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As it currently stands, the U.S. is the only major world power that does not require real estate professionals to comply with anti-money laundering laws. However, that is changing on March 1 when transfers of residential real estate for which credit is not extended by an institution with an anti-money laundering program will need to be reported to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network, or FinCEN. That change will affect single-family homes.
In 2016, FinCEN expanded the reporting requirements beyond financial institutions to title insurance companies that are required to file reports and maintain records concerning non-financed purchases of residential real estate above a specific price threshold by certain legal entities in select metropolitan areas of the U.S.
On Aug. 29, 2024, FinCEN published the rule with the start date for real estate transactions beginning March 1.
The rule, published as 31 C.F.R. § 1031.320, applies in some unexpected situations, such as transfers from an individual to that individual’s limited liability company that are for no value and only intended as a means to limit liability. Failure to understand when a FinCEN report is required could subject lawyers and law firms to civil and criminal penalties.
Three questions to ask to determine whether a transfer needs to be reported
1. Is this residential real property?
Residential real property is:
• Improved property designed for occupancy by one to four families.
• Vacant land with intent to build a one- to four-family structure.
• Shares in a cooperative housing corporation.
In its comments to the rule, FinCEN stated that the definition is meant to include single-family houses, townhouses, condominiums, cooperatives and mixed-use property, such as a one- to four-family residence located above a commercial enterprise.
2. Is the transferee either an entity or a trust?
A transferee entity is any person other than a transferee trust or an individual. A transferee trust is any legal arrangement created when a person places assets under the control of a trustee for the benefit of one or more persons.
3. Is this a non-financed transfer?
A non-financed transfer is a transfer that does not involve an extension of credit to all transferees that is (a) secured by the transferred residential real property and (b) extended by a financial institution that has both an obligation to maintain an anti-money laundering program and an obligation to report suspicious transactions.
If the answers to these three questions are “yes,” then, with some exceptions and exemptions, the transfer is reportable.
What information needs to be reported?
The rule requires that seven categories of information be reported to FinCEN when there is a reportable transaction.
1. Reporting person
• Legal name of reporting person
• Category of the reporting person (per 31 C.F.R. § 1031.320(c)
• Street address
2. Transferee
• Legal name of the entity or trust
• IRS taxpayer identification number (IRS TIN)
• Address
• Other identifying information
3. Transferee’s beneficial owners and signing individual(s)
• Full legal name
• Date of birth
• Current residential street address
• IRS taxpayer identification number
The Rule defines the beneficial owners for entities and trusts as individuals who own at least 25% of the transferee entity or who exercise substantial control over the entity
4. Transferor
If individual:
• Full legal name
• Date of birth
• Current residential street address
• IRS taxpayer identification number
If the transferor is an entity or trust:
• Identifying information about the entity or trust
• IRS TIN for the trustee of a trust.
5. Residential real property
• Street address
• Legal description
• Date of closing
6. Payment
• Amount of the payment
• Method by which the payment
was made
• If the payment was paid from an account held at a financial institution, the name of the financial institution and the account number
• Name of the payor on any wire, check or other type of payment if the payor is not the transferee entity or transferee trust.
7. Hard money, private and other similar loans
• Whether the reportable transfer involved credit extended by a person that is not a financial institution with an obligation to maintain an anti-money laundering program and an obligation to report suspicious transactions.
How the American Land Title Association is preparing
The association—known as ALTA—has been actively involved in training its members and creating transferee and transferor collection forms to comply with the rule and will make these forms available for members.
Who must report?
• Title insurance companies and all real estate professionals
• Priority list (from most important to least)
- Settlement agent on a settlement statement
- Person who prepares the settlement statement
- Person who files the deed for recordation
- Person who issues the owner’s title insurance policy
- Person who disburses the greatest amount of funds
- Person who provides an evaluation of the status of the title
- Person who prepares the deed (and if no deed is involved, then whoever drafted the legal instrument to transfer title, including the stock certificate in a cooperative housing corporation)
The rule provides that if there are multiple parties who might be a reporting person, the parties can enter into a written agreement designating who will be treated as the reporting person for that transfer.
Penalties for failure to report (civil and criminal)
Negligence violations
• Subject to a civil penalty of not more than $1,394.00 for each violation
• Additional civil penalty of up to $108,489.00 for a pattern of negligence
Willful violations
• Subject to imprisonment of up to five years
• A criminal fine of up to $250,000, or both
• May also be accompanied by a civil penalty: the greater of $69,733 or the amount involved in the transaction (with a cap of $278,937).
The rule hopes to discourage fraudulent real estate transactions, which has been a major issue plaguing the real estate market for some time. With the official rollout date being March 1, please check back for updates regarding FinCEN, Indiana banking and real estate as well as other related legal topics.•
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Schumann is associate attorney at Krieg DeVault LLP.
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