[Federal Register: April 10, 2003 (Volume 68, Number 69)]
[Proposed Rules]
[Page 17569-17571]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ap03-16]
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DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA28
Financial Crimes Enforcement Network; Anti-Money Laundering
Program Requirements for ``Persons Involved in Real Estate Closings and
Settlements''
AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: FinCEN is in the process of implementing the requirements
delegated to it under the USA Patriot Act of 2001, in particular the
requirement pursuant to section 352 of the Act that financial
institutions establish anti-money laundering programs. The term
``financial institution'' includes ``persons involved in real estate
closings and settlements.'' FinCEN is issuing this advance notice of
proposed rulemaking (``ANPRM'') to solicit public comments on a wide
range of questions pertaining to this requirement, including how to
define ``persons involved in real estate closings and settlements,''
the money laundering risks posed by such persons, and whether any such
persons should be exempted from this requirement.
DATES: Written comments may be submitted on or before June 9, 2003.
ADDRESSES: Commenters are encouraged to submit comments by electronic
mail because paper mail in the Washington, DC area may be delayed.
Comments submitted by electronic mail may be sent to
regcomments@fincen.treas.gov with the caption in the body of the text,
``ATTN: Section 352--Real estate settlements.'' Comments may also be
submitted by paper mail to FinCEN, PO Box 39, Vienna, VA 22183-0039,
``ATTN: Section 352 `` Real estate settlements.'' Comments should be
sent by one method only. Comments may be inspected at FinCEN between 10
a.m. and 4 p.m., in the FinCEN Reading Room in Washington, DC. People
wishing to inspect the comments submitted must request an appointment
by telephoning (202) 354-6400 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Office of Chief Counsel, FinCEN, (703)
905-3590; Office of the General Counsel (Treasury), (202) 622-1927; or
the Office of the Assistant General Counsel for Banking and Finance
(Treasury), (202) 622-0480 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
I. Background
On October 26, 2001, the President signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA Patriot Act) Act of 2001 (Pub. L.
107-56) (``the Act''). Title III of the Act, also known as the
International Money Laundering Abatement and Financial Anti-Terrorism
Act of 2001, made a number of amendments to the anti-money laundering
provisions of the Bank Secrecy Act (``BSA''), which are codified in
subchapter II of chapter 53 of title 31, United States Code. These
amendments are intended to make it easier to prevent, detect, and
prosecute international money laundering and the financing of
terrorism.
Section 352(a) of the Act, which became effective on April 24,
2002, amended section 5318(h) of the BSA. As amended, section
5318(h)(1) requires every financial institution including persons
involved in real estate settlements and closings under section
5312(a)(1)(U) to establish an anti-money laundering program that
includes, at a minimum: (i) The development of internal policies,
procedures, and controls; (ii) the designation of a compliance officer;
(iii) an ongoing employee training program; and (iv) an independent
audit function to test programs. When prescribing minimum standards for
anti-money laundering programs, section 352 directs the Secretary of
the Treasury to ``consider the extent to which the requirements imposed
under [section 352 of the Act] are commensurate with the size,
location, and activities of the financial institutions to which such
regulations apply.'' The Secretary has delegated the authority to
administer the BSA to the Director of FinCEN.
On April 29, 2002, and again on November 6, 2002, FinCEN
temporarily exempted certain financial institutions, including persons
involved in real estate closings and settlements, from the requirement
to establish an anti-money laundering program.\1\ The purpose of the
temporary exemption was to enable Treasury and FinCEN to study the
affected industries and to consider the extent to which anti-money
laundering program requirements should be applied to them, taking into
account the specific characteristics of the various entities defined as
``financial institutions'' by the BSA.
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\1\ See 31 CFR 103.170, as codified by interim final rule
published at 67 FR 21110 (April 29, 2002, as amended at 67 FR 67547
(November 6, 2002) and corrected at 67 FR 68935 (November 14, 2002).
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A real estate closing or settlement is the process in which the
purchase price is paid to the seller and title is transferred to the
buyer.\2\ The process may be carried out in different ways, depending
on a number of factors, including location. In the eastern states,
typically the parties meet and exchange documents in what is sometimes
referred to as a ``New York style'' or ``table closing.'' In the
western states, the parties may not meet, instead relying on the
services on an escrow agent to handle the documents in what is
sometimes referred to as a ``Western style'' or an ``escrow
closing.''\3\ The person actually conducting the process may be an
attorney, a title insurance company, an escrow company, or another
party.
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\2\ Whether the process is referred to as a settlement or a
closing may vary by jurisdiction. See, e.g., 24 CFR 3500.2
explaining that settlement for purposes of the Real Estate
Settlement Procedures Act of 1974 (``RESPA'') may also be called a
``closing'' depending on the jurisdiction.
\3\ See, 11 Thompson on Real Property, sec. 94.04.
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II. Issues for Comment
1. What Are the Money Laundering Risks in Real Estate Closings and
Settlements?
The real estate industry could be vulnerable at all stages of the
money laundering process by virtue of dealing with high value
products.\4\ Money launderers have used real estate transactions to
attempt to disguise the illegal source of their proceeds. For example,
narcotics traffickers have purchased property with monetary instruments
that they purchased in structured amounts (that is, multiple purchases
each below the BSA reporting thresholds that in aggregate exceeded
[[Page 17570]]
the thresholds).\5\ Narcotics traffickers have also tried to launder
cash proceeds by exchanging them for checks from a real estate
company.\6\
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\4\ According to a report published by the National Institute of
Justice, ``real estate transactions offer excellent money laundering
opportunities,'' and, in particular, opportunities to ``legitimate
and repatriate illegal funds.'' Barbara Webster and Michael S.
McCampbell, National Institute of Justice, International Money
Laundering: Research and Investigation Join Forces, September 1996,
pages 5 and 6.
\5\ See, e.g., U.S. v. High, 117 F.3d 464 (11th Cir. 1997).
\6\ See U.S. v. Leslie, 103 F.3d 1093 (2d Cir. 1997).
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In money laundering, the initial or placement stage is the stage at
which funds from illegal activity, or funds intended to support illegal
activity, are first introduced into the financial system. This could
occur, for example, in the real estate industry through the payment for
real estate with a large cash down payment.
In the second or layering stage of money laundering, the illicit
funds are further disguised and distanced from their illegal source
through the use of a series of frequently complex financial
transactions. This could occur in the real estate industry when, for
instance, multiple pieces of real estate are bought and resold,
exchanged, swapped, or syndicated, making it more difficult to trace
the true origin of the funds.\7\
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\7\ See U.S. v. Nattier, 127 F.3d 655 (8th Cir. 1997) (embezzler
engaged in a number of real estate purchases through real estate
firm in an attempt to conceal the source of the funds).
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The third or integration phase of money laundering occurs when the
illegal funds appear to have been derived from a legitimate source. In
the context of the real estate industry, this could occur when real
estate is sold by a money launderer to a bona fide purchaser and the
purchaser, or his or her financial institution, provides the money
launderer with a check that the money launderer then has the ability to
represent as the proceeds of a legitimate business transaction.
The real estate industry itself has taken steps to identify
potential money laundering vulnerabilities. For instance, the American
Land Title Association has identified several potential ``red flag''
situations involving real estate transactions, including:
[sbull] Where a prospective buyer is paying for real estate with
funds from a high risk country, such as a ``non-cooperative country or
territory'' as designated by the Financial Action Task Force (``FATF'')
or a country designated by the Secretary as ``a primary money
laundering concern'' pursuant to section 311 of the Act;
[sbull] Where the seller requests that the proceeds of a sale of
real estate be sent to a high risk country;
[sbull] Where a person is seeking to purchase real estate in the
name of a nominee and has no apparent legitimate explanation for the
use of a nominee;
[sbull] Where a person is acting, or appears to be acting, as an
agent for an undisclosed party and is reluctant or unwilling to provide
information about the party or the reason for the agency relationship;
[sbull] Where a person does not appear to be sufficiently
knowledgeable about the purpose or use of the real estate being
purchased;
[sbull] Where the person appears to be buying and selling the same
piece of real estate within a short period of time or is buying
multiple pieces of real estate for no apparent legitimate purpose;
[sbull] Where the prospective purchaser or seller seeks to have the
documents reflect something other than the true nature of the
transaction; and
[sbull] Where the person provides suspicious documentation to
verify his or her identity.
FinCEN solicits comment on the experience of the real estate
settlement industry with money laundering schemes, the existence of any
safeguards in the industry to guard against money laundering, and what
additional steps may be necessary to protect the industry from abuse by
money launderers, including those who finance terrorist activity.
2. How Should Persons Involved in Real Estate Closings and Settlements
Be Defined?
The BSA identifies a person involved in a real estate closing or
settlement as a financial institution. The statute includes no
definition of the term and FinCEN has not had an occasion to define the
term in a regulation. Moreover, the legislative history provides no
insight into how Congress intended the term to be defined. Because
section 5312(a)(1)(U) uses the phrase ``persons involved in real estate
closings and settlements'' (emphasis added), a reasonable
interpretation of the section could therefore cover participants other
than those who actually conduct the real estate settlement or
closing.\8\
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\8\ Thus, for example, in a settlement or closing involving
residential property, the term could cover participants other than
the settlement agent listed on the HUD-1 form, as required by RESPA.
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The universe of participants in real estate transactions is
potentially broad, even in the simplest residential real estate
transaction. The typical residential real estate transaction may
involve the following participants:
[sbull] A real estate broker or brokers,
[sbull] One or more attorneys, who represent the purchaser or the
seller,
[sbull] A bank, mortgage broker, or other financing entity,
[sbull] A title insurance company,
[sbull] An escrow agent, and
[sbull] An appraiser, who may assess the condition and value of the
real estate, as well as various inspectors.
Moreover, the participants involved, and the nature of their
involvement, could vary with the contemplated use of the real estate,
the nature of the rights to be acquired, or how these rights are to be
held. Real estate may be acquired for any one or number of purposes,
including, without limitation, residential, commercial, portfolio
investment, or development purposes. As for the nature of the rights to
be acquired, the real estate may be held in fee simple, under a lease
agreement or as security for indebtedness. Finally, real estate may be
held directly or through various investment vehicles, such as real
estate investment trusts, real estate limited partnerships, or entities
commonly referred to as ``syndicates'' of real estate investors.
The guiding principle in defining the phrase ``persons involved in
real estate closings and settlement'' is to include those persons whose
services rendered or products offered in connection with a real estate
closing or settlement that can be abused by money launderers. Equally
as important is identifying those persons who are positioned to
identify the purpose and nature of the transaction. Another factor may
be the importance of various participants to successful completion of
the transaction, which may suggest that they are well positioned to
identify suspicious conduct. In addition, professionals may have very
different roles, in different transactions, that greatly impact on
their exposure to money laundering. At one end of the spectrum may be
those professionals involved in structuring a real estate deal (and
thus in the best position to observe and prevent their use for money
laundering); at the other end, those whose role may be far from the
financial aspects, such as property inspectors. Finally, involvement
with the actual flow of funds used to purchase the property is a
significant factor.
As noted above, attorneys often play a key role in real estate
closings and settlements and thus merit consideration along with all
the other professionals involved in the closing and settlement process.
Section 352 requires that a financial institution take steps to detect
and prevent itself from being abused by money launderers, and to comply
with existing BSA requirements, such as reporting the receipt of cash
or cash equivalents in an amount over $10,000 on Form 8300. This
provision does not independently impose any reporting requirements on
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financial institutions. FinCEN therefore does not believe that
application of section 352 requirements to attorneys in connection with
activities relating to real estate closings or settlements raises
issues of, or poses obligations inconsistent with, the attorney-client
privilege.\9\ In fact, attorneys already must exercise due diligence
when they receive funds from clients where there is an indication that
the funds may be tainted, and cannot simply accept funds without the
risk that their fees will be subject to forfeiture.\10\ When engaging
in conduct subject to anti-money laundering regulations, attorneys,
like other professionals, should take the basic steps contemplated by
section 352 to ensure that their services are not being abused by money
launderers.
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\9\ The recent resolution by the American Bar Association
opposing the imposition of suspicious activity reporting obligations
on attorneys recognizes the distinction between anti-money programs
and reporting requirements. See Task Force on Gatekeeper Regulation
and the Profession, Report to the House of Delegates (available on
www.abanet.org/leadership/recommendations03/104.pdf) (accepting the
concepts of reasonable compliance training and due diligence to
minimize risk of lawyers' involvement in illegal money laundering
activity).
\10\ See U.S. v. Moffitt, Zwerling & Kemler, P.C., 83 F.3d 660
(4th Cir. 1996) (firm that ``tiptoed'' around the most pertinent
questions regarding the source of fees received from drug dealer
required to forfeit fees shown to be derived from proceeds of
narcotics trafficking).
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FinCEN accordingly seeks comment on which participants in the real
estate closing or settlement process are in a position where they can
effectively identify and guard against money laundering in such
transactions. Information and comment may, among other things, address
both the extent to which various participants have access to
information regarding the nature and purpose of the transactions at
issue and the importance of the participants' involvement to successful
completion of the transactions. Information and comment should focus on
the real estate sector in general and on various transaction types.
FinCEN is particularly interested in receiving comments addressing
commercial real estate transactions. Comments are welcome from those
involved centrally in the real estate settlement process, i.e., those
who may act as an agent for all parties and are responsible for
reviewing the form and type of payment, as well as being aware of the
parties to the real estate transaction, and those who view their
involvement as more peripheral.
3. Should Any Persons Involved in Real Estate Closings or Settlements
Be Exempted From Coverage Under Section 352?
FinCEN also solicits comments regarding whether there should be an
exemption for any category of persons involved in real estate closings
and settlements. In this connection, FinCEN anticipates that persons
that are already subject to separate anti-money laundering program
rules (or that will be subject to separate rules) will not also be
subject to the anti-money laundering rules for persons involved in real
estate closings and settlements.\11\ Comments regarding possible
exemptions should be designed to enable FinCEN to evaluate whether the
risk of money laundering through a category of persons is sufficiently
small that a proposed anti-money laundering program rule could be
crafted that would exempt the category while also providing adequate
protection for the industry from the risks of money laundering. In
addition, FinCEN wishes to make it clear that it does not intend to
cover purchasers and sellers of their own real estate, although they,
too, are ``persons involved in real estate settlements and closings.''
The question of exemption is specifically directed to real estate
professionals, and those who trade in real estate on a commercial
basis.
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\11\ For example, banks already must comply with anti-money
laundering rules. See 31 CFR 103.120. Similarly, loan and finance
companies fall within the definition of a financial institution
under the BSA, and are currently being studied by FinCEN for
inclusion in the anti-money laundering rules.
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4. How Should the Anti-Money Laundering Program Requirement for Persons
Involved in Real Estate Closings and Settlements Be Structured?
In applying section 352 of the Act to persons involved in real
estate closings and settlements, FinCEN must consider the extent to
which the standards for anti-money laundering programs are commensurate
with the size, location, and activities of persons in this industry.
FinCEN recognizes that while large businesses are involved in real
estate closings and settlements, businesses in this industry may be
smaller companies or sole proprietors. FinCEN thus seeks comment on any
particular concerns these smaller businesses may have regarding the
implementation of an anti-money laundering program.
FinCEN also recognizes that persons involved in real estate
closings and settlements may have some programs in place to meet
existing legal obligations, such as the requirement to report on Form
8300 the receipt of over $10,000 in currency and certain monetary
instruments. These businesses may also have procedures in place to
protect them against fraud. FinCEN therefore seeks comment on what
types of programs persons involved in real estate closings and
settlements have in place to prevent fraud and illegal activities, and
the applicability of such programs to the prevention of money
laundering.
III. Conclusion
With this ANPRM, FinCEN is seeking input to assist it in
determining how to implement the requirements of section 352 with
respect to persons involved in real estate closings and settlements.
FinCEN welcomes comments on all aspects of a potential regulation and
encourages all interested parties to provide their views.
IV. Executive Order 12866
This ANPRM is not a ``significant regulatory action'' for purposes
of Executive Order 12866. It neither establishes nor proposes any
regulatory requirements. Instead, it seeks public comment on a wide
range of questions concerning the extent to which the anti-money
laundering program mandates of section 352 of the USA Patriot Act
should apply to persons involved in real estate closings and
settlements.
Dated: April 3, 2003.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
[FR Doc. 03-8688 Filed 4-9-03; 8:45 am]
BILLING CODE 4810-02-P