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GEOGRAPHIC TARGETING ORDERS: BACK AND BIGGER THAN EVER

geotargetThe United States Treasury’s Financial Crimes Enforcement Network (“FinCEN”) will continue to track all-cash purchases of high-end real estate in an effort to combat money laundering. FinCEN’s method? Another Geographic Targeting Order.

As we wrote about previously in this space, in January 2016 FinCEN issued Geographic Targeting Orders covering all-cash deals over certain thresholds in Manhattan ($3,000,000) and Miami ($1,000,000). The first Geographic Targeting Order (“GTO”) was effective from March 1, 2016 through August 27, 2016. The new GTOs pick up right where the first ones left off, on August 28, and they will run through February 23, 2017.

For the most part, the requirements remain the same. FinCEN is still only interested in knowing about purchasers who utilize business entities, like LLCs or trusts, to purchase residential real estate. In order to be a “Covered Transaction” and therefore subject to FinCEN scrutiny, purchases must be of residential real property, for an amount exceeding a location-specific threshold (as discussed below), without financing, and must involve certain methods of payment. The onus remains on title companies to investigate and report to FinCEN the identity of the beneficial owner of the purchasing entity – be it a corporation, LLC, partnership or trust.

There are two major changes to the criteria for a “Covered Transaction” in the new GTO:

  1. The first and flashiest change is the addition of 12 new counties – or boroughs – across four states:

    • In New York, Brooklyn, Queens, Staten Island and the Bronx join Manhattan, albeit with a halved price threshold of $1,500,000.
    • In Florida, FinCEN deemed that Miami-Dade’s neighboring counties, Broward and Palm Beach, should also be included; their price thresholds are the same as Miami’s, at $1,000,000.
    • California enjoys its first appearance on the GTO list, with San Diego County, Los Angeles County, and three northern tech-bubble counties (San Francisco, San Mateo and Santa Clara); the threshold for all of the California purchases is $2,000,000.
    • Last, and least, for a change, is Texas, where all-cash purchasers of residential real estate in Bexar County (which encompasses San Antonio) for over $500,000 will be targeted by the new geographic orders.
  1. The second and more interesting (if also more subdued) change is the addition of two new methods of payment that will subject a transaction to the GTO if all the other requirements are met. Previously, in order to be the target of a GTO the purchase had to include any amount of any of the following: (a) currency (cash); (b) cashier’s check; (c) certified check; (d) traveler’s check or (e) a money order. FinCEN has added to the mix personal checks and business checks.

This second change is of most concern to buyers and sellers of real estate and their attorneys.

As we wrote in our previous post on the first iteration of the GTO, one can avoid bringing an otherwise geographically-targeted transaction within the purview of the GTO by wiring all of the sums to be paid in the transaction. This remains the case, but the rationale remains difficult to ascertain. Perhaps it is because wire transfers originate from and land at banks, or perhaps this was again overlooked in yet another striking example of governmental incompetence.

However, we also mentioned that because personal checks are currently not subject to scrutiny under the existing GTO, a purchaser can dispatch with unforeseen, last-minute, disputed or miscalculated sums at the closing table without subjecting the transaction to GTO compliance. This will no longer be the case as of August 28, 2016, and it occasions an absurd result: even a small personal check to pay a tiny adjustment to the purchase price will compel the title company to report the transaction to FinCEN.

Under the old GTO’s rules, a buyer and seller could theoretically have agreed to make and accept all payments in the form of personal checks or business checks. In New York, many of the standard form contracts used by real estate practitioners contain provisions requiring that all payments at closing over a certain sum be made by purchaser’s certified check or an official bank check. However, less scrupulous parties, such as buyers and sellers using real estate transactions to launder money, might have been tempted to forgo such assurances if it meant the transaction would not be reported to the U.S. Treasury. Now, under the new GTO, using a personal check to so much as credit the purchaser $20 for a new doorknob will place news of the transaction on FinCEN’s doorstep.

In sum, if a purchaser desires to avoid having their title company report their purchase in one of the covered jurisdictions to the U.S. Treasury, he or she better have everything hammered out to the penny and their wires keyed in before even taking a seat at the closing table.

By Patrick R. Doyle and Jerome J. Strelov

Category: Closings, FinCEN, Geographic Targeting Order, Going Private, GTO's, News One comment »

One Response to “GEOGRAPHIC TARGETING ORDERS: BACK AND BIGGER THAN EVER”

  1. Patrick R. Doyle

    To follow up:

    This past weekend I spoke with a friend who used to work at the Financial Industry Regulatory Authority (FINRA). He thought FinCEN may have left wire transfers out of the geographic targeting orders because a wire for a large sum might obligate a bank to file a “Suspicious Activity Report”, or “SAR” with FinCEN anyway.

    The SAR form includes sections for “Characterization of Suspicious Activity” and a required “Narrative” section, wherein the financial institution must do their best to describe the transaction. If the bank has knowledge that the wire transfer was effectuated in order to purchase real estate, that information would likely go into the SAR.

    If my financial regulatory friend is to be believed, FinCEN wasn’t worried about covering all of its bases within the GTO; they’ll know you bought a place one way or another.


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