August Geographic Targeting Orders Cover Funds Transfers and Hawaii Luxury Residential Real Estate  

On August 22, 2017, the Financial Crimes Enforcement Network (FinCEN) issued revised Geographic Targeting Orders (GTOs) designed to combat money laundering and related financial crimes in select U.S. residential real estate markets. The GTOs further expand the scope of GTOs issued in January 2016, expanded in July 2016, and renewed in February 2017. In tandem with the August GTOs, FinCEN issued an Advisory to Financial Institutions and Real Estate Firms and Professionals (the “Advisory”) and FAQs.


This Business Update outlines the key provisions of the August GTO. For information about this Business Update or MassPoint’s related services, contact Hdeel Abdelhady at habdelhady@masspointpllc.com.


Money Laundering and Illicit Finance Risks Inherent in Luxury Real Estate: Concerns and Rationale for GTOs
In the Advisory, FinCEN explains that luxury real estate markets are “vulnerable to penetration by foreign and domestic criminal organizations and corrupt actors, especially those misusing otherwise legitimate limited liability companies or other legal entities to shield their identities.”[i] FinCEN is not alone in its concern about beneficial ownership opacity generally and in the context of real estate transactions.

Concerns among U.S. and other G-20 officials and agencies about the use of shell companies to conceal money laundering and related crimes (e.g., corruption, sanctions and tax evasion, narcotics trafficking) have yielded policy and regulatory actions in recent years.[ii] Outside of the United States, proposals have been offered and action has been taken to identify the beneficial owners in banking and other transactions. In the United States, steps have been proposed and taken to deprive individual illicit actors of the evasive benefits of corporate opacity. For example, beginning in May 2018, U.S. banks and other “covered financial institutions” will be required to collect, record, and retain beneficial ownership information.[iii]

Real estate, and particularly luxury real estate, has not been spared of policy and regulatory scrutiny. In the United Kingdom, a proposal for a register of foreign legal owners of property and their beneficial owners is advancing.[iv] In the United States, FinCEN has not only issued and expanded GTOs, but also has cross-checked (with Bank Secrecy Act (BSA) data) and analyzed GTO-mandated information to gain “greater insight into illicit finance risks in the high-end real estate market.”

Indeed, according to FinCEN, as of May 2, 2017, “over 30 percent of the real estate transactions reported under the GTOs involved a beneficial owner or purchaser representative that had been the subject of unelated Suspicious Activity Reports filed by U.S. financial institutions.”[vi]
As it appears that data collected through GTOs has thus far justified their expansion, it would not be unreasonable to expect additional expansions of FinCEN GTOs (nor would it be entirely surprising for FinCEN to treat, as a regularized or regulatory matter, real estate industry participants as “financial institutions.”[vii]

U.S. regulators are not alone in their concerns about the interplay between luxury real estate, money laundering, and other illicit activity. Congress members have also raised concerns. At an April 2017 BSA hearing of the House Financial Services Committee’s Subcommittee on Terrorism and Illicit Finance, one high ranking subcommittee member suggested that “GTOs be extended geographically and temporally, to apply nationwide and permanently.”[viii] Another subcommittee member expressed concerns that requiring reporting only by title insurance companies was insufficient, given the reduced incentive to obtain title insurance in all-cash real estate transactions.[ix]  Others raised questions as to whether FinCEN’s GTOs (as of April 27, 2017) were sufficiently broad in geographic scope.[x]

Given the high level and widespread nature of scrutiny of illicit activity in luxury real estate markets, it seems reasonable to expect FinCEN to, at minimum, continue to employ and expand GTOs in the foreseeable future. The remainder of this Business Update discusses core mechanics of the August GTO.

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Notes

[i] Advisory at 2.

[ii] See, e.g., Jamie Smyth and George Parker, G-20 leaders back drive to unmask shell companies, Financial Times, Nov. 16, 2014.

[iii] Customer Due Diligence Requirements for Financial Institutions; Final Rule, 81 Fed. Reg. 29,398 (May 11, 2016) (to be codified at 31 C.F.R. 1010, 1020, 1023, 1024, and 1026) (the “CDD Rule”). See also, Hdeel Abdelhady, Proposed U.S. Rule Requires Banks to Collect Beneficial Ownership Information, Butterworths Journal of International Banking and Financial Law, November 2014 (discussing elements of the proposed CDD rule that are consistent with the final rule).

[iv] See, e.g., Ali Qassim, U.K. Register of Overseas Beneficial Owners Raises Concerns, Bloomberg BNA, April 18, 2017.

Advisory at 2.

[vi] Id. at 5.

[vii] FinCEN has more than once noted that “persons involved in real estate closings and settlements” are “financial institutions” under the law, but have not been regulated by FinCEN as financial institutions. This and other statements could merely be descriptive of FinCEN’s authority vis-à-vis the real estate industry, or such statements may telegraph FinCEN’s future policy or regulatory thinking. Time will tell. See, e.g., Advisory at 1.

[viii] MassPoint PLLC, Congressional Hearing on Terrorism Finance Probes Bank Secrecy Act Data Effectiveness, Lack of Beneficial Ownership Transparency, and Potential BSA and Patriot Act Amendments at 4, April 28, 2017.

[ix] Id. at 4. It is worth noting here that title insurance companies often provide real estate settlement services even when no lender’s or owner’s title insurance policy is purchased. Thus, a title insurance company may be involved in an all cash transaction that does not involve the issuance of a title insurance policy. That said, it is accurate that FinCEN’s GTOs are not comprehensive as to transactions scope and geography. However, there are many ways that the purpose and letter of GTOs can be thwarted—for example, an individual can effectively have the power to obtain beneficial ownership of an entity through holding convertible debt that, at the time of a reportable real estate transaction, has not been converted into equity.

[x] Id. at 4-5.