FinCEN’s Focus on Money Laundering in Real Estate
Joyce Hatto was an English pianist and piano teacher who performed throughout Europe from the 1950s until the 1970s. Married to record producer William Barrington-Coupe, Hatto produced recordings under several labels, but primarily her husband’s Saga Records label.
Hatto quit performing in public in 1976, at age 48. But she didn’t stop playing the piano and released over 100 additional recordings and CDs under her husband’s label, even though she was treated for ovarian cancer starting in 1992. Her recordings received rave reviews for her versatility and breadth.
By early 2006, detractors raised doubts about Hatto’s recordings. It seemed implausible; they said that a pianist who hadn't performed in public for decades and who was fighting cancer for years could be so prolific. One of her recordings contained the same missed note as that of a different pianist. Yet, despite the doubters, when Hatto in June 2006, she was mourned by the music community.
In 2007, it was revealed that Hatto’s CDs contained copies of other artists’ commercial recordings—sometimes digitally altered, sometimes not. By February 2007, Barrington-Coupe admitted that he had fraudulently substituted other pianists’ performances for his wife’s. He claimed she wasn’t involved in the deception. He said his deception started by inserting small portions of different recordings to cover up audible signs of Hatto’s cancer pain and expanded to wholesale copying of other artists’ performances.
As I discussed in Identifying Suspicious Activity in Real Estate Transactions, the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) has long had its eye on the real estate industry. As with Hatto’s prolific records, FinCEN contends that commercial real estate transactions sometimes may not be as they seem. Instead, according to FinCEN, real estate may be used for money laundering, tax evasion, and other criminal activities.
This article discusses FinCEN’s December 2021 Advance Notice of Proposed Rulemaking Relating to Real Estate Transactions (ANOPR) and where real estate sponsors and investors can expect FinCEN to focus its future regulatory and enforcement efforts.
History of FinCEN Regulation of Real Estate Transactions
For some time, FinCEN has required financial institutions, such as banks, to file suspicious activity reports (SAR). In 2003, FinCEN issued a previous Advanced Notice of Proposed Rulemaking (2003 ANOPR) requesting comments on money laundering risks in real estate closings and settlements. Although many commentators believed the settlement process should be regulated, there was no consensus on what businesses should be covered by the regulations.
In 2012, FinCEN started requiring non-bank residential mortgage lenders and originators to file SARs. In 2014, that requirement was expanded to include Fannie Mae, Freddie Mac, and Federal Home Loan Banks due to their involvement in the residential mortgage market.
FinCEN also has attempted to regulate all-cash residential real estate transactions, which make up about 19% of existing home sales and 4.4% of new home sales. In 2016, FinCEN has issued Geographic Targeting Orders (GTO) requiring title insurance companies to report all-cash home purchases in target metropolitan areas, including Manhattan and Miami with a reporting threshold of $3 Million. FinCEN also sought to identify the beneficial owners making those purchases.
Over time, FinCEN issued additional GTOs covering additional areas in Florida and New York and parts of California, Hawaii, Illinois, Massachusetts, Nevada, and Washington and lowered the reporting threshold to $300,000. While FinCEN reports these GTOs have been helpful to law enforcement in identifying money laundering and pursuing criminal complaints, indictments, and asset forfeitures.
FinCEN Advance Notice of Proposed Rulemaking
The ANOPR identifies real estate transactions as a prime means of money laundering in the US. FinCEN identified several key systemic factors that make the real estate market vulnerable to money laundering, including lack of transparency, attractiveness of the US real estate market as an investment vehicle, and the lack of industry regulation.
Although current regulations focus on residential real estate, according to the ANOPR, money laundering vulnerabilities exist throughout the real estate market and aren’t limited to any particular sector. So FinCEN is exploring whether it expand regulation to other areas of the real estate market, including commercial real estate and purchases by natural persons, who FinCEN believes may be nominees facilitating money laundering.
It's no coincidence that the ANOPR was issued around the same time as notices of proposed rulemaking implementing the Corporate Transparency Act (CTA), which will require many businesses to report information about their formation and beneficial ownership. Although a discussion of CTA is beyond the scope of this article, those interested in more details on the CTA can read my previous articles Corporate Transparency Act May Require Small Businesses and Real Estate Investments to Report Beneficial Owners and Corporate Transparency Act—What Real Estate Sponsors and Investors Should Do Now to Prepare.
FinCEN’s Focus in the ANOPR
FinCEN poses more questions in the ANOPR – 82 to be exact -- than it has answers. Although the response period for the ANOPR expired in February 2022, these questions provide insight into FinCEN's focus and areas that might see expanded regulation. FinCEN divides its 82 questions into seven categories:
real estate market information
money laundering risks in real estate transactions
what real estate transactions should be regulated?
who should have to report information?
what information should be reported
regulatory burdens
possible recordkeeping and reporting requirements covering “persons involved in real estate closings and settlements?
Although many of the questions are generic, the specific questions provide insight into FinCEN's focus and should concern many in the real estate industry.
Use of Legal Entities. Six questions—under four of the seven categories—ask about real estate purchased by entities, particularly limited liability companies and similar entities. FinCEN’s focus appears to be the use of trusts and other legal entities to purchase residential real estate. One question assumes that purchases by entities will be regulated and asks whether the proposed rule should be “limited to transactions involving legal entities or should it cover natural persons as well?” The following question asks which legal entities should be included and asks explicitly whether trusts should be included.
Residential vs. Commercial Real Estate. Many of FinCEN’s questions ask commentators to explain how residential and commercial real estate transactions differ. Besides asking how residential and commercial transactions differ generally, FinCEN asks specific questions about all-cash purchases, use of legal entities and trusts, transaction costs, due diligence, recordkeeping, and ancillary services in both types of transactions.
Use of Professionals. FinCEN asks about the involvement of real estate brokers, settlement agents, title companies, and attorneys in residential and commercial real estate transactions. The questions home in on real estate brokers and attorneys, asking how frequently those professionals are involved in transactions. One question specifically asks whether real estate attorneys, real estate brokers, title insurance companies, title and escrow agents, and other specific industries should have to report information about their transactions.
All-Cash Transactions. Eight of the ANOPR’s 82 questions relate to all-cash (non-financed transactions). Fin-CEN asks whether its proposed rule should be limited to all-cash transactions. FinCEN also asks when and how frequently parties use attorneys and real estate brokers in all-cash transactions.
Geographic Limitations. One question appears to foreshadow national regulation by asking whether there are any jurisdictions “in which residential real estate transactions have unique customs or requirements that would make designing a rule in such jurisdictions . . . problematic.”
What’s Next?
From the questions, real estate brokers, attorneys, and title/escrow agents may be tapped to report the identities of parties involved in transactions.
FinCEN’s focus on attorneys is concerning. While attorneys are already prohibited from participating in unlawful activity (and already must decline to represent a client in a money-laundering scheme), nearly all real estate transactions involving attorneys are legal.
Requiring attorneys to report non-public information about their clients risks trespass on the attorney-client privilege. And clients who know their attorney must report certain information may not share critical information with their attorneys to protect their privacy. Incomplete information leads to less-than-optimal legal advice to the client.
Real estate attorneys do more than prepare legal documents. Attorneys also assist clients in structuring lawful transactions. For example, if a client suggests unlawful behavior, the attorney will require that the client find a different, lawful approach.
But more important, discouraging clients from free disclosure to attorneys puts real estate attorneys in the same position as Joyce Hatto. It appears Hatto’s husband didn’t tell her he was using other artists' performances to promote her brand. He may have intended to protect her feelings, but the result was to take away her agency to control her reputation. Likewise, attorneys whose clients are afraid to provide complete information may be hamstrung from redirecting clients who unintentionally wander into illegal territory.
Even if FinCEN doesn’t target attorneys, it’s likely at least all-cash, residential real estate transactions involving entities will soon face additional regulation. FinCEN believes that any proposed regulation should require certain persons to collect, report, and retain information about specified non-financed purchases of real estate. FinCEN is considering proposing such a rule that would apply throughout the United States and would contain no lower reporting dollar threshold.
© 2022 by Elizabeth A. Whitman
Any references to clients and their legal situations have been modified to protect client confidentiality.
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