Real Estate and Investment: Adapting to FinCEN’s NewRules 

The end goal of most criminals is to accumulate wealth to enjoy a lavish lifestyle. However, the strong anti-money laundering (AML) framework in the U.S. makes it challenging and complicated to hide illicit proceeds or prove the legitimate source of the funds in question.

For that reason, bad actors often favor cash transactions that enable them to operate outside of the formal financial system. The Financial Crimes Enforcement Network (FinCEN) recently issued two new rules designed to support ongoing efforts to combat illicit finance. This article will discuss the rule impacting the real estate segment.

AML Regulations for Residential Real Estate Transfers

Over the past eight years, FinCEN has issued several geographical targeting orders(GTOs), with the first GTOs dating back to 2016 and covering Manhattan, New York, and Miami-Dade County, Florida. FinCEN has also issued multiple updates to these orders, with amendments issued as recently as October 2024.

These orders address the use of real estate transactions as a vehicle to launder and hide illicit proceeds while attempting to mitigate systemic risks, including customer, geographical and transactional risks. Moreover, the GTOs require the filing of forms IRS-8300 to record the noted cash transactions in support of these real estate sales within the targeted regions. To date, these regions include multiple locations in California, Colorado, Connecticut, Florida, Hawaii, Illinois, Maryland, Massachusetts, Nevada, New York, Texas, Virginia, Washington and the District of Columbia.

In February 2024, FinCEN issued a notice of proposed rulemaking seeking to create a formal rule on a nationwide basis. In August 2024, FinCEN published its final rule to safeguard residential real estate sales by increasing transparency and accountability in the real estate market. The rule goes into effect December 1, 2025.

Before diving into the rule, it is helpful to provide some background. It is well known that criminals use illicit proceeds to acquire goods and services and that real estate properties are one of their most sought-after and valuable assets. However, acquiring these properties by justifying the source of their funds, using a complex structure to further support the purchase, and/or using a straw buyer can be complicated. As a result, illicit actors often resort to all-cash transactions to acquire real estate assets, often hiding their true identity behind legal entities or trusts.

Key Actors in a Real Estate Transaction

In simple terms, a real estate transaction is the process of transferring ownership of a real property from one party to another. These transactions are supported by several legitimate actors working in a synchronized fashion, which may include:

• Transferor (aka “seller”)
• Transferee (aka “buyer”)
• Real estate broker (for both the selling and buying party)
• Real estate salesperson (i.e., the agent representing the client during a real estate transaction under the real estate broker’s supervision)
• Settlement agencies (e.g., escrow agents, real estate attorneys and title companies)
• Banks/mortgage lenders
• Home inspectors
• Appraisers
• Title insurance companies
• Homeowners insurance companies
• Homeowners associations
• Closing entities (includes the professionals that support the final transfer of ownership; in many cases, title companies and real estate attorneys serve as closing entities)

These actors work together in support of a single transaction through various processes, including:

• Contract negotiation (where parties of the transaction discuss and agree on a sales price)
• Contract ratification (process of accepting a real estate offer)
• Settlement process (process of finalizing all needed documents, such as title search, title insurance, deed, any needed loans, escrow payments and addressing of contingencies)
• Closing stage (final process where ownership is successfully transferred)

Applicability of and Exceptions to the FinCEN Rule

The new FinCEN rule requires the filing of a report containing specific information for reportable, nonfinanced transfers of residential real property to a legal entity or trust. Transfers to natural persons/individuals are not covered by this rule.

For the purpose of this rule, FinCEN further defined the term nonfinanced as a transaction not supported by a regulated entity through the issuance of a loan or an extension of credit. Cash transactions, as well as transfers supported by loans issued by a lender that does not have an obligation to maintain an AML program, for example, a non-bank private lender, are reportable under this rule.

• It is worth noting that there are several exceptions to the rule provided for certain lower-risk transactions. Per the rule, a “reportable transfer does not include:
• a transfer of an easement;
• a transfer resulting from the death of an individual, whether pursuant to the terms of a decedent’s will or the terms of a trust, the operation of law, or by contractual provision;
• a transfer incident to divorce or dissolution of a marriage or civil union;
• a transfer to a bankruptcy estate;
• a transfer supervised by a court in the [U.S.];
• a transfer made for no consideration by an individual, either alone or with their spouse, to a trust of which that individual, their spouse or both of them are the settlor or grantor;
• a transfer to a qualified intermediary for purposes of a like-kind exchange under Section 1031 of the Internal Revenue Code; and
• a transfer for which there is no reporting person.”

‘Report Cascade’ Identifies Responsible Parties

These real estate reports will be the responsibility of key actors in a real estate transaction using what FinCEN calls “the report cascade,” which includes and covers seven key stakeholders/steps within the real estate settlement and closing processes.

It is important to understand these roles and where they fit within a real estate transaction. It is common to think of a real estate broker or salesperson when considering the term “real estate transaction”; however, this rule does not apply to brokers while exercising their sales duties.

FinCEN has identified the settlement agent on the closing and settlement statement as the first level/opportunity of reporting, followed by the individual who prepares the closing or settlement documents. From there, the list continues with the person who records the deed (a signed legal document that grants its holder ownership of a real estate asset) all the way to the person who prepares the deed or the legal instrument that transfers ownership.

Beneficial Ownership Reporting

The report, which is still pending FinCEN’s guidance and final issuance, shall include information on the legal entities, transferee and transferor, and the ultimate beneficial owner(s), among other things.

According to FinCEN, a beneficial owner is an individual who, either directly or indirectly, exercises substantial control over the legal entity or owns or controls at least 25% of the entity’s ownership interests. This definition is consistent with the definition of a beneficial owner in FinCEN’s Beneficial Ownership Information Reporting Rule. In the case of a trust, FinCEN provides several scenarios where the beneficial owner is an individual who is a trustee or otherwise has authority to dispose of trust assets; is a beneficiary who is the sole permissible recipient of income and principal from the trust or who has the right to demand a distribution of, or to withdraw, substantially all of the assets of the trust; is a grantor or settlor of a revocable trust; or is the beneficial owner of an entity or trust that holds one of these aforementioned positions in the trust.

BSA Tie-in to FinCEN Rule

It is important to remember that while the Bank Secrecy Act (BSA), Title 31U.S.C.5312(a)(2), defines those involved in the settlement and closing of real estate transactions as financial institutions (FIs) and therefore required to maintain an AML and counter-terrorist financing (CTF) program, FinCEN has exempted such people from comprehensive regulation under the BSA. This new rule and reporting requirement seeks to impose AML regulations on these people.

FinCEN is using its authority to mandate a streamlined specific reporting mechanism for certain transactions rather than imposing the establishment of a comprehensive AML/CTF program requirement on settlement and closing entities, even though FinCEN did consider imposing such obligations as noted in the final rule as published in the Federal Register, Volume 89, Number 168.

While the proposed rule did not include potential penalties for noncompliance, FinCEN intends to use the BSA penalty structure for the final rule. Negligent violations of the rule could result in a civil penalty of up to $1,394 for each violation and an additional civil money penalty of up to $108,489 for a pattern of negligent activity. In addition, willful violations of the final rule could result in a term of imprisonment of not more than five years or a criminal fine of not more than $250,000, or both. Such violations could also result in a civil penalty of not more than the greater of the amount involved in the transaction (not to exceed $278,937) or $69,733.

FinCEN intends to notify potential reporting people about the need to comply with the final rule’s requirements.

The real estate reporting rule is a significant step to further ongoing AML and corporate transparency efforts within a significant sector that have been and continues to be exploited by criminal networks to conceal and launder their proceeds. The rule adds an additional layer of transparency to certain obscure real estate transactions happening outside of our traditional financial system. It is paramount for FIs to be fully aware of this rule and its implementation and to further partner with those impacted by the rule to continue to eliminate systemic vulnerabilities and associated risks thus protecting the U.S. financial system and bolstering law enforcement efforts.

Read the full article at ACAMS Today.