In late August, the US Treasury Department introduced significant anti-money laundering laws that, for the first time, extend to the residential real estate and investment adviser sectors. These new regulations are designed to strengthen existing protections against illicit financial activities. As part of the Treasury’s mission to enhance economic growth and ensure financial stability, these measures aim to safeguard national security by addressing the vulnerability of these industries to money laundering.
What Are FinCEN’s New Real Estate and Investment Adviser Rules?
Final Residential Real Estate Rule
Under the Bank Secrecy Act (BSA), persons involved in real estate closings and settlements are required to maintain anti-money laundering (AML) and countering the financing of terrorism (CFT) programs. For a long time, the Financial Crimes Enforcement Network (FinCEN) has exempted these individuals from full regulation under the BSA. However, data from FinCEN’s geographic targeting orders (Residential Real Estate GTOs) concerning non-financed residential real estate transfers revealed a pressing need for greater transparency in this sector.
The Treasury Department has identified significant risks posed by criminals and corrupt officials who exploit opaque legal entities and trusts to launder proceeds through residential real estate transactions.
In response to these concerns, FinCEN proposed a new reporting requirement under the BSA, explicitly targeting high-risk non-financed transfers of residential real property to legal entities and trusts. FinCEN has issued a final rule that adopts the proposed requirement with certain modifications.
This final rule mandates that designated persons involved in real estate closings and settlements must file real estate reports for specific non-financed transfers to legal entities and trusts. Notably, transfers to individuals and certain estate planning transactions are excluded from this requirement.
The rule specifies that the “reporting person” for any given transfer will be one of a few individuals filling designated roles in the real estate closing and settlement process. Determination of the reporting individual follows a cascading approach unless overruled by a mutual agreement among parties in the reporting cascade. The reporting individual must provide detailed information, including their identity, the transferee legal entity or trust, its beneficial owner(s), the transferred property, and additional transactional data.
Final Investment Adviser Rule
The new Investment Adviser Rule changes the definition of “financial institution” to now include “investment advisers.” The term “investment advisers” encompasses two main categories:
Registered Investment Advisers (RIAs): These are individuals or entities registered or required to be registered with the Securities and Exchange Commission (SEC) under section 203 of the Investment Advisers Act.
Exempt Reporting Advisers (ERAs): These are persons who are exempt from registering with the SEC under sections 203(l) or 203(m) of the Investment Advisers Act.
A significant modification in the Investment Adviser Rule is the refined definition of “investment adviser” compared to the Proposed Rule. Specifically, the term now excludes Registered Investment Advisers (RIAs) who register with the SEC solely based on criteria such as mid-sized advisers, multi-state advisers, pension consultants, or advisers who do not report any assets under management to the SEC on Form ADV.
Impact of FinCEN’s New Real Estate and Investment Adviser Rules on Real Estate Businesses
The new rule aims to increase transparency in the residential real estate sector by requiring detailed reports on buyers, sellers, and financial sources, including US and foreign investors, to curb money laundering.
Investment advisers and firms must now perform thorough due diligence to meet AML/CFT standards, which involves verifying identities, examining financial records, and reporting suspicious activities to FinCEN.
Real estate investors will face more legal and financial scrutiny, which means they need detailed documentation of transactions and proof of legal funding to avoid accusations of money laundering or fraud.
How Alessa Can Help
Alessa offers AML compliance solutions for non-financials to help manage the new FinCEN regulations. Our platform provides a complete AML compliance software, helping you meet all reporting and disclosure requirements smoothly. Our solution includes various modules that can also operate as stand-alone solutions, including:
- Identity Verification and KYC
- Automated Transaction Monitoring
- Watchlist, PEP and Sanctions Screening
- Automated Regulatory Reporting
- Client Risk Scoring
Get in touch with us for a free demo to see how we can adjust our solution to fit your needs, providing peace of mind as you adapt to these changes.
