REAL ESTATE PROFESSIONALS TARGETED BY THE USA PATRIOT
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
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.