Money Laundering in the U.S. Real Estate Sector

Money Laundering in the U.S. Real Estate Sector

Updated January 4, 2022
Money Laundering in the U.S. Real Estate Sector
Global Trends and Domestic Concerns
mortgage lenders and originators and the government-
Money laundering and other financial crimes in the real
sponsored enterprises Fannie Mae and Freddie Mac.
estate sector take many forms and continue to challenge
Nevertheless, the Financial Action Task Force (FATF), the
real estate, financial institution, law enforcement,
intergovernmental AML/CFT standards-setting body (of
policymaker, and regulatory stakeholders. Global scrutiny
which the United States is a member), reports that national
of the real estate market’s vulnerability to money
security and foreign policy gaps remain in U.S. efforts to
laundering has grown in recent years. An issue Congress
stop REML. A wide range of financial transparency
may consider is how to balance the money-laundering risks
advocacy organizations share FATF’s concerns.
posed by the real estate sector against differing views on
how to implement appropriate oversight.
International Standards
Since 2003, FATF has recommended that real estate agents, as
According to various sources, real estate money-laundering
well as lawyers, notaries, accountants, and others categorized
(REML) schemes can involve a wide range of domestic and
as “designated non-financial businesses and professions,”
transnational criminals, including drug cartels and human
(DNFBPs) be subject to AML requirements when facilitating
traffickers, international terrorists, and foreign kleptocrats
real estate purchase or sale transactions for clients. Under
(corrupt high-level officials). The purchase of real estate,
current Treasury rules, however, U.S. real estate agents and
often combined with methods to conceal a purchaser’s
other DNFBPs involved in real estate transactions are not
identity and source of funds, can allow criminals to
subject to comprehensive AML/CFT measures. According to
integrate ill-gotten proceeds into the legal economy or park
FATF’s most recent (2016) mutual evaluation report of the
illicit wealth abroad. Although real estate transactions often
United States, this is inconsistent with global AML
intersect with financial institutions that are subject to anti-
recommendations.
money laundering (AML) and combating the financing of
terrorism (CFT) requirements, AML/CFT gaps remain.
U.S. Policy
The U.S. Department of the Treasury’s 2020 National
The U.S. AML/CFT regime is statutorily based on the BSA
Strategy to Counter Illicit Finance states that “Treasury is
and implemented through regulations in 31 C.F.R. Chapter
committed to working with Congress to minimize the risks
X. The Treasury’s Financial Crimes Enforcement Network
of the laundering of illicit proceeds through real estate
(FinCEN) administers the BSA. Unlike banks and certain
purchases”—and identifies REML as among its top 12
other financial institutions, the U.S. real estate industry as a
AML priorities and supporting actions.
whole is not subject to the full application of all BSA/AML
requirements. This includes real estate brokers and agents,
Key reported REML risks and vulnerabilities include
title or title insurance company representatives, closing

agents, appraisers, inspectors, attorneys, and others.
real estate transactions involving opaque legal entities
that obscure the natural persons who benefit from such
On December 2, 2021, FinCEN issued an Advance Notice
property ownership;

of Proposed Rulemaking (ANPRM) to contemplate further
use of nominee purchasers or title holders to conceal the
AML recordkeeping and reporting requirements for certain
true property owners;

persons involved in real estate transactions.
complicit professionals in the real estate industry;
 all-cash sales of high-value real estate that do not
Establishing AML Programs
involve mortgage lenders; and

Within the real estate sector, residential mortgage lenders
use of commercial real estate transactions to commit
and originators (since 2012), as well as Fannie Mae and
fraud, tax evasion, and money laundering, including
Freddie Mac (since 2014), are subject to the BSA’s
international transfers involving politically exposed
requirement that financial institutions establish AML
persons (PEPs) and organized crime figures.
programs. Pursuant to 31 U.S.C. 5318(h), such AML
Congress has enacted legislation to address REML risks
programs should encompass the development of AML
and vulnerabilities. In 1988, Congress amended the Bank
policies, procedures, and controls; the designation of an
Secrecy Act (BSA; 12 U.S.C. 1829b, 1951-1959 and 31
AML compliance officer; the provision of ongoing
U.S.C. 5311-5314, 5316-5366) by adding, “persons
employee training; and the establishment of an independent
involved in real estate closings and settlements” to the
audit function to test AML programs.
definition of a financial institution. In 2001, Congress
further amended the BSA to require financial institutions,
“Persons involved in real estate closings and settlements”
unless exempted, to establish AML programs. Over the past
are among the 26 categories of businesses or sectors
decade, Treasury has taken other steps to regulate aspects of
defined by 31 U.S.C. 5312 as a “financial institution.”
the real estate sector, particularly with respect to residential
Nevertheless, they are exempt under FinCEN rules from
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Money Laundering in the U.S. Real Estate Sector
requirements to file Suspicious Activity Reports (SARs or
to a 70% drop in corporate entities purchasing loan-free,
Form 111) and Currency Transaction Reports (CTRs), and
luxury residential real estate in 2016. Treasury also found
from maintaining a customer identification program (CIP)
that, as of April 2019, 35% of all real estate transactions
for AML recordkeeping purposes. Such persons remain
reported under GTOs involved subjects identified in a SAR.
exempt from establishing AML programs, despite a 2003
In July 2020, the U.S. Government Accountability Office
FinCEN ANPRM contemplating a rulemaking for
reported that FinCEN had not yet determined whether or
additional AML requirements on persons involved in real
how to address ongoing REML risks through more
estate closings and settlements.
permanent regulatory tools (GAO-20-546).
Other Reporting Requirements
Voluntary AML Guidelines and Reporting
U.S. persons engaged in trade or business, including those
FinCEN worked with the National Association of Realtors
engaged in the U.S. real estate industry, are required to file
to develop voluntary AML guidelines for real estate
Form 8300 with FinCEN and the Internal Revenue Service
professionals, first published in 2012 and most recently
(IRS) on transactions involving receipt of over $10,000 in
updated in February 2021. In August 2017, FinCEN also
currency and certain monetary instruments, pursuant to 31
issued a public Advisory to Financial Institutions and Real
U.S.C. 5331 and 26 U.S.C. 6050I (31 C.F.R. 1010.330).
Estate Firms and Professionals, which outlines money-
Filers may submit Form 8300 on a voluntary basis for
laundering risks posed by the real estate sector and
suspicious transactions that do not exceed $10,000.
encouraged real estate professionals—including real estate
brokers, escrow agents, and title insurers—to voluntarily
Individuals, including those employed in the real estate
file a SAR if a real estate transaction seems suspicious.
industry, may also be required to file a Currency and
Monetary Instrument Reports (CMIRs or Form 105) with
Policy Outlook
the U.S. Customs and Border Protection (CBP) on cross-
At the end of the 116th Congress, the Anti-Money
border movements into or out of the United States of
Laundering Act of 2020 (AMLA) was enacted as Division
currency or monetary instruments totaling over $10,000,
F of the William M. (Mac) Thornberry National Defense
pursuant to 31 U.S.C. 5316 (31 C.F.R. 1010.340).
Authorization Act FY2021 (P.L. 116-283). The AMLA
Individuals and entities may also be required to keep certain
contained multiple components, including the Corporate
records and file annual Reports of Foreign Bank and
Transparency Act (CTA), which mandated that FinCEN
Financial Accounts (FBARs or Form 114) with FinCEN,
collect beneficial ownership information directly from
pursuant to 31 U.S.C. 5314 (31 C.F.R. 1010.350).
certain legal entities. A key issue for Congress may focus
on the oversight of FinCEN’s implementation of the
Geographic Targeting Orders
AMLA, including the CTA.
In 2016, FinCEN issued its first Geographic Targeting
Order (GTO), pursuant to 31 U.S.C. 5326 (31 C.F.R.
As described in the December 2021 ANPRM, FinCEN is
1010.370), requiring U.S. title insurance companies to
considering multiple rulemaking approaches for addressing
identify the natural persons behind shell companies used in
REML risks and vulnerabilities. One option could be to
all-cash purchases of residential real estate in certain
issue a tailored AML reporting requirement on a certain
specified U.S. metropolitan areas. GTOs are geographically
class of domestic financial institutions within the
limited, temporary orders (180 days) that require designated
nonfinanced sector of the real estate market, pursuant to 31
businesses or sectors to maintain records and submit reports
U.S.C. 5318(a)(2), as amended by Section 6102(a) of the
to FinCEN on certain specified transactions. Since 2016,
AMLA; such a requirement could be an alternative to or in
FinCEN has continued to renew and expand the scope of its
addition to the BSA’s general requirements. A second
GTOs on U.S. title insurance companies.
option could be to promulgate more general requirements
for SAR reporting and AML program establishment for
As required by the GTOs, U.S. title insurance companies,
persons involved in real estate closings and settlements.
along with their subsidiaries and agents, must submit CTRs
FinCEN is also considering whether to take an “iterative”
to FinCEN and retain related records involving certain
approach to rulemaking in order to address REML in
residential real estate purchases by legal entities and their
residential and commercial sectors separately.
beneficial owners (natural persons who directly or
indirectly own 25% or more of equity interests). The
Additional key questions include (1) which persons in the
current GTO, effective through April 29, 2022, covers
real estate sector should be responsible for AML
transactions involving non-financed purchases of high-
recordkeeping and reporting requirements; (2) what should
value ($300,000 or more) residential real estate by legal
be the geographic scope and transactions threshold, if any,
entities (corporations, limited liability companies,
of future AML rulemaking; and (3) how to define the scope
partnerships, and other similar business entities) in
of legal entities whose transactions in real estate would be
specified cities, counties, or boroughs of nine U.S. states
subject to AML requirements—including whether to
(California, Florida, Hawaii, Illinois, Massachusetts,
include trusts and legal entities formed under the laws of
Nevada, New York, Texas, and Washington).
foreign jurisdictions.
Early reports suggest that the GTOs had a dampening effect
Liana W. Rosen, Specialist in International Crime and
on the role of shell companies purchasing residential real
Narcotics
estate. One academic study, for example, found that the
Rena S. Miller, Specialist in Financial Economics
introduction of GTOs on U.S. title insurance companies led
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Money Laundering in the U.S. Real Estate Sector

IF11967

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https://crsreports.congress.gov | IF11967 · VERSION 3 · UPDATED