'Patriot act' could pose problems for RE industry

Real Estate Weekly, June 18, 2003 by Barbara Nelson

Industry professionals are crossing their fingers that a proposed U.S. Treasury Department regulation that would hold them responsible for detecting money-laundering schemes in real estate transactions will not adversely affect the way they conduct business.

On April 10, the Treasury Department's Financial Crimes Enforcement unit, or FinCEN, served the real estate industry with an advance notice it was to begin implementing Section 352 of the U.S.A. Patriot Act that was passed by Congress in October 2001 as it relates to their industry. The act - also called the International Money Laundering Abatement Financial Antiterrorism Act - already requires financial institutions to establish money-laundering programs.

'The intent of the Patriot Act and the desire of the Treasury Department is to protect the financial system from infiltration by those who would launder money to hide criminal actions or to finance terror," said Taylor Griffin, U.S. Treasury Department spokesman.

However, Section 352 which also includes "persons involved in real estate closings and settlements, had no implementation language for the real estate industry. FinCEN would like to amend the act to better reflect how industry professionals could adhere to the regulation.

"This could be an absolute nightmare for the real estate industry, on the other hand it could be a practical mechanism that is realistic and reasonable for the industry to comply with," said Jeffery A. Moerdler, head of the communications practice in the New York office of the Boston law firm of Mintz Levin Cohn Ferris Glovsky and Popeo.

On April 24, 2002, Section 352 became effective requiring financial institutions and persons involved in the real estate settlements and closings to establish an anti-money laundering program that requires the development of internal policies, procedures and controls; the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test the program once in place.

The rule could adversely affect the ability to close real estate deals and could involve costly procedures, according to Moerlder.

Part of the advance notification was to gather written comments from real estate professionals. The comment period ended June 9. FinCen asked four questions. What are the money laundering risks in real estate closings? How should persons involved in real estate closings and settlements be defined? Should any person involved in real estate closings/settlements be exempted from coverage of the law? How should the anti-money laundering program requirement for persons involved in real estate closings/settlements be structured?

Moerdler, who is writing a 15- to 20-page comment paper for the American College of Real Estate Lawyers, said he hopes the Treasury Department will not be too broad in their scope.

"The concern is not to go too far," Moerdler said. "They need to know how the real estate market works and what's realistic and what's not. The devil is in the details and it depends on how it all works out."

Treasury Department officials say the new amendment will reflect the comments from the industry.

"We will review the comments we received from the real estate industry as we go forward to propose a rule to implement the Patriot Act," Griffin said. "The expertise offered by the those in the industry is invaluable to the Treasury Department in this process.

However, many in the industry are saying that the industry isn't as vulnerable to money laundering as other businesses that involve liquid assets.

"Other than citing four appellate decisions involving money laundering in real estate, FinCEN does not offer any compelling arguments that the industry is rife with the financial abuse that would demand such potentially expensive and burdensome set of anti-money laundering regulations, in either residential or commercial property context," said Kevin Shepherd, co-chair of Venable LLP real estate practice.

"There is a reason why commercial real estate transactions, which involve illiquid and most visible of assets, have not been a haven for money launderers."

Cash transactions are not practical.

"There's been only one incident in my 20-year career that someone came to a closing with $30,000 to $40,000 cash in a briefcase," Moerdler said. "I told him to go to the bank and get a cashiers check, because I didn't want to have responsibility for that much money."

Treasury Department officials will not disclose how long it will take to review the comments or write the amendment. But once the rule is written another public comment period will take place, allowing real estate professionals to read the rule and respond, said a high-ranking spokesman for the U.S. Treasury Department.

Meanwhile there are some industries profiting from the act - software development companies. Several companies now offer Patriot Act compliance software for financial institutions. Whether those programs can be adapted to the real estate industry is unclear.