Under the USA Patriotic Act “persons involved in real estate closings and settlements” are required to establish anti-money laundering programs.

Participants in residential and commercial real estate transactions now risk the imposition, by the federal government, of onerous anti-money laundering requirements that would have been unfathomable before the September 11th attacks.

On October 26, 2001, the President signed into law theUniting and Strengthening America by Providing Appropriate Tools Requiring to Intercept and Obstruct Terrorism Act of 2001 (the USA Patriotic Act). Title III of the Patriot Act made a number of amendments to the anti-money laundering provisions of the Bank Secrecy Act intending to make it easier to prevent, detect, and prosecute international money laundering and financing of terrorism.

Section 352 of the Patriot Act, which became effective on April 24, 2002, requires every financial institution, including persons involved in real estate settlements and closings, 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.

On April 29, 2002 and again on November 6, 2002, the Department of the Treasury temporarily exempted certain financial institutions, including persons involved in real estate closings and settlements, from the requirement to establish an anti-money laundering program. The purpose of the temporary extension was to enable Treasury to study the affected industries.

A real estate settlement or closing is the process in which the purchase price is paid to the seller and a deed is delivered to the buyer. The process may be carried out in different ways. In the eastern states, typically the parties meet and exchange documents in what is often referred to as a “New York style” or “table closing.” In the western states, the parties may do not meet, instead relying on the services of an escrow agent to handle the documents in what is often referred to as a “Western style” or an “escrow closing.” The person actually conducting the process may be an attorney, a title insurance company, an escrow company, or another party.

As part of the effort to study affected industries, the Department of the Treasury’s Financial Crimes Enforcement Network published an advance notice of proposed rulemaking on April 10, 2003 to solicit public comments on a wide range of issues pertaining to the Patriot Act’s requirement, including how to define “persons involved in real estate closings and settlements.”

As noted above, when imposing these new requirements, Section 352(a) of the Patriotic Act defines “financial institution” as “… including persons involved in real estate settlements and closings …” Because the section uses the phrase “persons involved in …,” a reasonable interpretation of the Act could therefore cover participants other than those who actually conduct the real estate settlement or closing?

The universe of participants in real estate transactions is potentially broad, even in the simplest residential transfer. The typical residential real estate transaction may involve the following participants: a real estate broker or brokers; one or more attorneys, who represent the purchaser, seller or lender; a bank, mortgage broker, or other financing entity; a title insurance company; an escrow agent; an appraiser, who may assess the condition and value of the real estate; as well a surveyor and 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 a number of purposes, including 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 (which can be a home equity loan or a securitized mortgage backed security of a commercial property). Additionally, real estate may be held directly of through investment vehicles such as real estate investment trusts, limited partnerships, or any of many other forms of entities.

Focusing on the purpose of the Patriotic Act, the principal in defining the suspect phrase is to include those persons whose services rendered or products offered in connection with a real estate settlement that can be abused by those financing terrorism. Equally as important is identifying those in real estate transactions who are well positioned to identify suspicious conduct. It is worthy of note that existing law to prevent abuse by money launderers requires the reporting of the receipt of cash or cash equivalents in an amount over $10,000 on Form 8300 – something commonly done at a real estate settlement.

Accordingly, the Financial Crimes Enforcement Network is seeking comment on (1) how to define “persons involved in real estate closings and settlements.” Additionally, as detailed in the April 10, 2003 advance notice of proposed rulemaking, public comment is being solicited to respond to:

(2) Should any persons involved in real estate closings or settlements be exempted from coverage under section 352? (3) How should the anti-money laundering program requirement for persons involved in real estate closings and settlements be structured? And (4) What are the money laundering risks in real estate closings and settlements?

The September 11th terrorists will score another victory if a massive, time consuming and expensive new federal anti-money laundering program is created out of the USA Patriot Act requirement for “persons involved in real estate closings and settlements.” All participants in the real estate industry should submit written comments to the Department of the Treasury, not later than June 9th, opposing the imposition of onerous anti-money laundering and financing of terrorism requirements on real estate transactions. Comments may be submitted to US Treasury Comment with the caption, “ATTN: Section 352 – Real estate settlements.”