The U.S. real estate market has long served as a prime destination for criminals seeking to store and launder illicit wealth. Not only does real estate provide a relatively safe investment, but historically, the real estate sector has been subject to little regulatory oversight. To help address this concern, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued real estate Geographic Targeting Orders (GTOs), requiring U.S. title insurance companies within specified geographic areas to report on transactions over a certain monetary threshold. On October 26, 2022, FinCEN once again renewed and expanded its GTOs. Although GTO reporting requirements apply to U.S. title insurance companies, other U.S. financial institutions can incorporate the geographic areas identified by FinCEN into their existing Know Your Customer (KYC) processes as part of an overall risk-based approach to better assess, manage, and mitigate money laundering/terrorist financing (ML/TF) risks.
What are Geographic Targeting Orders?
Under the Bank Secrecy Act (BSA), the Director of FinCEN has the authority to issue regulations requiring banks and other financial institutions to take certain precautions against financial crime, including the establishment of AML programs and the filing of reports. Pursuant to this authority, FinCEN issued the first GTO in January 2016 to collect data on money laundering and other illicit financial activity related to the purchase of real estate. More specifically, Geographical Targeting OrdersGTOs require U.S. title insurance companies (including their subsidiaries and agents) to identify the natural persons, or beneficial owners, behind shell companies used in non-financed purchases of residential real estate in designated areas around the U.S., and to file a Currency Transaction Report (CTR) within 30 days of the closing. For purposes of the GTOs, a “beneficial owner” includes each individual who directly or indirectly, owns 25% or more of the equity interest in the legal entity.
What is the financial threshold for GTOs?
The transactions covered by the GTOs include cash transactions (including cashier’s checks, certified checks, traveler’s checks, personal checks, business checks, money orders in any form, funds transfers, or virtual currency) without a bank loan or similar form of financing, of residential real property purchased by a legal entity (including a corporation, limited liability company, partnership, or other similar business entity formed under U.S. law or in a foreign jurisdiction). The purchase amount threshold for the GTOs was set as $300,000 USD in 2018 and has remained unchanged for all but two of the designated areas.
GTOs are temporary orders, effective for up to 180 days, that may be renewed or re-issued.
New York City and Miami were the original targets of the first GTOs. FinCEN has subsequently renewed and amended the GTOs, including expanding the orders’ reach to additional U.S. jurisdictions.
What cities and locations do the recently renewed and expanded GTOs cover?
FinCEN renewed the GTOs that cover the following major U.S. metropolitan areas:
- Miami-Dade, Broward, and Palm Beach counties in Florida;
- The five boroughs of New York City;
- San Diego, Los Angeles, San Francisco, San Mateo, and Santa Clara counties in California;
- The city of Honolulu and Hawaii, Maui, Kauai, and Honolulu counties in Hawaii;
- Clark County in Nevada;
- King County in Washington;
- Suffolk and Middlesex counties in Massachusetts;
- Cook County in Illinois;
- The city and county of Baltimore in Maryland;
- Montgomery, Anne Arundel, Prince George’s and Howard counties in Maryland;
- Arlington and Fairfax counties, and the cities of Alexandria, Falls Church, and Fairfax in Virginia;
- Fairfield County in Connecticut; and
- The District of Columbia.
Additionally, FinCEN expanded the geographic coverage of the GTOs to include the following locations:
- Bexar, Tarrant, Dallas, Harris, Montgomery, and Webb counties in Texas.
The terms of FinCEN’s recent GTO are effective beginning on October 27, 2022 and ending on April 24, 2023. The effective period of the GTO for purchases in the newly added areas begins on November 25, 2022. The purchase amount threshold remains $300,000 for each covered metropolitan area, except for the City and County of Baltimore, where the purchase threshold is $50,000.
The U.S. businesses that are subject to compliance with the GTOs are expected to implement procedures reasonably designed to ensure compliance with the terms of the GTOs. This includes conducting due diligence to determine whether the title insurer (or its subsidiaries or agents) is involved in a transaction subject to GTO reporting and to subsequently collect and report the applicable information to FinCEN. Failure to comply with GTO requirements carries civil and criminal penalties. These include monetary fines up to $500,000 and ten years in prison. Ignorance of the law does not allow title agents to escape penalties for GTO violations.
What do FIs need to know about GTOs to manage risk?
While GTO requirements apply specifically to U.S. title insurance companies, other U.S. financial institutions subject to the BSA, such as banks, credit unions, and others, would do well to keep up to date on the latest GTO locations, conduct a risk assessment to identify potential areas of exposure, and incorporate this information into their AML compliance programs. This includes things such as amending policies and procedures, conducting timely training (including identification of red flags), communicating relevant information with impacted staff, and keeping the board of directors apprised of pertinent developments and potential impact on the institution. This also includes having processes and procedures in place, such as robust geographic screening that covers GTO watch areas, customer due diligence and identification of beneficial owners of properties in GTO designated places, and ongoing monitoring for changes to GTO locations and ownership in GTO territories.
Additionally, institutions should include reasonable due diligence to determine whether any identified GTO-related activity would require suspicious activity reporting. In fact, FinCEN reported that at least 30% of transactions covered by the GTOs involve a beneficial owner or purchaser previously reported as suspicious. By paying heed to GTO guidance, FIs can help identify illicit activities as well as mitigate their own risk of being used in furtherance of financial crime.
Real Estate Transaction Red Flags That May Help FIs Identify Suspicious Activity
Organizations such as FinCEN and the Financial Action Task Force (FATF) maintain lists of red flags that are used to single out real estate transactions involving money laundering. Many of these red flags include transactions that hide the identity of the beneficial owner through tactics such as the use of intermediaries or nominees, and the purchase of real estate in cash or through opaque legal entities. Others involve cases where the transaction does not make business sense or otherwise involves a significant loss to the client. Understanding how real estate can be misused and being able to spot red flags can also help FIs to promptly identify and report suspicious activity. Examples of some of the more common red flags include the following:
- The customer or funds are located in a jurisdiction with a weak AML regime, a high degree of corruption, or that funds terrorism.
- There is a large and unexplained distance between the customer and the property.
- Transactions have unusual involvement of third parties, intermediaries, or nominees.
- Customer owns residential property that is titled in the name of a third party or obscures the identity of the true owner.
- Transactions involve politically exposed persons (PEPs), including high-ranking foreign government officials or their family members.
- Transaction involves over or under-valued property. For example, the owner is selling the property for significantly less than the purchase price or the seller seems disinterested in obtaining a better price.
- The transaction involves the use of large amounts of cash, especially when this does not match the characteristics of the buyer. For example, the buyer brings actual cash to the closing, or the property is purchased without a mortgage particularly if this is at odds with the buyer’s circumstances.
- The property purchase or transaction is inconsistent with the individual’s occupation, income, or financial status.
- The speed of the transaction is unusual, or there is no reasonable explanation for rushing the transaction.
- There is an immediate resale of the property, especially if the sale entails a significant increase or decrease in price compared to the purchase price and is without a logical explanation.
- The transaction involves an unusual source of funding.
- The transaction is made in cryptocurrency where the property is not listed for sale in cryptocurrency.
- The purchase is made without viewing the property or without concern for the state or physical condition of the property.
- The client exhibits other suspicious behavior. For example, the client’s behavior does not make commercial sense or is out of line with the normal course of business in the industry.
Knowing the customer’s identity, and understanding the nature and purpose of the transaction, as well as the planned use for the property, are essential to spotting red flags and mitigating the risk of money laundering. If any red flags are detected, additional information should be obtained from the customer and senior management will need to be notified. Depending on the type and amount of red flags present, and the nature of other facts surrounding the customer and the transaction, the institution will need to assess whether to file a suspicious activity report (SAR).
Through the renewal of its GTO program, FinCEN has been able to obtain valuable data that is used to assist law enforcement in tracking illicit funds laundered through the real estate sector. Furthermore, FinCEN has noted the usefulness of the information obtained from GTO reporting and it is likely that GTOs will continue to be renewed and further expanded in the future. Moreover, in late 2021, the Biden Administration announced their intention to focus on corruption in the real estate market. Therefore, in their role as gatekeepers to the financial system and as the front line of defense against financial crime, financial institutions would be well advised to stay on top of developments in this area by monitoring regulatory changes as well as conduct periodic risk assessments to identify areas where they may be impacted, either directly or indirectly, by FinCEN’s Geographic Targeting OrderGTO program.
A robust KYC program, regulatory reporting solution and comprehensive sanctions screening, including incorporation of GTO guidance, are essential components of effective AML compliance. Schedule a demo today with a risk specialist and learn how Alessa can help your institution effectively manage money laundering and sanctions risk in a rapidly changing environment.
- Tucker, Ola M. (2022). The Flow of Illicit Funds: A Case Study Approach to Anti-Money Laundering Compliance. Georgetown University Press.