December, 2006

USA Patriot Act Update for Real Estate Attorneys©

November 4, 2006  

In the coming months the Treasury Department, through the Financial Crimes Enforcement Network (“FinCEN”), may issue new regulations that will impose anti-money laundering (“AML”) program requirements on “persons involved in real estate closings and settlements.” Nearly four years has passed since FinCEN put the real estate industry on notice that the federal government was likely to introduce regulations that would impose AML program requirements on “persons involved in real estate closings and settlements.” Many in the real estate industry, including mortgage brokers, real estate agents, title insurance companies, and real estate lawyers, reacted negatively to that prospect. Since that time, the contours of the regulatory regime seems to be taking shape. FinCEN has acknowledged the serious concerns these groups have raised, and it’s likely that the regulations that will be issued will meaningfully respond to these concerns.


Treasury issued an advance notice of proposed rulemaking on April 10, 2003 seeking comment on a requirement that “persons involved in real estate closings and settlements” adopt an AML program. By the June 9, 2003 deadline for submitting comments, Treasury received 52 comment letters from interested parties, including a number of bar organizations and real estate industry groups. To date, Treasury has not taken any further public action on the proposed rulemaking.


The 2003 advance notice derives from Title III of the USA Patriot Act of 2001. The act amended a number of provisions of the Bank Secrecy Act. Title III, known as the International Money Laundering and Abatement and Financial Anti-Terrorism Act of 2001, amended the Bank Secrecy Act to facilitate the prevention, detection, and prosecution of international money laundering and to prevent the financing of terrorism.


The Bank Secrecy Act, as amended by Section 352 of the USA Patriot Act, now requires every “financial institution” to establish an AML program that includes the following minimal elements: (a) the development of internal policies, procedures, and controls; (b) the designation of a compliance officer; (c) an ongoing employee training program; and (d) an independent audit function to test programs. The Bank Secrecy Act’s definition of “financial institution” is very broad; it includes institutions that are already subject to federal regulation such as banks, savings associations, credit unions, and registered securities broker-dealers and futures commission merchants –as well as persons involved in real estate closings and settlements.


A wide variety of interested real estate industry groups responded to the advance notice and, for the most part, urged FinCEN to tread carefully in regulating the multi-trillion dollar commercial real estate industry. A number of bar groups submitted comments to FinCEN, including the American College of Real Estate Lawyers (“ACREL”), the ABA Section of Real Property, Probate, and Trust Law, the ABA Task Force on Gatekeeper Regulation and the Profession, the Section of Real Property, Probate and Trust Law of the Florida State Bar Association, and the American College of Mortgage Attorneys. The approaches taken by each organization differ in important respects, but the consistent themes among most of the comments are the concerns that the AML requirements may adversely affect the attorney-client privilege and the duty of client confidentiality, and that they would impose onerous burdens on the real estate industry with no corresponding benefit to the fight against money laundering and terrorist financing.


Since the close of the 2003 comment deadline, ABA and ACREL representatives have engaged in constructive discussions with representatives of FinCEN to air concerns about imposing AML requirements on the real estate industry. These discussions have revealed that one of FinCEN’s policy goals is to meet the statutory goals regarding the regulation of “real estate settlement professionals” while, at the same time, avoiding the unnecessary regulation of attorneys who handle no funds while representing one of the “persons” involved in a real estate closing or settlement. FinCEN is evidently looking to exclude attorneys who act in ways that Treasury considers to be within the historic understanding of performing the functions of an attorney, such as legal analysis, legal advocacy, legal counsel, and other similar, non-financial services.


FinCEN appears to be leaning toward a “financial intermediaries” type of standard. Under this standard, the AML requirements would apply, at most, only to those attorneys who act as “financial intermediaries” and actually handle the receipt and transmission of cash proceeds through accounts that they actually control in the act of closing a commercial real estate transaction. FinCEN has made it clear that it does not desire to regulate attorneys acting within their traditional roles, but once attorneys step outside their traditional roles, they should be subject to the AML requirements.


FinCEN’s reticence in seeking to regulate attorneys qua attorneys is well-founded. In a significant decision last year by the U.S. Court of Appeals for the District of Columbia Circuit, the appellate court ruled that the Federal Trade Commission (“FTC”) had no authority to subject lawyers to the strictures of the Gramm-Leach-Bliley Act’s (“Act”) privacy protective provisions. American Bar Ass’n v. Federal Trade Comm’n, 430 F.3d 457 (D.C. Cir. 2005). The court ruled that nowhere did Congress authorize the FTC to regulate the legal profession. In response to the FTC’s position that Congress sought to regulate the legal profession by enacting the privacy legislation, the court noted that “[Congress] does not . . . hide elephants in mouseholes.” Id. at 467. In a metaphor rich passage supportive of the federalism notion that states, and not the federal government, have historically and exclusively regulated the legal profession, the court remarked:


When we examine a scheme of the length, detail, and intricacy of the one before us, we find it difficult to believe that Congress, by any remaining ambiguity, intended to undertake the regulation of the profession of law–a profession never before regulated by “federal functional regulators”–and never mentioned in the statute. To find this interpretation deference worthy, we would have to conclude that Congress not only had hidden a rather large elephant in a rather obscure mousehole, but had buried the ambiguity in which the pachyderm lurks beneath an incredibly deep mound of specificity, none of which bears the footprints of the beast or any indication that Congress even suspected its presence.


Id. at 469. This case lends strong support to the view that, absent express congressional authority, federal regulators cannot regulate the legal profession. Because of federalism principles, it is unlikely that Congress would intrude into this sensitive area.


FinCEN will likely proceed to the next step in the development of the regulations this year. The next step may be the issuance of a notice of proposed rulemaking, which again will contemplate a public comment period before the FinCEN finalizes the regulations. Until then, it’s important that the real estate industry continue to engage in a dialogue with FinCEN as it develops this federalized real estate regulatory regime.


Kevin L. Shepherd, a partner at the Baltimore office of Venable LLP, chairs the USA Patriot Act Task Force of the ABA Section of Real Property, Probate and Trust Law and oversees the USA Patriot Act Working Group of the American College of Real Estate Lawyers. The views expressed in this article are the author’s alone. © All rights reserved. 2006.