January 22, 2016
by Matthew D. Lee and Jed M. Silversmith
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. 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. 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. 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.
 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.
 FinCEN’s press release dated Jan. 13, 2016, is available here: https://www.fincen.gov/news_room/nr/html/20160113.html.
 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.