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Show Me (Where You Got) the Money: New AML Rules Promise to Upend Real Estate

In our hot housing market, the only concern for the typical real estate professional is getting the highest dollar they can for a property. But possible new rules targeting illegal cash could remake the regulatory landscape in real estate, changing things for buyers, sellers and agents.



In a recent Instagram post, Ryan Serhant, celebrity real estate agent and star of Bravo’s “Million Dollar Listing,” tells a story about one of his clients being arrested by the FBI. Serhant excitedly recounts that the client acted through an attorney, paid his deposit through a fake name and was soon raided and sent to jail for securities fraud.

According to Serhant’s retelling, he knew almost nothing about where the client obtained his money, only that he worked in finance: “I don’t know a whole lot of details,” Serhant concludes enthusiastically about the $10 million sale, “And that is the story of how I sold 260 West Broadway 12C!”


Serhant, like all real estate agents in the U.S., did not need to know. The industry has long been excluded from performing due diligence on customers to evaluate whether they may be purchasing land, homes or buildings with the proceeds of crime. For real estate agents, the most important question is whether their clients have the money — not where it came from. Simultaneously, there is nothing stopping buyers from purchasing real estate through complex webs of shell companies and third parties to protect their anonymity.

This is about to change. A flurry of legislative and regulatory proposals, motivated by widespread recognition that the murky world of real estate is often utilized to sidestep sanctions and launder criminal proceeds, is set to upend the industry. According to a recent report by think-tank Global Financial Integrity, at least $2.3 billion was laundered through U.S. real estate between 2015 and 2020, 82 percent of which involved the use of legal entities to mask ownership. To curb this flow of dirty money, new rules are being proposed that may radically alter the industry’s regulatory obligations and, in turn, the process by which we buy and sell property.


FinCEN’s proposed new rules

The most immediate changes may derive from new regulations proposed by the Financial Crimes Enforcement Network (FinCEN), a department of the U.S. Treasury responsible for combatting money laundering and terrorist financing.

In 2021, FinCEN requested comments on proposals to improve reporting and monitoring requirements surrounding real estate transactions. One approach contemplated by FinCEN, what one might term the “lighter” model, is an extension of reporting requirements associated with so-called geographic targeting orders (GTOs). GTOs require title insurance companies in specific areas to collect and report information on all-cash purchases above a certain threshold for a specific period. Their purpose is to target geographic locations associated with financial crime, such as Miami, which has long served as a central node for drug trafficking between the U.S. and South America.

The lighter model contemplated by FinCEN would create continuous, nationwide requirements to collect and report information on real estate transactions. These requirements could be limited to title insurance companies, but the agency has also requested comments on requiring a wider variety of actors, such as agents, lawyers, developers and auction houses, to collect and report similar information on non-financed transactions. Also up for debate is what exactly must be collected, which could range from information on the identity of each party to more detailed data on where the buyer obtained the funds used to purchase the real estate.

An alternative “heavier” approach would impose requirements on real estate actors to create and implement anti-money laundering (AML) programs equivalent to those operated by banks and other financial institutions. This would require the development of AML policies and procedures, the designation of a dedicated AML officer, regulator training for staff and periodic independent assessments of controls. FinCEN also queries the possibility of applying customer due diligence rules, which would require real estate actors to perform substantial checks on prospective clients before they can act on their behalf.

The impact of this model on the real estate industry cannot be understated; financial institutions spend billions of dollars on these tasks and are often fined billions more for failing to do so effectively. Real estate professionals would suddenly have a far more robust set of regulatory obligations, and prospective home buyers may face more extensive questions on the source of their wealth.

The ENABLERS and KLEPTO acts

While FinCEN explores new regulations surrounding real estate, legislation is advancing through Congress that mandates the heavier approach. Furthest along is the ENABLERS Act, which seeks to remove exemptions from AML rules long enjoyed by “persons involved in real estate closings and settlements” and other actors.

Real estate actors would, in other words, now be considered financial institutions for the purpose of the Bank Secrecy Act and thus be required to implement full AML compliance programs. Further, the ENABLERS Act would direct FinCEN to create a new rule requiring title insurance companies to collect and report information on the beneficial owners of entities involved in real estate transactions.

On June 22, the House Armed Services Committee voted to include the new bill in the National Defense Authorization Act, which sets the annual budget for the Department of Defense. Observers agree that this substantially increases the likelihood of the ENABLERS Act passing through the House, and the Biden Administration has signaled positive sentiment toward its aims. If enough senators can be appeased, the act could become law before the next election.

Following behind is the KLEPTO Act, co-sponsored by a bipartisan group of senators, including Massachusetts’ Elizabeth Warren, a Democrat. The act would, among other aims, require real estate professionals to collect and report to FinCEN beneficial ownership information for all entities involved in both residential and commercial transactions. It also proposes, like the ENABLERS Act, to require real estate actors to develop and maintain key elements of AML compliance programs.

Both these acts and FinCEN’s proposed rulemaking remain works in progress, and the real estate industry is undoubtedly making its voice heard to policymakers. Changes, strategic exclusions and loopholes may emerge as this process unfolds. Nevertheless, change is coming for the U.S. real estate industry.

If the most aggressive proposed rules become law, sketchy clients with opaque sources of funds will no longer serve as mere entertainment. Rather, they will present a liability for real estate agents now responsible for performing comprehensive due diligence. The resulting changes, both for the industry and home buyers, could be seismic.


repost from https://www.corporatecomplianceinsights.com/new-aml-rules-real-estate/

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