Some basics will serve to clarify the background for all this. The minutiae is dry, but attorneys counseling on the covered transaction, as well as title companies charged with collecting the data, will want to locate the legal underpinnings. Established in 1990, FinCEN is a bureau of the United States Treasury Department, with a stated mission of safeguarding “the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.”
FinCEN maintains data on financial transactions, analyzes and disseminates that data for law enforcement purposes, and facilitates global cooperation with counterpart organizations. Its authority, which permits the issuance of Geographic Targeting Orders (GTO), arises from the Currency and Financial Transactions Reporting Act of 1970, as amended by Title 1111 of the USA Patriot Act of 2001, and other legislation, which, together, is generally referred to as the Bank Secrecy Act (BSA). The BSA, which is codified at 12 U.S.C. §§1829b, 1951–1959 and 31 U.S.C. §§5311–5314, 5316-5332 (with regulations implementing the BSA appearing at 31 CRF Chapter X) is the primary U.S. antimoney laundering law and tool for detecting, deterring, and disrupting terrorist financing networks. Thus, what this is really all about becomes apparent.
The Secretary of the Treasury is empowered to issue regulations requiring banks and other financial institutions to take precautions against financial crimes, including the establishment of anti–money-laundering programs and the filing of reports for utilization in criminal, tax, regulatory investigations and proceedings, intelligence, and counterterrorism matters.
Defining a GTO
A GTO, which is the source of title company involvement is this whole process, is an order imposed by the Director of FinCEN, pursuant to the powers established under the BSA, mandating record keeping and reporting requirements on domestic financial institutions or non-financial trades or businesses. Specifically, this applies to “certain U.S. title insurance companies to identify the natural persons behind companies used to pay ‘all cash’ for high-end residential real estate ...” in a specific geographic area for transactions involving U.S. currency or monetary instruments. (See 31 U.S.C. §5326(a); 31 C.F.R. §1010.370; and Treasury Order 180-01.) (Initially limited to select title insurance companies, the GTOs have since been expanded to, and now affect, all title insurance companies, including their subsidiaries and agents, which FinCEN defines as a “covered business.”)
Unless extended, GTO's are valid for up to 180 days. They can, however, be renewed by the director of FinCEN if it is determined that the circumstances justifying the original GTO continue to exist. And this did occur; on February 21, 2017, the GTO, set to expire on February 23, 2017, was continued for an additional 180 days, as of February 24, 2017, with a new expiration date of August 22, 2017.
Purpose of a GTO
GTO's provide information to FinCEN to facilitate analysis of data to establish measures to prevent financial crimes, especially in combatting money laundering, which is perceived as rampant in highend residential real estate actions. The GTO’s are also intended to assist regulators in understanding the anti-money laundering risks believed inherent in all-cash residential real estate transactions.
In particular, the data collected from all title insurance companies, their subsidiaries and agents (“covered businesses”) are used to identify the individuals, including the agents, lawyers, and bankers assisting them, attempting to hide the proceeds of criminal activity through the seemingly anonymous purchase of high-end residential real estate.
According to FinCEN, the original Manhattan and Miami-Dade GTO’s yielded enough meaningful information to justify expanding the GTO to other areas because produced data revealed possible criminal activity associated with the beneficial owners behind various purchasing entities (or, in the words of FinCEN, “shell companies”). These findings corroborated FinCEN’s belief that the transactions covered by the GTO’s are vulnerable to abuse for money laundering. See, U.S. Department of the Treasury, Financial Crimes Enforcement Network Mission Statement, available at www.fincen.gov/news/news-rel eases/fincen-expands-reach-real-estate-geographictargeting-orders-beyond-manhattan.
Transactions to Be Reported
The GTO extends to, and requires covered businesses to report certain details of, “covered transactions,” defined by FinCen as a transaction in which all of the following elements are satisfied:
- The property is residential (including an individual condominium or cooperative unit) designed principally for the occupancy of one to four families (which may include mixed-use properties containing one-to-four residential units as well as bulk sales. For transfers of more than one condominium unit or cooperative apartment between the same parties, the New York City Department of Finance categorizes multiple unit transfers as “bulk sales” and applies the higher commercial Real Property Transfer Tax rate instead of the lower residential rate. There are, of course, exceptions to this treatment of multiple unit transfers allowed by the Department of Finance. See, for instance, Chapter 21, Title 11 of the Administrative Code of the City of New York.)
- The residential property is in a targeted county and meets the established minimum purchase price (New York: Bronx, Brooklyn, Queens, Richmond, $1.5 million, Manhattan, $3 million; California: Los Angeles, San Diego, San Francisco, San Mateo, Santa Clara, $2 million; Florida: Miami-Dade, Broward, Palm Beach, $1 million; Texas: Bexar, $500,000.).
- The purchase is without a loan from a financial institution with anti-money laundering programs (i.e., banks, credit unions, or mortgage companies-private or seller financing does not qualify).
- The purchaser is an entity. Again, a corporation, limited liability company, partnership or similar legal business entity. A trust is not considered a legal entity and, in most states, trusts are not distinct from the trustee. Consequently, trusts are excluded from the reporting requirements.
- Any part of the purchase price, including earnest money deposits, and including payments to a party representing the purchaser or seller (e.g., an attorney, real estate agent or settlement agent) is paid using one or more of the following: (i) currency (defined as legal tender in all forms including paper or coinage); (ii) cashier's check; (iii) certified check; (iv) travelers check; (v) business check; (vi) personal check; and/or (vii) money order. (If a purchase is made entirely by wire transfer, this would not fall within the definition of a covered transaction and the reporting requirements of the GTO would not apply. This includes not just funds sent directly to the person conducting the closing, but also funds transferred to a party representing the purchaser or seller (e.g., an attorney or real estate agent). Conversely, if any amount of the purchase price, even a de minimis one, is funded using currency or any one of the types of payments detailed in the GTO, then it would be considered a covered transaction subject to the reporting requirements.)
Reporting requirements involve title companies and attorneys. Whether insuring a purchase, conducting a settlement, or performing a service (including accommodation services such as recording a deed) in connection with a covered transaction, the covered business is required to report the transaction by filing a FinCEN Form 8300 (the “form”) within 30 days of the closing or rendering of services. (In addition to collecting information directly from the purchaser, beneficial owner, or the individual(s) primarily responsible for representing the purchaser, a covered business may collect information from the attorney or real estate agent involved in the covered transaction. To this end, covered businesses can reasonably rely on the information provided to them by third parties in determining whether the individual identified as a beneficial owner is in fact a beneficial owner.)
In addition to providing information showing that the transaction is in actuality a covered transaction, the form specifically requires the collection and reporting of identifying information (driver’s license, passport, or other similar identifying documentation) for the purchaser, beneficial owner(s) of the purchasing entity, and the individual(s) primarily responsible for representing the purchaser (defined as the individual authorized by the entity to enter into legal binding contracts). The information from the identification must be provided on the form or, if legible enough, a copy of the identification can be attached to and submitted with the form. The following information must also be provided:
- information sufficient to enable the covered business (again, all title insurance companies, their subsidiaries and agents) to complete the form.
- a written statement from the purchaser's counsel or the settlement agent stating that no part of the purchase price was funded by the use of currency, checks (vide supra), or a money order; or
Critically, a covered business is not relieved of its obligations under the GTO merely by filing the form. Rather, the covered business must then retain all compliance-related records for a period of five years from the last day that the GTO is effective, including all renewals. Additionally, all such records must be made available upon request to FinCEN or any other appropriate law enforcement or regulatory agency.
Who Must Comply?
Ostensibly, almost anyone involved in a transaction covered by a GTO is subject to compliance (although not all are necessarily responsible for non-compliance), but it is expressly directed at, and the onus is with, covered businesses, because they are responsible for obtaining and reporting the source of closing funds, along with, among other things, the identity of the purchaser.
While not a direct target of the GTO, purchasers and their attorneys are subject to the requirements in the sense that the requisite information necessary for the covered business to comply with the GTO will, in some instances, come from them.
Penalties for Non-Compliance
Penalties for non-compliance is indeed a serious matter. Violating the GTO can subject a covered business (including its officers, directors, employees, and agents) to civil and/or criminal penalties. (With respect to criminal penalties, which can include jail time, it is presumed that this is only applicable to the employees responsible for non-compliance.)
As for civil penalties, if there is a willful violation, the fine will be the greater of the amount involved (up to $100,000) or $25,000 (with a separate violation occurring for each day that the violation continues). If there is but a neglect to file a report, or there is a material misstatement or omission in the filed report, the fine will be capped at the amount of the transaction. For structuring or assisting in the structuring of a transaction to avoid the currency transaction reporting, the fine will also be capped at the amount of the transaction. General negligence (either in the reporting or lack of reporting) will yield a fine of $500 and, if a pattern of negligence is established, a fine of $50,000.
Regarding criminal penalties, should there be a willful violation of the GTO, the covered business can be fined up to $250,000 with the potential for five years in prison. For a willful violation accompanied by the violation of any other laws, the fine is increased to $500,000 with a potential prison term of ten years. In addition to the covered business, anyone who structures or assists in the structuring of a transaction to avoid the currency transaction reporting is subjected to an unspecified fine and up to five years in prison.
Penalties can be assessed any time within six years from the date of the covered transaction. Civil actions may be commenced within two years of the date of the penalty or criminal conviction.
Mindful that penalties are severe and can be levied against a partner, director, officer, agent or employee of a covered business, practitioners can expect that a covered business will vigorously require complete disclosure and compliance with all requests necessary to properly report the transaction. And on this point, although the GTO’s are meant to allow FinCEN to collect information about transactions after the closing-so as not to chill the transaction in advance-the reality is that if a covered business cannot obtain the requisite information, placing them in direct non-compliance for the failure, the covered business is unlikely to proceed with the transaction.
Ethical and Practical Aspects
Attorneys in the process might presume that clients' information can be withheld under a claim of privilege. FinCEN, however, has specifically opined on this and their position is that the information necessary for completing a form, suspicious activity report, or other Bank Secrecy Act reporting requirement, cannot be withheld from the government founded on attorney-client privilege. As an aside, even if FinCEN were silent on this point, given the penalties for non-compliance, a covered business is unlikely to respond well to a claim of privilege that even potentially puts them in noncompliance with the GTO.
There are, of course, transactions that appear to meet the elements of a covered transaction but are not specifically mentioned in the GTO. What to do with those can be a dilemma.
For instance, it is possible for an entity to acquire a property without any financing and without acquiring a fee title insurance policy. As title insurers, their subsidiaries and agents are the covered businesses subject to the requirements of the GTO, if a covered business is not involved, it appears that there is nothing to report. Suppose then that the client acquires a $3.5 million property in any of the targeted areas without title insurance, but decides a week, a month, or a few months after the acquisition to obtain an owner's in possession title insurance policy. Might this be considered the structuring or assisting in the structuring of a transaction to avoid the currency transaction reporting? If a client is advised to proceed in such a fashion then it likely is. While the transaction is presumably excluded from the reporting requirements, to avoid non-compliance, or even the appearance of non-compliance, the title insurer is likely to insist on reporting the transaction nonetheless.
Another example emerges when a client acquires an interest (be it partial, controlling, or all) in an entity that already owns residential real estate in a targeted area that otherwise meets the minimum applicable threshold. The GTO is silent on this issue, but again, with the threat of serious penalties for non-compliance, a title insurer may yet again err on the side of caution and insist on reporting the transaction.
While the cited examples appear to be outside of the scope of the GTO, mindful that one who structures or assists in structuring a transaction to avoid the currency transaction reporting requirements may be held civilly and criminally liable, until these and other areas are addressed by FinCEN, discussing such approaches with a client seems perilous.
Having familiarity with what is required for reporting purposes will help attorneys advise clients of what will be expected of them. Sellers' attorneys may consider including (and purchasers’ attorneys should expect to see) language in the contract of sale that the purchaser agrees to comply with any and all FinCEN-related reporting requirements. For those who employ in their contract Anti-Money Laundering and Anti-Terrorism Law clauses (including USA PATRIOT Act Compliance, Presidential Executive Order No. 13224, rules and regulations of the Specially Designated Nationals and Blocked Persons Lists maintained by Office of Foreign Assets Control, and other government lists), expanding them to expressly include cooperation with FinCEN would seem wise.