GUEST VIEWPOINT: U.S. Department of the Treasury’s FinCEN Issues New Geographic Targeting Order

Jeff Vegh | December 8, 2020

Jeff Vegh

What happens when real estate is not purchased with the best of intentions? In the broadest of terms, as real estate agents and brokers, the end-goal is to make the sale, (hopefully) have the buyer and seller walk away happy as a result of the deal and collect our commissions. At what point in the negotiations does anyone truly wonder about the origins of the funds or the intentions of the purchaser? When sitting for the Real Estate Agent Licensing exam, did anyone learn anything about suspicion of money laundering or identification of potential red flags for fraud? I know I didn’t.

The Financial Action Task Force, a global inter-governmental body that sets international standards to prevent money laundering and terrorist financing activities, states that real estate is a well-established method of money laundering in the international community. As it frequently attracts criminals who want to launder their dirty money, the FATF has recognized it as a high-risk sector and recommends additional scrutiny given to the industry. Furthermore, according to the FATF Standards (which are a set of 40 recommendations for the financial sector to ensure that there is a coordinated global response to prevent organized crime, corruption and terrorism), FATF Recommendation #22 specifically identifies Real Estate Agents as one of the “Designated Non-Financial Businesses and Professions” that should apply risk-based Customer Due Diligence (CDD) “when they are involved in transactions for their client concerning the buying and selling of real estate.”

What makes real estate so attractive to money launderers though? In the U.S., there is no real requirement for real estate firms to have established Anti-Money Laundering policies or procedures that help detect and monitor for illicit activity. Additionally, transactions, especially if they are all-cash, often involve few parties. The ability for a property to be purchased with a shell company, such as an LLC, is easy, which helps hide the true ownership. Where the initial purchase may not confirm the true source of the funds if a bank is not involved in the deal, upon the completion of the sale, ill-gotten gains “washed” through the system can now easily be converted into “clean” cash once the property is sold, with funds now easily traced to the new transaction and therefore easily integrated into the banking system.

On Nov. 4, 2020, the Financial Crimes Enforcement Network (FinCEN), a division of the U. S. Department of Treasury charged with helping prevent money laundering and terrorist financing violations in U.S. financial institutions, issued a Geographic Targeting Order requiring title insurance companies to collect and report information about the persons involved in certain residential real estate transactions. The intention of the GTO is to require title insurance companies to report the ultimate beneficial owners that sit behind shell companies (defined as anyone owning more than 25% ownership stake) that are often used to purchase high-end real estate. The GTO requires the title insurance companies to report the legal entities and individuals involved in all-cash deals of $300,000 or more and must be reported to FinCEN via a Currency Transaction Report. (Note: CTRs are also used by banks and certain other Designated Non-Financial Businesses and Professions when certain transactions reach a specified dollar amount and must be reported to the government for potential monitoring.) The GTO should not prevent the closing from taking place, but rather is intended to allow the Treasury to collect information about these transactions after the closing.

This is not the first time FinCEN has issued a GTO, but is the most recent update to the requirement. The first Order was issued in January 2016 and initially included all-cash residential real estate transactions in only two metropolitan areas (Manhattan and Miami). Since then, the GTO has been updated several times and has expanded to now include 12 major metropolitan cities, including all five boroughs of New York City.

The issuance of the GTO is not a be-all and end-all in detecting illicit activity in real estate. While there are still no requirements for attorneys or brokers to submit similar CTR or equivalent notifications to anyone, FinCEN’s requirements and guidance are definitely a step in the right direction.

The terms of this Order are effective beginning Nov. 6, 2020 and end on May 4, 2021.

To see the most recent GTO, go to:

https://www.fincen.gov/sites/default/files/shared/
508_Real%20Estate%20GTO%20Order%20FINAL%20GENERIC%2011.4.2020.pdf

For more information on FinCEN Advisory related to Real Estate, including money laundering risks in the real estate sector, see:

https://www.fincen.gov/sites/default/files/advisory/2017-08-22/Risk%20in%20Real%20Estate%20Advisory_FINAL%20508%20Tuesday%20%28002%29.pdf

For more information on FATF Guidelines related to Real Estate, see:

https://www.fatf-gafi.org/documents/documents/fatfguidanceontherisk-basedapproachforrealestateagents.html

and

https://www.fatf-gafi.org/documents/documents/
moneylaunderingandterroristfinancingthroughtherealestatesector.html

 

Jeff Vegh
Jeff Vegh is a seasoned Risk and Anti-Money Laundering (AML)/Financial Crimes Compliance professional working in the banking sector and has provided consultancy and advice to various firms in the AML/KYC space in various capacities. He is also a Licensed Real Estate Agent with Silversons Realty in Scarsdale.