Real estate transactions are FinCEN targets: far-reaching impact of two proposed rules

Real estate transactions are FinCEN targets: far-reaching impact of two proposed rules

Roger Pettingell Sarasota Real Estate

It is likely that the Financial Crimes Enforcement Network (FinCEN) will put forth new regulations this year addressing real estate transactions. A look at the proposals in its recent advanced notice of proposed rulemaking (ANPRM) – which bolster the anti-money laundering (AML) regulations in real estate transactions (Real Estate ANPRM) and the separate Notice of Proposed Rule Making (Beneficial Ownership NPRM)[1] – is a reminder of this Administration’s commitment to the fight against corruption and illicit finance in the US real estate market, as well as other key industries.

In this article, we highlight some of the factors that could shape any final rule and discuss what these rules could mean for real estate market participants.[2]

THE REAL ESTATE ANPRM

The existing real estate framework

The Bank Secrecy Act of 1970 (BSA) and its amending legislation[3] require financial institutions to establish and implement AML/CFT programs to detect and report suspicious transactions to combat money laundering, terrorism financing, and other illicit financing. This current framework covers about 80 percent of US real estate transactions: specifically financed residential and commercial transactions[4] and all-cash residential real-estate transactions over $300,000 in certain US cities.[5] FinCEN seeks to expand the requirements to the remaining 20 percent of real estate transactions currently exempt from reporting requirements.

The proposed rules may extend to virtually all real estate transactions

FinCEN seeks to ensure consistent reporting nationwide and curb illicit financial activities involving non-financed real estate transactions. The proposed rule would extend the BSA’s reporting requirements to virtually all real estate transactions due to its broad definition of “non financed” transaction[6] and nation-wide coverage.[7] If the rules are adopted, any non-financed real estate transactions, regardless of geographic location or value, would be covered under the BSA’s reporting requirements.

Comments submitted by the US office of Transparency International (TI-US) propose that FinCEN extend the rules even further.[8] Specifically, TI-US recommends eliminating dollar thresholds, including commercial real estate transactions, covering trusts, and expanding the information collected to include the source of the funds, among other additions.[9]

Conversely, the National Association of Realtors (NAR) suggests limited AML reporting requirements that would cover only non-financed residential real estate transactions and for which title insurance companies should be exclusively responsible.[10] NAR strongly opposes FinCEN’s alternative proposal to mandate full AML/CFT program requirements, which it views as overly burdensome, given that most of NAR’s members are independent contractors or small businesses.

The proposed rules could expand reporting to all service providers

To combat illicit real estate transactions, the proposed rules would also broaden the categories of service providers subject to recordkeeping and reporting requirements for non-financed real estate transactions. This could cover real estate brokers, attorneys, title insurance companies, appraisers, inspectors, shell companies, trusts, and natural persons.

The proposed rules would also broaden the categories of service providers subject to its recordkeeping and reporting requirements, potentially affecting real estate brokers, attorneys, title insurance companies, appraisers, inspectors, shell companies, trusts, and natural persons.

Comments submitted by the American Bar Association (ABA) strongly oppose any rules that would require lawyers who represent a client in these transactions to disclose the identity and beneficial ownership of their clients or to report information about their clients’ transactions.[11] The ABA highlights the importance of preserving lawyer-client confidentiality and objects to regulating lawyers as financial institutions.

Conversely, the American Land Title Association (ALTA) notes that FinCEN should place reporting obligations on the party most likely to possess or collect the data or be in the most direct contractual relationship with the customer, such as title agents or attorneys.[12]

Separately, comments submitted by the Financial and International Business Association (FIBA) urge FinCEN to codify any new rules with clear definitions, limitations, qualifications and exemptions, to permit compliance departments to understand effectively and efficiently whether a transaction is subject to FinCEN reporting requirements.[13]

THE BENEFICIAL OWNERSHIP NPRM

The proposed rules laid out in the Beneficial Ownership NPRM are designed to implement several key disclosure requirements of the CTA and to prevent anonymous shell companies from helping to transfer illicit money in the US.[14]

Entities subject to Beneficial Ownership reporting requirements

The Beneficial Ownership NPRM identifies two types of reporting companies: domestic companies and foreign companies registered to do business in the US.

The NPRM proposes exempting 23 categories of entities from the new reporting requirements, largely because they are already subject to similar existing requirements.[15] Exemption from reporting will extend to all subsidiaries wholly owned by a parent company subject to an exemption – but, conversely, will not extend to entities whose ownership interests include even a minority interest held by an entity required to report. Comments from interested stakeholders, such as the Private Investor Coalition, urged FinCEN to also exempt single-family offices from the new reporting requirements, due to privacy and national security risks.

These new proposed reporting requirements are particularly significant to real estate market participants because they apply primarily to large market participants, leaving non-exempt market participants subject to the new reporting and recordkeeping requirements. The final rule could impose a significant burden on non-exempt real estate market participants, such as independent contractors, small businesses and sole proprietors that may not have the means to implement these new requirements.

Beneficial Ownership information to report

The Beneficial Ownership NPRM would require the “company applicant” of non-exempt companies to file a Beneficial Ownership Information (BOI) report with FinCEN, which must identify and certify each beneficial owner and the “company applicant.”

Beneficial owners include all individuals who either exercise substantial control over the entity or who own or control at least 25 percent of the ownership interest of the entity.[16] A company applicant is the individual who files the document that forms the entity for a domestic entity or who files the document that first registers the entity to do business in the US for a foreign entity.

The US Small Business Administration expressed concerns about the economic burden that these new reporting requirements would create on small businesses and encouraged FinCEN to review this timeline for compliance and to grant non-exempt entities up to two years to comply.

At the close of the comment period earlier this year, more than 240 comments had piled up from stakeholders seeking clarity or expressing concern regarding burdens imposed by the rules. While FinCEN said it would consider requests, it noted that subsequent proposals will address many of the concerns raised in comments. FinCEN has not disclosed the timing surrounding the issuance of the final rule.

The NPRM comes after longstanding international criticism that the US lacks appropriate measures to ensure corporate transparency. While it will help combat corruption and strengthen the AML framework, the rule will likely impose new reporting burdens on companies who were not previously subject to AML disclosures.

Key takeaways

  • Real estate market participants should expect greater FinCEN scrutiny and potentially significant new burdens imposed on those currently exempt from reporting obligations.
  • A broader range of real estate service providers may soon be subject to AML/CFT requirements and have to report about virtually every real estate transaction to participate in the US real estate market.
  • Expanded recordkeeping and disclosure requirements may necessitate an evaluation of internal resources to ensure compliance.

As the proposed rules evolve, market participants should consider their ability to respond and comply.


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