On January 13, 2016, the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) announced Geographic Targeting Orders (GTOs) designed to gather data related to its anti-money laundering efforts in the Borough of Manhattan, New York and Miami-Dade County, Florida. The GTOs, which go into effect March 1, 2016 and last through August 27, 2016, require certain United States title insurance companies to identify the natural persons behind companies paying cash for high-end residential real estate. The GTOs apply to residential sales in Manhattan of at least $3 million, and in Miami-Dade County of at least $1 million.
FinCEN's concern is with individuals using shell companies to make cash purchases of high-value residential real estate for money laundering purposes. Purchases involving mortgages have existing disclosure requirements, but there is a perceived loophole for cash purchases. FinCEN's concerns were supported by a recent New York Times investigation, which revealed that nearly ½ of homes in the United States worth at least $5 million are purchased using shell companies (that figure is higher in Manhattan and Los Angeles).
A transaction is subject to the GTOs where: (i) the purchaser is a legal entity; (ii) residential real property in the aforementioned locations is being purchased; (iii) the purchase price exceeds the applicable threshold; and (iv) any part of the purchase is made using currency, cashier's check, certified check, traveler's check or money order.
If a transaction triggers the GTOs, title insurance companies are required to report to FinCEN the identities of the beneficial owners of 25 percent or more of the direct or indirect equity interests in the purchasing entity by filing FinCEN Form 8300 within 30 days of closing a transaction subject to the GTOs. In addition, copies of identifying documents must be provided (e.g., driver's license, passport, etc.), along with a summary of key terms of the transaction (i.e., closing date, purchase price, location of property, form of payment, etc.).
At this time, FinCEN is relying on title insurance companies to report the required information, and there has been no explicit increase to the level of due diligence required by attorneys involved in transactions subject to the GTOs. However, FinCEN has indicated that when a particular transaction appears to violate anti-money laundering rules, FinCEN will pursue the facilitators of the money laundering, specifically, bankers, accountants, lawyers and those setting up business entities used to make suspect purchases.
While the GTOs attempt to close certain loopholes, others may remain. For example, "residential real property" under the GTOs means real property designed for the occupancy of one to four families (including individual units of condominiums and cooperatives), while a property designed for the occupancy of five or more families would fall outside the GTOs. Further, title companies may "reasonably rely on the information provided" by third parties, including the purchaser or its agents/representatives. While subject to a reasonability standard, there does not appear to be an obligation to verify the accuracy of such information, absent suspicious circumstances.
Also, the GTOs state that they apply to corporations, LLCs, partnerships or similar business entities, but do not expressly state that such entities include trusts, and the American Land Title Association has made a request to FinCEN to have trusts expressly excluded from the reporting requirements. Finally, only transactions which include title insurance are subject to the GTOs. While there are inherent risks in foregoing title insurance, money launderers may be willing to take those risks in an effort to avoid the reporting obligations.
While the GTOs currently are temporary, the Director of FinCEN has stated that if officials find that many sales involve suspicious money, FinCEN will develop permanent reporting requirements across the country.