9 December 2021
US Real Estate Market Faces New Scrutiny From FinCEN
The US real estate market faces increasing regulatory scrutiny, with Treasury regulator FinCEN calling for public comment on its plans to root out money laundering and corruption in the sector, particularly through all-cash deals.
The advance notice of proposed rulemaking (ANPRM) aims to help “enhance the transparency of the domestic real estate market on a nationwide basis and protect the US real estate market from exploitation by criminals and corrupt officials,” FinCEN said.
The sector in the US has relatively few reporting requirements, even though an estimated $2.3bn was laundered through real estate transactions between 2015 and 2020.
More than half of those transactions involved politically exposed persons (PEPs), typically government officials, their relatives, or close associates, according to an analysis by think tank Global Financial Integrity.
“FinCEN has long been concerned with the potential for corrupt officials and illicit actors to launder the proceeds of criminal activity through the purchase of real estate in the United States,” a FinCEN statement says.
“The US real estate market continues to be used as a vehicle for money laundering and can involve businesses and professions that facilitate (even if unwittingly) acquisitions of real estate in the money laundering process.”
There is currently little oversight of real estate transactions that do not require a mortgage, and FinCEN says all-cash deals make it “nearly impossible” to trace beneficial owners behind shell companies that are often used to purchase properties.
“As a result, corrupt officials and criminals engaging in illicit activity can exploit the US real estate sector to launder their ill-gotten wealth.”
While current rules require title-insurance companies to report all-cash residential real estate transactions valued at more than $300,000 in a dozen large US cities, they do not apply nationwide, or to commercial real estate, which FinCEN hopes to include in new measures.
The ANPRM aims to provide FinCEN with suggestions on how to develop a regulation that balances the need to address vulnerabilities in the real estate market while minimizing the burden imposed on the industry. Comments are invited up to February 7th, 2022.
The real estate ANPRM is part of a whole-government effort to fight corruption and prevent money laundering in the US. The newly released US Strategy on Countering Corruption spotlights the money laundering risks in the US real estate market, as well as the need to protect the sector from abuse by corrupt officials and other illicit actors.
FinCEN has also this month issued a proposed rule for beneficial ownership report, designed to counter illicit finance and increase transparency. This includes “unmasking” shell companies by better defining who has “substantial control” of an entity.
“FinCEN is taking aggressive aim at those who would exploit anonymous shell corporations, front companies, and other loopholes to launder the proceeds of crimes, such as corruption, drug, and arms trafficking, or terrorist financing,” said Acting FinCEN Director Himamauli Das.
For compliance teams, the greater emphasis being placed on beneficial ownership by FinCEN highlights the importance of adverse media checks. News stories may indicate that customers are involved in UBO-related money laundering offenses before official sources. Shell companies are also often leveraged by individuals who are subject to international sanctions, making screening high-risk customers against relevant sanctions lists equally important.
New regulations in Canada
The new measures in the US follow changes to anti-money laundering (AML) measures in Canada, aimed at the real estate market, that came into effect in June 2021. These new measures, built into a revision of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), include new and revised definitions.
The definition of “business relationship” requires real estate developers, real estate brokers, and sales representatives to comply with client identification requirements under the PCMLTFA. The intent is to continue exempting low-risk accounts from the formation of a business relationship, and exceptions that were previously included in the definition of a business relationship have been restated for clarification.
Customer due diligence requirements and beneficial ownership requirements apply to all REs including accountants and accounting firms, British Columbia notaries, casinos, departments and agents or mandataries of Her Majesty, dealers in precious metals and stones, and real estate brokers, sales representatives, and developers.
Compliance teams may find further guidance from FINTRAC helpful:
- New business relationship requirements
- Know-your-client requirements
- Screening for politically exposed persons and heads of international organizations
- New record-keeping requirements
Real estate brokers, developers, and sales reps must also submit reports to FINTRAC, including: Suspicious transaction reports, terrorist property reports, large case transaction reports, and large virtual currency transaction reports. There is also a 24-hour rule requirement for large cash transaction reports and large virtual currency reports.
There are also administrative penalties for real estate firms issued in Canada – see the ‘administrative monetary penalties’ section of our Canada guide.
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