Identifying beneficial ownership has been a primary focus in the financial regulatory compliance space over the last several years. In January of 2021, the United States Congress passed the U.S. Corporate Transparency Act (CTA), a breakthrough measure aimed at maintaining the integrity of the domestic and international financial sector, while also allowing national security and counter-intelligence agencies to improve their detection of illicit financial activity. The CTA ultimately led to the creation of a national beneficial ownership registry, effectively amending the Bank Secrecy Act to require corporations, limited liability companies, and similar entities to report certain information about their beneficial owners (the individual, “natural persons” who ultimately own or control these companies), while requiring appropriate reporting of beneficial ownership with respect to both domestic and foreign entities upon their creation or incorporation. These measures also required the Treasury’s Financial Crimes Enforcement Network (FinCEN) to maintain strict protocols to ensure that all reported beneficial ownership information is collected and stored in a confidential, secure, and non-public register. With these new reporting requirements coming into effect on January 1^st, 2024, the United States government is now seeking to expand similar requirements beyond this realm and onto other industries synonymous with illicit finance, setting their sights on the real estate sector.

            Exploiting the international real estate market has become a tried-and-true method for criminals seeking to successfully launder their ill-gotten gains. The industry has developed into an attractive vehicle for those seeking to clean their dirty money because real estate prices are fairly easy to manipulate through the under- or over-valuation of property pricing. Furthering this trend is the fact that the U.S. real estate market has remained arguably the ripest for exploitation of any of the respective world powers due in large part to a history of lax AML legislation governing the sector. Over the past two decades, criminals, drug and human traffickers, and politically exposed persons (PEPs) have been able to create “shell companies” or trusts that exist simply as fronts to shroud the actors behind these investment opportunities. Over this same time period, there have been other successful strategies that have risen to prominence that include the use of nominee purchases and use of obscure legal entities to facilitate real estate purchases/sales, all while mitigating the risks of potential detection. Couple this with the fact that the majority of real estate professionals operating within this industry are exempt from anti-money laundering (AML) requirements makes detecting and tracking money laundering activity even more of a challenge for domestic authorities and law enforcement attempting to maintain oversight on this sector.  All told, each of these factors further propagate the washing cycle by allowing large amounts of cash of varying origins to be used to fund small and large-scale real estate transactions, all while allowing the individuals behind them to potentially make a substantial profit off of the ultimate sales of their appreciating assets as an added bonus.

            The misuse of this market has developed into a billion-dollar business, this as upwards of 22% of domestic real estate transactions remain “all-cash” deals that are virtually impossible to flag and subsequently track. To date, FinCEN has seen success with the expansion of its Geographic Targeting Orders (GTO’s) with respect to acquiring data on cash-based residential real estate purchases. These measures require U.S. title insurance companies to identify the natural persons/beneficial owners (that is, people who own at least 25% of an entity, either directly or indirectly) behind shell companies used in all-cash purchases of residential real estate exceeding a $300,000 purchase amount threshold. However, these measures currently only govern select “high-value” jurisdictions across the U.S., mostly in major U.S. metropolitan areas that remain lucrative investment points (i.e. Boston, Chicago, New York City, Los Angeles, and Miami, among others). Given the current state of affairs however, the U.S. Treasury is now aiming to enhance their efforts to tackle the issue of anonymity in real estate on a broader scale. Last week, the U.S. Treasury Department announced the proposal of a rule that would formally require all real estate professionals to report the identities of the beneficial owners of companies buying real estate in cash to the regulator beginning in 2024.¹ The potential rule has been long awaited, with many expecting the measure to be announced at some point in 2023, this after Treasury began taking public comments on new rules for commercial real estate two years ago.

            “Treasury has advanced its efforts to prevent corrupt and other illicit actors from misusing anonymous, non-financed (i.e., all-cash) purchases of residential real estate to launder or hide the proceeds of crime,” the Department noted in a recent release. “Since 2016, FinCEN has leveraged its Residential Real Estate Geographic Targeting Order (GTO) program to collect information about certain residential real estate transactions in the United States. In December 2021, Treasury issued an advance notice of proposed rulemaking (ANPRM) to solicit public feedback on how to address the risks associated with this sector. Building on this information and public feedback, Treasury aims to issue a notice of proposed rulemaking (NPRM) in early 2024 that will be an important step toward bringing greater transparency to this sector.”²

            The Treasury is also considering additional steps with regard to addressing the illicit finance risks associated with the U.S. commercial real estate sector, though details of these changes have been limited to date. Global RADAR will provide additional updates on these developments as they become available.

Citations

1. Prentice, Chris, and Luc Cohen. “US Flags Early 2024 for New Rule Targeting Real Estate Money Laundering …” Reuters, Thomson Reuters, 11 Dec. 2023. 
2. Sherman, Erik. “Proposed Money Laundering Rule for Real Estate Coming Soon.” GlobeSt, 13 Dec. 2023.