The U.S. Dept. of Treasury’s Financial Crimes Enforcement Network Geographic Targeting Order by Marc Israel

Marc Israel, MiT National Land Title Services

It should come as no surprise to anyone that people from around the world like to invest their money in the stable real estate markets of New York City and other “trophy” cities around the U.S. And it should come as no further surprise that bad guys also want to turn their ill-gotten monies into stable, and legal, properties here as well. In a never ending game of cat and mouse, the real estate industry, and specifically the title insurance business, has been asked to do our fair share to help catch the bad guys.

Earlier this year, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (known as FinCen) issued an order called a Geographic Targeting Order (GTO) which directed title companies to report certain residential real estate transactions to the Feds. The GTO was initially done as a 6-month trial in only two locations—Manhattan and Miami. It has now been extended for another 6 months and expanded to new cities in California, Texas and Florida, as well as to all five boroughs of New York City.

FinCen orders title companies to report on transactions:

(1) of residential properties;

(2) bought for all cash;

(3) where the purchase price exceeds $3 million in Manhattan or $1.5 million in the other four boroughs;

(4) the buyer is an LLC or similar legal entity; and

(5) purchase is made with untraceable funds.

In a city where foreign buyers, or others who seek to remain anonymous, are not only commonplace but a big part of the market, the GTO absolutely comes into play. It remains to be seen if it will serve its purpose of catching bad guys, but it will certainly impact buyers seeking to use corporate entities to buy a residence for all cash in the city.

In order to understand the impact of the order, it is important to keep in mind who the government is trying to catch. They are looking for people who are using anonymous corporate entities to move untraceable cash into real estate in New York City and other U.S. cities.

So, at the outset, that tells us a few things. First, if you are an individual making the purchase in your own name, you are not subject to the GTO. Why? Because the purpose of the GTO is to track anonymous entities making these purchases. A person is not anonymous and he can be tracked. Therefore, he is not subject to the GTO.

The second thing it tells us is that FinCen is only trying to find untraceable cash. As such, if the buying entity is getting a mortgage the GTO does not apply since the existence of the mortgage means both that the money can be traced and that the lending bank is already subject to similar reporting requirements.

Third, even if it is an LLC, and even if the purchase is for “all cash” the GTO does not apply so long as the money used to purchase the property is delivered by bank wire, bank check or cashier’s check. Why? Because all of these methods of payment can be traced and already have bank reporting requirements attached to them.

Instead, the transaction that FinCen is looking for is the one where:

(1) the entity, such as an LLC, is anonymous;

(2) the purchase is being made for “all cash,” and

(3) the payment is being made by personal check, money order, travelers checks, or other similarly untraceable form of payment.

In these situations, if a purchase exceeds the threshold amount, the title company is then required to gather, and report, a good deal of information about the transaction to FinCen.

The mere fact that the title company is required to submit the information to FinCen is not a deal killer. At worst, in most cases, all it may do is delay the transaction for a short period of time. Of course, if FinCen does not like what it sees in the report then all bets are off and the transaction may be scrutinized to the extent that the deal doesn’t even happen.

In summary, the GTO that seeks to stop bad actors from laundering their money through New York City real estate is here, it is real, and it will certainly be triggered by the types of deals that take place in New York on a regular basis. As such, if you are in this market you need to know about it. However, the likelihood that it will have any meaningful impact on both the ability to close a deal or on the larger market is likely pretty slim.

Marc Israel, Esq., is president and chief counsel at MiT National Land Services, New York, N.Y.