NEW YORK, August 10 - In a significant move towards combating money laundering and illicit financial activities, the U.S. Treasury Department is poised to introduce a groundbreaking rule that will bring an end to anonymous luxury home purchases. This anticipated measure is designed to eliminate a pervasive loophole that has allowed corrupt individuals, including oligarchs, terrorists, and criminals, to conceal their ill-gotten wealth.
The forthcoming rule, which has been eagerly awaited, is set to mandate greater transparency in the real estate sector. It is expected to require real estate professionals, including title insurers, to report the identities of the beneficial owners of companies acquiring real estate through cash transactions to the Treasury's Financial Crimes Enforcement Network (FinCEN).
According to reliable sources familiar with the matter, FinCEN is scheduled to unveil the rule sometime this month, as indicated by its regulatory agenda. However, there is a possibility of slight delays in the timeline due to ongoing developments. Advocates against corruption, along with lawmakers, have been advocating for the establishment of this rule, which is aimed at replacing the existing fragmented reporting system.
For decades, criminals have exploited the anonymity offered by the real estate market to launder illicit gains. U.S. Treasury Secretary Janet Yellen highlighted this issue in March, revealing that an astonishing $2.3 billion had been funneled through U.S. real estate between 2015 and 2020.
Recognizing the severity of the problem, Erica Hanichak, the government affairs director of the FACT Coalition, an advocacy group, stressed the significance of FinCEN's initiative: "That's why FinCEN is taking this important step to put something officially on the books that would root out money laundering through the sector once and for all."
Critics argue that FinCEN's progress has been sluggish, given that officials first announced plans for this rule back in 2021. Moreover, the agency has been grappling with a related rule focused on unveiling the true owners of shell companies. Lawmakers from both sides of the aisle have called for tighter regulations regarding the shell company rule, which has inadvertently slowed down FinCEN's work on the real estate reporting rule, according to insiders.
While the American Land Title Association, representing title insurers, welcomes the proposed rule, it suggests that FinCEN should delay its implementation until the shell company rule is finalized.
To ensure inclusivity and gather valuable insights, the proposed rule is expected to undergo a period of public and industry feedback.
The Need for Reform
Unlike the stringent regulations that banks have long adhered to, which demand the disclosure of customer funds' origins and reporting of suspicious transactions, the real estate industry has so far operated without nationwide rules.
Instead, FinCEN has employed geographic targeting orders (GTOs), which impose real estate purchase disclosure rules in a limited number of cities, including New York, Miami, and Los Angeles. The impending rule is projected to effectively expand the reach of GTOs nationwide.
The implementation of GTOs in 2016 came after revelations by The New York Times exposed that nearly half of luxury real estate purchases were made through anonymous shell companies.
However, these orders can be evaded simply by acquiring property outside the designated areas, according to Jodi Vittori, an expert on illicit finance at the Carnegie Endowment for International Peace.
Advocates for transparency, in their push for a nationwide rule, point to cases like that of Guo Wengui, a Chinese businessman in exile. Prosecutors allege that he employed an anonymous shell company to funnel profits from a fraudulent scheme into the purchase of a $26 million New Jersey mansion in December 2021. Had Guo chosen a property in Manhattan, he would have been subject to a GTO, likely triggering immediate scrutiny from law enforcement.
To harness the full potential of the rule, FinCEN would need to bolster its enforcement resources, as indicated by David Szakonyi, a professor of political science at George Washington University: "FinCEN needs more people and more computers to process the information."
In an environment where financial secrecy has facilitated a range of criminal activities, this impending rule marks a significant step towards enhanced transparency, accountability, and the curbing of illicit financial flows within the luxury real estate market.