The United States Treasury Department – the bureau of the U.S. government tasked with promoting the country’s economic growth and maintaining financial security – has already proposed a number of new measures in 2024 aimed at closing loopholes in domestic legislation that remain susceptible to crime. Earlier this year, Global RADAR chronicled the Financial Crimes Enforcement Network’s (FinCEN) findings from its 2024 Financial Trend Analysis which identified identity-related fraud as a significant and pervasive threat impacting the integrity of parties found across multiple industries both domestically and abroad in 2024. FinCEN had also previously reported on other criminal trends that included sanctions evasion tactics by Russian actors in wake of the military conflict in Ukraine, illicit financial threats posed by wildlife and human trafficking, ransomware trends affecting financial entities and government agencies, and a number of risks posed to the U.S. real estate sector in its current state.
Earlier this month, the Treasury moved forward in its battle against the latter, proposing an incoming rule that would require realtors to disclose the names of both individuals and entities found behind anonymous shell companies, LLC’s and trusts involved in all-cash purchases and transfers of residential real estate. The proposed move is notable in that there will reportedly be no monetary threshold for purchase value that will need to be met for said reporting to take place. Since the turn of the decade, middle and lower-income families searching for a place to call home have encountered frustrations in competing with obscenely wealthy investment firms and individuals who are oft-able to pay over asking prices and pay with cash up front for properties, effectively shutting out an entire demographic from the market altogether. This problem has not only lead to the exponential increase in costs of rent, property shortages, and artificially inflated property values, but has also culminated in increased money laundering activity across the sector via an influx of both foreign funds and those derived from illicit activity. Many of these companies and trusts remain in the shadows, with those behind them choosing to remain anonymous as they grow their respective portfolios, this as the sources of their funds are potentially derived from illicit activity. The Biden administration is now attempting to address this issue by proposing a new rule to eliminate anonymity.
Though some home buyers will utilize the anonymity provided by use of shell companies the way they were intended to be used (i.e. to protect their privacy and limit their exposure to potential lawsuits), the reality is that real estate is commonly used by criminals, politically-exposed persons (PEPs) and sanctioned individuals seeking to clean their dirty money. There is a real allure to the real estate market in that it allows those behind these purchases to gain access to lucrative and appreciating assets, generally in some of America’s most sought-after jurisdictions, while also allowing them to turn a profit upon the ultimate sale of said property – this as property values continue to rise significantly over recent years. Aside from the misuse of LLC’s and shell companies, completing sales and purchases in cash makes it all the more difficult for law enforcement to establish a paper trail on those behind these transactions given that they avoid scrutiny from financial institutions obligated to detect and report suspected incidents of money laundering.2
The new rule proposed by FinCEN has been established to build upon the framework of the immensely successful residential real estate geographic targeting orders (GTO’s) established by the agency in 2016. GTO’s were originally imposed to enhance anti-money laundering reporting obligations on financial institutions operating in different regions of the United States that were perceived to be particularly vulnerable to money laundering activity (expanding to cover a total of over 20 major metropolitan areas across the country as of 2023). These GTO’s required all domestic financial institutions and all other non-financial businesses within these covered regions to report on the natural persons behind shell companies used in non-financed real estate transactions greater than a set threshold value of $300,000. The Wall Street Journal writes that if adopted, the newly proposed rules would replace the existing area-specific targeting orders with nationwide reporting requirements.FinCEN is also exploring additional legislative changes to increase transparency across the commercial real estate sector, bringing them current with the U.S. Bank Secrecy Act.
In a separate filing issued last week,FinCEN also proposed new regulations for investment advisors with respect to compliance with national anti-money laundering (AML) and counter-terrorism financing (CFT) reporting rules. The new requirements would cover investment advisers registered with the U.S. Securities and Exchange Commission (SEC), as well as exempt reporting advisors (ERAs). All told, domestic investment advisors – whom to date had been exempt from any staunch AML compliance requirements – will soon be forced to implement many of the same AML/CFT safeguards that their counterparts in the banking and brokerage domains, respectively, are subjected to. This will include the timely filing of suspicious activity reports (SARs) with FinCEN and will establish maintenance/record-keeping requirements for these individuals to better deter suspected money laundering activity. The proposed rule would also allow information sharing between FinCEN, law enforcement agencies and certain financial institutions.3 The move comes following a period of unprecedented growth for the U.S. investment sector, one that has opened the door for an influx of dirty money on behalf of bad actors found both domestically and abroad seeking to exploit the lack of regulation in this area. In a fact sheet released on February 13th, FinCEN highlighted an alarming trend in “foreign adversaries” of the United States, including China and Russia, investing in early-stage companies through investment advisers to access sensitive information and emerging technology,1 adding to the already pressing need for increased transparency across this piece of the composite financial sector.
If the proposed rule is adopted, investment advisers would have 12 months to become compliant. FinCEN is seeking comments on the proposed rule until April 15.
Citations
- “Fact Sheet: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers Notice of Proposed Rulemaking (NPRM).” The Financial Crimes Enforcement Network, The U.S. Department of the Treasury, 13 Feb. 2024.
- Sun, Mengqi. “U.S. to Tackle Secrecy in All-Cash Home Purchases.” The Wall Street Journal, 7 Feb. 2024.
- Sun, Mengzi. “U.S. Proposes Requiring Investment Advisers to Put in Place Anti-Money-Laundering Controls.” The Wall Street Journal, 13 Feb. 2024.
