The Director of the Financial Crimes Enforcement Network (also known as FinCEN) recently gave a speech in San Francisco regarding the agency’s investigative priorities. Director Jennifer Shasky Calvery’s comments drew media attention because she mentioned the need for more transparency of real estate transactions negotiated by professionals (like brokers, title companies, accountants and lawyers). Calvery suggested that real estate professionals should perform more due diligence and anti-money laundering (AML) scrutiny of large real estate transactions involving shell companies. For the past decade, federal law enforcement has been more aggressive in pursuing civil enforcement penalties and even criminal prosecution of financial institutions that are involved in aiding and abetting money laundering activities of bank customers. Now, it appears FinCEN has decided to scrutinize the beneficial ownership of real estate purchased and owned by shell companies.

Three months ago, the New York Times published a front-page investigative story that reported about suspected money laundering by international organized crime in the lucrative real estate market of Manhattan. Numerous multi-million dollar real estate transactions were conducted by shell companies that have no business operations or employees. This article may have drawn the attention of regulators and investigators at FinCEN.^[1] Just this week, Law360 also published an article entitled “Real Estate Industry Poised for Money Laundering Crackdown.”^[2] Shell corporations (often formed as limited liability corporations) do have legitimate business purposes as transactional entities for deals that involve tax reasons, limitations of financial liability and investor privacy. However, federal prosecutors and law enforcement agencies typically find shell companies are often utilized to disguise money laundering and hide illicit proceeds of criminal or fraudulent conduct.

FinCEN’s attention to the real estate market may prompt real estate professionals to do more due diligence and ensure they “know their customer” before engaging in transactions with shell entities. Even though the Bank Secrecy Act (BSA) does not apply to real estate transactions (that do not involve a bank mortgage), the federal money laundering statutes (18 U.S.C. 1956 and 1957) apply to everyone when proceeds from a specified unlawful activity are being used.

The director’s comments may signal a trend in real estate that follows the post 9/11 crackdown of financial institutions who ignore AML obligations (such as preparing suspicious activity reports and filing currency transaction reports) and run afoul of the BSA. Real estate professionals should be cautious of being willfully blind to who their customers are and where the cash is coming from for a lucrative real estate transaction. FinCEN is now looking more closely at these deals.

Note:
[1] The New York Times, “Towers of Secrecy: Stream of Foreign Wealth Flows to Elite New York Real Estate.” By Louise Story and Stephanie Saul (Feb. 7, 2015)
[2] The author of this article was interviewed by Law360’s reporter Natalie Rodriguez.