FinCEN recently broadened its anti-money laundering targeting orders amid skyrocketing luxury real estate prices in several U.S. markets. Stout’s Forensic Services practice is closely following the matter, analyzing the potential for illegal real estate funding via shell companies and the importance for businesses to protect themselves from potential criminal activity. The article below is a discussion on current analysis. Read a related article on this topic.

Last year the world was introduced to the Panama Papers and this year the Paradise Papers.[1]

Both document leaks involved the theft of massive volumes of confidential, attorney-client information. But they also shed light into an opaque part of the global financial markets, which involves the use of special purpose corporate vehicles (commonly known as shell companies) and offshore bank accounts to transfer money around the world while obscuring the identities of the ultimate beneficial owners. Much has been written about the celebrities, multinational corporations, politicians, and other world leaders with offshore interests and connections that were revealed in the leaks. Moreover, much ink has been spilled over the potential that such leaks may contain information concerning entities that may have been involved in financial crimes.

One of the main concerns expressed by law enforcement officials is that shell, or front, companies and offshore bank accounts may be used to facilitate money laundering, terrorist financing, and tax evasion. In fact, in early 2016, former U.S. Attorney for the Southern District of New York Preet Bharara and his team opened a criminal investigation into matters related to the Panama Papers leak.[2] 

A shell company is a registered corporate vehicle that may exist and carry out transactions but generally lacks significant assets or active operations. Shell companies may be used for both legitimate and illegitimate purposes. For example, a shell company may be set up for legal tax avoidance or mitigation reasons (not to be confused with tax evasion, which uses illegal means). One important attribute of a shell company is that it may provide a layer of anonymity for the owner(s) whereby their identit(ies) need not be disclosed in transactions to which the shell company is a party. Not surprisingly, shell companies have been repeatedly implicated in alleged financial crimes. Often, such schemes may involve elaborate, complex webs of shell companies and offshore bank accounts.

Of particular concern to U.S. law enforcement is the potential for criminals to use these vehicles to launder funds via the purchase of high-end residential real estate properties. With this in mind, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) launched the Geographic Targeting Order (GTO) program, a temporary initiative aimed at increasing transparency with respect to such purchases within certain major U.S. metropolitan areas, in January 2016.[3]  FinCEN extended and expanded the program in July 2016[4]  and once again earlier this year.[5]

As signaled by its continued extension and expansion of the program, it seems FinCEN will keep the real estate industry firmly in its crosshairs. The question is, what is next? So far, FinCEN’s focus has been on high-end residential real estate. But is commercial real estate next? And how can businesses protect themselves from rogue actors, such as these potential criminals, whose actions could put their companies’ financial performance and reputations at risk? 

FinCEN’s GTO Program

The GTO program is intended to be part of a risk-based approach to combating money laundering of offshore funds via the U.S. real estate sector. According to FinCEN, “all cash” purchases (i.e., those without bank financing), which are structured using limited liability companies or other opaque arrangements, may be used by individuals attempting to launder funds and hide their assets.[6]

The GTO requires U.S. title insurance companies to report beneficial ownership information regarding legal entities, including shell companies, involved in all cash purchases of certain high-end residential real estate (including individual condominium or cooperative units) in specified geographic areas.[7]  Such information may be used by law enforcement and forensic investigators in probes into potential money laundering, terrorist financing, and/or sanctions violations. Information that reveals common ownership across bank accounts and corporate vehicles can prove valuable when tracing the flow of money in a complex investigation.

FinCEN limited the original GTO to two geographic areas – Miami-Dade County, FL, and the Borough of Manhattan, NY. For the purposes of the original GTO, all cash purchases included payments made, at least in part, by hard currency (cash), cashier’s check, certified check, traveler’s check, or money order, and “beneficial owner” is defined as an individual who, directly or indirectly, owns 25% or more of the equity interests of the purchasing entity. The specified information must be reported on a Form 8300 filing.[8]

In July 2016, FinCEN extended and expanded the GTO program, adding additional cities and counties to the list of covered geographic areas. The list included: 1) all boroughs of New York City; 2) Miami-Dade County and the two counties immediately north (Broward and Palm Beach); 3) Los Angeles County; 4) three counties that are part of the San Francisco Bay Area (San Francisco, San Mateo, and Santa Clara); 5) San Diego County; and 6) Bexar County, which includes San Antonio. FinCEN also expanded the methods of payments covered by the GTO to include personal or business checks.[9]

With this year’s extension and expansion, FinCEN once again added another location (Honolulu), and expanded the program to cover transactions made via an additional payment method (wire transfers), as shown in Figure 1. The current extension runs through March 20, 2018.[10]

Each of the subject geographic areas has a different reporting threshold. The Borough of Manhattan and Honolulu County command the highest minimum purchase prices for triggering reporting obligations (Figure 2).

The expansion of the GTO to include wire transfers is particularly notable because it could multiply the number of covered transactions subject to GTO reporting requirements. The change follows Congress’ enactment of the Countering America’s Adversaries Through Sanctions Act (Pub. Law No. 115-44). Today, a large portion of both cross-border and domestic money transfers are handled electronically through wire transfers and other electronic payment methods, including purchases of real estate not involving traditional forms of mortgage or bank financing.

Wire Transfers

Wire transfers are electronic exchanges of money from one bank account to another. They may be initiated from virtually anywhere in the world without the need for physical face-to-face contact with a bank representative. That said, international wire transfers are often perceived to be subject to greater regulatory risks and scrutiny by bank executives than are paper checks, money orders, or cashier’s checks. Criminals attempting to launder funds may seek to avoid bank anti-money laundering (AML) reporting thresholds by structuring a transaction to include a number of smaller, individual payments using written checks, money orders, or other payment methods with each payment falling below the relevant threshold. Moreover, money launderers may use more elaborate schemes to hide their sources of money by transferring funds across dozens or more bank accounts held at dozens or more banks across multiple jurisdictions.

What’s Next?

According to FinCEN, the first full year of the GTO program confirmed their concerns about the risks of financial crime in the luxury property market. Furthermore, they report the information collected in the program has proved useful in advancing a number of criminal investigations. Through March 9, 2017, roughly 240 transactions were reported under the program. About 30% of these transactions (73 transactions) involved beneficial owners or purchaser representatives who were subjects of a past suspicious activity reports (SARs), as shown in Figure 3.[12]

On the same day it expanded the GTO program, FinCEN also published an advisory note targeted at real estate firms and related professionals, titled “Advisory to Financial Institutions and Real Estate Firms and Professionals (FIN-2017-A003).” The note stated:

The Financial Crimes Enforcement Network (FinCEN) is issuing this advisory to provide financial institutions and the real estate industry with information on money laundering risks associated with certain real estate transactions. As highlighted by recent Geographic Targeting Orders (GTOs) issued by FinCEN, real estate transactions involving luxury property purchased through shell companies – particularly when conducted with cash and no financing – can be an attractive avenue for criminals to launder illegal proceeds while masking their identities.[13]

FinCEN recommends its advisory note be shared with real estate professionals, organization executives, comptroller/treasury/accounting departments, compliance departments, and legal departments. Furthermore, it points out that while real estate brokers, escrow agents, title insurers, and other real estate professionals are currently not subject to formal reporting requirements, FinCEN encourages voluntary SARs reporting of suspicious transactions involving real estate purchases and sales.

What is especially interesting to note is that FinCEN addresses money laundering risks in the entire real estate sector in its advisory note, not solely the luxury residential property market. In fact, buried in a footnote is the following statement: “Although FinCEN to date has focused on residential real estate, money laundering can also involve commercial real estate transactions.” Further, one of the case studies cited by FinCEN in its advisory note is the 1Malaysia Development Berhad corruption scandal, which involved the forfeiture of over $1 billion in assets, including a hotel in Beverly Hills, CA.[14]

In May 2018, many financial institutions, including loan or finance companies, mortgage companies, and mortgage brokers, will be subject to new customer due diligence requirements. These new reporting requirements will include collecting information at account opening about the beneficial ownership of new legal entity customers.[15]  FinCEN has stated it is issuing the AML program and SAR filing requirements for residential mortgage lenders and originators “as the first step in an incremental approach” to implementing regulations over the broader loan and finance company sector.[16] Moreover, FinCEN has proposed AML and SAR rules for government-sponsored housing enterprises such as Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac).

Will we see FinCEN, or another U.S. government agency, announce a new GTO-like program in the future aimed at additional segments of the U.S. real estate sector? We will continue to monitor the latest developments in this arena. 

1. The International Consortium of Investigative Journalists, see www.icij.org.
2. “Panama Papers: U.S. launches criminal inquiry into tax avoidance claims,” The Guardian, April 19, 2016.
3. “FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami,” Department of Treasury FinCEN, January 13, 2016.
4. “FinCEN Expands Reach of Real Estate ‘Geographic Targeting Orders’ Beyond Manhattan and Miami,” Department of Treasury FinCEN, July 27, 2016.
5. “FinCEN Targets Shell Companies Purchasing Luxury Properties in Seven Major Metropolitan Areas,” Department of Treasury FinCEN, August 22, 2017.
6. Ibid.
7. Ibid.
8. “FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami,” Department of Treasury FinCEN, January 13, 2016.
9. "FinCEN Expands Reach of Real Estate ‘Geographic Targeting Orders’ Beyond Manhattan and Miami,” Department of Treasury FinCEN, July 27, 2016.
10. Nicholas Nehamas and Rene Rodriguez, “Feds Widen Hunt for Dirty Money in Miami Real Estate.” Miami Herald, August 23, 2017.
11. Jamal El-Hindi, “Geographic Targeting Order,” Department of Treasury FinCEN, August 22, 2017.
12. Kevin G. Hall, “Why Isn’t Treasury’s Crackdown on Real Estate Money Permanent?” McClatchy DC Bureau, August 22, 2017.
13. Advisory to Financial Institutions and Real Estate Firms and Professionals.” Department of Treasury FinCEN, FIN-2017-A003, August 22, 2017.
14. Ibid.
15. "Customer Due Diligence Requirements for Financial Institutions,” A Rule by the Financial Crimes Enforcement Network, Federal Register, May 11, 2016; “Customer Due Diligence Requirements for Financial Institutions; Correction,” A Rule by the Financial Crimes Enforcement Network, Federal Register, September 28, 2017.
16. "Important Information for Mortgage Companies and Brokers,” Department of Treasury FinCEN.