At the end of 2021, the Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (ANPRM) to solicit public comment on a potential rule to address the vulnerability of the U.S. real estate market to money laundering and other illicit activity. Several industry associations provided their thoughts, including the American Land Title Association (ALTA), Mortgage Bankers Association(MBA) and the Real Estate Providers Council Inc.
ALTA
ALTA began its letter by stating it believes “it is time to transition from the series of temporary real estate related geographic targeting orders (GTOs) to a more permanent and tailored solution.
“While the GTOs have proved to be moderately valuable for law enforcement, the temporary nature of the regime and use of non-real estate specific forms and practices has made the GTOs costly and difficult to implement for the title industry,” the letter stated.
“Therefore, we recommend FinCEN develop tailored and specific transaction reporting requirements for the all-cash real estate transactions involving corporate entities, instead of imposing a traditional anti-money laundering regime like those imposed on banks,” the letter continued. “Additionally, FinCEN should wait to take further action on this topic until it has completed the regulations and protocols to implement the beneficial ownership database under the Corporate Transparency Act (CTA).”
The GTOs have required title insurers to provide the following information to FinCEN for reportable transactions: the basic transaction information; the name of the purchasing entity; and beneficial ownership information about the purchasing entity. ALTA said that while the first two pieces of information are easy for title companies to provide, beneficial ownership data is more costly and difficult to collect because it is not necessary to close the deal.
“The title industry is often not in the best position to collect beneficial ownership information because it doesn’t have as direct of a relationship with the customer and often is engaged only at the later stages of the transaction,” the letter stated. “Further, the title company must rely on the parties that represent the buyer (either the real estate broker/agent or the buyer’s attorney) to obtain the information. Often those parties will resist assisting the title company because of a lack of awareness of the GTO or because the information is sensitive (or privileged).
“As FinCEN notes, the thing that is ‘highly useful for FinCEN and law enforcement’ is the ability to obtain ‘greater insight regarding assets held by persons of investigative interest,’” ALTA continued. “Thus, law enforcement’s asset tracing capabilities will be greatly enhanced when the CTA is implemented.”
It said FinCEN should develop a real estate specific transaction reporting program.
“We believe a future regulation should continue to focus solely on all-cash transactions and shell companies,” the letter stated. “The GTOs have always been focused on entities. Adding reporting on transactions involving natural persons would drastically increase the volume of reports. Without the ability to automate reporting directly into FinCEN’s E-Filing system by API, the cost on industry would be extraordinary. Further, adding reporting of transactions involving natural persons would be duplicative of data that law enforcement could otherwise purchase from commercial data providers.
“Lastly, we already experience significant customer hesitation to provide sensitive nonpublic information (NPI), like their Social Security number, during a closing,” the letter stated. “Companies in the title industry have worked hard to reduce the amount of NPI they store and retain to assuage customer concerns about data breaches. FinCEN should not expose the industry to those increased risks when commercially available data exists to meet the same need.”
ALTA also advised that subjecting title companies to bank-like AML requirements is unnecessary and costly.
“FinCEN acknowledges the main rationale of imposing due diligence and anti-money laundering requirements on banks and other financial institutions is to ‘enhance financial transparency,’” the letter stated. “It does not make sense to subject title companies to a similar regime because all the money utilized in a real estate transaction (whether financed or not) is already flowing through U.S.-based financial institutions that have anti-money laundering requirements. Additionally, title companies do not have a continuing relationship with the buyer or seller (like a bank has with the holder or owner of an account), given that the average buyer will own their home for 13 years after purchase. Thus, imposing similar requirements on ALTA members would not enhance transparency and only add unnecessary and excessive costs to real estate transactions.”
ALTA also asked FinCEN to meet with industry software providers and commercial title data providers to “understand the data standards used by these systems and the types of data that is easily extractable for transaction reports under a permanent regulation.”
“Under the GTO, much of the requested transaction data (outside of beneficial ownership data) is already collected in these software systems,” the letter stated. “As FinCEN puts permanent rules in place, understanding what additional data is easily extracted from these systems can help it best design the regulation to ensure that FinCEN is receiving high quality data that would be useful to law enforcement.
“Additionally, we believe that FinCEN should not require the industry to provide data when it is readily available from commercial sources,” ALTA continued. “Thus, we recommend FinCEN contact commercial title data providers to learn about the data they have available and the ability to match it to information that will be collected under the CTA. This outreach will hopefully minimize the collection of the same data multiple times.”
It also urged FinCEN to place direct requirements on the professionals in the best position to collect the information.
“The agency should use the guiding principle that any reporting obligation should be directly placed on the party most likely to possess or collect that data or be in the most direct contractual relationship with the customer,” ALTA stated. “Thus, if FinCEN wants data about the transaction (closing date, address, etc.), then it should impose requirements directly on the person conducting the settlement, whether they be title agents, direct operations of the title insurers, or attorneys.
“If FinCEN wants additional information about the buyers, then the agency should impose the obligation on their representatives – the buyer’s real estate broker/agent and their attorney,” the letter continued. “According to a 2021 Global Financial Integrity (GFI) report on money laundering and real estate, the top two gatekeepers and facilitators of real estate money laundering by high-net-worth individuals are 1) lawyers/law firms and 2) real estate agent/brokers. For any reporting requirement to succeed, all parities need to have some skin in the game to either directly report or cooperate in the filing of a report.”
MBA, NAR and others
A group of ten real-estate related associations, including the Mortgage Bankers Association and National Association of Realtors wrote a separate letter, stating it appreciated the goal of preventing the use of LLCs or any form of real estate to finance illicit acts, money laundering, or terrorism, but urged FinCEN to proceed cautiously to not harm legitimate real estate capital flows in the process.
“We also appreciate that FinCEN is seeking ‘to maximize benefits while minimizing burdens on reporting financial institutions and nonfinancial trades or businesses,’” they wrote. “+As part of this effort, anti-money laundering (AML) rules and requirements should focus on risk while not overburdening legitimate actors with unnecessary or duplicative compliance, which will only increase costs without meaningfully combating money laundering.”
It provided three suggestions for FinCEN as it moves forward:
- Study the commercial and multifamily real estate markets to tailor future regulation to how those markets function.
- Leverage the Corporate Transparency Act and the beneficial ownership database to reduce the necessary scope of further action on the ANPRM.
- Distinguish nonbank commercial real estate lenders from true all-cash transactions.
They first noted, “FinCEN is appropriately seeking to gain a better understanding of commercial and multifamily markets before it proposes any regulations under the Bank Secrecy Act (BSA) that would apply in the context of those markets. As noted in the ANPRM, the existing geographic targeting orders, to date, have been limited to all-cash residential real estate transactions in certain locations. Commercial and multifamily real estate (collectively, CRE) transactions are significantly different from residential transactions in terms of economics, due diligence, sophistication, and documentation. At its core, CRE comprises income producing properties. The distinct features of commercial real estate transactions could serve to mitigate some of risks, as many complex CRE transactions involves multiple parties who demand transparency to protect their investments, whether those investments are equity or debt. Illicit finance is a threat to those investments.
“While the ANPRM cites reports that warn of vulnerabilities in commercial real estate, especially all-cash transactions, the reports do not analyze the specific vulnerabilities or examine whether those same susceptibilities exist inside the banking system as well,” the letter continued. “For example, if a nonfinanced CRE transaction is funded by a bad actor’s shell company that has an account at a U.S. depository institution, the vulnerability already existed in other areas of the financial system, not solely in a commercial real estate investment. Likewise, when funds come from an attorney using an Interest on Lawyers Trust Account (IOLTA) at a bank, the vulnerability exists because of improper use of the IOLTA, not because of commercial real estate. These types of vulnerabilities are more appropriately addressed in the banking sector.”
It also said the CTA will provide FinCEN with beneficial ownership information on CRE owners.
“A useful approach to maximizing benefits while minimizing burdens on reporting financial institutions and nonfinancial trades or businesses would be to leverage other reporting requirements, and limit the scope of any new regulatory actions to regulatory gaps,” the letter stated. “For example the full implementation of the 2019 Corporate Transparency Act (CTA) will provide federal authorities with an additional tool to detect illicit finance. The ANPRM lists key factors that FinCEN identifies as contributing to the “systemic vulnerability” of the U.S. real estate market,” including:
- Lack of transparency.
- Attractiveness of the real estate market.
- Lack of industry regulation.
“In the discussion on transparency, the ANPRM focuses on the lack of beneficial ownership information of a legal entity as a key vulnerability,” the associations stated. “When fully implemented, the CTA and federal database of beneficial owners will provide law enforcement with a powerful tool to identify bad actors behind legal entities.”
It also suggested that bank and nonbank financed CRE transactions should not be equated with all-cash transactions.
“In a footnote to the ANPRM, FinCEN describes a broad definition of ‘non-financed’ that includes any commercial mortgage or financing not underwritten by a depository institution,” the associations stated. “In doing so, the ANPRM suggests that nonbank CRE loans have risks comparable to the risks of all-cash transactions. This not the case. Accordingly, we urge FinCEN to distinguish nonbank CRE mortgages from all-cash transactions.”
RESPRO
RESPRO provided its own letter, supporting appropriately tailored anti-money laundering and countering the financing of terrorism rules, but also urged it to wait to propose a rule until the CTA is finalized.
“RESPRO agrees with the American Land Title Association (ALTA) and others that FinCEN should not propose a rule until the implementation Corporate Transparency Act (CTA) is finalized,” RESPRO stated. “We also believe that any rule covering real estate be specifically tailored to real estate for the reasons associated with my previous comments regarding the unique nature of real estate transactions and their diversity of execution across the nation.
“FinCEN should apply the current GTO regime nationally with one key exception, the responsibility for Beneficial Ownership Interest (BOI) data should come under the rubric of the CTA database,” the letter continued. “The title industry would continue to provide basic transaction information and the name of the purchasing entity. It is clear that the CTA database will encompass the necessary information on BOI. It would be duplicative and confusing to attempt to collect the data again via the GTO regime. Furthermore, as noted, those subject to the GTO regime are not necessarily in the best position to acquire accurate data.”
RESPRO also opposed expansive regulations, saying it would be inappropriate to take the approach of proposing and implementing a full BSA-style AML/CFT program complete with mandatory suspicious activity reports.
“Most of the settlement service providers, including real estate agents and brokers, title agents, real estate attorneys, and others are small-business entities,” RESPRO stated. “The imposition of such a program would be prohibitively burdensome and counterproductive. It would add costs to real estate transactions, drive providers from the industry, reduce competition in settlement services and simply not effectively achieve the desired result. In short, it would do more harm than good. A more limited, tailored and incremental approach is the right approach.”