The Perfect Storm
A perfect storm for AML risk can arise from (i) the use of legal entities to conceal ownership, (ii) the limited application of anti-money laundering ("AML") requirements to real estate transactions and (iii) the misuse of virtual currency to launder money. For example, (i) the US Financial Crimes Enforcement Network ("FinCEN") has explained that "[t]he misuse of shell companies to launder money is a systemic concern for law enforcement and regulatory agencies, but it is of particular concern in the 'all-cash' segment of the real estate market, which currently has fewer AML protections";1 (ii) the Financial Action Task Force ("FATF") has stated that "the [US] regulatory framework has some significant gaps," including "minimal coverage" of certain "institutions and businesses" such as real estate agents, lawyers, and "trust and company service providers";2 and (iii) FinCEN has identified that "virtual currency has the potential to be exploited for money laundering and other illicit finance."3
Expanded FinCEN Reporting Requirements
In light the foregoing concerns, on November 15, 2018, FinCEN issued revised geographic targeting orders ("GTOs") that require US title insurance companies to identify the natural persons behind legal entities (US and non-US) used in certain "all-cash" purchases of residential real estate and to report these persons and purchases to FinCEN.4 While earlier GTOs required title insurance companies to perform similar identification and reporting, the November 2018 GTOs are more expansive in that they apply to transactions (i) in additional US jurisdictions, (ii) with a lower purchase price and (iii) funded at least in part using virtual currency.
Tightening the Net
"All-cash" residential real estate transactions often do not involve the participation of a financial institution that is required to maintain an AML compliance program, such as a bank or mortgage lender, decreasing the likelihood that anyone will have performed identity verification and/or due diligence on a purchaser or will be monitoring the transaction for suspicious activity. As for other participants in high-end US residential real estate transactions—such as real estate agents, lawyers, trust and company services provides, and, to a lesser extent, accountants—FATF, an intergovernmental group that focuses on AML developments, has concluded that these participants are "not subject to an appropriate range of AML/CTF requirements," which it considers "a serious gap" in the US AML regime.5
The most recent GTOs represent the latest in a series of such actions that FinCEN started two years ago. To partially mitigate the risk posed by this AML vulnerability, FinCEN issued GTOs in January 2016 that required "certain US title insurance companies to identify the natural persons behind companies used to pay 'all cash' for high-end residential real estate" in certain US jurisdictions.6 The January 2016 GTOs were limited to purchases in (i) Manhattan with a total purchase price in excess of $3 million and (ii) Miami with a total purchase price in excess of $1 million. The January 2016 GTOs applied to purchases that were made, (i) at least in part, using currency or a cashier's check, a certified check, a traveler's check, or a money order in any form and (ii) without a bank loan or other similar form of external financing.
FinCEN reissued the GTOs directed to title insurance companies in July 2016, February 2017, August 2017 and March 2018, and subjected purchases made in additional US jurisdictions to the identification and reporting requirements.7 FinCEN also expanded the scope of the GTOs to include purchases that were made, at least in part, using "a funds transfer."
Continued Expansion of Scope
The November 2018 GTOs further expand the scope of the earlier GTOs in three important ways. The November 2018 GTOs:
- Subject additional US counties to the identification and reporting requirements: (i) Tarrant, Texas, and Dallas, Texas; (ii) Clark, Nevada; (iii) King, Washington; (iv) Suffolk, Massachusetts, and Middlesex, Massachusetts; and (v) Cook, Illinois.
- Establish a uniform threshold for the total purchase price—$300,000—that will trigger the identification and reporting requirements for all covered US jurisdictions. This threshold is lower than the lowest threshold used in prior GTOs.
- Expressly include purchases that were made, at least in part, using "virtual currency." Historically, FinCEN has treated "virtual currency" as an item of value that substitutes for currency but is distinct from "real currency" or "funds."8
First, the inclusion of virtual currency in the November 2018 GTOs may indicate that FinCEN's position on virtual currency is evolving to view virtual currency as a true alternative to cash or that FinCEN has detected an uptick in the use of virtual currency in transactions, including real estate, connected to potential money laundering concerns.
Second, the expanded scope of the November 2018 GTOs indicates that FinCEN remains concerned with money laundering risks in the real estate sector and with respect to virtual currency activities. While FinCEN has not indicated that it intends to make the GTOs permanent by adopting an AML requirement for title insurance companies, the broader real estate sector should be aware of FinCEN's continuing interest and the potential for the imposition of a permanent AML requirement at a later date. Similarly, virtual currency market participants should remain attentive to FinCEN's developing views on their sector in order to be in a position to influence the way those views develop.
1 FinCEN, Advisory to Financial Institutions and Real Estate Firms and Professionals, FIN-2017-A003 (Aug. 22, 2017), https://www.fincen.gov/resources/advisories/fincen-advisory-fin-2017-a003.
2 FATF, United States Mutual Evaluation Report 3 (Dec. 2016), http://www.fatf-gafi.org/publications/mutualevaluations/documents/mer-united-states-2016.html.
3 FinCEN, Prepared Remarks of FinCEN Director Kenneth A. Blanco, delivered at the 2018 Chicago-Kent Block (Legal) Tech Conference (Aug. 9, 2018), https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-2018-chicago-kent-block.
4 Press Release, FinCEN Reissues Real Estate Geographic Targeting Orders and Expands Coverage to 12 Metropolitan Areas (Nov. 15, 2018), https://www.fincen.gov/news/news-releases/fincen-reissues-real-estate-geographic-targeting-orders-and-expands-coverage-12.
6 Press Release, FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami (Jan. 13, 2016), https://www.fincen.gov/news/news-releases/fincen-takes-aim-real-estate-secrecy-manhattan-and-miami. The GTOs did not, and do not, address real estate agents, lawyers, trust and company services providers, or accountants or other types of real estate transactions that involve the participation of financial institutions that are required to maintain an AML compliance program, such as a bank or mortgage lender.
7 See, e.g., Press Release, FinCEN Targets Shell Companies Purchasing Luxury Properties in Seven Major Metropolitan Areas (Aug. 22, 2017), https://www.fincen.gov/news/news-releases/fincen-targets-shell-companies-purchasing-luxury-properties-seven-major.
8 FinCEN, Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, FIN-2013-G001 (Mar. 18, 2013), https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf.
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