According to a New York Times report, almost half of expensive residential properties in the United States are purchased through shell companies without disclosure or examination of buyers’ identities or backgrounds.
The focus of this initiative complements the United States’ anti-corruption crusade. Corrupt foreign officials and criminals have been using real estate purchases to invest dirty proceeds of criminal schemes.
Title insurance companies face criminal and civil penalties for failure to comply with FinCEN’s geographic targeting orders (“GTOs”). Under the GTOs, title insurance companies must report the identity of each beneficial owner (direct or indirect owner of 25 percent or more of the purchaser) involved in certain real estate transactions above certain market-specific thresholds (e.g. $3 million in New York City, $1 million in surrounding boroughs) and completes the transaction without a mortgage loan or other external financing. The titles insurance company is required to report the transaction no later than 30 days after the closing.
The FinCEN program requires title insurance companies to implement appropriate compliance policies and procedures to ensure due diligence when conducting a transaction subject to the GTO.
According to FinCEN, a significant number of the reported transactions have indicated possible criminal activity. Because of this success, FinCEN expanded the list of geographic targets. FinCEN is likely to continue expanding the program nationwide.
“The information we have obtained from our initial GTOs suggests that we are on the right track,” said FinCEN Acting Director Jamal El-Hindi. “By expanding the GTOs to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”
FinCEN’s focus on real estate transactions has coincided with its increased enforcement efforts against casinos and money service businesses. Each of these programs is designed to identify the source of cash funds and extends anti-money laundering enforcement beyond banks and other traditional financial institutions.