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FinCEN and Anti-Money Laundering and Tax Evasion

Thursday, March 21, 2024 10:48 AM | Anonymous

And Effect of Proposed Rules on Escrow Agents, Settlement Agents, Title Insurance Agents and Others

By Rose Pothier, Esq./Pothier & Associates

The U.S. Congress passed the Bank Secrecy Act [officially known as the Currency and Foreign Transactions Reporting Act] in 1970. The Bank Secrecy Act requires covered financial institutions to report on customer activity, including banking activity, to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network [“FinCEN”] to further its objectives in fighting against money laundering and tax evasion.

Since that time, FinCEN proposed and passed various regulations to further its efforts to control money laundering and tax evasion including enlarging the scope of the Bank Secrecy Act in 2016 involving real estate closings/settlements issuing geographic targeting orders [GTOs]. Since 2016, U.S. title insurance companies report on information regarding legal entity Transferees in GTOs in covered transactions identified by FinCEN. Reportedly, once the current proposed regulations are passed and in effect, FinCEN will ease out the GTO reporting by title insurance companies.

FinCEN released a Notice of Proposed Rulemaking involving certain U.S. residential real estate transactions [Notice] on February 7, 2024. Under the provisions of the Notice, after passage of final rules, escrow agents, settlement agents and others will be obligated to report to FinCEN about details in closings of non-financed transfers of residential real estate to legal entities or trusts. There will not be a geographical reporting reference. The new rules will apply to covered residential real estate transactions across the U.S.

The Real Estate Report under the proposed rules would have to be filed with FinCEN within 30 days of closing the real property transfer. The Reporting Person would have to keep for five years after the closing/transfer copies of the Real Estate Report along with the form signed by the Transferee or the Transferee’s representative certifying the Transferee’s Beneficial Ownership information given to the Reporting Person is correct.

Details about what detail must be reported to FinCEN on affected residential real estate transfers are in the Notice. You may obtain a copy of the Notice and read its provisions which was published in the Federal Register on February 16, 2024 as 89 Fed. Reg. 12,424 and is available online at https://www.federalregister.gov/documents/2024/02/16/2024-02565 /anti-money-laundering-regulations-for-residential-real-estate-transfers. In short, details on the beneficial owners of the Transferee entity or trust will be required, who will be the reporting person, due date for reporting and the like are set forth in the Notice.

The provisions of this article are not intended to be nor are they a legal opinion on the content of the proposed regulations set forth in the Notice or any reader who is strongly advised to seek legal counsel from their own resources. Also, the provisions of this article may be changed at any time should there be additional thoughts on the part of the author or if there is clarification or changes to the original Notice filed on February 7, 2024.

Given the length of the provisions of the Notice, and to give you a brief summary of some of its provisions, we set forth in highlight format some aspects.

  1. Covered Transactions. Covered Transactions will include the Reporting Person filing a “Real Estate Report” with FinCEN on various types of real estate transfers. The transfers include those of single-family residences, townhouses, condominiums and cooperatives, buildings for occupancy by 1-4 families, and vacant or unimproved land that is zoned or upon which a permit has been issued for building to be occupied by 1-4 families.
  2. Types of Covered Transactions. There is no limitation on the amount of the purchase price if the transaction is otherwise covered. Transactions involving cash, no cash or other consideration exchange, gifts and the like will also need reporting. There are limited exemptions, so most affected Covered Transactions must have Real Estate Reports filed with FinCEN. In the case of transactions involving easements for purposes involving the real estate which are effective after the death of the real estate property owner or which result from a divorce or are made as part of a bankruptcy estate, no reporting may be required. Also, if there is a loan/credit extended by a covered financial institution [meeting the FinCEN requirements] on which the subject property is security for the loan, a Real Estate Report may not be required.
  3. Types of Transaction Transferees. Where one of the Transferees of residential real property is a “transferee entity” or “transferee trust”, the Real Estate Report must be made regardless of the amount of interest the Transferee has in the transferred property. The Transferee may be formed domestically in the U.S. or be a foreign entity. The Transferees may include limited liabilities companies, partnerships, corporations along with common law and statutory trusts. There are other types of covered or non-covered entities set forth in the Notice.
  4. Types of Information to Report to FinCEN. The type of information to include in the Real Estate Reports may be different for various types of Transferees. Generally, it will include the names of the Transferee

    beneficial owners for the legal entity or trust who will take title to the real property along with the names of the persons representing the Transferee entity or trust. Additionally, the report requires disclosure of the name of the business acting as the Reporting Person, address of the residential real property being transferred or sold, the name of the Seller/Transferor and any payments made associated with the Covered Transaction.

  5. Who are Beneficial Owners of Entity or Trust Transferees. At this time, reference must be made to FinCEN’s recent regulations concerning reporting Beneficial Information Reports on existing and new corporations and other entities. In these regards, Transferees must disclose information to the Reporting Person about the business entity or trust Transferee and its beneficial ownership. The Beneficial Owner must directly or indirectly exercise “substantial control” over the Transferee entity or trust OR own or control 25% of the Transferee entity’s or trust’s ownership interest. Also, the Beneficial Owners of Transferee trusts are individuals acting as Trustees or in other position of authority to dispose of trust assets, is a Beneficiary with sole permission to receive income and principal from the Transferee trust or has the right to demand distribution of, or to withdraw, substantially all 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 the positions set forth above.
  6. Who are Reporting Persons? Under the Notice, there are a number of levels of Reporting Persons who are required to file the Real Estate Report with FinCEN. It can become complicated when considering “The Cascade” of persons and entities, FinCEN states are in line for the position to act as Reporting Person. FinCEN suggests the obligation would fall to escrow agents, settlement agents, title insurance agents or attorneys involved in the Covered Transactions. Although seemingly incredible, FinCEN suggests the parties involved in the reporting procedure, presumably, collecting, compiling and filing the Real Estate Report will take 15 to 90 minutes to decide upon who is to be the Reporting Person and prepare the designation agreement.

FinCEN sets forth a procedure called “The Cascade” to detail how the Reporting Person in various transactions will be selected. If there is a question about who is the proper Reporting Person, the persons in line would have to determine amongst themselves as to whether there is another potential Reporting Person higher in the line of Tiers of “The Cascade”. The Reporting Person is to keep for five years a copy of any agreement designating the Reporting Person.

For detail, review the Notice as the following is only a brief summary of the provisions of “The Cascade” to determine the Reporting Person:

  1. First Tier of “The Cascade”. In the First Tier in “The Cascade”, the reporting obligation will fall with the closing or settlement agent as set forth on the Closing Statement. If no person is directly named on the Closing Statement, the next in line would be the person that prepared the Closing Statement. If no one prepared a Closing Statement, the next in line would be the person who filed the transfer Deed [or other instrument that transfers title] for recording transfer of title to the residential real property.
  2. Second Tier of “The Cascade”. If no one can be identified as set forth in subsection A above, the reporting obligation would then fall to a Second Tier in “The Cascade” procedure. In the Second Tier, the obligation to report would devolve to the title insurance underwriter on the residential real property transfer.
  3. Third Tier of “The Cascade”. If no one is identified as the Reporting Person in the First Tier or the Second Tier, then the reporting requirement would fall to a Third Tier in “The Cascade” procedure. In the Third Tier, the obligation to report would fall to the person who disburses the largest amount of funds involved in the residential real property transfer. However, the disburser of funds would rest with persons involved in the transactions and who are disbursing funds via third-party accounts and excludes direct transfers from Transferees to Transferors and direct disbursements from banks.
  4. Fourth Tier of “The Cascade”. If no one is identified as the Reporting Person in the first three Tiers of “The Cascade”, then the reporting requirement would fall to a Fourth Tier of “The Cascade” procedure. In the Fourth Tier, the Reporting Person would be a person who prepares a title evaluation on the subject residential real property, which would usually be a title check by a title insurance company given in lieu of providing actual title insurance, or may be an opinion letter provided by an attorney.
  5. Fifth Tier [Final Tier] of “The Cascade”. If no one is identified as the Reporting Person in the first four Tiers of “The Cascade”, then the reporting requirement would fall to a Fifth Tier of “The Cascade” procedure. In the Fifth Tier, the Reporting Person would be the Deed preparer involved in the transaction. It may be an attorney, but may also be an escrow agent, settlement agent or, in some events, the Deed may be prepared by the Transferee itself.

Overall, the new Real Estate Report filings with FinCEN on Covered Transactions generally involving transfers of title in closings/settlements of non-financed transfers of residential real estate to legal entities or trusts will involve considerable time which should be carefully considered by escrow agents, settlement agents and title insurance agents who likely are the most common who will be selected as Reporting Persons.

There is time now to consult with principals at FinCEN regarding the particular conditions of the Real Estate Reporting filings involving residential real estate of non-financed transfers to legal entities or trusts as the proposed regulations are not final. However, time is short, so if you want a copy of the Notice or name of a contact person at a professional organization to report your thoughts, you may contact the author. I am pleased to be working with the Escrow Institute of California, Government Affairs Committee who is working on comments to submit for changes to the proposed regulations.

March 5, 2024

Author: Rose Pothier, Esq.

Pothier & Associates

2122 North Broadway

Santa Ana, California 92706

(714) 953-8580-Office



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