Proposed Rule2024-02565
Anti-Money Laundering Regulations for Residential Real Estate Transfers
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
February 16, 2024
Issuing agencies
Treasury DepartmentFinancial Crimes Enforcement Network
Abstract
FinCEN is issuing a proposed rule to require certain persons involved in real estate closings and settlements to submit reports and keep records on identified non-financed transfers of residential real property to specified legal entities and trusts on a nationwide basis. Transfers made directly to an individual would not be covered by this proposed rule. The proposed rule describes the circumstances in which a report must be filed, who must file a report, what information must be provided, and when a report is due. These reports are expected to assist the U.S. Department of the Treasury; Federal, State, and local law enforcement; and national security agencies in addressing illicit finance vulnerabilities in the U.S. residential real estate sector and to curtail the ability of illicit actors to anonymously launder illicit proceeds through the purchase of residential real property, which threatens U.S. economic and national security.
Full Text
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<title>Federal Register, Volume 89 Issue 33 (Friday, February 16, 2024)</title>
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[Federal Register Volume 89, Number 33 (Friday, February 16, 2024)]
[Proposed Rules]
[Pages 12424-12470]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-02565]
[[Page 12423]]
Vol. 89
Friday,
No. 33
February 16, 2024
Part II
Department of the Treasury
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Financial Crimes Enforcement Network
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31 CFR Chapter X
Anti-Money Laundering Regulations for Residential Real Estate
Transfers; Proposed Rule
Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 /
Proposed Rules
[[Page 12424]]
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DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Chapter X
RIN 1506-AB54
Anti-Money Laundering Regulations for Residential Real Estate
Transfers
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: FinCEN is issuing a proposed rule to require certain persons
involved in real estate closings and settlements to submit reports and
keep records on identified non-financed transfers of residential real
property to specified legal entities and trusts on a nationwide basis.
Transfers made directly to an individual would not be covered by this
proposed rule. The proposed rule describes the circumstances in which a
report must be filed, who must file a report, what information must be
provided, and when a report is due. These reports are expected to
assist the U.S. Department of the Treasury; Federal, State, and local
law enforcement; and national security agencies in addressing illicit
finance vulnerabilities in the U.S. residential real estate sector and
to curtail the ability of illicit actors to anonymously launder illicit
proceeds through the purchase of residential real property, which
threatens U.S. economic and national security.
DATES: Written comments on this proposed rule must be submitted on or
before April 16, 2024.
ADDRESSES: Comments may be submitted by any of the following methods:
<bullet> Federal E-Rulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments. Refer to Docket Number
FINCEN-2024-0005 and RIN 1506-AB54.
<bullet> Mail: Policy Division, Financial Crimes Enforcement
Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-
2024-0005 and RIN 1506-AB54.
Please submit comments by one method only.
FOR FURTHER INFORMATION CONTACT: The FinCEN Regulatory Support Section
at 1-800-767-2825 or electronically at <a href="/cdn-cgi/l/email-protection#99ffebfad9fff0f7fafcf7b7fef6ef"><span class="__cf_email__" data-cfemail="abcdd9c8ebcdc2c5c8cec585ccc4dd">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
The U.S. Department of the Treasury (Treasury) has long recognized
the illicit finance risks posed by abuse of the U.S. real estate market
and of legal entities and trusts by criminals and corrupt officials to
launder ill-gotten gains through transfers of residential real estate.
The abuse of U.S. residential real estate markets threatens U.S.
economic and national security and can disadvantage individuals and
small businesses that seek to compete fairly in the U.S. economy. The
proposed rule is designed to enhance transparency nationwide in the
U.S. residential real estate market and to assist Treasury, law
enforcement, and national security agencies in protecting U.S. economic
and national security interests by requiring certain persons involved
in real estate closings and settlements to file reports and maintain
records related to identified non-financed transfers of residential
real estate to specified legal entities and trusts on a nationwide
basis, including information regarding beneficial owners of those
entities and trusts.
Among the persons required by the Bank Secrecy Act (BSA) to
maintain anti-money laundering (AML) programs are ``persons involved in
real estate closings and settlements.'' \1\ Yet, for many years, FinCEN
has exempted such persons from comprehensive regulation under the BSA
and has issued a series of time-limited and geographically focused
``geographic targeting orders'' (GTOs) to the real estate sector in
lieu of more comprehensive regulation. Information received in response
to FinCEN's GTOs relating to non-financed transfers of residential real
estate (Residential Real Estate GTOs) have demonstrated the need for
increased transparency and further regulation of this sector. This
notice of proposed rulemaking (NPRM) thus proposes a new reporting
requirement for non-financed residential real estate transactions,
consistent with the BSA's longstanding directive to impose AML
requirements on persons involved in real estate closings and
settlements. At the same time, FinCEN has carefully considered the
comments received in response to an advance notice of proposed
rulemaking (ANPRM) on Anti-Money Laundering Regulations for Real Estate
Transactions, and FinCEN appreciates the burdens that traditional AML
program and SAR requirements may impose on persons involved in real
estate transactions. This NPRM therefore proposes a streamlined
reporting framework designed to minimize unnecessary burdens while also
enhancing transparency. Although certain information collected under
this proposed rule may also be available to law enforcement, in some
instances, through the new beneficial ownership reporting requirements
imposed by the Corporate Transparency Act (CTA), the CTA's reporting
regime and this proposed rule serve different purposes.
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\1\ 31 U.S.C. 5312(a)(2)(U).
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In contrast to the beneficial ownership reporting requirements
outlined in the CTA, this proposed rule is a tailored reporting
requirement that would capture a particular class of activity that
Treasury deems high-risk and that warrants reporting on a transaction-
specific basis. More specifically, the proposed rule 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 here as a ``Real
Estate Report.'' 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 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. 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.\2\
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\2\ 31 U.S.C. 5318(h).
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[[Page 12425]]
II. Background
A. Illicit Finance Risks in the U.S. Real Estate Sector
As Secretary of the Treasury (Secretary) Yellen noted at the 2023
Summit for Democracy, ``[c]orrupt actors have for decades anonymously
stashed their ill-gotten gains in real estate. Those looking to exploit
our system have been able to--with anonymity--store illicit proceeds in
an appreciating asset . . . Treasury is working to remove that
anonymity[.]'' \3\ The Secretary has made increasing transparency in
the domestic and international financial system a national priority,
noting that ``illicit proceeds . . . equaling an estimated two percent
of U.S. gross domestic product (GDP) flow through the U.S. financial
system each year. Permitting illicit actors to benefit from the
stability and security of the U.S. financial system weakens financial
transparency, distorts markets, and hurts ordinary Americans.'' \4\
Treasury's Strategic Plan for 2022 to 2026 makes clear that one
indicator of success in combatting illicit actors' abuse of the U.S.
financial system is achieving an ``updated regulatory framework for
real-estate [sic] to effectively cover cash transactions.'' \5\
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\3\ U.S. Department of the Treasury, Remarks by Secretary Janet
L. Yellen on Anti-Corruption as a Cornerstone of a Fair,
Accountable, and Democratic Economy at the Summit for Democracy
(Mar. 28, 2023), available at <a href="https://home.treasury.gov/news/press-releases/jy1371">https://home.treasury.gov/news/press-releases/jy1371</a>.
\4\ Id; U.S. Department of the Treasury, Strategic Plan 2022-
2026 (2022), p. 23, available at <a href="https://home.treasury.gov/system/files/266/TreasuryStrategicPlan-FY2022-2026.pdf">https://home.treasury.gov/system/files/266/TreasuryStrategicPlan-FY2022-2026.pdf</a>.
\5\ Id. at p. 24.
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The United States' stable real estate market and strong property
rights protections make U.S. residential real estate attractive to
illicit actors looking to launder the proceeds of crime and corruption.
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. 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 \6\ and extended by a financial
institution that has both an obligation to maintain an AML program and
an obligation to report suspicious transactions. Money launderers
exploit the absence of an obligation on any party to a non-financed
transfer to conduct due diligence.
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\6\ For the purposes of this proposed rule, ``residential real
property'' means: (1) real property located in the United States
containing a structure designed principally for occupancy by one to
four families; (2) vacant or unimproved land located in the United
States zoned, or for which a permit has been issued, for the
construction of a structure designed principally for occupancy by
one to four families; or (3) shares in a cooperative housing
corporation.
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As a result, and as the Administration's 2021 U.S. Strategy for
Countering Corruption notes, the United States' real estate market is a
significant destination for the laundered proceeds of illicit activity.
Treasury's 2022 National Money Laundering Risk Assessment (2022 NMLRA)
also reflects this. The 2022 NMLRA identifies a lack of transparency in
non-financed real estate transfers in particular as a key weakness in
the U.S. Anti-Money Laundering and Countering the Financing of
Terrorism (AML/CFT) regulatory regime.\7\
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\7\ The White House, United States Strategy for Countering
Corruption (Dec. 2021), p. 22, available at <a href="https://www.whitehouse.gov/wp-content/uploads/2021/12/United-States-Strategy-on-Countering-Corruption.pdf">https://www.whitehouse.gov/wp-content/uploads/2021/12/United-States-Strategy-on-Countering-Corruption.pdf</a>; U.S. Department of the
Treasury, National Money Laundering Risk Assessment (Feb. 2022), p.
5, available at <a href="https://home.treasury.gov/system/files/136/2022-National-Money-Laundering-Risk-Assessment.pdf">https://home.treasury.gov/system/files/136/2022-National-Money-Laundering-Risk-Assessment.pdf</a>.
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International bodies, such as the Financial Action Task Force
(FATF) and non-government organizations, have likewise noted the
sector's appeal for illicit actors intent on laundering funds.\8\ In
particular, the FATF has recommended that the United States take
appropriate action to address money laundering risks in relation to
non-financed transfers of real estate.\9\ Furthermore, open-source
investigative reports have demonstrated that criminal actors frequently
employ legal entities, such as limited liability companies (LLCs), to
launder money, including through real estate. In August 2021, Global
Financial Integrity (GFI), a non-governmental organization, published a
study estimating that at least $2.3 billion had been laundered through
the U.S. real estate market from 2015 to 2020 and the ``use of
anonymous shell companies and complex corporate structures continue[d]
to be the number one money laundering typology'' involving real
estate.\10\ Additionally, over 50 percent (30 of the 56 cases the study
examined) involved politically exposed persons (PEPs), which the FATF
has found ``may be able to use their political influence for profit
illegally [and] . . . thus may present a risk higher than other
customers.'' \11\ GFI also highlighted that legal entities and trusts
are frequently used to make such purchases, and that purchases are
rarely made in the name of the PEP. For example, a 2020 forfeiture
complaint filed by the Department of Justice (DOJ) alleged that a
former president of a country in Africa and his spouse used funds
derived from corruption to purchase U.S. residential properties worth
millions of dollars via a trust.\12\ Such crimes undermine the national
security goals of the United States, one pillar of which is countering
corruption.\13\ FinCEN's own December 2022 analysis revealed that
between March and October 2022--the eight months following the invasion
of Ukraine--Russian oligarchs sent millions of dollars to their
children to purchase residential real estate in the
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United States, often via legal entities, demonstrating the appeal of
residential real estate even to the potential targets of U.S.
sanctions.\14\
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\8\ The FATF is a global standard-setter of anti-money
laundering and counter terrorist financing guidelines. The FATF has
noted that ``[c]riminals gravitate towards sectors that apply or are
believed to apply less comprehensive regulation and mitigation
measures or where supervision is found to be lacking,'' and that
``[t]he purchase of real estate allows for the movement of large
amounts of funds all at once in a single transaction as opposed to
multiple transactions of smaller values.'' See Financial Action Task
Force, Guidance for a Risk Based Approach: Real Estate Sector (July
2022), p. 18, available at <a href="https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf">https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf</a>.
\9\ See Financial Action Task Force, United States Mutual
Evaluation Report (Dec. 2016), p. 1, available at <a href="https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MER-United-States-2016.pdf.coredownload.inline.pdf">https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MER-United-States-2016.pdf.coredownload.inline.pdf</a>.
\10\ Global Financial Integrity, ``Acres of Money Laundering:
Why U.S. Real Estate is a Kleptocrat's Dream'' (Aug. 2021), pp. 13-
16, available at <a href="https://gfintegrity.org/report/acres-of-money-laundering-why-u-s-real-estate-is-a-kleptocrats-dream/">https://gfintegrity.org/report/acres-of-money-laundering-why-u-s-real-estate-is-a-kleptocrats-dream/</a>. According to
its website, GFI is ``a Washington, DC-based think tank focused on
illicit financial flows, corruption, illicit trade and money
laundering.'' See Global Financial Integrity, ``About,'' available
at <a href="https://gfintegrity.org/about/">https://gfintegrity.org/about/</a>.
\11\ Financial Action Task Force, Guidance for a Risk Based
Approach: Real Estate Sector (July 2022), pp. 29-30, available at
<a href="https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf">https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf</a>; see e.g., U.S. Department of
Justice, Press Release, Over $1 billion in misappropriated 1MDB
Funds Now Repatriated to Malaysia (Aug. 5, 2021), available at
<a href="https://www.justice.gov/opa/pr/over-1-billion-misappropriated-1mdb-funds-now-repatriated-malaysia">https://www.justice.gov/opa/pr/over-1-billion-misappropriated-1mdb-funds-now-repatriated-malaysia</a>. The term ``PEP'' generally includes
a current or former senior foreign political figure, their immediate
family, and their close associates. See Federal Financial
Institutions Examination Council, FFIEC BSA/AML Examination Manual,
Politically Exposed Persons--Overview (v5 2015), p. 290; see also
Board of Governors of the Federal Reserve System, Federal Deposit
Insurance Corporation, Financial Crimes Enforcement Network,
National Credit Union Administration, and Office of the Comptroller
of the Currency, Joint Statement on Bank Secrecy Act Due Diligence
Requirements for Customers Who May Be Considered Politically Exposed
Persons (Aug. 21, 2020), available at <a href="https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200821a1.pdf">https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200821a1.pdf</a>.
\12\ See Complaint for Forfeiture, U.S. v. Real Property Located
in Potomac, Maryland, Commonly Known as 9908 Bentcross Drive,
Potomac, MD 20854 (D. Md. July 15, 2020) (Case No. 20-cv-02071).
\13\ The White House, National Security Strategy (Oct. 2022), p.
36, available at <a href="https://www.whitehouse.gov/wp-content/uploads/2022/10/Biden-Harris-Administrations-National-Security-Strategy-10.2022.pdf">https://www.whitehouse.gov/wp-content/uploads/2022/10/Biden-Harris-Administrations-National-Security-Strategy-10.2022.pdf</a>.
\14\ See FinCEN, Financial Trend Analysis--Trends in Bank
Secrecy Act Data: Financial Activity by Russian Oligarchs in 2022
(Dec. 2022).
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As numerous public law enforcement actions illustrate, non-financed
purchases of residential real estate by certain legal entities and
trusts are acutely vulnerable to exploitation by illicit actors, due to
a general lack of AML regulations covering or applicable to transfers
conducted in this manner.\15\ While many non-financed residential real
estate transfers may involve no illicit funds, a substantial proportion
of such non-financed transactions are conducted by persons also engaged
in activity characterized by other financial institutions as
suspicious, and reporting on such non-financed residential real estate
transactions is of significant value to law enforcement. For example,
the individuals and entities identified in Residential Real Estate GTO
reports correlate with traditional SAR filings by financial
institutions: FinCEN has found that approximately 42 percent of non-
financed real estate transfers captured by the Residential Real Estate
GTOs are conducted by individuals or legal entities on which a SAR has
been filed. In other words, persons of potential interest to law
enforcement due to their engagement in suspicious activity are also
engaging in a type of transaction known to be used as a method of
money-laundering: the non-financed purchase of residential real estate
through a legal entity.
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\15\ See, e.g., U.S. v. Delgado, 653 F.3d 729 (8th Cir. 2011)
(drug trafficking, money laundering); U.S. v. Fernandez, 559 F.3d
303 (5th Cir. 2009) (drug trafficking, money laundering); Complaint
for Forfeiture, U.S. v. All the Lot or Parcel of Land Located at 19
Duck Pond Lane Southampton, New York 11968, Case No. 1:23-cv-01545
(S.D.N.Y. Feb. 24, 2023) (sanctions evasion); Indictment and
Forfeiture, U.S. v. Maikel Jose Moreno Perez, Case No. 1:23-cr-
20035-RNS (S.D. Fla. Jan. 26, 2023) (bribery, money laundering,
conspiracy); Motion for Preliminary Order of Forfeiture and
Preliminary Order of Forfeiture, U.S. v. Colon, Case No. 1:17-cr-47-
SB (D. Del. Nov. 18, 2022) (drug trafficking, money laundering);
U.S. v. Andrii Derkach, Cr. No. 22-432 (E.D.N.Y. Sept. 26, 2022)
(sanctions evasion, money laundering, bank fraud); Doc. No. 10 at p.
1, U.S. vs. Ralph Steinmann and Luis Fernando Vuiz, Case No. 22-2-
306-CR-Gayles/Torres (S.D. Fla. July 12, 2022) (bribery, money
laundering); U.S. v. Jimenez, 2022 U.S. Dist. LEXIS 77685, 2022 WL
1261738 (S.D.N.Y. Apr. 28, 2022) (Case No. 1:18-cr-00879) (false
claim fraud, wire fraud, money laundering, identity theft);
Complaint for Forfeiture, U.S. v. Real Property Located in Potomac,
Maryland, Commonly Known as 9908 Bentcross Drive, Potomac, MD 20854,
Case No. 20-cv-02071 (D. Md. July 15, 2020) (public corruption,
money laundering); Final Order of Forfeiture, U.S. v. Raul Torres,
Case No. 1:19-cr-390 (N.D. Ohio Mar. 30, 2020) (operating an animal
fighting venture, operating an unlicensed money services business,
money laundering); U.S. v. Bradley, 2019 U.S. Dist. LEXIS 141157,
2019 WL 3934684 (M.D. Tenn. Aug. 20, 2019) (Case No. 3:15-cr-00037-
2) (drug trafficking, money laundering); Indictment, U.S. v. Patrick
Ifediba, et al., Case No. 2:18-cr-00103-RDP-JEO, Doc. 1 (N.D. Ala.
Mar. 29, 2018) (health care fraud); Redacted Indictment, U.S. v.
Paul Manafort, Case 1:18-cr-00083-TSE (E.D. Va. Feb. 26, 2018)
(money laundering, acting as an unregistered foreign agent); U.S. v.
Miller, 295 F. Supp. 3d 690 (E.D. Va. 2018) (wire fraud); U.S. v.
Coffman, 859 F. Supp. 2d 871 (E.D. Ky. 2012) (mail, wire, and
securities fraud); U.S. v. 10.10 Acres Located on Squires Rd., 386
F. Supp. 2d 613 (M.D.N.C. 2005) (drug trafficking); Atty. Griev.
Comm'n of Md. v. Blair, 188 A.3d 1009 (Md. Ct. App. 2018) (money
laundering drug trafficking proceeds); State v. Harris, 861 A.2d 165
(NJ Super. Ct. App. Div. 2004) (money laundering, theft); see also
U.S. Department of Justice, Press Release, United States Reaches
Settlement to Recover More Than $700 Million in Assets Allegedly
Traceable to Corruption Involving Malaysian Sovereign Wealth Fund
(Oct. 30, 2019), available at <a href="https://www.justice.gov/opa/pr/united-states-reaches-settlement-recover-more-700-million-assets-allegedly-traceable">https://www.justice.gov/opa/pr/united-states-reaches-settlement-recover-more-700-million-assets-allegedly-traceable</a>; U.S. Department of Justice, Press Release, Acting
Manhattan U.S. Attorney Announces $5.9 Million Settlement of Civil
Money Laundering And Forfeiture Claims Against Real Estate
Corporations Alleged to Have Laundered Proceeds of Russian Tax Fraud
(May 12, 2017), available at <a href="https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-attorney-announces-59-million-settlement-civil-money-laundering-and">https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-attorney-announces-59-million-settlement-civil-money-laundering-and</a>; U.S. Department of Justice, Press Release,
Associate of Sanctioned Oligarch Indicted for Sanctions Evasion and
Money Laundering: Fugitive Vladimir Vorontchenko Aided in Concealing
Luxury Real Estate Owned by Viktor Vekselberg (Feb. 7, 2023),
available at <a href="https://www.justice.gov/usao-sdny/pr/associate-sanctioned-oligarch-indicted-sanctions-evasion-and-money-laundering">https://www.justice.gov/usao-sdny/pr/associate-sanctioned-oligarch-indicted-sanctions-evasion-and-money-laundering</a>.
Moreover, as the FATF noted in July 2022, ``[d]isparities with rules
surrounding legal structures across countries means property can
often be acquired abroad by shell companies or trusts based in
secrecy jurisdictions, exacerbating the risk of money laundering.''
International bodies, such as the FATF have found that
``[s]uccessful AML/CFT supervision of the real estate sector must
contend with the obfuscation of true ownership provided by legal
entities or arrangements[.]'' Financial Action Task Force, Guidance
for a Risk Based Approach: Real Estate Sector (July 2022), p. 17,
available at <a href="https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf">https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf</a>.
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In addition to the law enforcement and national security concerns
regarding abuse of the residential real estate sector, money laundering
through residential real estate can distort real estate prices and
potentially make it more difficult for legitimate buyers and sellers to
participate in the market. In particular, the presence of illicit funds
in the real estate sector can affect housing prices.\16\ Legitimate
buyers are also adversely affected by illicit actors' preference to
avoid financing, as sellers generally favor such ``all-cash'' offers
due to the speed with which a sale can be closed.\17\
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\16\ See, e.g., Richard Vanderford, ``Fraudulent Covid Aid Drove
Up U.S. House Prices, Report Says,'' The Wall Street Journal (June
22, 2023).
\17\ See The White House, United States Strategy for Countering
Corruption (Dec. 2021), p. 7, available at <a href="https://www.whitehouse.gov/wp-content/uploads/2021/12/United-States-Strategy-on-Countering-Corruption.pdf">https://www.whitehouse.gov/wp-content/uploads/2021/12/United-States-Strategy-on-Countering-Corruption.pdf</a>; Financial Action Task Force,
Guidance for a Risk Based Approach: Real Estate Sector (July 2022),
p. 19, available at <a href="https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf">https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf</a>.
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Due to the illicit finance risks presented and the attendant
economic burdens of market abuse, FinCEN's public efforts to counter
money laundering in the real estate sector have focused on the use of
legal entities by illicit actors to obfuscate ownership of residential
real property.\18\ The reasoning behind this focus on legal entities is
discussed extensively in FinCEN's December 2021 Anti-Money Laundering
Regulations for Real Estate Transactions ANPRM (2021 ANPRM), which
highlighted how, as evidenced by open source investigative articles,
law enforcement actions, and feedback from FinCEN's Residential Real
Estate GTOs program, individuals intent on laundering money through
residential real estate frequently take advantage of the opacity of
shell companies or other legal entity structures to mask true
beneficial ownership of a property and their involvement in real estate
transfers.\19\
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\18\ See, e.g., FinCEN, Press Release, FinCEN Renews and Expands
Real Estate Geographic Targeting Orders (Apr. 21, 2023), available
at <a href="https://www.fincen.gov/news/news-releases/fincen-renews-and-expands-real-estate-geographic-targeting-orders-1">https://www.fincen.gov/news/news-releases/fincen-renews-and-expands-real-estate-geographic-targeting-orders-1</a> (announcing the
renewal of an effort to combat illicit finance by collecting
information on legal entity purchases of real estate); FinCEN, FIN-
2017-A003, Advisory to Financial Institutions and Real Estate Firms
and Professionals (Aug. 22, 2017), p. 2 (noting that high-value
residential real estate markets are vulnerable to penetration by
foreign and domestic criminal organizations and corrupt actors,
especially those misusing otherwise legitimate LLCs or other legal
entities to shield their identities).
\19\ 86 FR 69589 (Dec. 8, 2021).
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B. FinCEN's Prior Regulation of the Real Estate Sector
1. Current Law
Enacted in 1970, the Currency and Foreign Transactions Reporting
Act, generally referred to as the BSA, is designed to combat money
laundering, the financing of terrorism, and other illicit financial
activity.\20\ The Secretary is authorized to administer the BSA and to
require financial institutions to keep
[[Page 12427]]
records and file reports that ``are highly useful in criminal, tax, or
regulatory investigations or proceedings'' or in the conduct of
``intelligence or counterintelligence activities, including analysis,
to protect against international terrorism.'' \21\ The Secretary
delegated the authority to implement, administer, and enforce
compliance with the BSA and its implementing regulations to the
Director of FinCEN.\22\
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\20\ See 31 U.S.C. 5311. Certain parts of the Currency and
Foreign Transactions Reporting Act, its amendments, and the other
statutes relating to the subject matter of that Act, have come to be
referred to as the BSA. The BSA is codified at 12 U.S.C. 1829b, 12
U.S.C. 1951-1960, and 31 U.S.C. 5311-5314 and 5316-5336, and
includes notes thereto, with implementing regulations at 31 CFR
Chapter X. The Anti-Money Laundering Act of 2020, Section 6003(1)
(Definitions), defines the BSA as section 21 of the Federal Deposit
Insurance Act (12 U.S.C. 1829b), Chapter 2 of Title I of Public Law
91-508 (12 U.S.C. 1951 et seq.), and 31 U.S.C. chapter 53,
subchapter II.
\21\ 31 U.S.C. 5311(1).
\22\ Treasury Order 180-01, Paragraph 3(a) (Jan. 14, 2020),
available at <a href="https://home.treasury.gov/about/general-information/orders-and-directives/treasury-order-180-01">https://home.treasury.gov/about/general-information/orders-and-directives/treasury-order-180-01</a>.
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The BSA requires each covered financial institution to establish an
AML/CFT program, which must include, at a minimum, ``(A) the
development of internal policies, procedures, and controls; (B) the
designation of a compliance officer; (C) an ongoing employee training
program; and (D) an independent audit function to test programs.'' \23\
The BSA also authorizes the Secretary to require covered financial
institutions to report any suspicious transaction relevant to a
possible violation of law or regulation (a ``suspicious activity
report'' or ``SAR'').\24\ Among the financial institutions subject to
those requirements under the BSA are ``persons involved in real estate
closings and settlements.'' \25\
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\23\ 31 U.S.C. 5318(h)(1)(A)-(D).
\24\ 31 U.S.C. 5318(g).
\25\ 31 U.S.C. 5312(a)(2)(U).
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FinCEN's regulations implementing the BSA require banks, non-bank
residential mortgage lenders and originators (RMLOs), and housing-
related Government Sponsored Enterprises (GSEs) to file SARs and
establish AML/CFT programs.\26\ However, FinCEN's regulations exempt
other persons involved in real estate closings and settlements from the
requirement to establish AML/CFT programs, and the regulations do not
impose a SAR filing requirement on such persons.\27\
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\26\ 31 CFR parts 1020, 1029, 1030.
\27\ 31 CFR 1010.205(b)(1)(v).
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2. FinCEN's Real Estate Exemption
In 2002, FinCEN temporarily exempted certain financial
institutions, including ``persons involved in real estate closings and
settlements'' and ``loan and finance companies,'' from the requirement
to establish an AML/CFT program. FinCEN explained that it would
``continue studying the money laundering risks posed by these
institutions in order to develop appropriate AML program
requirements.'' \28\ That additional time was needed to consider the
businesses that would be subject to such requirements, as well as the
nature and scope of the AML/CFT risks associated with those
businesses.\29\ FinCEN also explained its concern that many of these
financial institutions were sole proprietors or small businesses, and
FinCEN intended to avoid imposing ``unreasonable regulatory burdens
with little or no corresponding anti-money laundering benefits.'' \30\
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\28\ 67 FR 21110, 21111 (Apr. 29, 2002).
\29\ Id. FinCEN initially exempted persons involved in closings
and settlements for six months, and then subsequently extended the
temporary exemption indefinitely. Id.; 67 FR 67547, 67548 (Nov. 6,
2002).
\30\ 67 FR 21110, 21112 (Apr. 29, 2002).
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In 2003, FinCEN issued an ANPRM regarding the AML/CFT program
requirement for ``persons involved in real estate closings and
settlements'' (2003 ANPRM). The 2003 ANPRM solicited comments on the
money laundering risks in real estate closings and settlements, how to
define ``persons involved in real estate closings and settlements,''
whether any persons involved in real estate closings and settlements
should be exempted from the AML/CFT program requirement, and how to
structure the requirement in light of the size, location, and
activities of persons in the real estate industry.\31\ FinCEN received
52 comments on the 2003 ANPRM from individuals, various institutions
and associations of interested parties, law firms, state bar
associations, an office within DOJ, and an office within the Internal
Revenue Service (IRS).\32\ Many comments suggested that the threat of
money laundering through real estate warranted appropriate regulation,
but commenters disagreed over the specific businesses that should be
covered. FinCEN did not propose regulations in response to these
comments, and persons involved in real estate closings and settlements
continue to be exempt from the AML/CFT program requirement.
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\31\ 68 FR 17569 (Apr. 10, 2003).
\32\ See FinCEN's website to review comments submitted,
available at <a href="https://www.fincen.gov/comments-advance-notice-proposed-rule-anti-money-laundering-programs-persons-involved-real-estate">https://www.fincen.gov/comments-advance-notice-proposed-rule-anti-money-laundering-programs-persons-involved-real-estate</a>.
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3. FinCEN's Targeted Actions in the Real Estate Sector
While maintaining the exemption for persons involved in real estate
closings and settlements, FinCEN has taken targeted action to address
certain vulnerabilities in the real estate sector. In a 2012 final
rule, FinCEN eliminated an exemption for ``loan and finance
companies,'' and required such companies--defined as RMLOs--to file
SARs and comply with AML/CFT program obligations.\33\ In a 2014 final
rule, FinCEN extended similar requirements to the housing-related
GSEs--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.\34\ In
a 2020 final rule, FinCEN also imposed additional AML/CFT obligations
on banks lacking a federal functional regulator, ensuring that such
entities would be subject to requirements to have an AML/CFT program
and meet Customer Identification Program (CIP) and Customer Due
Diligence (CDD) requirements, including the verification of beneficial
owners of legal entity accounts, in addition to their existing SAR
obligations (which would include reporting on transactions involving
suspicious real estate transactions).\35\
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\33\ 77 FR 8148 (Feb. 14, 2012) (codified at 31 CFR part 1029).
\34\ 79 FR 10365 (Feb. 25, 2014) (codified at 31 CFR part 1030).
\35\ 85 FR 57129 (Sept. 15, 2020) (codified at 31 CFR 1020.210).
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To address non-financed transfers of residential real estate that
do not involve a bank or other lender, FinCEN also began to issue
Residential Real Estate GTOs in 2016.\36\ The Residential Real Estate
GTOs require title insurance companies to file reports and maintain
records concerning non-financed purchases of residential real estate
above a certain price threshold by certain legal entities in select
metropolitan areas of the United States.
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\36\ See 31 U.S.C. 5326; 31 CFR 1010.370; Treasury Order 180-01
(Jan. 14, 2020), available at <a href="https://home.treasury.gov/about/general-information/orders-and-directives/treasury-order-180-01">https://home.treasury.gov/about/general-information/orders-and-directives/treasury-order-180-01</a>. In
general, a GTO is an order administered by FinCEN which for a finite
period of time imposes additional recordkeeping or reporting
requirements on domestic financial institutions or other businesses
in a given geographic area, based on a finding that the additional
requirements are necessary to carry out the purposes of, or to
prevent evasion of, the BSA. The statutory maximum duration of a GTO
is 180 days, though it may be renewed.
---------------------------------------------------------------------------
Information received in response to the Residential Real Estate
GTOs has confirmed the money laundering risks involved in non-financed
transfers of residential real estate and provided FinCEN and its law
enforcement partners with additional data about that money laundering
typology. The data obtained through the Residential Real Estate GTOs
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. FinCEN regularly
receives feedback from law enforcement
[[Page 12428]]
partners that they use the information to generate new investigative
leads, identify new and related subjects in ongoing cases, and support
prosecution and asset forfeiture efforts. Taking that input into
account, FinCEN has renewed the time-limited Residential Real Estate
GTOs multiple times and has expanded them to cover additional
metropolitan areas and methods of payment, yielding additional insight
into the risks in both the luxury and non-luxury residential real
estate markets.\37\ The information on real estate purchases thus
enables investigators to connect real estate transactions with other
suspicious financial activity. Although the Residential Real Estate
GTOs have been effective, they were intended to be a temporary
information collection measure that is limited in duration, not a
permanent solution to a nationwide problem.\38\ 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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\37\ FinCEN found that money laundering risks existed at lower
price thresholds, and thus the current Residential Real Estate GTOs
set a $300,000 threshold for all covered jurisdictions, except for
the City and County of Baltimore, for which the threshold is
$50,000.
\38\ See supra note 36.
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4. The 2021 Real Estate ANPRM
On December 8, 2021, FinCEN published an ANPRM requesting comment
on potential AML regulations for certain real estate professionals.\39\
The 2021 ANPRM solicited public comment on whether and how to address
money laundering vulnerabilities in the U.S. real estate market,
including whether a transactional reporting requirement, triggered when
a real estate purchase meets certain conditions, should be imposed on
real estate professionals under the BSA. The 2021 ANPRM also solicited
comment on whether, in lieu of a transactional reporting requirement,
FinCEN should promulgate AML/CFT program requirements and SAR filing
requirements for persons involved in real estate closings and
settlements, similar to those that are in place for banks and other
financial institutions. The 2021 ANPRM further sought comment
concerning many aspects of real estate transfers, including: views on
the scope of potential regulation of non-financed residential and
commercial real estate transfers by legal entities and legal
arrangements such as trusts; the sector's vulnerability to money
laundering; differences in residential and commercial real estate
transfers; due diligence best practices present in the industry; and
the costs of any potential regulations.
---------------------------------------------------------------------------
\39\ See 86 FR 69589 (Dec. 8, 2021).
---------------------------------------------------------------------------
In response to the 2021 ANPRM, FinCEN received 151 public comments
from a wide variety of stakeholders, including real estate industry
associations, law firms and associations, non-governmental
organizations, credit unions, Members of Congress, academics, and
members of the public. Approximately 41 were unique comments and 110
were uniform statements submitted by members of the title insurance
industry.
In general, commenters were split in their opinions on whether
FinCEN should require transactional reports \40\ or require persons
involved in real estate closings and settlements to have full AML/CFT
program obligations.\41\ One commenter wrote that if FinCEN were to
apply new reporting measures, it should work with the IRS to amend IRS
Form 1099-S to include buyer-side information, along with the seller-
side information it already collects.\42\ Still other commenters
suggested expanding the Residential Real Estate GTOs program to cover
the entire nation either all at once or incrementally.\43\ FinCEN has
considered all the comments that it received in response to the 2021
ANPRM in drafting this proposed rule.
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\40\ National Association of Realtors, ANPRM Comment (Feb. 18,
2022), pp. 1, 14, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0128">https://www.regulations.gov/comment/FINCEN-2021-0007-0128</a>.
\41\ See Transparency International U.S., ANPRM Comment (Feb.
18, 2022), p. 9, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0115">https://www.regulations.gov/comment/FINCEN-2021-0007-0115</a>; The FACT Coalition, ANPRM Comment (Feb. 18,
2022), p. 3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0122">https://www.regulations.gov/comment/FINCEN-2021-0007-0122</a>; California Reinvestment Coalition, ANPRM
Comment (Feb. 18, 2022), p. 2, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0126">https://www.regulations.gov/comment/FINCEN-2021-0007-0126</a>; Coalition for
Integrity, ANPRM Comment (Feb. 21, 2022), pp. 3-4, available at
<a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0127">https://www.regulations.gov/comment/FINCEN-2021-0007-0127</a>; Louise
Shelley and Ross Delston, ANPRM Comment (Feb. 21, 2022), p. 2,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0151">https://www.regulations.gov/comment/FINCEN-2021-0007-0151</a>.
\42\ American Escrow Association, ANPRM Comment (Feb. 18, 2022),
pp. 13-17, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0124">https://www.regulations.gov/comment/FINCEN-2021-0007-0124</a>.
\43\ See Prosperus Title, ANPRM Comment (Feb. 18, 2022), p. 1,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0125">https://www.regulations.gov/comment/FINCEN-2021-0007-0125</a>; Marisa N. Bocci, ANPRM Comment (Feb. 21, 2022), p. 3,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0150">https://www.regulations.gov/comment/FINCEN-2021-0007-0150</a>; RESPRO, ANPRM Comment (Feb. 21, 2022), p. 2, available at
<a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0152">https://www.regulations.gov/comment/FINCEN-2021-0007-0152</a>.
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III. FinCEN's Proposed Approach to a Real Estate Reporting Requirement
A. Streamlined SAR Requirement
FinCEN has considered the extent to which non-financed residential
real estate transactions should be subject to the standard AML program
and SAR-filing requirements that the BSA applies to other financial
institutions. By subjecting financial institutions to those
requirements and expressly including ``persons involved in real estate
closings and settlements'' among the types of financial institutions
specified in the statute, the BSA appears to indicate an expectation
that such persons comply with the same AML/CFT rules currently
applicable to other types of financial institutions. Although FinCEN
originally issued an exemption in 2002 that relieved persons involved
in real estate closings and settlements from that obligation, that
exemption was intended to be only temporary while FinCEN continued to
study money laundering risks in the real estate sector.\44\
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\44\ See 67 FR 21110 (Apr. 29, 2002).
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After many years of study and several targeted and temporary
actions to enhance transparency in the real estate sector, FinCEN is of
the view that the money laundering risks for non-financed residential
real estate transactions warrant comprehensive AML/CFT regulations. As
explained above, such transactions can be used to facilitate and
obscure illicit activity. And, as several commenters on the ANPRM have
urged, AML programs and SAR-filing obligations would provide highly
useful information to law enforcement about those transactions. FinCEN
recognizes, however, that the standard AML program and SAR-filing
requirements may be especially burdensome to persons involved in real
estate transactions, as many of them may be small businesses or
individuals who cannot easily implement an AML program designed to
identify and report suspicious activity. Such programs, which require
financial institutions to make risk-based judgments about transactions
and suspicious activity, may also be ineffective if small businesses
and individuals in the real estate sector have difficulty implementing
them.
For these reasons, FinCEN is proposing a streamlined reporting
requirement that differs from the requirements typically imposed on
other financial institutions. In particular, section 5318(g) of the BSA
authorizes the Secretary to require financial institutions to report,
via SARs, any ``suspicious transactions relevant to a possible
violation of law or regulation.'' \45\ But the BSA affords the
Secretary flexibility in implementing that requirement, and indeed
directs the Secretary to consider ``the means by or
[[Page 12429]]
form in which the Secretary shall receive such reporting,'' including
relevant ``burdens,'' ``efficiency,'' and ``benefits.'' \46\ A new
provision added to the BSA by section 6202 of the Anti-Money Laundering
Act of 2020 (AML Act) further directs FinCEN to ``establish streamlined
. . . processes to, as appropriate, permit the filing of noncomplex
categories of reports of suspicious activity.'' In assessing whether
streamlined filing is appropriate, FinCEN must determine, among other
things, that such reports would ``reduce burdens imposed on persons
required to report[,]'' while at the same time ``not diminish[ing] the
usefulness of the reporting to Federal law enforcement agencies,
national security officials, and the intelligence community in
combating financial crime, including the financing of terrorism[.]''
\47\
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\45\ 31 U.S.C. 5318(g)(1)(A).
\46\ 31 U.S.C. 5318(g)(5)(B)(i)-(iii).
\47\ See AML Act, section 6202 (codified at 31 U.S.C.
5318(g)(D)(i)(1)). Section 6102(c) of the AML Act also amended 31
U.S.C. 5318(a)(2) to give the Secretary the authority to ``require a
class of domestic financial institutions or nonfinancial trades or
businesses to maintain appropriate procedures, including the
collection and reporting of certain information as the Secretary of
the Treasury may prescribe by regulation, to . . . guard against
money laundering, the financing of terrorism, or other forms of
illicit finance.'' FinCEN believes this authority also provides an
additional basis for the reporting requirement proposed in this
NPRM.
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Based on that authority, FinCEN is proposing to streamline the SAR
reporting requirement for purposes of this rule and to create a new
form--the Real Estate Report--to reflect this streamlined approach.
FinCEN believes that a streamlined reporting requirement, without an
accompanying AML/CFT program, is appropriate, as the proposed rule
would impose a requirement to report basic, standardized information
about all relevant transactions, nationwide.
FinCEN believes the proposed streamlined reporting requirement
would enhance the usefulness of BSA reporting to Federal law
enforcement agencies, national security officials, and the intelligence
community for combating financial crimes. The information collected
would contain crucial details about a typology of real estate transfers
that present acute illicit finance risks and for which there is broad
consensus that regulation is needed--information that would not
otherwise be routinely identified and reported in a traditional SAR.
FinCEN also believes that a streamlined filing requirement would
reduce the potential burden on reporting persons. The filing
requirement would be triggered when the conditions set forth in the
proposed rule are met, which FinCEN believes will reduce the overall
burden for most filers, compared to those that would be required when
implementing a traditional AML program. The streamlined filing
requirement, unlike the requirements for filing a traditional SAR,
would entail no risk-based judgment about when to file and no narrative
assessment. Thus, similar to a Currency Transaction Report (CTR), Form
8300, or report filed under the Residential Real Estate GTOs, the
proposed Real Estate Report would not require filers to make
discretionary decisions.\48\ Because of this, while FinCEN's
traditional SAR authority mandates that SARs be guided by a financial
institution's AML/CFT program designed to ensure that those
discretionary decisions are made appropriately, FinCEN believes that an
AML/CFT program is not necessary for reporting persons to accurately
prepare and file useful reports under the proposed rule.\49\ For this
reason, the proposed rule would exempt persons involved in real estate
closings and settlements from the BSA's requirement to establish AML/
CFT programs--effectively maintaining the current exemption for such
persons under 31 U.S.C. 5318(h)(1), in light of the new reporting
requirement.\50\
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\48\ Under the BSA and its implementing regulations, ``each
financial institution other than a casino shall file a [CTR] of each
deposit, withdrawal, exchange of currency or other payment or
transfer, by, through, or to such financial institution which
involves a transaction in currency of more than $10,000[.]'' 31 CFR
1010.311; see also 31 U.S.C. 5313. Under the BSA, relevant IRS
statutes, and associated implementing regulations, ``[a]ny
[individual, trust, estate, partnership, association, company or
corporation] who, in the course of a trade or business . . .
receives currency in excess of $10,000 in 1 transaction (or 2 or
more related transactions) shall . . . [file a Form 8300] with
respect to the receipt of currency.'' 31 CFR 1010.330(a)(1)(i); see
also 31 U.S.C 5331; 26 U.S.C. 7701(a)(1).
\49\ See 31 U.S.C. 5318(g)(5)(C).
\50\ See 31 CFR 1010.205(b)(v).
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The proposed rule would also exempt reporting persons from the
confidentiality provisions that the BSA applies to suspicious activity
reporting.\51\ These confidentiality provisions typically serve to
ensure that banks and other such financial institutions do not alert
SAR subjects to the fact that a SAR is being filed based on a suspicion
with respect to the subject, potentially inducing a behavior change and
reducing the utility of the SAR. However, as the triggering criteria
for the filing of the proposed streamlined filing (a non-financed
transfer to certain legal entities and trusts) would be known by all
parties to the transfer, including those whose information will be
collected and reported to FinCEN, the same confidentiality
considerations do not apply.\52\
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\51\ See 31 U.S.C. 5318(g)(2).
\52\ 31 U.S.C. 5318(a)(7).
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B. The Corporate Transparency Act
FinCEN notes that certain information collected under this proposed
rule--most notably the beneficial ownership information of certain
legal entities--will be collected and available to law enforcement in
certain instances by virtue of the new beneficial ownership reporting
requirements imposed by the CTA and implemented through the Beneficial
Ownership Information Reporting Requirements Rule (BOI Reporting
Rule).\53\ However, the CTA's reporting regime and this proposed rule
would serve different purposes. This proposed rule is designed as a
tailored reporting requirement that would capture a particular class of
activity that Treasury deems high-risk--namely, non-financed
residential real estate transfers to certain legal entities and
trusts--and that, given the risk, warrants reporting on a transaction-
specific basis. The resulting reports could readily alert law
enforcement to the persons involved in a transfer of assets that
carries significant illicit finance risk. Indeed, as with traditional
SARs, reports under this proposed rule would require reporting on
specific real estate transactions and allow Treasury and law
enforcement to connect money laundering through real estate with other
types of potentially illicit activities and to conduct broad money
laundering trend analysis. In contrast, the BOI Reporting Rule requires
companies to file reports about the beneficial ownership of certain
legal entities; however, this information is unlikely to shed light on
purchases of real estate by criminal actors or allow law enforcement to
map out purchases of residential real estate by individual criminals
and money launderers as well as their networks. Although some
information about real estate purchases may in some cases be separately
available through other sources such as state land registries (as
discussed
[[Page 12430]]
below), the inclusion of both beneficial ownership information and real
estate transaction information in a single report as proposed in this
NPRM will enable law enforcement to access information about potential
criminal activity in a more timely and efficient manner.
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\53\ The BOI Reporting Rule implements the CTA's reporting
provisions. In recognition of the fact that illicit actors
frequently use corporate structures to obfuscate their identities
and launder ill-gotten gains, the BOI Reporting Rule requires
certain legal entities to file reports with FinCEN that identify
their beneficial owners. See 87 FR 59498 (Sept. 30, 2022). Access by
authorized recipients to BOI collected under the CTA are governed by
other FinCEN regulations. See 88 FR 88732 (Dec. 22, 2023).
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In addition, the information to be reported under this proposed
rule would differ from the information to be reported under the CTA in
several ways. For instance, the proposed rule would require reporting
of certain information about beneficial owners that is not required to
be reported under the CTA reporting regime.\54\ A discussion of the
content of the proposed Real Estate Report is included in Section IV.E.
Furthermore, reports filed pursuant to the BOI Reporting Rule--
Beneficial Ownership Information Reports--and reports filed pursuant to
this proposed rule--Real Estate Reports--would be housed in different
databases with differing access privileges. The proposed Real Estate
Reports would be stored electronically in the same database as
traditional SAR and other BSA reports, in keeping with the nature,
purposes, and use of those reports.
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\54\ For example, the CTA reporting regime will only indirectly
require trusts to report their beneficial owners if an individual
indirectly owns or controls a reporting company through a trust.
---------------------------------------------------------------------------
Nevertheless, although they serve different purposes, the proposed
rule adopts or adapts certain definitions from the BOI Reporting Rule
where appropriate. These definitions are discussed in more detail in
Section IV.B.
C. Lack of Alternative Sources of Relevant Information
While other investigative methods and databases may be available to
law enforcement seeking information on persons involved in non-financed
transfers of residential real property, such sources of information are
often incomplete, unreliable, and diffuse, resulting in a misalignment
between these sources and the potential risks posed by the
transfers.\55\ Furthermore, the non-uniformity of the title transfer
processes across states and the fact that the recording of title
information is largely done at the local level complicates and hinders
investigative efforts. An investigator could spend months or even years
going through the electronic or physical property records databases of
the over 3,000 counties in the United States, only some of which have
digitized their records. Furthermore, although certain data about non-
financed transfer could be obtained through the Residential Real Estate
GTOs, those GTOs currently cover only 68 cities and counties are
currently covered by the Residential Real Estate GTOs. In order to
verify how many non-financed purchases of residential real estate a
known illicit actor has made, law enforcement may have to issue
subpoenas to each jurisdiction and potentially travel in-person to many
counties to find the relevant information. Law enforcement is also
likely to experience difficulty in finding beneficial ownership
information for non-financed transfers of residential real estate to
legal entities or trusts not registered in the United States. This is
particularly key as international buyers contributed approximately $59
billion to the existing-home U.S. residential real estate market from
April 2021 to March 2022 and 44 percent of international purchases were
non-financed, compared to 24 percent for all existing-home buyers.\56\
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\55\ See generally Sarah Mancini, Kate Lang, and Chi Wu,
``Mismatched and Mistaken: How the Use of an Inaccurate Private
Database Results in SSI Recipients Unjustly Losing Benefits,''
National Consumer Law Center (Apr. 2021), available at <a href="https://www.nclc.org/wp-content/uploads/2022/08/RptMismatchedFINAL041421.pdf">https://www.nclc.org/wp-content/uploads/2022/08/RptMismatchedFINAL041421.pdf</a>.
\56\ See National Association of Realtors, 2022 International
Transactions in U.S. Residential Real Estate (July 2022), pp. 4-5,
available at <a href="https://cdn.nar.realtor/sites/default/files/documents/2022-international-transactions-in-us-residential-real-estate-07-18-2022.pdf?_gl=1*3orrzx*_gcl_au*MTc4MTk3NTgzOS4xNjg3OTg1MTYy">https://cdn.nar.realtor/sites/default/files/documents/2022-international-transactions-in-us-residential-real-estate-07-18-2022.pdf?_gl=1*3orrzx*_gcl_au*MTc4MTk3NTgzOS4xNjg3OTg1MTYy</a>. The
overall dollar value of international investment in residential real
estate was comparatively low from 2021-2022 compared to the prior
ten years due, in part, to investment and travel restrictions
accompanying the COVID-19 pandemic. FinCEN believes this dollar
value, in the absence of pandemic conditions, may therefore
experience some mean reversion.
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The disjointed nature of existing local databases also poses a
significant obstacle to a common investigative methodology employed by
law enforcement when it searches for perpetrators of money laundering
and other criminal activity--namely, identifying networks of
individuals that have potentially engaged in suspicious activity. A
search of the proposed Real Estate Reports would be far more efficient
than searching incomplete commercial databases or potentially visiting
thousands of county-level deed offices. FinCEN assesses that law
enforcement would benefit from access to information about transfers
that reflect an identified money laundering typology in one central
location managed and hosted by the U.S. government. Finally, existing
commercial databases do not collect important information that is the
focus of this rule, including funds transfer information.
IV. Section-by-Section Analysis
The proposed rule would impose reporting and recordkeeping
requirements related to certain transfers of residential real property
(reportable transfers). The reporting and recordkeeping obligations
would primarily apply to ``reporting persons,'' who are certain persons
involved in real estate closings and settlements. Generally, the
reporting person would be identified on the basis of their order in a
``cascade'' of specific functions performed by various persons involved
in facilitating the closing or settlement of a real estate transaction.
The proposed rule would also allow persons in the cascade to designate
the reporting person amongst themselves.
The reporting person would be required to report information
identifying the transferee entity or trust, the beneficial owners of
the transferee entity or trust, and certain individuals signing
documents on behalf of the transferee entity or transferee trust
(signing individual), as well as information concerning the reporting
person, the transferor, the real estate transferred, and certain
payment information. The reporting person would be required to file a
Real Estate Report with FinCEN and maintain a copy of that report,
along with a certification by the transferee's representative as to the
identities of the beneficial owner(s) of the transferee, for a period
of five years. If the persons involved in facilitating the closing or
settlement enter into a designation agreement with regard to the
reporting person, then the parties to the agreement would also be
required to retain that agreement for a period of five years.\57\
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\57\ See 31 CFR 1010.430(d).
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A. Residential Real Property in Reportable Transfers
1. Reportable Residential Real Property
The proposed rule is meant to broadly capture residential real
property such as single-family houses, townhouses, condominiums, and
cooperatives, as well as apartment buildings designed for one to four
families. These properties would be captured even if there is also a
commercial element to the property, such as a single-family residence
that is located above a commercial enterprise. The proposed rule would
also include certain types of land on which a residence is not yet
built. The criteria for whether property falls within the parameters of
the rule can be met in one of three ways: (1) it is real property that
includes a structure
[[Page 12431]]
designed principally for occupancy by one to four families; (2) it is
land that is vacant or unimproved, and that is zoned, or for which a
permit has been issued, for occupancy by one to four families; or (3)
it is a share in a cooperative housing corporation. This definition
modifies and expands the definition of ``residential real property''
used in the Residential Real Estate GTOs.
Although shares of a cooperative are generally treated under state
law as personal property rather than real property, FinCEN believes
that the money laundering risks for residential cooperatives are
similar to those of condominiums and other residential real property. A
cooperative is a corporation, and the owners of the cooperative are the
corporation's shareholders. Receiving ownership of shares in a
cooperative therefore differs from receiving ownership of real
property, as it does not include the filing of a deed specifying that
ownership of a piece of real property has been transferred. However,
the fundamental purpose of owning shares in a cooperative is to possess
a piece of real property--generally a unit in an apartment owned by the
cooperative. As the primary purpose for owning shares in a cooperative
is to occupy real property, and because the market for cooperatives
overlaps with the market for condominiums and other types of real
property, FinCEN believes that it is appropriate to treat shares of a
cooperative as residential real property for purposes of this rule.
Without this treatment, money laundering risks may be unduly
incentivized to shift investments to this segment of the real estate
market.
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.\58\ FinCEN believes this geographical scope is
appropriate and that more limited coverage would likely push illicit
activity into non-covered areas. Furthermore, a uniform national
approach will provide consistency and predictability for businesses
required to maintain records and make reports under this proposed rule.
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\58\ 31 CFR 1010.100(hhh).
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2. Ownership Interests in Reportable Residential Real Property
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.
Deeds are documents demonstrating title over property and recording
changes in ownership and are effective when signed by the transferor
and delivered to the transferee. They are generally publicly recorded,
and although not all deeds are filed as such, the majority are, and
there are benefits to doing so, such as preempting disputes over
ownership and effecting the ability to sell the property.
The ownership interests of a cooperative housing corporation are
not reflected on a deed and are instead typically demonstrated through
stock or shares. The holder of each ownership interest has the right to
dispose of that stock or share, the value of which primarily reflects
the value of the residence attached to the interest.
B. Transferees in Reportable Transfers
1. Transferee Entities
The proposed regulation would require reporting only if a
transferee of an ownership interest in residential real property is a
transferee entity or a transferee trust, as those terms are defined.
Such a transfer would be reportable even if one or more other
transferees (i.e., those that are neither a transferee entity nor
transferee trust) also receive an ownership interest in the same
property as part of the same transaction. Generally, the proposed rule
provides that a ``transferee entity'' is any person other than a
transferee trust or an individual. For example, a transferee entity may
be a corporation, partnership, estate, association, or limited
liability company. However, the definition of a ``transferee entity''
contains exceptions for certain highly regulated entities.\59\
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\59\ For example, as discussed further below, individuals and
trusts (outside of statutory trusts) are excepted from the
definition of ``transferee entity.'' In addition, certain types of
legal entities that are exempt from the requirement to report
beneficial ownership information under the CTA are also excepted.
Trusts are considered ``transferee trusts'' rather than ``transferee
entities'' to ensure the proposed rule differentiates between legal
entities and legal arrangements.
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The proposed definition is informed by comments submitted in
response to the 2021 ANPRM. In general, the 2021 ANPRM commenters
recognized the money laundering risks presented by transfers of
residential real estate to certain legal entities and supported
coverage of them in any potential regulation.\60\ Some commenters
stated that only legal entities that are not covered by the CTA should
be covered by any potential regulation of the real estate sector, as
their beneficial ownership information will not be collected under the
BOI Reporting Rule.\61\ However, as discussed below, FinCEN believes
that this would leave a serious regulatory gap that would prevent the
proposed rule from achieving its purpose of addressing illicit finance
risk in the residential real estate sector. One commenter suggested
that FinCEN use the definition of ``legal entity'' that appears in
FinCEN's 2020 CDD Rule.\62\
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\60\ See Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), pp. 10, 24, 30, 39, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; American Land Title Association,
ANPRM Comment (Feb. 17, 2022), p. 1, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0020">https://www.regulations.gov/comment/FINCEN-2021-0007-0020</a>; Transparency
International U.S., ANPRM Comment (Feb. 18, 2022), pp. 3, 5,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0115">https://www.regulations.gov/comment/FINCEN-2021-0007-0115</a>; The FACT Coalition, ANPRM Comment (Feb. 18, 2022), pp. 2, 4,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0122">https://www.regulations.gov/comment/FINCEN-2021-0007-0122</a>; California Reinvestment Coalition, ANPRM Comment (Feb. 18,
2022), pp. 2-3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0126">https://www.regulations.gov/comment/FINCEN-2021-0007-0126</a>; Coalition for Integrity, ANPRM Comment (Feb.
21, 2022), p. 4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0127">https://www.regulations.gov/comment/FINCEN-2021-0007-0127</a>; Anti-Corruption Data Collective, ANPRM
Comment (Feb. 18, 2022), p. 3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0153">https://www.regulations.gov/comment/FINCEN-2021-0007-0153</a>.
\61\ See American Land Title Association, ANPRM Comment (Feb.
17, 2022), p. 2, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0020">https://www.regulations.gov/comment/FINCEN-2021-0007-0020</a>.
\62\ Financial & International Business Association, ANPRM
Comment (Feb. 21, 2022), p. 2, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0142">https://www.regulations.gov/comment/FINCEN-2021-0007-0142</a>.
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a. Regulated Entities
Although this rule does not rely on the CTA for its legal
authority, FinCEN is proposing to adopt many of the CTA's exemptions
for purposes of this proposed definition, insofar as the policy
rationales for those exemptions align with the goals of this proposed
rule. The exemptions that FinCEN proposes to adopt would apply to legal
entities that FinCEN believes have sufficient AML/CFT compliance
obligations in the real estate context, and which are already subject
to more government supervision, or have disclosure requirements that
obviate the need for inclusion in this proposed rule.
[[Page 12432]]
The exclusions in the proposed rule that align with the CTA's
exemptions largely turn on whether the entity in question is supervised
by a government agency, is a government agency, or has disclosure
requirements that may diminish illicit finance risk in the context of
residential real property.\63\
---------------------------------------------------------------------------
\63\ See 31 U.S.C. 5336(a)(11)(B)(xxi).
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Specifically, the proposed rule would exclude U.S. governmental
authorities, securities reporting issuers, and certain banks, credit
unions, depository institution holding companies, money service
businesses, brokers or dealers in securities, securities exchange or
clearing agencies, other Exchange Act registered entities, insurance
companies, state-licensed insurance producers, Commodity Exchange Act
registered entities, public utilities, financial market utilities, and
registered investment companies, as well as any legal entity whose
ownership interests are controlled or wholly owned, directly or
indirectly, by any of the above.
For example, in the residential real estate context, FinCEN
assesses that the illicit finance risk of non-financed transfers is
adequately diminished when a business must register its securities with
the Securities and Exchange Commission (SEC) under Section 12 of the
Securities Exchange Act of 1934 or must file Forms 10-K or other
supplementary and periodic information under section 15(d) of the
Securities Exchange Act of 1934. Persons who beneficially own more than
five percent of a covered class of equity securities for these
businesses must publicly file with the SEC certain information relating
to such beneficial ownership.\64\ Persons who are a director or an
officer or who beneficially own more than 10 percent of such registered
equity security (insiders) also must publicly report their ownership
and transactions.\65\
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\64\ See 15 U.S.C. 78m(d)(1), (g)(1); 17 CFR 240.13d-1.
\65\ See U.S. Securities and Exchange Commission, ``Officers,
Directors, and 10% Shareholders,'' available at <a href="https://www.sec.gov/education/smallbusiness/goingpublic/officersanddirectors">https://www.sec.gov/education/smallbusiness/goingpublic/officersanddirectors</a>.
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b. Non-Profit Organizations
The definition of transferee entity in the proposed rule should be
read to include non-profit organizations.\66\
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\66\ Under U.S. tax law, non-profit organizations include tax-
exempt organizations: charitable organizations, churches and
religious organizations, private foundations, and other non-profits
such as civic leagues, social clubs, labor organizations, and
business leagues, under Internal Revenue Code Section 501(c)(3), as
well as political organizations subject to Section 527 to the
Internal Revenue Code. See IRS, ``Exempt Organization Types,''
available at <a href="https://www.irs.gov/charities-non-profits/exempt-organization-types">https://www.irs.gov/charities-non-profits/exempt-organization-types</a>.
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FinCEN and at least four major federal financial institution
regulators (the Federal Reserve Board of Governors, the Federal Deposit
Insurance Corporation, the National Credit Union Administration, and
the Office of the Comptroller of the Currency have made clear that the
U.S. government does not view the charitable sector as a whole as
presenting a uniform or unacceptably high risk of being used or
exploited for money laundering, terrorist financing, or sanctions
violations. The agencies have also recognized that the vast majority of
charities and other non-profit organizations comply with the law and
properly support charitable and humanitarian causes.\67\ The FATF also
has made clear that only a small subset of non-profits sending funds
cross-border should be considered high risk as it relates to serving as
potential vehicles of terrorist financing.\68\
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\67\ Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, FINCEN, National Credit Union
Administration, and Office of the Comptroller of the Currency, Joint
Fact Sheet on Bank Secrecy Act Due Diligence Requirements for
Charities and Non-Profit Organizations (Nov. 19, 2020), available at
<a href="https://www.fincen.gov/sites/default/files/shared/Charities%20Fact%20Sheet%2011_19_20.pdf">https://www.fincen.gov/sites/default/files/shared/Charities%20Fact%20Sheet%2011_19_20.pdf</a>.
\68\ Financial Action Task Force, Risk of Terrorist Abuse of
Non-Profit Organisations (June 2014), p. 8, available at <a href="https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Risk-of-terrorist-abuse-in-non-profit-organisations.pdf.coredownload.pdf">https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Risk-of-terrorist-abuse-in-non-profit-organisations.pdf.coredownload.pdf</a>.
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However, non-profit organizations (a subset of which are often
referred to as charities), have proven vulnerable to abuse by certain
illicit actors and have been implicated in illicit finance schemes,
including fraud, money laundering, tax evasion, and terrorist
financing.\69\ FinCEN's consultations with law enforcement indicate
that charities are routinely the subjects of investigations involving
fraud and money laundering, and a review of criminal cases involving
illicit finance crimes and non-profit organizations shows that such
organizations are vulnerable to exploitation by illicit actors. Indeed,
charities purporting to support such causes as AIDS research, police
and firefighters, disabled youth, childhood hunger, and veterans'
issues have been investigated and prosecuted for fraud and money
laundering.\70\ Further, non-profit organizations have been used by
corrupt governmental officials to extort money from individuals seeking
zoning approvals and permits; \71\ manipulated to engage in bribery of
corrupt foreign officials; \72\ and exploited to finance terrorism.\73\
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\69\ See U.S. Department of the Treasury, ``Protecting
Charitable Organizations,'' available at <a href="https://home.treasury.gov/policy-issues/terrorism-and-illicit-finance/protecting-charitable-organizations">https://home.treasury.gov/policy-issues/terrorism-and-illicit-finance/protecting-charitable-organizations</a> (noting that ``terrorists have exploited the
charitable sector to raise and move funds, provide logistical
support, encourage terrorist recruitment, or otherwise support
terrorist organizations and operations''); U.S. Department of
Justice, Press Release, Charity Founders Sentenced to Prison for
Using Non-Profit to Steal from Donors and Cheat on Their Taxes (Nov.
6, 2020), available at <a href="https://www.justice.gov/usao-sdca/pr/charity-founders-sentenced-prison-using-non-profit-steal-donors-and-cheat-their-taxes">https://www.justice.gov/usao-sdca/pr/charity-founders-sentenced-prison-using-non-profit-steal-donors-and-cheat-their-taxes</a>; see generally Organization for Economic Cooperation and
Development, Report on Abuse of Charities for Money-Laundering and
Tax Evasion (Feb. 2009), available at <a href="https://www.oecd.org/tax/exchange-of-tax-information/42232037.pdf">https://www.oecd.org/tax/exchange-of-tax-information/42232037.pdf</a>; World Bank, Combatting the
Abuse of Non-Profit Organizations (June 2015), available at <a href="https://elibrary.worldbank.org/doi/pdf/10.1596/978-0-8213-8547-0">https://elibrary.worldbank.org/doi/pdf/10.1596/978-0-8213-8547-0</a>; Financial
Action Task Force, Combating the Terrorist Financing Abuse of Non-
Profit Organisations (Nov. 2023), available at <a href="https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/BPP-Combating-TF-Abuse-NPO-R8.pdf.coredownload.inline.pdf">https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/BPP-Combating-TF-Abuse-NPO-R8.pdf.coredownload.inline.pdf</a>.
\70\ See U.S. v. Lyons, 472 F.3d 1055, 1061-1065 (9th Cir.
2007); Dhafir v. U.S., 2015 U.S. Dist. LEXIS 197346, 2015 WL
13727329 (N.D.N.Y. June 25, 2015).
\71\ See generally U.S. v. Hairston, 46 F.3d 361 (4th Cir.
1995).
\72\ See generally U.S. v. Chi Ping Patrick Ho, 984 F.3d 191 (2d
Cir. 2020) (in which a Chinese think tank registered in Hong Kong
and in the United States as a public charity exploited a charity in
Uganda to engage in money laundering and bribery under the Foreign
Corrupt Practices Act).
\73\ See Sotloff v. Qatar Charity, 2023 U.S. Dist. LEXIS 93911,
2023 WL 3721683 (S.D. Fla. May 30, 2023) (financial support for
Hamas, Al Qaeda, and ISIS); In re Terrorist Attacks on September 11,
2001, U.S. Dist. LEXIS 247199*, *344 (S.D.N.Y. Apr. 27, 2020)
(financial support for Al Qaeda); Strauss v. Credit Lyonnais, S.A.,
925 F. Supp. 2d 414, 415 (E.D.N.Y. 2013) (financial support for
Hamas); U.S. Department of the Treasury, Press Release, Treasury
Targets Hizballah Finance Official and Shadow Bankers in Lebanon
(May 11, 2021), available at <a href="https://home.treasury.gov/news/press-releases/jy0170">https://home.treasury.gov/news/press-releases/jy0170</a> (highlighting a non-profit providing funding for
Hizballah).
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Illicit funds funneled through non-profit organizations are often
invested in residential real estate. For instance, in July 2021, the
11th Circuit affirmed the conviction and forfeiture judgments involving
multiple non-profit organizations in Florida.\74\ The defendants that
exploited the non-profits were convicted of conspiracy to commit wire
fraud, operation of an illegal gambling business, conspiracy to commit
money laundering, and money laundering.\75\ The court found that funds
laundered through the non-profits were used to purchase three
residential real estate properties in Florida, which were subsequently
forfeited.\76\
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\74\ U.S. v. Masino, 2021 U.S. App. LEXIS 22615, 2021 WL 3235301
(11th Cir. July 30, 2021); U.S. v. Masino, 2019 U.S. Dist. LEXIS
34862, 2019 WL 1045179 (N.D. Fla. Mar. 5, 2019).
\75\ U.S. v. Masino, 2021 U.S. App. LEXIS 22615, 2021 WL 3235301
(11th Cir. July 30, 2021).
\76\ U.S. v. Masino, 2019 U.S. Dist. LEXIS 34862, 2019 WL
1045179 (N.D. Fla. Mar. 5, 2019), aff'd U.S. v. Masino, 2021 U.S.
App. LEXIS 22615, 2021 WL 3235301 (11th Cir. July 30, 2021).
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One 2021 ANPRM commenter specifically stated that FinCEN should
[[Page 12433]]
cover purchases by non-profits.\77\ Another commenter detailed the
regulations that cover non-profits and advocated against covering
them.\78\ Having considered the circumstances and comments in totality,
FinCEN believes that non-profit organizations are vulnerable to abuse
by illicit actors seeking to launder illicit proceeds through
residential real estate. Accordingly, they would be captured under the
proposed definition of transferee entity.
---------------------------------------------------------------------------
\77\ See The FACT Coalition, ANPRM Comment (Feb. 18, 2022), p.
4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0122">https://www.regulations.gov/comment/FINCEN-2021-0007-0122</a>.
\78\ See Kirton McConkie, ANPRM Comment (Feb. 7, 2022), pp. 1-8,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0017">https://www.regulations.gov/comment/FINCEN-2021-0007-0017</a>.
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c. Unregistered Pooled Investment Vehicles
Pooled investment vehicles (PIVs) that are not registered with the
SEC may be transferee entities for purposes of the proposed rule.
Broadly, PIVs can include investment companies registered with the SEC,
such as mutual funds and exchange-traded funds, as well as unregistered
investment companies, such as private real estate investment trusts,
certain real estate funds, special purpose financing vehicles, and
private funds (which are usually categorized by their sponsors
according to the investment strategy they pursue, and include funds
such as hedge funds, private equity funds, and venture capital
funds).\79\ Under the proposed rule, PIVs that are investment companies
and are registered with the SEC would be exempt from the definition of
a transferee entity. The difference between registered and unregistered
PIVs turns in part on whether the PIV is or is not excluded from
registration requirements as an investment company under the Investment
Company Act of 1940.\80\ PIVs that meet these exclusion requirements,
and are therefore not registered with the SEC, do not have disclosure
and reporting requirements that govern similar but public PIVs, such as
mutual funds or exchange-traded funds.
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\79\ The term ``pooled investment vehicle'' has a particular
definition in Rule 206(4)-8 under the Investment Advisers Act of
1940. See 17 CFR 275.206(4)-8. However, the term is used more
broadly in this NPRM. For information on private funds, see U.S.
Securities and Exchange Commission, ``Private Fund Adviser
Overview,'' available at <a href="https://www.sec.gov/divisions/investment/guidance/private-fund-adviser-resources">https://www.sec.gov/divisions/investment/guidance/private-fund-adviser-resources</a>. Section 202(a)(29) of the
Advisers Act defines the term ``private fund'' as an issuer that
would be an investment company, as defined in section 3 of the
Investment Company Act of 1940 (15 U.S.C. 80a-3), but for section
3(c)(1) or 3(c)(7) of that Act. Section 3(c)(1) excludes a
privately-offered issuer having fewer than a certain number of
beneficial owners. Section 3(c)(7) excludes a privately-offered
issuer the securities of which are owned exclusively by ``qualified
purchasers'' (generally, persons and institutions owning a specific
amount of investments). See U.S. Securities and Exchange Commission,
``Investment Company Registration and Regulation Package,''
available at <a href="https://www.sec.gov/investment/fast-answers/divisionsinvestmentinvcoreg121504#P84_14584">https://www.sec.gov/investment/fast-answers/divisionsinvestmentinvcoreg121504#P84_14584</a>.
\80\ Id.
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Furthermore, unregistered PIVs are not subject to comprehensive
AML/CFT regulation and are therefore vulnerable to abuse by illicit
actors. The risks they present may be significant--the private fund
sector, for example, holds approximately $20 trillion assets under
management--a number that has more than doubled over the past decade
and is comparable to the holdings of highly regulated U.S. banks.\81\
In recent years, private funds have been used by sanctioned persons,
corrupt officials, tax evaders, and other criminal actors as a gateway
to the U.S. financial system. This includes funds stolen from
Malaysia's sovereign wealth fund, 1MDB; \82\ Venezuela's state-owned
oil and natural gas company, PDVSA; \83\ and funds from a large-scale
cryptocurrency fraud scam.\84\
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\81\ See U.S. Securities and Exchange Commission, ``Private Fund
Statistics,'' available at <a href="https://www.sec.gov/divisions/investment/private-funds-statistics">https://www.sec.gov/divisions/investment/private-funds-statistics</a>. This figure reflects the assets of private
funds managed by registered investment advisers only. Form PF is
filed by certain investment advisers registered with the SEC to
report confidential information about the private funds they advise.
Form PF is not filed by investment advisers that advise private
funds but that are not registered with the SEC. Form PF provides the
SEC and Financial Stability Oversight Council (FSOC) with important
information about the basic operations and strategies of private
funds and has helped establish a baseline picture of the private
fund industry for assessing systemic risk.
\82\ Peter Grant, ``1MDB probe may be good news for Park Lane
Hotel Investors,'' The Wall Street Journal (July 26, 2016),
available at <a href="https://www.wsj.com/articles/1mdb-probe-may-be-good-news-for-park-lane-hotel-investors-1469554543">https://www.wsj.com/articles/1mdb-probe-may-be-good-news-for-park-lane-hotel-investors-1469554543</a>.
\83\ See generally Criminal Complaint, U.S. v. Guruceaga, Case
No. 1:18-cr-20685 (S.D. Fla. July 23, 2018).
\84\ U.S. Department of Justice, Press Release, Former Partner
of Locke Lord LLP Convicted in Manhattan Federal Court Of Conspiracy
To Commit Money Laundering And Bank Fraud In Connection with Scheme
To Launder $400 Million Of OneCoin Fraud Proceeds (Nov. 21, 2019),
available athttps://www.justice.gov/usao-sdny/pr/former-partner-
locke-lord-llp-convicted-manhattan-federal-court-conspiracy-commit-
money#:~:text=SCOTT%2C%20a%20former%20equity%20partner,and%20operated
%20for%20that%20purpose.
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Unregistered PIVs have also been used to hide criminal proceeds in
real estate. In one particular example, a criminal actor had a
substantial ownership interest in a private fund and used it to both
obfuscate and provide a veneer of legitimacy to illicit funds to make
U.S. real estate purchases.\85\ Illicit actors may also hold a
minority, non-controlling interest in an unregistered PIV, resulting in
the unregistered PIV channeling that investor's illicit funds into real
estate, as unregistered PIVs are not generally required to establish
the identities of investors or look into the investor's source of
funds.\86\
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\85\ See, e.g., Peter Grant, ``1MDB probe may be good news for
Park Lane Hotel Investors,'' The Wall Street Journal (July 6, 2016),
available at <a href="https://www.wsj.com/articles/1mdb-probe-may-be-good-news-for-park-lane-hotel-investors-1469554543">https://www.wsj.com/articles/1mdb-probe-may-be-good-news-for-park-lane-hotel-investors-1469554543</a>; Complaint, U.S. v.
``The Wolf of Wall Street'' Motion Picture, Case No. 2:16-cv-05362-
DSF-PLA (C.D. Cal. 2016); Will Parker, ``Meet the secretive Kazakh
company backing the Upper West Side's latest skyscraper,'' The Real
Deal: Real Estate News (Apr. 14, 2018), available at <a href="https://therealdeal.com/new-york/2018/04/13/meet-the-secretive-kazakh-company-backing-the-upper-west-sides-latest-skyscraper/">https://therealdeal.com/new-york/2018/04/13/meet-the-secretive-kazakh-company-backing-the-upper-west-sides-latest-skyscraper/</a>; Miranda
Patrucic, Vlad Lavrov, and Ilya Lozovsky, ``Kazakhstan's Secret
Billionaires,'' OCCRP (Nov. 5, 2017), available at <a href="https://www.occrp.org/en/paradisepapers/kazakhstans-secret-billionaires">https://www.occrp.org/en/paradisepapers/kazakhstans-secret-billionaires</a>.
\86\ See., e.g., U.S. Department of Justice, Press Release,
Acting Manhattan U.S. Attorney Announces Settlement of Civil
Forfeiture Claims Against Over $50 Million Laundered Through Black
Market Peso Exchange (Nov. 12, 2020), available at <a href="https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-attorney-announces-settlement-civil-forfeiture-claims-against-over">https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-attorney-announces-settlement-civil-forfeiture-claims-against-over</a>.
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Outside of the real estate sector, the lack of comprehensive AML/
CFT coverage for unregistered PIVs has posed major national security
challenges, enabling U.S. adversaries to invest in, and thereby gain
access to, sensitive and emerging U.S. technologies.\87\ In fact,
according to a 2018 Department of Defense report, unregistered PIVs
such as private funds and special purpose vehicles have allowed
jurisdictions whose interests compete with the United States to
``access the crown jewels of U.S. innovation,'' including in the realms
of artificial intelligence, sensors, virtual reality, self-driving
vehicles, robotics, microchips, and facial and other image recognition
technologies, without such activity being reviewed by the Committee on
Foreign Investment in the United States or other relevant government
authority, where required.\88\
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\87\ Cory Bennett and Bryan Bender, ``How China acquires `The
Crown Jewels' of U.S. technology,'' Politico (May 22, 2018),
available at <a href="https://www.politico.com/story/2018/05/22/china-us-tech-companies-cfius-572413">https://www.politico.com/story/2018/05/22/china-us-tech-companies-cfius-572413</a>.
\88\ Michael Brown and Pavneet Singh, ``China's Technology
Transfer Strategy: How Chinese Investments in Emerging Technology
Enable A Strategic Competitor to Access the Crown Jewels of U.S.
Innovation,'' Defense Innovation Unit Experimental (Jan. 2018),
available at <a href="https://nationalsecurity.gmu.edu/wp-content/uploads/2020/02/DIUX-China-Tech-Transfer-Study-Selected-Readings.pdf">https://nationalsecurity.gmu.edu/wp-content/uploads/2020/02/DIUX-China-Tech-Transfer-Study-Selected-Readings.pdf</a>; Paul
Mozur and Jane Perlez, ``China Tech investment flying under the
radar, Pentagon warns,'' The New York Times (Apr. 7, 2017).
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[[Page 12434]]
FinCEN therefore believes that unregistered PIVs generally present
sufficient illicit finance risk to warrant inclusion in the definition
of a transferee entity. These unregistered PIV may include entities
such as private funds,\89\ certain market intermediaries,\90\ certain
companies that primarily engage in the business of acquiring
mortgages,\91\ certain funds maintained by charitable
organizations,\92\ and certain church plans.\93\
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\89\ Private funds often are excluded from the definition of
``investment company'' under 15 U.S.C. 80a-3(c)(1) and/or 15 U.S.C.
80a-3(c)(7).
\90\ Certain market intermediaries are excluded from the
definition of ``investment company'' under 15 U.S.C. 80a-3(c)(2).
\91\ Certain investment vehicles that are primarily engaged in
``purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate'' are excluded from the definition of
``investment company'' under 15 U.S.C. 80a-3(c)(5)(C).
\92\ Certain investment vehicles maintained by certain
charitable organizations are excluded from the definition of
``investment company'' under 15 U.S.C. 80a-3(c)(10).
\93\ Certain church plans are excluded from the definition of
``investment company'' under 15 U.S.C. 80a-3(c)(14).
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d. Large Operating Companies
The proposed definition would capture certain legal entities that
are known as ``large operating companies'' in the CTA and BOI Reporting
Rule context. Within that framework, a large operating company is an
entity that: ``employs more than 20 employees on a full-time basis in
the United States;'' ``filed in the previous year Federal income tax
returns in the United States demonstrating more than $5,000,000 in
gross receipts or sales in the aggregate;'' and ``has an operating
presence at a physical office within the United States[.]'' \94\ When
explaining why this exemption was added to the CTA, Senator Sherrod
Brown noted:
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\94\ 31 U.S.C. 5336(a)(11)(B)(xxi).
The justification for the exemption of entities that have both
physical operations and at least 20 employees in the United States
is that those entities' physical U.S. presence will make it easy for
U.S. law enforcement to discover those entities' true owners. Like
other exemptions in the bill, this exemption should be narrowly
construed to exclude entities that do not have an easily located
physical presence in the United States, do not have multiple
employees physically present on an ongoing basis in the United
States, or use strategies that make it difficult for U.S. law
enforcement to contact their workforce or discover the names of
their beneficial owners.\95\
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\95\ Senator Sherrod Brown, ``National Defense Authorization
Act,'' Congressional Record 166: 208, p. S7311 (Dec. 9, 2020),
available at <a href="https://www.congress.gov/116/crec/2020/12/09/CREC-2020-12-09-pt1-PgS7296.pdf">https://www.congress.gov/116/crec/2020/12/09/CREC-2020-12-09-pt1-PgS7296.pdf</a>.
Senator Brown cautioned however, that ``[t]his exemption should be
subject to continuous, careful review by Treasury . . . to detect and
prevent its misuse.'' \96\
---------------------------------------------------------------------------
\96\ Id.
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One of the primary purposes of the proposed rule is to identify
transferee entities that engage in non-financed residential real estate
transfers. While it may be easier for law enforcement to identify
beneficial owners behind large operating companies in comparison to
shell companies, the very fact that a legal entity has engaged in
activity that FinCEN has identified as presenting an illicit finance
risk--the use of identity obfuscating vehicles in a non-financed
residential real estate transfer--is valuable information for law
enforcement, both to support individual investigations and to allow for
aggregated analysis of money laundering in the U.S. real estate sector.
However, certain large operating companies may fall within other
exclusions provided for in the proposed rule. For example, a company
required to register its securities with the SEC under section 12 of
the Securities Exchange Act of 1934 would be excluded.
2. Transferee Trusts
The proposed rule defines ``transferee trust'' as any legal
arrangement created when a person (generally known as a settlor or
grantor) places assets under the control of a trustee for the benefit
of one or more persons (each generally known as a beneficiary) or for a
specified purpose, as well as any legal arrangement similar in
structure or function to the above, whether formed under the laws of
the United States or a foreign jurisdiction. The proposed rule further
notes that a trust is deemed to be the transferee trust regardless of
whether residential real property is titled in the name of the trust
itself or in the name of the trustee in their capacity as the trustee
of the trust. However, the proposed rule excludes trusts that are
securities reporting issuers, which includes companies that must
register securities with the SEC and become subject to periodic
reporting and disclosure requirements. FinCEN considers these trusts to
be more tightly supervised and, because they are required to make
certain public disclosures, they present a lower illicit finance risk.
For similar reasons, trusts that have a trustee that is a securities
reporting issuer are not covered by the proposed rule. Furthermore, the
proposed rule excludes statutory trusts from being transferee trusts;
instead, a statutory trust could be considered to be a transferee
entity, unless one of the exemptions to the definition of ``transferee
entity'' applies.
Multiple 2021 ANPRM commenters highlighted the use of trusts to
facilitate exploitation of the real estate market for the purpose of
laundering money, were largely supportive of including them in any
regulation, and suggested that transfers to trusts be covered,
particularly since the CTA did not explicitly provide for reporting of
beneficial ownership information from trusts.\97\ Other commenters
recognized that trusts can present illicit finance risks but were only
supportive of covering certain types.\98\ As discussed in detail above,
FinCEN believes that non-financed residential real estate transfers to
trusts present a high risk for money laundering. The reporting of all
non-financed transfers of residential real estate in which the
transferee is a trust would provide data relevant to a possible
violation of law or regulation.
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\97\ See, Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), pp. 3, 30, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; Coalition for Integrity, ANPRM Comment (Feb.
21, 2022), p. 4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0127">https://www.regulations.gov/comment/FINCEN-2021-0007-0127</a>; The FACT Coalition, ANPRM Comment (Feb. 18,
2022), p. 4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0122">https://www.regulations.gov/comment/FINCEN-2021-0007-0122</a>; Transparency International U.S., ANPRM
Comment (Feb. 18, 2022), pp. 3, 8, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0115">https://www.regulations.gov/comment/FINCEN-2021-0007-0115</a>; American College
of Trust and Estate Counsel, ANPRM Comment (Feb. 4, 2022), pp. 1-22,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0013">https://www.regulations.gov/comment/FINCEN-2021-0007-0013</a>; Anti-Corruption Data Collective, ANPRM Comment (Feb. 18,
2022), p. 3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0153">https://www.regulations.gov/comment/FINCEN-2021-0007-0153</a>; California Reinvestment Coalition, ANPRM
Comment (Feb. 18, 2022), p. 1, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0126">https://www.regulations.gov/comment/FINCEN-2021-0007-0126</a>.
\98\ See American College of Trust and Estate Counsel, ANPRM
Comment (Feb. 4, 2022), pp. 1-22, available at <a href="https://www.regulations.gov/docket/FINCEN-2021-0007/comments?filter=ACTEC">https://www.regulations.gov/docket/FINCEN-2021-0007/comments?filter=ACTEC</a>;
National Association of Realtors, ANPRM Comment (Feb. 18, 2022), p.
13, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0128">https://www.regulations.gov/comment/FINCEN-2021-0007-0128</a>.
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3. Beneficial Owners of Transferee Entities and Transferee Trusts
The proposed Real Estate Report would collect information about the
beneficial owners of transferee entities and transferee trusts. Where
possible, FinCEN has aligned the proposed rule's definitions of
beneficial ownership with those contained in the CTA and its
implementing regulations.
a. Determining the Beneficial Owners of Transferee Entities
Consistent with the CTA, the proposed rule provides that a
beneficial owner of a transferee entity is ``any
[[Page 12435]]
individual who, directly or indirectly, either exercises substantial
control over the transferee entity or owns or controls at least 25
percent of the ownership interests of the transferee entity.'' However,
as the owners or directors of tax-exempt organizations do not hold a
direct ownership stake in the organization, the reportable beneficial
owners would be limited only to the individuals who exercise
substantial control.
Comments on the 2021 ANPRM were generally supportive of using the
CTA's definition of the beneficial owner in any potential regulation.
However, one commenter suggested FinCEN use the definition of
beneficial owner set out in the Residential Real Estate GTOs.
FinCEN considered that definition as well as other definitions for
beneficial ownership for transferee entities. However, FinCEN believes
that the BOI Reporting Rule's definition would be best suited to
capture potentially obfuscated ownership of residential real property
in high-risk non-financed transfers, particularly since it will always
result in the identification of at least one beneficial owner via the
``substantial control'' component of the definition, even if no
individual meets the 25 percent ``ownership interests'' threshold. In
addition, the use of consistent definitions of beneficial ownership
across regulations would reduce the potential for confusion.
b. Determining the Beneficial Owners of Transferee Trusts
The proposed rule would collect information about the beneficial
owners of trusts, defined as any individual who, at the time of the
real estate transfer to the trust: (1) is a trustee; (2) otherwise has
authority to dispose of transferee trust assets, such as may be the
case with a trust protector; \99\ (3) is a beneficiary who is the sole
permissible recipient of income and principal from the transferee trust
or who has the right to demand a distribution of, or to withdraw,
substantially all of the assets of the transferee trust; (4) is a
grantor or settlor of a revocable transferee trust; or (5) is the
beneficial owner of a legal entity or trust that holds one of the
positions described in (1)-(4), taking into account the exceptions that
apply to transferee entities and transferee trusts.
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\99\ A trust protector is a person given power within the trust
to take certain types of significant actions, such as the right to
oversee the trustee's decisions, to remove the trustee, or to amend
or terminate the trust. See section 808 of the Uniform Trust Code
(2003), available at <a href="https://www.uniformlaws.org/viewdocument/committee-archive-76?CommunityKey=193ff839-7955-4846-8f3c-ce74ac23938d&tab=librarydocuments">https://www.uniformlaws.org/viewdocument/committee-archive-76?CommunityKey=193ff839-7955-4846-8f3c-ce74ac23938d&tab=librarydocuments</a>; Andrew T. Huber, ``Trust
Protectors: The Role Continues to Evolve,'' American Bar Association
(Jan.-Feb. 2017), available at <a href="https://www.americanbar.org/groups/real_property_trust_estate/publications/probate-property-magazine/2017/january_february_2017/2017_aba_rpte_pp_v31_1_article_huber_trust_protectors/">https://www.americanbar.org/groups/real_property_trust_estate/publications/probate-property-magazine/2017/january_february_2017/2017_aba_rpte_pp_v31_1_article_huber_trust_protectors/</a>.
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This proposed definition leverages the BOI Reporting Rule's
approach to ascertaining the beneficial owners of a trust. Although the
BOI Reporting Rule does not require reporting of beneficial ownership
information by most trusts, as most trusts are not ``reporting
companies'' for purposes of the CTA, the rule does require certain
information to be reported about the beneficial owners of trusts when
an individual is considered to own or control a reporting company
through a trust. In line with that approach, each of the defined
beneficial owners of a transferee trust has either ownership or control
over trust assets, including over any real property transferred to the
trust. For example, an individual who is the sole permissible recipient
of both income and principal from the trust, or has the right to demand
a distribution of, or withdraw, substantially all of the assets from
the trust, has an ownership or controlling interest in the assets held
in trust. Other individuals with authority to dispose of trust assets,
such as trustees and grantors or settlors that have retained the right
to revoke the trust, will be considered as controlling the assets held
in trust. In the case of legal entities or trusts with ownership or
control of trust assets, the beneficial owners of those legal entities
or trusts also would be beneficial owners of the trust.
c. Beneficial Ownership as a Transactional Reporting Requirement
The proposed rule would not require reporting persons to report
changes to beneficial ownership of a transferee entity or transferee
trust on an ongoing basis. The proposed rule is concerned only with
real estate transfers, and it is not within the scope or intention of
these regulations to require reporting persons to conduct ongoing
monitoring of ownership of residential real property. While at least
one 2021 ANPRM commenter supported the introduction of ongoing
monitoring for change of ownership, most commenters did not address
this issue. FinCEN assesses that it would likely represent a large and
impractical burden to place an obligation on reporting persons that
would require them to investigate changes to beneficial ownership of
residential real estate that continues to be owned by a client
transferee entity or trust, or to require transferee entities or
transferee trusts to report changes in beneficial ownership to a real
estate professional involved in their transfer of residential real
property after the transfer has been concluded.
C. Reportable Transfers
The proposed rule would define a reportable transfer as a transfer
of any ownership interest in residential real property to a transferee
entity or transferee trust, with certain exceptions. These proposed
exceptions are meant to reflect FinCEN's intent to capture only higher
risk transfers and therefore the definition exempts most financed
transfers, as well as certain types of other low-risk transfers. Under
the proposed rule, transfers would be reportable irrespective of the
value of the property or the dollar value of the transaction; there is
no dollar threshold for a reportable transfer. As such, gifts and other
similar transfers of property may be reportable. Importantly, transfers
would only be reportable if a reporting person is involved in the
transfer and if the transferee is either a legal entity or trust.
Transfers between individuals would not be reportable.
1. Exception for Financed Transfers
First, certain financed transfers would be excepted. Specifically,
the exception would apply to transfers involving an extension of credit
to the transferee, but only if the credit is secured by the transferred
residential real property and is extended by a financial institution
that has both an obligation to maintain an AML program and a
requirement to file SARs. Transfers financed by a private lender or the
seller, neither of which are likely to have AML/CFT compliance programs
and SAR filing obligations, would not fall within this exception. The
purpose of the exception is to avoid duplication of required due
diligence, as banks and other financial institutions subject to AML/CFT
program requirements and SAR filing obligations must already extend
them to any mortgages offered in a financed residential real estate
transfer. Unlike in the non-financed space, these due diligence
obligations of covered financial institutions mitigate the risks of
money laundering through real estate for financed transactions and lead
to reporting on suspicious transactions.
Some commenters on the 2021 ANPRM highlighted that non-financed
purchases make up a significant portion of the residential real estate
market.\100\
[[Page 12436]]
Most commenters who addressed the issue were supportive of FinCEN
covering non-financed transfers.\101\ Some explicitly stated that only
non-financed transfers should be covered, but two comments stated that
FinCEN should cover both non-financed and financed transfers.\102\ Two
commenters were not supportive of covering non-financed transactions,
either because they believe real estate professionals are already
reporting on potential financial crimes through other FinCEN forms,
such as the Form 8300, or because they believe most settlement agents
already force funds through financial institutions that have
traditional AML/CFT program requirements.\103\ However, FinCEN believes
that further regulation is needed and its experience with the
Residential Real Estate GTOs program has shown that existing reporting
through Form 8300s and the minimal involvement of financial
institutions subject to AML/CFT program requirements are not sufficient
to obviate the illicit finance threat posed by non-financed transfers
of residential real property.
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\100\ See Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), p. 15, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; Transparency International U.S., ANPRM
Comment (Feb. 18, 2022), p. 3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0115">https://www.regulations.gov/comment/FINCEN-2021-0007-0115</a>.
\101\ See Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), p. 15, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; Transparency International U.S., ANPRM
Comment (Feb. 18, 2022), p. 3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0115">https://www.regulations.gov/comment/FINCEN-2021-0007-0115</a>; League of
Southeastern Credit Unions & Affiliates, ANPRM Comment (Feb. 7,
2022), pp. 1-4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0011">https://www.regulations.gov/comment/FINCEN-2021-0007-0011</a>; Illinois Credit Union League, ANPRM Comment
(Feb. 21, 2022), p. 1, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0137">https://www.regulations.gov/comment/FINCEN-2021-0007-0137</a>.
\102\ See Louise Shelley and Ross Delston, ANPRM Comment (Feb.
21, 2022), p. 1, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0151">https://www.regulations.gov/comment/FINCEN-2021-0007-0151</a>; Anti-Corruption Data Collective, ANPRM
Comment (Feb. 18, 2022), p. 3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0153">https://www.regulations.gov/comment/FINCEN-2021-0007-0153</a>.
\103\ See Morgan, Lewis, & Bockius, ANPRM Comment (Feb. 18,
2022), pp. 2-3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0123">https://www.regulations.gov/comment/FINCEN-2021-0007-0123</a>; Prosperus Title, ANPRM Comment (Feb. 18,
2022), 1-2, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0125">https://www.regulations.gov/comment/FINCEN-2021-0007-0125</a>.
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2. Exceptions for Low-Risk Transfers
Exceptions also would exist for transfers that are the result of a
grant, transfer, or revocation of an easement; transfers that occur as
a result of the death of an owner of the residential real property;
transfers that are the result of divorce or dissolution of marriage; or
transfers to a bankruptcy estate. FinCEN views easements, which involve
rights to use land for a specified purpose, as presenting little
illicit finance risk. Transfers incidental to death, divorce, or
bankruptcy are governed by preexisting legal documents, such as wills,
or generally involve the court system through probate, divorce, or
bankruptcy proceedings. FinCEN believes these circumstances present a
relatively low risk for purposes of laundering money.
3. No Exceptions Based on the Property's Value or Purchase Price
Residential real properties with a wide range of values are used by
illicit actors to launder money, including residential real properties
transferred for no consideration.\104\ Criminal networks interested in
cleaning funds do not exclusively invest in luxury or high-value
property, but also launder money through low-value real estate. FinCEN
believes that any dollar threshold would enable money launderers to
structure payments to avoid reporting requirements. Accordingly, the
proposed rule does not provide exceptions for transfers above or below
a set dollar value. Furthermore, it is meant to capture both sales and
non-sale transfers, such as gifts and transfers to trusts. The transfer
of residential real property to a trust by the settlor or grantor may
therefore be reportable, although FinCEN expects that such reporting
will be significantly limited by the exception for transfers of
financed residential real property and by the exception for transfers
occurring as a result of death. The latter, in particular, would exempt
transfers by an executor of the grantor or settlor's property to a
testamentary trust.
---------------------------------------------------------------------------
\104\ For example, whereas the Residential Real Estate GTOs
utilize a $300,000 threshold for most covered jurisdictions, a
$50,000 threshold applies for the City and County of Baltimore to
take into account local money laundering trends.
---------------------------------------------------------------------------
FinCEN believes that the inclusion of low dollar value transfers in
the proposed rule is unlikely to significantly increase the burden on
potential reporting persons versus a scenario in which a dollar
threshold is imposed. For example, according to the U.S. Census Bureau,
residences costing less than $125,000 accounted for less than 0.5
percent of all new residences sold in 2022, and residences costing less
than $300,000 accounted for 7 percent of all new residences sold in
2022.\105\ The American Land Title Association (ALTA) has indicated to
FinCEN that a uniform reporting threshold, regardless of what the
threshold is, would decrease compliance burdens for industry compared
to thresholds that vary across jurisdictions. With respect to non-sale
transfers made for no consideration, such as transfers made to a trust,
FinCEN notes that the proposed rule provides the previously discussed
exception for transfers that most often involve no consideration, such
as those that occur due to death or divorce, which substantially
narrows the scope of coverage. However, FinCEN welcomes comments on the
potential burdens related to the reporting of non-sale transfers.
---------------------------------------------------------------------------
\105\ U.S. Census Bureau, ``Table Q1. New Houses Sold by Sales
Price: United States,'' available at <a href="https://www.census.gov/construction/nrs/pdf/quarterly_sales.pdf">https://www.census.gov/construction/nrs/pdf/quarterly_sales.pdf</a>.
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4. No Application to Transfers Without a Reporting Person
FinCEN believes that the proposed rule would capture the majority
of sale and non-sale transfers of residential real estate. However,
transfers that do not involve a typical real estate-related
professional as reflected in the cascade of potential reporting persons
would not be captured.
5. No Application to Transfers to Natural Persons
Transfers made directly to individuals would not be reportable
under this regulation. Therefore, if the transferred property's title
is in the name of one or more individuals, with no ownership interests
held by a transferee entity or a transferee trust, the transfer would
not be reportable under the rule.
Some 2021 ANPRM commenters recognized that non-financed transfers
of residential real estate to individuals present money laundering risk
and supported their coverage by any potential regulation.\106\ Other
commenters, however, stated that the burden of covering natural person
purchases would be too large for the industry to bear and expressed
privacy concerns.\107\
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\106\ See Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), p. 24, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; The FACT Coalition, ANPRM Comment (Feb. 18,
2022), p. 3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0122">https://www.regulations.gov/comment/FINCEN-2021-0007-0122</a>; California Reinvestment Coalition, ANPRM
Comment (Feb. 18, 2022), pp. 2-3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0126">https://www.regulations.gov/comment/FINCEN-2021-0007-0126</a>; Coalition for
Integrity, ANPRM Comment (Feb. 21, 2022), p. 4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0127">https://www.regulations.gov/comment/FINCEN-2021-0007-0127</a>; Anti-Corruption
Data Collective, ANPRM Comment (Feb. 18, 2022), p. 3, available at
<a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0153">https://www.regulations.gov/comment/FINCEN-2021-0007-0153</a>.
\107\ See National Federation of Independent Business, ANPRM
Comment (Dec. 22, 2021), p. 1, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0007">https://www.regulations.gov/comment/FINCEN-2021-0007-0007</a>; American Land
Title Association, ANPRM Comment (Feb. 17, 2022), p. 2-5, available
at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0020">https://www.regulations.gov/comment/FINCEN-2021-0007-0020</a>.
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All non-financed transfers of residential real estate are less
regulated than financed transfers and are inherently more vulnerable to
money
[[Page 12437]]
laundering. However, FinCEN has not yet conducted a review of
residential real estate purchases by natural persons sufficient to
conclude that those transactions present a high risk for money
laundering. To be sure, illicit actors often use natural person
nominees or straw purchasers--such as a spouse, relative, or employee--
to acquire real estate while obscuring beneficial ownership.\108\ Such
nominees or straw purchasers are unlikely to disclose that they are
receiving ownership of real estate on behalf of the illicit actor.
Requiring the reporting of information about transfers to individuals
would significantly increase the number of reports filed and
significantly increase burden on industry. Although the BSA would
provide privacy protections for reports filed under the proposed rule,
for the reasons stated above, FinCEN is not proposing to cover
residential real estate purchases by natural persons at this time.
---------------------------------------------------------------------------
\108\ See, e.g., U.S. Department of the Treasury, National
Strategy for Combatting Terrorist and Other Illicit Financing
(2020), pp. 17-18, available at <a href="https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf">https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf</a>.
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D. Reporting Persons
The proposed rule would impose a filing and recordkeeping
obligation on certain persons involved in real estate closings and
settlements. The proposed rule would designate only one reporting
person for any given reportable transfer. The reporting person would be
identified in one of two ways: by way of a cascading reporting order or
by way of a written agreement between the real estate professionals
described in the cascading reporting order.
1. The Reporting Cascade
Through the cascade, a real estate professional would be a
reporting person required to file a report and keep records for a given
transfer if the person performs a function described in the cascade and
no other person performs a function described higher in the cascade.
For example, if no person is involved in the transfer as described in
the first tier of potential reporting persons, the reporting obligation
would fall to the person involved in the transfer as described in the
second tier of potential reporting persons, if any, and so on. The
cascade includes only persons engaged as a business in the provision of
real estate closing and settlement services within the United States.
For any reportable transfer, a potential reporting person would
need to determine whether there is another potential reporting person
involved in the transfer who sits higher in the cascade. Although
potential reporting persons will likely communicate with each other
regarding the need to file a report, there would be no requirement to
verify that any other potential reporting person in fact filed it.
The proposed cascade is as follows: \109\
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\109\ The types of businesses involved in a real estate closing
or settlement vary depending on the type of transaction and on the
jurisdiction. As such, the reporting cascade (see Proposed
amendments infra 31 CFR 1031.320(c)) is itemized to capture a broad
array of potential businesses. However, FinCEN believes that, for
any transaction, the functions described in first three tiers of the
reporting cascade would be performed by only one business, with no
other separate business performing the other two functions. FinCEN
therefore treats the reporting cascade as having five functional
groupings.
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First, real estate professionals providing certain settlement
services in the settlement process--In the first instance, the
reporting obligation would rest with real estate professionals
providing certain settlement services at the termination of the
settlement process. Specifically, the cascade first designates as a
reporting person the person listed as the closing or settlement agent
on a settlement (or closing) statement, which is common to the vast
majority of residential real property transfers. This ensures that a
potential reporting person familiar with the intricacies of the
transfer, including transactional information and details about the
parties involved, will be the most frequent reporting person. This, in
turn, will ensure that the reports are more accurate and useful to law
enforcement and will lessen the burden on reporting persons. In the
event that no person is directly identified as a closing or settlement
agent on the statement, the reporting obligation would fall on the
person that prepared the closing or settlement statement. If no person
prepared a closing or settlement statement, the reporting obligation
falls to the person that files the deed or other instrument that
transfers ownership of the residential real property.
Second, the person that underwrites an owner's title insurance
policy for the transferee--If no person executes the specific
settlement functions in the first tier of the cascade, the reporting
obligation would then fall upon the person that underwrites the title
insurance policy associated with the real property transfer. Such
policies are typically underwritten by large title insurance companies
that issue policies providing indemnity in the event the title of the
transferred property is later determined to have a defect or
encumbrance.\110\ Title insurance companies have been the reporting
persons for the Residential Real Estate GTOs since 2016 and have
demonstrated the ability to gather information and file reports
containing information similar to that which would be collected under
the proposed rule. Given that the underwriting function is further
removed from the termination of the settlement process than the
settlement services described in the first tier of the cascade, and so
further removed from information to be collected, FinCEN assesses that
persons underwriting such policies should be second line reporting
persons. Title insurance agents may serve as settlement agents and if
serving such a first-tier function, would have easier access to the
necessary information in that capacity.
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\110\ The U.S. title insurance market is concentrated, with four
national underwriters accounting for approximately 81 percent of
total industry premiums as September 2022. Fitch Rating, U.S. Title
Insurance Outlook 2023 (Dec. 2, 2022), available at <a href="https://www.fitchratings.com/research/insurance/us-title-insurance-outlook-2023-02-12-2022">https://www.fitchratings.com/research/insurance/us-title-insurance-outlook-2023-02-12-2022</a>.
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Third, the person that disburses the greatest amount of funds in
connection with the reportable transfer--In the event that no person
executes the specific settlement functions in the first tier of the
cascade, and no person underwrites a title insurance policy, the third
tier of the cascade would require reporting by the person that
disburses the greatest amount of funds in connection with residential
real property transfer. The proposed rule notes that such disbursement
may be in any form, including from an escrow account (which is
frequently used to settle real estate transfers), from a trust account,
or from a lawyer's trust account. Such reporting persons will have
visibility into funds transfer information associated with the
residential real property transfer and FinCEN believes that, by virtue
of this, they should be able to obtain the information this proposed
rule would collect with relatively little burden. However, this tier of
the cascade would only cover persons involved in real estate
settlements and closings who are disbursing funds via third-party
accounts and excludes direct transfers from transferees to transferors
and disbursements coming directly from banks.
Fourth, the person that prepares an evaluation of the title
status--In the event that no person participates in the transfer who
falls within the first three tiers of the cascade, the reporting person
would be the person who prepares an
[[Page 12438]]
evaluation of the status of the title. Such an evaluation may take the
form of a title check, which is typically performed by title insurance
companies in lieu of providing actual insurance or an opinion letter,
which is rendered by attorneys.
Fifth, the person who prepares the deed--Finally, should no person
identified in the first four tiers of the cascade participate in the
real property transfer, the reporting obligation would fall to the
preparer of the deed associated with the transfer. A deed is typically
prepared by an attorney, but it may also be prepared by a non-attorney
settlement or closing agent or by the transferee itself.
2. Capturing Both Sale and Non-Sale Transfers
The reporting cascade is designed to capture both sales of
residential real estate and non-sale transfers of residential real
estate. It assigns a reporting obligation based on the functions
fulfilled by the various real estate professionals involved in the
closing and settlement process, regardless of whether the transfer is a
sale or non-sale. FinCEN believes that it is necessary to capture non-
sale transfers to ensure uniform coverage of non-financed transfers and
to ensure that nominees do not purchase homes for criminal actors and
then transfer the title on free of charge to a legal entity or trust.
During a typical closing and settlement for a non-financed transfer
of residential real estate, a transferee will offer to purchase a
residential real property for a given price. This offer can occur
through a representative, such as a real estate agent, attorney, or
registered agent, or it may come directly from the transferee itself.
If the transferor accepts the offered price, either directly or through
a representative, the parties can proceed toward the settlement
process, normally through a sales contract. It is at this point that
title agencies or companies and escrow agents or companies typically
become involved in the process. Title agencies will conduct an
examination of the title to ensure it is free from defects, such as
liens or other encumbrances. Escrow companies may at this point hold a
deposit or ``earnest money'' from the transferee that the transferee
would forfeit should it be responsible for breaking the purchase
contract.\111\ A transferee may also, and usually does, purchase a
title insurance policy, which ensures that the title of the property is
free from defects and indemnifies the transferee should a title defect
later come to light. As noted above, a transferee may opt, in lieu of
title insurance, to obtain a title check from the title insurance
company or an opinion letter from an attorney.\112\ However, neither
title insurance nor a title check is required to close or settle non-
financed transfers of residential real property.
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\111\ ``Escrow is [a] transaction in which an impartial third-
party acts in a fiduciary capacity for all or some of the parties .
. . in performing [s]ettlement services according to local practice
and custom.'' American Land Title Association, ALTA Best Practices
4.0 (May 23, 2023), p. 4, available at <a href="https://www.alta.org/best-practices/download.cfm?bestPracID=97&type=pdf">https://www.alta.org/best-practices/download.cfm?bestPracID=97&type=pdf</a>.
\112\ DarrowEverett LLP, ``Are Attorney Opinion Letters a Viable
Alternative to Title Insurance'' (Feb. 23, 2023), available at
<a href="https://www.darroweverett.com/attorney-opinion-letter-advantages-risks-title-insurance/">https://www.darroweverett.com/attorney-opinion-letter-advantages-risks-title-insurance/</a>; Fannie Mae, B7-2-06, Attorney Title Opinion
Letter Requirements: Attorney Title Letter Opinion Requirements
(Dec. 13, 2023), available at <a href="https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B7-Insurance/Chapter-B7-2-Title-Insurance/2522435591/B7-2-06-Attorney-Title-Opinion-Letter-Requirements-04-06-2022.htm">https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B7-Insurance/Chapter-B7-2-Title-Insurance/2522435591/B7-2-06-Attorney-Title-Opinion-Letter-Requirements-04-06-2022.htm</a>.
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The transfer can then move toward settlement, which is also
sometimes referred to as ``closing.'' According to ALTA, settlement is
``[t]he process of completing a real estate transaction in accordance
with written instructions during which deeds, mortgages, leases, and
other required instruments are executed and/or delivered, an accounting
between the parties is made, the funds are disbursed, and the
appropriate documents are recorded in the public record.'' \113\ At
settlement, a closing or settlement agent--which is most often a title
agent but can be a representative of an escrow company or an attorney--
will prepare a ``settlement statement,'' which normally contains an
itemized list of all of the fees or charges that the buyer and seller
will pay during the settlement portion of the transfer.\114\ At
settlement, the settlement statement and other closing documents are
signed by the parties to the transfer and, if applicable, funds are
disbursed to the transferor. This typically occurs via an escrow
account, but also occurs at times via a trust account or attorney trust
account or via a direct transfer of funds between the transferee and
transferor (though, due to its risky nature, this practice is not
common). Following the execution of the settlement statement and other
closing documents and the disbursal of funds, the settlement agent will
file the deed (the instrument which effects the transfer of ownership
of the property) with the relevant local land registry or recordation
office. Deeds are typically prepared by attorneys, but may be prepared
by the settlement agent, escrow officer, or the transferee itself.\115\
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\113\ American Land Title Association, ALTA Best Practices 4.0
(May 23, 2023), p. 4, available at <a href="https://www.alta.org/best-practices/download.cfm?bestPracID=97&type=pdf">https://www.alta.org/best-practices/download.cfm?bestPracID=97&type=pdf</a>.
\114\ ``The title agent and settlement agent are often the same
entity that performs two separate functions in a real estate
transaction. The terms title agent and settlement agent are often
used interchangeably.'' American Land Title Association, ``ALTA
Urges CFPB to Preserve Role of Independent Third-party Settlement
Agents'' (Nov. 8, 2012), p. 26, available at <a href="https://www.alta.org/news/news.cfm?20121108-ALTA-Urges-CFPB-to-Preserve-Role-of-Independent-Third-party-Settlement-Agents">https://www.alta.org/news/news.cfm?20121108-ALTA-Urges-CFPB-to-Preserve-Role-of-Independent-Third-party-Settlement-Agents</a>; see, e.g., American Land
Title Association, ``ALTA Model Settlement Statements,'' available
at <a href="https://www.alta.org/trid/#statements">https://www.alta.org/trid/#statements</a>; Consumer Finance
Protection Bureau, What is a HUD-1 Settlement Statement? (Sept. 4,
2020), available at <a href="https://www.consumerfinance.gov/ask-cfpb/what-is-a-hud-1-settlement-statement-en-178/">https://www.consumerfinance.gov/ask-cfpb/what-is-a-hud-1-settlement-statement-en-178/</a>.
\115\ See <a href="http://Redfin.com">Redfin.com</a>, ``Steps to closing on a house,'' available
at <a href="https://www.redfin.com/guides/steps-to-closing-on-a-house">https://www.redfin.com/guides/steps-to-closing-on-a-house</a>;
American Land Title Association, ALTA Best Practices 4.0 (May 23,
2023), p. 4, available at <a href="https://www.alta.org/best-practices/download.cfm?bestPracID=97&type=pdf">https://www.alta.org/best-practices/download.cfm?bestPracID=97&type=pdf</a>; see generally American Land
Title Association, ``ALTA Urges CFPB to Preserve Role of Independent
Third-party Settlement Agents'' (Nov. 8, 2012), available at <a href="https://www.alta.org/news/news.cfm?20121108-ALTA-Urges-CFPB-to-Preserve-Role-of-Independent-Third-party-Settlement-Agents">https://www.alta.org/news/news.cfm?20121108-ALTA-Urges-CFPB-to-Preserve-Role-of-Independent-Third-party-Settlement-Agents</a>.
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A transfer of residential real estate that does not involve a
purchase, such as a transfer that is a gift or that is made to a trust,
involves a closing and settlement process that is distinct from the
process described above that exists for typical sales of residential
real estate. For example, such non-sale transfers would not involve a
settlement agent or settlement statement or the transfer of funds
through escrow. They may, however, involve an attorney or other real
estate professional who prepares or files the deed, provides title
insurance, or provides a title evaluation.
3. Designation Agreements
Although the reporting cascade would identify the real estate
professional who would be primarily responsible for filing a Real
Estate Report, the real estate professionals described in the reporting
cascade may enter into a written agreement to designate another person
in the reporting cascade as the reporting person. For example, if a
real estate professional involved in the transfer provides certain
settlement services in the settlement process, as described in the
first tier of the cascade, that person may enter into a written
designation agreement with a title insurance company underwriting the
transfer as described in the second tier of the cascade, through which
the two parties agree that the title insurance company would be the
designated reporting person with respect to that transfer. The person
who would otherwise be the reporting person must
[[Page 12439]]
be a party to the agreement; however, it is not necessary that all
persons involved in the transfer who are described in the reporting
cascade be parties to the agreement.
While the agreement must be in writing and must identify the date
of the agreement, the name and address of the transferor, the name and
address of the transferee entity or transferee trust, the property, the
name and address of the designated reporting person, and the name and
address of all other parties to the agreement, there is no required
format for the designation agreement. All parties to the agreement
would be required to retain a copy for a period of five years.
4. Employees, Agents, and Partners
If an employee, agent, or partner acting within the scope of such
individual's employment, agency, or partnership would be the reporting
person in a reportable property transfer, then the individual's
employer, principal, or partnership is deemed to be the reporting
person. In that case, it is the responsibility of the reporting person
(i.e., the employer, principal, or partnership) to ensure that a report
is filed. Accordingly, FinCEN expects that, in most cases, individuals
will not be reporting persons. However, there may be certain cases
(e.g., sole proprietorships) where the responsibility to file a report
rests with an individual.
5. Consultations With Real Estate Professionals
The cascade is designed to both prevent an increased burden on
reporting persons by ensuring that multiple real estate professionals
do not have to collect information and file a report about the same
transfer, while at the same time minimizing opportunities for reporting
evasion by ensuring a report is filed for most reportable transfers. In
the course of developing this cascading reporting order, FinCEN held
extensive discussions with real estate professionals and the IRS, which
employs a somewhat similar cascading reporting structure for its Form
1099-S.\116\ These discussions suggest that potential reporting persons
involved in a real estate closing or settlement would be aware of one
another's presence or absence in the process at the time of closing,
and that the reporting chain would be easily interpreted by persons
involved in real estate closings and settlements.
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\116\ See 29 CFR 1.6045-4 (Information reporting on real estate
transactions with dates of closing on or after January 1, 1991).
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Several 2021 ANPRM commenters suggested the use of a reporting
cascade.\117\ Some commenters recommended that title and escrow
companies and agents, real estate agents and brokers, real estate
attorneys, and other real estate professionals be the reporting persons
in any potential regulation, to ensure that a broad swath of real
estate professionals are included and to prevent reporting
loopholes.\118\ One commenter suggested that title insurance companies
that are already affiliated with heavily regulated financial
institutions, such as banks, should not be required to report; FinCEN
is not proposing this path because it is unclear who would decide this
or how it would be determined.\119\ Another commenter stated that
FinCEN should place any compliance obligations on the seller, but
FinCEN believes this would place too much burden on individuals who are
not real estate professionals.\120\ Two commenters suggested requiring
only title insurance companies to report in the residential context,
and only secondarily requiring escrow agents to report if title
insurance is not purchased.\121\
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\117\ See Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), p. 11, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; Transparency International U.S., ANPRM
Comment (Feb. 18, 2022), p. 10, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0115">https://www.regulations.gov/comment/FINCEN-2021-0007-0115</a>; Senator Sheldon
Whitehouse, ANPRM Comment (Feb. 18, 2022), p. 4, available at
<a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0118">https://www.regulations.gov/comment/FINCEN-2021-0007-0118</a>; The FACT
Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0122">https://www.regulations.gov/comment/FINCEN-2021-0007-0122</a>; California
Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0126">https://www.regulations.gov/comment/FINCEN-2021-0007-0126</a>; National Association of Realtors, ANPRM Comment (Feb. 18,
2022), p. 15, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0128">https://www.regulations.gov/comment/FINCEN-2021-0007-0128</a>.
\118\ See Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), p. 11, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; League of Southeastern Credit Unions &
Affiliates, ANPRM Comment (Feb. 7, 2022), pp. 3-4, available at
<a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0011">https://www.regulations.gov/comment/FINCEN-2021-0007-0011</a>; American
Land Title Association, ANPRM Comment (Feb. 17, 2022), p. 3,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0020">https://www.regulations.gov/comment/FINCEN-2021-0007-0020</a>; Transparency International U.S., ANPRM Comment (Feb. 18,
2022), p. 10, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0115">https://www.regulations.gov/comment/FINCEN-2021-0007-0115</a>; The FACT Coalition, ANPRM Comment (Feb. 18,
2022), p. 3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0122">https://www.regulations.gov/comment/FINCEN-2021-0007-0122</a>; American Escrow Association, ANPRM Comment
(Feb. 18, 2022), pp. 13-17, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0124">https://www.regulations.gov/comment/FINCEN-2021-0007-0124</a>; California
Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0126">https://www.regulations.gov/comment/FINCEN-2021-0007-0126</a>; Illinois Credit Union League, ANPRM Comment (Feb. 21, 2022),
p. 1, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0137">https://www.regulations.gov/comment/FINCEN-2021-0007-0137</a>; Palmera Consulting, ANPRM Comment (Feb. 21, 2022), p. 4,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0141">https://www.regulations.gov/comment/FINCEN-2021-0007-0141</a>; Louise Shelley and Ross Delston, ANPRM Comment (Feb. 21,
2022), p. 2, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0151">https://www.regulations.gov/comment/FINCEN-2021-0007-0151</a>.
\119\ See Prosperus Title, ANPRM Comment (Feb. 18, 2022), p. 1,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0125">https://www.regulations.gov/comment/FINCEN-2021-0007-0125</a>.
\120\ See Morgan, Lewis, & Bockius, ANPRM Comment (Feb. 18,
2022), p. 3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0123">https://www.regulations.gov/comment/FINCEN-2021-0007-0123</a>.
\121\ See Anti-Corruption Data Collective, ANPRM Comment (Feb.
18, 2022), p. 1, 4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0153">https://www.regulations.gov/comment/FINCEN-2021-0007-0153</a>; National Association of Realtors,
ANPRM Comment (Feb. 18, 2022), p. 14, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0128">https://www.regulations.gov/comment/FINCEN-2021-0007-0128</a>.
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Rather than to include or exclude any particular persons involved
in real estate settlements and closings based on the titles they hold,
FinCEN decided to design a reporting cascade based on the functions
performed in a closing or settlement. This functional approach will
ensure that the professional closest to the proposed information to be
reported is most often the reporting person, thereby increasing
efficiency and lessening overall burden. FinCEN notes that, as a result
of this functional approach, specific real estate professionals such as
real estate agents, brokers, and attorneys are not directly subject to
obligations in the reporting cascade. They acquire reporting
obligations only if they perform the specified functions.
Several commenters on the 2021 ANPRM argued against inclusion of
attorneys, claiming that attorney-client privilege should prevent
attorneys involved in real estate closings and settlements from
reporting information, including beneficial ownership information.\122\
In this proposed rule, FinCEN would require reporting by attorneys only
when they perform certain functions--functions that generally may be
performed by non-attorneys. Although some jurisdictions in the United
States require a licensed attorney to perform certain closing or
settlement functions, FinCEN believes that the functions described in
the cascade may generally be performed by both attorneys and non-
attorneys. Indeed, FinCEN believes that the same reporting obligations
should apply to
[[Page 12440]]
attorneys and non-attorneys alike when they perform the same functions
in reportable transfers of residential real property. Furthermore,
FinCEN expects that reporting of factual information about a real
estate transfer would not implicate attorney-client privilege, in most
cases. Also, the proposed rule provides that potential reporting
persons, including attorneys, may enter into designation agreements
with other real estate professionals described in the cascade, thereby
passing the reporting obligation to another professional.
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\122\ See Joint Editorial Board for Uniform Real Property Acts,
ANPRM Comment (Feb. 5, 2022), pp. 1-2, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0014">https://www.regulations.gov/comment/FINCEN-2021-0007-0014</a>; American Bar
Association, ANPRM Comment (Feb. 7, 2022), pp. 1-12, available at
<a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0018">https://www.regulations.gov/comment/FINCEN-2021-0007-0018</a>; Marisa N.
Bocci, ANPRM Comment (Feb. 21, 2022), p. 5, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0150">https://www.regulations.gov/comment/FINCEN-2021-0007-0150</a>.
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E. Information To Be Reported
1. Description of Information
The proposed rule requires reporting persons to report and maintain
records of certain information regarding reportable transfers. This
includes certain information about any reporting persons, transferee
entities, transferee trusts, signing individuals, transferors, the
residential real property, and reportable payments. To a large degree,
this information is similar to the transactional information required
to be reported through traditional SARs. FinCEN emphasizes that Real
Estate Reports, like SARs, would be housed in FinCEN's secure BSA
Portal and would not be accessible to the general public; FinCEN
imposes strict limits on the use and re-dissemination of the data it
provides to its law enforcement and other agency partners.
The following discussion addresses in more detail some of the types
of information the rule proposes to collect.
1. Name and address: The proposed rule would collect the name and
address of the principal place of business for reporting persons,
transferee entities and transferee trusts, and transferors that are
entities. For legal entities that are trustees of transferor trusts,
the proposed rule would collect the place of trust administration. It
would collect the name and a residential address for each individual
who signed documents on behalf of the transferee (signing individuals),
all beneficial owners of a transferee entity or transferee trust,
individual transferors, and individuals who are trustees of transferor
trusts.
2. Citizenship: The proposed rule would collect citizenship
information for all beneficial owners of a transferee entity or
transferee trust. FinCEN proposes to collect this information to better
analyze the volume of illicit funds entering the United States via
entities or trusts beneficially owned by non-U.S. persons. FinCEN
cannot do this type of broad analysis without collecting citizenship
information. For instance, traditional SARs already collect this type
of information and FinCEN was able to analyze SARs in aggregate to
identify Russian investment in the U.S. economy, including the real
estate sector, after the invasion of Ukraine.\123\
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\123\ See FinCEN, FIN-2023-Alert002, FinCEN Alert on Potential
U.S. Commercial Real Estate Investments by Sanctioned Russian
Elites, Oligarchs, and their Proxies (Jan. 25, 2023), available at
<a href="https://www.fincen.gov/sites/default/files/shared/FinCEN%20Alert%20Real%20Estate%20FINAL%20508_1-25-23%20FINAL%20FINAL.pdf">https://www.fincen.gov/sites/default/files/shared/FinCEN%20Alert%20Real%20Estate%20FINAL%20508_1-25-23%20FINAL%20FINAL.pdf</a>; FinCEN, FIN-2022-Alert002, FinCEN Alert on
Real Estate, Luxury Goods, and Other High-Value Assets Involving
Russian Elites, Oligarchs, and their Family Members (Mar. 16, 2022),
available at <a href="https://www.fincen.gov/sites/default/files/2022-03/FinCEN%20Alert%20Russian%20Elites%20High%20Value%20Assets_508%20FINAL.pdf">https://www.fincen.gov/sites/default/files/2022-03/FinCEN%20Alert%20Russian%20Elites%20High%20Value%20Assets_508%20FINAL.pdf</a>.
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3. Unique identifying number: The proposed rule would collect a
unique identifying number for each person (whether an individual or
entity) whose name and address are required to be reported. For any
individual for whom a unique identifying number would be collected, a
unique identifying number can be an IRS Taxpayer Identification Number
(TIN) or, if they do not have one, a foreign equivalent or a foreign
passport number. For an entity, a unique identifying number can be an
IRS TIN or, if the entity does not have one, a foreign equivalent or a
foreign registration number. FinCEN chose to include the collection of
TINs, such as Social Security Numbers (SSNs) or Employer Identification
Numbers (EINs), for transferee entities, transferee trusts, beneficial
owners of transferee entities and trusts, as well as for certain
individuals signing documents on behalf of the transferee entity or
trust during the residential real estate transfer, for a number of
reasons. Reporting TINs provides law enforcement with the most
efficient means to identify potential individuals involved in illicit
activity and connect those persons to other transactions during
investigations. Unlike names, addresses, and dates of birth, which can
be common across multiple individuals, TINs are unique to a given
individual, entity, or trust. Consequently, collections of TINs would
cut down on flagging of individuals, entities, and trusts that are not
the intended subject of an investigation, which will allow law
enforcement to more efficiently pursue leads, conduct investigations,
and identify illicitly acquired assets. FinCEN's consultations with law
enforcement have confirmed that law enforcement views access to TIN
information as extremely helpful for streamlining investigative work.
Law enforcement officials also indicated to FinCEN that it is
relatively easy for illicit actors to create a false identity using a
combination of name, address, and date of birth, and often do so,
thereby impeding an investigation from the outset. However, law
enforcement noted that obtaining a false TIN was orders of magnitude
more difficult and that collection of such information was therefore
crucial to their investigations. Moreover, TINs are routinely collected
in other BSA reports, including SARs.\124\ Accordingly, the proposed
rule would collect TINs for certain persons involved in covered
residential real estate transfers.
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\124\ FinCEN, FinCEN Suspicious Activity Report (FinCEN SAR)
Electronic Filing Requirements (Aug. 2021), p. 62, available at
<a href="https://bsaefiling.fincen.treas.gov/docs/XMLUserGuide_FinCENSAR.pdf">https://bsaefiling.fincen.treas.gov/docs/XMLUserGuide_FinCENSAR.pdf</a>;
see also FinCEN, Report of Cash Payments Over $10,000 Received in a
Trade or Business (FinCEN Form 8300) Electronic Filing Requirements
(Aug. 2021), p. 28, available at <a href="https://bsaefiling.fincen.treas.gov/docs/XMLUserGuide_FinCEN8300.pdf">https://bsaefiling.fincen.treas.gov/docs/XMLUserGuide_FinCEN8300.pdf</a>
(indicating Form-8300s require TINs to be reported); FinCEN, FinCEN
Currency Transaction Report (CTR) Electronic Filing Requirements
(Aug. 2021), p. 27, available at <a href="https://bsaefiling.fincen.treas.gov/docs/XMLUserGuide_FinCENCTR.pdf">https://bsaefiling.fincen.treas.gov/docs/XMLUserGuide_FinCENCTR.pdf</a>
(indicating CTRs required TINs to be reported); FinCEN, FinCEN
Report of Foreign Bank and Financial Accounts (FBAR) Electronic
Filing Requirements (Aug. 2021), p. 29, available at <a href="https://bsaefiling.fincen.treas.gov/docs/XMLUserGuide_FinCENFBAR.pdf">https://bsaefiling.fincen.treas.gov/docs/XMLUserGuide_FinCENFBAR.pdf</a>
(indicating FBARs require TINs to be reported).
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4. Representative capacity of signing individual: For any signing
individual, the proposed rule would collect a description of the
capacity in which the individual is authorized to act as the signing
individual for the transferee entity or transferee trust, such as
whether the signing individual is a legal representative. Additionally,
if the signing individual is acting in that capacity as an employee,
agent, or partner, the proposed rule would collect the name of the
employer, principal, or partnership.
5. Information concerning payments: The proposed rule would collect
the total consideration paid by all transferees regarding the
residential real property, as well as the total amount paid by the
transferee entity or trust, the method of each payment made by the
transferee entity or transferee trust, the accounts and financial
institutions used for each such payment, and, if the payor is anyone
other than the transferee entity or transferee trust, the name of the
payor on the payment form. With respect to the reporting of payments
made by the transferee entity or transferee trust, the proposed rule
seeks only to capture transactions where the greatest risk for money
laundering is present--the movement of funds from accounts held or
controlled by the transferee--and therefore exempts payments made from
escrow or trust
[[Page 12441]]
accounts held by the reporting person. Accordingly, the rule would
require the reporting of payments made from other escrow or trust
accounts, payments made into any escrow or trust accounts (to prevent
illicit actors from trying to circumvent the reporting requirement),
and payments sent directly from the transferee to the transferor. For
example, if the payment path is (1) from the transferee's bank account
to a trust account, (2) from that trust account to an escrow account
held by the reporting person, and then (3) from that escrow account to
the transferor, the reporting person would need to provide the payment
details of the first leg of the payment path. FinCEN notes that the
reporting requirement would include the reporting of payments that the
reporting person may consider as being paid outside of closing, such as
a payment made between a buyer and seller through bank accounts located
outside of the United States. FinCEN proposes to collect payment
information because financial information is key to ensuring that the
reports meet the threshold for being highly valuable to law
enforcement. The payment information behind real estate transfers
conducted in a manner that has been identified as high risk for money
laundering would help support law enforcement investigations, as it can
help connect beneficial owners to suspicious activity or funding
sources. The collection of this information may also serve as a
deterrent to those thinking about attempting to launder money through
the U.S. residential real estate sector.
6. Information concerning the residential real property: The
proposed rule would require the address of the relevant property, if
applicable, and a legal description, such as the section, lot, and
block. This information would be reported for each property involved in
the transfer. For example, if a four-unit town home is transferred to a
transferee entity, all four addresses would be reported.
Commenters on the 2021 ANPRM had diverse views on what information
should or should not be collected under any potential regulation. Most
commenters who thought that information should be collected were in
favor of collecting transferee side information, including beneficial
ownership information.\125\ However, other commenters said that only
basic information that is already collected in the course of a closing
about the transferee should be collected, and that requiring real
estate professionals to collect beneficial ownership information would
be too burdensome.\126\ FinCEN recognizes that while most of the
information that would be collected under this proposed rule is
provided to the most frequent reporters in the normal course of a
closing, beneficial ownership information is not. FinCEN addressed
concerns about the burden of collecting beneficial ownership
information in this proposed rule by making sure that reporting persons
can collect this information through a form, which is then certified by
the transferee as being accurate, as will be discussed further below.
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\125\ See Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), pp. 27-28, 44-45, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; Transparency International U.S.,
ANPRM Comment (Feb. 18, 2022), pp. 8-9, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0115">https://www.regulations.gov/comment/FINCEN-2021-0007-0115</a>; The FACT
Coalition, ANPRM Comment (Feb. 18, 2022), p. 4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0122">https://www.regulations.gov/comment/FINCEN-2021-0007-0122</a>; California
Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0126">https://www.regulations.gov/comment/FINCEN-2021-0007-0126</a>.
\126\ See American Land Title Association, ANPRM Comment (Feb.
17, 2022), pp. 2-4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0020">https://www.regulations.gov/comment/FINCEN-2021-0007-0020</a>; American Escrow Association, ANPRM
Comment (Feb. 18, 2022), pp. 13-17, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0124">https://www.regulations.gov/comment/FINCEN-2021-0007-0124</a>.
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Some commenters advocated for the collection of transferor
information as well.\127\ FinCEN opted to collect only minimal
transferor information, as the primary party of interest to law
enforcement is the new owner of property that has been transferred in a
manner that presents money laundering concerns.
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\127\ See Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), pp. 27-28, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; Senator Sheldon Whitehouse, ANPRM Comment
(Feb. 18, 2022), p. 4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0118">https://www.regulations.gov/comment/FINCEN-2021-0007-0118</a>; The FACT Coalition, ANPRM Comment
(Feb. 18, 2022), p. 4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0122">https://www.regulations.gov/comment/FINCEN-2021-0007-0122</a>; California Reinvestment Coalition,
ANPRM Comment (Feb. 18, 2022), p. 3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0126">https://www.regulations.gov/comment/FINCEN-2021-0007-0126</a>; Coalition for
Integrity, ANPRM Comment (Feb. 21, 2022), p. 4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0127">https://www.regulations.gov/comment/FINCEN-2021-0007-0127</a>.
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Commenters also mentioned collecting certain funds payment
information,\128\ identifying PEPs involved in the transfer,\129\
beneficial ownership verification,\130\ information about the property
being transferred,\131\ and any representatives of the transferee in
the transfer.\132\ Elements of each of these are included in the
proposed rule, except for PEP identification and beneficial owner
verification, which FinCEN believes would require reporting persons to
undertake independent research that would represent a dramatically
increased burden, compared to collecting information from the
transferee.
---------------------------------------------------------------------------
\128\ See Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), pp. 27-28, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; Transparency International U.S., ANPRM
Comment (Feb. 18, 2022), p. 9, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0115">https://www.regulations.gov/comment/FINCEN-2021-0007-0115</a>; Senator Sheldon
Whitehouse, ANPRM Comment (Feb. 18, 2022), p. 4, available at
<a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0118">https://www.regulations.gov/comment/FINCEN-2021-0007-0118</a>; The FACT
Coalition, ANPRM Comment (Feb. 18, 2022), p. 4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0122">https://www.regulations.gov/comment/FINCEN-2021-0007-0122</a>; California
Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0126">https://www.regulations.gov/comment/FINCEN-2021-0007-0126</a>; Coalition for Integrity, ANPRM Comment (Feb. 21, 2022), p. 4,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0127">https://www.regulations.gov/comment/FINCEN-2021-0007-0127</a>; Anti-Corruption Data Collective, ANPRM Comment (Feb. 18,
2022), p. 3, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0153">https://www.regulations.gov/comment/FINCEN-2021-0007-0153</a>.
\129\ See Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), pp. 27-28, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; Transparency International U.S., ANPRM
Comment (Feb. 18, 2022), p. 9, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0115">https://www.regulations.gov/comment/FINCEN-2021-0007-0115</a>; The FACT
Coalition, ANPRM Comment (Feb. 18, 2022), p. 4, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0122">https://www.regulations.gov/comment/FINCEN-2021-0007-0122</a>; California
Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3,
available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0126">https://www.regulations.gov/comment/FINCEN-2021-0007-0126</a>.
\130\ See Transparency International U.S., ANPRM Comment (Feb.
18, 2022), p. 9, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0115">https://www.regulations.gov/comment/FINCEN-2021-0007-0115</a>.
\131\ See Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), pp. 44-45, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; American Land Title Association, ANPRM
Comment (Feb. 17, 2022), p. 6, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0020">https://www.regulations.gov/comment/FINCEN-2021-0007-0020</a>; Anti-Corruption
Data Collective, ANPRM Comment (Feb. 18, 2022), p. 3, available at
<a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0153">https://www.regulations.gov/comment/FINCEN-2021-0007-0153</a>.
\132\ See Global Financial Integrity, ANPRM Comment (Feb. 17,
2022), pp. 44-45, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0102">https://www.regulations.gov/comment/FINCEN-2021-0007-0102</a>; American Escrow Association, ANPRM Comment
(Feb. 18, 2022), p. 16, available at <a href="https://www.regulations.gov/comment/FINCEN-2021-0007-0124">https://www.regulations.gov/comment/FINCEN-2021-0007-0124</a>.
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2. Collection of Information
FinCEN expects that the reporting person will have access to some,
but not all, of the reportable information in the normal course of
business. In particular, the reporting person may not have on hand the
identifying information for the beneficial owners of the transferee
entity or trust. The proposed rule therefore includes guidelines for
how the reporting person should collect this information.
The reporting person may collect the information directly from a
transferee or a representative of the transferee, so long as the person
certifies that the
[[Page 12442]]
information is correct to the best of their knowledge. The
certification may be collected using a form that may be provided by
FinCEN, similar to the one provided with respect to the CDD Rule, which
requires certain financial institutions collect beneficial ownership
information from legal entity customers, or the reporting person may
incorporate a certification into a document of their own design,
including existing closing documents used by the reporting person.\133\
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\133\ See 31 CFR 1010.230.
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FinCEN could have proposed that reporting persons must personally
conduct extensive research to verify beneficial ownership and other
information provided to them, but is proposing the use of a
certification due to its comparative lesser burden on filers. The use
of certifications will also ensure uniform information collection
standards are met across reportable transfers. Any certification form
signed in the course of a transfer must be retained by the reporting
person for five years. Although the reporting person may rely on the
information collected from other parties as described above, the
reporting person may not report information that the reporting person
knows, suspects, or has reason to suspect is inaccurate or incomplete.
As an alternative, FinCEN considered requiring reporting persons to
undertake the verification of the information to be reported. However,
FinCEN is instead proposing the use of a written certification form
because this approach would present a lower burden on reporting persons
when compared with a scenario in which they would independently verify
information through their own research. Allowing parties to the
transfer and their representatives to provide information directly,
while attesting to its accuracy, will reduce time and resources
expended by reporting persons while ensuring that the most accurate
information is provided to law enforcement and that compliance can be
monitored more effectively. The proposed rule would also allow the
flexibility of the reporting person collecting the information by any
other means, so long as the transferee's representative (whether a
signing individual or other type of representative) attests to its
accuracy.
F. Filing Procedures
A reporting person must electronically file a Real Estate Report
with FinCEN, following the reporting form's instructions, no later than
30 calendar days after the date on which the transferee entity or
transferee trust receives the ownership interest in the residential
real property. This is to ensure that reporting of time sensitive
information about residential real estate closings and settlements is
not unduly delayed.
G. Records Retention
Reporting persons must maintain a copy of any Real Estate Report
they have filed and any certifications as to the identities of the
beneficial owner(s) of a transferee entity or transferee trust for five
years from the date of filing and keep them available at all times for
inspection as authorized by law.
All parties to a designation must similarly retain a copy of the
agreement for five years from the date of signing and keep it available
at all times for inspection as authorized by law.
H. Exemptions
The proposed rule would exempt reporting persons and Federal,
State, local, or Tribal government authorities from the confidentiality
provision in 31 U.S.C. 5318(g)(2) prohibiting the disclosure to any
person involved in the transaction that the transaction has been
reported.\134\ As noted above, FinCEN recognizes that financial
institutions who file SARs are subject to restrictions prohibiting the
disclosure of the existence of the SAR to any of its subjects. However,
this would not be feasible with the proposed Real Estate Report, as
reporting persons would need to collect information directly from the
subjects of the Report. Moreover, all parties to a non-financed
residential real estate transfer that is subject to the proposed rule
would already be aware that a report would be filed, given that such
filing is non-discretionary, rendering confidentiality unnecessary.
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\134\ 31 U.S.C. 5318(a)(7) (which allows the Secretary to
prescribe appropriate exemptions).
---------------------------------------------------------------------------
Furthermore, persons involved in real estate closings and
settlements are exempt from the requirement to maintain an AML program
requirement.\135\ For the reasons discussed earlier, that exemption
will continue to apply to persons involved in real estate closings and
settlements under the proposed rule. However, the exemption does not
apply to reporting persons who are financial institutions otherwise
required to establish an AML/CFT program under FinCEN's regulations.
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\135\ 31 CFR 1010.205(b)(1)(v).
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V. Final Rule Effective Date
FinCEN is proposing an effective date of one year from the date the
final rule is issued. A one-year effective date is intended to provide
real estate professionals with sufficient time to review and prepare
for implementation of the rule. FinCEN solicits comment on the proposed
effective date for this rule.
VI. Request for Comment
FinCEN seeks comments on the questions listed below, but invites
any other relevant comments as well. FinCEN encourages commenters to
reference specific question numbers to facilitate FinCEN's review of
comments.
1. What would the cost and hour burden of filing reports as
detailed by this NPRM be for your profession? Please quantify, if
possible, the anticipated burden this proposed rule would represent for
the designated reporting persons.
2. What percentage of residential real property transfers involve
transfers to the types of entities described in the regulation as
``transferee entities'' and ``transferee trusts''?
3. What are the benefits and drawbacks to having a cascading
hierarchy of reporting persons, as proposed?
4. Will real estate professionals know or be able to discover the
other real estate professionals performing functions in the closing
process as laid out by the reporting cascade?
5. Please provide feedback on the order of the proposed cascading
reporting hierarchy. Does it include those real estate professionals
who are most able to obtain and report the required information? Should
any person involved in real estate closings and settlements present in
the proposed cascade be removed? Added? Why?
6. Are there potential loopholes in the proposed cascading
reporting order? If so, how might they be overcome? For example, would
specifically adding real estate agents and brokers close any reporting
gaps?
7. How likely are potential reporting persons to enter into
designation agreements? Are there any particular challenges associated
with entering into such an agreement? With documenting that such an
agreement has been made?
8. What are typical costs to close a residential real estate deal?
What percentage of the sale price do these costs typically represent?
9. What sort of due diligence is normally conducted, before or at
closing for residential properties, regarding (i) the parties to a
transfer; (ii) the source of funds for any transfer; and (iii) other
key aspects of the transfer?
10. What sort of existing recordkeeping or reporting requirements,
unrelated to BSA
[[Page 12443]]
compliance, exist for non-financed residential real estate transfers?
If any, what information must be recorded or reported, to whom, and for
how long? What entity provides oversight?
11. Should FinCEN limit the scope of any final rule to only non-
financed transfers? What are the benefits and drawbacks to doing so?
12. What adjustments, if any, should be made to the proposed
definition of a reportable transfer?
13. Should the rule except transfers that involve a qualified
extension of credit to ``all'' transferees or to ``any'' transferee?
14. What percentage of residential real estate transfers are non-
financed?
15. What adjustments, if any, should be made to the proposed
definition of ``residential real property''? Is the description of such
property as ``designed principally for occupancy by one to four
families'' a clear industry standard?
16. Are the beneficial owners of transferee entities or transferee
trusts routinely identified by some participant in the transfer?
17. What information, if any, should be reported about transfers
involving tax-exempt organizations?
18. What do persons involved in real estate closings and
settlements do if they have any suspicions about a transfer of
residential real property, customer, or the payments supporting the
transfer?
19. What roles do attorneys play in non-financed sales and non-sale
transfers of residential real estate? Are there attorney-client
privilege concerns with reporting these transfers, as proposed in the
rule? If so, what is the basis for these concerns?
20. Please describe the purpose of the use of an escrow account,
trust account, or lawyers' trust account in a real estate transfer. Do
these accounts present money laundering concerns? Is the use of these
accounts sufficiently captured in the proposed rule? Are there
attorney-client privilege concerns around the use of lawyer's trust
accounts, and if so, what is the basis for these concerns?
21. How are opinion letters used in the real estate closing and
settlement process? Are there attorney-client privilege concerns around
the use of opinion letters? If so, what is the basis for those
concerns?
22. Are there other attorney-client privilege concerns, such as
around attorneys acting as settlement agents, drafting or filing deeds,
or reporting any of the required information? What is the basis for
those concerns?
23. How do factors related to parties to the transfer, the payments
related to the transfer, and the property itself bear on money
laundering risk assessment? What kinds of transfers and customers are
highest and lowest risk? How are those risks mitigated and what are the
associated costs of that mitigation?
24. Is it possible to estimate the extent to which residential real
property values are affected by money laundering through real estate?
25. Please provide comments on the proposed definition of
transferee entity.
26. Please provide comments on the proposed definition of
transferee trust.
27. Please provide comments on the proposed definition of
beneficial owners of transferee entities.
28. Please provide comments on the proposed definition of
beneficial owners of transferee trusts.
29. Please provide comments on any other definition in the proposed
rule.
30. Please provide comments on the proposed coverage of transfers
of residential real estate to transferee entities and transferee
trusts, including the benefits and drawbacks to covering each.
31. Are there any areas within the geographic scope of this
proposed rule that have unique customs or requirements that should be
taken into account?
32. Please comment on how aware real estate professionals involved
in residential real property transfers are of other categories of real
estate professionals that may be involved in a given closing or
settlement.
33. What are the benefits of the rule as proposed?
34. Is the information FinCEN proposes to be reported regarding
non-financed residential real estate transfers to transferee entities
and transferee trusts sufficient, over- or under-inclusive? What
information should be added or removed and why?
35. Should FinCEN ask for citizenship information of beneficial
owners of transferee entities and transferee trusts? Why or why not?
36. Is the information FinCEN proposes to be reported regarding
reporting persons sufficient, over- or under-inclusive? What
information should be added or removed and why?
37. Please provide comments on the proposed collection of TINs for
transferors and transferees and their beneficial owners.
38. Is the information FinCEN proposes to be reported regarding
signing individuals sufficient, over- or under-inclusive? What
information should be added or removed and why?
39. Is the information FinCEN proposes to be reported regarding
transferors sufficient, over- or under-inclusive? What information
should be added or removed and why?
40. Is the information FinCEN proposes to be reported regarding the
description of the transferred property sufficient, over- or under-
inclusive? What information should be added or removed and why?
41. Is the information FinCEN proposes to be reported regarding
payments sufficient, over- or under-inclusive? What information should
be added or removed and why? Would it be useful to reporting persons to
have space on the reporting form to explain or discuss suspected or
observed suspicious activity?
42. Should FinCEN require information regarding additional
information about the source of funds for covered residential real
estate transfers? How would or should reporting persons go about
ascertaining source of funds information?
43. How should FinCEN consider real estate transfers to foreign
trusts and charitable trusts? Foreign non-profits? Do these present
sufficient money laundering risk that they should be covered by any
final rule? Why or why not?
44. If program or other requirements were limited to purchases
above a certain price threshold, how would this affect: (i) the burden
of implementing such potential rules; and (ii) the utility of such
potential rules for addressing money laundering issues in the real
estate market?
45. What are the key benefits for a reporting person, if any,
assuming issuance of the rules?
46. Please list any legislative, regulatory, judicial, corporate,
or market-related developments that have transpired since FinCEN issued
the 2021 ANPRM that you view as relevant to FinCEN's current proposed
issuance of AML regulations.
47. Are there particular concerns that small businesses may have
regarding the implementation of this proposed rule?
48. What would be the value of covering partially non-financed
residential real estate transfers? What level of financing would be
sufficient to alleviate that concern?
49. FinCEN understands that for certain residential real estate
transfers involving multiple investors, such as with unregistered PIVs,
or large operating companies, there may be multiple financing methods
involved in a single residential transfer. Please detail in the context
of the proposed rule how due diligence checks on partially financed
residential real estate transfers involving multiple entities
[[Page 12444]]
may differ from due diligence checks on fully financed residential real
estate transfers multiple entities.
50. This NPRM is focused on residential real estate. Do the same
considerations for type of purchaser covered and professionals required
to report apply to the commercial real estate sector?
VII. Regulatory Analysis
This regulatory impact analysis (RIA) evaluates the anticipated
effects of the proposed rule in terms of its expected costs and
benefits to affected parties, among other economic considerations, as
required by Executive Orders 12866, 13563, and 14094 (E.O. 12866 and
its amendments).\136\ This RIA also includes assessments of the
potential economic impact on small entities pursuant to the Regulatory
Flexibility Act (RFA) and reporting and recordkeeping burdens under the
Paperwork Reduction Act of 1995 (PRA), as well as analysis required
under the Unfunded Mandates Reform Act of 1995 (UMRA).\137\
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\136\ See infra Section VII.B.
\137\ Pursuant to its UMRA-related analysis, FinCEN has not
anticipated material changes in expenditures for State, local, and
Tribal governments, but because the proposed rule would impose new
reporting and recordkeeping requirements on select entities in the
private sector in connection with certain residential property
transfers, FinCEN considers expenditures these private entities may
incur as part of the regulatory impact in its assessment below.
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As discussed in greater detail below, the proposed rule is expected
to promote national security objectives \138\ and enhance compliance
with international standards \139\ by improving law enforcement's
ability to identify the natural persons associated with transactions
conducted in the U.S. residential real estate sector and thereby
diminish the ability of corrupt and other illicit actors to launder
their proceeds through real estate purchases in the United States. More
specifically, the collection of the proposed streamlined SARs, Real
Estate Reports, in a repository that would be readily accessible to law
enforcement is expected to increase the efficiency with which resources
can be utilized to identify such natural persons, or beneficial owners,
when they have conducted non-financed purchases of residential real
property using legal entities or trusts.
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\138\ See The White House, United States Strategy on Countering
Corruption (Dec. 6, 2021), available at <a href="https://www.whitehouse.gov/wp-content/uploads/2021/12/United-States-Strategy-on-Countering-Corruption.pdf">https://www.whitehouse.gov/wp-content/uploads/2021/12/United-States-Strategy-on-Countering-Corruption.pdf</a>.
\139\ See Financial Action Task Force, The FATF Recommendations
(Feb. 2012; last updated Nov. 2023), available at <a href="https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Fatf-recommendations.html">https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Fatf-recommendations.html</a>; see also Financial Action Task Force, United
States Mutual Evaluation Report (Dec. 2016), p.1., available at
<a href="https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MER-United-States-2016.pdf.coredownload.inline.pdf">https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MER-United-States-2016.pdf.coredownload.inline.pdf</a>.
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The following RIA first describes the economic analysis FinCEN
undertook to inform its expectations of the proposed rule's impact and
burden.\140\ This is followed by certain pieces of additional and, in
some cases, more specifically tailored analysis as required by E.O.
12866 and its amendments,\141\ the RFA,\142\ the UMRA,\143\ and the
PRA,\144\ respectively. Requests for comment related to the RIA--
regarding specific findings, assumptions, or expectations, or with
respect to the analysis in its entirety--can be found in the final
subsection \145\ and have been previewed and cross-referenced
throughout the RIA.
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\140\ See Section VII.A.
\141\ See Section VII.B.
\142\ See Section VII.C.
\143\ See Section VII.D.
\144\ See Section VII.E.
\145\ See Section VII.F.
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A. Assessment of Impact
This proposed rule has been determined to be a ``significant
regulatory action'' under Section 3(f) of Executive Order 12866 because
it may raise legal or policy issues. The following assessment indicates
that the proposed rule may also be considered significant under Section
3(f)(1), as the proposed rule is expected to have an annual effect on
the economy of $200 million or more.\146\ Consistent with certain
identified best practices in regulatory analysis, the economic analysis
conducted in this section begins with a review of FinCEN's broad
economic considerations, identifying the relevant market failures (or
fundamental economic problems) that demonstrate the need or otherwise
animate the impetus for the policy intervention as proposed.\147\ Next,
the analysis turns to details of the current regulatory requirements
and the background of market practices against which the proposed rule
would introduce changes and establishes baseline estimates of the
number of entities and residential real property transactions FinCEN
expects could be affected in a given year. The analysis then briefly
reviews the content of the proposed rules with a focus on the
specifically relevant elements of the proposed definitions and
requirements that most directly inform how FinCEN contemplates
compliance with the proposed requirements would be operationalized.
Next, the analysis proceeds to outline the estimated costs to the
respective affected parties that would be associated with such
operationalization. Finally, the analysis concludes with a brief
discussion of certain alternative policies FinCEN considered and could
have proposed, including an evaluation of the relative economic merits
of each against the expected value of the rule as proposed.
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\146\ Executive Order 12866 (Sept. 30, 1993), section 3(f)(1);
see also Section VII.A.4.
\147\ Broadly, the anticipated economic value of a proposed rule
can be measured by the extent to which it might reasonably be
expected to resolve or mitigate the economic problems identified by
such review.
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1. Broad Economic Considerations
The proposed rule principally addresses two broad problems. First,
is the problematic use of the United States' residential real estate
market to facilitate money laundering and illicit activity. Second, and
related, is the difficulty of determining who beneficially owns legal
entities or trusts that may engage in non-financed transactions, either
because this data is not available to law enforcement or access is not
sufficiently centralized to be meaningfully usable for purposes of
market level risk-monitoring or swift investigation and prosecution.
The second problem contributes to the first, making money laundering
and illicit activity through residential real property more difficult
to detect and prosecute, and thus more likely to occur. Although FinCEN
is unable to quantify the economic benefits of the proposed rule,
FinCEN expects that the proposed rule would generate benefits by
mitigating those two problems. In other words, FinCEN expects that the
proposed rule could make law enforcement investigations of illicit
activity and money laundering in residential real estate less costly
and more effective, and it would thereby generate value in the
reduction of social costs associated with such activity.
a. The Problem of Money Laundering and Illicit Activity via Residential
Real Property
First, and most significantly, real estate money laundering can
facilitate a broad range of illicit activity, and such activity entails
significant social costs. For example, crimes such as tax evasion
deprive governments of funds that could otherwise be used for public
services or infrastructure investment.\148\ Other crimes such as
financial fraud deprive
[[Page 12445]]
victims of their property, chilling legitimate investment and business
activity that can yield economic benefits. Crimes involving various
forms of corruption can hinder economic development and discourage
legitimate businesses from operating in affected areas.\149\ More
ge
[…truncated; see source link]Indexed from Federal Register on February 16, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.