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FinCEN Issues ANPR to address residential real estate money laundering

Terri Luttrell, CAMS-Audit, CFCS
February 9, 2024
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ANPR to address residential real estate money laundering

FinCEN is focusing on residential real estate money laundering. Here is what you need to know.

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Notice of proposed rule making

Residential Real Estate Money Laundering

The Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM) on February 7, 2024, to combat and deter money laundering through non-financed residential real estate purchases. The proposed rule is part of a requirement of the Anti-Money Laundering Act of 2020 (AMLA) to initiate transparency within the real estate industry. If approved as written, professionals involved in real estate closings and settlements will have to report information to FinCEN about non-financed residential real estate transfers to legal entities or trusts. This will not include transfers in the name of individuals since this type of transaction is not considered high-risk for money laundering. 

Real estate money laundering (REML) is a serious issue that has become increasingly common in recent years. It is no secret that criminals use real estate to clean money derived from illegal proceeds; it’s one of the oldest forms of money laundering.  However, the subjective nature of real estate pricing makes for easily manipulated transactions. Treasury Secretary Janet Yellen said in March 2023 that illicit actors laundered at least $2.3 billion through U.S. real estate between 2015 and 2020, and the actual number is almost certainly higher. With heightened Russian sanctions globally, it is more important than ever to understand the typologies associated with money laundering through real estate and to be prepared to detect this activity within your financial institution. 

“Illicit actors are exploiting the U.S. residential real estate market to launder and hide the proceeds of serious crimes with anonymity, while law-abiding Americans bear the cost of inflated housing prices,” said FinCEN Director Andrea Gacki of the NPRM. “Today marks an important step toward not only curbing abuse of the U.S. residential real estate sector but safeguarding our economic and national security.”  

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According to the FinCEN Fact Sheet, here are some of the provisions of the NPRM: 

  • Businesses, including attorneys, performing specified closing or settlement functions for the non-financed sale or transfer of residential real property to an entity or trust will be required to collect and report information to FinCEN. This information includes: 
  • Beneficial ownership information for the legal entity or trust receiving the property 
  • Information about individuals representing the entity or trust 
  • Information about the business filing the report  
  • Information about the residential real property being sold or transferred 
  • Information about the seller 
  •  Information about any payments made 
  • Professionals involved in real estate closings and settlements would remain exempt from the anti-money laundering compliance program requirements of the Bank Secrecy Act. However, they would be required to file a modified suspicious activity report (SAR) for any sale or transfer of residential real property that meets the requirements outlined in the proposed rule. The modified SAR that would be used for reporting purposes would be known as a “Real Estate Report.”  

The rule will replace existing Geographic Targeting Orders (GTOs) currently in place to detect money laundering and other illicit activity through real estate purchases. The GTO covers only select geographic locations and transactions over a certain dollar amount. The new rule will expand the requirements nationwide, with no dollar amount limit. 

Criminals use real estate, usually higher-end residential or commercial property, to hide and launder their illegally gained money by purchasing properties directly or through shell companies.  Once the illicit funds have been placed into a real estate purchase, money can be laundered in a variety of ways, such as: 

  • Renovating a property and reselling, with exaggerated construction costs 
  • Selling at a higher price from appreciated value over time 
  • Renting a recently purchased property for a “clean” stream of income 
  • Obtaining a loan against the real estate to have access to clean funds  

Rules and red flags to monitor real estate for money laundering 

While the current NPRM doesn’t cover commercial real estate, FinCEN has issued several red flags and SAR instructions to detect and report money laundering through commercial real estate properties. The January 2023 alert to financial institutions, Potential U.S. Commercial Real Estate Investments by Sanctioned Russian Elites, Oligarchs, and Their Proxies, is a beginning effort to close in on money laundering through commercial real estate. FinCEN highlighted some of the common risk factors associated with money laundering through real estate. These REML risk factors include: 

  • Multiple real estate transactions in a short period 
  • Obvious property over- or undervaluation 
  • Cash purchases 
  • Unknown source of funds for purchases 
  • A large disparity between the buyer’s income and the value of the property 
  • Owner has no known ties to property jurisdiction 
  • Use of straw buyers and proxies 
  • Use of front companies and complex corporate vehicles 

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Detect and prevent

Real estate money laundering

REML can be complex, but financial institutions can implement several measures to help prevent and detect illicit activity and comply with anti-money laundering (AML) regulations:  

  • AML Enhanced due diligence (EDD): Implement robust know-your-customer (KYC) procedures to verify the identities of buyers, sellers, and beneficial owners involved in real estate transactions. This includes obtaining detailed information, such as proof of identity and source of funds.  
  • Transaction monitoring: Establish systems to monitor real estate transactions for suspicious activities. This can involve setting thresholds for reporting large cash transactions and tracking other unusual patterns using anti-money laundering software. 
  • Training and awareness: Provide education and training programs for mortgage lenders and other front-line staff to raise awareness about money laundering risks, red flags, and reporting obligations. This will help them identify suspicious activities and comply with AML requirements.  
  • Public-private partnerships: Foster collaboration between government agencies, law enforcement, and the private sector, including real estate industry professionals. Sharing expertise, information, and best practices can help create a united front against REML. 

Real estate money laundering poses a significant threat to the integrity of financial systems and the stability of property markets. However, implementing robust EDD and monitoring programs can curb these illicit activities. By staying vigilant, raising awareness, and adopting a proactive approach, financial institutions can create a more transparent and secure real estate environment that safeguards against money laundering and upholds the integrity of the global financial system.

About the Author

Terri Luttrell, CAMS-Audit, CFCS

Compliance and Engagement Director
Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry, working both in medium and large community and commercial banks ranging from $2 billion to $330 billion in asset size.

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