FinCEN’s Safeguards Against Cash Real Estate Purchases

 

A small bureau in The U.S.Department of Treasury has potentially changed an aspect of the real estate industry forever. The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) focus on the real estate market’s role in potentially becoming an instrument for money laundering has been apparent since 2016 when they released their first real estate GTO. Since then, FinCEN has continued to release a series of Geographic Targeting Orders (GTO) that aim to stop people from purchasing expensive real estate anonymously. Read on for an overview of recent GTOs that affluent real estate buyers should be aware of. 

 

FinCEN began to target real estate as the number of shell companies purchasing real estate became increasingly more popular. In fact, the Washington Post reports that in 2015, the year before FinCEN released the GTO on cash real estate transactions, 58% of real estate purchases of over $3 million were made by limited liability corporations, which did not have to disclose their true owners, as opposed to named individuals. 

 

FinCEN took note that when real estate transactions are made using cash, the buyer could remain anonymous. This is because without the need of a mortgage which goes through a financial institution and must be in accordance with AML and KYC rules, an LLC purchaser has no obligation to disclose its true owner. So, in January 2016 FinCEN announced its first GTO, which would require that all-cash real estate purchases in Miami and New York City over a certain price have the title insurance company make a record of the beneficial owner and report it to FinCEN. 

 

In Miami, the title insurance company was required to take down information for any property sold at greater than $1,000,000. Meanwhile in NYC, $3,000,000 was the minimum price requirement. For a transaction to be considered a “cash” transaction it must be made in currency, cashier’s check, certified check, travelers check, or money order. 

 

If all these requirements are met, the title insurance company must identify the purchaser, the purchaser’s representative, and the beneficial owner. The beneficial owner is defined as the natural person or people who enjoy benefits from the purchase by owning 25% or more of the property. GTOs are given a lifetime of 180 days thanks to the PATRIOT Act but can be renewed and updated after their 180-day expiration date. Since the first real estate GTO was put into effect on March 1, 2016, FinCEN has continued to release subsequent GTOs which are the same in essence: requiring title insurance companies to disclose the beneficial owner.

 

The latest GTO has been effective since November 6, 2020 and now covers the following cities: Boston, Chicago, Dallas-Fort Worth, Honolulu, Las Vegas, Los Angeles, Miami, New York City, San Antonio, San Diego, San Francisco, and Seattle. The purchase amount threshold has been lowered to $300,000 for all the cities. The August 2018 GTO and November 2018 GTO expanded definitions of cash transactions to include wire transfers and cryptocurrencies. 

 

With so many targeted cities and a much lower price threshold, GTOs are now providing much more information to FinCEN on cash real estate deals than they did when they first started. According to reports by Ballard Spahr, the Government Accountability Office (GAO) had admitted that while GTOs have led to an increase in investigative leads and acted as an obstacle against money laundering, it’s too early to assess their effectiveness because of the sheer amount of data received. It is important to remember that FinCEN’s approach to closing this money laundering loophole has relied heavily on the use of title insurance companies because they are considered a  financial institution and thus have jurisdiction over them.

 

But what happens if someone is willing to risk not buying title insurance in order to keep their anonymity? By this logic, the current GTO doesn’t necessarily stop all money laundering through real estate purchases. However, it will certainly create more headaches for legitimate transactions.

 

 Although FinCEN’s plan to curb money laundering through real estate is not perfect, it will continue until a better plan is put forward. Our firm will be monitoring any developments that may arise related to the FinCEN GTOs, whether that be statements on their effectiveness and how FinCEN is using the data they receive, or perhaps an expansion of the burden that title insurance companies have put onto other real estate professionals.