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Category: FinCEN


GEOGRAPHIC TARGETING ORDERS: BACK AND BIGGER THAN EVER

August 12th, 2016 — 11:06am

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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. Continue reading »

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

1 comment » | Closings, FinCEN, Geographic Targeting Order, Going Private, GTO's, News

This GTO Is Not a Dream Vehicle: Another Blow to Privacy

July 9th, 2016 — 12:47pm

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punchOn January 13, 2016, the United States Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a Geographic Targeting Order, or “GTO”, covering the Borough of Manhattan. The GTO was ostensibly issued in response to the media blitz around the use of shell companies to launder money via the purchase of real property. Continue reading »

The GTO applies to “Covered Transactions”, which are defined as transactions in which a purchaser buys Manhattan residential real property for more than $3,000,000.00 in an all-cash deal (i.e., one not involving a lender) using any of the following: (a) currency (cash), (b) a cashier’s check, (c) a certified check, (d) a traveler’s check or (e) a money order. There is no exception for low amounts when it comes to any of the above payment methods; so, strangely enough, a certified check for $1.00 will render the GTO applicable to the entire transaction if all other requirements are met. The order applies to all such Covered Transactions from March 1, 2016 through August 27, 2016.

The GTO requires title companies involved in Covered Transactions to file a report with FinCEN detailing, among other things, the identity of each “Beneficial Owner” of the purchaser entity – that is, each individual owning at least 25% of the equity interests in the entity. Title companies must conduct an investigation into the identities of all Beneficial Owners – and the officers, directors, employees and agents of the title companies that do not comply are faced with the prospect of civil or criminal penalties.

This means, in effect, that purchasers interested in the privacy afforded by the use of a trust or a limited liability company (LLC) when buying a home will have that privacy invaded, at least by their title company and the U.S. Treasury.

Unless, of course, a purchaser chooses to exploit one of the gaping loopholes the government left when creating this GTO.

Perhaps the most egregious error occasioned by the GTO is the omission of wire transfers from the methods of payment covered by the order. Seemingly, a purchaser wishing to circumvent the GTO and therefore maintain his or her anonymity simply needs to have the purchase price, all title company charges and any condominium or co-op fees wired. This requires some prior planning and a little patience at the closing table while the wires are processed, but it can easily be accomplished.

One might think this means that final adjustments or last-minute, power-play demands at the closing table would foil the would-be GTO-evader. However, this is not the case: uncertified personal checks also fall outside the umbrella of a Covered Transaction. It seems that the purchaser can wire the principal amounts required by the transaction and not be derailed when the seller holds out for that extra $121.53 in common charges his or her attorney insists is due at the table.

FinCEN even acknowledged these shortfalls in the Frequently Asked Questions addendum it published on February 1, 2016 in connection with the GTO: a “method of payment not specifically enumerated in [the GTO’s] Section II.A.2.v. (e.g., a wire transfer or an uncertified personal check) would not, in and of itself, qualify as a Covered Transaction.”

The recent release of the Panama Papers and the increased media focus on the use of shell companies for illicit purposes mean that FinCEN’s Manhattan real estate GTO is unlikely to be the last governmental attempt to monitor the use of LLCs and trusts in connection with real estate acquisition. But, given how this GTO was engineered, perhaps the biggest takeaway is that one should never underestimate a government’s ability to fall asleep at the wheel.

By Patrick R. Doyle

Comment » | Closings, FinCEN, Geographic Targeting Order, Going Private, GTO's, News

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