FinCEN Cracks Down on Real Estate Secrecy

January 22, 2016

by Matthew D. Lee and Jed M. Silversmith

Law360

In yet another sign of its aggressive campaign to fight money laundering, the Treasury Department’s Financial Crimes Enforcement Network has trained its sights on the high-end real estate market in New York and Miami. With the issuance of a little-known yet incredibly powerful anti-money laundering tool called a “geographic targeting order,” FinCEN will soon require certain title insurance companies to identify the natural persons behind companies that used to pay all cash for luxury residential real properties located in the borough of Manhattan and Miami-Dade County.[1] According to a press release announcing the issuance of the GTOs, FinCEN is concerned that individuals are using all-cash purchases of real estate as a mechanism to carry out money laundering, and such individuals are using limited liability companies or other opaque structures to conceal their identities in such transactions.[2] Under the terms of these GTOs, certain title insurance companies involved in all-cash real estate transactions with purchase prices exceeding $3 million in Manhattan, or exceeding $1 million in Miami-Dade County, must report such transactions to FinCEN and, in particular, identify the “beneficial owner” of the entity used to facilitate the purchase.

Background Regarding Geographic Targeting Orders

A GTO is an administrative order issued by the director of FinCEN requiring all domestic financial institutions or nonfinancial trades or businesses that exist within a geographic area to report on transactions any greater than a specified value. GTOs are authorized by the Bank Secrecy Act (BSA). Originally, GTOs were only permitted by law to last for 60 days, but that limitation was extended by the USA Patriot Act to 180 days. GTOs are typically not made public, and generally only those businesses served with a copy of a particular are aware of its existence.

Over the course of the last 24 months, FinCEN — the primary agency of the U.S. government focused on anti-money laundering compliance and enforcement — has exercised its authority to issue GTOs frequently throughout the United States in areas of money laundering concern. Recent GTOs have focused on shipments of cash across the border in California and Texas, the Fashion District of Los Angeles, exporters of electronics in South Florida, and check cashing businesses in South Florida. In each of these instances, FinCEN publicly announced the issuance of the GTO and its terms, and expressed concern that the industries or regions in question were highly susceptible to money laundering.

Prior Efforts to Prevent Money Laundering in Real Estate Transactions

For several years, FinCEN has sought to ensure financial transparency and combat illegality in the real estate market. In February 2015, the New York Times published a series of articles focused on the use of shell companies to purchase high-value real estate in New York City.[3] In a November 2015 speech, FinCEN’s director disclosed that through analysis of BSA reporting and other information, FinCEN has observed the frequent use of shell companies by international corrupt politicians, drug traffickers and other criminals to purchase luxury residential real estate in cash. FinCEN has uncovered fund transfers in the form of wire transfers originating from banks in offshore havens at which accounts have been established in the name of the shell companies. The perpetrator will direct an individual involved in the settlement and the closing in the U.S. to put the deed to the property in the name of the shell company, thereby obscuring the identity of the owner of the property.

The BSA established anti-money laundering obligations for financial institutions, including institutions involved in real estate transactions. By including these businesses in the definition of “financial institution,” Congress recognized the potential money laundering and financial crime risks in the real estate industry. In the USA Patriot Act, Congress mandated that FinCEN issue regulations requiring financial institutions to adopt AML programs with minimum requirements, or establish exemptions, as appropriate. Since that time, FinCEN has implemented AML requirements for certain real estate businesses or established exemptions for others consistent with the BSA.

One particular area of recent focus for FinCEN is seeking greater transparency in the area of beneficial ownership of corporate entities. To that end, in July 2014, FinCEN issued proposed regulations that would amend existing BSA regulations to help prevent the use of shell and shelf companies to engage in or launder the proceeds of illegal activity in the U.S. financial sector. As proposed, the regulations would clarify and strengthen customer due diligence obligations of banks and other financial institutions, including brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities. The proposed amendments would add a new requirement that these entities know and verify the identities of the real people who own, control and profit from the companies they service.

In the press release announcing issuance of the two GTOs focused on real estate transactions, FinCEN Director Jennifer Shasky Calvery said that her agency was “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.” Calvery further explained that “[o]ver 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.” Information gathered by title insurance companies and reported to FinCEN will be utilized by federal law enforcement agencies to enhance their ability to identify the natural persons involved in transactions vulnerable to abuse for money laundering and will combat the ability of individuals to disguise their involvement in such transactions.

Terms of the Manhattan and Miami-Dade GTOs

The latest GTOs focused on real estate transactions apply to certain title insurance companies engaging in “covered transactions,” which are defined as transactions in which (1) a legal entity (2) purchases residential real estate either in the borough of Manhattan or Miami-Dade County (3) for a total purchase price of excess of $3 million (Manhattan) or $1 million (Miami-Dade) (4) without a bank loan or other similar form of external financing and (5) using, at least in part, currency or a cashier’s check, certified check, traveler’s check, or money order. “Legal entity” is defined as a corporation, limited liability company, partnership or other similar business entity, whether domestic or foreign.

If a title insurance company is engaged in a transaction that meets all of the requirements for a “covered transaction,” the title insurance company must report said transaction to FinCEN within 30 days of the closing using a designated form titled “FinCEN Form 8300.” On the Form 8300, the title insurance company must identify (1) the purchaser; (2) the purchaser’s representative, if any; and (3) the beneficial owner, which is defined as each natural person who, directly or indirectly, owns 25 percent or more of the equity interests of the purchaser. The title insurance company must obtain and copy the driver’s license, passport or other similar identification for each beneficial owner. The title insurance company must retain all records relating to the GTO for at least five years and make such records available to FinCEN or any other law enforcement or regulatory agency upon request.

The Manhattan and Miami-Dade GTOs take effect on March 1, 2016, and remain effective until Aug. 27, 2016, unless extended by subsequent order of the FinCEN director. Each title insurer subject to the GTO is required to supervise, and is responsible for, compliance by each of its officers, directors, employees and agents. The title insurance company must transmit a copy of the GTO to each of its agents, and must also transmit a copy to its chief executive officer or similarly acting manager. Any title insurance company, and any of its officers, directors, employees and agents, may be held liable for civil or criminal penalties for violating any terms of the GTO.

Implications of FinCEN’s Latest GTOs

Title insurance companies handling transactions occurring in Manhattan or Miami-Dade County must immediately familiarize themselves, and their employees and agents, with the obligations imposed by these latest GTOs. Title insurance companies would be well-advised to implement training programs so that they are prepared to address these new compliance obligations when they take effect on March 1, 2016. Companies that fail to comply with the reporting and record-keeping requirements of these GTOs may face civil or criminal penalties. While the terms of each GTO currently last for only six months, FinCEN will likely extend the duration of each GTO for additional six months, and may even make them permanent through further regulatory action. Finally, depending upon the quality of the information reported to FinCEN by title companies in Manhattan and Miami, FinCEN may well determine to expand the geographic reach of these orders to other parts of the United States.

Footnotes:

[1] The Manhattan GTO is available here: https://www.fincen.gov/news_room/nr/files/Real_Estate_GTO-NYC.pdf. The Miami-Dade GTO is available here: https://www.fincen.gov/news_room/nr/files/Real_Estate_GTO-MIA.pdf.

[2] FinCEN’s press release dated Jan. 13, 2016, is available here: https://www.fincen.gov/news_room/nr/html/20160113.html.

[3] See “Towers of Secrecy,” The New York Times, Feb. 8-12, 2015, available at: http://www.nytimes.com/2015/02/08/nyregion/the-hidden-money-buying-up-new-york-real-estate.html?_r=0.


“FinCEN Cracks Down on Real Estate Secrecy,” by Matthew D. Lee and Jed M. Silversmith was published in Law360 on January 22, 2016. To read the article online, please click here.

FinCEN Cracks Down on Real Estate Secrecy in Manhattan and Miami

In yet another indication of its aggressive efforts to fight money laundering, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) today issued another Geographic Targeting Order (GTO), this time targeting the luxury real estate market in New York and Miami.  The GTO reflects the government’s concerned that criminals are laundering proceeds of criminal activity through cash purchases of expensive real estate.  This latest GTO will temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in Manhattan and Miami-Dade County.  FinCEN has used its powers to issue GTOs frequently in the past 24 months throughout the United States, including at the Texas and California borders (prior coverage here); the Fashion District of Los Angeles (prior coverage here); exporters of electronics in South Florida (prior coverage here); and check cashers in South Florida (prior coverage here).  In a subsequent post we will present more detailed analysis of this latest GTO.

The text of the FinCEN’s press release announcing today’s GTO follows:

FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami

 “Geographic Targeting Orders” Require Identification for High–End Cash Buyers

 WASHINGTON – The Financial Crimes Enforcement Network (FinCEN) today issued Geographic Targeting Orders (GTO) that will temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in the Borough of Manhattan in New York City, New York, and Miami-Dade County, Florida. 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 properties through limited liability companies or other opaque structures. 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 involved in certain high-end residential real estate transactions in Manhattan and Miami-Dade County.

 With these GTOs, FinCEN is proceeding with its risk-based approach to combating money laundering in the real estate sector. Having prioritized anti-money laundering protections on real estate transactions involving lending, FinCEN’s remaining concern is with the money laundering vulnerabilities associated with all-cash real estate transactions. This includes transactions in which individuals use shell companies to purchase high-value residential real estate, primarily in certain large U.S. cities.

 “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,” said FinCEN Director Jennifer Shasky Calvery. “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.”

 Under specific circumstances, the GTOs will require certain title insurance companies to record and report to FinCEN the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing. They will report this information to FinCEN where it will be made available to law enforcement investigators as part of FinCEN’s database.

 The information gathered from the GTOs will advance law enforcement’s ability to identify the natural persons involved in transactions vulnerable to abuse for money laundering. This would mitigate the key vulnerability associated with these transactions – the ability for individuals to disguise their involvement in the purchase.

 FinCEN is covering certain title insurance companies because title insurance is a common feature in the vast majority of real estate transactions. Title insurance companies thus play a central role that can provide FinCEN with valuable information about real estate transactions of concern. The GTOs do not imply any derogatory finding by FinCEN with respect to the covered companies. To the contrary, FinCEN appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors.

 The GTOs will be in effect for 180 days beginning on March 1, 2016. They will expire on August 27, 2016.

 Any questions about the Orders should be directed to the FinCEN Resource Center at 800-767-2825.

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 FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

 

FinCEN Announces Another Geographic Targeting Order

South Florida check cashers will soon be required to obtain additional identifying information about customers cashing federal tax refund checks over $1,000. The Financial Crimes Enforcement Network issued another Geographic Targeting Order on Monday that will apply to check cashers in Miami-Dade and Broward counties from August 3, 2015 through January 30, 2016. Check cashers will have to obtain at the time of the check-cashing transaction: (1) a copy of the customer’s identification (which must evidence nationality or residence and include a photograph); (2) a digital photograph of the customer (surveillance video is insufficient for this requirement); (3) the customer’s phone number; and, (4) the customer’s thumbprint on the check. This GTO is meant to assist in combating stolen identity tax refund fraud, which has increased in South Florida. This crime involves filing a fraudulent tax return using a stolen identity and then cashing the refund check also using fake identification. Requiring check cashers to obtain this additional information (and keep it until at least January 30, 2021) will assist authorities in prosecuting these crimes.

FinCEN’s announcement can be found here.

The order is available here.

Recent Actions Confirm FinCEN’s Aggressive Anti-Money Laundering Enforcement Agenda

July 2015

Matthew D. Lee

Financier Worldwide Magazine

Blank Rome Partner Matthew D. Lee recently authored an article for the July 2015 edition of Financier Worldwide Magazine, “Recent Actions Confirm FinCEN’s Aggressive Anti-Money Laundering Enforcement Agenda.”

The publicly stated mission of the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is to safeguard the US financial system from illicit use, and combat money laundering and promote national security through the collection, analysis and dissemination of financial intelligence and strategic use of financial authorities. Historically viewed as primarily a data-gathering agency, FinCEN has recently advanced a significantly more aggressive enforcement agenda aimed at combating trade-based money laundering, money laundering through real estate transactions, the use of third-party money launderers, and money laundering through use of virtual currency. In each of these areas, FinCEN’s latest actions confirm that the agency intends to take a far more aggressive approach to enforcement and will exercise its authority, where warranted, to impose substantial penalties and sanctions on wrongdoers.

To read the full article, please click here.

“Recent Actions Confirm FinCEN’s Aggressive Anti-Money Laundering Enforcement Agenda,” by Matthew D. Lee was published in the Financier Worldwide Magazine July 2015 Issue.

FinCEN Announces First Civil Enforcement Action Against Virtual Currency Exchanger

Continuing its aggressive anti-money laundering enforcement agenda, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced yesterday that it had commenced the first-ever civil enforcement action against a virtual currency exchanger.  FinCEN announced that it had assessed a $700,000 civil money penalty against Ripple Labs Inc. and its wholly-owned subsidiary, XRP II, LLC.  Ripple is the second largest cryptocurrency by market capitalization, after Bitcoin.

FinCEN found that Ripple Labs willfully violated multiple provisions of the Bank Secrecy Act by acting as a money services business (MSB) and selling its virtual currency known as XRP.  Ripple Labs failed to register with FinCEN as a MSB and failed to implement and maintain an adequate anti-money laundering program designed to protect its products from use by money launderers or terrorist financiers.  Ripple Labs’ subsidiary, XRP II, also willfully violated the BSA by failing to implement an effective AML program and by failing to report suspicious activity related to several financial transactions.  Ripple Labs and XRP II agreed with FinCEN’s conclusions and consented to imposition of the civil money penalty.  In a companion civil settlement with the U.S. Attorney’s Office for the Northern District of California, Ripple Labs agreed to forfeit $450,000 and avoided criminal prosecution.

In a Statement of Facts and Violations released as part of the settlement documents, and agreed to by Ripple Labs and XRP II, FinCEN and U.S. Attorney’s Office described the following suspicious transactions that were not properly reported:

On September 30, 2013, XRP II negotiated an approximately $250,000.00 transaction by email for a sale of XRP virtual currency with a third-party individual. XRP II provided that individual with a “know your customer” (“KYC”) form and asked that it be returned along with appropriate identification in in order to move forward with the transaction. The individual replied that another source would provide the XRP virtual currency and did not “require anywhere near as much paperwork” and essentially threatened to go elsewhere. Within hours, XRP II agreed by email to dispense with its KYC requirement and move forward with the transaction. Open source information indicates that this individual, an investor in Ripple Labs, has a prior three-count federal felony conviction for dealing in, mailing, and storing explosive devices and had been sentenced to prison, see United States v. Roger Ver, CR 1-20127-JF (N.D. Cal. 2002);

In November 2013, XRP II rejected an approximately $32,000.00 transaction because it doubted the legitimacy of the overseas customer’s source of funds.  XRP II failed to file a suspicious activity report for this transaction; and

In January 2014, a Malaysian-based customer sought to purchase XRP from XRP II, indicating that he wanted to use a personal bank account for a business purpose.  Because of these concerns, XRP II declined the transaction but again failed to file a suspicious activity report for the transaction.

As part of this global settlement, Ripple Labs agreed to implement a series of remedial measures including the following:

  • It agreed to conduct activity only through a registered MSB;
  • It agreed to implement and maintain an effective AML program;
  • It agreed to comply with Funds Transfer and Funds Travel Rules;
  • It agreed to conduct a three-year “look-back” to require suspicious activity reporting for prior suspicious transactions; and
  • It agreed to retain external independent auditors to review BSA/AML compliance every two years until 2020.

FinCEN’s latest enforcement action is an outgrowth of its efforts to regulate the growing virtual currency industry.  Two years ago, FinCEN issued guidance specifying that virtual currency exchangers and administrators are “money transmitters” under the BSA and are required to register with FinCEN and institute certain recordkeeping, reporting, and AML program measures.  In a speech delivered today at the West Coast AML Forum, FinCEN Director Jennifer Shasky Calvery touted her agency’s enforcement action against Ripple Labs and warned other virtual currency businesses of the consequences of non-compliance:

     Virtual currency exchangers – like all members of regulated industry – must bring products to market that comply with our anti-money laundering laws. Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.

The regulatory framework for money services businesses, which include virtual currency exchangers and administrators, has been in existence for years.  To clarify these regulatory requirements, FinCEN issued guidance just over two years ago, noting that virtual currency exchangers and administrators are “money transmitters” under the Bank Secrecy Act (BSA) and its implementing regulations.  As such, they are required to register with FinCEN as a money services business and institute certain recordkeeping, reporting, and AML program measures.

Since issuing the guidance, FinCEN has regularly engaged with the virtual currency industry through administrative rulings and outreach efforts to further clarify our regulatory coverage.  We are extremely fortunate to have a team of experts who work very hard to keep pace with the quickly evolving technology in this area.  They share what they have learned through extensive training efforts with law enforcement, regulators, and prosecutors domestically and globally.  These are the people who are on the front lines of investigating illegal use of emerging payment systems.  They also share their experiences with industry so that companies will be able to avoid being compromised by unlawful actors, and being used as a vehicle for illicit finance.

The FinCEN Director also noted that her agency, working with BSA examiners at the Internal Revenue Service, recently initiated a series of supervisory examinations of virtual currency businesses:

     Working closely with our delegated BSA examiners at the Internal Revenue Service (IRS), FinCEN recently launched a series of supervisory examinations of businesses in the virtual currency industry.  As with our BSA supervision of other parts of the financial services industry, these exams will help FinCEN determine whether virtual currency exchangers and administrators are meeting their compliance obligations under the applicable rules.  Where we identify problems, we will use our supervisory and enforcement authorities to appropriately penalize non-compliance and drive compliance improvements.