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A Complete Guide to AML Reforms in the US Real Estate Sector

In 2023, the US real estate sector was valued at $113.6 trillion. However, the sector has faced many challenges due to inflation, high interest rates, and the rise of remote work, leading to vacant commercial properties. Additionally, authorities have expressed concerns about the increasing levels of illicit finance in high-end residential purchases. 

Our Guide to AML Reforms in the US Real Estate Sector considers the state of the industry in-depth, exploring common risks, regulatory trends, and best practices for compliance staff.

Financial Crime Risks in Real Estate

The Financial Action Task Force (FATF) and US regulators stress that the starting point for all firms is understanding the financial crime risks facing their business and responding appropriately. Financial crime risks that real estate businesses need to be aware of include:

  • Money laundering: Criminals often use property purchases to integrate illicit funds into the legitimate financial system, allowing them to invest funds in a large asset that can appreciate over time and generate legitimate income through rent, renovation, and future onward sale. The US has some regulatory barriers to prevent this abuse, but real estate remains vulnerable due to the significant role that shell companies are allowed to play in property purchases. These non-publicly traded companies have a limited physical presence and undertake little economic activity, hiding ownership and control through nominee directors and intermediary shareholders. 
  • Sanctions risks: Money laundering and sanctions evasion are often linked, with many individuals and organizations seeking to launder illicit funds also being liable to be designated under US sanctions. The US has a wide range of sanctions against transnational criminals, terrorists, corrupt officials and business people, and human rights abusers. The overlap between money laundering and sanctions has become more evident since the Russian invasion of Ukraine in 2022, with many oligarchs linked to President Putin being designated under US sanctions. Sanctioned Russian elites and their proxies have been trying to hide funds in US real estate, especially the commercial sector, which has raised concerns by the Financial Crimes Enforcement Network (FinCEN).
  • Fraud: There are multiple types of real estate fraud, but most involve a combination of impersonation and the use of false information. Common typologies in the sector include: 
    • Mortgage fraud, which involves falsifying information to obtain a mortgage. 
    • Title fraud, where individuals impersonate real homeowners to sell a property and keep the proceeds without the owner’s knowledge. 
    • Real estate investment trust (REIT) fraud, when criminals falsely represent themselves as representatives of REITs to seek investments in non-existent properties.
    • Business email compromise (BEC) fraud, where communications are manipulated to divert expected payments to the criminal’s account. 

AML Reforms in the US Real Estate Sector

The anti-money laundering and combatting the financing of terrorism (AML/CFT) regulatory framework for real estate businesses is set globally by the FATF’s 40 Recommendations, which cover financial institutions that provide loan finance to buy properties and the professionals that support the execution of the transaction.

FATF’s Preventive Measures for Real Estate Firms 

The FATF's Risk-Based Approach Guidance for the Real Estate Sector suggests that real estate professionals should follow preventive measures similar to other obligated entities. The guidance promotes a risk-based approach, where measures are applied sensitively, depending on the business and its operating context. Real estate firms must undertake customer due diligence (CDD), identify politically exposed persons (PEPs), and report suspicious transactions to the financial intelligence unit (FIU) as a suspicious activity report (SAR). Firms must also implement AML/CFT programs appropriate to the business’s size, nature, and risk profile. Key elements include appointing a senior compliance officer, staff training, and an independent audit function.

FATF’s Recommendation on Beneficial Ownership

Alongside these preventative measures, the FATF’s Recommendation 24 sets out requirements for BO data. Since March 2022, governments are recommended by the FATF to establish and maintain accurate and updated national beneficial ownership registries. These registries are primarily intended for use by regulators, law enforcement agencies, and other public bodies. However, the FATF suggests governments should also consider providing access to obligated entities to help them undertake necessary preventive measures.

Current US AML Regulations on CDD and Beneficial Ownership

The primary legislation governing AML/CFT in the US is encompassed in the Bank Secrecy Act (BSA), the PATRIOT Act, and the AML Act 2020, which are enforced by Final Rules issued by FinCEN. Under this legal framework, certain CDD requirements apply for real estate professionals, including:

  • CDD is not necessary for cash transactions.
  • CDD is only required for financial institutions providing credit.
  • Residential mortgage loan originators (RMLOs) only need to conduct CDD on the buyer's side.
  • Non-obligated real estate firms must report transactions exceeding $10,000, report foreign bank and financial account holdings annually, and record/report international currency movements.

In relation to beneficial ownership regulations, there is currently no federal requirement for businesses to maintain beneficial ownership (BO) information or a federal BO registry, however, this is about to change. The collection of company information, including BO, is defined by state laws. The US currently has a federal BO requirement in real estate called the Geographic Targeting Order (GTO), which requires title insurance companies to report the BOs behind shell companies buying properties over $300,000 in designated areas. The most recent GTO was issued in April 2023.

Forthcoming Changes – Corporate Transparency Act (CTA)

The US government passed the CTA in January 2021 to create a registry of beneficial owners of all businesses formed or registered in the US. The reporting company's applicant must file a BO report for each beneficial owner, along with identifying business information. The act exempts 23 types of companies, including those publicly listed and registered with the Securities Exchange Commission (SEC), large operating companies, and major financial institutions. The CTA sets out a range of civil and criminal penalties for failing to meet its obligations, including fines and imprisonment.

These changes will impact many small and medium-sized enterprises in the real estate sector, requiring them to collect, report, and update information they have not previously been required to.

Further Proposed Changes - Expanded Coverage

In parallel to CTA-related changes, FinCEN has been proposing changes to the AML/CFT obligations for real estate professionals. In December 2021, FinCEN issued a proposed final rule suggesting that all real estate transactions, regardless of financing, value or location, should be subject to the recordkeeping and reporting requirements that are currently only mandatory for insurance companies under the GTO. This means that all real estate companies, including brokers and agents involved in settling and closing transactions, must comply with the regulations. Moreover, the proposed rule also suggests that certain purchasers, such as shell companies, trusts, and nominee purchasers, must comply with the regulations.

Direction of Travel

While FinCEN has not announced any updates regarding the expansion of AML/CFT coverage to a broader spectrum of real estate transactions and service providers, it’s possible they may wait to review the early implementation of the CTA before making any further announcements. 

However, it is evident that the overall direction is towards increased regulations. Real estate companies of all kinds are now expected to understand and provide information on their own ownership and control, as well as assessing the risks associated with their clients and partners during real estate transactions. Although the regulatory position is subject to change, FinCEN has made it clear that all real estate professionals must take financial crime risks seriously.

AML Compliance Checklist for Real Estate Companies

By identifying and addressing potential risks, real estate firms can reduce their exposure to financial crime and minimize their exposure to legal penalties and regulatory scrutiny. But what steps can compliance teams take to ensure their AML systems are both effective and efficient? 

1. Understand the Wider Risk Environment

Money laundering and terrorist financing are constantly evolving threats that require businesses to go beyond simply ticking boxes on a pre-determined checklist of potential issues. Instead, real estate firms of all types should ensure they understand the risk environment in which they operate. Three criteria for firms to consider include: 

  • Customer risks
  • Geographic risks
  • Product/service/channel risks

2. Implement Effective Controls

After performing a risk assessment, companies must decide on the necessary anti-financial crime framework. This includes appointing a senior compliance officer, creating governance structures, policies, and procedures. However, given the current focus of the US government on identifying beneficial ownership and enhancing CDD standards, companies should prioritize the following areas:

3. Strategically Leverage Technology

Technology can help streamline CDD processes by automating risk assessments and compliance. Implementing machine learning, cloud computing, and application programming interfaces (APIs) can assist in identifying high-risk behavior patterns, manage large volumes of customer data, and access specialized tools for risk assessment and screening. It's crucial to choose reliable technology partners for high-quality risk data and adaptable platforms.

4. Calendarize Regulatory Milestones and Deadlines

It is crucial for real estate businesses in the US to stay informed about the latest regulatory changes and important dates. One key date to keep in mind is the filing deadline for BO information, which runs from January 1, 2024, to January 1, 2025. In addition, it's important to monitor updates from FinCEN regarding final rules on access, changes to CDD, and real estate reporting and recordkeeping.

Advanced AML Solutions for Real Estate Professionals

Property companies must have strong AML compliance policies and professionals working in the sector should receive regular, up-to-date training about emerging threats and regulatory requirements. When it comes to technology, investing in the right tools is vital to effectively detect financial crime red flags and efficiently remediate alerts. Real estate firms looking to enhance their AML systems, should prioritize solutions that offer the following advanced capabilities:

  • Custom rule creation: Ensure transaction monitoring and fraud detection systems provides detailed explanations for flagged alerts. This aids in understanding potential risks and supports informed decision-making.
  • Explanatory AI alerts: Look for systems that allow easy customization of rules to address specific real estate money laundering patterns. This adaptability ensures relevance to evolving threats.
  • Behavioral analysis: Seek systems with advanced behavioral analysis capabilities. This uncovers anomalies and patterns, providing insights into sophisticated money laundering activities within real estate transactions.
  • Network analysis: Consider solutions employing network analysis to examine relationships between entities involved in real estate transactions. This comprehensive view reveals intricate connections, enriching the understanding of potential money laundering networks.
  • Predictive analytics: Explore systems with predictive analytics models. These assess the likelihood of real estate transactions being linked to money laundering, enabling proactive risk management and preventive measures.

For more information on how firms can navigate AML reforms in the US real estate sector, download the guide below.

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