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REAL ESTATE PROFESSIONALS TARGETED BY THE USA PATRIOT ACT?

Jay Hollander, Esq. is the principal of Hollander and Company LLC, www.hollanderco.com, a New York City law firm concentrating its efforts in the protection and development of property interests relating to real property, intellectual property and commercial interests, as well as related litigation.

The content of this article is intended to provide general information relating to its subject matter. Providing it does not establish any attorney-client relationship and does not constitute legal advice. Personal advice in the context of a mutually agreed attorney-client relationship should be sought about your specific circumstances.

Press reports have revealed that, shortly before the onset of the Iraq war, Saddam Hussein and his son broke into the Central Bank of Baghdad, making off with approximately $1 billion in cash.

If Mr. Hussein tried to launder that money by using it to purchase real estate in America, how would the money he laundered be detected? And by whom?

That’s just what the United States Department of the Treasury is wondering. And how that question is answered may determine whether real estate attorneys and other industry professionals find themselves joining the ranks of insurance companies, banks and other financial institutions on the front lines in the fight against money laundering, a facilitator of terrorism and illegal activity.

Section 352 of the USA Patriot Act, enacted shortly after the September 11, 2001 terrorist attacks, required all “financial institutions” to establish their own anti-money laundering programs. These programs include established internal written procedures, a designated compliance officer, continuing training and an auditing mechanism to assure proper compliance.

The Banking Secrecy Act, in turn, generically included the category of “persons involved in real estate closings and settlement” within the definition of “financial institutions”, but without specifically defining who such a “person” is, leaving the details to regulations to be proposed by the Treasury Department.

While Treasury has previously granted the industry temporary exemptions from the Patriot Act’s requirements, the Department, together with the Financial Crimes Enforcement Network, recently issued an advanced notice of proposed rule making, intended to obtain comments that will shape the exact nature and extent of final regulations requiring the real estate industry to establish its own anti money laundering programs.

The proposed rule making comment period is intended to clarify questions regarding the scope of regulation, including: the nature of the money laundering risks in real estate closings and settlements; how the phrase “ persons involved in real estate closings and settlements” should be defined; how the anti money laundering program requirement for persons involved in real estate closings and settlements should be structured; and, finally, whether any persons involved in real estate closings or settlements should be exempted from coverage under the anti money laundering requirements?

Despite the lack of easy liquidity inherent in real estate transactions, Treasury is yet to be convinced that real estate transactions do not lend themselves to persistent potential abuse by those seeking to launder illegal funds.

The worry in the industry is that Treasury may interpret the generic reference to financial institutions as including “persons involved in real estate closings and settlement” so generally that everyone, from attorneys to real estate and mortgage brokers to title and escrow agents and appraisers , may fall under the Patriot Act’s requirements when final regulations are proposed later this year, imposing a broad system of disclosure, investigation and reporting requirements throughout the industry.

Nevertheless, thorny issues make easy application of the legislation to the industry problematic.


Attorneys in particular have objected to the proposed regulations’ applying to them for fear that such a requirement would or put them in the conflicted position of having to police their own clients and, worse, expose them to the risk of violating the attorney-client privilege through onerous reporting requirements.

To be sure, attorneys have increasingly adopted as accepted practice, the requirement of checking the names of buyers and sellers against the List of “Specially Designated Nationals and Blocked Persons”, published in the Federal Register by the Office of Foreign Assets Control, but the burden of establishing formal structured internal anti-money laundering programs in even the smallest offices of real estate professionals, as well as the possible imposition of liability for failure to comply, could have a chilling effect on many segments of the real estate industry.

For example, if it turns out that lawyers are required to set up their own compliance programs to oversee transactions, the potential liability and, hence, the costs of legal representation in real estate transactions may rise dramatically, leading some to abandon the field altogether.

Brokers could find that the expenses and potential exposure associated with compliance will have to impact their commission structure in order to cover the costs.

Lenders and title companies may have to require money laundering related background checks on parties to real estate transactions as part of the routine searches required in title reports and may face novel issues regarding title insurance coverage as a result.

It behooves affected segments of the industry to speak up now before the die is cast.

Copyright © Jay Hollander, 2003. All Rights Reserved.

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