Last month, the Treasury Department’s Financial Crimes Enforcement Network announced that it was expanding on its rules that require title insurers to report buyers’ identities and the source of the funds for certain residential real estate deals.
The Geographic Targeting Order expands on FinCEN’s previous rules, and now requires title insurers to disclose the buyers’ identity on residential real estate deals of $300,000 or more in 12 of America’s largest markets – certain counties within the major U.S. markets of Boston, Chicago, Dallas-Fort Worth, Honolulu, Las Vegas, Los Angeles, Miami, New York City, San Antonio, San Diego, San Francisco and Seattle.
Title insurers are required to know the identity of the individuals behind legal entities making purchases of residential real estate, including all individuals who directly or indirectly own 25% or more of the legal entity making the purchase, in an effort to identify potentially bad actors hiding behind shell companies.
Banks are already required to collect and maintain beneficial ownership and source of funds information and apply it to identify potentially suspicious activity. FinCEN now requires that title insurers collect similar information.
FinCEN is trying to stop money launderers from using residential real estate deals in major U.S. cities to hide ill-gotten funds. In August 2017, FinCEN published examples of how residential real estate was used to launder funds.
At that time, the reportable dollar limits were much higher. By lowering the dollar limit, including virtual payments (e.g., Bitcoin, Etherium, Litecoin) and expanding the geographies, FinCEN’s November 2018 GTO is designed to assess how pervasive money laundering is in the residential real estate market.
The question is: are title insurers currently able to meet FinCEN’s requirement to identify, investigate and report on purchasers in residential transactions meeting the $300,000 threshold?
What was the original GTO and why did FinCEN issue it?
FinCEN originally issued a temporary (6-month term) GTO on January 13, 2016, which focused on title companies that processed all-cash residential real estate purchases in New York City and surrounding boroughs, and Miami-Dade County, Florida.
FinCEN issued the GTO because it was concerned that individuals, using shell companies or opaque structures, were hiding assets or potentially laundering money through all-cash purchases of high-end real estate.
As a result, FinCEN required U.S. title companies to identify individuals with 25% or greater ownership, either directly or indirectly, of entities used to purchase residential real estate and set certain reporting thresholds in specific locations: $3 million for Manhattan, Queens, Brooklyn, State Island and the Bronx; and $1 million for Miami Dade County.
While the GTO was supposed to be temporary, it appears to have been effective because FinCEN has continually renewed and updated the order, expanding the reporting scope considerably. In the November 2018 GTO, FinCEN included new geographies in Hawaii, Nevada, Washington, Massachusetts and Illinois, and lowered the reporting amount to residential real estate purchases of $300,000. Further, the revised GTO also requires reporting for additional forms of payment to include virtual currencies.
What does this mean for title companies?
Title companies are now going to have to identify transactions that meet the FinCEN definition of a covered transaction (i.e., the purchase by a legal entity of residential real estate in the specified markets where the purchase price is $300,000 or more) and report it to the government.
While all-cash transactions at the original reportable levels were easier to recognize, the most recent version of the FinCEN GTO requires more sophisticated transaction monitoring techniques to identify reportable activity. As a result, there are three potential impacts to the title insurance industry:
- Title companies may tap bank anti-money laundering approaches and other advanced technologies to build compliance programs. Title companies may want to take a page out of the banking sector’s anti-money laundering playbook and start applying advanced technologies like cognitive computing and machine learning to transaction monitoring. Residential real estate purchases of at least $300,000 in major U.S. cities are far from rare. Busy title insurers would be wise to consider leveraging technology to know the ultimate buyers and the sources of financing in order to have it readily available to comply with reporting requirements. As title insurers contemplate adoption of technology, it should note that FinCEN just released new guidance indicating that it recognizes the need for innovation to combat money laundering and terrorist financing.
- The market for title insurers may contract as a result of higher regulatory compliance demands and associated costs. The cost of developing and implementing a sophisticated transaction monitoring program that identifies reportable activity is significant. Title companies that do a large volume of residential transactions in affected GTO areas could find the cost too burdensome and decide to merge with larger title companies. Title insurers who have already adopted technologies, processes and people in order to comply with earlier versions of the GTOs may be able to adjust more easily to the new FinCEN GTO reporting requirement.
- Regulators may want to involve more entities in residential real estate transactions—beyond title insurers and banks. FinCEN’s Advisory in August 2017 highlighted examples of money laundering through residential real estate transactions, likely as a result of information gained through its GTOs, and could look to expand reporting obligations beyond title insurers. While banks have long-standing know-your-customer programs, advanced technologies, processes and talent in place to detect and report money-laundering, FinCEN’s successful use of GTOs for title companies could mean FinCEN might someday increase regulations for other companies that engage in residential real estate.
The 2016 FinCEN GTO was originally scheduled for six months; three years later the program is still in place and the scope has continued to expand. The GTO program continues to have success in identifying suspicious activity in residential real estate and appears to be here to stay.
As the GTO price threshold for residential purchases drops and the number of affected U.S. markets increases, the pressure on title insurers to build or expand their regulatory compliance programs has skyrocketed and it does not appear to be changing. As a result, we expect the face of residential real estate compliance obligations to change quickly.