As property values keep rising in the San Francisco Bay Area and Silicon Valley at unprecedented rates , we continue to see how this phenomenon affects our area in a variety of different ways. I have written in my blog on a number of prior occasions regarding both the positive and negative impacts that these high real estate costs are having upon our community. It would now appear that our region’s expensive home prices have attracted interest from money launderers, as well as those who would try to bring them to justice, a development that should be of interest to everyone involved in the local real estate market.
A few months ago, a colleague and I were talking about a mandate that was recently imposed by federal authorities on title companies insuring residential real estate in parts of the Bay Area, which obliged them to provide information on certain all-cash purchases in order to monitor potential money laundering activity. Starting on March 1, 2016, the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Treasury Department began requiring title insurers to report the beneficial ownership of business organizations that purchase expensive residential real property for all cash without financing in certain specified locations. Initially, FinCEN targeted sales in Manhattan over $3 million and in Miami-Dade County over $1 million; the scope of this directive was expanded several months later to cover other locations, including transactions over $2 million in portions of the Bay Area, namely, San Mateo County, Santa Clara County, and the City and County of San Francisco.
In our discussion of this situation, my colleague and I noted that these regulations left several avenues available for abuse. First, by focusing on all-cash transactions, FinCEN has left the door open for money launderers who can place a relatively nominal mortgage on their properties to shield their deals from scrutiny. Second, nominee or holding transactions, in which title to real estate is held in someone else’s name (a type of arrangement that has been previously mentioned in this blog), are outside the range of transactions dealt with under these rules. Finally, and somewhat inexplicably, wire transfers were not incorporated among the kinds of payments triggering review by FinCEN, leaving a significant gap in the types of matters scrutinized under this system.
Recently, however, the federal government has taken action to close down this latter loophole, and has further expanded the regions included within its reporting requirements. On August 22, 2017, FinCEN announced that it would begin requiring title insurance companies to report information about the beneficial ownership of business organizations acquiring “luxury” real estate when any portion of the purchase price is paid by wire transfer, as well as the other types of cash payments previously identified. In addition, reporting will be required for residential real estate purchases over $3 million in the City and County of Honolulu. These changes are set to take effect September 22, 2017 .
Along with increasing the extent of its inquiries, the federal government has also been reaching out beyond title companies to assist in its efforts to fight money laundering dealings. Together with its recent announcement set forth above, FinCEN also issued an advisory to real estate professionals, highlighting the risks that exist in the real estate market for money laundering and similar illegal activities, and calling for their voluntary assistance to bring suspicious actions to the attention of relevant authorities. As such, real estate brokers, attorneys, and other professionals who work on real estate transactions should acknowledge the issues involved with these types of arrangements and make themselves aware of these reporting requirements.
