The Financial Crimes Enforcement Network (“FinCEN”) is a bureau of the United States Department of Treasury. FinCEN’s mission statement is “to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis and dissemination of financial intelligence and strategic use of financial authorities.” Their goal is to protect the country against financial crimes, money laundering, tax evasion and terrorist financing by obtaining and analyzing financial transaction data for law enforcement purposes.
Over the years, FinCEN has strived to make the standard mortgage market less susceptible to money laundering and fraud. Now the focus is on all cash residential real estate purchase transactions, or any transaction not involving bank financing from a financial institution subject to federal banking regulations.
In 2006, FinCEN issued a Geographic Targeting Order (“GTO”) which required title insurance companies in the United States who insure real estate transactions to collect certain information in order to identify the natural persons behind companies which are used to pay all cash in residential real estate purchases over a certain amount in certain cities throughout the U.S. Residential real estate is defined by FinCEN as real property (including condominium units and cooperative apartments) designated as a one to four family usage. FinCEN implemented this requirement for title insurance companies because title insurance is a common feature in the vast majority of real estate transactions. Title insurance companies therefore play a central role that can provide FinCEN with valuable information about real estate transactions of concern.
The goal of the original GTO was to safeguard against individuals who are trying to hide their illegal assets and identity by purchasing high end residential real estate properties through shell companies, primarily in specific U.S. cities. The title insurance companies must identify the true beneficial owner behind the legal entity used and report it to FinCEN. Once it is determined that a business and its transaction is covered under the GTO, the title insurance company must report the transaction to FinCEN and provide any required supporting documentation and information within 30 days of the covered transaction.
To determine if an all cash real property transaction is covered by the GTO, the following criteria must all apply:
-The purchaser is a legal entity (meaning a corporation, limited liability company (LLC), partnership, business trust or other similar business entity, either formed under the laws of the state, United States or a foreign jurisdiction). Other than a business trust, most trusts, such as personal trusts and testamentary trusts, will not be targeted by the GTO. If the Purchaser is determined to be any of the above legal entities and meet the criteria listed in numbers 2 and 3 below, the title company is required to report the names of the beneficial owner’s of the company. If the legal entity is an LLC, the title company must also report the names of it’s members.
-The purchased property must be residential real property meeting the following criteria in New York:
– Total purchase price is $3,000,000.00 or more in the Borough of Manhattan; and
– Total purchase price is $1,500,000.00 or more in the Boroughs of Brooklyn, Queens, Bronx or Staten Island.
-The purchases must be made, at least in part, by using currency or a cashier’s check, certified check, traveler’s check, personal check, business check or money order. The original GTO did not apply to electronic fund transfers since the bank had already collected adequate information about both the originator and the recipient of the such funds and will disclose this information to regulators if requested.
The law primarily requires identification of all natural persons behind shell companies used to pay “all cash” for high-end residential real estate. FinCEN has found that about 30 percent of the transactions covered by the GTOs involve a beneficial owner or purchaser representative that is also the subject of a previous suspicious activity report.
The original GTO became effective on August 28, 2016. On August 23, 2017, FinCEN extended the GTO. The Treasury Department closed a gaping loophole in its effort to crack down on money laundering in real estate, extending its LLC disclosure rules to deals that involve wire transfers. In its revised GTO, Treasury officials said wire transfers would now be subject to regulations that require title insurance companies to disclose the identity of buyers who purchase luxury real estate through LLCs. The latest changes are meant to give teeth to regulations that critics have said are too lax and have had little impact.
FinCEN also published an eight-page advisory for financial institutions, alerting them to money-laundering risks associated with real estate. “Many real estate transactions involve high-value assets, opaque entities, and processes that can limit transparency because of their complexity and diversity. In addition, the real estate market can be an attractive vehicle for laundering illicit gains because of the manner in which it appreciates in value, ‘cleans’ large sums of money in a single transaction, and shields ill-gotten gains from market instability and exchange-rate fluctuations” said the advisory board of FinCEN.
Failure to follow all terms of the GTO may result in civil or criminal penalties against the title company and the covered business and any of its agents, employees, officers or directors.
*DISCLAIMER. Nothing herein is offered as legal advice. All information in this article is for informational purposes only. Please consult with an attorney before taking any legal actions.