US Treasury Proposes Beneficial Ownership Rule Tackling Luxury Real Estate Money Laundering

To fight real estate money laundering, estimated in the billions between 2015 and 2020, the US Treasury is proposing a rule in August requiring real estate firms to report entities’ ultimate beneficial owners when they buy luxury property with cash. Reports would be sent to the Financial Crimes Enforcement Network (FinCEN). 

The requirement would standardize reporting, creating more consistent anti-money laundering and counter-terrorist financing (AML/CFT) controls for the sector. In March of this year, Treasury Secretary Janet Yellen addressed the problem of an estimated $2.3 billion in illicit funds being laundered through the sector:

“Corrupt actors have for decades anonymously stashed their ill-gotten gains in real estate. Those looking to exploit our system have been able to—with anonymity—store illicit proceeds in an appreciating asset. Buyers can pay in cash. …Treasury is working to remove that anonymity – and capture information about residential and commercial transactions not covered by our Bank Secrecy Act or beneficial ownership regimes.”

Regulators Address Longstanding Money Laundering Trends

The measures continue initiatives begun in 2021, when FinCEN proposed a rule to regulate the sector and address key money laundering risks in the US. Five years earlier, the Financial Action Task Force’s (FATF) 2016 Mutual Evaluation Report had highlighted significant risks in the American real estate sector, including:

• A lack of regulatory AML/CFT oversight for real estate agents.
• Vulnerabilities in high-end real estate.
• An insufficient strategy regulating real estate through the financial sector.

It also emphasized that US real estate agents and residential mortgage loan originators (RMLOs) had a poor understanding of the AML risks related to luxury real estate. 

FinCEN’s 2021 proposal sought to address longstanding money laundering in the sector by creating reporting requirements for non-financed property purchases. Historically, cash real estate transactions have not been subject to reporting regulations. In contrast, financed purchases pass through the financial sector and are therefore subject to AML regulations, including reporting. FinCEN thus proposed to enhance transparency in a historically opaque sector, providing better information to those fighting financial crime, such as law enforcement.

The proposal responded to the White House’s anti-money-laundering strategy, released in the same year. The strategy pointed out several key risks, including in real estate. Specifically, it called for increased transparency in the sector through reporting requirements for real estate transactions. 

It also highlighted the importance of collecting beneficial ownership data. The Treasury rule to be put forth in August will continue the process of implementing this strategy, pushing for transparency in cash real estate transactions by making it harder for illicit actors to hide behind shell companies.

How Should Real Estate Firms Respond?

Firms and professionals in the real estate sector may wish to familiarize themselves with ongoing regulatory discussions of the risks facing real estate in the US. This could include an in-depth study of FinCEN’s 2021 proposal alongside the FATF’s comments on American real estate’s AML gaps, discussed at length in chapter five of the 2016 MER. They may also want to study regulatory guidance on emerging money laundering trends, such as FinCEN’s April 2023 advisory. FinCEN is also driving sweeping reforms to implement the Corporate Transparency Act, including significant beneficial ownership reporting requirements for many small and medium-sized firms effective January 1, 2024. Firms can consult the final rule and related guidance, keeping an eye out for updates leading up to the implementation date.

Firms wishing to contribute feedback regarding the Treasury’s upcoming rule proposal should watch closely for further updates.