U.S. regulators tackle money laundering in the luxury home market

Seventy-eight percent of real estate transactions in the U.S. must comply with the Bank Secrecy Act’s (BSA) strict anti-money laundering (AML) requirements.

The remaining 22%, however, are primarily “all-cash” deals in which real estate professionals are under no legal obligation to monitor, identify and evaluate transactions in real time or flag and report those that are suspicious.

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN)is taking action to address this gap in the U.S. AML regime with increased scrutiny of money-laundering risks in the real estate sector.

Money laundering can take many forms, occur in many settings and involve a wide variety of participants, making nearly any business that handles cash subject to risk.

Thomson Reuters’ online AML Training course helps businesses address this risk by teaching employees how to spot, address and report suspicious transactions.

Only some in real estate industry subject to BSA/AML requirements

The BSA imposes a number of obligations on financial institutions designed to deter money laundering. One key feature is the requirement that regulated financial entities file a Suspicious Activity Report (SAR) for suspicious transactions.

The real estate industry is subject to BSA/AML requirements since the BSA’s definition of “financial institution” includes those involved in real estate transactions.

So far, FinCEN has imposed these requirements only on the standard mortgage market — i.e., mortgage bankers and mortgage brokers — and housing government-sponsored entities.

FinCEN estimates that requiring the mortgage lending industry to file SARs puts 78% of residential purchases in the U.S. subject to BSA/AML compliance.

The problem is when a purchaser does not need lender financing and no regulated financial institution is involved, the other parties generally involved in a real estate transaction — e.g., settlement/closing attorneys and agents, appraisers and title search and insurance companies — have no BSA/AML compliance obligations.

Shell companies making cash purchases of luxury real estate raises concern

The issue has been growing in recent years as multiple regulatory and legal sources point to an increase in the number of shell companies using cash to purchase luxury real estate. A New York Times investigation found shell companies purchased nearly half of residential homes over $5 million in 2015.

The use of shell companies obscures the identity of the actual owner or owners, making it difficult to determine the true owner of a property in a transaction, allowing corrupt officials, drug traffickers and others to purchase luxury real estate with cash.

Meanwhile, the lack of BSA/AML oversight means real estate professionals — often motivated by a commission on the purchase of this high-value real estate — are free to ignore the numerous red flags signaling a problematic source of funds.

FinCEN targets Miami and New York as potential centers for real estate money laundering

FinCEN recently took on the concern by issuing geographic targeting orders (GTOs) requiring title companies in Florida’s Miami-Dade county and Manhattan, New York to report all-cash purchases of high-end residential real estate.

FinCEN uses GTOS to track transactions in geographic areas considered high risk for money laundering, terrorist financing and other illegal activities.

Miami-Dade and Manhattan are already subject to heightened law enforcement interest as popular areas for luxury buyers and with a higher volume of all-cash transactions (the Miami Herald reports that 53% of all Miami-Dade home sales and 90% of new construction sales in 2015 were cash deals).

The GTOs require title insurance companies in those geographic areas to identify the natural person behind a shell company using “all cash” — meaning, purchased without a mortgage — to buy high-end residential real estate in transactions occurring between March 1, 2016 and August 30, 2016.

Speaking at the Association of Certified Anti-Money Laundering Specialists (ACAMD) AML and Financial Crimes Conference on April 12, 2016, FinCEN Director Jennifer Shasky Calvery said the GTOs would help determine where the real estate industry is most vulnerable to money laundering and the best approach to mitigating the risks.

If the GTOs show a significant number of sales involving suspicious money, FinCEN will consider extending and/or expanding the orders into other geographic areas.

The war on terror has made the deterrence of money laundering and terrorist financing a top priority for government agencies around the world.

FinCEN’s recent action correlates with other enforcement agencies that are broadening the scope of investigations from traditional financial institutions to include other targets of financial crime.

Aggressive enforcement of anti-money laundering, anti-bribery/anti-corruption laws and economic and trade sanctions across a wider range of industries mean nearly everyone needs to understand what these laws require.

Thomson Reuters’ online courses on Anti-Money LaunderingAnti-Bribery and Anti-Corruption and OFAC Sanctions and Embargoes give employees an overview of what makes these activities a crime, how the laws address such crimes and the best way to comply with the laws’ requirements.

Compliance Learning

Provide interactive and engaging training courses to your employees