The Financial Crimes Enforcement Network (FinCEN) recently revised Geographic Targeting Orders (GTOs) that expanded the number of residential real estate transactions in which title insurance companies must identify the beneficial owners. In 2016, FinCEN first issued a GTO that required ascertaining and reporting the natural persons behind shell companies that make such cash purchases. Since then, it has repeatedly renewed and expanded the orders.
As of the latest update in November 2018, the GTOs were expanded to cover all-cash purchases valued at $300,000 or more, as well as purchases using virtual currencies, in counties in the following metropolitan areas:
- Dallas-Fort Worth
- Las Vegas
- Los Angeles
- New York City
- San Antonio
- San Diego
- San Francisco
The revised GTOs added several locations that haven’t had this requirement before. They also standardized the $300,000 value threshold, which had previously varied across locations, and added virtual currency purchases. As a result, many title closing companies that were not required to report on beneficial ownership in the past are now obligated to do so.
Although the GTOs apply to title insurance companies, title companies and title insurance lawyers –not banks – it’s a best practice for banks to understand the requirements of the new orders, and gain an understanding of how their affected clients are complying with the reporting requirements. Title closing companies in the targeted areas need to understand the source of the funds for qualifying transactions, and be able to trace those funds back to the natural persons who are the beneficial owners of such transactions. Title companies must adhere to FinCEN’s 2016 Beneficial Ownership Guidance in record-keeping and reporting related to the GTOs.
Banks should determine whether their title insurance clients are title closers, and whether they’re closing properties within the targeted locales. For those that are, it’s worth the effort to understand their policies and procedures related to obtaining beneficial ownership of such covered transactions.
Banks can take a few steps to better understand how their affected clients are complying with the GTOs:
- Understand their affected clients’ policies and procedures.
- Understand the types of documentation title closing clients plan to obtain in order to understand and document beneficial ownership determinations. This should be outlined in their respective policies and procedures.
- Confirm that clients are gathering the appropriate information.
- Understand title closing clients’ documentation and recording procedures.
- Find out whether your clients’ programs have been audited to validate that procedures and controls are working as designed.
- If a client’s program has not been audited, consider reviewing their documentation directly.
- Consider performing a site visit or walkthrough with each your affected clients.
While these steps are an extra layer of due diligence, they may be well worth the effort. All-cash residential real estate transactions, which occur outside the banking system, have long been identified by law enforcement as having high potential for hiding money laundering and other illegal activities. FinCEN has made it clear that the GTOs are a useful tool for law enforcement agencies, and seem likely to continue to gather what they see as valuable data.
And so far, the GTOs have proven to be effective. Economists at the Federal Reserve Bank of New York and the University of Miami led a study that showed a drastic decline in the types of transactions targeted by the 2016 order after the reporting requirement was implemented. Before the order, corporate entities accounted for an average of $111 million worth of cash-based home purchases in Miami-Dade County per week (29 percent of all residential transactions), according to the study. That fell to $5 million per week (2 percent of all transactions) soon after the order went into effect.
Contact me or another member of Kaufman Rossin’s risk advisory services team to learn more about the latest regulatory activity and how that may affect your financial institution.