On February 07, 2024, FinCEN issued a Notice of Proposed Rulemaking (NPRM) to combat and deter money laundering in the U.S. residential real estate sector by increasing transparency. FinCEN is seeking to require certain professionals involved in the closing or settlement of residential real estate transfers to report information to FinCEN about certain non-financed sales and transfers and keep records. The reporting requirement is tailored in nature as it is designed to capture a particular class of activity that Treasury deems high-risk and that warrants reporting on a transaction-specific basis. The new reporting requirement for non-financed residential real estate transactions would require certain persons involved in residential real estate closings and settlements to file, and to maintain a record of, a streamlined version of a Suspicious Activity Report (SAR), referred to as a “Real Estate Report.”
The information required to be reported in the Real Estate Report would identify the reporting person, the legal entity or trust to which the residential real property is transferred, the beneficial owners of that transferee entity or transferee trust, the person that transfers the residential real property, and the property being transferred, along with certain transactional information about the transfer.
Here is a summary of the NPRM and conditions highlighted in FinCEN’s Fact Sheet
- It would require businesses, including attorneys, performing specified closing or settlement functions for the non-financed sale or transfer of residential real property to an entity or trust, to collect and report information to FinCEN.
- The information to be reported includes:
- Beneficial ownership information for the legal entity (transferee entity) or trust (transferee trust) receiving the property
- Information about individuals representing the transferee entity or transferee trust
- Information about the business filing the report (the reporting person)
- Information about the residential real property being sold or transferred
- Information about the transferor (the seller)
- Information about any payments made
- The persons subject to these reporting and recordkeeping requirements would be deemed reporting persons for purposes of the proposed rule and would be determined through a “cascading” approach based on the function performed by the person in the real estate closing and settlement.
- The “cascade” is designed to minimize burdens on persons involved in real estate closings and settlements while avoiding gaps in reporting and incentives for evasion. To provide some flexibility in this cascade approach, real estate professionals would also have the option to designate a reporting person from among those in the cascade by agreement.
- The reporting person would be required to file the Real Estate Report no later than 30 days after the date of closing. Because of the streamlined nature of these Real Estate Reports compared to traditional SARs, as well as the flexible “cascade” framework, persons subject to this reporting requirement would not need to maintain the types of AML programs otherwise required of financial institutions under the BSA.
- The proposed rule also makes clear that reportable residential real property includes property located in the United States, which is defined in the BSA implementing regulations to mean any State, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and territory or possession of the United States.
- For purposes of the proposed rule, a person may hold an ownership interest in residential real property if the person has rights to the property that are demonstrated through a deed or, for an interest in a cooperative housing corporation, through stock, shares, membership, a certificate, or other contractual agreement evidencing ownership.
Reasoning Behind the NPRM
U.S. residential real estate continues to be an attractive investment to illicit actors looking to launder the proceeds of crime and corruption. As per FinCEN, this is particularly the case for non-financed transfers that are currently outside the purview of the due diligence requirements imposed on regulated financial institutions pursuant to the BSA. FinCEN states that for purposes of this rule, a non-financed transfer is any transfer that does not involve an extension of credit to the transferee secured by the transferred residential real property and extended by a financial institution that has both an obligation to maintain an AML program and an obligation to report suspicious transactions. As a result, money launderers exploit the absence of an obligation on any party to a non-financed transfer to conduct due diligence.
In addition, FinCEN states that the data obtained through the Residential Real Estate GTOs (Geographic Targeting Orders) has connected non-financed residential real property purchases by certain legal entities with the true beneficial owners making the purchases, thereby decreasing the ability of criminals to hide their identities while laundering money through real estate. Residential Real Estate GTOs have been effective as per FinCEN; however, they were intended to be a temporary information collection measure that is limited in duration, not a permanent solution to a nationwide problem. Therefore, the proposed nationwide reporting framework for certain residential real estate transfers, if finalized, would replace the current Residential Real Estate GTOs.
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