New Ownership Reporting Rules Target Cash Sales Of Residential Real Estate - Sun and Planets Spirituality AYINRIN

New Ownership Reporting Rules Target Cash Sales Of Residential Real Estate - Sun and Planets Spirituality AYINRIN 

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Weeks after the debut of a new system requiring millions of companies to file reports with the U.S. government about who ultimately owns and controls them, there’s a new effort bubbling up from Treasury to combat money laundering and financial abuse. This time, the focus is on residential real estate sales.

The corporate filing requirement—called the Corporate Transparency Act or CTA—went live on January 1, 2024, when the U.S. Department of the Treasury officially began accepting beneficial ownership information reports. The CTA was designed “to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity.”

Now, attention is turning to residential real estate transactions. As with the CTA, the idea is to encourage transparency. Specifically, the rule is designed to enhance transparency to better combat money laundering and tax fraud. Sound familiar?

Put another way, the goal is to stop dirty money.

Proposed Real Estate Reporting Rules

The proposed regulation, published this week by Treasury’s Financial Crimes Enforcement Network (FinCEN) would require real estate professionals to report information to the agency about non-financed residential real estate sales to legal entities, trusts, and shell companies. The rule would not require the reporting of sales to individuals.

According to the authorities, cash purchases of residential real estate are considered high risk for money laundering.

“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,” FinCEN Director Andrea Gacki said in a statement.

Gacki called it “an important step toward not only curbing abuse of the U.S. residential real estate sector, but safeguarding our economic and national security.”

There are many similarities between the CTA and the proposed rules, including the terms used (like beneficial owners and reporting person). However, FinCEN was quick to draw some distinctions between the proposed rules and CTA, stating that “this proposed rule is a tailored reporting requirement that would capture a particular class of activity that Treasury deems high-risk and that warrants reporting on a transaction-specific basis.”

The proposed rule would require businesses involved in closings or settlements to collect and report information to FinCEN. This information includes the identity of the reporting person, the legal entity or trust to which the residential real property is transferred, the beneficial owners of that transferee entity or trust, the person that transfers the residential real property, and the property being transferred, along with certain transactional information.

The reporting person would be required to file the report no later than 30 days after the date of closing.

The rule would apply to sales of residential real property such as single-family houses, townhouses, condominiums, cooperatives, and apartment buildings designed for one to four families. It would apply even if a commercial element exists, like a single-family residence above a commercial enterprise.

Reportable transactions would be those in the U.S., defined as any State, the District of Columbia, the Indian lands (as defined in the Indian Gaming Regulatory Act), and U.S. territories or possessions.

There is no threshold purchase price for the transfer—the transfer would be reportable irrespective of purchase price. That also means that transfers of ownership for which no consideration is exchanged, like gifts, would need to be reported.

Exempt transfers would include those involving an easement, the death of the property’s owner, the result of a divorce, or those made to a bankruptcy estate.

For a transfer to be reportable, it must be non-financed, meaning that it does not involve an extension of credit secured by the transferred property and extended by a financial institution subject to existing reporting obligations. Transfers financed by private lenders that do not have certain existing reporting obligations would also need to be reported.

And, like the CTA, there would be exemptions, primarily those already having a reporting requirement. That means, for example, that the proposed rule would exclude 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 those entities.

Real Estate And Money Laundering

Real estate has increasingly become a concern in the U.S., which is one of the largest and most valuable markets in the world, weighing in at $47 trillion in 2023.

Evidence suggests that real estate can easily be used for money laundering and other illegal activities due to holes in reporting requirements. Treasury reports that the “financed portion of the U.S. real estate market is well-regulated,” citing banking and related regulations. However, FinCEN also noted that 20-30% of residential real estate purchases in the U.S. are non-financed and not necessarily subject to reporting requirements. This, they say, leads to “a critical vulnerability.”

In one recent example cited by FinCEN, a Delaware man was sentenced to 45 years in prison for conspiracy to commit money laundering, conspiracy to distribute cocaine, and various other drug and money laundering offenses. The man and his wife had been accused of laundering over a million dollars in drug proceeds through the purchase of real estate in Delaware and Pennsylvania using their company, Zemi Property Management. They deposited drug money into several different bank accounts—and asked others to do the same—and then used those funds to secure cashier’s checks to buy the property. (You can read my previous article about that arrest here.)

Another area of interest is foreign ownership of U.S. property—especially when it comes to certain kinds of property, like farmland. States are digging in their heels on reporting requirements for farmland, as are the feds. Last year, the Committee on Foreign Investment in the United States (CFIUS) proposed rules that impact real estate ownership near military bases. CFIUS has the authority to review, renegotiate, enforce, and impose conditions to transactions, including real estate acquisitions, that could impact U.S. national security. Lawmakers have sought to expand CFIUS' authority as foreign investors from some countries buy up land.

While FinCEN hasn’t suggested that the proposed rules are intended to curb foreign ownership, the link between money laundering and foreign criminals has been strong in recent years. In 2022, FinCEN issued an alert, warning that “[s]anctioned Russian elites and their proxies may seek to evade sanctions through the purchase and sale of commercial or high-end residential real estate.” And, the agency noted that real estate can be an attractive vehicle “for storing wealth or laundering illicit gains due to its high value, its potential for appreciation, and the potential use of layered and opaque transactions to obfuscate a property’s ultimate beneficial owner.”

The proposed rules were drafted after an advance notice of proposed rulemaking on Anti-Money Laundering Regulations for Real Estate Transactions. The current proposal is said to be “a streamlined reporting framework designed to minimize unnecessary burdens while also enhancing transparency.”

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