February 11, 2016
On January 13, 2016, the U.S. Treasury Department’s Financial Crimes Enforcement Network ("FinCEN") issued geographic targeting orders ("GTOs") that will temporarily require title insurance companies to identify and report the individuals behind legal entities that pay "all cash" for high-end residential real estate in the Borough of Manhattan in New York City (over $3 million) and in Miami-Dade County, Florida (over $1 million). The GTOs are designed to address concerns that corrupt officials and other transnational criminals are hiding ill-gotten gains by purchasing residential properties through opaque shell entities with cash, thereby avoiding the scrutiny imposed by financial institutions involved in lending transactions. For purposes of the GTO, "all cash" means any purchase of high-end residential real estate that (i) is not financed by a bank loan or other external financing source and (ii) is purchased, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, or a money order. The GTOs will be in effect beginning on March 1, 2016, and will expire on August 27, 2016 (unless renewed) and require reporting the identity of individuals who, directly or indirectly, own 25% or more of the equity interests of the purchasing entity.
This is the first time that U.S. authorities have subjected title insurance companies to any special anti-money laundering ("AML") requirements. Although FinCEN has the authority under the Bank Secrecy Act ("BSA") to impose a range of recordkeeping, reporting and compliance program requirements on "persons involved in real estate closings and settlements," it has refrained from doing so to date. But as a nonfinancial trade or business, a title insurance company is subject to some limited reporting requirements, such as the requirement to report cash payments of more than $10,000 to the Internal Revenue Service and FinCEN. Similarly, nonfinancial trades and businesses are subject to the GTO provisions of the BSA.
A GTO is a rare and potent tool that the Treasury Department can use to require financial institutions as well as nonfinancial trades or businesses to report on transactions over a specified threshold within a certain geographic area, if only for a limited period of time to address law enforcement needs. Historically, GTOs were not made public, and until recently, only the businesses served with a GTO were made aware of its existence. Over the last two years, however, FinCEN has issued a number of GTOs to address areas of money laundering concern across the country. FinCEN has publicly announced the issuance of the GTOs, released copies of the GTOs, explained the terms, and set forth the money laundering risks the GTOs were designed to address. Notably, the January 2016 order was the third GTO in less than a year targeting Miami.
Over the past several years, the global effort to combat corruption and money laundering has resulted in greater public awareness of the methods used by criminals to hide the proceeds of transnational crime. In July 2006, the Financial Action Task Force on Money Laundering ("FATF"), a leading international AML organization, criticized the United States for failing to comply with a FATF standard on the collection of beneficial ownership information and urged the United States to correct this deficiency. In August 2014, FinCEN issued a notice of proposed rulemaking that would require banks, securities-broker dealers and certain other financial institutions to obtain beneficial ownership information, but a final rule has not been issued to date. Indeed, many U.S. states continue to use automated procedures that allow for the creation of new corporations and limited liability companies within 24 hours or less by filing an online application. Dozens of internet sites highlight the anonymity of beneficial owners allowed under applicable state laws, point to those practices as a reason to incorporate in those states, and list those states together with offshore jurisdictions as preferred locations for the formation of new corporations.
In 2015, U.S. media sources reported on the growing use of shell companies to purchase domestic real estate, which can make it difficult to ascertain the ultimate or "beneficial" owner of real property. U.S. regulators emphasized the complexities involved in determining beneficial owners of shell companies–Assistant Attorney General Leslie R. Caldwell noted that it could be "very, very difficult to penetrate who is the beneficial owner of these shell companies," and FinCEN Director Jennifer Shasky Calvery acknowledged that her agency had "seen instances in which multimillion-dollar homes were being used as safe deposit boxes for ill-gotten gains, in transactions made more opaque by the use of anonymous shell agencies."
The increasing use of shell entities to purchase residential real estate has further shrouded the ultimate owners of many high-end properties in major U.S. cities. In Manhattan, where roughly $8 billion is spent each year on residential property valued at $5 million or more, the use of shell companies in real estate transactions is on the rise. In 2008, 39% of the units in buildings with residences that sold for $5 million or more were purchased with shell companies. By 2014, the figure was 54%. According to a recent series in The New York Times, neighbors at one luxury condominium complex in New York City included a former Russian senator with connections to organized crime, a Greek businessman arrested as part of a corruption sweep, a Chinese contractor who was found housing workers in hazardous conditions, and an Indian mining magnate fined for pollution in Africa. Most of the properties had been purchased through shell companies.
The prevalence of sales to shell companies is not unique to Manhattan: in Los Angeles, 51% of sales $5 million or more were made to shell companies. For the San Francisco Bay Area and Miami, the figures were 48% and 37%, respectively.
– Louise Story & Stephanie Saul,
FinCEN has adopted a "risk-based" approach to money laundering in the real estate sector, an industry still struggling to regain its footing in the wake of the financial crisis. Because most real estate transactions involve some form of financing, and are thus subject to the AML scrutiny imposed by financial institutions, FinCEN has been reluctant to impose potentially duplicative requirements on the rest of the industry. Although the BSA includes "persons involved in real estate closings and settlements" in the definition of financial institution, regulatory action is required to enumerate the persons that would fit in this category.
Under the authority granted by the USA PATRIOT Act, FinCEN exempted persons involved in real estate closings and settlements from AML requirements on April 29, 2002 and again on November 6, 2002. In 2003, FinCEN issued an Advance Notice of Proposed Rulemaking seeking comment on how to define "persons involved in real estate closings and settlements," the money laundering risks posed by such persons, and whether they should be subject to anti-money laundering program requirements, but no subsequent action was taken. As such, existing FinCEN regulations do not require real estate professionals to establish AML programs, identify customers or file suspicious activity reports ("SARs"). Real estate professionals who engage in transactions with knowledge that the proceeds are derived from illegal activity still run the risk of liability under criminal anti-money laundering statutes and related civil forfeiture provisions.
Over the last several years, FinCEN assessed the need for further regulatory action in the real estate industry. In 2012, FinCEN released a study of eight years’ worth of data from SAR and Form 8300 reports filed by or in relation to real estate title and escrow businesses which demonstrated significant trends in suspicious activity characterizations, notably mortgage loan fraud and money laundering. SARs filed on the real estate title and escrow-related industry characterized mortgage loan fraud as the most reported activity, followed by false statements and "BSA/structuring/money laundering." Furthermore, SARs filed by money services businesses regarding real estate title and escrow-related firms overwhelmingly (over 96 percent) listed structuring, the practice of conducting transactions in a specific pattern calculated to avoid the creation of records and reports required under the BSA, as at least one of the activity characterizations.
In light of these findings, FinCEN prioritized risks surrounding mortgage fraud, extending the BSA’s AML compliance program and SAR requirements to non-bank residential mortgage lenders and originators in 2012. At the time, FinCEN noted that several comments received in response to the Notice of Proposed Rulemaking expressed support for expanding the regulations to cover other businesses and professions in the real estate industry. FinCEN deferred issuing regulations for these other businesses and professions until further research and analysis could be conducted.
Three years later, in November 2015, Director Calvery announced that FinCEN had detected the frequent use of shell companies by international corrupt politicians, drug traffickers, and other criminals to purchase luxury residential real estate: 78% of real estate purchases were financed by some type of mortgage, and thus captured in the current regulatory structure, but the remaining 22% of real estate purchases were made in all-cash, effectively circumventing regulatory scrutiny. Director Calvery noted that FinCEN had engaged in productive discussions with its state regulatory counterparts in an effort to target vulnerabilities "with the least amount of burden."
After media reports highlighted the patterns of money laundering through the real estate sector in 2015, there were more vociferous calls for greater due diligence requirements applicable to professionals in the real estate sector. In issuing the GTOs for Manhattan and Miami, FinCEN is experimenting with additional reporting requirements while continuing to study the impact and utility of such reports for the industry and law enforcement.
"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," explained FinCEN Director Calvery when announcing the GTOs. "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."
The January 2016 GTOs are directed at title insurance companies and their subsidiaries and agents, and do not apply to other real estate professionals, such as brokers, appraisers or lawyers involved in real estate transactions. FinCEN explained that it pinpointed title insurance companies for AML reporting because title insurance is "a common feature in the vast majority" of real estate transactions. Furthermore, title insurers tend to be larger and more sophisticated institutions with the capacity and experience to comply with these types of reporting requirements. FinCEN emphasized that the GTOs did not imply any "derogatory finding" with respect to the covered entities, and expressed its appreciation for the assistance and cooperation of title insurance companies and the American Land Title Association in protecting real estate markets from abuse by illicit actors.
In the short term, FinCEN’s GTOs could impact high-end residential real estate transactions in Manhattan and Miami. According to PropertyShark, a real estate data company, 1,045 residential properties were sold for more than $3 million in the second half of 2015 in Manhattan alone, worth roughly $6.5 billion in total. The New York Times found that nearly half of homes nationwide worth at least $5 million are purchased using shell companies. In major U.S. cities, however, the figure is higher.
The GTOs require certain title insurance companies and any of their subsidiaries and agents to report any transaction in which (1) a legal entity, defined as "a corporation, limited liability company, partnership or other similar business entity, whether formed under the laws of a state or of the United States or a foreign jurisdiction"; (2) purchases residential real property located in the Borough of Manhattan in New York, New York for a total purchase price greater than $3,000,000 or residential real property in Miami-Dade County, Florida for a total purchase price greater than $1,000,000; (3) such purchase is made without a bank loan or other similar form of external financing; and (4) such purchase is made, 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. FinCEN has confirmed that the definition of "legal entity" does not include trusts.
The transaction must be reported by electronically filing a FinCEN Form 8300 within 30 days of the closing of the transaction. The GTOs provide specific instructions on how to complete the form to comply with the GTOs. The FinCEN Form 8300 must contain (1) information about the identity of the individual primarily responsible for representing the purchaser (the title insurance company must obtain and record a copy of this individual’s driver’s license, passport, or other similar identifying documentation); (2) information about the identity of the purchaser; (3) information about the identity of the beneficial owner(s) (each individual who, directly or indirectly, owns 25% or more of the equity interests of the purchaser) of the purchaser (the title company must obtain and record a copy of the beneficial owner’s driver’s license, passport, or other similar identifying documentation); (4) information about the transaction, including the date of closing, the total amount transferred, the total purchase price, and the address of the real property; and (5) information about the title insurance company.
Unlike the existing Form 8300 requirements which only require title insurance companies to report receipts over $10,000 of cash and, in certain circumstances, cashier’s checks, bank drafts, travelers checks and money orders that have a face amount of $10,000 or less, these GTOs require reporting on transactions conducted in part by currency, cashier’s, certified, or traveler’s checks, or money orders, regardless of the amount of cash or the instruments involved. Real estate transactions conducted only with checks drawn on an account and/or wire transfers are not subject to the GTO reporting requirements.
The GTOs require title insurance companies to retain all records relating to compliance with the GTOs for five years and to make the records available to FinCEN, other agencies, and law enforcement upon request. Title insurance companies and their officers, directors, employees, and agents may be liable for civil or criminal penalties for violating the terms of the GTOs.
The temporary GTOs will remain in effect for 180 days beginning on March 1, 2016 and ending on August 27, 2016, unless extended. If the orders prove effective in Manhattan and Miami, and result in significant actionable information for law enforcement, they could be used as the model for similar reporting requirements in other regions.
|Practice Point for Residential Real Estate Buyers
* As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called Specially Designated Nationals; their assets are blocked and U.S. persons are generally prohibited from dealing with them. In order to expedite this process and to close on time, buyers should have the appropriate documentation and disclosure ready to produce to title insurance companies. Sellers should consider requiring their buyer to agree in the contract of sale to satisfy such production demands.
FinCEN’s recent GTOs represent only one part of a broader federal effort to reduce money laundering in the real estate sector. The Treasury Department and federal law enforcement officials are investing greater resources into investigating luxury real estate sales that involve shell companies, including a new 10-agent Federal Bureau of Investigation unit to focus on money laundering. Federal officials have noted that future AML investigations will be expanded to focus on professionals who assist in money laundering in the real estate sector, including real estate agents, lawyers, bankers, and corporate entity formation agents.
Public scrutiny of these professionals increased precipitously on January 31, 2016, less than two weeks after FinCEN issued the GTOs, when the CBS News program 60 Minutes profiled an undercover investigation by Global Witness, a nonprofit group that has been pushing for stricter anti-money laundering rules. A Global Witness investigator posing as the agent of a government official from a mineral-rich African country surreptitiously taped meetings with U.S. lawyers who allegedly provided advice on how to move suspect money into the United States, including through the use of shell companies.
The resulting media blitz may result in stronger reporting requirements than those imposed by FinCEN to date. Shortly after the 60 Minutes broadcast, the U.S. House of Representatives reintroduced legislation to require states to collect beneficial ownership information for limited liability companies and other corporate entities used in real estate transactions, or to have the Treasury Department do so if states are unable to meet the requirement. Certain reporting measures, when imposed on attorneys, may conflict with the attorney-client privilege, which protects communications between clients and their lawyers for the purpose of obtaining or providing legal advice. Notably, a client’s communication with his or her attorney may not be privileged if made in furtherance of a crime or fraud.
 Press Release, U.S. Dep’t of Treas., FinCEN, FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami (Jan. 13, 2016), available at https://www.fincen.gov/news_room/nr/html/20160113.html. These superseded GTOs issued on January 6, 2016.
 The Uniting And Strengthening America By Providing Tools Required To Intercept And Obstruct Terrorism Act of 2001 ("USA PATRIOT Act"), which imposed AML program requirements on certain financial institutions, provided a temporary exemption from the AML program requirements for "persons involved in real estate closings and settlements" until such time as FinCEN issued applicable regulations. Pub. L. No. 107-56, 115 Stat. 272 (2001); 31 C.F.R. §103.170(b)(1)(vii) (2002) (currently codified at 31 C.F.R. § 1010.205(b)(1)(v) (2016)).
 26 U.S.C. § 60501. The Internal Revenue Code requires reporting to the IRS of cash payments over $10,000 by all trades or businesses that are not required to file similar reports on currency transactions under the BSA (i.e., non-financial institutions). In 2001, the USA PATRIOT Act incorporated these IRS reporting requirements for nonfinancial trades and businesses into the BSA. Treasury regulations allow a single Form 8300 to satisfy both the IRS and BSA filing requirements. See 31 CFR 1010.330(a)(1)(ii) and (e) (formerly 103.30(a)(ii)); IRS Part 4, Ch. 26, Section 10, Form 8300 History and Law, available at https://www.irs.gov/irm/part4/irm_04-026-010.html#d0e41.
 Recent GTOs have focused on shipments of cash across the border in California and Texas, on the Fashion District of Los Angeles, on exporters of electronics in South Florida, and on check cashing businesses in South Florida. See, e.g., Press Release, FinCEN, FinCEN Issues Geographic Targeting Order Covering the Los Angeles Fashion District as Part of Crackdown on Money Laundering for Drug Cartels (Oct. 2, 2014), available at https://www.fincen.gov/news_room/nr/pdf/20141002.pdf.
 See FinCEN, supra n.1; Press Release, FinCEN, FinCEN Renews Geographic Targeting Order (GTO) Requiring Enhanced Reporting and Recordkeeping for Electronics Exporters Near Miami, Florida (Oct. 23, 2015), available at https://www.fincen.gov/news_room/nr/pdf/20151023.pdf; FinCEN Combats Stolen Identity Tax Refund Fraud in South Florida with Geographic Targeting Order (July 13, 2015), available at https://www.fincen.gov/news_room/nr/pdf/20150713.pdf.
 Incorporation Transparency and Law Enforcement Assistance Act, H.R. 4450, 114th Cong. (2016), available at https://www.gpo.gov/fdsys/pkg/BILLS-114hr4450ih/pdf/BILLS-114hr4450ih.pdf.
 See Louise Story & Stephanie Saul, Stream of Foreign Wealth Flows to Elite New York Real Estate, N.Y. Times, Feb. 7, 2015, available at http://www.nytimes.com/2015/02/08/nyregion/stream-of-foreign-wealth-flows-to-time-warner-condos.html?rref=collection%2Fnewseventcollection%2Fshell-company-towers-of-secrecy-real-estate&action=click&contentCollection=us®ion=rank&module=package&version=highlights&content Placement=1&pgtype=collection.
 See Louise Story, U.S. Will Track Secret Buyers of Luxury Real Estate, N.Y. Times, Jan. 13, 2016, available at http://www.nytimes.com/2016/01/14/us/us-will-track-secret-buyers-of-luxury-real-estate.html?_r=0.
 Id.; FinCEN, Real Estate Title and Escrow Companies: A BSA Filing Study, Assessing Suspicious Activity Reports Related to Real Estate Title and Escrow Businesses 2003-2011 (2012) [hereinafter "FinCEN Study"], citing 69 Fed. Reg. 17,569 and noting that no further regulatory action was taken in this regard.
 Id. at 2 n.3; 31 U.S.C § 5326. As described above, nonfinancial trades or businesses are required to comply with the BSA requirements for the reporting of cash payments (and in certain instances, cash equivalents) greater than $10,000 and are subject to the Treasury Department’s GTO authority.
 FinCEN Study, supra n.21, at 5-6. FinCEN observed that from 2003 through 2011, real estate title and escrow-related businesses filed over 1,000 reports of suspicious activity, primarily using Form 8300. Notably, the ratio of SAR reports filed on the industry (which are mandatory) to those filed by the industry (which are voluntary) was about 750:1. Fifteen distinct real estate title and escrow businesses also filed 29 SARs, including 11 SARs for money services businesses ("SAR-MSBs") and 18 SARs. The industry was the subject of almost 22,000 SARs and SAR-MSBs during the review period. SARs filed on the real estate title and escrow-related industry during the nine year review period reported more than $41 billion in suspicious activity amounts. Suspicious Form 8300 filings by title and escrow-related businesses reported more than $43 million in total cash received from clients for the same period of time.
 Id. at 7. More than 93 percent of the false statement characterizations coincided with reporting of mortgage loan fraud. Nine of the eighteen SARs filed by real estate title and escrow-related businesses described mortgage loan fraud as at least one of the reasons for filing the report.
 FinCEN, Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Residential Mortgage Lenders and Originators, 77 Fed. Reg. 8,148 (Feb. 14, 2012) (codified at 31 C.F.R. § 1029.210 (2016)).
 FinCEN, Director Jennifer Shasky Calvery Prepared Remarks for the American Bankers Association and American Bar Association Money Laundering Enforcement Conference (Nov. 16, 2015), available at https://www.fincen.gov/news_room/speech/html/20151116.html.
 See Press Release, Transparency Int’l USA, Groups Call on U.S. Gov’t to Regulate the Use of Anonymous Cos. to Buy Prop. & to Require Diligence on the Sources of Money by Fin. Inst. (Mar. 11, 2015).
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