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Real Estate and the Fight against Money Laundering & Terrorist Financing

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By Scott Rinn, Senior Policy Representative – Business Issues, NAR

RISMEDIA, July 2009-Is it possible that the seller in your real estate transaction is using the property to finance terrorism? Could the buyer be attempting to launder money obtained illegally by a drug cartel? Although rare, the answer is “yes” in both cases. And, although it is unlikely that you’ll run into such a situation, real estate brokers and agents are required to observe existing laws and regulations designed to fight money laundering and terrorist financing (ML/TF) and should keep in mind their responsibilities, as real estate professionals, to be alert to suspicious activity.

Current law requires all businesses to report cash transactions over $10,000 to the IRS (form 8300), and prohibits conducting business with specified individuals and countries designated by the U.S. Department of Treasury’s Office of Foreign Asset Control (OFAC) (http://www.ustreas.gov/offices/enforcement/ofac/sdn/index.shtml). Financial institutions, however, are subject to more rigorous requirements under the USA PATRIOT Act, the Bank Secrecy Act, and regulations promulgated by the Financial Crime Enforcement Network (FinCEN), the agency within the Treasury Department assigned primary responsibility for fighting financial crimes. These requirements include the collection and verification of certain customer information, submission of suspicious activity reports, adoption of written policies and procedures, and the retention of certain documentation.

The real estate industry, generally, including real estate brokers and agents, is not currently subject to the additional mandatory regulations imposed on financial institutions, but that may change if there is an increase in the frequency and the manner in which real estate is used in illegal financing schemes. Even if real estate were to remain an infrequent source of ML/TF there is a chance that regulators, in an effort to leave no stone unturned, will look at the entire real estate profession to determine whether additional regulation is necessary, similar to that imposed on the financial industry.

In order to more effectively participate in this important effort, the real estate industry should consider the implementation of self-regulating steps to fight financial crimes, e.g. inform settlement service providers of ML/TF “red flags,” provide instructions on how to file a suspicious activity report (SAR) and to remind settlement providers of existing legal obligations. An international organization known as the Financial Action Task Force (FATF), with 32 countries as members, including the United States, published a list of ML/TF red flags for the worldwide real estate industry in June, 2007. The red flags provide examples of activity previously found to involve real estate in illegal financing schemes. The FATF red flags include:

• Transactions using wire transfers.

• Transactions in which the parties:
o Do not show particular interest in the characteristics of the property (e.g. quality of construction, location, date on which it will be handed over, etc.)
o Do not seem particularly interested in obtaining a better price for the transaction or in improving payment terms.
o Show a strong interest in completing the transaction quickly, without there being good cause.
o Show considerable interest in transactions relating to buildings in particular areas, without caring about the price they have to pay.

• Transactions performed through intermediaries, when they act on behalf of groups of potentially associated individuals.
• Transactions relating to the same property or rights that follow in rapid succession and entail a significant increase or decrease in the price compared with the purchase price.
• Transactions entered into at a value significantly different (much higher or much lower) from the real value of property or differing markedly from market values.
• Transactions carried out on behalf of minors, incapacitated persons or other persons who, although not included in these categories, appear to lack the economic capacity to make such purchases.

Uniform requirements would not provide uniform benefits if applied equally to all parties: mortgage brokers, mortgage lenders, underwriters, attorneys, escrow agents, title companies, title agents, closing companies, closing agents, real estate brokers and real estate agents. Each of these parties have different relationships with the borrower and seller, different responsibilities concerning knowledge of funding sources and different levels of professional training with regard to gathering personal information, the receipt and disbursement of funds, and the recording of the transaction.

The real estate industry, however, has a role to play in helping to fight ML/TF. Each stakeholder should review its role in the process, determine how they might contribute to this important effort and take steps to educate themselves about ML/TF red flags, best practices and suspicious activity reporting. The National Association of Realtors® (NAR) has conducted research to compare FATF recommendations with existing U.S. laws to determine whether gaps exist which should be addressed. The research demonstrates that most FATF recommendations are already being met through existing regulations on U.S. financial institutions. In addition, NAR has been working with FATF, through its membership in the International Consortium of Real Estate Associations (ICREA), to determine an appropriate ML/TF “risk based approach” for the real estate sector. In the future, NAR will continue to provide its members with information and guidance on anti-money laundering and terrorist financing issues, while working to avoid unnecessary, inefficient or burdensome regulations on real estate brokers and agents.

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