On December 6, 2021, the US Financial Crimes Enforcement Network (“FinCEN”) solicited public comment on how it should impose recordkeeping and reporting requirements on certain persons involved in all-cash real estate transactions (“2021 ANPRM”).1 Comments must be submitted to FinCEN by February 7, 2022.
The requirements contemplated in the 2021 ANPRM may be applied nationwide to a broad range of real estate transactions, including commercial real estate transactions. They also may impose obligations on market participants that currently are not subject to federal anti-money laundering compliance obligations, such as real estate developers, managers, lenders, and investment advisers and investment companies involved in real estate.
The 2021 ANPRM is the first step in the rulemaking process and will most likely be followed by a detailed proposal and a final rule. In this Legal Update, we provide background on FinCEN’s approach to real estate transaction reporting requirements and summarize the 2021 ANPRM. As discussed further below, potentially affected participants should consider submitting comments on the 2021 ANPRM to encourage FinCEN to draft a detailed proposal that appropriately weighs the goals of preventing money laundering with potentially burdensome compliance obligations.
To aid in the detection and deterrence of money laundering, in 1970, the US Congress passed the Currency and Foreign Transactions Reporting Act, colloquially known as the Bank Secrecy Act (“BSA”), which enlisted financial institutions to monitor and report on certain customer activity.2
While the BSA covers a broad range of financial institutions, FinCEN has issued regulations implementing the BSA only for a smaller subset (“covered financial institutions”). Covered financial institutions subject to FinCEN regulation include banks; casinos; money services businesses; broker-dealers; mutual funds; insurance companies; futures commission merchants; introducing brokers; dealers in precious metals, precious stones or jewels; credit card system operations; certain loan and finance companies; and housing government-sponsored enterprises.3 However, many categories of persons involved in real estate closings and settlements remain outside the definition of covered financial institutions, even though FinCEN has considered adding certain market participants since at least 2003.4 This includes many nonbank market participants in the commercial real estate sector.
In recent years, FinCEN has shown a particular interest in expanding the scope of the BSA to cover a wider range of transactions involving real property. Since 2016, FinCEN has issued a series of 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.5 In addition, on the same day FinCEN announced the 2021 ANPRM, President Biden announced a broader strategy to combat corruption and illicit finance by implementing initiatives similar to the contemplated requirements discussed in the 2021 ANPRM.
The 2021 ANPRM indicates that FinCEN remains concerned with money laundering vulnerabilities in the US real estate market and notes that more than 30 percent of the transactions reported under the GTOs involve a beneficial owner that has been the subject of a Suspicious Activity Report. Further, FinCEN believes that these vulnerabilities are not limited to the transactions covered by the GTOs, and include real estate transactions in the commercial markets and involving natural persons. And while the GTOs only apply to a subset of localities (e.g., metropolitan areas in Texas, Florida, New York, Massachusetts, California, Hawaii and Nevada), the 2021 ANPRM contemplates extending reporting requirements to all real estate transactions nationwide. Accordingly, FinCEN states that it is preparing a proposed rule that would impose nationwide recordkeeping and reporting requirements on certain persons participating in transactions involving non-financed purchase of real estate.
The 2021 ANPRM contemplates a broad scope of coverage for the proposed regulation. FinCEN states that the non-financed purchase of real estate refers to “any real estate purchase or transaction that is not financed via a loan, mortgage, or other similar instrument, issued by a bank or non-bank residential mortgage lender or originator, and that is made, at least in part, using currency or value that substitutes for currency.” It also contemplates that the proposed regulation may cover all non-financed purchases of real estate regardless of dollar value, although it also requests comment on the appropriate transaction threshold for covered transactions, if any.
As with the GTOs, it appears likely that the proposed regulation will cover residential real estate. Further, FinCEN implies that all-cash commercial real estate transactions will be covered by the proposed rule and states that it is interested in commenters helping it define how commercial real estate projects involving bond financing, multiple transactions or multi-year development periods may be addressed.6 It also solicits comment on applying the proposed regulation to non-financed purchases by natural persons, including nominees and “straw-man” purchasers and trustee/trust arrangements.
The 2021 ANPRM recognizes that not all real estate transactions involve the same types of participants. For example, it notes that title insurance is not mandatory in every US real estate transaction, and therefore, imposing a regulation solely with respect to title insurers would not ensure complete coverage. Accordingly, FinCEN suggests several categories of participants who might be covered by the proposed regulation.
FinCEN suggests in one part of the 2021 ANPRM that covered participants might include real estate brokers and agents, lawyers representing a buyer or seller, title insurers or title insurance representatives, closing agents, appraisers and inspectors. However, in another part of the 2021 ANPRM, FinCEN states that it also is considering whether settlement agents, escrow companies and agents, real estate investment companies, real estate development companies, real estate property management companies, real estate auction houses, investment advisers, private money lenders and money services business should also be covered participants for compliance purposes.7 In a third part of the 2021 ANPRM, FinCEN suggests that individuals in the private equity industry also could be covered persons.8 Given FinCEN’s broad interpretation of its authority, it is conceivable that any and all of these categories of participants could be viewed as financial institutions under the BSA.
FinCEN also recognizes that an overly broad approach to identifying covered persons could lead to unnecessary and duplicative reporting. Therefore, it suggests that the proposed regulation might contain a “cascading” approach through which there would be one and only one covered person for each covered transaction.
The 2021 ANPRM states that, at a minimum, FinCEN believes that the proposed regulation should require covered persons to collect, report and retain information on covered transactions. It then states that the two alternatives FinCEN is considering are: (i) requiring covered persons to report all covered transactions to FinCEN or (ii) requiring covered persons to adopt comprehensive (four-pillar) anti-money laundering compliance programs and monitor and report suspicious activity to FinCEN. The first approach would mirror the requirements of the GTOs, while the second approach would be similar to the compliance obligations imposed on most other types of financial institutions.
FinCEN also requests comment on how it might apply other compliance obligations, such as customer due diligence and beneficial ownership identification requirements to the real estate industry.
The 2021 ANPRM would impose anti-money laundering compliance obligations on a broad swath of the US real estate sector. Many categories of previously unregulated market participants would be subject to extensive reporting and recordkeeping obligations under either contemplated approach. For some categories, such as lawyers, this will become part of the long-running debate regarding the appropriate use of FinCEN’s authority.9
For other categories of professionals, such as commercial real estate developers, managers, lenders, and investment advisers and investment companies involved in real estate, the 2021 ANPRM may raise new issues that they have not yet confronted. These market participants and their trade associations should consider engaging with FinCEN to help shape the proposed regulation. While it is clear that FinCEN intends to act, thoughtful engagement early in the process can help channel that action toward more efficient regulation.
Finally, market participants that are most likely to be subject to the proposed regulation, such as title insurers, might begin to consider how they will implement an anti-money laundering compliance program. At a minimum, having good recordkeeping and a strong culture of compliance will help to ease the transition to whatever approach FinCEN eventually adopts.
1 86 Fed. Reg. 69,589 (Dec. 8, 2021); Press Release, FinCEN Launches Regulatory Process for New Real Estate Sector Reporting Requirements to Curb Illicit Finance (Dec. 6, 2021), https://www.fincen.gov/news/news-releases/fincen-launches-regulatory-process-new-real-estate-sector-reporting-requirements.
5 Press Release, FinCEN Renews Real Estate Geographic Targeting Orders for 12 Metropolitan Areas (Oct. 29, 2021); Press Release, FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami (Jan. 13, 2016).
6 The 2021 ANPRM does not specifically address commercial real estate transactions involving nonbank financing, although it is conceivable FinCEN may address this structure given the existing compliance obligations imposed on nonbank residential real estate lenders. See 31 C.F.R. pt. 1029.
7 FinCEN proposed anti-money laundering rules for investment advisers in 2015 but has not implemented them. Press Release, FinCEN Proposes AML Regulations for Investment Advisers (Aug. 25, 2015). FinCEN already imposes extensive anti-money laundering compliance requirements on money services businesses. 31 C.F.R. pt. 1022.
8 The references to “private money lenders” and “private equity” could be read to mean nonbank financers of real estate transactions that are not covered by existing anti-money laundering compliance regulations. Currently, many, if not most, nonbank financers of commercial real estate are exempt from anti-money laundering compliance.
9 E.g., ABA, Gatekeeper Regulations on Attorneys, https://www.americanbar.org/advocacy/governmental_legislative_work/priorities_policy/independence_of_the_legal_profession/bank_secrecy_act/.