The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced today that its aggressive efforts to combat money laundering in the luxury real estate market have been extended for an additional six months. Confirming his agency’s concerns about illicit funds flowing through the U.S. real estate industry, FinCEN Acting Director Jamal El-Hindi said today that this initiative is “producing valuable data that is assisting law enforcement and is serving to inform our future efforts to address money laundering in the real estate sector.” Today’s announcement means that temporary measures requiring U.S. title insurance companies to identify the natural persons behind shell companies used to pay all-cash to high-end residential real estate in six major metropolitan areas – known as “Geographic Targeting Orders” (GTOs) –remain in place for six more months.
Background Regarding Geographic Targeting Orders
A GTO is an administrative order issued by the director of FinCEN requiring all domestic financial institutions or nonfinancial trades or businesses that exist within a geographic area to report on transactions any greater than a specified value. Authorized by the Bank Secrecy Act, GTOs were originally only permitted by law to last for 60 days, but that limitation was extended by the USA Patriot Act to 180 days. Historically, FinCEN’s issuance of a GTO was not publicized, and generally only those businesses served with a copy of a particular GTO were aware of its existence.
Over the course of the last three years, FinCEN — the primary agency of the U.S. government focused on anti-money laundering compliance and enforcement — has aggressively exercised its GTO authority frequently throughout the United States in areas of money laundering concern. Recent, publicly announced GTOs have focused on shipments of cash across the border in California and Texas, the fashion district of Los Angeles, exporters of electronics in South Florida, and check cashing businesses in South Florida. In each of these examples, FinCEN publicly announced the issuance of the GTO and its terms, and expressed concern that the industries or regions in question were vulnerable to money laundering.
Prior Efforts to Prevent Money Laundering in Real Estate Transactions
For several years, FinCEN has sought to ensure financial transparency and combat illegality in the real estate market. In February 2015, The New York Times published a series of articles focused on the use of shell companies to purchase high-value real estate in New York City. In a November 2015 speech, FinCEN’s then-director disclosed that through analysis of Bank Secrecy Act reporting and other information, FinCEN has observed the frequent use of shell companies by international corrupt politicians, drug traffickers and other criminals to purchase luxury residential real estate in cash. In particular, FinCEN uncovered fund transfers in the form of wire transfers originating from banks in offshore havens at which accounts have been established in the name of the shell companies. The perpetrator will typically direct an individual involved in the settlement and the closing in the U.S. to place the deed to the property in the name of the shell company, thereby obscuring the identity of the owner of the property.
The Bank Secrecy Act established anti-money laundering obligations for financial institutions, including institutions involved in real estate transactions. By including these businesses in the definition of “financial institution,” Congress recognized the potential money laundering and financial crime risks in the real estate industry. In the USA Patriot Act, Congress mandated that FinCEN issue regulations requiring financial institutions to adopt AML programs with minimum requirements, or establish exemptions, as appropriate. Since that time, FinCEN has implemented AML requirements for certain real estate businesses or established exemptions for others consistent with the Bank Secrecy Act.
The Original Manhattan and Miami-Dade Real Estate GTOs
Approximately one year ago, FinCEN issued what were believed to be the first-ever GTOs focused on real estate transactions. Effective March 1, 2016, these GTOs required certain title insurance companies to identify the natural persons behind companies used to pay all cash for luxury residential real properties located in the borough of Manhattan and Miami-Dade County. All-cash transactions exceeding $3 million in Manhattan, or exceeding $1 million in Miami-Dade County, were to be reported to FinCEN with an identification of the “beneficial owner” behind the transaction.
The enhanced reporting required by the GTOs applied to “covered transactions,” which were defined as transactions in which (1) a legal entity (2) purchases residential real estate either in the borough of Manhattan or Miami-Dade County (3) for a total purchase price of excess of $3 million (Manhattan) or $1 million (Miami-Dade) (4) without a bank loan or other similar form of external financing and (5) using, at least in part, currency or a cashier’s check, certified check, traveler’s check, or money order. “Legal entity” was defined as a corporation, limited liability company, partnership or other similar business entity, whether domestic or foreign.
If a title insurance company is engaged in a transaction that meets all of the requirements for a “covered transaction,” it was required to report said transaction to FinCEN within 30 days of the closing using a designated form entitled “FinCEN Form 8300.” On the Form 8300, the title insurance company must identify (1) the purchaser; (2) the purchaser’s representative, if any; and (3) the beneficial owner, which is defined as each natural person who, directly or indirectly, owns 25 percent or more of the equity interests of the purchaser. The title insurance company must obtain and copy the driver’s license, passport, or other similar identification for each beneficial owner.
Expansion of GTOs to Six Other Major Metropolitan Areas
On the eve of the expiration of the original Manhattan and Miami-Dade GTOs in August 2016, FinCEN announced a significant expansion of its efforts to combat money laundering in real estate transactions with the issuance of six more GTOs. Effective on August 28, 2016, those GTOs covered the following geographic areas: (1) all boroughs of New York City; (2) Miami-Dade County and the two counties immediately north (Broward and Palm Beach); (3) Los Angeles County, California; (4) three counties comprising part of the San Francisco area (San Francisco, San Mateo, and Santa Clara counties); (5) San Diego County, California; and (6) the county that includes San Antonio, Texas (Bexar County). The monetary thresholds for each geographic area varied.
Beyond expanding their geographic reach, the six new GTOs contained two significant changes from the original Manhattan and Miami-Dade GTOs. First, the earlier GTOs defined “cash” transactions to include money orders, cashier’s checks, certified checks, and traveler’s checks. The newly-issued GTOs also applied to personal and business checks, thereby expanding the types of transactions that will be subject to enhanced reporting. Notably, however, none of the GTOs apply to real estate transactions conducted solely using wire transfers, an area that FinCEN currently lacks authority to regulate. Critics of the real estate GTOs pointed out that money launderers could exploit this gap in the regulatory scheme by using wire transfers from offshore banks to finance their luxury real estate purchases. Second, the new GTOs applied to all U.S. title insurance companies, instead of the few title companies originally selected.
Implications of FinCEN’s Renewal of the Six Real Estate GTOs
Today’s action by FinCEN to extend the six real estate GTOs for an additional six months is not surprising and confirms that FinCEN remains concerned about the risk of money laundering when individuals attempt to purchase high-end real estate in all-cash deals through limited liability companies or similar structures. In a press release issued today, FinCEN revealed that approximately 30 percent of the transactions covered by the GTOs involved a beneficial owner or purchaser representative that is also the subject of a previously-filed “suspicious activity report,” thereby corroborating FinCEN’s long-expressed concerns about the use of shell companies to buy luxury real estate in all-cash deals.
Title insurance companies handling transactions occurring in the six geographic regions covered by the latest GTOs, and their employees and agents, must be familiar with the obligations imposed by these latest GTOs. Title insurance companies should have training programs in place so that they are prepared to address these ongoing compliance obligations. Companies that fail to comply with the reporting and record-keeping requirements of these GTOs, and their employees, may face civil or criminal penalties.
It will be interesting to see whether FinCEN will make permanent the temporary measures imposed by these GTOs through regulations. With a new administration in place committed to rolling back regulations, it is entirely possible that the GTOs may eventually expire without further regulatory action. On the other hand, the GTOs appear to have produced valuable information for law enforcement, and that result may prompt FinCEN to implement these anti-money laundering measures on a permanent basis.
 The New York thresholds are as follows: the Borough of Manhattan – $3,000,000; the Borough of Brooklyn – $1,500,000; the Borough of Queens – $1,500,000; the Borough of Bronx – $1,500,000; and the Borough of Staten Island – $1,500,000. The Florida thresholds are as follows: Miami-Dade County – $1,000,000; Broward County – $1,000,000; Palm Beach County – $1,000,000. The California thresholds are as follows: San Diego County – $2,000,000; Los Angeles County – $2,000,000; San Francisco County – $2,000,000; San Mateo County – $2,000,000; Santa Clara County – $2,000,000. The Texas threshold is as follows: Bexar County – $500,000.