On February 7, 2024, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a Notice of Proposed Rulemaking (the “Proposed Rule”) designed to combat and deter money laundering in the U.S. residential real estate sector, which has made it difficult for legitimate buyers to acquire real estate due in part to inflated prices resulting from an increase in buyers and the ability of those additional buyers to make “all cash” offers using ill-gained funds in lieu of financing. The public comment period for the Proposed Rule expires on April 8, 2024.[1]
Affected Transactions and Transferees
The Proposed Rule broadly captures transactions involving residential real property (including single-family houses, townhouses, condominiums, and cooperatives, as well as apartment buildings designed for one to four families) located anywhere in the United States (including any Indian lands, as that term is defined in the Indian Gaming Regulatory Act) or in any territory or possession of the United States. The Proposed Rule also captures (i) transactions involving certain vacant land that is zoned for residential purposes (or if a building permit has been issued for the construction of a structure designed principally for occupancy by one to four families), and (ii) transactions involving shares in a cooperative housing corporation. The Proposed Rule includes exceptions as described in more detail below, however, there is no threshold purchase price, meaning that gifts or transfers without consideration may also be reportable.
Generally, the Proposed Rule requires reporting where a transferee of an ownership interest in residential real property is a “transferee entity” or a “transferee trust”.
A “transferee entity” may be a corporation, partnership, estate, association, or limited liability company. However, the definition of a “transferee entity” excludes certain highly-regulated entities, including U.S. governmental authorities, securities reporting issuers, certain banks, credit unions, depository institution holding companies, money service businesses, brokers or dealers in securities, securities exchange or clearing agencies, other Exchange Act registered entities, insurance companies, state-licensed insurance producers, Commodity Exchange Act registered entities, public utilities, financial market utilities, and registered investment companies, as well as any legal entity whose ownership interests are controlled or wholly owned, directly or indirectly, by any of the above. Entities (i) with greater than 20 employees, (ii) that file Federal income tax returns demonstrating gross receipts or sales exceeding $5,000,000, and (iii) having a physical office in the United States are also exempt from the Proposed Rule.
A ”transferee trust” is defined by the Proposed Rule as any legal arrangement created when a person (generally known as a settlor or grantor) places assets under the control of a trustee for the benefit of one or more persons (each generally known as a beneficiary) or for a specified purpose, as well as any legal arrangement similar in structure or function to the above, whether formed under the laws of the United States or a foreign jurisdiction. The Proposed Rule further notes that a trust is deemed to be the transferee trust regardless of whether residential real property is titled in the name of the trust itself or in the name of the trustee in their capacity as the trustee of the trust.
Excepted Transactions
Acquisitions of residential real estate using secured financing are exempt from the Proposed Rule so long as the financing is provided by a financial institution that has both an obligation to maintain an anti-money laundering program and a requirement to file a Suspicious Activity Report.
Also exempt are transactions involving easements, transfers occurring following an owner’s death, transfers resulting from a divorce or marriage dissolution, and transfers to a bankruptcy estate.
Reporting Persons; Real Estate Report
The Proposed Rule requires professionals involved in real estate closings and settlements to report information to FinCEN about covered transactions via a “Real Estate Report” and proposes a reporting “cascade” for use in determining the reporting person. There are 5 levels to the cascade. For any reportable transfer, a potential reporting person would need to determine whether there is another potential reporting person involved in the transfer who sits higher in the cascade and thus would be the appropriate reporting person. The first level of the cascade involves real estate professionals providing certain settlement services in the settlement process (i.e., the person listed as the closing or settlement agent on a settlement statement). The second level is the person underwriting an owner’s title insurance policy for the transferee. The third level is the person distributing the greatest amount of funds in connection with the reportable transfer. The fourth level is the person that prepares an evaluation of the title status (which is typically performed by a title insurance company, or occasionally an attorney when asked to prepare an opinion letter). The fifth and final level of the cascade is the person who prepares the deed (which is often prepared by an attorney or the closing agent).
The Real Estate Report must include the following information: (i) the name and address of the principal place of business for reporting persons, transferee entities and transferee trusts, and transferor entities; (ii) citizenship information for all “beneficial owners”; (iii) a unique identifying number for each person (whether an individual or entity) whose name and address are required to be reported; (iv) with respect to the signatory, a description of the capacity in which the individual is authorized to act as the signing individual for the transferee entity or transferee trust; (v) the total consideration paid by all transferees and other payment-related information; and (vi) property identifying information (e.g., address, legal description, etc.). The Real Estate Report must be filed with FinCEN within 30 days after closing and must be maintained by the reporting person for five years after the date of filing.
A “beneficial owner” of a transferee entity includes individuals who directly or indirectly either exercise substantial control over the transferee entity, or owns or controls at least 25% of the ownership interests of the transferee entity.
A “beneficial owner” of a transferee trust includes: (1) any trustee; (2) any individual with authority to dispose of transferee trust assets; (3) any beneficiary who is the sole permissible recipient of income and principal from the transferee trust or who has the right to demand a distribution or withdrawal of substantially all of the trust’s assets; (4) the grantor or settlor of a revocable transferee trust; or (5) any individual that is the beneficial owner of a legal entity or trust that holds one of the positions described in (1)–(4), taking into account the exceptions that apply to transferee entities and transferee trusts under the Proposed Rule.
Conclusion
The Proposed Rule is aimed at deterring money laundering while minimizing burdens on affected reporting persons by including a streamlined reporting framework. While businesses involved in real estate transactions may face initial challenges in adapting to the new reporting requirements, bad actors will hopefully be excluded from the market, allowing legitimate buyers an opportunity to meaningfully participate.
FOOTNOTES
[1] Following the comment period, FinCEN will decide whether to move forward with the final rule, which requires FinCEN to conclude that the proposed solution will help accomplish the goals or solve the problems identified. Following review of the draft final rule by all relevant agencies, the final rule will be published in the Federal Register.