FinCEN Seeks To Extend Money Laundering Rules To Real-Estate

by Mike Godfrey, for LawAndTax-News.com, Washington

18 September 2003

America's real-estate sector currently has a fight on its hands trying to stall government proposals that will apply anti-money laundering rules to property transactions, which industry representatives argue will increase costs and bureaucracy and potentially de-stabilise one of the strongest components of the US economy.

As part of the Patriot Act passed shortly after September 11, financial institutions such as banks, brokerage houses, mutual funds etc had to comply with tough new rules to prevent the potential laundering of terrorist money through the financial system. However, the Financial Crimes Enforcement Network, a division of the Treasury Department, wants to include within the provisions of the act "persons involved in real-estate closings and settlements," according to the Wall Street Journal.

Under the rules, firms or individuals involved in the closing and settlement of real estate transactions will have to set up similar anti-money laundering procedures that exist in a bank or brokerage for example. This would mean the appointment of a compliance officer, the drawing up of internal policies, procedures and controls as well as continual training and employment of independent auditors to test compliance systems.

FinCEN deems this necessary for the real-estate sector as participants are dealing in 'high-value products' which it claims leaves the industry vulnerable to money-launderers citing a 1996 National Institute of Justice report saying real-estate offers "excellent money-laundering opportunities." However, industry representatives claim that the market's illiquid nature sets it apart from other areas of finance and therefore it is harder to launder money through real-estate transactions. Plus, they say that rules are already in place that combat money laundering.

"This could substantially increase settlement costs, stifling mortgage originations, real-estate transfers and capital formation, which would weaken an industry that has been a stabilizing factor in this time of economic uncertainty," Clifton E. Rodgers Jr., senior vice president of the Washington-based lobbying group Real Estate Roundtable told the WSJ. "Moreover, extensive requirements will cause delays in real-estate settlements and closings," added Rodgers.

Meanwhile, one real-estate practitioner has suggested that FinCEN exempts transactions worth less than $10 million that are financed by an institutional lender. The size of these smaller transactions may not justify the cost of performing due diligence in addition to that already conducted by financial institutions," Jeffrey A. Moerdler, a real-estate partner with the New York office of law firm Mintz Levin Cohn Ferris Glovsky & Popeo PC, informed the WSJ.

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