As the principal broker for a RE/MAX franchise in coastal Cannon Beach, Oregon, Alaina Giguiere’s typical responsibilities include marketing homes for sellers, touring homes with buyers, generating new business leads, managing client relationships, and drafting and reviewing contracts with buyers and sellers. Never in her decades-long career did Giguiere think she might be responsible for monitoring and reporting potential criminal activity in the real estate market.
“It is just ridiculous to put that on real estate agents and companies,” Giguiere said. “That is not the role of a real estate agent. There is already so much liability and so many things put on us, as agents, it should not be our job to keep track of who paid cash for a home and who didn’t.”
But she may soon not have a choice: In December, Financial Crimes Enforcement Network (FinCEN), a bureau within the U.S. Treasury Department, disclosed that new reporting requirements were coming for all-cash real estate transactions, with the goal of cracking down on individuals who use the U.S. real estate market to launder money.
According to the National Association of Realtors, all-cash purchases accounted for 23% of existing-home purchases or $518 billion out of the total of $2.25 trillion in existing home sales in 2021.
There are currently only 12 metropolitan areas in the U.S. in which title insurance companies are required by law to file reports identifying individuals who made all-cash real estate purchases exceeding $300,000 through shell companies. These metros are known as “geographic targeting orders” (GTOs) and include Boston, Chicago, Dallas-Fort Worth, Honolulu, Las Vegas, Los Angeles, Miami, New York City, San Antonio, San Diego, San Francisco, and Seattle. The GTOs and $300,000 reporting requirement were established in 2016 by FinCEN and were originally designed to target shell companies purchasing real estate in Manhattan and Miami.
The use of shell companies to purchase real estate and other assets in the U.S. and abroad by world and industry leaders was highlighted in the “Pandora Papers,” a trove of nearly 12 million confidential documents obtained and published by the International Consortium of Investigative Journalists. It revealed how heads of state, celebrities, criminals and others shielded vast fortunes through secretive companies set up in tax havens around the world.
Though shell companies are often used by bad actors to mask U.S. home purchases, there are plenty of legal and practical reasons for buying a home through an LLC or trust.
“There are buyers that use shell companies for privacy reasons,” said Michael Nourmand, president of Beverly Hills-based brokerage Nourmand & Associates Realtors. “And some buyers will use shell companies to limit their liability especially if it’s an investment property.”
FinCEN’s advanced notice of proposed rulemaking (ANPRM) looked at establishing more widespread recordkeeping and reporting mandates as authorized under the Bank Secrecy Act, for individuals involved in all-cash real estate transactions in both the residential and commercial real estate sectors.
“Increasing transparency in the real estate sector will curb the ability of corrupt officials and criminals to launder the proceeds of their ill-gotten gains through the U.S. real estate market,” Himamauli Das, acting director of FinCEN said in a statement. “Addressing this risk will strengthen U.S. national security and help protect the integrity of the U.S. financial system. We urge stakeholders to provide input to assist us in developing an approach that enhances transparency while minimizing burden on business.”
When the ANPRM comment period closed in late February, FinCEN had received over 150 public comments. While individuals involved in the industry and trade organizations, such as NAR and American Land Title Association (ALTA), support measures to curb money laundering in the real estate sector, they made it clear that they oppose the new reporting requirements.
In her 16-page comment on behalf of the trade organization, NAR president Leslie Rouda Smith noted the business group’s support for the Anti-Money Laundering Act of 2020 and the Corporate Transparency Act, as well as what she termed “FinCEN’s implementation of risk-based, pragmatic anti-money laundering (AML) and countering the financing of terrorism (CFT) solutions.”
Rouda Smith wrote that the current GTOs already provide an effective template for the collection and reporting of all-cash real estate transactions. “Implementing a nationwide recordkeeping and reporting requirement for title insurance companies, similar to those in place under the GTOs, would facilitate transparency in real estate sales and support law enforcement efforts to detect and stop illicit financial flows involving the real estate industry,” Rouda Smith wrote in her comment.
However, Rouda Smith also stated that she believes imposing these reporting requirements on real estate professionals would not be an effective strategy for achieving FinCEN’s anti-money laundering objectives and that FinCEN’s proposed establishment of mandatory filing requirement for Suspicious Activity Reports (SARs) “would be both overly burdensome and less effective” than the procedures currently in place with the GTOs.
Rouda Smith argued that real estate agents and brokerages’ limited resources and insufficient anti-money laundering expertise and experience “would make it nearly impossible for these practitioners meaningfully comply with a regulation that requires submitting SARs” or “conducting independent compliance testing pursuant to the Banks Secrecy Act.”
NAR claims that such requirements would have a negative impact on the real estate market as a whole and potentially increase real estate costs, while providing little benefit in return.
“Real estate professionals should not be, in effect, ‘deputized’ to investigate and enforce money laundering laws because they are not well-positioned and lack the institutional experience to serve in a quasi-law enforcement, investigatory or regulatory capacity,” Rouda Smith wrote. “Requiring real estate professionals to submit mandatory SARs also will exacerbate the phenomenon of ‘defensive’ SAR filings and produce an overabundance of SAR filings that are not ‘highly useful,’ as required by the AML Act, thereby undermining law enforcement’s ability to accurately identify and prosecute bad actors.”
In addition, Rouda Smith noted that 87% of NAR’s members are independent contractors, small businesses and sole proprietors and, unlike banks, do not have the means to implement sophisticated anti-money laundering programs.
NAR, one of America’s biggest lobbying organizations, also stated that imposing reporting requirements on commercial real estate transactions is not appropropriate or necessary “given the lack of reliable data demonstrating the need for such requirements across an extremely large and complex industry.” In 2021, foreign homebuyers, defined as non-U.S. citizens with permanent residences outside of the U.S., non-immigrant visa holders, or recent immigrants, made up just 8.6% of all commercial real estate buyers, according to NAR. However, while 59% of commercial real estate transactions involving foreign buyers were all-cash purchases, this represented roughly just 5% of all commercial real estate transactions in 2021.
As the regulations currently stand, it falls on title insurers in the 12 GTOs to report these all-cash transactions. In its seven-page comment, authored by ALTA general counsel Steve Gottheim, the trade organization expressed that while it felt that the GTOs have proven “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.”
In its comment letter, ALTA suggested that FinCEN develops “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.”
Like NAR, ALTA feels that asking individual title insurers to record and report every single all-cash transaction “does not make sense functionally and would be unnecessarily costly.”
According to ALTA, in the U.S., there are roughly 20,000 title companies, escrow companies and attorneys that conduct real estate settlements. Of all these title companies, 94% have fewer than 20 employees and 63% have fewer than five employees.
“It is certainly a burden,” Todd Ewing, the founder and CEO of Washington, D.C.-based Federal Title & Escrow said. “It is more labor, more time spent and more liability that we are exposed to. If we don’t complete the forms correctly or we misreport something or a bad actor passes through our office, even if we report everything accurately, we will be subpoenaed and have to seek counsel. It seems to be that there has to be a better way to monitor this than placing it on individual title companies. We are not a government entity, we provide title insurance.”
Instead of placing the burden on title insurers, ALTA recommends that FinCEN meet with the software companies used by title firms to prepare transaction documents and disclosures 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,” as they feel that “title insurers are not in the best position to possess or collect the requested data.”
While there is still debate as to what these regulations will look like and who will be responsible for implementing them, Giguiere agrees that there should be anti-money laundering laws in place.
“We have a lot of cash buyers up here, but it is from people selling their software company or something like that,” Giguiere explained. “So in quiet Cannon Beach I don’t think it is really necessary, but in more active markets, I can appreciate why these rules would need to be in place.”
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