USA PATRIOT ACT: THE COMPLEXITIES OF IMPOSING ANTI-MONEY LAUNDERING OBLIGATIONS ON THE REAL ESTATE INDUSTRY, THE

Real Property, Probate and Trust Journal, Summer 2004 by Shepherd, Kevin L

Editors' Synopsis: This Article discusses how the USA PATRIOT Act's anti-money laundering provisions may potentially affect the real estate industry. The author reviews the history of anti-money laundering legislation, as applied to the real estate industry, and focuses on the USA PATRIOT Act's requirement that all financial institutions, including "persons involved in real estate closings and settlements," establish anti-money laundering programs. Next, the author examines the drawbacks associated with this type of program in real estate, including potential infringement upon the attorney-client privilege. In conclusion, the author proposes a "best practices " model for the real estate industry as an alternative to the USA PATRIOT Act's anti-money laundering program requirements.

The terrorist attacks on September 11, 2001 killed almost three thousand people and destroyed several billion dollars' worth of commercial real estate1 in less than two hours.2 The federal legislative response to this astonishing aerial assault was particularly swift and sweeping. A scant forty-five days after the attacks, Congress enacted the massive Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA PATRIOT Act").3 The stated purposes of the USA PATRIOT Act are "[t]o deter and punish [domestic and foreign] terrorist acts .. . [and] to enhance law enforcement investigatory tools."4

Because legislators viewed the prevention of money laundering as a crucial element in the war against terrorism,5 Congress used the USA PATRIOT Act to strengthen federal anti-money laundering ("AML") and anti-terrorist financing laws.6 Title III of the USA PATRIOT Act, known as the International Money Laundering and Anti-Terrorist Financing Act of 2001, amended the Bank secrecy Act of 1970 ("BSA"),7 which now requires that all financial institutions establish minimum AML programs. The purpose of Title III is to make it easier "to prevent, detect, and prosecute international money laundering and the financing of terrorism."8

Included among the federally defined financial institutions is "persons involved in real estate closings and settlements."9 Since the enactment of the USA PATRIOT Act, federal regulators have attempted to develop regulations that would impose AML program requirements on persons involved in real estate closings and settlements.10 To date, final regulations have not been issued for this form of financial institution. Of the almost thirty types of financial institutions enumerated under the BSA,11 "persons involved in real estate closings and settlements" remains one of the last forms for which regulators have not yet issued AML program requirements.12

This Article will trace the development of the federal regulatory effort, discuss the troubling ambiguities lurking in the phrase "persons involved in real estate closings and settlements," examine the daunting challenges in imposing a practical and effective AML regime on the real estate industry, highlight the encroachment on the attorney-client privilege and the duty of client confidentiality that would result from the imposition of AML program requirements on real estate lawyers, propose a voluntary best practices model that the real estate industry may adopt in lieu of the imposition of formal AML program requirements, and propose two other narrowly tailored alternatives if the federal regulators do not agree with this model.

I. BACKGROUND OF THE PHRASE "PERSONS INVOLVED IN REAL ESTATE CLOSINGS AND SETTLEMENTS"

Congress enacted the BSA13 over three decades ago, primarily in response to congressional concern that foreign banks were laundering the proceeds of illegal activity and evading federal income taxes.14 The BSA imposed AML obligations on "financial institutions," as defined under the BSA. When the BSA was enacted in 1970, the definition of "financial institutions" included traditional financial institutions, such as insured banks.15 In 1988, nearly twenty years after the enactment of the BSA, Congress amended the BSA in an anti-drug abuse act by adding a new category of financial institution-persons involved in real estate closings and settlements.16 The USA PATRIOT Act further expanded the list of financial institutions in 2001 by including credit unions, futures commission merchants, commodity trading advisors, commodity pool operators,18 and informal or unlicensed transmitters of money.19 With the enactment of the USA PATRIOT Act, there are now twenty-seven separately identified categories of financial institutions.20

The eight word phrase-"persons involved in real estate closings and settlements"-is bereft of any meaningful legislative history.21 Neither the BSA (as amended in 1988) nor its legislative history define or elaborate on its meaning.22 The USA PATRIOT Act and its legislative history also shed no light on the meaning of this phrase.23 Therefore, the Treasury Department's Financial Crimes Enforcement Network ("FinCEN")24 must define this phrase.