Proposed Rule Closing Decades-Old Anti-Money Laundering Loophole Marks Major Milestone in the Fight Against Global Corruption
The Financial Accountability and Corporate Transparency (FACT) Coalition today welcomed the Treasury Department’s release of much-needed draft reforms closing loopholes that have, for decades, allowed international and domestic bad actors to launder money through U.S. real estate markets. The draft rule proposed today would, for the first time, require certain U.S. real estate professionals to conduct basic checks on their customers to prevent money laundering in the residential real estate sector.
“This draft rule sends a clear message that the U.S. plans to close off options for criminals looking to hide their ill-gotten gains in our real estate markets,” said Ian Gary, executive director of the 100-plus member FACT Coalition. “It is imperative that Treasury now finalize strong, permanent rules to prevent the misuse of U.S. residential and commercial real estate by foreign and domestic criminals, sanctioned Russian oligarchs, drug traffickers, sponsors of international terrorism, and other bad actors.”
While FACT’s analysis is ongoing, the draft rule’s release marks a turning point in the ongoing implementation of the Biden Administration’s 2021 Strategy on Countering Corruption, which identifies certain key anti-money laundering (AML) reforms as core national security objectives. FACT and its allies have submitted comments to Treasury on multiple rounds of consultations surrounding these proposed revisions, making numerous recommendations to ensure the efficacy of a final AML regime for real estate transactions.
The roughly $50 trillion U.S. real estate sector has long been a favorite hiding place for the proceeds of corruption, drug trafficking, and other transnational crimes. Individual residential real estate transactions can represent staggering sums – the U.S. Department of Justice is currently pursuing forfeiture of a $63 million Los Angeles mansion believed to have been purchased with bribe money by a former high-ranking Armenian public official.
While limited measures called Geographic Targeting Orders (GTOs) have provided some glimpse into the beneficiaries of all-cash residential real estate transactions in certain high-risk jurisdictions, they are, by definition, temporary and limited in scope. Meanwhile, real estate professionals as a whole have largely been exempted from AML monitoring and reporting requirements under the PATRIOT Act for more than two decades.
There is evidence that the harms associated with money laundering through real estate purchases go far beyond enabling corruption and other crimes. Increased demand for high-value properties – driven in part by an influx of dirty cash into the sector – can both directly contribute to rising home prices and disincentivize development of new affordable housing. Basic reporting safeguards for certain high-risk real estate transactions, including non-financed transactions that do not involve a bank or other institution with AML responsibilities, can help to mitigate these effects without impacting the ability of ordinary people to obtain a mortgage or purchase a house.
Today’s draft rule represents only the latest in a wave of recent and upcoming actions by Treasury to insulate the U.S. economy from dirty money. Another major milestone was reached on January 1, when Treasury began collecting information on the true, “beneficial” owners of anonymous shell entities under the landmark Corporate Transparency Act (CTA).
“With the launch of the nation’s first federal beneficial ownership registry in January, Treasury took a massive first step toward dismantling the systems of financial secrecy that have for so long made the U.S. the world’s foremost destination for dirty money,” said Gary Kalman, executive director of Transparency International U.S., a FACT Coalition member. “By finalizing strong anti-money laundering safeguards for the multi-trillion dollar real estate sector, the Biden administration can live up to its commitments and catapult the United States from being a laggard to a leader in the global fight against corruption and illicit finance.”
Notes to the Editor:
- Click here to read the full text of the draft rule.
- Treasury has announced its intention to release a separate rule to counter money laundering in U.S. commercial real estate markets later this year.
- In February 2022, The FACT Coalition and its allies – including Global Financial Integrity, the Anti-Corruption Data Collective, Transparency International-US, and a coalition of groups committed to fair housing – submitted comments to FinCEN to inform the rulemaking process. These recommendations urged the need for a final AML regime that:
- Is permanent and nationwide;
- Covers both residential and commercial real estate transactions;
- Has low – or no – monetary reporting thresholds for transactions;
- Includes cascading reporting obligation covering title companies, escrow agents, attorneys and real estate agents, so that someone is always responsible for reporting regardless of how a transaction is structured;
- Requires reporting on other, non-sale transfers of ownership of real estate; and
- Requires key information on both the buyer and seller of a given property – including the true, “beneficial” owner of an entity involved in the transaction, the source of funds, and identification as a “politically exposed person,” or PEP.
- In December 2023, FACT Coalition-member Transparency International-US released a report, “Welcome Mat for Corruption: The U.S. and its Real Estate Market”, which assessed risks in the U.S. real estate market against other countries.
- In December 2021, FACT Coalition-member Global Financial Integrity released its ground-breaking report, “Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat’s Dream,” which identified dozens of cases of money laundering in both U.S. residential and commercial real estate.