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FinCEN issues rules impacting real estate and investment advisory compliance

Terri Luttrell, CAMS-Audit, CFCS
September 6, 2024
Read Time: 0 min

FinCEN's 2024 real estate and investment advisory rules

FinCEN is tightening the reins on residential real estate money laundering and investor advisers. Here is what you need to know.

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Takeaway 1

Real estate money laundering is a serious issue, with an estimated $2.3 billion laundered between 2015 and 2020 through the U.S. real estate market alone. 

Takeaway 2

FinCEN’s rules on residential real estate and investment advisers are an effort to tighten the loopholes for lack of transparency and prevent money laundering.

Takeaway 3

By staying vigilant and adopting a proactive approach, financial institutions can create a more secure real estate environment that safeguards against money laundering.   

Real estate money laundering is a serious issue that has become increasingly prevalent in recent years, although it is one of the oldest forms of money laundering. Treasury Secretary Janet Yellen said criminals laundered at least $2.3 billion through U.S. real estate between 2015 and 2020. After Russia invaded Ukraine, real estate money laundering became popular with oligarchs who avoided sanctions by funneling millions of dollars to their children to purchase U.S. real estate. The subjective nature of real estate pricing makes for easily manipulated transactions.

In a move to tighten anti-money laundering (AML) and counter-terrorist financing (CFT) measures, FinCEN has issued two final rules to help safeguard the residential real estate and investment adviser sectors from illicit activity. FinCEN’s new rules aim to close loopholes that enable criminals to launder money through real estate in the U.S.

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Summary of FinCEN's real estate rules

Understanding FinCEN's new real estate and investment adviser rules

The real estate transactions rule mandates reporting by certain professionals involved in real estate closings and settlements for non-financed residential real estate transfers (i.e., cash purchases). This rule targets legal entities and trusts. It excludes personal transactions, which are more transparent and pose less money laundering risk. It also does not cover commercial real estate (CRE) transactions, although FinCEN is expected to address CRE at a later date. Residential real estate professionals must now report details about the involved parties, beneficial owners, and the nature of each transaction. The reporting form for this rule will be published before its effective date of December 1, 2025.

The investment advisers rule expands the definition of "financial institution" under the Bank Secrecy Act (BSA) to include certain registered investment advisers and exempt reporting advisers. These entities are now required to establish AML/CFT programs, report suspicious activities, adhere to the BSA recordkeeping rules, and fulfill other BSA obligations. This rule addresses a significant gap in the regulatory framework by bringing investment advisers under the same AML/CFT requirements as other financial institutions. According to the Treasury, the rule will provide highly useful information to law enforcement authorities and national security agencies.

Impact on banks and credit unions

What financial institutions need to know

Both rules are designed to address significant vulnerabilities in the U.S. financial system, making it harder for illicit actors to exploit real estate transactions. Here’s what AML/CFT professionals should prepare for:

  • Expanded due diligence requirements: The real estate transactions rule requires a closer examination of non-financed real estate transfers. Financial institutions must understand the broader context of client activities and know whether they involve real estate transactions or investment advisory services. Knowing their customers and their customers’ customers will be essential for AML/CFT staff.
  • Updated AML/CFT programs: If their financial institution is involved in any part of the covered transaction, such as providing escrow services, AML/CFT professionals must ensure that real estate professionals and advisers are fully integrated into their institution’s compliance framework. This includes monitoring their activities, understanding their client base, and ensuring they adhere to the same standards as other regulated entities.
  • Enhanced risk management: As AML/CFT obligations expand to include real estate transactions and investment advisers, risk management strategies for financial institutions must adapt. This means identifying and assessing new sources of risk, such as private funds managed by investment advisers or cash real estate transactions. Risk assessment processes should be refined to ensure that they can detect and mitigate these newly identified risks.
  • More regulatory scrutiny: These new rules will increase regulatory scrutiny. It’s essential to ensure that your compliance programs are updated to address covered real estate professionals and investment advisers and robust enough to withstand regulatory review. Regular audits, thorough documentation, and a proactive approach to compliance will be critical in avoiding penalties and maintaining your institution’s reputation.

Detection and prevention

Actionable steps for compliance

  1. Educate and advise your clients: Ensure your clients involved in real estate or investment advisory services know these new requirements. Provide education and training programs for mortgage lenders and other front-line staff to raise awareness. Help them understand how these rules affect their operations and what steps they need to take to remain compliant.
  2. Strengthen AML/CFT programs: Review and update your AML/CFT policies and procedures. Focus on integrating real estate and investment advisory activities within your monitoring systems. Ensure that your institution can identify and report suspicious activities from these clients. Establish systems to monitor real estate transactions for suspicious activities. This can involve setting thresholds for reporting large cash transactions and tracking other unusual patterns using anti-money laundering software. 
  3. Stay informed and prepared: As the implementation dates approach, keep abreast of further guidance from FinCEN. The real estate rule takes effect on December 1, 2025, while the investment adviser rule comes into force on January 1, 2026. Make sure your institution is fully prepared to comply with these new regulations.

The new final rules satisfy a long list of anti-money-laundering regulations mandated by the Anti-money Laundering Act of 2020 and represent a significant step forward in the fight against money laundering and terrorist financing. By closing critical loopholes in the real estate and investment advisory sectors, FinCEN is strengthening the framework that protects the integrity of the U.S. financial system. As these rules come into effect, AML/CFT professionals must adapt, ensuring that their institutions proactively identify and mitigate risks associated with real estate professionals and investment advisors. Be prepared to tackle these challenges head-on and continue to build a safer, more transparent financial system.

 

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About the Author

Terri Luttrell, CAMS-Audit, CFCS

Compliance and Engagement Director
Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry, working both in medium and large community and commercial banks ranging from $2 billion to $330 billion in asset size.

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