Biden Administration Plans New Rule to Crack Down on CRE Shell Companies

AML, or anti-money laundering, is a big part of financial regulations that aim to reduce illegal funds going through complex transactions and hiding their original source or ultimate destination.

Multiple agencies—and entities such as banks, insurance firms, brokerages, corporations, and many more—must pay attention to tracing where funds come from and go to. Now, plans of the Biden administration are likely to make things more complicated in the commercial real estate realm.

The Financial Crimes Enforcement Network, or FinCEN, a bureau of the Treasury, announced on Monday that it was looking for public comments on a potential rule that would address potential money laundering in real estate that has been paid for in cash. 

“Real estate transactions involving loans or other financing by regulated financial institutions, such as banks, which are subject to federal anti-money laundering rules, are less susceptible to money laundering because those institutions are required to report suspicious activity to FinCEN,” the bureau says. 

The bureau compared the frequently more fluid processes of CRE transactions to a family purchasing a home with a mortgage. A bank, for example, has regulations to follow that require identification of the buyer, source of funds, and so on.

“In contrast, when real estate is purchased without such financing, it can be nearly impossible to trace the beneficial owners behind shell companies that are often used to purchase the real estate,” FinCEN noted. The transaction might be aboveboard, or it could be criminals or corrupt officials laundering their money by placing it into property that isn’t easily connected with their identities.

The focus, according to the advanced notice of proposed rulemaking, or ANPRM is to create “an effective system to collect and permit authorized uses of information concerning potential money laundering associated with non-financed transactions.”

“FinCEN seeks input on how it should implement such a system, consistent with the Bank Secrecy Act, to maximize benefits while minimizing burdens on reporting financial institutions and nonfinancial trades or businesses.” 

Regulators are explicitly eyeing commercial real estate as part of an eventual rule, although that may come in multiple steps, first in residential and then in CRE. It could be that FinCEN would require information from title insurance companies to identify transaction information as well as beneficial owners.

“Currently, title insurance companies are required to identify to the Treasury Department’s Financial Crimes Enforcement Network the persons behind shell companies used in all-cash purchases of residential real estate—but only on homes costing over $300,000, and only in a dozen metropolitan areas,” Bloomberg reported. Though that information raises the question of whether anything of practical interest to potential laundering might be missed as the 2021 third quarter median home price was $404,700, and one might expect such transactions to focus on more expensive property to more efficiently hide money.