On January 13, 2016, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued two temporary Geographic Targeting Orders (the Orders) that will require title insurance companies to identify the individual owners of “shell companies” that pay “all cash” for “high-end” residential real estate in the borough of Manhattan in New York City and in Miami-Dade County, Florida. The stated reason given by FinCEN for issuing the Orders is its concern that foreign individuals are using anonymous shell companies to launder money through residential real estate in the United States. According to FinCEN Director Jennifer Calvery, FinCEN has developed rules “to make the standard mortgage market transparent and less hospitable to fraud and money laundering, but cash purchases present a more complex [problem that needs to be addressed further.]” The Orders focus on title insurance companies because such companies are a common feature in the vast majority of real estate transactions and FinCEN hopes that requiring title companies to report will help the agency quickly gather valuable information to curb money laundering in the real estate sector. Title insurance companies, title abstract companies, title closers and their agents (collectively, title companies) should be attentive in each transaction to determine to what extent they are required to report.
What Types of Transactions are Covered by the Orders?
The Orders provide that if a “Covered Business” is involved in a “Covered Transaction,” then the Covered Business must report certain information to FinCEN within 30 days of the closing of the Covered Transaction. A Covered Business is a title insurance company and any of its subsidiaries and agents. It is not clear if the person actually closing the transaction on behalf of the title company is separately responsible, but it would be appropriate for such person to ascertain if the title company is complying with the FinCEN requirements. A Covered Transaction is a transaction in which (i) a legal entity (i.e., a corporation, limited liability company, partnership, or other business entity formed within or without the United States), (ii) purchases residential real estate (x) in Manhattan for a total purchase price in excess of $3,000,000 or (y) in Miami Dade County for a total purchase price in excess of $1,000,000, and (iii) such purchase is made, at least in part, using currency (or with a check or money order) and without external financing. It would appear from the Order that closings accomplished entirely with wire transfers may be exempt, however, care must be taken if funds are entrusted to attorneys, title companies or others in escrow or as good faith deposits using checks or money orders.
What Information must Title Insurance Companies Report to FinCEN?
The Orders require that title companies collect and report the following information to FinCEN:
- the identity of the individual representing (i.e., acting on behalf of) the purchaser (along with a copy of such individual’s driver’s license, passport, or other similar identifying documentation);
- the date of the closing of the Covered Transaction;
- the address of the purchased property;
- the total purchase price
- the amount of money transferred in the form of a monetary instrument; and
- the identity of the “Beneficial Owner” of the purchasing legal entity (along with copies of such Beneficial Owner’s driver’s license, passport, or other similar identifying documentation).
A Beneficial Owner is an individual who, directly or indirectly, owns 25% or more of the equity interests of the purchasing legal entity. In addition to the above requirements, if the purchasing legal entity is a limited liability company, then the Covered Business must report the name, address, and taxpayer identification number of all of its members.
When are the Orders Effective?
The Orders take effect for closings occurring on or after March 1, 2016. The Orders expire on August 27, 2016 because applicable law provides that temporary orders can only last for 180 days (temporary orders are renewable at the discretion of the Secretary of the Treasury). Although the effective periods of the Orders as presently in effect are relatively short, title companies must retain all records relating to their compliance with the Orders for five years and make such records available to FinCEN (or another law enforcement or regulatory agency) upon request.
Principals in each Covered Transaction should cooperate with such filings and attorneys should confirm that their clients’ title companies are making the requisite reports. Attorneys need to be attentive to their legal and ethical obligations; in particular, an attorney must consider whether the duty of confidentiality requires that the attorney refrain from disclosing a client’s identity.
Filings by a title company with FinCEN under the Orders do not provide an exemption from the filing of the Form BE 13 with the US Bureau of Economic Analysis or a request for an exemption if the entity purchasing the property is otherwise required to make such a filing or request an exemption.
For more information on the matters discussed in this Locke Lord QuickStudy, please contact the authors.