The United States Treasury is about to implement a rule to prevent individuals from exploiting a longstanding loophole that provided anonymity while purchasing real estate.

The Financial Crimes Enforcement Network (FinCEN) of the US Treasury says that the proposed rule will prevent criminals from hiding their identities while laundering money through US residential properties.

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“The US Department of the Treasury (Treasury) has long recognised the illicit finance risks posed by abuse of the US real estate market and of legal entities and trusts by criminals and corrupt officials to launder ill-gotten gains through transfers of residential real estate,” the US Treasury stated in an unpublished copy of the proposed rule.

“The abuse of US residential real estate markets threatens US economic and national security and can disadvantage individuals and small businesses that seek to compete fairly in the US economy. The proposed rule is designed to enhance transparency nationwide in the US residential real estate market and to assist Treasury, law enforcement, and national security agencies in protecting US economic and national security interests by requiring certain persons involved in real estate closings and settlements to file reports and maintain records related to identified non-financed transfers of residential real estate to specified legal entities and trusts on a nationwide basis, including information regarding beneficial owners of those entities and trusts.

“Among the persons required by the Bank Secrecy Act (BSA) to maintain anti-money laundering (AML) programs are “persons involved in real estate closings and settlements.” Yet, for many years, FinCEN has exempted such persons from comprehensive regulation under the BSA and has issued a series of time-limited and geographically focused “geographic targeting orders” (GTOs) to the real estate sector in lieu of more comprehensive regulation.

“Information received in response to FinCEN’s GTOs relating to non-financed transfers of residential real estate (Residential Real Estate GTOs) have demonstrated the need for increased transparency and further regulation of this sector. This notice of proposed rulemaking (NPRM) thus proposes a new reporting requirement for non-financed residential real estate transactions, consistent with the BSA’s longstanding directive to impose AML requirements on persons involved in real estate closings and settlements.

“At the same time, FinCEN has carefully considered the comments received in response to an advance notice of proposed rulemaking (ANPRM) on Anti-Money Laundering Regulations for Real Estate Transactions, and FinCEN appreciates the burdens that traditional AML program and SAR requirements may impose on persons involved in real estate transactions. This NPRM therefore proposes a streamlined reporting framework designed to minimise unnecessary burdens while also enhancing transparency.

“Although certain information collected under this proposed rule may also be available to law enforcement, in some instances, through the new beneficial ownership reporting requirements imposed by the Corporate Transparency Act (CTA), the CTA’s reporting regime and this proposed rule serve different purposes.

“In contrast to the beneficial ownership reporting requirements outlined in the CTA, this proposed rule is a tailored reporting requirement that would capture a particular class of activity that Treasury deems high-risk and that warrants reporting on a transaction-specific basis. More specifically, the proposed rule would require certain persons involved in residential real estate closings and settlements to file, and to maintain a record of, a streamlined version of a Suspicious Activity Report (SAR), referred to here as a “Real Estate Report.”

“The information required to be reported in the Real Estate Report would identify the reporting person, the legal entity or trust to which the residential real property is transferred, the beneficial owners of that transferee entity or transferee trust, the person that transfers the residential real property, and the property being transferred, along with certain transactional information about the transfer. The reporting person would be required to file the Real Estate Report no later than 30 days after the date of closing.”

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The proposed rule will be published in an official document on Friday. Concerned parties and US agencies will have 60 days to send comments about the proposed rule.

The International Consortium of Investigative Journalists (ICIJ) identified 206 US-based trusts holding more than $1 billion in combined assets linked to 41 countries in its 2021 Pandora Papers. Nearly 30 of those trusts were tied to individuals or companies accused of fraud, human rights abuses and official corruption.

At least 10 Nigerian politicians were mentioned in Pandora Papers. 

The proposed rule will apply nationwide and will not be limited to purchases above a certain price threshold.

A FinCEN official told the ICIJ that the US Treasury was also considering regulatory options to protect commercial real estate from some identified illicit financial risks.