Posted by: Taxlitigator | August 24, 2017

FinCEN ISSUES TARGETING ORDERS TO TITLE INSURANCE COMPANIES IN CALIFORNIA, HAWAII, FLORIDA, TEXAS AND NEW YORK by Charles P. Rettig

The Financial Crimes Enforcement Network (FinCEN) just announced the issuance of revised Geographic Targeting Orders (GTOs) that require U.S. title insurance companies to identify the natural persons behind shell companies used to purchase for high-end residential real estate in seven metropolitan areas for the period September 22, 2017 to March 20, 2018. Following the recent enactment of the Countering America’s Adversaries through Sanctions Act, FinCEN has revised their previously issued GTOs to capture a broader range of transactions, include transactions involving wire transfers and expanded the GTOs to include transactions conducted in the City and County of Honolulu, Hawaii.

THE GTO’s – U.S. title insurance companies are now required to report to FinCEN by filing a FinCEN Form 8300 within 30 days of the closing of the Covered Transaction. Each FinCEN Form 8300 filed pursuant to the GTO must be: (i) completed in accordance with the terms of this GTO and the FinCEN Form 8300 instructions (when such terms conflict, the terms of the GTO apply), and (ii) e-filed through the Bank Secrecy Act E-filing system. Further, they must: (1) retain all records relating to compliance with the GTO for a period of five years from the last day that the GTO is effective (including any renewals of the GTO); (2) store such records in a manner accessible within a reasonable period of time; and (3) make such records available to FinCEN or any other appropriate law enforcement or regulatory agency, upon request.

ADVISORY – In addition, FinCEN published an Advisory to provide financial institutions and the real estate industry with information on the money laundering risks associated with real estate transactions, including those involving luxury property purchased through shell companies, particularly when conducted without traditional financing. The Advisory provides information on how to detect and report these transactions to FinCEN.

In January 2016, FinCEN issued GTOs to require U.S. title insurance companies to report beneficial ownership information on legal entities, including shell companies, used to purchase certain luxury residential real estate in Manhattan and Miami—specifically, luxury residential property purchased by a shell company without a bank loan and made at least in part using a cashier’s check or similar instrument.  In July 2016 and February 2017, FinCEN reissued the original GTOs and extended coverage to all boroughs of New York City, two additional counties in the Miami metropolitan area, five counties in California (including Los Angeles, San Francisco, and San Diego), and the Texas county that includes San Antonio.

TRANSACTIONS COVERED BY THE GTO’s – The GTOs identify a Covered Transaction as a transaction in which: (a) a Legal Entity (generally a corporation, limited liability company, partnership or other similar business entity, whether formed under the laws of a state or of the United States or a foreign jurisdiction), (b) purchases residential real property, (c) without a bank loan or other similar form of external financing, (d) such purchase is made, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, or a money order in any form, or a funds transfer, and (e) the total purchase price is (i) $2,000,000 or more in the California county of San Diego, Los Angeles, San Francisco, San Mateo, or Santa Clara, (ii) $3,000,000 or more in the City and County of Honolulu in Hawaii, (iii) $3,000,000 or more in the Borough of Manhattan in New York City, New York, (iv) $1,500,000 or more in the Borough of Brooklyn, Queens, Bronx, or Staten Island in New York City, New York, (v) $1,000,000 or more in the Florida county of Miami-Dade, Broward, or Palm Beach, and (vi) $500,000 or more in the Texas county of Bexar.

The GTOs require a Covered Business to collect and report certain identifying information about the Beneficial Owner(s) of the Purchaser in a Covered Transaction. For purposes of the GTOs, a “Beneficial Owner” means each individual who, directly or indirectly, owns 25% or more of the equity interests of the Purchaser. The GTOs provide that the Covered Business must obtain and record a copy of the Beneficial Owner’s driver’s license, passport, or other similar identifying documentation. The Covered Business may reasonably rely on the information provided to it by third parties involved in the Covered Transaction, including the Purchaser or its representatives, in determining whether the individual identified as a Beneficial Owner is in fact a Beneficial Owner

SUSPICIOUS ACTIVITY REPORTS – Within the scope of real estate transactions covered by the GTOs, FinCEN data indicate that about 30 percent of reported transactions involve a beneficial owner or purchaser representative that was also the subject of a previous suspicious activity report. A covered financial institution is required to file a SAR if it knows, suspects, or has reason to suspect a transaction conducted or attempted by, at, or through the financial institution involves funds derived from: illegal activity, attempts to disguise funds derived from illegal activity, is designed to evade regulations promulgated under the BSA, lacks a business or apparent lawful purpose, or involves the use of the financial institution to facilitate criminal activity. According to FinCEN, beneficial owners or purchaser representatives in a significant portion of transactions reported under the GTO had been previously connected to a wide array of suspicious activities, including:

  • A beneficial owner suspected of being connected to over $140 million in suspicious financial activity since 2009 and who sought to disguise true ownership of related accounts.
  • Two beneficial owners (husband and wife) involved in a $6 million purchase of two condominiums were named in nine SARs filed from 2013 – 2016 in connection with allegations of corruption and bribery associated with South American government contracts.
  • A beneficial owner suspected of being connected to a network of individuals and shell companies that received over $6 million in wire transfers with no clear business purpose from entities in South America. Much of these funds were used for payments to various real estate related businesses.
  • Eleven SARs filed from 2008 through 2015 named either the buyer (an LLC), beneficial owner, or purchaser’s representative involved in a GTO-reported $4 million purchase of a residential unit. Law enforcement records indicate that both the purchaser’s representative and his business associate were associated with a foreign criminal organization involved in narcotics smuggling, money laundering, health care fraud, and the illegal export of automobiles.

FORM 8300 DUE WITHIN 30 DAYS – If the Covered Business is involved in a Covered Transaction, then the Covered Business shall report the Covered Transaction to FinCEN by filing a FinCEN Form 8300 within 30 days of the closing of the Covered Transaction. Each FinCEN Form 8300 filed pursuant to this Order must be: (i) completed in accordance with the terms of this Order and the FinCEN Form 8300 instructions (when such terms conflict, the terms of this Order apply), and (ii) e-filed through the Bank Secrecy Act E-filing system.

FinCEN is concerned about this small segment of the market in which shell companies are used to buy luxury real estate in “all-cash” transactions. In addition, feedback from law enforcement to FinCen apparently indicates that the reporting has advanced criminal investigations.  FinCEN believes the expanded GTOs will further help law enforcement and inform FinCEN’s future efforts to assess and combat the money laundering risks associated with luxury residential real estate purchases.

Additional information is available at:

FinCEN Targets Shell Companies Purchasing Luxury Properties in Seven Major Metropolitan Areas

https://www.fincen.gov/news/news-releases/fincen-targets-shell-companies-purchasing-luxury-properties-seven-major

Advisory to Financial Institutions and Real Estate Firms and Professionals (FIN-2017-A003)

https://www.fincen.gov/sites/default/files/shared/Real%20Estate%20GTO%20Order%20-%208.22.17%20Final%20for%20execution%20-%20Generic.pdf

FinCEN Geographical Targeting Order (GTO) dated August 22, 2017

https://www.fincen.gov/sites/default/files/advisory/2017-08-22/Risk%20in%20Real%20Estate%20Advisory_FINAL%20508%20Tuesday%20%28002%29.pdf

FinCEN Frequently Asked Questions re Geographical Targeting Order (GTO) dated August 22, 2017

https://www.fincen.gov/sites/default/files/shared/FAQs%20on%20Phase%204%20Real%20Estate%20GTO%208.22.2017%20FINAL.pdf

CHARLES RETTIG – Chuck Rettig is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., specializing in civil and criminal tax controversies as well as tax, business and estate planning, and family wealth transfers. Listed as the only Eminent Practitioner by Chambers USA specializing in “Tax: Fraud – Nationwide, Chuck is internationally recognized for his expertise in the representation of US Persons having undeclared interests in foreign financial accounts and assets, including sensitive civil examinations, IRS voluntary disclosure programs and procedures. Mr. Rettig is a Certified Specialist both in Taxation Law and in Estate Planning, Trust & Probate Law by the State Bar of California, Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com For more information please contact Chuck Rettig directly – rettig@taxlitigator.com


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