FinCEN’s Incoming Reporting Rule Ups the Ante on Real Estate Due Diligence

According to a recent GlobeSt article, a long-awaited Financial Crimes Enforcement Network (FinCEN) anti-money laundering rule may finally be rolled out in Q3 2023.

The rule, titled “Residential Real Estate Transaction Reports and Records” aims to stop anonymous property purchases, especially cash purchases, that can be used to launder illicit funds.

Long in the making

The proposal for the new rule, which is set to focus on residential properties including high-end luxury homes, was originally announced back in 2021.

Since then, Reuters notes that FinCEN has been pursuing a related regulation targeting the anonymous owners of shell companies and that work on that piece “slowed down FinCEN’s work on the real estate reporting rule.” Now, however, the real estate rule seems to be firmly back in motion.

Reuters adds that the real estate rule is “expected to require that real estate professionals such as title insurers report the identities of the beneficial owners of companies buying real estate in cash.”

CRE could be next

While the upcoming rule currently focuses on residential properties, worth noting is that the same regulations may be incoming for commercial real estate (CRE) as well.

In their original announcement, FinCEN noted that money laundering risks originate from both the residential and commercial sectors, and that both “merit appropriate regulatory treatment.”

The agency added, however, that the differences and complexities of different real estate sectors may require an iterative approach – with regulation rolling out on residential before additional rules targeting CRE deals are put forward.

Doubling up on diligence

Though many real estate professionals already conduct appropriate levels of due diligence, the new system will double up on existing practices. That means carefully screening new clients and deals, and scrutinizing any details that raise potential red flags.

As Michael Romer of real estate law firm Romer Debbas LLP, summed up for GlobeSt: “It’s going to put an onus on all of us to ensure that we know who our clients are and are effectively vetting our clients before we work for them. The lawyers and real estate professionals not doing KYC [know your customer practices] on their clients absolutely need to start doing that.”