FinCEN expands GTO powers to real estate sectors in Manhattan, Miami to capture secretive beneficial

The US Financial Crimes Enforcement Network (FinCEN) is expanding its use of a powerful tool to snare more information on the secretive buyers of luxury real estate in two of the country’s hottest markets, a first for the bureau following similar orders targeting armored car companies, wholesale clothing and electronics trade.

FinCEN stated Wednesday it has issued geographic targeting orders (GTO) temporarily requiring certain U.S. title insurance companies to identify the natural person, or “beneficial owners,” behind companies paying “all cash” for high-end residential real estate in Manhattan and Miami-Dade Country, Florida.

The move is part of a larger initiative by FinCEN and its director, Jennifer Shasky Calvery, to identify and target key sectors that could be vulnerable to financial crime, but in some instances are not specifically covered by the AML duties in place for entities considered to be financial institutions, including banks, money services business, and more recently, non-bank residential mortgage lenders and originators.

FinCEN, which is also the country’s financial intelligence unit and administers anti-money laundering (AML) regulations, is concerned that all-cash purchases – meaning those without bank financing – may be “conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures,” also referred to as “shell companies,” as they only exist on paper to obscure ownership.

As highlighted by a series last year in The New York Times, there are a “lot of corrupt politically-exposed persons (PEPs) who are investing in the U.S. and transnational organized crime groups as well,” said Bruce Zagaris, an attorney at Berliner, Corcoran & Rowe LLP in Washington, D.C.

“Even the People’s Republic of China has publicly been complaining that the US is purposely not enforcing rules to not transact with criminal groups and corruption because they want the money” to help prop up the economy.

FinCEN stated it is covering certain title insurance companies because that group “is a common feature in the vast majority of real estate transactions. Title insurance companies thus play a central role that can provide FinCEN with valuable information about real estate transactions of concern.” The information will go into FinCEN’s databases to help law enforcement.

The GTOs, which will cover residential purchases of $1 million in South Florida and $3 million in Manhattan, will be in effect for 180 days beginning on March 1, 2016 and expire on August 27, 2016.

“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,” Shasky Calvery said.

“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.”

Critical nexus point

That FinCEN chose the nexus point of title companies, rather than, say, attorneys, appraisers or company formation agents, is a “really good first step,” said a former government financial crime investigator, adding that impenetrable ownership structures can cripple investigations.

Such companies are “already doing title checks and already trying to prove ownership, so they could be a backstop” for deals that clearly have no actual human involved, said the person, who asked not to be named. “They are in the best position to see that information and report back to the government.”

Unlike real estate agents, which can be a small, even one-person operation with little training, title and insurance operations in many instances are larger and have to worry about licensing issues and reputational harm, said the person.

While it’s unclear how FinCEN with find out about non-compliance with the GTO, or which government agency will audit the title companies – potentially the IRS AML division – what is more likely is federal agencies doing undercover stings at title companies to ensure they are abiding by the terms of the order, said the former investigator.

FinCEN has gotten more creative and aggressive using its GTO powers in recent years.

In August, the bureau extended a prior GTO for common carriers of currency – which encompass armored car operations – at two border crossings in Southern California and issued a new GTO for carriers at eight key border crossings in Texas. To read a copy of the orders, please click here.

Prior to that, in July, FinCEN issued a GTO requiring check cashers in two South Florida counties to get more information at lower thresholds from anyone cashing in tax refund checks.

The move was a direct response to the rise in criminal identity thieves stealing account information or personal details from individuals in the region and filing false tax returns, later gaining a check from the Internal Revenue Service under fictitious pretenses and cashing the check using fake identification documents.

That FinCEN GTO was the second one in South Florida in three months – the first was tied to trade and also follows orders linked to Los Angeles’ fashion district – and is further evidence the agency is trying to make a statement against multi-dimensional crimes in critical financial hubs.

Longstanding quest

Foreshadowing the latest GTO, Shasky Calvery stated in May there could be changes coming – some of which could cause gnashing of teeth in the legal community – to ensure entities involved in real estate transactions, facilitators, and attorneys, aren’t tied to organized crime groups, drug kingpins or corrupt politicians.

FinCEN issued AML rules for non-bank residential mortgage lenders in 2012 and has been considering rules around those involved in real estate closings and settlements for more than a decade.

In April 2003, the agency issued an advance notice of proposed rulemaking for the real estate sector, stating rules could cover settlement and closing attorneys and agents, appraisers, title search and insurance companies, escrow companies, and possibly mortgage servicers and corporate service providers.

The initiative was decried by attorneys and the lobbyists in the company formation area, with FinCEN later dropping the initiative because of comments from stakeholders and that it had not adequately analyzed and defined the specific money laundering risks of these entities.

But now, with more pressure from the G20 and a growing nexus of crimes tied to illicit groups using shell entities and offshore jurisdictions to purchase real estate in the United States with dirty money, Shasky Calvery could get more support this time around if and when a formal proposal is released.

In an independent analysis of FinCEN and other data, she stated at that time the bureau “continues to see the use of shell companies by international corrupt politicians, drug traffickers, and other criminals to purchase luxury residential real estate in cash.”

Stepping on ‘big toes’

The move is also a shrewd one by Shasky Calvery, as the GTO will likely find certain egregious instances of transnational organized crime groups, corrupt politically-exposed persons or even entities with ties to terror groups who used anonymity to park assets in real estate, said the person.

If FinCEN is able to uncover the proverbial “smoking gun,” she should be able to garner more support to make the rules permanent, critical momentum the bureau will need to take on the powerful real estate lobby, which props up state and local economies and could be a political flashpoint.

“The whole idea of this is for FinCEN to find out if there needs to be a permanent regulation” covering title companies or other real estate-related entities, said the person. “But that will be a huge uphill battle in Congress because there would need to be proposed regulations and public hearings and everyone will chime in” and try to thwart such a proposal. “She will be stepping on some big toes.”

Beyond the borders of the GTO itself, though, money moving out of the confines of the order could also give as much insight as what is found within it, as certain criminal groups could try to shift illicit funds to another region of the country, giving banks and law enforcement more leads to start new cases.

But the results of the GTO may surprise even FinCEN and future naysayers.

“Shasky Calvery is putting out a big net,” said the former investigator. “She may be only trying to find tuna, such as individuals tied to organized crime groups. But she will find a lot more than that, such as people who are tied to really bad governments or terror attacks. That one would be golden for her.”