New Real Estate Reporting Requirements Under Consideration By FinCEN – Real Estate and Construction

On December 6, 2021, the US Financial Crimes Enforcement Network
(“FinCEN”) solicited public comment on how it should
impose recordkeeping and reporting requirements on certain persons
involved in all-cash real estate transactions (“2021
ANPRM”).1 Comments must be
submitted to FinCEN by February 7, 2022.

The requirements contemplated in the 2021 ANPRM may be applied
nationwide to a broad range of real estate transactions, including
commercial real estate transactions. They also may impose
obligations on market participants that currently are not subject
to federal anti-money laundering compliance obligations, such as
real estate developers, managers, lenders, and investment advisers
and investment companies involved in real estate.

The 2021 ANPRM is the first step in the rulemaking process and
will most likely be followed by a detailed proposal and a final
rule. In this Legal Update, we provide background on FinCEN’s
approach to real estate transaction reporting requirements and
summarize the 2021 ANPRM. As discussed further below, potentially
affected participants should consider submitting comments on the
2021 ANPRM to encourage FinCEN to draft a detailed proposal that
appropriately weighs the goals of preventing money laundering with
potentially burdensome compliance obligations.

Background

To aid in the detection and deterrence of money laundering, in
1970, the US Congress passed the Currency and Foreign Transactions
Reporting Act, colloquially known as the Bank Secrecy Act
(“BSA”), which enlisted financial institutions to monitor
and report on certain customer activity.2

While the BSA covers a broad range of financial institutions,
FinCEN has issued regulations implementing the BSA only for a
smaller subset (“covered financial institutions”).
Covered financial institutions subject to FinCEN regulation include
banks; casinos; money services businesses; broker-dealers; mutual
funds; insurance companies; futures commission merchants;
introducing brokers; dealers in precious metals, precious stones or
jewels; credit card system operations; certain loan and finance
companies; and housing government-sponsored enterprises.3 However, many categories of persons
involved in real estate closings and settlements remain outside the
definition of covered financial institutions, even though FinCEN
has considered adding certain market participants since at least
2003.4 This includes many nonbank
market participants in the commercial real estate sector.

In recent years, FinCEN has shown a particular interest in
expanding the scope of the BSA to cover a wider range of
transactions involving real property. Since 2016, FinCEN has issued
a series of geographic targeting orders (“GTOs”) that
require US title insurance companies to identify the natural
persons behind legal entities (US and non-US) used in certain
“all-cash” purchases of residential real estate and to
report these persons and purchases to FinCEN.5 In addition, on the same day FinCEN
announced the 2021 ANPRM, President Biden announced a broader
strategy to combat corruption and illicit finance by implementing
initiatives similar to the contemplated requirements discussed in
the 2021 ANPRM.6

2021 ANPRM

The 2021 ANPRM indicates that FinCEN remains concerned with
money laundering vulnerabilities in the US real estate market and
notes that more than 30 percent of the transactions reported under
the GTOs involve a beneficial owner that has been the subject of a
Suspicious Activity Report. Further, FinCEN believes that these
vulnerabilities are not limited to the transactions covered by the
GTOs, and include real estate transactions in the commercial
markets and involving natural persons. And while the GTOs only
apply to a subset of localities (e.g., metropolitan areas in Texas,
Florida, New York, Massachusetts, California, Hawaii and Nevada),
the 2021 ANPRM contemplates extending reporting requirements to all
real estate transactions nationwide. Accordingly, FinCEN states
that it is preparing a proposed rule that would impose nationwide
recordkeeping and reporting requirements on certain persons
participating in transactions involving non-financed purchase of
real estate.

Covered Transactions

The 2021 ANPRM contemplates a broad scope of coverage for the
proposed regulation. FinCEN states that the non-financed purchase
of real estate refers to “any real estate purchase or
transaction that is not financed via a loan, mortgage, or other
similar instrument, issued by a bank or non-bank residential
mortgage lender or originator, and that is made, at least in part,
using currency or value that substitutes for currency.” It
also contemplates that the proposed regulation may cover all
non-financed purchases of real estate regardless of dollar value,
although it also requests comment on the appropriate transaction
threshold for covered transactions, if any.

As with the GTOs, it appears likely that the proposed regulation
will cover residential real estate. Further, FinCEN implies that
all-cash commercial real estate transactions will be covered by the
proposed rule and states that it is interested in commenters
helping it define how commercial real estate projects involving
bond financing, multiple transactions or multi-year development
periods may be addressed.7 It also
solicits comment on applying the proposed regulation to
non-financed purchases by natural persons, including nominees and
“straw-man” purchasers and trustee/trust
arrangements.

Covered Participants

The 2021 ANPRM recognizes that not all real estate transactions
involve the same types of participants. For example, it notes that
title insurance is not mandatory in every US real estate
transaction, and therefore, imposing a regulation solely with
respect to title insurers would not ensure complete coverage.
Accordingly, FinCEN suggests several categories of participants who
might be covered by the proposed regulation.

FinCEN suggests in one part of the 2021 ANPRM that covered
participants might include real estate brokers and agents, lawyers
representing a buyer or seller, title insurers or title insurance
representatives, closing agents, appraisers and inspectors.
However, in another part of the 2021 ANPRM, FinCEN states that it
also is considering whether settlement agents, escrow companies and
agents, real estate investment companies, real estate development
companies, real estate property management companies, real estate
auction houses, investment advisers, private money lenders and
money services business should also be covered participants for
compliance purposes.8 In a third
part of the 2021 ANPRM, FinCEN suggests that individuals in the
private equity industry also could be covered persons.9 Given FinCEN’s broad
interpretation of its authority, it is conceivable that any and all
of these categories of participants could be viewed as financial
institutions under the BSA.

FinCEN also recognizes that an overly broad approach to
identifying covered persons could lead to unnecessary and
duplicative reporting. Therefore, it suggests that the proposed
regulation might contain a “cascading” approach through
which there would be one and only one covered person for each
covered transaction.

Potential Requirements

The 2021 ANPRM states that, at a minimum, FinCEN believes that
the proposed regulation should require covered persons to collect,
report and retain information on covered transactions. It then
states that the two alternatives FinCEN is considering are: (i)
requiring covered persons to report all covered transactions to
FinCEN or (ii) requiring covered persons to adopt comprehensive
(four-pillar) anti-money laundering compliance programs and monitor
and report suspicious activity to FinCEN. The first approach would
mirror the requirements of the GTOs, while the second approach
would be similar to the compliance obligations imposed on most
other types of financial institutions.

FinCEN also requests comment on how it might apply other
compliance obligations, such as customer due diligence and
beneficial ownership identification requirements to the real estate
industry.

Takeaways

The 2021 ANPRM would impose anti-money laundering compliance
obligations on a broad swath of the US real estate sector. Many
categories of previously unregulated market participants would be
subject to extensive reporting and recordkeeping obligations under
either contemplated approach. For some categories, such as lawyers,
this will become part of the long-running debate regarding the
appropriate use of FinCEN’s authority.10

For other categories of professionals, such as commercial real
estate developers, managers, lenders, and investment advisers and
investment companies involved in real estate, the 2021 ANPRM may
raise new issues that they have not yet confronted. These market
participants and their trade associations should consider engaging
with FinCEN to help shape the proposed regulation. While it is
clear that FinCEN intends to act, thoughtful engagement early in
the process can help channel that action toward more efficient
regulation.

Finally, market participants that are most likely to be subject
to the proposed regulation, such as title insurers, might begin to
consider how they will implement an anti-money laundering
compliance program. At a minimum, having good recordkeeping and a
strong culture of compliance will help to ease the transition to
whatever approach FinCEN eventually adopts.

Footnotes

1 86 Fed. Reg. 69,589 (Dec. 8,
2021); Press Release, FinCEN Launches Regulatory Process for
New Real Estate Sector Reporting Requirements to Curb Illicit
Finance (Dec. 6, 2021), https://www.fincen.gov/news/news-releases/fincen-launches-regulatory-process-new-real-estate-sector-reporting-requirements.

2 12 U.S.C. §§ 1829b,
1951-1960; 31 U.S.C. §§ 5311-5314, 5316-5336.

3 31 C.F.R. ch.
X.

4 See 68 Fed. Reg.
17,569 (Apr. 10, 2003).

5 Press Release, FinCEN
Renews Real Estate Geographic Targeting Orders for 12 Metropolitan
Areas (Oct. 29, 2021); Press Release, FinCEN Takes Aim at
Real Estate Secrecy in Manhattan and Miami (Jan. 13,
2016).

6 Please watch for our
forthcoming Legal Update on President Biden’s strategy on
countering corruption.

7 The 2021 ANPRM does not
specifically address commercial real estate transactions involving
nonbank financing, although it is conceivable FinCEN may address
this structure given the existing compliance obligations imposed on
nonbank residential real estate lenders. See 31 C.F.R. pt.
1029.

8 FinCEN proposed anti-money
laundering rules for investment advisers in 2015 but has not
implemented them. Press Release, FinCEN Proposes AML
Regulations for Investment Advisers (Aug. 25, 2015). FinCEN
already imposes extensive anti-money laundering compliance
requirements on money services businesses. 31 C.F.R. pt.
1022.

9 The references to
“private money lenders” and “private equity”
could be read to mean nonbank financers of real estate transactions
that are not covered by existing anti-money laundering compliance
regulations. Currently, many, if not most, nonbank financers of
commercial real estate are exempt from anti-money laundering
compliance.

10 E.g., ABA, Gatekeeper
Regulations on Attorneys, https://www.americanbar.org/advocacy/governmental_legislative_work/priorities_policy/independence_of_the_legal_profession/bank_secrecy_act/.

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