Heightened Scrutiny of Real Estate Cash Purchases May Complicate Future Buys by Those Tied to Sanctioned Countries
On January 13, 2016, the Financial Crimes Enforcement Network (FinCEN) issued two new Geographic Targeting Orders (GTOs) that will temporarily require US title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in Manhattan and Miami. The GTOs go into effect on March 1, 2016 and will expire 180 days later. While in effect, title insurance companies will be required to file FinCEN Form 8300 whenever certain high-end real estate purchases occur in Manhattan or Miami without a bank loan or other form of external financing.
The purpose of this enhanced reporting requirement is to bring transparency to a traditionally opaque transaction: all cash real estate purchases. People looking to launder large amounts of illicit funds have generally been able to anonymously purchase real estate with cash using front companies that don’t disclose their beneficial owners. The GTOs will require title insurance companies to conduct enhanced due diligence, know their customers, and to file a report with FinCEN when necessary. This is a laudable effort by FinCEN to close a recognized gap in the financial system’s broader anti-money laundering framework.
However, many innocent and law abiding people also purchase real estate with cash. This enhanced reporting requirement may lead to circumstances where unbanked communities or people with financial ties to sanctioned countries find themselves unable to purchase a home in the United States. For example, it is not uncommon for a newly arrived immigrant from Iran or a young couple with family in Iran to bring or receive large amounts of untraceable cash from Iran, which they will then use to buy a home.
The cash is largely untraceable not because it is illicit, but because much of the economy in Iran operates without documentation. Economic sanctions currently authorize US persons to receive non-commercial family remittances from Iran and to bring one’s own cash to the United States when immigrating here.
The problem is exacerbated due to the lack of a direct banking channel between Iran and the United States. More broadly there is a general lack of awareness of such compliance issues in the Iranian American and unbanked communities. Accordingly, a lot of the transfers are processed through unverifiable third parties such as hawalas and saraafis. This might further taint the money in addition to its being untraceable.
The current GTOs are limited to $3,000,000+ and $1,000,000+ real estate purchases in Manhattan and Miami, respectively. However, if successful in uncovering fraud or money laundering, the regulations may be replicated with lower dollar thresholds throughout the entire real estate industry. Moreover, title insurance companies may currently feel pressure to over-comply with the rules and require a broader-than-necessary range of buyers to verifiably explain the source of their funds.
People with ties to sanctioned countries or unbanked communities planning on purchasing homes in the United States with cash should take steps early to ensure their compliance with federal law. This might mean avoiding the use of unlicensed money transmitters such as hawalas. It would probably be important to retain all records (including records from a foreign country) that could conceivably explain the source of the funds. One should also be ready to have these documents translated to English if needed.
If the funds are connected to a sanctioned country, it may be prudent to consult an attorney to determine whether one needs a specific license from OFAC before effectuating the funds transfer. It may also be helpful to file a request for interpretive guidance with OFAC, even if the transfer is clearly authorized by a general license or exemption. OFAC’s favorable written response or specific license may help quell the concerns of an overly compliant title insurance company.
Disclaimer: Blog posts should not be relied upon as legal advice and are only provided for informational purposes. Information contained in blog posts may also become outdated with the passage of time as laws change and U.S. foreign policy and national security objectives evolve.