Looking Out for “Dirty Money”

//Looking Out for “Dirty Money”

By Joann Prinzivalli

While there is a lot of government intrusion in our lives since the terrorist attacks of 9/11 spawned the reactionary USA PATRIOT Act, the recently-implemented reporting requirements imposed on title companies relating to certain real estate sales in Manhattan and Miami can be traced back to the passage of Currency and Foreign Transactions Reporting Act of 1970, commonly called the “Bank Secrecy Act” (31 U.S.C. 5311-5330 with other sections scattered through parts of the U.S. Code.

The agency involved with the new, temporary, reporting requirements, is called the “Financial Crimes Enforcement Network” – FinCEN, for short. FinCEN was created by 31 U.S.C. 310, as enacted by Pub. L. 107–56, title III, §361(a)(2), Oct. 26, 2001, 115 Stat. 329; amended Pub. L. 108–458, title VI, §§6101, 6203(a), Dec. 17, 2004, 118 Stat. 3744, 3746; Pub. L. 111–195, title I, §109(c), July 1, 2010, 124 Stat. 1338) – and based on the timing, it’s fairly clear that this particular watchdog agency was created by Congress during the panic that occurred in the wake of the 9/11 attacks.

Prior to the 9/11 attacks, the Bank Secrecy Act was primarily used as a means of tracing funds for the purpose of uncovering money laundering practices involving organized crime, particularly the money generated from drug trafficking. In the 1970’s and 80’s, a Mafia enterprise was distributing a great deal of heroin and cocaine in the United States. Independent pizza shops were used in the distribution of the drugs, and the proceeds from the drug sales were “laundered” through their bank accounts. On paper, cash sales of pizza never looked so good. Almost $5 million in small denomination bills was deposited between mid-March and mid-April 1982 in one bank, and millions more at other banks, raising red flags. The investigation took time, and it wasn’t until April 1984 that hundreds of arrests took place throughout the United States.

In the aftermath, there was a lot of real estate that had been confiscated by way of the federal criminal forfeiture (21 U.S.C. §883 and 18 U.S.C. §1963) or civil forfeiture (21 U.S.C. §881) statutes, that had belonged to defendants, or that were used as drug distribution centers. In the late 1980’s and early 1990’s the title industry saw a rise in sales of these confiscated properties related to the “Pizza Connection” cases.

As of March 1st of 2016, the Bank Secrecy Act has been used by FinCEN for a pilot program, centering on transactions in Manhattan and Miami. The requirements come into play if the transaction is for residential property, is “all cash” (or financing is private or non-institutional – i.e., the lender isn’t one that is required to report to FinCEN already), and the purchaser is an entity (not individuals, not trusts), and the purchase price, including any “gross-up” (commonly found with condominium sponsor sales, where charges normally imposed on the seller are contractually passed to the purchaser, including transfer taxes and even the sponsor’s attorney fees) exceeds $3 million.

For transactions meeting all of these requirements, and where the sources of any of the funds are not exempt) the title companies and their agents are required to ascertain and report to FinCEN the identity of the people who are 25% or more beneficial owners of the purchaser entities and the nature of the funds must be identified.

The criminal and civil legal penalties to be imposed for willful or even negligent failure to properly report to FinCEN are enormous. In order to combat terrorism, the government finds it necessary to terrorize the title industry.

In typical government “build an elephant when the intent was to build a mouse” fashion, the authorities at FinCEN, who do not understand the way the title insurance industry works in New York, put the reporting onus on title companies and agents, who don’t actually handle the funds involved. The title companies are not challenging the requirements on the basis that title companies and agencies in New York are not actually “financial institutions” subject to the agency’s jurisdiction. In Miami, on the other hand, FinCEN has a nexus – title insurance companies and agencies often act as the settlement agent, and the transaction funds actually flow through the title company, that is not the case for most New York transactions. All we can do is ask the parties and take their affidavits and other proofs, and hope they are telling the truth.

In order to comply with the FinCEN requirements, we’ve come up with a title requirement that has been added to title report Schedule B for open files that may fall under the shadow of the reporting requirements – these title requirements will even be seen in title reports where the price is not quite $3 million, or the purchasers are individuals – and even if we are told at application that there will be an institutional mortgage. It’s always possible that the circumstances could change before or at the closing – a celebrity buyer might want to take title to that $40 million luxury Manhattan penthouse condominium in an LLC so paparazzi don’t know where they live. Perhaps the institutional financing might fall through and the funds are coming from a different source. On the other hand, the purchase might be on behalf of a Somali warlord seeking to funnel the proceeds of piracy – accessible once the unit is sold – in order to purchase arms, or ISIL, for a similar purpose.

Because of the severely draconian penalties, we have to take a broad approach in order to avoid being blind-sided by changes in suspect transactions that could result in a particular transaction being reportable.

The following is the title requirement (in the form we used to add it to existing reports):

Schedule B – ADDENDUM

X, Pursuant to the order of The Financial Crimes Enforcement Network, a bureau of the United States Department of Treasury, dated January 13, 2016, if the insured transaction pertains to an all-cash (or seller-financed or privately financed) acquisition of a residential, 1-4 family dwelling, condominium or cooperative unit in Manhattan (does not apply if there is no title insurance) by a limited liability company, corporation, partnership or a similar legal or business entity, for a purchase price in excess of $3 million (including any “grossup”),

the proposed insured purchaser shall provide all necessary information in order for the Company to complete IRS Form 8300, in advance of closing and purchaser shall provide copies of the driver’s licenses, passports or other similar identification for purchaser’s representative at closing and all beneficial owners of purchaser who are natural persons who directly or indirectly own 25% or more, in the aggregate, of the equity interests of the purchaser. If the proposed insured purchaser is a limited liability company, purchaser must also provide the names, addresses and taxpayer I.D. numbers of all of its members.

For all such transactions, the purchaser will be required to execute the completed IRSA Form 8300 at closing.

IF the entire price is funded by wire (including the contract deposit, an uncertified personal check or uncertified business check), this requirement does not apply. In such a case, the company must be furnished with an affidavit from a party with knowledge of the actual facts, stating that

“No funds involved in this purchase were made, even in part, using currency, bitcoin or other electronic or non-traditional funds transfer method (other than a wire transfer through the federal reserve system), or a cashier’s check, a certified check, a traveler’s check, or a money order.”

or IF the purchaser is a natural person or the trustee of a trust (other than a business trust), this requirement does not apply.

2017-08-04T18:01:33+00:00