As part of the anti-money laundering regime under the Bank Secrecy Act of 1970 (the “BSA”), in late 2021, the Financial Crimes Enforcement Network (“FinCEN”) division of the Department of the Treasury issued an advanced notice of proposed rule-making (“ANPRM”) seeking to address potential money laundering through real estate transactions. The comment period for the ANPRM closed on February 21, 2022. This ANPRM comes closely after the notice of proposed rule-making related to the implementation of the Corporate Transparency Act (the “CTA”), which you can read more about here. Both the CTA and the proposed regulations under the ANPRM would require significant levels of disclosure regarding the beneficial ownership of companies and real estate in non-financed real estate transactions. These measures aim to reduce money laundering, and assets held by undisclosed foreign investors. It is estimated that between 2015 and 2020, at least $2.3 billion was laundered through U.S. real estate, though the actual figure is likely much higher. Accordingly, both FinCEN and Congress are trying to limit the number of real estate transactions used to launder money.
The existing disclosure framework under the BSA requires recordkeeping and disclosure of certain information by financial and other reporting entities in commercial and residential real estate transactions involving financing, and in all-cash residential transactions valued at over $300,000 in specific cities. The existing requirements are intended to assist in detecting and reporting suspicious transactions to aid in combatting money laundering and the financing of terrorist activity. According to FinCEN, the current reporting framework covers roughly 80% of real estate transactions. The proposed rules, however, would apply to non-financed real estate transactions and essentially target the remaining 20% by potentially expanding reporting requirements to include all real estate transactions “not financed via a loan, mortgage, or other similar instrument, issued by a bank or a non-bank residential mortgage lender or originator, and that is made, at least in part, using currency or value that substitutes for currency” which could include real estate transactions using cryptocurrency. Additionally, unlike the current regulations, the proposed reporting requirements are not geographically limited to certain metropolitan areas.
The proposed rules and questions in the ANPRM targeted the following topics through a series of over 80 questions: (i) to whom new requirements should apply; (ii) which transactions should be covered; (iii) the dollar-value reporting threshold; (iv)what information should be reported; (v) how information should be reported; and (vi) who should be responsible fore reporting that information.
Financial institutions, and in some instances title insurance companies, currently bear the burden of meeting reporting requirements in covered transactions. However, the ANPRM could expand the scope of service providers required to report transaction information as FinCEN sought input on which service providers should be required to collect information, maintain records, and report information on non-financed purchases, and whether it should employ a “hierarchical, cascading reporting obligations on different entities involved in the transactions to ensure there is always an entity required to report.”
The proposed regulations are also coupled with the Kleptocrat Liability for Excessive Property Transactions and Ownership (the “KLEPTO Act”), the bi-partisan bill introduced by Senators Elizabeth Warren, Sheldon Whitehouse, Roger Wicker, and Bill Cassidy in April as a way to crack down on transactions by Russian President Vladimir Putin and his allies and to provide information as to who is purchasing assets, including real estate and aircrafts, as a way to launder funds.
Paired with the beneficial ownership reporting requirements under the CTA, any potential (additional) reporting requirements for real estate transactions will likely result in significant disclosure requirements for all real estate investors and owners in the future, even if real estate investment and ownership is accomplished using a third-party entity. While no final rule-making has been announced relating to real estate transactions, we can likely expect greater scrutiny and additional burdens to be imposed on real estate transactions in the future.