Earlier this year, the Financial Crimes Enforcement Network (FinCEN), a unit of the US Treasury Department, announced new rules targeting secret buyers of high-end real estate properties. From March 1 through August 27 of this year, FinCEN is requiring US title insurance companies to report the identity of the beneficial owners of Limited Liability Companies (LLCs) and other shell companies who exclusively use cash to purchase high-end real estate in two locations – Manhattan and Miami-Dade County. This is the first time the federal government is requiring real estate companies to disclose the identities of purchasers in all cash transactions. On August 28, FinCEN will expand the new rules 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.
Historically, certain high-net-worth individuals have used LLCs and other structures to purchase expensive real estate in cash, thereby concealing their identities and avoiding the need to disclose background information to banks in mortgage loan applications. The New York Times reported in 2015 that nearly half of the most expensive residential properties in the United States are purchased anonymously through shell companies and that the real estate industry is not legally required to conduct a full examination of buyers’ identities or backgrounds, at least until now. Foreign buyers have increasingly invested their money in the United States, often in real estate. For example, between 2003 and 2014, the percentage of condos purchased by shell companies in one particular building in Manhattan rose from one-third to over eighty percent.
FinCEN believes that certain of the individuals using front-companies to make all-cash purchases of high-end real estate could be foreign government officials or foreign criminals who are secretly investing criminal proceeds -- “dirty money” -- in American real estate to move the ill-gotten gains out of their home countries. In its press release announcing the new rules, FinCEN wrote that it was “concerned that all-cash purchases – i.e., those without 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.” Former FinCEN Director Jennifer Shasky Calvery said, “We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium US real estate to secretly invest millions in dirty money.”
As for the title insurance companies involved in the real estate transactions, they face criminal and civil penalties if they do not comply with FinCEN’s Geographic Targeting Orders (or GTOs). Specifically, the title insurance companies must report the identity of the beneficial owner – an individual who, directly or indirectly, owns 25% or more of the equity interests of the purchaser – where a legal entity – the purchasing corporation, LLC, partnership, or other entity – purchases residential real estate in Manhattan for over $3 million (or $1.5 million in the other boroughs), in Miami-Dade County, Broward County, and Palm Beach County, Florida for over $1 million, in San Diego, Los Angeles, and the Bay Area counties for over $2 million, and in Bexar County, Texas for over $500,000 – and does so without a bank loan or other external financing. The title insurance companies must submit a form to FinCEN within 30 days of closing in a qualifying real estate transaction. The title insurance company is also expected to implement procedures reasonably designed to ensure compliance with the terms of the GTOs, including reasonable due diligence to determine whether it is involved in a transaction subject to the GTOs and to collect and report the required information. At a minimum, the title insurance company must collect the beneficial owner’s driver’s license, passport, or other identifying information. The title insurance company may reasonably rely on information provided to it by third parties, including third parties who are part of the transaction.
FinCEN has begun to submit the identities of individuals using front-companies to purchase real estate in cashabove the set thresholds to a law enforcement database. According to a July 26, 2016 FinCEN press release, “a significant portion of covered transactions have indicated possible criminal activity” and federal and state law enforcement have successfully used the new data to generate leads and identify previously unknown suspects. Due to the success of the GTOs thus far, FinCEN has unsurprisingly started to expand to additional markets. Continued success may mean a nationwide regulatory program in the near future requiring title insurance companies to report the identity of the beneficial owner where a legal entity uses cash to purchase residential real estate above market- specific thresholds.
The new GTOs are the latest in a recent string of efforts by FinCEN to combat money laundering by targeting themeans and methods often used to conceal the true source of criminal proceeds. Moreover, while FinCEN released the GTOs on the heels of a New York Times investigation in 2015 into the use of shell companies to purchase high-end real estate, its focus on money laundering outside of the traditional banking arena is also not new. Under a new regime in 2012, FinCEN began to focus its enforcement approach on nonbank financial institutions, such as casinos and money service businesses. FinCEN has prioritized investigating and fining casinos for willful violations of the Bank Secrecy Act and failure to know the source of customer funds. FinCEN has been particularly critical of casinos for the failure to develop what it considers sufficient anti-money laundering (AML) compliance programs and failing to report suspicious activity. As for the real estate market specifically, FinCEN has viewed this industry as vulnerable to money laundering for several years and has reacted by tracking the rise of mortgage fraud suspicious activity reporting and geographic trends, and by establishing AML requirements for non-bank mortgage lenders and originators.
FinCEN’s latest efforts demonstrate that FinCEN is continuing its trend of aggressively reviewing source of cash funds and is focused on industries beyond typical financial institutions.