Tuesday, August 2, 2016

FEDERAL GOVERNMENT ATTEMPTS TO COMBAT MONEY LAUNDERING IN REAL ESTATE TRANSACTIONS

FEDERAL GOVERNMENT ATTEMPTS TO COMBAT
MONEY LAUNDERING IN REAL ESTATE TRANSACTIONS
 
In order to prevent money laundering in the real estate market, the US Department of Treasury Financial Enforcement Network (FinCen) issued an order in January of 2016 requiring some title insurance underwriters and its agents to report certain real estate transactions. The New York Times had a front page article on January 13, 2016 describing the new law and its impact on title companies and what must now take place at a closing.The January 2016 order affected residential real property in New York County NY over $3 million and another affected residential real property in Miami-Dade County, Florida over $1 million.
 
FinCen has now extended the Order from August 27, 2016 through February 23, 2017. In addition to expanding the reporting period, it has expanded the scope of the reporting requirements. While the initial order only covered Manhattan (New York County, NY) and Miami Dade (Florida), the continued Geographic Targeting Order (GTO) has been extended to residential property in Bexar County Texas, Broward and Palm Beach Counties in Florida, San Diego, Los Angeles, San Francisco, San Mateo and Santa Clara Counties in California, and Kings (Brooklyn), Bronx, Queens and Richmond (Staten Island) Counties in New York.In addition, the reporting requirement for the outer boroughs (Brooklyn, Bronx, Queens and Staten Island) has been reduced to $1.5 million (Manhattan remains at $3 million.
 
FinCen was established in 1990 by the United States Department of Treasury to "safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis and dissemination of financial intelligence and strategic use of financial authorities."
 
The GTO defines a covered transaction as any transaction that closes from March 1, 2016 toFebruary 23, 2017 involving:
1. Residential real property located in the geographic areas stated above.
2. The proposed buyer: is a legal entity, defined as a corporation, limited liability company, partnership or other similar business entity whether formed under the laws of New York, any other state, the United States or a foreign jurisdiction; therefore, individuals making the purchase are not covered by this regulation.
3. Consideration of more than $3 million outside of the outer boroughs and more than $1.5 million in Brooklyn, Bronx, Queens and Staten Island.
4. Without a loan or similar form of external financing from a financial institution; the reporting exclusion is only triggered by loans financed by a financial institution. If financing is provided by a private lender, seller or other business the transaction is reportable.
5. Any portion of the purchase price is paid using currency, cashier's check, certified check, traveler's check or money order. A personal or business check does not trigger the reporting requirement. If a purchase is entirely completed using wire transfers, already a common form of payment, the transaction is not subject to the new rule.
In the event a transaction meets the above criteria, the following must be reported to FinCen on a form IRS/FinCen 8300:
1. Identity of the individual primarily responsible for representing the Legal Entity; a description of the identification (driver's license, passport or other similar identifying document) obtained from the individual primarily responsible for representing the Purchaser with a copy retained in the file;
2. Identity of the Purchaser and any Beneficial Owner(s) of the Purchaser;
a. A description of the type of identification, driver's license, passport or other similar identifying document, obtained from the Beneficial Owner with a copy retained in the file;  
b. Any person or entity owning 25% or more of the purchasing entity is a "beneficial owner" and must be reported. If an entity is a member of the purchasing entity, members of that entity must be reported
3. Date of closing of the Covered Transaction; 
4. Total amount transferred in the form of a Monetary Instrument; 
5. Total purchase price of the Covered Transaction; and 
6. Address of the real property involved in the Covered Transaction;
Failure to report can subject the title company or any of its employees to a fine and/or penalty. Penalties can be assessed any time within six years from the date of the Covered Transaction. Civil actions may be commenced within two years of the date of the penalty or criminal conviction.
Commercial purchases including residential buildings with more than five units and individual purchases below the monetary threshold will not be scrutinized by FinCen. Title closers are being advised of this new disclosure requirement in the event the transaction fits the GTO and the transaction has not been identified prior to closing. It would be important for the real estate agent to identify the transactions which will be impacted by this new law and make the parties aware this may be of concern at the time of closing. In the event a party will not provide the information on a covered transaction, the insurance policy will not be issued by the title company which will obviously impact the transaction.
Alfred M. Fazio, Esq.
Capuder Fazio Giacoia LLP 
90 Broad Street 
New York, N.Y.  10004-2627  

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