While real estate ownership by limited liability companies (LLCs) remains an area of focus for government agencies seeking to root out money laundering and terrorism financing, a growing area of interest is the obligations of real estate lawyers in preventing the use of these entities to further criminal activities. To date, lawyers have not been subjected to formal reporting requirements as other real estate transaction participants such as financial institutions have.  Given the continuing focus on these criminal activities in real estate transactions, real estate lawyers should consider developing more robust client diligence procedures to mitigate money laundering and terrorism financing risks in these transactions as well as to minimize the reputational risk associated with participating in such transactions.

FinCEN’s GTOs

Since January 2016, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury has issued a series of Geographic Targeting Orders (GTOs) to collect information regarding “all cash” residential real estate transactions in certain markets in an effort to better understand the use of LLCs in such transactions.  FinCEN has speculated that individuals use LLCs in these transactions to mask their identity in an effort to facilitate money laundering and terrorism financing.  On Aug. 22, 2017, FinCEN issued its most recent GTO that expanded the number of locations and the types of real estate transactions subject to reporting requirements.  Honolulu joined the list of covered areas, which also includes New York, Miami, San Diego, Los Angeles, San Francisco and San Antonio.  In addition, the GTO added wire transfers to the list of covered payment mechanisms, which closed a significant gap in the transactions requiring reporting.  In connection with this GTO, FinCEN issued an advisory aimed at real estate transaction participants, including lawyers, noting that as of May 2, 2017 “over 30 percent of the real estate transactions reported under the GTOs involved a beneficial owner or purchaser representative that had been the subject of unrelated Suspicious Activity Reports (SARs) filed by U.S. financial institutions.” This data point supports FinCEN’s concern that individuals involved in suspicious activities are using LLCs to mask their identities.