Picture this scenario: Despite the difficulties of the current market, an owner or investor manages to close a deal and is ready to reinvest the proceeds, only to be notified that the buyer's funds were the product of suspected money laundering.
The Department of the Treasury's Financial Crimes Enforcement Network (FinCEN), a lead agency tasked with fighting such illegal activity, then seizes the proceeds of the transaction and investigators attempt to determine whether the owner or investor was complicit in the alleged illegal activity.
When the dust finally settles from the national real estate market crisis, FinCEN likely will have its hands full investigating real estate money laundering cases similar to the above scenario. Reports of suspicious activity in the commercial and residential real estate markets have indicated a rising incidence of suspected money-laundering.
Although the housing downturn has dampened residential market trans-actions, the number of filings with FinCEN for suspicious activity in real estate remains disproportionately large considering the sharp decrease in the number of deals.
Authorities have cited the recent indictment by a federal grand jury in Tampa of Neil Mohamed Husani, a Southwest Florida real estate investor, as an example of suspected money laundering in the industry. Husani and three others allegedly inflated property values through fraudulent appraisals in a scheme to defraud financial institutions of more than $80 million in bank loans.
In 2002, FinCEN temporarily exempted “persons involved in real estate closings and transactions” from anti-money laundering (AML) programs applicable to other financial institutions under the Bank Secrecy Act. In 2003, FinCEN gave notice of proposed AML regulations that would affect the real estate industry, which received sharp criticism.
Anticipating the advent of AML regulations, real estate practitioners now frequently include provisions in purchase and sale agreements that broadly demand compliance with the Patriot Act, the Bank Secrecy Act, the Trading with the Enemy Act, Executive Order 13224 and Office of Foreign Assets Control (OFAC) regulations.
The goal? To ensure that money involved in a deal won't wind up financing terrorism or other illegal activity.
Although these AML provisions are often included in the transaction documents, buyers and sellers often perform little, if any, due diligence. This approach to self-policing exposes buyers and sellers to potential civil and criminal liability.
Fortunately, complying with traditional AML laws and the OFAC regulations is relatively straightforward. Neither buyers nor sellers of real property should transact with money they know or have reason to believe is ill gotten. Failing to make adequate inquiries into the source of funds can constitute willful blindness.
Check the list
Buyers and sellers of real property should check the relevant code of federal regulations and the list of specifically designated nations or entities to make sure the deal does not involve any designated country or person. This includes checking the owners, investors and principals on both sides of the transaction, whether or not you are contractually bound.
Complying with the Bank Secrecy Act, however, is anything but straightforward. Until FinCEN provides further guidance, buyers and sellers should protect themselves by requiring AML representations and warranties in their purchase agreements. The contracts must spell out adequate remedies in the event of breach and should survive long after the transaction has closed.
With no final regulations governing parties involved in real estate transactions, uncertainty will continue to exist regarding compliance with the Bank Secrecy Act. Performing reasonable due diligence will help curb the growth of money laundering in real estate transactions. At the same time, the due diligence will reduce buyers' and sellers' exposure to civil and criminal liability under the AML laws.
Kevin Sher is an associate in the real estate department of the Los Angeles-based law firm Greenberg Greenberg Glusker. Attorney Dan Nabel contributed to this report.