Involved in a cash sale? See if new rules affect you
In an effort to curb money laundering and other crimes, a federal agency has adopted rules for brokers and others involved in non-financed transactions.
Key points:
- The Financial Crimes Enforcement Network, an arm of the Treasury Department, unveiled new rules last month that affect real estate professionals.
- Real estate attorneys, brokers and others will soon be required to file "suspicious activity reports" when involved in cash transfers of residential real estate between holding companies and trusts.
- Expect to see more paperwork — and a potential business opportunity for business for title insurance or closing companies.
August marked a pivotal time for real estate — but the NAR settlement rule changes weren't the only thing to impact industry professionals last month. A federal agency has also adopted new rules that will add some hoops for brokers and others involved in closing real estate transactions.
The Financial Crimes Enforcement Network unveiled new rules in late August requiring settlement agents, employees of title companies, licensed attorneys and real estate brokers to file suspicious activity reports for non-financed transfers of residential real estate between holding companies and trusts.
FinCEN said these transfers can create national security issues and have been deemed "high risk" for illicit financial activity by the U.S. Treasury.
What real estate professionals should know
Under the new rules, anyone involved in those types of transactions is required to identify themself. They must also identify the legal entities involved, the beneficial owner, the transferee and the property itself.
But the real estate industry has some time to prepare: The rules don't go into effect until December 1, 2025.
Does this effect typical residential sales?
In outlining the rules, which were published in the Federal Register, FinCEN noted that most residential real estate transactions involve a mortgage. That means they are already subject to anti-money laundering and countering the financing of terrorism (AML/CFT) requirements, so the new rules wouldn't apply.
But since "non-financed transfers do not involve such financial institutions, such transfers can be and have been exploited by illicit actors of all varieties," FinCEN stated.
A broader effort to curb money laundering
FinCEN began discussing the new rules in February as a part of the Biden-Harris administration's expansion of the Corporate Transparency Act, according to Stuart Saft, who leads Holland & Knight's New York real estate practice group. The CTA went into effect in January 2024 and requires business owners to file beneficial ownership reports with the federal government by January 1, 2025.
FinCEN said its new rules are designed to help the agency stop money laundering through real estate transfers. The network currently uses real estate geographic targeting orders (GTOs) to perform this task. GTOs are state-specific rules that require title and escrow companies to identify individuals behind legal entities in all-cash transactions and currently applies in states including California, Florida, New York and Texas.
However, 61% of transactions that would be covered by GTOs occur in jurisdictions that do not have the regulations on the books, FinCEN found.
An enforcement challenge
Although FinCEN's new rules aim to crack down on money laundering, Saft says they could also create some headaches for law enforcement. For instance, there are roughly 30 million entities that will have to file transparency reports as of January 1, Saft said — so the review process will take some time.
On top of that, changes to beneficial ownership of real estate happens thousands of times per day. This will create a "huge additional intake" of suspicious activity reports, Saft said, which may result in some illicit activity going unnoticed.
"[The Department of Housing and Urban Development] has been collecting this information at closings for 50 years, so why not just modify HUD's closing statement?" Saft said in an interview.
A business opportunity for some
While law enforcement might be overwhelmed, FinCEN's new rules could create a "windfall" of business for entitles like title insurance or closing companies that are responsible for filing suspicious activity reports, Saft said.
That windfall would be driven primarily by the added costs of producing the reports, which law firms like Holland & Knight have decided not to compile because of the risk involved with verifying the transaction information.
"If structured properly, it's likely to present real business opportunities because it will be less likely that law firms continue to do this work," Saft said.