Money Laundering and FinCEN Regulation

The Pandora Papers

Release of the Pandora Papers in 2021 (11.9 million documents published by the International Consortium of Investigative Journalists) exposed an international financial system awash in dirty money. Prime ministers, dictators, celebrities, arms dealers, oligarchs, and billionaires remain as determined as ever to move cash to places where the origin of funds is not questioned, taxes are low or non-existent, and one’s identity can be effectively concealed.

The Pandora Papers came five years after a previous and similar report, the Pulitzer-prize winning Panama Papers. These, however, exposed the files of just one law firm in Panama. The Pandora Papers were a much bigger story, encompassing 14 offshore providers, thousands of beneficial owners of shell companies and trusts, and spanning the period from 1996 through 2020. The finance ministers of Pakistan and Brazil were (and perhaps still are) siphoning money out of their countries and parking it offshore, often in the United States.

Acquiring American real estate, along with purchase of art and antiquities, are the preferred destinations for much of this international cash. Baker McKenzie, the largest law firm in the U.S., has been instrumental in creating vehicles (shell companies and trusts) to move this money. In 2016, the New York Times claimed that nearly half of the luxury real estate in the city was purchased by anonymous shell companies, many of which are used by money launderers, terrorists, and criminals to conceal profits by investing in U.S. real estate.

Reverberations of the Pandora Papers and the Panama Papers will continue to be felt in legislation and government enforcement for years to come.

White House Strategy Countering Corruption

In 2021, the Biden White House issued the “United States Strategy on Countering Corruption” which provides for a whole-of-government approach to opposing financial corruption both within the U.S. and abroad. Along with FinCEN in the Treasury Department, other anti-corruption task forces are established within the State Department, USAID, and the Commerce Department. The theme is one of urgent national security and opposition to the “weaponization of corruption” and building resilience against this “evolving threat.”

While corruption and money laundering are undoubtedly both socially expensive and morally reprehensible, FinCEN’s declaration that these practices are weapons that threaten our national security is over the top. One has the impression that authors of both the White House Strategy and expanded FinCEN regulations were aware of entering new and intrusive territory. The extreme language used may be an attempt to encourage Americans to accept the federalization of real estate transactions and state-based entity formation without a fight.

The status of this anti-corruption strategy in the Trump White House is as yet unknown.

EXISTING REGULATION AND ENFORCEMENT

Geographical Targeting Orders (GTOs)

It has been a matter of great frustration to FinCEN that the United States is considered the land of opportunity when it comes to laundering cash using real estate. For several years, FinCEN has issued geographic targeting orders applying elevated scrutiny and reporting requirement in specific major urban areas of the country where money laundering is common in luxury real estate (New York and Miami for instance).

Overall, the results of GTOs have been disappointing. Wire transfer transactions are not subject to GTOs, and there are other loopholes. For instance, what if a title company is not utilized as an escrow agent to close the transaction? No FinCEN form 8300 is generated or filed. The result is that GTOs have not have the hoped-for effect mostly because cash-laundering transactions migrated to commercial deals and venues outside of the stated geographical parameters.

Suspicious Activity Reports (SARs)

Algorithms now screen all bank transactions, large and small, for suspicious activity. The FBI receives required suspicious activity reports (SARs) by the tens of thousands from U.S. banks. In 2020, HSBC Bank stated: “The goal of any financial crime compliance programme is to detect and prevent financial crime. One way we do that is through transaction monitoring and sanctions screening. Each month, we screen over 689 million transactions across 236 million accounts for signs of money laundering and financial crime. . . . During 2019, we filed almost 50,000 suspicious activity reports to law enforcement and regulatory authorities where we identified potential financial crime. . . . In August 2019, we became the first bank to introduce a system that will automatically screen all our trade finance transactions for potential signs of financial crime.”

BSA/AML Reporting

FinCEN requires banks and title companies to file currency transaction reports (CTRs) as well as suspicious activity reports in any transaction that lacks economic sense or has no apparent lawful business purpose; where a purchase or sale generates little to no revenue or is conducted without regard to high fees or penalties; involves the purchase of real estate without regard for the property’s condition, location, assessed value, or sale price; involves funding that far exceeds the purchaser’s wealth, comes from an unknown origin, or is derived from unconnected individuals or companies; is conducted in an irregular manner; or includes a request by the participants to alter records (pertaining to assessed value, for instance). Banks and title companies have staff dedicated to compliance and reporting, often referred to as BSA/AML (Bank Secrecy Act/Anti-Money Laundering) compliance officers.

Customer Due Diligence Rule

The long-standing Customer Due Diligence Rule (CDD rule, 81 FR 29398) states that covered financial institutions (such as banks and title companies) must have customer identification programs (CIPs) to verify the identity of customers; identify the beneficial owners of companies opening accounts; understand the nature and purpose of customer relationships to develop customer risk profiles; conduct ongoing monitoring to identify and report suspicious transactions; and, on a risk basis, maintain and update customer information.

Corporate Transparency Act (CTA)

The Corporate Transparency Act (31 U.S.C. Sec. 5336) was passed in 2021 as Congress’ response to worldwide financial corruption. It required that FinCEN, a division of the Treasury Department, write and implement rules and regulations to enforce the CTA. The declared goal was “to combat, to the broadest extent possible, the proliferation of anonymous shell companies that facilitate the flow and sheltering of illicit money in the United States.” The CTA required that FinCEN, a division of the Treasury Department, write and implement appropriate rules and regulations to enforce the legislation.

FINCEN REPORTING OF BENEFICIAL OWNERSHIP INFORMATION

In enforcing the CTA, FinCEN promulgated sweeping beneficial ownership information (BOI) reporting rules which required both new and existing stated-based registered entities to report personal identifying information on their beneficial owners. BOI reporting requirements were published in 31 CFR Part 1010 et. seq. FinCEN took its mission seriously, stating:

Illicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system. Not only do such acts undermine U.S. national security, but they also threaten U.S. economic prosperity: shell and front companies can shield beneficial owners’ identities and allow criminals to illegally access and transact in the U.S. economy, while creating an uneven playing for small U.S. business engaged in legitimate activity. . . .

Few jurisdictions in the United States, however, require legal entities to disclose information about their beneficial owners or individuals who take the steps to create an entity. . . . This lack of transparency creates opportunities for criminals, terrorists, and other illicit actors to remain anonymous while facilitating fraud, drug trafficking, corruption, tax evasion, organized crime, or other illicit activity through legal entities in the United States.

FinCEN BOI Overreach

FinCEN sought to require beneficial ownership reporting by everyone who forms an LLC, corporation, or other registered entity in any state, which was a huge change to the practice of entity formation in the United States. FinCEN’s complex regime imposed reporting duties on company applicants and persons including senior officers of reporting companies. These were required to report beneficial owner information to FinCEN.

A beneficial owner was defined as any individual who directly or indirectly exercised substantial control over an entity or owned at least a 25% interest. Those exercising substantial control would have included not just managers, officers, and board members but also others (such as investors or promoters) who wielded control from behind the scenes. Any attempt to conceal such persons from FinCEN or avoid BOI reporting would have been a serious violation.

FinCEN’s ultimate goal was to deputize all transactional gatekeepers—title insurance companies, real estate agents and brokers, law firms, settlement and closing agents, and others who collect information and maintain records regarding non-financed (cash) purchases of real estate. Such intrusive self-reporting would have been a significant burden upon ordinary people who form new businesses and engage in real estate transactions, not just lawyers, accountants, and title professionals.

Public and political reaction was swift and defiant. Since when, it was asked, is it the federal government’s role to achieve transparency in local real estate transactions? Isn’t that an invasion of individual privacy and civil liberties in an area customarily regulated by the states? Do legitimate privacy concerns of law-abiding citizens make them presumptive money launderers? And why was radical transparency suddenly an absolute good to be enforced by Washington?

FinCEN BOI rules were among the least business-friendly regulation regimes ever seen in the United States. It was promptly challenged in several federal courts. Ultimately, the BOI reporting rules were substantially retracted, at least as to entities formed in the U.S.

Current Status of BOI Reporting

The best way to summarize FinCEN’s new position is to quote the FinCEN website:

March 21, 2025

FinCEN Removes Beneficial Ownership Reporting Requirements for U.S. Companies and U.S. Persons, Sets New Deadlines for Foreign Companies

Consistent with the U.S. Department of the Treasury’s March 2, 2025 announcement, the Financial Crimes Enforcement Network (FinCEN) is issuing an interim final rule that removes the requirement for U.S. companies and U.S. persons to report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act. In that interim final rule, FinCEN revises the definition of “reporting company” in its implementing regulations to mean only those entities that are formed under the law of a foreign country and that have registered to do business in any U.S. State or Tribal jurisdiction by the filing of a document with a secretary of state or similar office (formerly known as “foreign reporting companies”).

FinCEN also exempts entities previously known as “domestic reporting companies” from BOI reporting requirements. Thus, through this interim final rule, all entities created in the United States—including those previously known as “domestic reporting companies”—and their beneficial owners will be exempt from the requirement to report BOI to FinCEN. Foreign entities that meet the new definition of a “reporting company” and do not qualify for an exemption from the reporting requirements must report their BOI to FinCEN under new deadlines, detailed below. These foreign entities, however, will not be required to report any U.S. persons as beneficial owners, and U.S. persons will not be required to report BOI with respect to any such entity for which they are a beneficial owner.

Upon the publication of the interim final rule, the following deadlines apply for foreign entities that are reporting companies: Reporting companies registered to do business in the United States before the date of publication of the IFR must file BOI reports no later than 30 days from that date. Reporting companies registered to do business in the United States on or after the date of publication of the IFR have 30 calendar days to file an initial BOI report after receiving notice that their registration is effective. FinCEN is accepting comments on this interim final rule and intends to finalize the rule this year.

FINCEN REPORTING OF RESIDENTIAL TRANSACTIONS

New FinCEN Residential Rule

FinCEN is still on track to expand its regulatory and data-collection efforts in residential real estate. The Final Rule to Increase Transparency in Residential Real Estate Transfers (the residential rule) was published in August 2024. After public review and comment, the final version of this rule is scheduled to take effect on December 1, 2025.

The details of the residential rule are evolving quickly. FinCEN will be including a new sub-part to Chapter X of the Code of Federal Regulations for this purpose. For now, much of the best information on the residential rule is available is on the FinCEN website.

FinCEN’s website states that its objective is to focus on residential cash transactions:

Illicit actors often favor non-financed transfers (including “all-cash” sales) of residential real estate to avoid scrutiny from financial institutions that have anti-money laundering and countering the financing of terrorism (AML/CFT) program and Suspicious Activity Report (SAR) filing requirements under the Bank Secrecy Act. Illicit actors also often hold residential real estate in the name of a legal entity or trust, in an effort to obscure their identities and their ownership interests in the property.

Transfers that are both non-financed and involve a transferee that is a legal entity or trust are of higher risk for money laundering and make the proceeds of crime and their owners more difficult to track and identify. The reporting of these transfers [by means of the Residential Rule] will help curtail the anonymous laundering of illicit proceeds through the purchase of residential real property which threatens U.S. economic and national security.

This rule will address the demonstrated need for increased transparency and work to deter illicit use of the U.S. residential real estate market.

In this context, SARs will be called real estate reports.

Scope of FinCEN’s Residential Rule

Reportable transfers must be reported to FinCEN by a reporting person when they meet the following criteria:

(1) the property is residential real property including unimproved land;

(2) the transfer is non-financed (i.e., consideration is paid in cash);

(3) the property is transferred to a legal entity (such as an LLC) or investor land trust; and

(4) an exemption does not apply.

Transfers meeting the rule’s requirements must be reported regardless of purchase price or the value of the property. Cash and gift transfers are therefore clearly subject to the rule. However, transfers made directly to an individual are not covered.

Transfers that are financed solely by a non-institutional lender that does not otherwise have an obligation to maintain a BSA/AML program and file SARs (this would include private hard-money lenders as well as individual sellers engaging in owner finance) are included in the definition of non-financed transfers and are subject to reporting requirements unless an exemption applies.

Exemptions to the Residential Rule

Exemptions are provided for certain transfers that FinCEN considers to be lower in corruption risk, including:

(1) transfer of an easement;

(2) transfer resulting from the death of an individual, whether pursuant to the terms of a decedent’s will or the terms of a trust, the operation of law, or by contractual provision;

(3) transfer incident to divorce or dissolution of a marriage or civil union;

(4) transfer to a bankruptcy estate;

(5) transfer supervised by a court in the United States;

(6) transfer made for no consideration by an individual, either alone or with their spouse, to a trust of which that individual, their spouse, or both of them, are the settlor or grantor;

(7) transfer to a qualified intermediary for purposes of a like-kind exchange under Section 1031 of the Internal Revenue Code; or

(8) transfer for which there is no reporting person.

Reporting Persons under the Residential Rule

A reporting person has an obligation to make a report concerning a reportable transfer if he, she, or it is part of the reporting cascade, a defined term that consists of a list of different closing-related professional functions (conducting the closing, preparing the closing statement, disbursing funds, recording documents, or preparing documents, all in descending order). Signing individual refers to the person who signs closing documents on behalf of the transferee.

FinCEN’s intention is to include as reporting persons all settlement agents, title insurance agents, escrow agents, and attorneys who do real estate closings. However, there is only one reporting person for any given reportable transfer. In most cases in Texas this will be the title company that closes the transaction. If an attorney closes the transaction in the office, then the attorney will be responsible for reporting to FinCEN.

What information must be reported?

Personal identifying information on both transferor and transferee (sellers and buyers) must be reported along with a description of the property and the consideration paid.

Required information on the transferee includes the name of the legal entity or trust receiving ownership of the property; the EIN or social security number; the beneficial owners (i.e., persons owning a 25% or greater interest or exercising substantial control) of the transferee entity or trust including their residential addresses; and the name of the authorized person who executes documents on the behalf of the transferee (the signing individual).

A reporting person may exercise reasonable reliance on information provided by others (i.e., the beneficial owners) so long as there is no reason to believe that it is unreliable. Reports must be filed by the later of either the final day of the month following the closing or 30 days after the date of closing.

Impact of Residential Rule on Trusts

FinCEN’s expansion into the realm of trusts is significant. A trust agreement is a private document that need not be filed or recorded anywhere. Trusts are not registered entities created by paying a filing fee to the state. As a result, trusts, including those that hold real estate, have traditionally enjoyed a high degree of confidentiality.

However, under present rules, a trust must be reported as a beneficial owner of an entity if it exercises substantial control or own 25% or more of a registered entity such as an LLC. This is further explained in the section below that addresses FinCEN reporting in entity formation.

What now is the obligation of trusts (and their participants) when it comes to the Residential Rule? FinCEN is clear that trusts are not considered to be individuals who are exempt from reporting, so reporting by trust participants (trustor, trustee, and beneficiary) may, depending on the circumstances, be required. This is the case regardless of whether residential real property is titled in the name of the trust itself or in the name of the trustee on behalf of the trust.

VIOLATIONS OF THE CTA

Civil and Criminal Penalties

While certain FinCEN reporting requirements have been retracted, the Corporate Transparency Act remains in effect and must be considered. Violations of the CTA fall into two general categories: first, reporting violations, including failure to report and false or fraudulent reporting; and second, knowing and unauthorized use or release of beneficial ownership information.

As to reporting violations: “It shall be unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN in accordance with this section, or to willfully fail to report complete or updated beneficial ownership information to FinCEN in accordance with this section” (31 CFR Sec. 1010.380(g)). Elements of the offense are:

(1) the person or entity is a reporting company that is required to report;

(2) there is a failure to report to FinCEN; and

(3) a person causes the failure to report or is a senior officer of the reporting company at the time.

Reporting violations (including false reports and failure to file or update FinCEN reports) can result in a fine of $500 per day up to $10,000 and/or up to two years in federal prison (31 U.S.C. Sec. 5336(h)(2) and (3)(A)).

Violations relating to knowing misuse or unauthorized release of beneficial ownership information are harsher and can result in the same daily fine up to $250,000 and/or a prison term of up to ten years (31 U.S.C. Sec. 5336(h)(2) and (3)(B)).

Asset Forfeiture

The arbitrary forfeiture of citizen assets by law enforcement (including FinCEN) is out of control in the United States. Confiscating cash, vehicles, guns, and houses from potential defendants and suspects (persons who not even been sued or charged with a crime) is the main financial lifeline for many police and sheriffs’ departments across the country. These practices resemble the confiscatory practices of third-world authoritarians and clearly violate the 14th Amendment due-process clause. To their shame, American courts continue to look away.

FinCEN is prepared to take forfeiture to the next level as it continues to try to expand its power. Federal law (18 U.S.C. Section 981) allows the U.S. Treasury to seize any property, real or personal, involved in a transaction involving money-laundering. In its 2021 NPRM, FinCEN literally boasts that previous forfeitures have yielded “luxury properties in New York City, Los Angeles, Beverly Hills, and London, mostly titled in the name of shell companies, as well as paintings by Van Gogh, Money, Picasso, a yacht, several items of extravagant jewelry, and numerous other items of personal property.” An Orwellian theme is apparent: in your hands, these things are extravagant; but by transferring them to the government, the result is justice.