The Treasury Department has announced its final regulations designed to stop the illicit flow of money through residential real estate.
The agency’s Financial Crimes Enforcement Network seeks to close loopholes used by criminals to launder money through cash-only real estate transactions. The rules are set to take effect in 2025.
The rules add a degree of finality to FinCEN’s previous attempts to combat money laundering in the residential real estate sector through so-called Geographic Targeting Orders (GTOs).
These orders, first implemented in 2016, require title insurance companies to file reports identifying the owners of all cash transactions for certain jurisdictions and thresholds. The orders sent shockwaves through the market in places like Miami, where cash transactions for homes were common.
However, critics say that the GTOs have massive loopholes. For example, criminals could simply buy properties in places where the GTOs do not apply. Money launderers could also buy properties at prices below the threshold.
The new regulation from the US Treasury Department is intended to prevent such circumvention. It applies nationwide and to all purchases, regardless of the price.
The agency has also adopted anti-money laundering regulations for investment advisers, who will be required to file reports on suspicious activities.
Gary Kalman, executive director of Transparency International US, a global coalition against corruption, said the rules were “a big deal” to ensure the US is no longer an easy place for money laundering.
“FinCEN has done a good job of proactively analyzing how clever lawyers might develop mechanisms to evade reporting,” Kalman said.
Under the GTOs, title insurers were responsible for reporting information about residential real estate sales to FinCEN. However, the new rules allow other real estate professionals to report information as well. FinCEN has created a “cascade system” to determine which professionals have reporting obligations.
The agency explained that this responsibility generally falls to settlement agents, title insurance agents, escrow agents and attorneys, but only one person is required to file a report for each transaction. Real estate agents and appraisers are exempt.
The FinCEN rules only apply to cash transactions involving residential real estate. There is no reporting requirement for transactions involving mortgages.
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Commercial real estate transactions are also not included, raising the possibility that money launderers are using them more often to avoid detection. Kalman said his organization is pushing for new reporting rules for commercial real estate.
“The commercial sector accounts for more than 30 percent of all real estate money laundering cases, and we encourage the Treasury Department to move forward as promised and issue rules as soon as possible to address these risks,” Kalman said in a statement.
