October 03, 2018

Van Hollen, Whitehouse Ask GAO to Dig Deeper into Issue of Money Laundering and Real Estate

Widespread Reporting on Potential Criminal Activity in Real Estate Market - Including Between Trump Organization and Russia

Today U.S. Senators Chris Van Hollen (D-Md.) and Sheldon Whitehouse (D-R.I.) wrote to the Government Accountability Office (GAO) asking it to further study the issue of whether vulnerabilities in anti-money laundering laws applicable to the real estate sector present increased risk of criminal activity.  


The luxury real estate market attracts money launderers because all-cash deals through shell corporations allow criminals to mask their ownership information. Cash-only real estate transactions are subject to fewer reporting requirements than financial institutions have to comply with. Addressing this problem is even more urgent when you consider the widespread reporting on the potential of criminal activity in the real estate market with regards to the Trump Organization and Russia. As such, the Senators believe this must be seriously looked at. They are asking the GAO to investigate efforts the U.S. government is already undertaking to close the regulatory loopholes exploited by the Trump Organization and others through real estate development and to study what more needs to be done.


Senator Van Hollen, as a member of the Senate Banking Committee, will raise this issue tomorrow with the Director of the Financial Crimes Enforcement Network at the Treasury Department and the Director of the Financial Crimes Section at the FBI during the Committee’s hearing on combating money laundering and other forms of illicit finance (livestream available here). Senator Whitehouse, Ranking Member of the Senate Judiciary Subcommittee on Crime and Terrorism, has introduced comprehensive legislation to address money laundering, including the use of shell corporations to purchase real estate. He has also led multiple hearings in the full Senate Judiciary Committee, the Crime and Terrorism Subcommittee, and the Helsinki Commission to spur action to address dangers from shell corporations used for money laundering and other criminal activity.


The full text of the letter is available below and here.


Dear Comptroller General Dodaro,


We write to you today regarding our concerns that transnational criminal organizations and other corrupt actors may be exploiting the gaps in U.S. regulatory and law enforcement processes related to the laundering of money through the U.S. real estate market. Accordingly, we ask for your assistance with an investigation into whether vulnerabilities in anti-money laundering laws applicable to the real estate sector present increased risk of criminal activity. 


As you know, the Bank Secrecy Act (BSA) and its implementing regulations generally require financial institutions to collect and retain various records of customer transactions, verify customers’ identities, maintain anti-money laundering (AML) programs, and report suspicious transactions. However, the full application of the BSA is unevenly distributed across sectors of the economy.  Residential real estate markets currently have fewer AML protections than lending financial institutions, presenting increased risk of access by foreign and domestic criminal organizations.


For example, although federal law requires persons involved in real estate closings and settlements to establish anti-money laundering programs, real estate professionals are not required to report suspicious transactions involving real estate purchases and sales.   While the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has noted that “drug traffickers, corrupt officials, money launderers, and other criminals seek to exploit real estate transactions to hide their illicit profits, conceal their identities, and launder funds”, the vulnerability of the real estate sector to money laundering is further emphasized by the following:


·         The real estate industry currently has an exemption from the BSA and portions of the Money Laundering Control Act of 1986.   Currently, no mandatory reporting requirements are placed on, real estate funds, title insurance and escrow agents. The standard for persons involved in real estate transactions is voluntary.


·         The real estate industry is currently not subject to FinCEN’s Customer Due Diligence rule, which was issued to amend BSA regulations to strengthen financial institutions’ vetting of customers.


·         FinCEN’s rule requiring covered financial institutions to identify and verify information of their legal entity customers at the time a new account is opened which goes into effect May 2018, does not extend to persons involved in real estate closings and settlements.


As a result, we are concerned that transnational criminal organizations and other illicit actors may seek to take advantage of any gaps in U.S. regulatory and law enforcement processes. The widespread money laundering risks posed by real estate transactions conducted without any financing (i.e.,“all-cash”) through the use of shell companies creates challenges for law enforcement and federal regulators seeking to safeguard the financial system from illicit use. According to the National Association of Realtors, one in four residential real estate purchases are “all-cash”, totaling hundreds of billions of dollars annually nationwide.


In January 2016, FinCEN issued real estate Geographic Targeting Orders (GTOs) for several areas of the U.S. that temporarily required certain U.S. title insurance companies to identify the persons behind shell companies used to purchase high-end residential real estate, among other requirements. FinCEN has indicated that these GTOs, which have been renewed and extended several times, are temporary measures intended to help the agency, “better understand the vulnerabilities presented by the use of shell companies to engage in all-cash residential real estate transactions.”


To better ensure effective and consistent AML safeguards, we are requesting an assessment of the results of the real estate GTOs, including the information provided to FinCEN and any actions taken, and how it has helped FinCEN achieve its defined objectives. Specifically, we ask GAO to address as rigorously as possible the following questions:


1.      Has the information gathered by the GTOs provided useful insight about any of the above mentioned regulatory gaps or exemptions that exist regarding the BSA and the real estate industry? 


2.      Has the information gathered by the GTOs produced other tangible benefits, and in what ways will closing the above mentioned regulatory gaps or exemptions enhance financial market integrity in the United States?


a.       How has FinCEN used the information collected from the real estate GTOs to inform its ongoing efforts to address money laundering vulnerabilities?


b.      Has the information gathered by the GTOs improved the ability of FinCen, DOJ, the FBI and other law enforcement agencies to prevent money laundering in the real estate industry?


c.       Based on the information it has collected from these GTOs, is FinCEN considering any regulatory changes?


3.      Are there ways to improve upon the information gathered by the GTOs to make FinCEN more effective in the fight against money laundering?


a.       Are there any gaps or loopholes that exist in the design of the GTO program that could be exploited by illicit actors, such as the beneficial ownership thresholds  or limiting the GTO to title insurance companies?


b.      Are there any unintended consequences from targeting specific geographic regions while leaving other areas uncovered? The adaptive nature of illicit actors raises concerns they may shift their real estate activities from GTO areas to other regions of the United States.


4.      Lastly, we ask that GAO identify any additional vulnerabilities and gaps in the current BSA framework, specifically as they pertain to the real estate sector, and how they might be addressed through regulatory or legislative action.


Thank you for your prompt attention to this request.