FinCEN Proposes New Residential Real Estate Reporting Requirements
On February 7, 2024, the US Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a Notice of Proposed Rulemaking on certain US residential real estate transactions (“2024 NPRM”). The 2024 NPRM would require certain professionals involved in real estate closings and settlements to report information to FinCEN about non-financed transfers of residential real estate to legal entities or trusts. The 2024 NPRM describes the circumstances in which a report would be filed; who would file a report; what information would need to be provided—including information about the beneficial owners of the legal entities and trusts—and when a report about the transaction would be due.1
As discussed further below, potentially affected participants should consider submitting comments on the 2024 NPRM by the April 16 deadline to encourage FinCEN to finalize a revised proposal that appropriately weighs the goals of preventing money laundering with potentially burdensome compliance obligations.
In this Legal Update, we provide background on FinCEN’s approach to real estate transaction reporting requirements and summarize the 2024 NPRM.
Background
In 1970, the US Congress passed the Currency and Foreign Transactions Reporting Act, colloquially known as the Bank Secrecy Act (“BSA”), which requires financial institutions to monitor and report on certain customer activity for the purpose of combating money laundering and tax evasion.2
While the BSA covers a broad range of financial institutions, FinCEN has issued regulations implementing the BSA only for a smaller subset (“covered financial institutions”). Covered financial institutions subject to FinCEN regulation include banks; casinos; money services businesses; broker-dealers; mutual funds; certain insurance companies; futures commission merchants; introducing brokers; dealers in precious metals, precious stones, or jewels; credit card system operations; certain loan and finance companies; and housing government-sponsored enterprises.3 However, many categories of persons involved in real estate closings and settlements remain outside the definition of covered financial institutions even though FinCEN has considered adding certain market participants since at least 2003.4
In recent years, FinCEN has shown a particular interest in expanding the scope of the BSA to cover a wider range of transactions involving real property.5 Since 2016, FinCEN has issued a series of geographic targeting orders (“GTOs”) that require US title insurance companies to identify the natural persons behind legal entities (US and non-US) used in certain “all-cash” purchases of residential real estate and to report these persons and purchases to FinCEN.6
On December 6, 2021, FinCEN solicited public comment on how it should impose recordkeeping and reporting requirements on certain persons involved in all-cash real estate transactions (“2021 ANPRM”).7 In response to the 2021 ANPRM, FinCEN received 151 public comments from a wide variety of stakeholders. On February 7, 2024, FinCEN issued the 2024 NPRM, which specifically focuses on reporting across the US residential real estate sector.
2024 NPRM
The 2024 NPRM would require businesses, including attorneys, performing specified closing or settlement functions for the non-financed sale or transfer of residential real property to an entity or trust to collect and report information to FinCEN in a “Real Estate Report.” Under the 2024 NPRM, the reporting person would not need to maintain a separate anti-money laundering (“AML”) program. Below we summarize the 2024 NPRM’s key requirements.
Reportable Transfers of Residential Real Property
The 2024 NPRM would require reporting on various types of residential real property transfers, including transfers of single-family houses, townhouses, condominiums, and cooperatives as well as buildings designed for occupancy by one to four families. It would also require reporting on transfers of vacant or unimproved land that is zoned, or for which a permit has been issued, for occupancy by one to four families.
In the case of reportable purchases, there is no threshold purchase price for the transfer. Likewise, transfers of ownership for which no consideration is exchanged, such as a gift, would need to be reported. Exempted types of transfers would be those that (i) involve an easement, (ii) occur as the result of the death of the property’s owner, (iii) are the result of a divorce, or (iv) are made to a bankruptcy estate.8
For a transfer to be reportable, it would need to be non-financed, meaning that it does not involve an extension of credit that is (1) secured by the transferred property and (2) extended by a covered financial institution subject to AML program and Suspicious Activity Report (“SAR”) reporting obligations. Transfers financed by private lenders or sellers would be covered by the reporting requirement if the lender or seller is not subject to an obligation to maintain an AML compliance program and a requirement to file SARs.
Reportable Transferees
As proposed, a transfer of residential real property would be reported only if at least one of the new owners of the residential real property is a “transferee entity” or “transferee trust” regardless of the size of their ownership interest in the property. These categories are defined broadly to capture a wide variety of legal entities and arrangements used to own property, such as limited liability companies, corporations, partnerships, and common law and statutory trusts. In this regard, the scope of the 2024 NPRM is broader than the beneficial ownership information reporting rule implementing the Corporate Transparency Act (“BOI Rule”), which is limited to legal entities.
Both domestic and foreign entities and trusts would be covered by the reporting requirement. Certain definitional exceptions would apply for entities and arrangements that are less likely to be used by illicit actors to launder money through residential real property--highly regulated entities (e.g., securities reporting issuers, governmental authorities, banks, money services business, broker-dealers) and certain trusts (e.g., securities reporting issuers, trusts in which the trustee is a securities reporting issuer) that are less likely to be used by illicit actors to launder money through residential real property. These exceptions leverage the exemptions in the BOI Rule, but are narrower (e.g., no exception for large operating companies).9
Reportable Information
At a high level, the Real Estate Report would include the following information about:
- Beneficial ownership for the legal entity (transferee entity) or trust (transferee trust) receiving the property;
- Individuals representing the transferee entity or transferee trust;
- The business filing the report (i.e., the reporting person);
- The residential real property being sold or transferred;
- The transferor (e.g., the seller); and
- Any payments made.
The 2024 NPRM incorporates the definition of “beneficial owner” from FinCEN’s BOI Rule. To be a beneficial owner of a transferee entity, an individual must, either directly or indirectly, exercise “substantial control” over the transferee entity or own or control at least 25% of the transferee entity’s ownership interests.
The beneficial owner of a transferee trust would be any individual who:
- Is a trustee or otherwise has authority to dispose of transferee trust assets;
- Is a beneficiary who is the sole permissible recipient of income and principal from the transferee trust or who has the right to demand a distribution of, or to withdraw, substantially all of the assets of the transferee trust;
- Is a grantor or settlor of a revocable trust; or
- Is the beneficial owner of a legal entity or trust who holds one of these aforementioned positions.
Reporting Persons
Under the 2024 NPRM, FinCEN expects that the obligation to file Real Estate Reports would generally apply to a settlement agent, title insurance agent, escrow agent, or attorneys (collectively, “Reporting Persons”).
The 2024 NPRM would designate only one Reporting Person for any given reportable transfer. The Reporting Person would be identified in one of two ways: (i) by a cascading reporting order or (ii) by a written agreement between the real estate professionals described in the cascading reporting order.
The Cascade
1. Under the cascading reporting order method, the reporting obligation would rest with the person listed as the closing or settlement agent on a settlement (or closing) statement. If no person is directly identified as a closing or settlement agent on the statement, the reporting obligation would fall on the person who prepared the closing or settlement statement. But, if no person prepared a closing or settlement statement, the reporting obligation would fall to the person who files the deed or other instrument that transfers ownership of the residential real property.
2. In the absence of a person executing these specific settlement functions, the reporting obligation moves to the second tier of the cascade and falls on the person who underwrites the title insurance policy for the real property transfer.
3. If no person executes the specific settlement functions in the first or second tiers of the cascade, the third tier of the cascade would require reporting by the person who disburses the greatest amount of funds in connection with residential real property transfer. This third tier would only cover persons involved in real estate settlements and closings who are disbursing funds via third-party accounts and excludes direct transfers from transferees to transferors and disbursements coming directly from banks.
4. If there are no parties in the transfer who fall within the first three tiers of the cascade, the reporting obligation moves to the fourth tier: the person who prepares an evaluation of the status of the title. This evaluation may include a title check, which is typically performed by title insurance companies in lieu of providing actual insurance, or an opinion letter, which is rendered by attorneys.
5. Finally, if no person identified in the first four tiers of the cascade participates in the real property transfer, the reporting obligation would fall to the final tier, the preparer of the deed associated with the transfer. A deed is typically prepared by an attorney, but it may also be prepared by a non-attorney settlement or closing agent or by the transferee itself.
Communication Between Potential Reporting Persons
For any reportable transfer, a potential Reporting Person would need to determine whether there is another potential Reporting Person involved in the transfer who sits higher in the cascade. Although FinCEN expects that potential Reporting Persons will communicate with each other regarding the need to file a report, there would be no requirement to verify that any other potential Reporting Person in fact filed it.
Filing Real Estate Reports and Keeping Records
Under the 2024 NPRM, a Real Estate Report would need to be filed within 30 days after the date of the property’s transfer. The reporting person would be required to keep a copy of the Real Estate Report for five years, along with a form signed by the transferee or a transferee’s representative certifying that the transferee’s beneficial ownership information is correct. The reporting person would also be required to keep a copy of any designation agreement. Other parties to the designation agreement would also need to keep copies of the agreement.
Takeaways
The 2024 NPRM would impose AML compliance obligations on a broad group of participants in the US residential real estate sector. For some categories, such as lawyers, the 2024 NPRM will become part of the long-running debate regarding the appropriate use of FinCEN’s authority.10 The 2024 NPRM may also raise attorney-client privilege concerns when lawyers performing specified closing or settlement functions file Real Estate Reports regarding certain of their clients’ transactions. Many categories of previously unregulated market participants may be subject to extensive reporting and recordkeeping obligations. At a minimum, having good recordkeeping and a strong culture of compliance will help to ease the transition to whatever approach FinCEN eventually adopts.
FinCEN estimates that the parties involved in a reportable transfer will need to spend 15 to 90 minutes determining which person from the reporting cascade has the filing obligation. For anyone who has purchased a house, this is an unrealistically low estimation that ignores the siloed nature of many aspects of the real estate profession as well as the frequently changing structures and roles that enter and exit a transaction prior to consummation. As drafted, the 2024 NPRM may turn real estate closings into an episode of Spider Man.11
In addition, FinCEN recently filed a notice with the Office of Management and Budget indicating that it intends to publish a separate proposal that addresses commercial real estate transaction reporting and recordkeeping.12 However, FinCEN’s proposal will not be released until September 2024. Commercial real estate market participants should consider engaging now with FinCEN to help shape the proposed regulation. Thoughtful engagement early in the process can help channel that action toward more efficient regulation.
1 89 Fed. Reg. 12,424 (Feb. 16, 2024), https://www.federalregister.gov/documents/2024/02/16/2024-02565/anti-money-laundering-regulations-for-residential-real-estate-transfers.
2 12 U.S.C. §§ 1829b, 1951-1960; 31 U.S.C. §§ 5311-5314, 5316-5336.
4 See 68 Fed. Reg. 17,569 (Apr. 10, 2003).
5 For more information about the expansion of real estate GTOs, please see our previous Legal Update.
6 Press Release, FinCEN Renews and Expands Real Estate Geographic Targeting Orders (Apr. 29, 2022), https://www.fincen.gov/news/news-releases/fincen-renews-and-expands-real-estate-geographic-targeting-orders; Press Release, FinCEN Renews Real Estate Geographic Targeting Orders for 12 Metropolitan Areas (Oct. 29, 2021); Press Release, FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami (Jan. 13, 2016).
7 For more information about the 2021 NPRM, please see our previous Legal Update.
8 Notably, transfers made in full or partial satisfaction of a debt previously contracted, such as through work-outs or non-judicial foreclosure, would not be exempted.
9 FinCEN notes that the beneficial ownership information of certain legal entities is also collected under the BOI Rule, but believes that the 2024 NPRM, if adopted, would serve a different purpose for law enforcement use because it focuses on at-risk transactions.
10 E.g., ABA, Gatekeeper Regulations on Attorneys, https://www.americanbar.org/advocacy/governmental_legislative_work/priorities_policy/independence_of_the_legal_profession/bank_secrecy_act/.
11 Kevin Phelan, The History Of Spider-Man’s Pointing Meme Explained, Looper (June 7, 2023).
12 Office of Management and Budget, “Commercial Real Estate Transaction Reports and Records,” RIN: 1506-AB61, https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202310&RIN=1506-AB61.
