Money Laundering in U.S. Real Estate

The Financial Crimes Enforcement Network (FinCEN) within the U.S. Treasury Department has recently issued a new order to further address the increase in money laundering and criminal activity within U.S. real estate.

In a statement, FinCEN said that reissuing the geographic targeting orders, “will further assist in tracking illicit funds and other criminal or illicit activity, as well as inform FinCEN’s future regulatory efforts in this sector.”

The Geographic Targeting Orders (GTOs) require U.S. title insurance companies to identify the individuals behind shell companies used in all-cash purchases of residential property.

Previously, the program had solely targeted the luxury real estate sector. However, the new rules have expanded to be more inclusive towards moderately priced homes, the lowest sale price being $300,000. Additionally, FinCEN is requiring that virtual currencies used for purchases, such as Bitcoin, be reported.

Shell companies and cash purchases remain two of the most common ways of laundering money through real estate, as reported by FinCEN.

Buying with cash allows criminals to bypass anti-money laundering reviews that banks have to complete when approving mortgages. Also, shell companies can provide a large level of secrecy, making it difficult for the seller to know who they’re making a deal with.

Prior to this change, people living in top luxury cities like Manhattan were only required to report such transactions if their home was $3 million or more. This equated to less than 150 deals in the first year of the program, as reported by the Mansion Global.

“There should be no possibility of forming an LLC without disclosing the beneficial owner.”

Currently, the GTOs cover the following major U.S. cities: Boston; Chicago; Dallas-Fort Worth; Honolulu; Las Vegas; Los Angeles; Miami; New York City; San Antonio; San Diego; San Francisco; and Seattle. This includes several big Trump markets such as New York, Miami, and Palm Beach.

According to USA Today, 70% of Donald Trump’s company’s property sales have been made to limited-liability corporations (LLCs).

FinCEN’s new targeting orders include key points that pertain to U.S. realtors. One of which is a requirement that regulated financial entities need to file a Suspicious Activity Report (SAR) for suspicious transactions.

A report published by the Federal Reserve Bank of New York and the University of Miami found that since the GTO program was implemented, the number of companies using all cash to buy homes has drastically decreased. Reportedly, in Miami, the number dropped by 95 percent.

“There should be no possibility of forming an LLC without disclosing the beneficial owner,” said Stef Cassella, a former U.S. Department of Justice prosecutor. “Then you could find out that it’s not just a post office box, but an individual, who you can put in front of a grand jury and seize their assets,” he said.

The Board of Application’s (BSA) definition of “financial institution” includes those involved in real estate transactions. FinCEN estimates that requiring the mortgage lending industry to file SARs puts 78% of residential purchases in the U.S. subject to BSA/AML compliance.

In 2015, A New York Times investigation found shell companies purchased nearly half of residential homes over $5 million. The House and Senate have proposed several bills over money laundering, yet, action to effectively eliminate the issue has yet to be taken, as it remains a divisive issue between members of Congress and federal agencies.

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