[Federal Register Volume 68, Number 69 (Thursday, April 10, 2003)]
[Proposed Rules]
[Pages 17569-17571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8688]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA28


Financial Crimes Enforcement Network; Anti-Money Laundering 
Program Requirements for ``Persons Involved in Real Estate Closings and 
Settlements''

AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury.

ACTION: Advance notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: FinCEN is in the process of implementing the requirements 
delegated to it under the USA Patriot Act of 2001, in particular the 
requirement pursuant to section 352 of the Act that financial 
institutions establish anti-money laundering programs. The term 
``financial institution'' includes ``persons involved in real estate 
closings and settlements.'' FinCEN is issuing this advance notice of 
proposed rulemaking (``ANPRM'') to solicit public comments on a wide 
range of questions pertaining to this requirement, including how to 
define ``persons involved in real estate closings and settlements,'' 
the money laundering risks posed by such persons, and whether any such 
persons should be exempted from this requirement.

DATES: Written comments may be submitted on or before June 9, 2003.

ADDRESSES: Commenters are encouraged to submit comments by electronic 
mail because paper mail in the Washington, DC area may be delayed. 
Comments submitted by electronic mail may be sent to 
[email protected] with the caption in the body of the text, 
``ATTN: Section 352--Real estate settlements.'' Comments may also be 
submitted by paper mail to FinCEN, PO Box 39, Vienna, VA 22183-0039, 
``ATTN: Section 352 `` Real estate settlements.'' Comments should be 
sent by one method only. Comments may be inspected at FinCEN between 10 
a.m. and 4 p.m., in the FinCEN Reading Room in Washington, DC. People 
wishing to inspect the comments submitted must request an appointment 
by telephoning (202) 354-6400 (not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Office of Chief Counsel, FinCEN, (703) 
905-3590; Office of the General Counsel (Treasury), (202) 622-1927; or 
the Office of the Assistant General Counsel for Banking and Finance 
(Treasury), (202) 622-0480 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

I. Background

    On October 26, 2001, the President signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism (USA Patriot Act) Act of 2001 (Pub. L. 
107-56) (``the Act''). Title III of the Act, also known as the 
International Money Laundering Abatement and Financial Anti-Terrorism 
Act of 2001, made a number of amendments to the anti-money laundering 
provisions of the Bank Secrecy Act (``BSA''), which are codified in 
subchapter II of chapter 53 of title 31, United States Code. These 
amendments are intended to make it easier to prevent, detect, and 
prosecute international money laundering and the financing of 
terrorism.
    Section 352(a) of the Act, which became effective on April 24, 
2002, amended section 5318(h) of the BSA. As amended, section 
5318(h)(1) requires every financial institution including persons 
involved in real estate settlements and closings under section 
5312(a)(1)(U) to establish an anti-money laundering program that 
includes, at a minimum: (i) The development of internal policies, 
procedures, and controls; (ii) the designation of a compliance officer; 
(iii) an ongoing employee training program; and (iv) an independent 
audit function to test programs. When prescribing minimum standards for 
anti-money laundering programs, section 352 directs the Secretary of 
the Treasury to ``consider the extent to which the requirements imposed 
under [section 352 of the Act] are commensurate with the size, 
location, and activities of the financial institutions to which such 
regulations apply.'' The Secretary has delegated the authority to 
administer the BSA to the Director of FinCEN.
    On April 29, 2002, and again on November 6, 2002, FinCEN 
temporarily exempted certain financial institutions, including persons 
involved in real estate closings and settlements, from the requirement 
to establish an anti-money laundering program.\1\ The purpose of the 
temporary exemption was to enable Treasury and FinCEN to study the 
affected industries and to consider the extent to which anti-money 
laundering program requirements should be applied to them, taking into 
account the specific characteristics of the various entities defined as 
``financial institutions'' by the BSA.
---------------------------------------------------------------------------

    \1\ See 31 CFR 103.170, as codified by interim final rule 
published at 67 FR 21110 (April 29, 2002, as amended at 67 FR 67547 
(November 6, 2002) and corrected at 67 FR 68935 (November 14, 2002).
---------------------------------------------------------------------------

    A real estate closing or settlement is the process in which the 
purchase price is paid to the seller and title is transferred to the 
buyer.\2\ The process may be carried out in different ways, depending 
on a number of factors, including location. In the eastern states, 
typically the parties meet and exchange documents in what is sometimes 
referred to as a ``New York style'' or ``table closing.'' In the 
western states, the parties may not meet, instead relying on the 
services on an escrow agent to handle the documents in what is 
sometimes referred to as a ``Western style'' or an ``escrow 
closing.''\3\ The person actually conducting the process may be an 
attorney, a title insurance company, an escrow company, or another 
party.
---------------------------------------------------------------------------

    \2\ Whether the process is referred to as a settlement or a 
closing may vary by jurisdiction. See, e.g., 24 CFR 3500.2 
explaining that settlement for purposes of the Real Estate 
Settlement Procedures Act of 1974 (``RESPA'') may also be called a 
``closing'' depending on the jurisdiction.
    \3\ See, 11 Thompson on Real Property, sec. 94.04.
---------------------------------------------------------------------------

II. Issues for Comment

1. What Are the Money Laundering Risks in Real Estate Closings and 
Settlements?

    The real estate industry could be vulnerable at all stages of the 
money laundering process by virtue of dealing with high value 
products.\4\ Money launderers have used real estate transactions to 
attempt to disguise the illegal source of their proceeds. For example, 
narcotics traffickers have purchased property with monetary instruments 
that they purchased in structured amounts (that is, multiple purchases 
each below the BSA reporting thresholds that in aggregate exceeded

[[Page 17570]]

the thresholds).\5\ Narcotics traffickers have also tried to launder 
cash proceeds by exchanging them for checks from a real estate 
company.\6\
---------------------------------------------------------------------------

    \4\ According to a report published by the National Institute of 
Justice, ``real estate transactions offer excellent money laundering 
opportunities,'' and, in particular, opportunities to ``legitimate 
and repatriate illegal funds.'' Barbara Webster and Michael S. 
McCampbell, National Institute of Justice, International Money 
Laundering: Research and Investigation Join Forces, September 1996, 
pages 5 and 6.
    \5\ See, e.g., U.S. v. High, 117 F.3d 464 (11th Cir. 1997).
    \6\ See U.S. v. Leslie, 103 F.3d 1093 (2d Cir. 1997).
---------------------------------------------------------------------------

    In money laundering, the initial or placement stage is the stage at 
which funds from illegal activity, or funds intended to support illegal 
activity, are first introduced into the financial system. This could 
occur, for example, in the real estate industry through the payment for 
real estate with a large cash down payment.
    In the second or layering stage of money laundering, the illicit 
funds are further disguised and distanced from their illegal source 
through the use of a series of frequently complex financial 
transactions. This could occur in the real estate industry when, for 
instance, multiple pieces of real estate are bought and resold, 
exchanged, swapped, or syndicated, making it more difficult to trace 
the true origin of the funds.\7\
---------------------------------------------------------------------------

    \7\ See U.S. v. Nattier, 127 F.3d 655 (8th Cir. 1997) (embezzler 
engaged in a number of real estate purchases through real estate 
firm in an attempt to conceal the source of the funds).
---------------------------------------------------------------------------

    The third or integration phase of money laundering occurs when the 
illegal funds appear to have been derived from a legitimate source. In 
the context of the real estate industry, this could occur when real 
estate is sold by a money launderer to a bona fide purchaser and the 
purchaser, or his or her financial institution, provides the money 
launderer with a check that the money launderer then has the ability to 
represent as the proceeds of a legitimate business transaction.
    The real estate industry itself has taken steps to identify 
potential money laundering vulnerabilities. For instance, the American 
Land Title Association has identified several potential ``red flag'' 
situations involving real estate transactions, including:
    [sbull] Where a prospective buyer is paying for real estate with 
funds from a high risk country, such as a ``non-cooperative country or 
territory'' as designated by the Financial Action Task Force (``FATF'') 
or a country designated by the Secretary as ``a primary money 
laundering concern'' pursuant to section 311 of the Act;
    [sbull] Where the seller requests that the proceeds of a sale of 
real estate be sent to a high risk country;
    [sbull] Where a person is seeking to purchase real estate in the 
name of a nominee and has no apparent legitimate explanation for the 
use of a nominee;
    [sbull] Where a person is acting, or appears to be acting, as an 
agent for an undisclosed party and is reluctant or unwilling to provide 
information about the party or the reason for the agency relationship;
    [sbull] Where a person does not appear to be sufficiently 
knowledgeable about the purpose or use of the real estate being 
purchased;
    [sbull] Where the person appears to be buying and selling the same 
piece of real estate within a short period of time or is buying 
multiple pieces of real estate for no apparent legitimate purpose;
    [sbull] Where the prospective purchaser or seller seeks to have the 
documents reflect something other than the true nature of the 
transaction; and
    [sbull] Where the person provides suspicious documentation to 
verify his or her identity.
    FinCEN solicits comment on the experience of the real estate 
settlement industry with money laundering schemes, the existence of any 
safeguards in the industry to guard against money laundering, and what 
additional steps may be necessary to protect the industry from abuse by 
money launderers, including those who finance terrorist activity.

2. How Should Persons Involved in Real Estate Closings and Settlements 
Be Defined?

    The BSA identifies a person involved in a real estate closing or 
settlement as a financial institution. The statute includes no 
definition of the term and FinCEN has not had an occasion to define the 
term in a regulation. Moreover, the legislative history provides no 
insight into how Congress intended the term to be defined. Because 
section 5312(a)(1)(U) uses the phrase ``persons involved in real estate 
closings and settlements'' (emphasis added), a reasonable 
interpretation of the section could therefore cover participants other 
than those who actually conduct the real estate settlement or 
closing.\8\
---------------------------------------------------------------------------

    \8\ Thus, for example, in a settlement or closing involving 
residential property, the term could cover participants other than 
the settlement agent listed on the HUD-1 form, as required by RESPA.
---------------------------------------------------------------------------

    The universe of participants in real estate transactions is 
potentially broad, even in the simplest residential real estate 
transaction. The typical residential real estate transaction may 
involve the following participants:
    [sbull] A real estate broker or brokers,
    [sbull] One or more attorneys, who represent the purchaser or the 
seller,
    [sbull] A bank, mortgage broker, or other financing entity,
    [sbull] A title insurance company,
    [sbull] An escrow agent, and
    [sbull] An appraiser, who may assess the condition and value of the 
real estate, as well as various inspectors.
    Moreover, the participants involved, and the nature of their 
involvement, could vary with the contemplated use of the real estate, 
the nature of the rights to be acquired, or how these rights are to be 
held. Real estate may be acquired for any one or number of purposes, 
including, without limitation, residential, commercial, portfolio 
investment, or development purposes. As for the nature of the rights to 
be acquired, the real estate may be held in fee simple, under a lease 
agreement or as security for indebtedness. Finally, real estate may be 
held directly or through various investment vehicles, such as real 
estate investment trusts, real estate limited partnerships, or entities 
commonly referred to as ``syndicates'' of real estate investors.
    The guiding principle in defining the phrase ``persons involved in 
real estate closings and settlement'' is to include those persons whose 
services rendered or products offered in connection with a real estate 
closing or settlement that can be abused by money launderers. Equally 
as important is identifying those persons who are positioned to 
identify the purpose and nature of the transaction. Another factor may 
be the importance of various participants to successful completion of 
the transaction, which may suggest that they are well positioned to 
identify suspicious conduct. In addition, professionals may have very 
different roles, in different transactions, that greatly impact on 
their exposure to money laundering. At one end of the spectrum may be 
those professionals involved in structuring a real estate deal (and 
thus in the best position to observe and prevent their use for money 
laundering); at the other end, those whose role may be far from the 
financial aspects, such as property inspectors. Finally, involvement 
with the actual flow of funds used to purchase the property is a 
significant factor.
    As noted above, attorneys often play a key role in real estate 
closings and settlements and thus merit consideration along with all 
the other professionals involved in the closing and settlement process. 
Section 352 requires that a financial institution take steps to detect 
and prevent itself from being abused by money launderers, and to comply 
with existing BSA requirements, such as reporting the receipt of cash 
or cash equivalents in an amount over $10,000 on Form 8300. This 
provision does not independently impose any reporting requirements on

[[Page 17571]]

financial institutions. FinCEN therefore does not believe that 
application of section 352 requirements to attorneys in connection with 
activities relating to real estate closings or settlements raises 
issues of, or poses obligations inconsistent with, the attorney-client 
privilege.\9\ In fact, attorneys already must exercise due diligence 
when they receive funds from clients where there is an indication that 
the funds may be tainted, and cannot simply accept funds without the 
risk that their fees will be subject to forfeiture.\10\ When engaging 
in conduct subject to anti-money laundering regulations, attorneys, 
like other professionals, should take the basic steps contemplated by 
section 352 to ensure that their services are not being abused by money 
launderers.
---------------------------------------------------------------------------

    \9\ The recent resolution by the American Bar Association 
opposing the imposition of suspicious activity reporting obligations 
on attorneys recognizes the distinction between anti-money programs 
and reporting requirements. See Task Force on Gatekeeper Regulation 
and the Profession, Report to the House of Delegates (available on 
www.abanet.org/leadership/recommendations03/104.pdf) (accepting the 
concepts of reasonable compliance training and due diligence to 
minimize risk of lawyers' involvement in illegal money laundering 
activity).
    \10\ See U.S. v. Moffitt, Zwerling & Kemler, P.C., 83 F.3d 660 
(4th Cir. 1996) (firm that ``tiptoed'' around the most pertinent 
questions regarding the source of fees received from drug dealer 
required to forfeit fees shown to be derived from proceeds of 
narcotics trafficking).
---------------------------------------------------------------------------

    FinCEN accordingly seeks comment on which participants in the real 
estate closing or settlement process are in a position where they can 
effectively identify and guard against money laundering in such 
transactions. Information and comment may, among other things, address 
both the extent to which various participants have access to 
information regarding the nature and purpose of the transactions at 
issue and the importance of the participants' involvement to successful 
completion of the transactions. Information and comment should focus on 
the real estate sector in general and on various transaction types. 
FinCEN is particularly interested in receiving comments addressing 
commercial real estate transactions. Comments are welcome from those 
involved centrally in the real estate settlement process, i.e., those 
who may act as an agent for all parties and are responsible for 
reviewing the form and type of payment, as well as being aware of the 
parties to the real estate transaction, and those who view their 
involvement as more peripheral.

3. Should Any Persons Involved in Real Estate Closings or Settlements 
Be Exempted From Coverage Under Section 352?

    FinCEN also solicits comments regarding whether there should be an 
exemption for any category of persons involved in real estate closings 
and settlements. In this connection, FinCEN anticipates that persons 
that are already subject to separate anti-money laundering program 
rules (or that will be subject to separate rules) will not also be 
subject to the anti-money laundering rules for persons involved in real 
estate closings and settlements.\11\ Comments regarding possible 
exemptions should be designed to enable FinCEN to evaluate whether the 
risk of money laundering through a category of persons is sufficiently 
small that a proposed anti-money laundering program rule could be 
crafted that would exempt the category while also providing adequate 
protection for the industry from the risks of money laundering. In 
addition, FinCEN wishes to make it clear that it does not intend to 
cover purchasers and sellers of their own real estate, although they, 
too, are ``persons involved in real estate settlements and closings.'' 
The question of exemption is specifically directed to real estate 
professionals, and those who trade in real estate on a commercial 
basis.
---------------------------------------------------------------------------

    \11\ For example, banks already must comply with anti-money 
laundering rules. See 31 CFR 103.120. Similarly, loan and finance 
companies fall within the definition of a financial institution 
under the BSA, and are currently being studied by FinCEN for 
inclusion in the anti-money laundering rules.
---------------------------------------------------------------------------

4. How Should the Anti-Money Laundering Program Requirement for Persons 
Involved in Real Estate Closings and Settlements Be Structured?

    In applying section 352 of the Act to persons involved in real 
estate closings and settlements, FinCEN must consider the extent to 
which the standards for anti-money laundering programs are commensurate 
with the size, location, and activities of persons in this industry. 
FinCEN recognizes that while large businesses are involved in real 
estate closings and settlements, businesses in this industry may be 
smaller companies or sole proprietors. FinCEN thus seeks comment on any 
particular concerns these smaller businesses may have regarding the 
implementation of an anti-money laundering program.
    FinCEN also recognizes that persons involved in real estate 
closings and settlements may have some programs in place to meet 
existing legal obligations, such as the requirement to report on Form 
8300 the receipt of over $10,000 in currency and certain monetary 
instruments. These businesses may also have procedures in place to 
protect them against fraud. FinCEN therefore seeks comment on what 
types of programs persons involved in real estate closings and 
settlements have in place to prevent fraud and illegal activities, and 
the applicability of such programs to the prevention of money 
laundering.

III. Conclusion

    With this ANPRM, FinCEN is seeking input to assist it in 
determining how to implement the requirements of section 352 with 
respect to persons involved in real estate closings and settlements. 
FinCEN welcomes comments on all aspects of a potential regulation and 
encourages all interested parties to provide their views.

IV. Executive Order 12866

    This ANPRM is not a ``significant regulatory action'' for purposes 
of Executive Order 12866. It neither establishes nor proposes any 
regulatory requirements. Instead, it seeks public comment on a wide 
range of questions concerning the extent to which the anti-money 
laundering program mandates of section 352 of the USA Patriot Act 
should apply to persons involved in real estate closings and 
settlements.

    Dated: April 3, 2003.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
[FR Doc. 03-8688 Filed 4-9-03; 8:45 am]
BILLING CODE 4810-02-P