The Financial Crimes Enforcement Network (FinCEN) announced the revision of its Geographic Targeting Orders (GTO) Tuesday. The GTO requires title insurers to report beneficial ownership information on legal entities, including shell companies, used to purchase high-end residential real estate in targeted metropolitan areas. It expanded the geographic regions covered to include the City and County of Honolulu, Hawaii and a broader range of transactions, including those involving wire transfers. The changes go into effect September 22, 2017.
FinCEN also issued FIN-2017-A003, an Advisory to Financial Institutions and Real Estate Firms and Professionals, warning of money laundering risk in the real estate sector and encouraging brokers, escrow agents, and other real estate professionals to voluntarily report suspicious transactions as other financial institutions are required to under the Bank Secrecy Act (BSA). The Advisory details examples of fraud used to finance terrorism and drug trafficking, summarizes the law, and outlines the process for mandatory and voluntary suspicious activity reporting.
In 2016, the GTOs were limited to threshold transactions in Manhattan and Miami. FinCEN later expanded the orders to extend to all of New York City, two more counties in the Miami metropolitan area, five counties in California, and Bexar County, Texas. Now Honolulu is included and covered transactions include purchases made without external financing and which are made "at least in part, using currency or a cashier's check, a certified check, a traveler's check, a personal check, a business check, or a money order in any form, or a funds transfer". Geographic Targeting Order II(A)(iv), August 22, 2017.
FinCEN is a bureau of the US Treasury tasked with combating money laundering, terrorism funding, drug trafficking, and other financial crimes by collecting, analyzing, and sharing financial intelligence. The aftermath of the housing crisis in the US brought a wave of international investors over which the Treasury has little oversight. The GTOs and the Suspicious Activity Reports (SARs) which financial institutions are required to file under the BSA form the foundation on which FinCEN builds its intelligence network. FinCEN reports that 30% of the reported transactions involve a beneficial owner or purchaser which was also the subject of a previous SAR.
The GTO revision applies only to title insurers, but all professionals involved in real estate closings should be cognizant of the risk related to cash transactions and familiarize themselves with the mandatory and voluntary reporting rules.