Real Estate in 2024 – Anticipating a Crackdown on Corruption & Fraud
Treasury Considers Expansion of Geographic Targeting Orders
📅 January 24, 2024
Real estate in the United States, particularly in certain US cities such as Miami, New York, and San Diego, has long been a popular channel for corrupt actors seeking to launder illicitly obtained funds. In comments at the Summit for Democracy in December 2021, Treasury Secretary Janet Yellen noted, “There’s a good argument that, right now, the best place to hide and launder ill-gotten gains is actually the United States.” Real estate is a relatively stable asset, and property purchases allow corrupt actors to move large amounts of money in a single transaction. In many jurisdictions the use of cash—even in large real estate transactions—does not require a declaration of beneficial ownership. Additionally, luxury real estate purchases allow corrupt actors to enjoy the proceeds of their crimes by renting or reselling property and integrating illicit funds into the formal financial system (the third stage of money laundering).
As part of the Biden administration’s 2021 Strategy on Countering Corruption, a long-awaited proposed rule from the Treasury Department that is slated to take effect in early 2024 will seek to address that glaring loophole in US anti-money laundering (AML) regulations as the United States remains the only G7 member state that does not require real estate professionals to comply with AML laws and regulations.
Despite financial institutions long being required to gather information about the source of customer funds and report suspicious transactions to FinCEN, the real estate industry’s AML standards have been governed by a patchwork set of rules known as “geographic targeting orders (GTOs),” which apply to specific jurisdictions on the county and city level and must be renewed by FinCEN. After a New York Times investigation revealed that “nearly half of homes nationwide worth at least $5 million are purchased using shell companies,” FinCEN in 2016 has issued GTOs to title insurance companies, requiring them to identify the natural persons behind legal entities used in cash purchases of residential real estate exceeding $300,000. The requirement is currently active in 12 US metropolitan areas. The GTOs have provided greater insight into illicit finance risks in the residential real estate market, but are only a temporary solution that must be renewed every six months, according to the US Strategy on Countering Corruption.
FinCEN this year will propose a rule that would require real estate professionals to report the identities of beneficial owners of companies making non-financed residential property purchases, effectively making the GTO program permanent nationwide and eliminating the minimum dollar threshold in an effort to address a massive loophole in the US AML regime. The current GTO—renewed in October—will expire on April 18. Treasury is also considering next steps with regard to addressing the illicit finance risks associated with the US commercial real estate sector, according to a Fact Sheet issued in December. The proposed rule is based on feedback the agency received from an Advanced Notice of Proposed Rulemaking issued in early December 2021.
The proposed changes to the reporting requirements for real estate transactions can also help deter sanctions evasion, which may be a predicate offense to money laundering because it involves either a specified unlawful activity in some jurisdictions or may involve criminal activity such as fraud that is a predicate offense to money laundering. As the United States and its allies continue to employ sanctions as a key tool to combat Russian malign influence and aggression, creating and expanding tools to address the blending of money laundering and sanctions evasion will be a critical prong in the multilayered effort to address illicit finance and national security threats posed by corrupt Russian senior officials, their families, and their associates, or their facilitators.