Report Focuses on Anonymity, Real Estate Transactions and Complicit Lawyers

Report Also Signals Upcoming AML Regulation for Certain Niche Institutions

Second Post in a Two-Post Series

In its 2020 National Strategy for Combating Terrorist and Other Illicit Financing (“2020 Strategy”), the U.S. Department of Treasury (“Treasury”) has laid out its AML and money laundering enforcement priorities. Last week, we blogged about the 2020 Strategy and focused on the document’s findings and recommendations for increased transparency into beneficial ownership; strengthening international regulation and coordination, and modernization of the BSA/AML regime in regards to technological innovation.

Here, we focus on the 2020 Strategy as it relates to combating money laundering relating to real estate transactions and gatekeeper professions in general, such as lawyers, real estate professionals and other financial professionals, including broker dealers. Importantly, the 2020 Strategy also notes that the Financial Crimes Enforcement Network (“FinCEN”) is working on a proposed regulation which would extend AML obligations for banks and other financial institutions not subject to a federal functional regulator; there are an estimated 669 such institutions in the U.S.

Real Estate Transactions: Growing Concern and Statistics

It is no surprise that the Treasury Department named real estate transactions on its findings and recommendations in 2020. Since 2016, FinCEN has authorized the imposition of Geographic Targeting Orders (“GTOs”), which impose certain requirements on title insurance companies for transactions occurring in particular locations around the U.S. for transactions that are not financed by loans from financial institutions. These transactions represent approximately 20 percent of real estate transactions. Since then FinCEN has extended the GTOs every six months.

Specifically, U.S. title insurance companies must identify the natural persons behind legal entities used in purchases of residential real estate performed without a bank loan or similar form of external financing. The monetary threshold for these transactions is $300,000 and the GTOs cover purchases involving virtual currency as well as “fiat” currency, wires, personal or business checks, cashier’s checks, certified checks, traveler’s checks, a money order in any form, or a funds transfer. Under the current GTO, the following nine districts are included:

• California: San Diego, Los Angeles, San Francisco, San Mateo and Santa Clara Counties
• Florida: Miami-Dade, Broward and Palm Beach Counties
• Hawaii: City and County of Honolulu
• Illinois: Cook County
• Massachusetts: Suffolk and Middlesex Counties
• Nevada: Clark County
• New York: Boroughs of Brooklyn, Queens, Bronx, Staten Island and Manhattan
• Texas: Bexar, Tarrant and Dallas counties
• Washington: King County

In August 2017, FinCEN issued an “Advisory to Financial Institutions and Real Estate Firms and Professionals” (the “Advisory”) which again indicated FinCEN’s growing concern with money laundering risks in the real estate industry. Although the Advisory created no legal obligations, it did suggest practices that it expected real estate industry members to be aware of and perhaps signals the potential for future regulation. The 2020 Strategy paper is the most recent indication that Treasury views real estate transactions as a vulnerability in its current regulatory scheme.

The document begins by highlighting the risk – through real estate transactions, anonymous companies or straw purchasers have the ability to purchase high-value assets that maintain relatively stable value. The risk, according to this document, is both domestic and foreign and is especially significant for all cash purchases, which do not require information on the source of funds or identification of a beneficial owner. The document also includes updated statistics on the types of information FinCEN was able to gather from the GTOs:

• 6,303 transactions (35 percent of all reported transactions) involved subjects identified in a Suspicious Activity Report (SAR), and of those transactions, 1,082 (17 percent) matched to higher-risk SARs.
• 2,002 transactions (11 percent of all reported transactions) involved a foreign beneficial owner or purchaser representative.
• 385 of those foreign buyer-transactions (or 19 percent) involved a foreign beneficial owner or purchaser representative who is the subject of a SAR.
• Foreign buyers are disproportionately likely to be the subject of a higher risk SAR – 206 of the 385 foreign buyer-transactions with a related SAR (or 54 percent) involved SAR reporting high-risk activity – more than three times the rate for domestic buyers (15 percent).

And it included a recent high-profile forfeiture action, on which we have blogged, involving real estate bought with illicit proceeds:

• On October 30, 2019, U.S. authorities reached a settlement to recover more than $700 million in assets derived from various crimes of corruption and fraud assets subject to the settlement agreement include high-end real estate in Beverly Hills, New York and London; a luxury boutique hotel in Beverly Hills; and tens of millions of dollars in business investments allegedly made with funds traceable to money misappropriated from Malaysia Development Berhad, Malaysia’s investment development fund.

But the most interesting inclusion here was Treasury’s analysis of federal cases involving real properties forfeited to DOJ’s Asset Forfeiture Fund between 2014 and June 2017, valued over $150,000. The Treasury’s assessment identified three key findings: 1) that “Complicit Professionals” were often real estate professionals, such as mortgage brokers and real estate agents, followed by lawyers; 2) most cases involved the use of legal entities to purchase or hold real estate; and 3) these purchases involved the use of a nominee purchaser or title holders, including family members or personal associates of the criminal.

The document indicates that Treasury believes that the GTOs are “working,” so to speak. Citing to a University of Miami/Federal Reserve Bank of New York study, all cash purchases by legal entities declined by 70 percent immediately following the first real estate GTO. Treasury concluded that the study “suggests that transparency initiatives like the GTOs have an impact in markets where anonymity is highly valued, but also highlights the need for a more comprehensive and permanent solution.”

Indeed, Treasury believes that there continue to be “parallel gaps” such as the ability to form companies without providing beneficial ownership information and the lack of BSA obligations in connection with real estate purchases. It also identified GTO evasion techniques where some purchases forego title insurance in jurisdictions where state law does not require it or where the property purchased is a unit in a new development. Ultimately, according to Treasury, “anonymity in real estate purchases can be abused in the same way as anonymity in financial services” and it will be committed to finding congressional solution.

Other Financial Services and Intermediaries

The 2020 Strategy document also describes gaps in BSA coverage stemming from certain financial institutions and intermediaries who are not required to implement comprehensive AML/CFT compliance programs. In particular, (1) state-chartered non-depository trust companies; (2) international banking entities; (3) non-federally insured, non-federally chartered banks and savings associations; (4) non-federally insured credit unions; and (5) private banks are not required to implement Customer Identification Programs (CIP) or gather beneficial ownership information, but are required to make SAR and Currency Transaction Reports (CTR) filings.

According to Treasury, these institutions should be required to establish AML programs and identify and verify the identify of natural and legal persons establishing accounts because doing so would enhance transparency and strengthen U.S. government efforts to detect and prevent illicit finance activity. Treasury has identified 669 of these institutions. The 2020 Strategy references an August 2016 notice of proposed rulemaking regarding this issue, and states that FinCEN is working with the Office of Management and Budget to finalize a proposed rule.

The non-regulation of investment advisors (IAs), however, presents a lower risk because these institutions may fulfill certain AML/CFT requirements through concurrent obligations. For instance, many IAs are registered broker dealers that already have certain AML/CFT requirements. This partial coverage is a concern in the context of IAs to the extent that the institutions do not have a “sufficiently broad view of the customers’ financial activity to assess suspicious activity or money laundering risks.” Moreover, the document notes that the Financial Action Task Force (“FATF”) has noted that the United States’ lack of comprehensive AML/CFT obligations for IA is a significant gap.

Key Gatekeeper Professions

Finally, the document highlights the areas of vulnerability arising with gatekeepers such as attorneys. It notes that because attorneys can provide advice on structuring transactions to avoid tax or other implications, they may unknowingly provide an access point to the U.S. financial system to criminals. Again, the document references FATF’s 2016 Mutual Evaluation Report (MER) on the United States, which stated that the “lack of BSA coverage of lawyers contrasts with the very significant gatekeeper role being played by them particularly in the high-end real estate transactions and the company formation processes in the U.S.”

Moreover, in Treasury’s 2018 National Money Laundering Risk Assessment, Treasury noted that law enforcement had an increased focus on attorneys complicit in money laundering, particularly the use of trust accounts that allow for the anonymization of money transmissions not associated with the provision of legal services.

All in all the 2020 Strategy highlights areas of vulnerability that track the ongoing dialogue related to BSA/AML priorities. Many of these points are not a surprise. But Treasury did take the step of calling for more BSA regulations for certain financial institutions – a position that we haven’t seen until now.