The FinCEN Rule aims to crack down on real estate money laundering

A new FinCEN rule aims to crack down on real estate money laundering by requiring certain individuals to report high-risk real estate transfers to FinCEN.

Key Takeaways:

• Criminals often facilitate money laundering through residential real estate because they can avoid government control through unfinanced residential real estate transfers
• The FinCEN Rule extends the reporting requirements of the Bank Secrecy Act to real estate professionals
• Violations of the rule can be reported through the AML Whistleblower Program
• The final rule will go into effect on December 1, 2025

The Financial Crimes Enforcement Network (FinCEN), an office of the U.S. Department of the Treasury, has issued a new rule for investment advisors to protect residential real estate from illegal financing such as money laundering. Criminals often facilitate money laundering through residential real estate because they can avoid government control through unfinanced transfers (including “cash sales”) of residential real estate. FinCEN’s new regulation aims to increase transparency by restricting certain defined persons, such as: B. Require real estate or escrow agents involved in real estate transfers to report to FinCEN on certain high-risk transfers. The investment advisor final rule also unifies anti-money laundering and anti-terrorist financing (AML/CFT) requirements across the real estate industry by requiring advisors registered with the U.S. Securities and Exchange Commission to report compliance and suspicious activity . The final rule will go into effect on December 1, 2025.

Obligations under the Final Rule

FinCEN is one of many federal agencies charged with enforcing the anti-money laundering provisions of the Bank Secrecy Act (BSA). The new rule advances its mission to protect the financial system from illegal activity by extending the BSA’s reporting requirements to residential real estate professionals. The new rule conflicts with two serious violations of the AML law that FinCEN enforces: (1) failure to file required reports and record violations, and (2) failure to file the property report. Starting in December 2025, failure to submit any of these documents will result in an enforceable violation of the new rule. When reporting, the person must be provided with information about the transfer of residential property, including:

• The reporting person;
• The legal entity (acquiring entity) or trust (acquiring trust) that receives title to the property; ex. Limited Liability Company (LLC)
• The beneficial owners of the transferring company or trust;
• Certain persons signing documents on behalf of the transferring entity or trust during the reportable transfer;
• The transferor (e.g. the seller);
• The residential property is transferred, and
• Total consideration and certain information about any payments made.

By requiring the reporter to know and disclose the identities of the above parties involved in transfers, illegal actors using shell companies or other anonymous means to launder money through real estate transfers can be more easily exposed. The new rule uses a reporting cascade to determine reporting responsibility. Essentially, the reporting cascade represents a list of seven different functions that a real estate professional may perform in a reportable residential property transfer and whether they are required to report based on that function.

Effects

The new regulation could lead to a significant increase in AML violations for a variety of reasons. The complexity of defining reporting requirements, the vague scope of what is and is not considered reportable, and the inability or refusal of real estate professionals to provide sufficient information about their clients could contribute to an increase in violations. As real estate professionals begin to adopt the new regime, both understanding and implementing a mandate of this complexity will likely place a significant burden on real estate professionals, particularly small business owners. Consciously choosing not to shoulder this burden or simply not reporting suspicious activity would result in a significant increase in money laundering violations. On the other hand, the desire to avoid triggering the rule’s complicated provisions may discourage real estate professionals from dealing with unidentifiable and potentially criminal actors. While the scheme may increase administrative burden, it may also help stabilize the housing market as the inflow of black money stops.

The final rule could strengthen ongoing efforts in various states to limit money laundering through real estate transfers. In 2022, two New York legislators introduced legislation that would require any person who purchases real estate in New York through a limited liability company (LLC) to disclose their identity to the state and include the information in their to file tax returns. LLCs allow property buyers to conceal their identities, but are required to identify themselves as the transferring entity under the final rule. New York has long struggled with money laundering of foreign investors in luxury real estate through anonymous shell companies and LLCs. While the legislation has not yet been passed, FinCEN’s new rule could finally help address the long-standing problem.

Impact on foreign money laundering

By creating and expanding new regulations through this rule, FinCEN expands the scope of the AML Whistleblower Program to include residential real estate. Money laundering has historically been difficult to detect, with the government often relying on whistleblowers to inform them of illegal activities. Any failure by residential real estate professionals to follow the new rule will constitute a violation that Insiders can report through the AML Whistleblower Program. Whistleblowers who provide information to the U.S. Treasury Department about violations of the Bank Secrecy Act (BSA) may be fined up to 30% of the fines imposed in a successful investigation. Outside of self-reporting, FinCEN relies on AML whistleblowers to hold real estate professionals accountable and detect money laundering.

The rule could have major international implications. On January 25, 2023, FinCEN warned financial institutions about potential investments by sanctioned Russian elites in the U.S. commercial real estate sector and reminded them of their BSA reporting obligations. Since Russia’s invasion of Ukraine, the U.S. Treasury Department has renewed efforts to isolate sanctioned Russian oligarchs from the international financial system. FinCEN’s final rule and expansion of BSA reporting requirements represent an important aspect of this renewed effort.

For example, in 2023, as part of its “Operation KleptoCapture,” the DOJ seized $75 million in luxury real estate in Miami, the Hamptons, and New York City that belonged to beneficial owner Viktor Vekselberg, a sanctioned Russian oligarch. Vekselberg’s attorney, Robert Wise, pleaded guilty to conspiring to commit international money laundering in order to preserve six properties in the United States. Wise assisted in the acquisition and managed the finances of the properties. The final rule could aim to target foreign elites like Vekselberg by requiring their executors, like Wise, to disclose the identity of their beneficial owners for high-risk transfers. Given the high-profile cases such as Vekselberg and Wise, as well as increasing resistance from some real estate groups, the new regulation could succeed in deterring real estate professionals from making risky transfers in the first place.

Publicity from multimillion-dollar Russian money laundering cases combined with FinCEN’s new rules and awards could encourage potential whistleblowers to come forward, extending the AML whistleblower program’s coverage to certain defined individuals in residential real estate and international Criminals such as identified terrorists and others are expanded to include those on OFAC’s sanctions list. The AML whistleblower provisions have recently been strengthened to include offers of cash rewards and protection from retaliation. Since then, the AML whistleblower program has had great success, incentivizing whistleblowers to provide tips that were “highly relevant to many of Treasury’s top priorities,” said FinCEN Director Andrea Gacki. The final rule appears aimed at extending these large gains to the residential real estate sector. Whether the regulation is effective in detecting and deterring money laundering or incentivizing whistleblowers to report it remains to be seen in the coming years.

This post was co-authored by Allison Nguyen