SOME PRELIMINARY OBSERVATIONS ON FINCEN ANTI-MONEY LAUNDERING PROGRAM REQUIREMENTS FOR PERSONS INVOLVED IN REAL ESTATE CLOSINGS AND SETTLEMENTS

Transcription

1 SOME PRELIMINARY OBSERVATIONS ON FINCEN ANTI-MONEY LAUNDERING PROGRAM REQUIREMENTS FOR PERSONS INVOLVED IN REAL ESTATE CLOSINGS AND SETTLEMENTS by Bruce Zagaris American Land Title Association 2003 Federal Conference Hyatt Regency Washington Rowe Bruce Zagaris, Esq. Berliner, Corcoran & 1101 Seventeenth St., NW Suite 1100 Washington, D.C (202) fax: (202)

2 I. INTRODUCTION On April 10, 2003, the Financial Crimes Enforcement Network ( FinCEN ), Treasury, issued an advance notice of proposed rulemaking. FinCEN is soliciting public comments on a wide range of questions in connection with the issuance of the advance notice. Comments are due on or before June 9, Although I have prepared a paper for today s meeting, the importance of the advance notice to your organization and its work compelled me to make some preliminary observations. FinCEN is required to issue the advance notice of proposed rule because Sec. 352(A) of The USA PATRIOT Act amended Section 5318(h) of the Bank Secrecy Act. As amended, section 5318(h)(1) requires every financial institution including persons involved in real estate settlements and closings under Section 5312(a)(1)(U) to establish an anti-money laundering (AML) program that includes, at a minimum: (1) the development of internal policies, procedures, and controls; (2) the designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test programs. When prescribing minimum standards for AML, Section 352 directs the Secretary of the Treasury to consider the extent to which the requirements imposed under Section 352 of the Act are commensurate with the size, location, and activities of the financial institutions to which such regulations apply. The Secretary has delegated the authority to administer the BSA to the Director of FinCEN. The notice provides five issues for which it seeks answers. II. WHAT ARE THE MONEY LAUNDERING RISKS IN REAL ESTATE CLOSINGS AND SETTLEMENTS? The discussion sets forth ways that money launderers can use and have used the purchase of real estate to launder money. This is the most significant issue. When it assumed office, the Bush Administration s key priority in AML programs was that it would weigh carefully the benefit of every existing and proposed AML program against the cost and depending on the cost-benefit analysis act accordingly. This standard appears in the first National Money Laundering Strategy report issued by the Bush Administration. In the aftermath of the September 11, 2001 attacks, the Bush Administration abandoned this approach and added to a

3 robust and expanded AML program counter-terrorism financial enforcement. In enacting the USA PATRIOT Act, the members of Congress competed against each other to see how quickly they could enact the toughest AML and counter-terrorism financial enforcement laws. Indeed, they acted so quickly that the Act has no legislative history and has unrealistically tight deadlines to make regulations. Except for one study by the National Institute of Justice in September 1996, there are no statistics or actual showing of the extent that real estate closings and settlements pose a serious AML problem. In fact, even prior to the enactment of the USA PATRIOT Act every real estate transaction was already covered by U.S. and foreign AML laws and executive orders. If cash or monetary instruments are used, then the persons who receive them in the transaction must file a Currency Transaction Report (IRS Form 8300). If wire transfers, checks, or other means of payment are used, a bank or financial institution is involved. They are covered by AML requirements. Hence, the application of additional AML laws and regulations to persons involved in real estate closings and settlements is redundant. Treasury should seriously assess the cost-benefit of the new provisions in its formulation of the final regulations. III. HOW SHOULD PERSONS INVOLVED IN REAL ESTATE CLOSINGS AND SETTLEMENTS BE DEFINED? FinCEN notes that in the typical residential real estate transaction the following participants may be involved: a real estate broker or brokers (normally both the buyer and seller have brokers and often one broker will split tasks and commissions, so that multiple brokers are involved); one or more attorneys, who represent the purchase or the seller (normally at least two attorneys are involved, although for small residential deals occasionally attorneys are not involved; on commercial and complex transactions, there are multiple attorneys involved, especially since some represent the lender, or persons who may have a lien on the property, including law enforcement); a bank, mortgage broker, or other financing entity; a title insurance company; an escrow agent, and an appraiser, who may assess the condition and value of the real estate, as well as various inspectors. 2

4 FinCEN correctly states that the guiding principle should be to pinpoint those persons whose services rendered or products offered in connection with a real estate closing or settlement that can be abused by money launderers and those persons who are able to identify the purpose and nature of the transaction. Another factor may be the importance of various participants to successful completion of the transaction, which may suggest that they are well positioned to identify suspicious conduct. In addition, professionals may have very different roles, in different transactions, that greatly impact on their exposure to money laundering. FinCEN notes that attorneys involved in structuring a real estate deal may be in the best position to observe and prevent their use for money laundering. However, these professionals already have an obligation to prevent money laundering and FinCEN and the regulation would have dubious legality if it intrudes on their confidentiality of the relationship between a lawyer and client, undermine the independence of the lawyer, and the free flow of information and confidence between an attorney and his or her client, without which ironically a lawyer will have difficulty spotting suspicious activity and preventing the same. However, because lawyers must file IRS Form 8300 for cash transactions, FinCEN is apparently taking the leap that therefore it has the right to impose any AML due diligence. The bar associations commenting on the Financial Action Task Force proposed gatekeepers recommendations have pointed out that lawyers should not be covered by AML laws and regulations unless they are actually carrying out a financial transaction. The AML laws and regulations should be clarified so that they do not applied to routine financial transactions that are normally carried out by a lawyer for the convenience of his or her client in the context of a transaction. Otherwise, a lawyer would wrongfully become subject to AML laws if his or her lawyer s escrow account is used to hold the down payment in a real estate transaction until the closing. In such case the lawyer is normally representing the seller and will have no knowledge of the source of the purchaser s funds. The FinCEN notice does not appear to take into consideration the withdrawal on March 25, 2003 by the Canadian Government of its proposed regulations that would subject attorneys to filing suspicious activity reports under the Proceeds of Crime (Money Laundering) Act and Terrorist Financing Act. The Canadian Government admitted that its regulatory 3

5 impact analysis statement failed to adequately take into account lawyers duties to their clients. Previously the British Columbia Supreme Court had enjoyed the Canadian Government from applying these regulations to lawyers. FinCEN requests comments on which participants in the real estate closing or settlement process are in a position where they can effectively identify and guard against money laundering in such transactions. It requests information and comment on: the extent to which various participants have access to information regarding the nature and purpose of the transactions at issue and the importance of the participants involvement to successful completion of the transactions; the real estate sector in general and on various transaction types; and the way in which commercial real estate transactions are involved. The problem will be that, except for situations in which persons involved in the real estate transaction have a continuing relationship with the persons participating in the transaction, they will not be in a position to ascertain what is unusual or suspicious, except perhaps from the economic substance. However, even with the economic substance some people have different values for wanting to own real estate and ways of paying for the transaction. For instance, foreigners often either pay more cash or send money from abroad, often from low-tax jurisdictions, which are coincidentally offshore financial centers. IV. SHOULD ANY PERSONS INVOLVED IN REAL ESTATE CLOSINGS OR SETTLEMENTS BE EXEMPTED FORM COVERAGE UNDER SECTION 352? FinCEN solicits comments regarding possible exemptions that should be designed to enable FinCEN to evaluate whether the risk of money laundering through a category of persons is sufficiently small that a proposed AML program rule could be designed that would exempt the category while also providing adequate protection for the industry from the risks of money laundering. FinCEN has clarified that it does not intend to cover purchasers and sellers of their own real estate even though they, too, are persons involved in real estate settlements and closings. FinCEN should clarify the parameters of purchasers and sellers of their own real estate. Does this just mean purchasers and sellers of real estate in which they live or have 4

6 their business? Does this mean that every time an individual buys or sells a condo or beach property that will be wholly or partly rental property that the property will be covered? Given the existing coverage of banks and financial institutions by AML and due diligence, it would seem prudent to limit the coverage of AML due diligence with respect to real estate settlements and transactions to those very large transactions, say in excess of $1 million. V. HOW SHOULD THE ANTI-MONEY LAUNDERING PROGRAM REQUIREMENT FOR PERSONS INVOLVED IN REAL ESTATE CLOSINGS AND SETTLEMENTS BE STRUCTURED? FinCEN has stated it must consider the extent to which the standards for AML programs are commensurate with the size, location, and activities of persons in this industry. FinCEN has noted that some businesses in the real estate closing and settlement industry may be smaller companies or sole proprietors. Hence, FinCEN requests comment on any particular concerns these smaller businesses may have regarding the implementation of an AML program. FinCEN, in recognition that persons involved in real estate closings and settlements may have some programs in place to meet existing legal obligations, such as the requirement to report on Form 8300 the receipt of over $10,000 in currency and certain monetary instruments, requests comment on what types of programs persons involved in real estate closings and settlements have in place to prevent fraud and illegal activities, and the applicability of such programs to the prevention of money laundering. FinCEN will find that the programs in place by real estate brokers and sales people, appraisers, and title companies are not meant to detect and prevent money laundering, especially in its very expanded definition. For instance, the USA PATRIOT Act has now included as predicate offenses for money laundering diverse foreign laws. Already, the complexity and cost of real estate settlements and closings must accommodate diverse federal, state and local laws concerning titles, liens, financing, taxes, and a whole host of legal and financial matters. To require, in addition, that persons who participate in real estate settlements and closing also learn AML, acquire AML systems, and hire AML compliance officers will add a whole new layer of bureaucracy, costs, and uncertainty to an important 5

7 sector of the U.S. economy. Except occasionally when the real estate professional has a longstanding and continuing relationship with a buyer or seller, their ability to be able to discern unusual and/or suspicious patters of potential money laundering will be quite limited. In particular, U.S. real estate professionals have no ability to ascertain potential violations of foreign laws and subjecting them to the requirements to become detectives about potential violations of foreign let alone U.S. law will make their very harried and difficult work much more unnecessarily uncertain, time consuming, and costly. VI. ANALYSIS The real estate industry should become engaged in informing FinCEN and the U.S. Congress of the inquiries FinCEN is making, the impact on the real estate industry in terms of its culture, the economic impact, and the difficulties of converting an already overworked industry into a law enforcement agency. The industry should also urge that a cost-benefit approach is taken to the design and implementation of new regulations. Increasingly, foreign disinvestment from the U.S. is occurring. Such disinvestment is unprecedented and has not occurred since World War II. For the sixth quarter the European Union has attracted more foreign investment than the U.S. The conjunction of the convergence of counter-terrorism financial enforcement and anti-money laundering, the impact of the loss of anonymity due to the Qualifying Intermediary regulations, together with the negative economic trends in the U.S. have caused the disinvestment. In particular, foreigners from the Middle East have withdrawn from U.S. investments due to the harshness of unilateral U.S. export controls and the uncertainty of their potential extension along with U.S. threats and military action in the Middle East. In addition, the major restrictions placed on visits from males from Middle Eastern countries has made investment from Middle Eastern countries in the U.S. comparatively risky and inconvenient. Similarly, investors recognize and many reject the enormous extraterritorial nature of the USA PATRIOT Act. Investors are aware that, in its passage, principal backers underscored that they would make foreigners pay for the opportunity and privilege of doing business with the largest economy in the world. In particular, foreign investors are concerned about the requirement that foreign financial 6

8 institutions subject themselves to U.S. jurisdiction even for their foreign accounts related to their U.S. correspondent accounts, and the U.S. courts and prosecutors ability to freeze the assets of the bank and its clients on a pre-trial basis. They are concerned about the application of Section 311 of the USA PATRIOT Act to foreign jurisdictions, foreign financial institutions, and transactions from certain foreign jurisdictions. Similarly, they are concerned about the application of the USA PATRIOT Act to foreign correspondent accounts and foreign political figures. They fear that the Act unfairly targets foreign institutions and transactions. They see that major U.S. money laundering prosecutions and sentences tend to target foreign institutions, while U.S. banks and financial institutions seem to avoid major penalties. The U.S. has come full circle from the late 1970s and 1980s when its laws welcomed foreign investment in U.S. real estate to discouraging the same. The application of AML rules to persons involved in real estate closings and settlements may be perceived as another last straw by many investors and their representatives. It will undercut trust between fiduciaries, counsel, and investors. It will further accelerate the costs of real estate transactions at a time when the costs of the U.S. economy are already skyrocketing and the international community, especially the G-7 Finance Ministers and the International Monetary Fund, has warned about the costs to the world economy of the twin U.S. deficits the budget and current account deficits. The real estate industry is not equipped and will never be capable unless its professionals undertake a lot of instruction of criminal justice, criminal law, money laundering, forensic accounting, and then invest considerable resources into securing hardware and software of conducting enhanced due diligence against politically exposed persons (PEPs), correspondent bank accounts, private banking, and conducting transactions with non-cooperative countries and territories. It takes many decades to develop the confidence and mechanisms to attract foreign investment. Once such investors leave, they will not easily return. The application of the advance notice of proposed rule-making perhaps signals another step in further dismantling the legal and cultural system that has been a key cornerstone in the development of the American democracy and its economy. 7

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