Federal Scrutiny of All-Cash Purchases

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The Financial Crimes Enforcement Network (FinCEN) has issued Geographic Targeting Orders (GTO’s) requiring several title insurance underwriters to identify the names of individuals involved in shell companies and other legal entities that make all-cash purchases for high-end residential real estate. Effective August 28, 2016, the GTO’s were augmented to include Los Angeles, San Francisco, San Mateo, Santa Clara and San Diego counties for transactions in excess of $2 million.

Why They are Targeting These Transactions?

FinCEN is concerned that all-cash transactions in these areas are being used by individuals to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures.

According to FinCEN, the initial GTOs are helping law enforcement identify possible illicit activity and informing future regulatory approaches. In particular, a significant portion of covered transactions have indicated possible criminal activity associated with the individuals reported to be the beneficial owners behind shell company purchasers. FinCEN said this corroborates concerns that the transactions covered by the GTOs (i.e., all-cash luxury purchases of residential property by a legal entity) are highly vulnerable to abuse for money laundering. Federal and state law enforcement agencies have also informed FinCEN that information generated by the GTOs has provided greater insight on potential assets held by persons of investigative interest and, in some cases, has helped generate leads and identify previously unknown subjects.

“The information we have obtained from our initial GTOs suggests that we are on the right track,” said FinCEN Acting Director Jamal El-Hindi. “By expanding the GTOs to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”

To help mitigate this potential money-laundering vulnerability, FinCEN will require certain underwriters to identify and report the true “beneficial owner” behind a legal entity involved in certain high-end deals in these two areas. The reporting requirement also pertains to the underwriters’ subsidiaries and agents.

“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.”

What Transactions are Affected?

Under specific circumstances, the orders require certain underwriters 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.

Any underwriters  that received the order must file a currency transaction report with FinCEN if these things occur:

  • Location deal occurs in Los Angeles, San Francisco, San Mateo, Santa Clara, or San Diego counties
  • All-cash deal (no financing)
  • For named California counties, purchase price is in excess of $2 million
  • There’s a corporate buyer
  • Purchase price paid via monetary instrument

What Are They Requiring to Be Reported?

The report must include:

  • Information about the identity of the individual primarily responsible for representing the buyer. The title company must obtain a record of the individual’s driver’s license, passport of other similar identification
  • Date of closing of the covered transaction
  • Total amount transferred in the form of a monetary instrument
  • Total purchase price of the covered transaction
  • Address of real property involved

If the purchase involved in the covered transaction is a limited liability company, the underwriter must provide the name, address and taxpayer identification number of all its members.

FinCEN has provided an example report here.

FinCEN has published a list of Frequently Asked Questions here.

Record Keeping

Additionally, covered title companies must retain all records relating to compliance with the order for five years, store the records so they are accessible with a reasonable period of time and make the data available to FinCEN or other law enforcement or regulatory agency, upon request.

Final Words

FinCEN said title insurance companies play a central role in real estate transactions and can provide valuable information about potential illegal activities.

“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,” FinCEN said in a release.

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