On January 13, the United States Department of the Treasury issued Geographic Targeting Orders (GTOs) that will require certain U.S. title insurance companies to identify the origin of money used in “all-cash” residential real estate transactions in Manhattan, New York, and Miami-Dade County, Florida. The Financial Crimes Enforcement Network (FinCEN) of the Department of Treasury believes that all-cash residential real estate purchases may be conducted by money launderers attempting to hide their assets through limited liability companies. Certain title companies will be required to identify and report the true “beneficial owner” behind a legal entity involved in high-end real estate transactions. The GTOs will force title insurance companies to do more work and will muddle the obligations of real estate attorneys that represent parties to “covered transactions.”
Background
FinCEN implemented these GTOs following the publication of a series of investigative pieces which sought to discern the individuals behind high-value real estate transactions throughout the U.S. Most notably, the New York Times published two such pieces about the use of shell companies to complete real estate purchases. In “Stream of Foreign Wealth Flows to Elite New York Real Estate,” the ownership of high-value condominium units in the Time Warner Center was tracked by sorting through more than 200 shell companies. “A Mansion, a Shell Company and Resentment in Bel Air.” focused on a single 30,000 square foot home in Bel Air which was listed for sale at $100,000,000.00. The shell company which owned the home, 901 Strada L.L.C., made the individual behind the LLC effectively judgment proof in spite of years of violation notices from the city and complaints by neighbors. Both articles also considered the origin of money behind transactions in New York and Los Angeles, finding that the money behind the shell companies could be traced back to figures that had been investigated for fraud and corruption around the globe.
In the release from FinCEN, FinCEN director Jennifer Shasky Calvery said, “We are seeking to understand the risk that corrupt foreign officials, or transnational criminal, may be using U.S. real estate to secretly invest millions in dirty money.” “These GTOs will produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector.”
Money Laundering Impact
Ms. Calvery’s second statement relies on several questionable assumptions and appears to be undercut by the content of the GTOs. The use of residential real estate to launder money may be a very real problem, but the GTOs do not guarantee the production of valuable data that will assist law enforcement. First, the GTOs are extremely limited in geographic scope. Second, the GTOs restricts the time during which each GTO is effective. The GTOs will be effective on March 1, 2016 and end on August 27, 2016. The GTOs also contain strict limits as to the amount of money required to trigger the collection and reporting or additional information. Section II, part A(2)(iii) of the Manhattan GTO defines “covered transactions” as all-cash purchases in excess of $3,000,000.00, while section II, part A(2)(iii) of the Miami GTO defines “covered transactions” as all-cash purchases in excess of $1,000,000.00.
Obligations of Title Insurance Companies
Title insurance companies, however, will be required to do extra work on covered transactions regardless of the propriety of any given transaction. In particular, title insurance companies will need to file a FinCEN Form 8300 within 30 days of closing a covered transaction. FinCEN Form 8300 is somewhat familiar to the general public, as this form requires information related to cash payments over $10,000.00. FinCEN Form 8300 will also contain information about the identity of the purchaser and the identity of the “beneficial owners.”
These GTOs define “beneficial owner” as “each individual who, directly, or indirectly, owns 25% or more of the equity interests of the Purchaser.” The title insurance company is required to “obtain and record a copy of the Beneficial Owner’s driver’s license, passport, or other similar identifying documentation.”
The comments section of FinCEN Form 8300 must contain additional information about the title insurance company in a covered transaction. In particular, the name, address, and taxpayer identification number of each member of the title insurance company must be provided. The GTOs also require the title insurance company to maintain all records relating to compliance with the GTOs for five years.
How, exactly, title insurance companies will respond to the GTOs remains unclear. Title insurance companies will need to determine how to train their agents and satisfy the reporting requirements with minimal guidance from FinCEN. At least one representative we spoke to from a title insurance firm expressed concern about the potential for increased liability that would result from the increased reporting requirements.
Involvement of Real Estate Attorneys
Title insurance companies are also expected to provided information “about the identity of the individual primarily responsible for representing the Purchaser.” Presumably, this provision of the GTOs refers to the attorney or attorneys representing the purchaser in the particular real estate transaction.
In addition to having the identity of attorneys disclosed as a part of reporting, the GTOs present other potential issues for the attorney or attorneys representing parties in covered transactions. At present, real estate lawyers are not asked to consider the origin of funds used to complete real estate transactions as a part of their due diligence. Rather than investigate their own clients, real estate attorneys are asked to represent their interest in the consummation of a given transaction.
Whether the GTOs place any new obligation on the attorneys representing the legal entities or beneficial owners involved in covered transactions is unclear. Under the GTOs, real estate attorneys in New York and Florida should reassess their obligations under their rules of professional conduct. Under Rule 8.4 of the Model Rules of Professional Conduct, “It is professional misconduct for a lawyer to: . . . (3) Engage in conduct involving dishonesty, fraud, deceit or misrepresentation.” Representing a money launderer in an all-cash residential real estate transaction would almost certainly violate Rule 8.4, among other rules. At present, however real estate lawyers do not typically inquire into the source of their client’s funds.
If FinCEN chooses to expand the duration or geographic limits of the GTOs, then lawyers in states beyond New York and Florida may be forced to consider the same. Connecticut, like New York and Florida, adopted the American Bar Association’s Model Rules of Professional Conduct. Accordingly, attorneys in Connecticut that perform real estate transactions should consider the impact of FinCEN’s efforts relative to their obligations to their clients.
Ultimately, the GTOs may pose a variety of questions to real estate attorneys. Is an attorney required to investigate into the origin of a client’s money? If so, how deeply must the attorney investigate? What facts or information uncovered by any such investigation would trigger an obligation to report under the rules of professional conduct? With no guidance as to their obligations, real estate attorneys are left to make these determinations independently for the time being.
Conclusion
In spite of the fact that the GTOs make it unlikely that FinCEN will ultimately collect the type of data it seeks, title insurance companies have been forced to bear the cost of FinCENs data collection efforts. Real estate attorneys should also see the GTOs as a reason to reevaluate their obligations to their clients.
FinCEN’s GTO may just signal the beginning of broader oversight of LLCs and real estate transactions by a variety of governmental entities. The Incorporation Transparency and Law Enforcement Assistance Act was introduced to Congress on February 3, 2016, with bipartisan sponsorship, including from New York Democrat Carolyn Maloney and New York Republican Peter King, and would require greater transparency of shell companies. Accordingly, real estate attorneys beyond those in Florida and New York should take note as greater scrutiny and burdensome reporting requirements appear to lie ahead.