FinCEN’s Anti-Money Laundering Regulations for Residential Real Estate Transfers

By: James M. Black II, Esq. and Daryl Caffarone

Overview

To crack down on money-laundering in the U.S. residential real estate market, the Financial Crimes Enforcement Network (“FinCEN”) has proposed new reporting requirements for certain real estate transactions. Specifically, the proposed rules require certain individuals involved in real estate closings and settlements to submit and keep records of non-financed (i.e., all-cash) transfers of residential property to legal entities and trusts. Therefore, this proposal does not apply to transfers made directly to an individual.[1]

The purpose of this rule is to enhance transparency nationwide in the residential real estate market while also assisting Treasury, law enforcement, and national agencies in protecting economic and national security. This rule is tailored to report a particular class of activity that the Treasury has deemed high-risk; FinCEN believes the information collected will contain crucial details about a typology of real estate transfers that presents illicit financial risks.

This new rule would go into effect one year after it has been issued.

When The Rule is Triggered

Broadly, the proposed rule would define a reportable transfer, which thus requires submitting a Real Estate Report to FinCEN, as a transfer of ownership interest in residential real property to a transferee entity or transferee trust, with certain exceptions.[2] Transfers are reportable irrespective of the value of the property.

Residential Property

The rule broadly captures most categories of residential real property (e.g., single-family houses, townhomes, condominiums, co-ops, and apartment buildings designed for 1-4 families).

To determine whether a residential real property falls within the parameters of the rule, FinCEN posed three clarifying questions.

1. Is it real property that includes a structure designed principally for occupancy by 1-4 families?
2. Is it land that is vacant or unimproved, zoned, or has a permit for occupancy by 1-4 families?
3. Is it a share in a cooperate housing corporation?

If the answer to any of these three questions is “yes”, then the property will fall within the parameters of the rule.[3]

Transferee Entities and Transferee Trusts

The regulation would only require reporting if a transferee of an ownership interest in residential real property is a transferee entity or a transferee trust.[4]

• Transferee Entity: This includes a corporation, partnership, estate, association, LLC, non-profit organization, or large operating company[5]; may also potentially include pooled investment vehicles depending on the circumstances.[6]
  • Exclusions: US governmental authorities, securities reporting issuers, and certain banks. This includes credit unions, depository institution holding companies, money service businesses, broker/dealers in securities, securities exchange or clearing agencies, state-licensed insurance producers, public utilities, financial market utilities, and registered investment companies.
    • Some of the exclusions in this rule align with the Corporate Transparency Act’s (“CTA”) exclusions, which also depend on what entity is supervised by a government agency, is a government agency, or has disclosure requirements that may diminish illicit financial risk.
  • Transferee Trusts: Any legal arrangement where a person (i.e. a settlor or grantor) (1) places assets under the control of a trustee for the benefit of one or more persons, or for a specific purpose, or (2) any legal arrangement similar in structure or function to (1), and (3) whether formed in the US or a foreign jurisdiction. A trust is still deemed a transferee trust whether residential real property is titled in the name of the trust itself, or the name of the trustee.
    • Exclusion: Trusts that are securities reporting issuers or have a trustee that is a securities reporting issuer, such as companies who are registered with the SEC; and statutory trusts (however, these may be considered transferee entities).

Exceptions

Certain transfers are excluded from these reporting requirements, such as:

• Financed Transfers: Transfers which involve extending credit to a transferee, but only if the credit is secured by the transferred residential real property and extended by a financial institution that is already obligated to maintain anti-money laundering (“AML”) programs and file suspicious activity reports (“SARs”).
• Low Risk Transfers: Transfers that are the result of a grant, transfer, or revocation of an easement; transfers which are the result of the death of an owner of residential property; transfers that are the result of divorce; transfers to a bankruptcy estate.

Who Must File the Report

Those required to file a report are listed in a cascading format (further referred to in the proposal as the “cascade”). For instance, a real estate professional would be required to file a report and keep the records for a given transfer if the person performs the functions described in the cascade and there is no other person who performs a function higher in the cascade.

The cascade is as follows:

1. Real estate professionals providing certain settlement services in the settlement process. The person listed as the closing or settlement agent on a settlement or closing statement. If no person prepared a closing or settlement statement, the obligation falls to the person that files the deed or other instrument that transfers ownership of the residential property.
2. The person that underwrites an owner’s title insurance policy for the transferee.
3. The person that disburses the greatest amount of funds in connection with the reportable transfer. Such disbursement may be in any form, including an escrow account, trust account, or a lawyer’s trust account.
4. The person that prepares an evaluation of the title status. Evaluation may be in the form of a title check, typically performed by title insurance companies in lieu of an actual insurance/opinion letter.
5. The person who prepares the deed.

The reporter must file the report with FinCEN within 30 days after the date on which the transferee entity receives ownership interest in the residential real property. The reporter is also required to keep the report available for inspection for 5 years after the date of filing.

What Information Must be Provided

The information would be kept in FinCEN’s secure Bank Secrecy Act (“BSA”) portal and would not be accessible to the public. The information may be collected directly from a transferee representative so long as the person certifies the information is correct to the best of their knowledge. Additionally, FinCEN may provide forms which are to be filed electronically by the reporter.

The required information includes:

1. Name and address. Collect the name/address of the principal place of business for reporting persons, transferee entities and trusts, and transferors that are entities. For legal entities that are trustees, would collect the place of trust administration.
2. Citizenship.
3. Unique identifying number. A unique ID number can be an IRS Tax ID Number (TIN), SSNs, EINs.
4. Representative capacity of signing individual.
5. Information concerning payments. Includes the total consideration paid by all transferees regarding the property, the method of each payment made, the accounts and financial institutions used for the payment, and (if the payor is anyone other than the transferee entity/trust) the name of the payor on the payment form.
6. Information concerning residential real property. Address of the property, legal description (i.e., section, lot, block). Would be reported for each property involved in the transfer.

For further guidance and assistance in understanding these proposed regulations and their implications, contact FRB's Corporate & Securities Practice Group at 516-599-0888 or by filling out the form below.

[1] Dept. of Treasury, Financial Crimes Enforcement Network: 31 CFR Ch. X (RIN 1506-AB54) (scheduled to be published Feb. 16, 2023), available at: https://public-inspection.federalregister.gov/2024-02565.pdf. (hereinafter referred to as “FinCEN Proposal”)

[2] FinCEN Proposal, 36.

[3] FinCEN Proposal, 22

[4] FinCEN Proposal, 24.

[5] A large operating company is defined as an entity that (1) employs more than 20 employees on a full-time basis in the US, (2) filed in the previous year Federal income tax returns in the US demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, (3) has an operating presence at a physical office within the US. FinCEN Proposal, 31.

[6] FinCEN Proposal, 28.

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