Treasury cracks the whip on money laundering
The U.S. government is laser-focused on uncloaking bad actors hiding behind shell companies to engage in money laundering and other illicit activities and is seeking to adopt new regulations to accomplish that goal — rules that will impact the housing industry.
The Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking (NPRM) that will require companies to report beneficial-ownership information as part of the Corporate Transparency Act (CTA). The goal of the regulatory push is to prevent criminals from abusing legal corporate entities, such as shell companies, to conceal proceeds from “corrupt and criminal acts,” including using shell companies to launder or conceal illicit funds through the purchase of real estate assets.
“Current U.S. law allows those seeking to hide their financial activities to form companies anonymously — without disclosing who ultimately owns and profits from them,” explained Deputy Secretary of the Treasury Wally Adeyemo in prepared remarks. “That makes moving illicit funds into the U.S. financial system especially enticing for criminals and corrupt actors, and it makes it even more important that the federal government has the tools to prevent and combat it.”
Adeyemo said the International Monetary Fund estimates that corruption costs governments around the world some $1 trillion annually in lost tax revenue.
A recent White House report outlining the U.S. strategy for countering corruption indicates that in Africa alone, for example, nearly $89 billion — about 3.7% of Africa’s entire gross domestic product — “leaves the continent in the form of illicit capital flight” every year. The same report also states that “more than $2.3 billion was laundered through U.S. real estate between 2015 and 2020.”
“Many real estate transactions involve the use of shell companies, all-cash purchases, purchases by international wire from countries with strict banking-secrecy regimes, processes that limit transparency, and the use of intermediaries without [anti-money laundering] obligations,” the White House report states. “These vulnerabilities are exacerbated by a perception that real estate can be a safe way to park value and obfuscate the source of illicit funds.”
The effort to rein in criminal actors hiding behind shell companies has been ongoing for years. FinCEN, part of the U.S. Department of the Treasury, has issued what are known as “geographic targeting orders” (GTOs) since 2016 to help address the issue, the White House report indicates. Those GTOs, the White House report states, were directed at title insurance companies, requiring them to identify the “natural persons behind legal entities [shell companies] used in all-cash purchases of residential real estate exceeding $300,000. …” The GTO dragnet ultimately encompassed a dozen U.S. metro areas.
FinCEN spokesman Stephen Hudak said at the time the first GTOs were initially issued in January 2016 — targeting shell companies in Manhattan and Miami — that over a quarter of the transactions covered by the orders in those two metro areas involved “a beneficial owner or purchaser representative” that also was ‘the subject of a suspicious activity report.”
In other words, a significant portion of transactions covered by the January 2016 GTOs were associated with possible criminal activity involving the beneficial owners of shell companies, he explained at the time. The suspicious activity, he added, included a beneficial owner who was linked to $16 million in suspect cash-withdrawal activity; a beneficial owner who was involved in passing possible counterfeit checks; and a beneficial owner who, through a network of shell companies, received about $7 million in suspicious wire transfers from businesses in South America.
“FinCEN is taking aggressive aim at those who would exploit anonymous shell corporations, front companies and other loopholes to launder the proceeds of crimes, such as corruption, drug and arms trafficking, or terrorist financing,” said Acting FinCEN Director Himamauli Das.
The CTA, established as part of the Anti-Money Laundering Act of 2020, mandates beneficial-ownership information reporting requirements for certain types of businesses, including corporations, limited liability companies, “and other similar entities created in or registered to do business in the United States,” a FinCEN press release states.
“The proposed rule [outlined in the NPRM] represents the culmination of years of bipartisan efforts by Congress, the Treasury, national security agencies, law enforcement, and other stakeholders to bolster the United States’ corporate transparency framework,” the FinCEN press release states. “FinCEN is committed to implementing these statutory obligations in a robust manner while minimizing burdens on reporting companies.”
The comment period for the NPRM will be open until early February of next year.
“The proposed rule for beneficial ownership reporting is a major step toward addressing the gaps in our corporate transparency framework that allow corruption to flourish and illicit funds to flow into the United States,” Secretary of the Treasury Janet L. Yellen said in a prepared statement. “The beneficial ownership rule will help close the loopholes that undermine U.S. national security, bolster economic fairness, and protect the integrity of our financial system.”
Along with the NPRM governing beneficial-ownership reporting, in early December FinCEN also announced an Advance Notice of Proposed Rulemaking (ANPR) that seeks public comment over the next 60 days on another potential set of regulations governing all-cash transactions. The ANPRM is focused on money-laundering risks in the U.S. real estate market and the need “to protect the sector from abuse by corrupt officials and other illicit actors,” a FinCEN press release announcing the rulemaking effort states.
The ANPRM contemplates establishing general recordkeeping and reporting mandates — now authorized under the Bank Secrecy Act — for persons involved in all-cash real estate transactions and seeks public comment on the best approach to use across both the residential and commercial real estate sectors.
“Today, certain all-cash real estate transactions are not subject to permanent anti-money laundering rules or requirements for beneficial ownership disclosure,” Treasury Deputy Secretary Adeyemo said. “As a result, our real estate markets are at risk of becoming a safe haven for criminals, kleptocrats, and others seeking to park corrupt profits.”
Adeyemo added, for example, that the brother of former Democratic Republic of the Congo president Joseph Kabila allegedly looted government funds and stashed some of proceeds in U.S. real estate worth nearly $3.5 million. He was reportedly able to turn the dirty money into usable assets by making the real estate purchases with cash — “taking advantage of this longstanding gap in U.S. anti-money laundering rules.”
“Increasing transparency in the real estate sector will curb the ability of corrupt officials and criminals to launder the proceeds of their ill-gotten gains through the U.S. real estate market,” said Das. “Addressing this risk will strengthen U.S. national security and help protect the integrity of the U.S. financial system.
“We urge stakeholders to provide input to assist us in developing an approach that enhances transparency while minimizing burden on business.”
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