FinCEN Issues Revised GTOs Including Lower Purchase Thresholds and Virtual Currencies

On November 15, 2018, FinCEN issued revised Geographic Targeting Orders (GTOs), once more expanding its scrutiny of “all-cash” purchases (i.e., those without bank loans or other external financing) in the luxury residential real estate market. FinCEN broadened the geographic scope of the orders, lowered the purchase amount threshold for each covered area, and added purchases that involve virtual currencies to the mandatory reporting list. Along with the GTOs, FinCEN also released frequently asked questions to clarify, among other things, the methods of payment covered and requirements for verification of beneficial ownership information.

Prior GTOs

In January 2016, FinCEN began issuing temporary GTOs requiring U.S. title insurance companies to identify the individuals behind legal entities that purchased high-end residential real estate in “all cash” transactions through the use of currency, a cashier’s check, a certified check, a traveler’s check, or a money order. The GTOs applied to real estate purchases over $3 million made in Manhattan in New York City and purchases over $1 million made in Miami-Dade County in Florida. In July 2016, FinCEN issued additional GTOs to expand the covered areas from just two locations to all five boroughs in New York City, additional counties in Florida, counties in California, and counties in Texas. GTOs published in August 2017 expanded coverage to include Honolulu, Hawaii and also required the reporting of transactions that involved wire transfers, drawing on new authorities provided by the Countering America’s Adversaries Through Sanctions Act of 2017 (CAATSA). The orders were renewed again without public announcement in March 2018. FinCEN repeatedly has said that the GTOs are returning valuable information on persons suspected of illegal activities, including foreign corruption, organized crime, fraud, and narcotics trafficking, and that 30 percent of reported transactions involve a beneficial owner or purchaser representative that was also the subject of a previous suspicious activity report (SAR).

The New GTOs

The new GTOs apply to title insurance companies, and any of their subsidiaries and agents, engaging in a “Covered Transaction.” A Covered Transaction is one in which a legal entity purchases residential real property:

• In the amount of $300,000 or more.
• Without a bank loan or other similar form of external financing.
• Using in part currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, a money order in any form, a funds transfer, or virtual currency.
• In the following covered areas:
  • The Texas counties of Bexar, Tarrant, or Dallas.
  • The Florida counties of Miami-Dade, Broward, or Palm Beach.
  • The Boroughs of Brooklyn, Queens, Bronx, Staten Island, or Manhattan in New York City.
  • The California counties of San Diego, Los Angeles, San Francisco, San Mateo or Santa Clara.
  • The city and county of Honolulu in Hawaii.
  • The Nevada county of Clark.
  • The Washington county of King.
  • The Massachusetts counties of Suffolk or Middlesex.
  • The Illinois county of Cook.

The new, uniform $300,000 reporting threshold is significantly lower than the thresholds in previous GTOs and also eliminates a previous practice of varying the thresholds by covered location.

Insurance companies that engage in the above listed activities must report the Covered Transaction to FinCEN by filing a FinCEN Currency Transaction Report. The report must be filed within 30 days of the closing of the Covered Transaction through the Bank Secrecy Act (BSA) E-Filing system. The insurance company must provide certain information in its report, such as information about the identity of the individual responsible for representing the Legal Entity and information about the identity of the Beneficial Owner(s) of the Legal Entity. A Beneficial Owner is defined for the purpose of these reports as an individual “who, directly or indirectly, owns 25 percent or more of the equity interests of the Legal Entity purchasing real property in the Covered Transaction.” Once the Beneficial Owner has been identified, the insurance company must obtain and record a copy of the Beneficial Owner’s driver’s license, passport, or other similar identifying documentation. The GTOs also require the insurance company to retain all records relating to compliance with the order for five years from the last day that the order is effective. These records must be stored in a reasonably accessible manner and must be made available to FinCEN upon request. This order is effective beginning November 17, 2018 and continues until May 15, 2019.

Along with the new orders, FinCEN also issued new frequently asked questions (FAQs). These clarify for the first time that, in identifying beneficial owners, a title insurance company may reasonably rely on information provided by third parties involved in the transaction. 

The Likelihood of Rulemaking

In the past, FinCEN has hinted that the information collected through the GTOs could lead to the creation of regulations in this sector. Most recently, in the press release accompanying the newest GTOs, FinCEN remarked that these GTOs will further assist in tracking illicit funds and inform its future regulatory efforts in this area. This time it seems that FinCEN could actually be moving forward with regulations. Earlier in November, FinCEN announced through the Office of Management and Budget that it will issue an Advance Notice of Proposed Rule Making (ANPRM) “soliciting information regarding various businesses and professions, including real estate brokers that could be covered by the BSA as persons involved in real estate closings and settlements.” FinCEN previously considered regulation of “persons involved in real estate closings and settlements” in a 2003 ANPRM, but never issued a final rule.  FinCEN’s repeated extension and expansion of its GTOs suggests it may be collecting the data to support another try at regulations for such persons.

Practical Considerations

FinCEN’s clarification that title insurers may reasonably rely on the representations of third parties about who their beneficial owners are is a helpful limitation on the risk title insurers face in complying with their obligations. They still must ensure though, in order for reliance to be reasonable, that they are not aware of information that contradicts the assertions of who has the requisite beneficial ownership.

One practical consideration for banks that we have identified before is that FinCEN, in an August 22, 2017, advisory, has encouraged real estate brokers, escrow agents, title insurers, and other real estate professionals—to voluntarily file SARs to report any suspicious transactions relating to real estate. Banks and other BSA-regulated financial institutions should be aware of this when considering whether to file SARs for any part of such transactions that touches them, to avoid situations where such parties file SARs but the regulated financial institution fails to do so.