by Jeremy Paner
Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued Geographic Targeting Orders (GTOs) to impose anti-money laundering (AML) recordkeeping and reporting requirements on certain title insurance companies in the Manhattan borough of New York City and Miami-Dade County, Florida. These orders require certain title insurance companies to identify and report the “beneficial owners” of shell companies used in cash purchases of high-end residential real estate.
Since her arrival at FinCEN, Director Shasky has aggressively used the GTO authority, especially on businesses located in Miami, Florida. In addition to today’s orders, FinCEN has issued and renewed GTOs over the past two years on the following businesses:
- Electronics exporters in and around Miami, Florida;
- Common carriers of currency operating around the United States-Mexico land border in Texas, between and including the Del Rio/Amistad Dam and Brownsville/Los Indios Ports of Entry and Departure;
- Common carriers of currency operating around the land border between San Diego County, California, and the United Mexican States at the San Ysidro and Otay Mesa Ports of Entry and Departure;
- Cashers of Federal tax refund checks in Miami-Dade County and Broward County, Florida; and
- Businesses in the Los Angeles Fashion District.
Section 5326 of the Bank Secrecy Act (BSA) authorizes the Treasury Department to issue orders requiring certain reporting and recordkeeping necessary to prevent evasion of the Act. These orders may be imposed upon both domestic financial institutions and non-financial trades or businesses in a specified geographic area. FinCEN’s regulatory implementation of this BSA authority is found in 31 C.F.R. 1010.370.
Persons Involved in Real Estate Closings and Settlements
Since the passage of the USA PATRIOT Act, financial institutions have been defined for the purposes of BSA compliance to include “persons involved in real estate closings and settlements.” As non-bank financial institutions, these persons would be required to establish anti-money laundering programs, if they were not exempt through regulation. (See, 31 C.F.R. 1010.205). In 2003, FinCEN issued an Advance Notice of Proposed Rulemaking to solicit public comments on proposed AML requirements, including a definition of “persons involved in real estate closings and settlements.” (See, 69 FR 17569 (April 10, 2003)). FinCEN included title insurance companies as participants in real estate transactions in this notice. The agency also indicated that it will require AML programs for companies in the real estate industry that are in position to:
- Provide services that can be abused by money launderers;
- Identify the purpose and nature of the transaction, as well as suspicious conduct; and
- Engage with the actual flow of funds used to purchase property.
Although the U.S. Department of the Treasury still has not defined “persons involved in real estate closings and settlements,” and the “temporary” AML compliance program exemption remains, it appears that FinCEN has determined that title insurance companies may be best positioned to both detect and prevent money laundering.
First Step to Shed Light on Dark Cash
According to its executive summary, the 2015 National Money Laundering Risk Assessment (NMLRA) “identifies the money laundering risks that are of priority concern to the United States.” This assessment cites several criminal prosecutions involving real estate-based money laundering, but it does not address that risk or the means by which it could be mitigated.
In contrast to the relative lack of response from Treasury, journalists have been eager to not only address, but actively investigate the effects of the deficiencies in the AML controls governing non-bank financial institutions in the real estate industry. In its investigative series Towers of Secrecy, the New York Times recently revealed the extent of dark foreign cash pouring into domestic real estate. Owners of condominiums at the Time Warner Center in Manhattan have used more than 200 shell companies to hide their ownership interest. The problem is not geographically limited to elite, luxury condominiums in Columbus Circle. Almost half of the most valuable properties in the United States are purchased through shell companies, according to the Times.
Director Shasky commented at the November 2015 American Bankers Association/American Bar Association Money Laundering Enforcement Conference that FinCEN will focus its investigations on the estimated 22 percent of real estate transactions that involve “all cash” purchases. The GTOs are a recognition of the need for additional information about this 22 percent of cash purchases and the beginning of the investigation process to gather increased insight into the AML vulnerabilities in the real estate industry. This insight will very likely lead to permanent regulatory changes to the AML regulations effecting non-bank financial institutions.
We will continue to monitor efforts to combat money laundering and publish updates as significant developments arise.