Why it matters

After years of concern about money laundering through shell corporations, repeated legislative and regulatory efforts to gain more information on beneficial owners of entities involved in various types of financial transactions, and a high-profile series of investigative reports in The New York Times, the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) seems to have adopted a more limited tactic for immediate impact. Beginning March 1, it will require title insurance companies to collect more granular information on "purchasers" and beneficial owners in "cash-only" real estate deals in two jurisdictions: Miami-Dade County in Florida, and Manhattan, one of the five boroughs in New York City. Deploying a pair of Geographic Targeting Orders (GTOs), this additional information must be collected, recorded and reported on an existing Form 8300 (currently used for reporting "cash" transactions over $10,000) for a six-month period beginning March 1, 2016 if the transaction exceeds $3 million in Manhattan and $1 million in Miami-Dade County.

Like the current Form 8300 reporting requirements, these new GTO requirements apply not only to transactions involving U.S. and foreign coin and currency, but also to cashier's checks, certified checks, traveler's checks, and money orders. However, the requirements do not appear to apply if payment is made with a virtual currency.

According to the FinCEN director, her agency may eventually expand the reporting requirements throughout the country. "Having prioritized anti-money laundering protections on real estate transactions involving lending, FinCEN's remaining concern is with money laundering vulnerabilities associated with all-cash real estate transactions," according to the agency.

NOTE
Following an explosive segment on this week's edition of 60 Minutes looking at the role of lawyers in helping establish shell corporations and structure schemes to disguise the source of illegal funds entering the United States, two key members of the House Financial Services Committee in a bipartisan effort are reportedly preparing to reintroduce this week legislation that would require more transparency in the reporting of beneficial ownership of corporations by both incorporation agents and corporations themselves. This legislation, which has been considered in several other Congresses and even gained the support of the White House, has been highly controversial in the business community. Its prospects in this session are uncertain but, much like FinCEN's decision to issue the GTOs, could gain momentum based on public reaction to the 60 Minutes exposé.

Detailed discussion

FinCEN issued GTOs in early January to require title insurance companies to identify the individuals who directly or indirectly are buying real estate with cash or cash-like instruments in two jurisdictions.

"FinCEN is concerned that all-cash purchases—i.e., those without bank financing—may be conducted by individuals attempting to hide their assets and identity by purchasing residential property through limited liability companies or other opaque structures," the regulator explained. "To enhance availability of information pertinent to mitigating this potential money laundering vulnerability, FinCEN will require certain title insurance companies to identify and report the true 'beneficial owner' behind a legal entity."

Exercising authority under the Bank Secrecy Act, Director Jennifer Shasky Calvery found "reasonable grounds exist for concluding that the additional recordkeeping and reporting requirements … are necessary," ordering title insurance companies to report certain information about the persons involved in transactions for a total purchase price in excess of $1 million in Miami-Dade County, Florida and over $3 million in the Borough of Manhattan, New York.

Addressing a gap in current reporting on real estate transactions, the GTO reporting requirements are triggered by such purchases made without a bank loan or other similar form of external financing, and like the current Form 8300 cover transactions "at least in part, using currency or a cashier's check, a certified check, a traveler's check, or a money order in any form." A transaction using virtual currency would not appear to be subject to the GTO, as virtual currency is not considered by FinCEN to be "currency" or any of the other items considered "cash" for purposes of Form 8300.

Title insurance companies, like any other trade or business, are already required to file a FinCEN Form 8300 on any "cash" transaction over $10,000 with specific information, including the identity of the individual primarily responsible for representing the purchaser. The GTO requires title insurance companies to obtain and record a copy of this individual's driver's license, passport, or other similar identifying documentation and provide it to FinCEN. The biggest change is the requirement to obtain, retain and report similar documentation on any beneficial owner(s), defined as an individual who, directly or indirectly, owns 25 percent or more of the equity interests of the purchaser.

The GTO states that the identity of the purchaser should also be shared, along with data about the transaction, such as the date of closing, the total amount transferred in the form of a monetary instrument, the total purchase price of the transaction, and the address of the real property involved. If the purchaser is a limited liability company, the title insurance company must also provide the name, address, and taxpayer identification number of all members.

All records relating to compliance with the GTOs must be retained for a five-year period. The GTOs will be in effect for 180 days, from March 1, 2016 until August 27, 2016.

"We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money," Director Calvery said in a statement. "Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address. These GTOs will produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector."

To read the GTO for the Borough of Manhattan, click here.

To read the GTO for Miami-Dade County, click here.

To read the FinCEN press release, click here.