With the United States housing market reaching historic highs and mortgage rates dipping into uncharted territory, the real estate industry has been in an unprecedented boom for the better part of the past 18 months. The amount of cash buyers of real estate properties has also grown exponentially in recent years, with the number of sales made in “high-class” jurisdictions particularly standing out. The allure of living in destination cities such as Miami, Los Angeles, New York and other American staples is undeniable, but the costs associated with purchases made in desirable locations are generally astronomical. For those involved in the drug trade, organized crime, or politically exposed persons (PEPs) however, real estate presents an appealing avenue by which they can launder large quantities of ill-gotten funds while also accruing valuable assets in the process. Unfortunately, this practice integrates dirty funds into the international financial system all while camouflaging their origins, allowing bad actors to stay ahead of the proper authorities and allowing their criminal activity to flourish.
Given very lax requirements with respect to personal and beneficial ownership structure identification, the U.S. real estate market is arguably the most ripe for exploitation of any of the respective world powers. As of this moment, only 12 American cities require title insurance companies to disclose the identity of buyers who purchase real estate properties of $300,000 or more via a shell company.3 The United States is also the only country in the G7 that is not subject to money laundering rules with respect to real estate purchases and sales. The U.S. Treasury Department has taken notice of this palpable issue and the growing potential for abuse of the market and is stepping up to the plate as part of a wide-scale effort to thwart money laundering and terrorism financing through this industry. In a statement released this past Monday, representatives from the Financial Crimes Enforcement Network (FinCEN) announced that they will be pursuing new regulatory requirements meant to harbor in real estate deals made in strictly cash. In their statement, the Treasury Department claimed, “The systemic money laundering vulnerabilities presented by the US real estate sector, and consequently, the ability of illicit actors to launder the` criminal proceeds through the purchase of real estate, threatens US national security and the integrity of the US financial system.”2
FinCEN has identified major deficiencies in both the monitoring and pertinent data collection processes involved with cash-bought properties as part of a comprehensive money laundering assessment conducted earlier this year. Unlike financed homes where there are specific safeguards in place for identity and source of wealth verification (with many mortgage companies requiring background and hard credit checks, as well as bank statements and proof of employment as part of their modified “KYC” protocols), the whereabouts of cash buyers rarely are subjected to any scrutiny. Homes purchased through shell companies further complicate matters with respect to regulators ability to maintain the appropriate checks and balances on transactions of this variety, making it even more difficult to track down the individual(s) behind million-dollar property purchases. “As a result, corrupt officials and criminals engaging in illicit activity can exploit the US real estate sector to launder their ill-gotten wealth,”1 noted FinCEN in their recent press release on these developments.
Given that roughly 20% of nationwide real estate sales (accounting for approximately $400 billion in total revenue collectively) are currently of the all-cash variety, it is not unsurprising that the industry itself is pushing back against potential regulation, claiming such measures could stifle the market and draw the national economy even further downward. Analysts have also speculated that both the commercial and high-end real estate markets could be drastically affected if new regulations were to ultimately be imposed. However, this step may be a necessary evil should it truly help to deter laundering activity domestically, while also potentially helping to expose criminals operating abroad who are seeking to venture into foreign investment opportunities of this variety – endeavors that are being met with little resistance at current. Summing up the greater tone of the potential action, FinCEN director Himamauli Das too released a written statement in which he noted, “Increasing transparency in the real estate sector will curb the ability of corrupt officials and criminals to launder the proceeds of their ill-gotten gains through the U.S. real estate market. Addressing this risk will strengthen U.S. national security and help protect the integrity of the U.S. financial system. We urge stakeholders to provide input to assist us in developing an approach that enhances transparency while minimizing burden on business.”4 FinCEN’s Advanced Notice of Proposed Rulemaking (ANPRM) to solicit public comment on a potential rule to address the vulnerabilities of the U.S. real estate market to money laundering and other illicit activity is currently open.
- “FinCEN Launches Regulatory Process for New Real Estate Sector Reporting Requirements to Curb Illicit Finance.” FinCEN Launches Regulatory Process for New Real Estate Sector Reporting Requirements to Curb Illicit Finance | FinCEN.gov, 6 Dec. 2021.
- “U.S. Treasury to Stiffen Real Estate Cash Deals after Billions Laundered.” CNBC, CNBC, 13 Dec. 2021.
- Wermus, Katie. “Treasury Wants to Regulate All-Cash Real Estate Deals to Crack down on Money Laundering.” Newsweek, Newsweek, 6 Dec. 2021.
- Wolf, Brett. “US Announces New Anti-Corruption Strategy, Treasury Weighs Anti-Laundering Rule for Real Estate Sector.” Thomson Reuters Institute, 15 Dec. 2021.