Anti-Money Laundering Regulations for Residential Real Estate Transfers, 12424-12470 [2024-02565]

Download as PDF 12424 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules DEPARTMENT OF THE TREASURY Financial Crimes Enforcement Network 31 CFR Chapter X RIN 1506–AB54 Anti-Money Laundering Regulations for Residential Real Estate Transfers Financial Crimes Enforcement Network (FinCEN), Treasury. ACTION: Notice of proposed rulemaking. AGENCY: FinCEN is issuing a proposed rule to require certain persons involved in real estate closings and settlements to submit reports and keep records on identified non-financed transfers of residential real property to specified legal entities and trusts on a nationwide basis. Transfers made directly to an individual would not be covered by this proposed rule. The proposed rule describes the circumstances in which a report must be filed, who must file a report, what information must be provided, and when a report is due. These reports are expected to assist the U.S. Department of the Treasury; Federal, State, and local law enforcement; and national security agencies in addressing illicit finance vulnerabilities in the U.S. residential real estate sector and to curtail the ability of illicit actors to anonymously launder illicit proceeds through the purchase of residential real property, which threatens U.S. economic and national security. DATES: Written comments on this proposed rule must be submitted on or before April 16, 2024. ADDRESSES: Comments may be submitted by any of the following methods: • Federal E-Rulemaking Portal: https://www.regulations.gov. Follow the instructions for submitting comments. Refer to Docket Number FINCEN–2024– 0005 and RIN 1506–AB54. • Mail: Policy Division, Financial Crimes Enforcement Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN–2024–0005 and RIN 1506–AB54. Please submit comments by one method only. FOR FURTHER INFORMATION CONTACT: The FinCEN Regulatory Support Section at 1–800–767–2825 or electronically at frc@fincen.gov. SUPPLEMENTARY INFORMATION: lotter on DSK11XQN23PROD with PROPOSALS2 SUMMARY: I. Executive Summary The U.S. Department of the Treasury (Treasury) has long recognized the illicit finance risks posed by abuse of the U.S. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 real estate market and of legal entities and trusts by criminals and corrupt officials to launder ill-gotten gains through transfers of residential real estate. The abuse of U.S. residential real estate markets threatens U.S. economic and national security and can disadvantage individuals and small businesses that seek to compete fairly in the U.S. economy. The proposed rule is designed to enhance transparency nationwide in the U.S. residential real estate market and to assist Treasury, law enforcement, and national security agencies in protecting U.S. economic and national security interests by requiring certain persons involved in real estate closings and settlements to file reports and maintain records related to identified non-financed transfers of residential real estate to specified legal entities and trusts on a nationwide basis, including information regarding beneficial owners of those entities and trusts. Among the persons required by the Bank Secrecy Act (BSA) to maintain anti-money laundering (AML) programs are ‘‘persons involved in real estate closings and settlements.’’ 1 Yet, for many years, FinCEN has exempted such persons from comprehensive regulation under the BSA and has issued a series of time-limited and geographically focused ‘‘geographic targeting orders’’ (GTOs) to the real estate sector in lieu of more comprehensive regulation. Information received in response to FinCEN’s GTOs relating to non-financed transfers of residential real estate (Residential Real Estate GTOs) have demonstrated the need for increased transparency and further regulation of this sector. This notice of proposed rulemaking (NPRM) thus proposes a new reporting requirement for nonfinanced residential real estate transactions, consistent with the BSA’s longstanding directive to impose AML requirements on persons involved in real estate closings and settlements. At the same time, FinCEN has carefully considered the comments received in response to an advance notice of proposed rulemaking (ANPRM) on AntiMoney Laundering Regulations for Real Estate Transactions, and FinCEN appreciates the burdens that traditional AML program and SAR requirements may impose on persons involved in real estate transactions. This NPRM therefore proposes a streamlined reporting framework designed to minimize unnecessary burdens while also enhancing transparency. Although certain information collected under this proposed rule may also be available to 1 31 PO 00000 U.S.C. 5312(a)(2)(U). Frm 00002 Fmt 4701 law enforcement, in some instances, through the new beneficial ownership reporting requirements imposed by the Corporate Transparency Act (CTA), the CTA’s reporting regime and this proposed rule serve different purposes. In contrast to the beneficial ownership reporting requirements outlined in the CTA, this proposed rule is a tailored reporting requirement that would capture a particular class of activity that Treasury deems high-risk and that warrants reporting on a transaction-specific basis. More specifically, the proposed rule would require certain persons involved in residential real estate closings and settlements to file, and to maintain a record of, a streamlined version of a Suspicious Activity Report (SAR), referred to here as a ‘‘Real Estate Report.’’ The persons subject to these reporting and recordkeeping requirements would be deemed reporting persons for purposes of the proposed rule and would be determined through a ‘‘cascading’’ approach based on the function performed by the person in the real estate closing and settlement. The ‘‘cascade’’ is designed to minimize burdens on persons involved in real estate closings and settlements while avoiding gaps in reporting and incentives for evasion. To provide some flexibility in this cascade approach, real estate professionals would also have the option to designate a reporting person from among those in the cascade by agreement. The information required to be reported in the Real Estate Report would identify the reporting person, the legal entity or trust to which the residential real property is transferred, the beneficial owners of that transferee entity or transferee trust, the person that transfers the residential real property, and the property being transferred, along with certain transactional information about the transfer. The reporting person would be required to file the Real Estate Report no later than 30 days after the date of closing. Because of the streamlined nature of these Real Estate Reports compared to traditional SARs, as well as the flexible ‘‘cascade’’ framework, persons subject to this reporting requirement would not need to maintain the types of AML programs otherwise required of financial institutions under the BSA.2 2 31 Sfmt 4702 E:\FR\FM\16FEP2.SGM U.S.C. 5318(h). 16FEP2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules II. Background lotter on DSK11XQN23PROD with PROPOSALS2 A. Illicit Finance Risks in the U.S. Real Estate Sector As Secretary of the Treasury (Secretary) Yellen noted at the 2023 Summit for Democracy, ‘‘[c]orrupt actors have for decades anonymously stashed their ill-gotten gains in real estate. Those looking to exploit our system have been able to—with anonymity—store illicit proceeds in an appreciating asset . . . Treasury is working to remove that anonymity[.]’’ 3 The Secretary has made increasing transparency in the domestic and international financial system a national priority, noting that ‘‘illicit proceeds . . . equaling an estimated two percent of U.S. gross domestic product (GDP) flow through the U.S. financial system each year. Permitting illicit actors to benefit from the stability and security of the U.S. financial system weakens financial transparency, distorts markets, and hurts ordinary Americans.’’ 4 Treasury’s Strategic Plan for 2022 to 2026 makes clear that one indicator of success in combatting illicit actors’ abuse of the U.S. financial system is achieving an ‘‘updated regulatory framework for real-estate [sic] to effectively cover cash transactions.’’ 5 The United States’ stable real estate market and strong property rights protections make U.S. residential real estate attractive to illicit actors looking to launder the proceeds of crime and corruption. This is particularly the case for non-financed transfers that are currently outside the purview of the due diligence requirements imposed on regulated financial institutions pursuant to the BSA. For purposes of this rule, a non-financed transfer is any transfer that does not involve an extension of credit to the transferee secured by the transferred residential real property 6 and extended by a financial institution that has both an obligation to maintain an AML program and an obligation to 3 U.S. Department of the Treasury, Remarks by Secretary Janet L. Yellen on Anti-Corruption as a Cornerstone of a Fair, Accountable, and Democratic Economy at the Summit for Democracy (Mar. 28, 2023), available at https://home.treasury.gov/news/ press-releases/jy1371. 4 Id; U.S. Department of the Treasury, Strategic Plan 2022–2026 (2022), p. 23, available at https:// home.treasury.gov/system/files/266/Treasury StrategicPlan-FY2022-2026.pdf. 5 Id. at p. 24. 6 For the purposes of this proposed rule, ‘‘residential real property’’ means: (1) real property located in the United States containing a structure designed principally for occupancy by one to four families; (2) vacant or unimproved land located in the United States zoned, or for which a permit has been issued, for the construction of a structure designed principally for occupancy by one to four families; or (3) shares in a cooperative housing corporation. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 report suspicious transactions. Money launderers exploit the absence of an obligation on any party to a nonfinanced transfer to conduct due diligence. As a result, and as the Administration’s 2021 U.S. Strategy for Countering Corruption notes, the United States’ real estate market is a significant destination for the laundered proceeds of illicit activity. Treasury’s 2022 National Money Laundering Risk Assessment (2022 NMLRA) also reflects this. The 2022 NMLRA identifies a lack of transparency in non-financed real estate transfers in particular as a key weakness in the U.S. Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulatory regime.7 International bodies, such as the Financial Action Task Force (FATF) and non-government organizations, have likewise noted the sector’s appeal for illicit actors intent on laundering funds.8 In particular, the FATF has recommended that the United States take appropriate action to address money laundering risks in relation to non-financed transfers of real estate.9 Furthermore, open-source investigative reports have demonstrated that criminal actors frequently employ legal entities, such as limited liability companies (LLCs), to launder money, including through real estate. In August 2021, Global Financial Integrity (GFI), a nongovernmental organization, published a study estimating that at least $2.3 billion had been laundered through the U.S. real estate market from 2015 to 2020 and the ‘‘use of anonymous shell companies and complex corporate structures continue[d] to be the number 7 The White House, United States Strategy for Countering Corruption (Dec. 2021), p. 22, available at https://www.whitehouse.gov/wp-content/ uploads/2021/12/United-States-Strategy-onCountering-Corruption.pdf; U.S. Department of the Treasury, National Money Laundering Risk Assessment (Feb. 2022), p. 5, available at https:// home.treasury.gov/system/files/136/2022-NationalMoney-Laundering-Risk-Assessment.pdf. 8 The FATF is a global standard-setter of antimoney laundering and counter terrorist financing guidelines. The FATF has noted that ‘‘[c]riminals gravitate towards sectors that apply or are believed to apply less comprehensive regulation and mitigation measures or where supervision is found to be lacking,’’ and that ‘‘[t]he purchase of real estate allows for the movement of large amounts of funds all at once in a single transaction as opposed to multiple transactions of smaller values.’’ See Financial Action Task Force, Guidance for a Risk Based Approach: Real Estate Sector (July 2022), p. 18, available at https://www.fatf-gafi.org/content/ dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf. coredownload.pdf. 9 See Financial Action Task Force, United States Mutual Evaluation Report (Dec. 2016), p. 1, available at https://www.fatf-gafi.org/content/dam/ fatf-gafi/mer/MER-United-States-2016.pdf. coredownload.inline.pdf. PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 12425 one money laundering typology’’ involving real estate.10 Additionally, over 50 percent (30 of the 56 cases the study examined) involved politically exposed persons (PEPs), which the FATF has found ‘‘may be able to use their political influence for profit illegally [and] . . . thus may present a risk higher than other customers.’’ 11 GFI also highlighted that legal entities and trusts are frequently used to make such purchases, and that purchases are rarely made in the name of the PEP. For example, a 2020 forfeiture complaint filed by the Department of Justice (DOJ) alleged that a former president of a country in Africa and his spouse used funds derived from corruption to purchase U.S. residential properties worth millions of dollars via a trust.12 Such crimes undermine the national security goals of the United States, one pillar of which is countering corruption.13 FinCEN’s own December 2022 analysis revealed that between March and October 2022—the eight months following the invasion of Ukraine—Russian oligarchs sent millions of dollars to their children to purchase residential real estate in the 10 Global Financial Integrity, ‘‘Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat’s Dream’’ (Aug. 2021), pp. 13–16, available at https:// gfintegrity.org/report/acres-of-money-launderingwhy-u-s-real-estate-is-a-kleptocrats-dream/. According to its website, GFI is ‘‘a Washington, DCbased think tank focused on illicit financial flows, corruption, illicit trade and money laundering.’’ See Global Financial Integrity, ‘‘About,’’ available at https://gfintegrity.org/about/. 11 Financial Action Task Force, Guidance for a Risk Based Approach: Real Estate Sector (July 2022), pp. 29–30, available at https://www.fatfgafi.org/content/dam/fatf-gafi/guidance/RBA-RealEstate-Sector.pdf.coredownload.pdf; see e.g., U.S. Department of Justice, Press Release, Over $1 billion in misappropriated 1MDB Funds Now Repatriated to Malaysia (Aug. 5, 2021), available at https://www.justice.gov/opa/pr/over-1-billionmisappropriated-1mdb-funds-now-repatriatedmalaysia. The term ‘‘PEP’’ generally includes a current or former senior foreign political figure, their immediate family, and their close associates. See Federal Financial Institutions Examination Council, FFIEC BSA/AML Examination Manual, Politically Exposed Persons—Overview (v5 2015), p. 290; see also Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, National Credit Union Administration, and Office of the Comptroller of the Currency, Joint Statement on Bank Secrecy Act Due Diligence Requirements for Customers Who May Be Considered Politically Exposed Persons (Aug. 21, 2020), available at https://www.federalreserve.gov/ newsevents/pressreleases/files/bcreg20200821a1. pdf. 12 See Complaint for Forfeiture, U.S. v. Real Property Located in Potomac, Maryland, Commonly Known as 9908 Bentcross Drive, Potomac, MD 20854 (D. Md. July 15, 2020) (Case No. 20–cv– 02071). 13 The White House, National Security Strategy (Oct. 2022), p. 36, available at https:// www.whitehouse.gov/wp-content/uploads/2022/10/ Biden-Harris-Administrations-National-SecurityStrategy-10.2022.pdf. E:\FR\FM\16FEP2.SGM 16FEP2 12426 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 United States, often via legal entities, demonstrating the appeal of residential real estate even to the potential targets of U.S. sanctions.14 As numerous public law enforcement actions illustrate, non-financed purchases of residential real estate by certain legal entities and trusts are acutely vulnerable to exploitation by illicit actors, due to a general lack of AML regulations covering or applicable to transfers conducted in this manner.15 14 See FinCEN, Financial Trend Analysis—Trends in Bank Secrecy Act Data: Financial Activity by Russian Oligarchs in 2022 (Dec. 2022). 15 See, e.g., U.S. v. Delgado, 653 F.3d 729 (8th Cir. 2011) (drug trafficking, money laundering); U.S. v. Fernandez, 559 F.3d 303 (5th Cir. 2009) (drug trafficking, money laundering); Complaint for Forfeiture, U.S. v. All the Lot or Parcel of Land Located at 19 Duck Pond Lane Southampton, New York 11968, Case No. 1:23–cv–01545 (S.D.N.Y. Feb. 24, 2023) (sanctions evasion); Indictment and Forfeiture, U.S. v. Maikel Jose Moreno Perez, Case No. 1:23–cr–20035–RNS (S.D. Fla. Jan. 26, 2023) (bribery, money laundering, conspiracy); Motion for Preliminary Order of Forfeiture and Preliminary Order of Forfeiture, U.S. v. Colon, Case No. 1:17– cr–47–SB (D. Del. Nov. 18, 2022) (drug trafficking, money laundering); U.S. v. Andrii Derkach, Cr. No. 22–432 (E.D.N.Y. Sept. 26, 2022) (sanctions evasion, money laundering, bank fraud); Doc. No. 10 at p. 1, U.S. vs. Ralph Steinmann and Luis Fernando Vuiz, Case No. 22–2–306–CR–Gayles/Torres (S.D. Fla. July 12, 2022) (bribery, money laundering); U.S. v. Jimenez, 2022 U.S. Dist. LEXIS 77685, 2022 WL 1261738 (S.D.N.Y. Apr. 28, 2022) (Case No. 1:18– cr–00879) (false claim fraud, wire fraud, money laundering, identity theft); Complaint for Forfeiture, U.S. v. Real Property Located in Potomac, Maryland, Commonly Known as 9908 Bentcross Drive, Potomac, MD 20854, Case No. 20–cv–02071 (D. Md. July 15, 2020) (public corruption, money laundering); Final Order of Forfeiture, U.S. v. Raul Torres, Case No. 1:19–cr–390 (N.D. Ohio Mar. 30, 2020) (operating an animal fighting venture, operating an unlicensed money services business, money laundering); U.S. v. Bradley, 2019 U.S. Dist. LEXIS 141157, 2019 WL 3934684 (M.D. Tenn. Aug. 20, 2019) (Case No. 3:15–cr–00037–2) (drug trafficking, money laundering); Indictment, U.S. v. Patrick Ifediba, et al., Case No. 2:18–cr–00103– RDP–JEO, Doc. 1 (N.D. Ala. Mar. 29, 2018) (health care fraud); Redacted Indictment, U.S. v. Paul Manafort, Case 1:18–cr–00083–TSE (E.D. Va. Feb. 26, 2018) (money laundering, acting as an unregistered foreign agent); U.S. v. Miller, 295 F. Supp. 3d 690 (E.D. Va. 2018) (wire fraud); U.S. v. Coffman, 859 F. Supp. 2d 871 (E.D. Ky. 2012) (mail, wire, and securities fraud); U.S. v. 10.10 Acres Located on Squires Rd., 386 F. Supp. 2d 613 (M.D.N.C. 2005) (drug trafficking); Atty. Griev. Comm’n of Md. v. Blair, 188 A.3d 1009 (Md. Ct. App. 2018) (money laundering drug trafficking proceeds); State v. Harris, 861 A.2d 165 (NJ Super. Ct. App. Div. 2004) (money laundering, theft); see also U.S. Department of Justice, Press Release, United States Reaches Settlement to Recover More Than $700 Million in Assets Allegedly Traceable to Corruption Involving Malaysian Sovereign Wealth Fund (Oct. 30, 2019), available at https:// www.justice.gov/opa/pr/united-states-reachessettlement-recover-more-700-million-assetsallegedly-traceable; U.S. Department of Justice, Press Release, Acting Manhattan U.S. Attorney Announces $5.9 Million Settlement of Civil Money Laundering And Forfeiture Claims Against Real Estate Corporations Alleged to Have Laundered Proceeds of Russian Tax Fraud (May 12, 2017), available at https://www.justice.gov/usao-sdny/pr/ acting-manhattan-us-attorney-announces-59- VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 While many non-financed residential real estate transfers may involve no illicit funds, a substantial proportion of such non-financed transactions are conducted by persons also engaged in activity characterized by other financial institutions as suspicious, and reporting on such non-financed residential real estate transactions is of significant value to law enforcement. For example, the individuals and entities identified in Residential Real Estate GTO reports correlate with traditional SAR filings by financial institutions: FinCEN has found that approximately 42 percent of nonfinanced real estate transfers captured by the Residential Real Estate GTOs are conducted by individuals or legal entities on which a SAR has been filed. In other words, persons of potential interest to law enforcement due to their engagement in suspicious activity are also engaging in a type of transaction known to be used as a method of money-laundering: the non-financed purchase of residential real estate through a legal entity. In addition to the law enforcement and national security concerns regarding abuse of the residential real estate sector, money laundering through residential real estate can distort real estate prices and potentially make it more difficult for legitimate buyers and sellers to participate in the market. In particular, the presence of illicit funds in the real estate sector can affect housing prices.16 Legitimate buyers are also adversely affected by illicit actors’ preference to avoid financing, as sellers generally favor such ‘‘all-cash’’ offers due to the speed with which a sale can be closed.17 million-settlement-civil-money-laundering-and; U.S. Department of Justice, Press Release, Associate of Sanctioned Oligarch Indicted for Sanctions Evasion and Money Laundering: Fugitive Vladimir Vorontchenko Aided in Concealing Luxury Real Estate Owned by Viktor Vekselberg (Feb. 7, 2023), available at https://www.justice.gov/usao-sdny/pr/ associate-sanctioned-oligarch-indicted-sanctionsevasion-and-money-laundering. Moreover, as the FATF noted in July 2022, ‘‘[d]isparities with rules surrounding legal structures across countries means property can often be acquired abroad by shell companies or trusts based in secrecy jurisdictions, exacerbating the risk of money laundering.’’ International bodies, such as the FATF have found that ‘‘[s]uccessful AML/CFT supervision of the real estate sector must contend with the obfuscation of true ownership provided by legal entities or arrangements[.]’’ Financial Action Task Force, Guidance for a Risk Based Approach: Real Estate Sector (July 2022), p. 17, available at https:// www.fatf-gafi.org/content/dam/fatf-gafi/guidance/ RBA-Real-Estate-Sector.pdf.coredownload.pdf. 16 See, e.g., Richard Vanderford, ‘‘Fraudulent Covid Aid Drove Up U.S. House Prices, Report Says,’’ The Wall Street Journal (June 22, 2023). 17 See The White House, United States Strategy for Countering Corruption (Dec. 2021), p. 7, available at https://www.whitehouse.gov/wpcontent/uploads/2021/12/United-States-Strategy- PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 Due to the illicit finance risks presented and the attendant economic burdens of market abuse, FinCEN’s public efforts to counter money laundering in the real estate sector have focused on the use of legal entities by illicit actors to obfuscate ownership of residential real property.18 The reasoning behind this focus on legal entities is discussed extensively in FinCEN’s December 2021 Anti-Money Laundering Regulations for Real Estate Transactions ANPRM (2021 ANPRM), which highlighted how, as evidenced by open source investigative articles, law enforcement actions, and feedback from FinCEN’s Residential Real Estate GTOs program, individuals intent on laundering money through residential real estate frequently take advantage of the opacity of shell companies or other legal entity structures to mask true beneficial ownership of a property and their involvement in real estate transfers.19 B. FinCEN’s Prior Regulation of the Real Estate Sector 1. Current Law Enacted in 1970, the Currency and Foreign Transactions Reporting Act, generally referred to as the BSA, is designed to combat money laundering, the financing of terrorism, and other illicit financial activity.20 The Secretary is authorized to administer the BSA and to require financial institutions to keep on-Countering-Corruption.pdf; Financial Action Task Force, Guidance for a Risk Based Approach: Real Estate Sector (July 2022), p. 19, available at https://www.fatf-gafi.org/content/dam/fatf-gafi/ guidance/RBA-Real-Estate-Sector.pdf. coredownload.pdf. 18 See, e.g., FinCEN, Press Release, FinCEN Renews and Expands Real Estate Geographic Targeting Orders (Apr. 21, 2023), available at https://www.fincen.gov/news/news-releases/fincenrenews-and-expands-real-estate-geographictargeting-orders-1 (announcing the renewal of an effort to combat illicit finance by collecting information on legal entity purchases of real estate); FinCEN, FIN–2017–A003, Advisory to Financial Institutions and Real Estate Firms and Professionals (Aug. 22, 2017), p. 2 (noting that high-value residential real estate markets are vulnerable to penetration by foreign and domestic criminal organizations and corrupt actors, especially those misusing otherwise legitimate LLCs or other legal entities to shield their identities). 19 86 FR 69589 (Dec. 8, 2021). 20 See 31 U.S.C. 5311. Certain parts of the Currency and Foreign Transactions Reporting Act, its amendments, and the other statutes relating to the subject matter of that Act, have come to be referred to as the BSA. The BSA is codified at 12 U.S.C. 1829b, 12 U.S.C. 1951–1960, and 31 U.S.C. 5311–5314 and 5316–5336, and includes notes thereto, with implementing regulations at 31 CFR Chapter X. The Anti-Money Laundering Act of 2020, Section 6003(1) (Definitions), defines the BSA as section 21 of the Federal Deposit Insurance Act (12 U.S.C. 1829b), Chapter 2 of Title I of Public Law 91–508 (12 U.S.C. 1951 et seq.), and 31 U.S.C. chapter 53, subchapter II. E:\FR\FM\16FEP2.SGM 16FEP2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules records and file reports that ‘‘are highly useful in criminal, tax, or regulatory investigations or proceedings’’ or in the conduct of ‘‘intelligence or counterintelligence activities, including analysis, to protect against international terrorism.’’ 21 The Secretary delegated the authority to implement, administer, and enforce compliance with the BSA and its implementing regulations to the Director of FinCEN.22 The BSA requires each covered financial institution to establish an AML/CFT program, which must include, at a minimum, ‘‘(A) the development of internal policies, procedures, and controls; (B) the designation of a compliance officer; (C) an ongoing employee training program; and (D) an independent audit function to test programs.’’ 23 The BSA also authorizes the Secretary to require covered financial institutions to report any suspicious transaction relevant to a possible violation of law or regulation (a ‘‘suspicious activity report’’ or ‘‘SAR’’).24 Among the financial institutions subject to those requirements under the BSA are ‘‘persons involved in real estate closings and settlements.’’ 25 FinCEN’s regulations implementing the BSA require banks, non-bank residential mortgage lenders and originators (RMLOs), and housingrelated Government Sponsored Enterprises (GSEs) to file SARs and establish AML/CFT programs.26 However, FinCEN’s regulations exempt other persons involved in real estate closings and settlements from the requirement to establish AML/CFT programs, and the regulations do not impose a SAR filing requirement on such persons.27 2. FinCEN’s Real Estate Exemption In 2002, FinCEN temporarily exempted certain financial institutions, including ‘‘persons involved in real estate closings and settlements’’ and ‘‘loan and finance companies,’’ from the requirement to establish an AML/CFT program. FinCEN explained that it would ‘‘continue studying the money laundering risks posed by these institutions in order to develop appropriate AML program requirements.’’ 28 That additional time was needed to consider the businesses that would be subject to such requirements, as well as the nature and scope of the AML/CFT risks associated with those businesses.29 FinCEN also explained its concern that many of these financial institutions were sole proprietors or small businesses, and FinCEN intended to avoid imposing ‘‘unreasonable regulatory burdens with little or no corresponding anti-money laundering benefits.’’ 30 In 2003, FinCEN issued an ANPRM regarding the AML/CFT program requirement for ‘‘persons involved in real estate closings and settlements’’ (2003 ANPRM). The 2003 ANPRM solicited comments on the money laundering risks in real estate closings and settlements, how to define ‘‘persons involved in real estate closings and settlements,’’ whether any persons involved in real estate closings and settlements should be exempted from the AML/CFT program requirement, and how to structure the requirement in light of the size, location, and activities of persons in the real estate industry.31 FinCEN received 52 comments on the 2003 ANPRM from individuals, various institutions and associations of interested parties, law firms, state bar associations, an office within DOJ, and an office within the Internal Revenue Service (IRS).32 Many comments suggested that the threat of money laundering through real estate warranted appropriate regulation, but commenters disagreed over the specific businesses that should be covered. FinCEN did not propose regulations in response to these comments, and persons involved in real estate closings and settlements continue to be exempt from the AML/CFT program requirement. 3. FinCEN’s Targeted Actions in the Real Estate Sector While maintaining the exemption for persons involved in real estate closings and settlements, FinCEN has taken targeted action to address certain vulnerabilities in the real estate sector. In a 2012 final rule, FinCEN eliminated an exemption for ‘‘loan and finance 28 67 FR 21110, 21111 (Apr. 29, 2002). FinCEN initially exempted persons involved in closings and settlements for six months, and then subsequently extended the temporary exemption indefinitely. Id.; 67 FR 67547, 67548 (Nov. 6, 2002). 30 67 FR 21110, 21112 (Apr. 29, 2002). 31 68 FR 17569 (Apr. 10, 2003). 32 See FinCEN’s website to review comments submitted, available at https://www.fincen.gov/ comments-advance-notice-proposed-rule-antimoney-laundering-programs-persons-involved-realestate. lotter on DSK11XQN23PROD with PROPOSALS2 29 Id. 21 31 U.S.C. 5311(1). Order 180–01, Paragraph 3(a) (Jan. 14, 2020), available at https://home.treasury.gov/about/ general-information/orders-and-directives/treasuryorder-180-01. 23 31 U.S.C. 5318(h)(1)(A)–(D). 24 31 U.S.C. 5318(g). 25 31 U.S.C. 5312(a)(2)(U). 26 31 CFR parts 1020, 1029, 1030. 27 31 CFR 1010.205(b)(1)(v). 22 Treasury VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 12427 companies,’’ and required such companies—defined as RMLOs—to file SARs and comply with AML/CFT program obligations.33 In a 2014 final rule, FinCEN extended similar requirements to the housing-related GSEs—Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.34 In a 2020 final rule, FinCEN also imposed additional AML/CFT obligations on banks lacking a federal functional regulator, ensuring that such entities would be subject to requirements to have an AML/CFT program and meet Customer Identification Program (CIP) and Customer Due Diligence (CDD) requirements, including the verification of beneficial owners of legal entity accounts, in addition to their existing SAR obligations (which would include reporting on transactions involving suspicious real estate transactions).35 To address non-financed transfers of residential real estate that do not involve a bank or other lender, FinCEN also began to issue Residential Real Estate GTOs in 2016.36 The Residential Real Estate GTOs require title insurance companies to file reports and maintain records concerning non-financed purchases of residential real estate above a certain price threshold by certain legal entities in select metropolitan areas of the United States. Information received in response to the Residential Real Estate GTOs has confirmed the money laundering risks involved in non-financed transfers of residential real estate and provided FinCEN and its law enforcement partners with additional data about that money laundering typology. The data obtained through the Residential Real Estate GTOs has connected nonfinanced residential real property purchases by certain legal entities with the true beneficial owners making the purchases, thereby decreasing the ability of criminals to hide their identities while laundering money through real estate. FinCEN regularly receives feedback from law enforcement 33 77 FR 8148 (Feb. 14, 2012) (codified at 31 CFR part 1029). 34 79 FR 10365 (Feb. 25, 2014) (codified at 31 CFR part 1030). 35 85 FR 57129 (Sept. 15, 2020) (codified at 31 CFR 1020.210). 36 See 31 U.S.C. 5326; 31 CFR 1010.370; Treasury Order 180–01 (Jan. 14, 2020), available at https:// home.treasury.gov/about/general-information/ orders-and-directives/treasury-order-180-01. In general, a GTO is an order administered by FinCEN which for a finite period of time imposes additional recordkeeping or reporting requirements on domestic financial institutions or other businesses in a given geographic area, based on a finding that the additional requirements are necessary to carry out the purposes of, or to prevent evasion of, the BSA. The statutory maximum duration of a GTO is 180 days, though it may be renewed. E:\FR\FM\16FEP2.SGM 16FEP2 12428 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 partners that they use the information to generate new investigative leads, identify new and related subjects in ongoing cases, and support prosecution and asset forfeiture efforts. Taking that input into account, FinCEN has renewed the time-limited Residential Real Estate GTOs multiple times and has expanded them to cover additional metropolitan areas and methods of payment, yielding additional insight into the risks in both the luxury and non-luxury residential real estate markets.37 The information on real estate purchases thus enables investigators to connect real estate transactions with other suspicious financial activity. Although the Residential Real Estate GTOs have been effective, they were intended to be a temporary information collection measure that is limited in duration, not a permanent solution to a nationwide problem.38 The proposed nationwide reporting framework for certain residential real estate transfers, if finalized, would replace the current Residential Real Estate GTOs. 4. The 2021 Real Estate ANPRM On December 8, 2021, FinCEN published an ANPRM requesting comment on potential AML regulations for certain real estate professionals.39 The 2021 ANPRM solicited public comment on whether and how to address money laundering vulnerabilities in the U.S. real estate market, including whether a transactional reporting requirement, triggered when a real estate purchase meets certain conditions, should be imposed on real estate professionals under the BSA. The 2021 ANPRM also solicited comment on whether, in lieu of a transactional reporting requirement, FinCEN should promulgate AML/CFT program requirements and SAR filing requirements for persons involved in real estate closings and settlements, similar to those that are in place for banks and other financial institutions. The 2021 ANPRM further sought comment concerning many aspects of real estate transfers, including: views on the scope of potential regulation of nonfinanced residential and commercial real estate transfers by legal entities and legal arrangements such as trusts; the sector’s vulnerability to money laundering; differences in residential 37 FinCEN found that money laundering risks existed at lower price thresholds, and thus the current Residential Real Estate GTOs set a $300,000 threshold for all covered jurisdictions, except for the City and County of Baltimore, for which the threshold is $50,000. 38 See supra note 36. 39 See 86 FR 69589 (Dec. 8, 2021). VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 and commercial real estate transfers; due diligence best practices present in the industry; and the costs of any potential regulations. In response to the 2021 ANPRM, FinCEN received 151 public comments from a wide variety of stakeholders, including real estate industry associations, law firms and associations, non-governmental organizations, credit unions, Members of Congress, academics, and members of the public. Approximately 41 were unique comments and 110 were uniform statements submitted by members of the title insurance industry. In general, commenters were split in their opinions on whether FinCEN should require transactional reports 40 or require persons involved in real estate closings and settlements to have full AML/CFT program obligations.41 One commenter wrote that if FinCEN were to apply new reporting measures, it should work with the IRS to amend IRS Form 1099–S to include buyer-side information, along with the seller-side information it already collects.42 Still other commenters suggested expanding the Residential Real Estate GTOs program to cover the entire nation either all at once or incrementally.43 FinCEN has considered all the comments that it received in response to the 2021 ANPRM in drafting this proposed rule. III. FinCEN’s Proposed Approach to a Real Estate Reporting Requirement A. Streamlined SAR Requirement FinCEN has considered the extent to which non-financed residential real 40 National Association of Realtors, ANPRM Comment (Feb. 18, 2022), pp. 1, 14, available at https://www.regulations.gov/comment/FINCEN2021-0007-0128. 41 See Transparency International U.S., ANPRM Comment (Feb. 18, 2022), p. 9, available at https:// www.regulations.gov/comment/FINCEN-2021-00070115; The FACT Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070122; California Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 2, available at https:// www.regulations.gov/comment/FINCEN-2021-00070126; Coalition for Integrity, ANPRM Comment (Feb. 21, 2022), pp. 3–4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070127; Louise Shelley and Ross Delston, ANPRM Comment (Feb. 21, 2022), p. 2, available at https:// www.regulations.gov/comment/FINCEN-2021-00070151. 42 American Escrow Association, ANPRM Comment (Feb. 18, 2022), pp. 13–17, available at https://www.regulations.gov/comment/FINCEN2021-0007-0124. 43 See Prosperus Title, ANPRM Comment (Feb. 18, 2022), p. 1, available at https:// www.regulations.gov/comment/FINCEN-2021-00070125; Marisa N. Bocci, ANPRM Comment (Feb. 21, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070150; RESPRO, ANPRM Comment (Feb. 21, 2022), p. 2, available at https://www.regulations.gov/ comment/FINCEN-2021-0007-0152. PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 estate transactions should be subject to the standard AML program and SARfiling requirements that the BSA applies to other financial institutions. By subjecting financial institutions to those requirements and expressly including ‘‘persons involved in real estate closings and settlements’’ among the types of financial institutions specified in the statute, the BSA appears to indicate an expectation that such persons comply with the same AML/CFT rules currently applicable to other types of financial institutions. Although FinCEN originally issued an exemption in 2002 that relieved persons involved in real estate closings and settlements from that obligation, that exemption was intended to be only temporary while FinCEN continued to study money laundering risks in the real estate sector.44 After many years of study and several targeted and temporary actions to enhance transparency in the real estate sector, FinCEN is of the view that the money laundering risks for nonfinanced residential real estate transactions warrant comprehensive AML/CFT regulations. As explained above, such transactions can be used to facilitate and obscure illicit activity. And, as several commenters on the ANPRM have urged, AML programs and SAR-filing obligations would provide highly useful information to law enforcement about those transactions. FinCEN recognizes, however, that the standard AML program and SAR-filing requirements may be especially burdensome to persons involved in real estate transactions, as many of them may be small businesses or individuals who cannot easily implement an AML program designed to identify and report suspicious activity. Such programs, which require financial institutions to make risk-based judgments about transactions and suspicious activity, may also be ineffective if small businesses and individuals in the real estate sector have difficulty implementing them. For these reasons, FinCEN is proposing a streamlined reporting requirement that differs from the requirements typically imposed on other financial institutions. In particular, section 5318(g) of the BSA authorizes the Secretary to require financial institutions to report, via SARs, any ‘‘suspicious transactions relevant to a possible violation of law or regulation.’’ 45 But the BSA affords the Secretary flexibility in implementing that requirement, and indeed directs the Secretary to consider ‘‘the means by or 44 See 45 31 E:\FR\FM\16FEP2.SGM 67 FR 21110 (Apr. 29, 2002). U.S.C. 5318(g)(1)(A). 16FEP2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules form in which the Secretary shall receive such reporting,’’ including relevant ‘‘burdens,’’ ‘‘efficiency,’’ and ‘‘benefits.’’ 46 A new provision added to the BSA by section 6202 of the AntiMoney Laundering Act of 2020 (AML Act) further directs FinCEN to ‘‘establish streamlined . . . processes to, as appropriate, permit the filing of noncomplex categories of reports of suspicious activity.’’ In assessing whether streamlined filing is appropriate, FinCEN must determine, among other things, that such reports would ‘‘reduce burdens imposed on persons required to report[,]’’ while at the same time ‘‘not diminish[ing] the usefulness of the reporting to Federal law enforcement agencies, national security officials, and the intelligence community in combating financial crime, including the financing of terrorism[.]’’ 47 Based on that authority, FinCEN is proposing to streamline the SAR reporting requirement for purposes of this rule and to create a new form—the Real Estate Report—to reflect this streamlined approach. FinCEN believes that a streamlined reporting requirement, without an accompanying AML/CFT program, is appropriate, as the proposed rule would impose a requirement to report basic, standardized information about all relevant transactions, nationwide. FinCEN believes the proposed streamlined reporting requirement would enhance the usefulness of BSA reporting to Federal law enforcement agencies, national security officials, and the intelligence community for combating financial crimes. The information collected would contain crucial details about a typology of real estate transfers that present acute illicit finance risks and for which there is broad consensus that regulation is needed—information that would not otherwise be routinely identified and reported in a traditional SAR. FinCEN also believes that a streamlined filing requirement would reduce the potential burden on reporting persons. The filing 46 31 U.S.C. 5318(g)(5)(B)(i)–(iii). AML Act, section 6202 (codified at 31 U.S.C. 5318(g)(D)(i)(1)). Section 6102(c) of the AML Act also amended 31 U.S.C. 5318(a)(2) to give the Secretary the authority to ‘‘require a class of domestic financial institutions or nonfinancial trades or businesses to maintain appropriate procedures, including the collection and reporting of certain information as the Secretary of the Treasury may prescribe by regulation, to . . . guard against money laundering, the financing of terrorism, or other forms of illicit finance.’’ FinCEN believes this authority also provides an additional basis for the reporting requirement proposed in this NPRM. lotter on DSK11XQN23PROD with PROPOSALS2 47 See VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 requirement would be triggered when the conditions set forth in the proposed rule are met, which FinCEN believes will reduce the overall burden for most filers, compared to those that would be required when implementing a traditional AML program. The streamlined filing requirement, unlike the requirements for filing a traditional SAR, would entail no risk-based judgment about when to file and no narrative assessment. Thus, similar to a Currency Transaction Report (CTR), Form 8300, or report filed under the Residential Real Estate GTOs, the proposed Real Estate Report would not require filers to make discretionary decisions.48 Because of this, while FinCEN’s traditional SAR authority mandates that SARs be guided by a financial institution’s AML/CFT program designed to ensure that those discretionary decisions are made appropriately, FinCEN believes that an AML/CFT program is not necessary for reporting persons to accurately prepare and file useful reports under the proposed rule.49 For this reason, the proposed rule would exempt persons involved in real estate closings and settlements from the BSA’s requirement to establish AML/CFT programs— effectively maintaining the current exemption for such persons under 31 U.S.C. 5318(h)(1), in light of the new reporting requirement.50 The proposed rule would also exempt reporting persons from the confidentiality provisions that the BSA applies to suspicious activity reporting.51 These confidentiality provisions typically serve to ensure that banks and other such financial institutions do not alert SAR subjects to the fact that a SAR is being filed based on a suspicion with respect to the subject, potentially inducing a behavior change and reducing the utility of the SAR. However, as the triggering criteria for the filing of the proposed streamlined filing (a non-financed 48 Under the BSA and its implementing regulations, ‘‘each financial institution other than a casino shall file a [CTR] of each deposit, withdrawal, exchange of currency or other payment or transfer, by, through, or to such financial institution which involves a transaction in currency of more than $10,000[.]’’ 31 CFR 1010.311; see also 31 U.S.C. 5313. Under the BSA, relevant IRS statutes, and associated implementing regulations, ‘‘[a]ny [individual, trust, estate, partnership, association, company or corporation] who, in the course of a trade or business . . . receives currency in excess of $10,000 in 1 transaction (or 2 or more related transactions) shall . . . [file a Form 8300] with respect to the receipt of currency.’’ 31 CFR 1010.330(a)(1)(i); see also 31 U.S.C 5331; 26 U.S.C. 7701(a)(1). 49 See 31 U.S.C. 5318(g)(5)(C). 50 See 31 CFR 1010.205(b)(v). 51 See 31 U.S.C. 5318(g)(2). PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 12429 transfer to certain legal entities and trusts) would be known by all parties to the transfer, including those whose information will be collected and reported to FinCEN, the same confidentiality considerations do not apply.52 B. The Corporate Transparency Act FinCEN notes that certain information collected under this proposed rule— most notably the beneficial ownership information of certain legal entities— will be collected and available to law enforcement in certain instances by virtue of the new beneficial ownership reporting requirements imposed by the CTA and implemented through the Beneficial Ownership Information Reporting Requirements Rule (BOI Reporting Rule).53 However, the CTA’s reporting regime and this proposed rule would serve different purposes. This proposed rule is designed as a tailored reporting requirement that would capture a particular class of activity that Treasury deems high-risk—namely, non-financed residential real estate transfers to certain legal entities and trusts—and that, given the risk, warrants reporting on a transaction-specific basis. The resulting reports could readily alert law enforcement to the persons involved in a transfer of assets that carries significant illicit finance risk. Indeed, as with traditional SARs, reports under this proposed rule would require reporting on specific real estate transactions and allow Treasury and law enforcement to connect money laundering through real estate with other types of potentially illicit activities and to conduct broad money laundering trend analysis. In contrast, the BOI Reporting Rule requires companies to file reports about the beneficial ownership of certain legal entities; however, this information is unlikely to shed light on purchases of real estate by criminal actors or allow law enforcement to map out purchases of residential real estate by individual criminals and money launderers as well as their networks. Although some information about real estate purchases may in some cases be separately available through other sources such as state land registries (as discussed 52 31 U.S.C. 5318(a)(7). BOI Reporting Rule implements the CTA’s reporting provisions. In recognition of the fact that illicit actors frequently use corporate structures to obfuscate their identities and launder ill-gotten gains, the BOI Reporting Rule requires certain legal entities to file reports with FinCEN that identify their beneficial owners. See 87 FR 59498 (Sept. 30, 2022). Access by authorized recipients to BOI collected under the CTA are governed by other FinCEN regulations. See 88 FR 88732 (Dec. 22, 2023). 53 The E:\FR\FM\16FEP2.SGM 16FEP2 12430 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules below), the inclusion of both beneficial ownership information and real estate transaction information in a single report as proposed in this NPRM will enable law enforcement to access information about potential criminal activity in a more timely and efficient manner. In addition, the information to be reported under this proposed rule would differ from the information to be reported under the CTA in several ways. For instance, the proposed rule would require reporting of certain information about beneficial owners that is not required to be reported under the CTA reporting regime.54 A discussion of the content of the proposed Real Estate Report is included in Section IV.E. Furthermore, reports filed pursuant to the BOI Reporting Rule—Beneficial Ownership Information Reports—and reports filed pursuant to this proposed rule—Real Estate Reports—would be housed in different databases with differing access privileges. The proposed Real Estate Reports would be stored electronically in the same database as traditional SAR and other BSA reports, in keeping with the nature, purposes, and use of those reports. Nevertheless, although they serve different purposes, the proposed rule adopts or adapts certain definitions from the BOI Reporting Rule where appropriate. These definitions are discussed in more detail in Section IV.B. lotter on DSK11XQN23PROD with PROPOSALS2 C. Lack of Alternative Sources of Relevant Information While other investigative methods and databases may be available to law enforcement seeking information on persons involved in non-financed transfers of residential real property, such sources of information are often incomplete, unreliable, and diffuse, resulting in a misalignment between these sources and the potential risks posed by the transfers.55 Furthermore, the non-uniformity of the title transfer processes across states and the fact that the recording of title information is largely done at the local level complicates and hinders investigative efforts. An investigator could spend months or even years going through the electronic or physical property records 54 For example, the CTA reporting regime will only indirectly require trusts to report their beneficial owners if an individual indirectly owns or controls a reporting company through a trust. 55 See generally Sarah Mancini, Kate Lang, and Chi Wu, ‘‘Mismatched and Mistaken: How the Use of an Inaccurate Private Database Results in SSI Recipients Unjustly Losing Benefits,’’ National Consumer Law Center (Apr. 2021), available at https://www.nclc.org/wp-content/uploads/2022/08/ RptMismatchedFINAL041421.pdf. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 databases of the over 3,000 counties in the United States, only some of which have digitized their records. Furthermore, although certain data about non-financed transfer could be obtained through the Residential Real Estate GTOs, those GTOs currently cover only 68 cities and counties are currently covered by the Residential Real Estate GTOs. In order to verify how many non-financed purchases of residential real estate a known illicit actor has made, law enforcement may have to issue subpoenas to each jurisdiction and potentially travel inperson to many counties to find the relevant information. Law enforcement is also likely to experience difficulty in finding beneficial ownership information for non-financed transfers of residential real estate to legal entities or trusts not registered in the United States. This is particularly key as international buyers contributed approximately $59 billion to the existing-home U.S. residential real estate market from April 2021 to March 2022 and 44 percent of international purchases were non-financed, compared to 24 percent for all existing-home buyers.56 The disjointed nature of existing local databases also poses a significant obstacle to a common investigative methodology employed by law enforcement when it searches for perpetrators of money laundering and other criminal activity—namely, identifying networks of individuals that have potentially engaged in suspicious activity. A search of the proposed Real Estate Reports would be far more efficient than searching incomplete commercial databases or potentially visiting thousands of county-level deed offices. FinCEN assesses that law enforcement would benefit from access to information about transfers that reflect an identified money laundering typology in one central location managed and hosted by the U.S. government. Finally, existing commercial databases do not collect important information that is the focus of this rule, including funds transfer information. 56 See National Association of Realtors, 2022 International Transactions in U.S. Residential Real Estate (July 2022), pp. 4–5, available at https:// cdn.nar.realtor/sites/default/files/documents/2022international-transactions-in-us-residential-realestate-07-18-2022.pdf?_gl=1*3orrzx*_gcl_ au*MTc4MTk3NTgzOS4xNjg3OTg1MTYy. The overall dollar value of international investment in residential real estate was comparatively low from 2021–2022 compared to the prior ten years due, in part, to investment and travel restrictions accompanying the COVID–19 pandemic. FinCEN believes this dollar value, in the absence of pandemic conditions, may therefore experience some mean reversion. PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 IV. Section-by-Section Analysis The proposed rule would impose reporting and recordkeeping requirements related to certain transfers of residential real property (reportable transfers). The reporting and recordkeeping obligations would primarily apply to ‘‘reporting persons,’’ who are certain persons involved in real estate closings and settlements. Generally, the reporting person would be identified on the basis of their order in a ‘‘cascade’’ of specific functions performed by various persons involved in facilitating the closing or settlement of a real estate transaction. The proposed rule would also allow persons in the cascade to designate the reporting person amongst themselves. The reporting person would be required to report information identifying the transferee entity or trust, the beneficial owners of the transferee entity or trust, and certain individuals signing documents on behalf of the transferee entity or transferee trust (signing individual), as well as information concerning the reporting person, the transferor, the real estate transferred, and certain payment information. The reporting person would be required to file a Real Estate Report with FinCEN and maintain a copy of that report, along with a certification by the transferee’s representative as to the identities of the beneficial owner(s) of the transferee, for a period of five years. If the persons involved in facilitating the closing or settlement enter into a designation agreement with regard to the reporting person, then the parties to the agreement would also be required to retain that agreement for a period of five years.57 A. Residential Real Property in Reportable Transfers 1. Reportable Residential Real Property The proposed rule is meant to broadly capture residential real property such as single-family houses, townhouses, condominiums, and cooperatives, as well as apartment buildings designed for one to four families. These properties would be captured even if there is also a commercial element to the property, such as a single-family residence that is located above a commercial enterprise. The proposed rule would also include certain types of land on which a residence is not yet built. The criteria for whether property falls within the parameters of the rule can be met in one of three ways: (1) it is real property that includes a structure 57 See E:\FR\FM\16FEP2.SGM 31 CFR 1010.430(d). 16FEP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules designed principally for occupancy by one to four families; (2) it is land that is vacant or unimproved, and that is zoned, or for which a permit has been issued, for occupancy by one to four families; or (3) it is a share in a cooperative housing corporation. This definition modifies and expands the definition of ‘‘residential real property’’ used in the Residential Real Estate GTOs. Although shares of a cooperative are generally treated under state law as personal property rather than real property, FinCEN believes that the money laundering risks for residential cooperatives are similar to those of condominiums and other residential real property. A cooperative is a corporation, and the owners of the cooperative are the corporation’s shareholders. Receiving ownership of shares in a cooperative therefore differs from receiving ownership of real property, as it does not include the filing of a deed specifying that ownership of a piece of real property has been transferred. However, the fundamental purpose of owning shares in a cooperative is to possess a piece of real property—generally a unit in an apartment owned by the cooperative. As the primary purpose for owning shares in a cooperative is to occupy real property, and because the market for cooperatives overlaps with the market for condominiums and other types of real property, FinCEN believes that it is appropriate to treat shares of a cooperative as residential real property for purposes of this rule. Without this treatment, money laundering risks may be unduly incentivized to shift investments to this segment of the real estate market. The proposed rule also makes clear that reportable residential real property includes property located in the United States, which is defined in the BSA implementing regulations to mean any State, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and territory or possession of the United States.58 FinCEN believes this geographical scope is appropriate and that more limited coverage would likely push illicit activity into non-covered areas. Furthermore, a uniform national approach will provide consistency and predictability for businesses required to maintain records and make reports under this proposed rule. 58 31 CFR 1010.100(hhh). VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 2. Ownership Interests in Reportable Residential Real Property For purposes of the proposed rule, a person may hold an ownership interest in residential real property if the person has rights to the property that are demonstrated through a deed or, for an interest in a cooperative housing corporation, through stock, shares, membership, a certificate, or other contractual agreement evidencing ownership. Deeds are documents demonstrating title over property and recording changes in ownership and are effective when signed by the transferor and delivered to the transferee. They are generally publicly recorded, and although not all deeds are filed as such, the majority are, and there are benefits to doing so, such as preempting disputes over ownership and effecting the ability to sell the property. The ownership interests of a cooperative housing corporation are not reflected on a deed and are instead typically demonstrated through stock or shares. The holder of each ownership interest has the right to dispose of that stock or share, the value of which primarily reflects the value of the residence attached to the interest. B. Transferees in Reportable Transfers 1. Transferee Entities The proposed regulation would require reporting only if a transferee of an ownership interest in residential real property is a transferee entity or a transferee trust, as those terms are defined. Such a transfer would be reportable even if one or more other transferees (i.e., those that are neither a transferee entity nor transferee trust) also receive an ownership interest in the same property as part of the same transaction. Generally, the proposed rule provides that a ‘‘transferee entity’’ is any person other than a transferee trust or an individual. For example, a transferee entity may be a corporation, partnership, estate, association, or limited liability company. However, the definition of a ‘‘transferee entity’’ contains exceptions for certain highly regulated entities.59 59 For example, as discussed further below, individuals and trusts (outside of statutory trusts) are excepted from the definition of ‘‘transferee entity.’’ In addition, certain types of legal entities that are exempt from the requirement to report beneficial ownership information under the CTA are also excepted. Trusts are considered ‘‘transferee trusts’’ rather than ‘‘transferee entities’’ to ensure the proposed rule differentiates between legal entities and legal arrangements. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 12431 The proposed definition is informed by comments submitted in response to the 2021 ANPRM. In general, the 2021 ANPRM commenters recognized the money laundering risks presented by transfers of residential real estate to certain legal entities and supported coverage of them in any potential regulation.60 Some commenters stated that only legal entities that are not covered by the CTA should be covered by any potential regulation of the real estate sector, as their beneficial ownership information will not be collected under the BOI Reporting Rule.61 However, as discussed below, FinCEN believes that this would leave a serious regulatory gap that would prevent the proposed rule from achieving its purpose of addressing illicit finance risk in the residential real estate sector. One commenter suggested that FinCEN use the definition of ‘‘legal entity’’ that appears in FinCEN’s 2020 CDD Rule.62 a. Regulated Entities Although this rule does not rely on the CTA for its legal authority, FinCEN is proposing to adopt many of the CTA’s exemptions for purposes of this proposed definition, insofar as the policy rationales for those exemptions align with the goals of this proposed rule. The exemptions that FinCEN proposes to adopt would apply to legal entities that FinCEN believes have sufficient AML/CFT compliance obligations in the real estate context, and which are already subject to more government supervision, or have disclosure requirements that obviate the need for inclusion in this proposed rule. 60 See Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), pp. 10, 24, 30, 39, available at https://www.regulations.gov/comment/ FINCEN-2021-0007-0102; American Land Title Association, ANPRM Comment (Feb. 17, 2022), p. 1, available at https://www.regulations.gov/ comment/FINCEN-2021-0007-0020; Transparency International U.S., ANPRM Comment (Feb. 18, 2022), pp. 3, 5, available at https:// www.regulations.gov/comment/FINCEN-2021-00070115; The FACT Coalition, ANPRM Comment (Feb. 18, 2022), pp. 2, 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070122; California Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), pp. 2–3, available at https://www.regulations.gov/comment/FINCEN2021-0007-0126; Coalition for Integrity, ANPRM Comment (Feb. 21, 2022), p. 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070127; Anti-Corruption Data Collective, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070153. 61 See American Land Title Association, ANPRM Comment (Feb. 17, 2022), p. 2, available at https:// www.regulations.gov/comment/FINCEN-2021-00070020. 62 Financial & International Business Association, ANPRM Comment (Feb. 21, 2022), p. 2, available at https://www.regulations.gov/comment/FINCEN2021-0007-0142. E:\FR\FM\16FEP2.SGM 16FEP2 12432 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules The exclusions in the proposed rule that align with the CTA’s exemptions largely turn on whether the entity in question is supervised by a government agency, is a government agency, or has disclosure requirements that may diminish illicit finance risk in the context of residential real property.63 Specifically, the proposed rule would exclude U.S. governmental authorities, securities reporting issuers, and certain banks, credit unions, depository institution holding companies, money service businesses, brokers or dealers in securities, securities exchange or clearing agencies, other Exchange Act registered entities, insurance companies, state-licensed insurance producers, Commodity Exchange Act registered entities, public utilities, financial market utilities, and registered investment companies, as well as any legal entity whose ownership interests are controlled or wholly owned, directly or indirectly, by any of the above. For example, in the residential real estate context, FinCEN assesses that the illicit finance risk of non-financed transfers is adequately diminished when a business must register its securities with the Securities and Exchange Commission (SEC) under Section 12 of the Securities Exchange Act of 1934 or must file Forms 10–K or other supplementary and periodic information under section 15(d) of the Securities Exchange Act of 1934. Persons who beneficially own more than five percent of a covered class of equity securities for these businesses must publicly file with the SEC certain information relating to such beneficial ownership.64 Persons who are a director or an officer or who beneficially own more than 10 percent of such registered equity security (insiders) also must publicly report their ownership and transactions.65 b. Non-Profit Organizations The definition of transferee entity in the proposed rule should be read to include non-profit organizations.66 63 See 31 U.S.C. 5336(a)(11)(B)(xxi). 15 U.S.C. 78m(d)(1), (g)(1); 17 CFR 240.13d–1. 65 See U.S. Securities and Exchange Commission, ‘‘Officers, Directors, and 10% Shareholders,’’ available at https://www.sec.gov/education/ smallbusiness/goingpublic/officersanddirectors. 66 Under U.S. tax law, non-profit organizations include tax-exempt organizations: charitable organizations, churches and religious organizations, private foundations, and other non-profits such as civic leagues, social clubs, labor organizations, and business leagues, under Internal Revenue Code Section 501(c)(3), as well as political organizations subject to Section 527 to the Internal Revenue Code. See IRS, ‘‘Exempt Organization Types,’’ available at https://www.irs.gov/charities-non-profits/exemptorganization-types. lotter on DSK11XQN23PROD with PROPOSALS2 64 See VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 FinCEN and at least four major federal financial institution regulators (the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency have made clear that the U.S. government does not view the charitable sector as a whole as presenting a uniform or unacceptably high risk of being used or exploited for money laundering, terrorist financing, or sanctions violations. The agencies have also recognized that the vast majority of charities and other nonprofit organizations comply with the law and properly support charitable and humanitarian causes.67 The FATF also has made clear that only a small subset of non-profits sending funds crossborder should be considered high risk as it relates to serving as potential vehicles of terrorist financing.68 However, non-profit organizations (a subset of which are often referred to as charities), have proven vulnerable to abuse by certain illicit actors and have been implicated in illicit finance schemes, including fraud, money laundering, tax evasion, and terrorist financing.69 FinCEN’s consultations with law enforcement indicate that charities are routinely the subjects of 67 Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, FINCEN, National Credit Union Administration, and Office of the Comptroller of the Currency, Joint Fact Sheet on Bank Secrecy Act Due Diligence Requirements for Charities and Non-Profit Organizations (Nov. 19, 2020), available at https:// www.fincen.gov/sites/default/files/shared/ Charities%20Fact%20Sheet%2011_19_20.pdf. 68 Financial Action Task Force, Risk of Terrorist Abuse of Non-Profit Organisations (June 2014), p. 8, available at https://www.fatf-gafi.org/content/ dam/fatf-gafi/reports/Risk-of-terrorist-abuse-in-nonprofit-organisations.pdf.coredownload.pdf. 69 See U.S. Department of the Treasury, ‘‘Protecting Charitable Organizations,’’ available at https://home.treasury.gov/policy-issues/terrorismand-illicit-finance/protecting-charitableorganizations (noting that ‘‘terrorists have exploited the charitable sector to raise and move funds, provide logistical support, encourage terrorist recruitment, or otherwise support terrorist organizations and operations’’); U.S. Department of Justice, Press Release, Charity Founders Sentenced to Prison for Using Non-Profit to Steal from Donors and Cheat on Their Taxes (Nov. 6, 2020), available at https://www.justice.gov/usao-sdca/pr/charityfounders-sentenced-prison-using-non-profit-stealdonors-and-cheat-their-taxes; see generally Organization for Economic Cooperation and Development, Report on Abuse of Charities for Money-Laundering and Tax Evasion (Feb. 2009), available at https://www.oecd.org/tax/exchange-oftax-information/42232037.pdf; World Bank, Combatting the Abuse of Non-Profit Organizations (June 2015), available at https://elibrary. worldbank.org/doi/pdf/10.1596/978-0-8213-8547-0; Financial Action Task Force, Combating the Terrorist Financing Abuse of Non-Profit Organisations (Nov. 2023), available at https:// www.fatf-gafi.org/content/dam/fatf-gafi/guidance/ BPP-Combating-TF-Abuse-NPO-R8.pdf. coredownload.inline.pdf. PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 investigations involving fraud and money laundering, and a review of criminal cases involving illicit finance crimes and non-profit organizations shows that such organizations are vulnerable to exploitation by illicit actors. Indeed, charities purporting to support such causes as AIDS research, police and firefighters, disabled youth, childhood hunger, and veterans’ issues have been investigated and prosecuted for fraud and money laundering.70 Further, non-profit organizations have been used by corrupt governmental officials to extort money from individuals seeking zoning approvals and permits; 71 manipulated to engage in bribery of corrupt foreign officials; 72 and exploited to finance terrorism.73 Illicit funds funneled through nonprofit organizations are often invested in residential real estate. For instance, in July 2021, the 11th Circuit affirmed the conviction and forfeiture judgments involving multiple non-profit organizations in Florida.74 The defendants that exploited the nonprofits were convicted of conspiracy to commit wire fraud, operation of an illegal gambling business, conspiracy to commit money laundering, and money laundering.75 The court found that funds laundered through the non-profits were used to purchase three residential real estate properties in Florida, which were subsequently forfeited.76 One 2021 ANPRM commenter specifically stated that FinCEN should 70 See U.S. v. Lyons, 472 F.3d 1055, 1061–1065 (9th Cir. 2007); Dhafir v. U.S., 2015 U.S. Dist. LEXIS 197346, 2015 WL 13727329 (N.D.N.Y. June 25, 2015). 71 See generally U.S. v. Hairston, 46 F.3d 361 (4th Cir. 1995). 72 See generally U.S. v. Chi Ping Patrick Ho, 984 F.3d 191 (2d Cir. 2020) (in which a Chinese think tank registered in Hong Kong and in the United States as a public charity exploited a charity in Uganda to engage in money laundering and bribery under the Foreign Corrupt Practices Act). 73 See Sotloff v. Qatar Charity, 2023 U.S. Dist. LEXIS 93911, 2023 WL 3721683 (S.D. Fla. May 30, 2023) (financial support for Hamas, Al Qaeda, and ISIS); In re Terrorist Attacks on September 11, 2001, U.S. Dist. LEXIS 247199*, *344 (S.D.N.Y. Apr. 27, 2020) (financial support for Al Qaeda); Strauss v. Credit Lyonnais, S.A., 925 F. Supp. 2d 414, 415 (E.D.N.Y. 2013) (financial support for Hamas); U.S. Department of the Treasury, Press Release, Treasury Targets Hizballah Finance Official and Shadow Bankers in Lebanon (May 11, 2021), available at https://home.treasury.gov/news/press-releases/ jy0170 (highlighting a non-profit providing funding for Hizballah). 74 U.S. v. Masino, 2021 U.S. App. LEXIS 22615, 2021 WL 3235301 (11th Cir. July 30, 2021); U.S. v. Masino, 2019 U.S. Dist. LEXIS 34862, 2019 WL 1045179 (N.D. Fla. Mar. 5, 2019). 75 U.S. v. Masino, 2021 U.S. App. LEXIS 22615, 2021 WL 3235301 (11th Cir. July 30, 2021). 76 U.S. v. Masino, 2019 U.S. Dist. LEXIS 34862, 2019 WL 1045179 (N.D. Fla. Mar. 5, 2019), aff’d U.S. v. Masino, 2021 U.S. App. LEXIS 22615, 2021 WL 3235301 (11th Cir. July 30, 2021). E:\FR\FM\16FEP2.SGM 16FEP2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules cover purchases by non-profits.77 Another commenter detailed the regulations that cover non-profits and advocated against covering them.78 Having considered the circumstances and comments in totality, FinCEN believes that non-profit organizations are vulnerable to abuse by illicit actors seeking to launder illicit proceeds through residential real estate. Accordingly, they would be captured under the proposed definition of transferee entity. lotter on DSK11XQN23PROD with PROPOSALS2 c. Unregistered Pooled Investment Vehicles Pooled investment vehicles (PIVs) that are not registered with the SEC may be transferee entities for purposes of the proposed rule. Broadly, PIVs can include investment companies registered with the SEC, such as mutual funds and exchange-traded funds, as well as unregistered investment companies, such as private real estate investment trusts, certain real estate funds, special purpose financing vehicles, and private funds (which are usually categorized by their sponsors according to the investment strategy they pursue, and include funds such as hedge funds, private equity funds, and venture capital funds).79 Under the proposed rule, PIVs that are investment companies and are registered with the SEC would be exempt from the definition of a transferee entity. The difference between registered and unregistered PIVs turns in part on whether the PIV is or is not excluded from registration requirements as an 77 See The FACT Coalition, ANPRM Comment (Feb. 18, 2022), p. 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070122. 78 See Kirton McConkie, ANPRM Comment (Feb. 7, 2022), pp. 1–8, available at https:// www.regulations.gov/comment/FINCEN-2021-00070017. 79 The term ‘‘pooled investment vehicle’’ has a particular definition in Rule 206(4)–8 under the Investment Advisers Act of 1940. See 17 CFR 275.206(4)–8. However, the term is used more broadly in this NPRM. For information on private funds, see U.S. Securities and Exchange Commission, ‘‘Private Fund Adviser Overview,’’ available at https://www.sec.gov/divisions/ investment/guidance/private-fund-adviserresources. Section 202(a)(29) of the Advisers Act defines the term ‘‘private fund’’ as an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a–3), but for section 3(c)(1) or 3(c)(7) of that Act. Section 3(c)(1) excludes a privatelyoffered issuer having fewer than a certain number of beneficial owners. Section 3(c)(7) excludes a privately-offered issuer the securities of which are owned exclusively by ‘‘qualified purchasers’’ (generally, persons and institutions owning a specific amount of investments). See U.S. Securities and Exchange Commission, ‘‘Investment Company Registration and Regulation Package,’’ available at https://www.sec.gov/investment/fast-answers/ divisionsinvestmentinvcoreg121504#P84_14584. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 investment company under the Investment Company Act of 1940.80 PIVs that meet these exclusion requirements, and are therefore not registered with the SEC, do not have disclosure and reporting requirements that govern similar but public PIVs, such as mutual funds or exchangetraded funds. Furthermore, unregistered PIVs are not subject to comprehensive AML/CFT regulation and are therefore vulnerable to abuse by illicit actors. The risks they present may be significant—the private fund sector, for example, holds approximately $20 trillion assets under management—a number that has more than doubled over the past decade and is comparable to the holdings of highly regulated U.S. banks.81 In recent years, private funds have been used by sanctioned persons, corrupt officials, tax evaders, and other criminal actors as a gateway to the U.S. financial system. This includes funds stolen from Malaysia’s sovereign wealth fund, 1MDB; 82 Venezuela’s state-owned oil and natural gas company, PDVSA; 83 and funds from a large-scale cryptocurrency fraud scam.84 Unregistered PIVs have also been used to hide criminal proceeds in real estate. In one particular example, a criminal actor had a substantial ownership interest in a private fund and used it to both obfuscate and provide a veneer of legitimacy to illicit funds to 80 Id. 81 See U.S. Securities and Exchange Commission, ‘‘Private Fund Statistics,’’ available at https:// www.sec.gov/divisions/investment/private-fundsstatistics. This figure reflects the assets of private funds managed by registered investment advisers only. Form PF is filed by certain investment advisers registered with the SEC to report confidential information about the private funds they advise. Form PF is not filed by investment advisers that advise private funds but that are not registered with the SEC. Form PF provides the SEC and Financial Stability Oversight Council (FSOC) with important information about the basic operations and strategies of private funds and has helped establish a baseline picture of the private fund industry for assessing systemic risk. 82 Peter Grant, ‘‘1MDB probe may be good news for Park Lane Hotel Investors,’’ The Wall Street Journal (July 26, 2016), available at https:// www.wsj.com/articles/1mdb-probe-may-be-goodnews-for-park-lane-hotel-investors-1469554543. 83 See generally Criminal Complaint, U.S. v. Guruceaga, Case No. 1:18–cr–20685 (S.D. Fla. July 23, 2018). 84 U.S. Department of Justice, Press Release, Former Partner of Locke Lord LLP Convicted in Manhattan Federal Court Of Conspiracy To Commit Money Laundering And Bank Fraud In Connection with Scheme To Launder $400 Million Of OneCoin Fraud Proceeds (Nov. 21, 2019), available athttps:// www.justice.gov/usao-sdny/pr/former-partnerlocke-lord-llp-convicted-manhattan-federal-courtconspiracy-commit-money#:∼:text= SCOTT%2C%20a%20former%20equity %20partner,and%20operated%20for%20that %20purpose. PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 12433 make U.S. real estate purchases.85 Illicit actors may also hold a minority, noncontrolling interest in an unregistered PIV, resulting in the unregistered PIV channeling that investor’s illicit funds into real estate, as unregistered PIVs are not generally required to establish the identities of investors or look into the investor’s source of funds.86 Outside of the real estate sector, the lack of comprehensive AML/CFT coverage for unregistered PIVs has posed major national security challenges, enabling U.S. adversaries to invest in, and thereby gain access to, sensitive and emerging U.S. technologies.87 In fact, according to a 2018 Department of Defense report, unregistered PIVs such as private funds and special purpose vehicles have allowed jurisdictions whose interests compete with the United States to ‘‘access the crown jewels of U.S. innovation,’’ including in the realms of artificial intelligence, sensors, virtual reality, self-driving vehicles, robotics, microchips, and facial and other image recognition technologies, without such activity being reviewed by the Committee on Foreign Investment in the United States or other relevant government authority, where required.88 85 See, e.g., Peter Grant, ‘‘1MDB probe may be good news for Park Lane Hotel Investors,’’ The Wall Street Journal (July 6, 2016), available at https:// www.wsj.com/articles/1mdb-probe-may-be-goodnews-for-park-lane-hotel-investors-1469554543; Complaint, U.S. v. ‘‘The Wolf of Wall Street’’ Motion Picture, Case No. 2:16–cv–05362–DSF–PLA (C.D. Cal. 2016); Will Parker, ‘‘Meet the secretive Kazakh company backing the Upper West Side’s latest skyscraper,’’ The Real Deal: Real Estate News (Apr. 14, 2018), available at https://thereal deal.com/new-york/2018/04/13/meet-the-secretivekazakh-company-backing-the-upper-west-sideslatest-skyscraper/; Miranda Patrucic, Vlad Lavrov, and Ilya Lozovsky, ‘‘Kazakhstan’s Secret Billionaires,’’ OCCRP (Nov. 5, 2017), available at https://www.occrp.org/en/paradisepapers/ kazakhstans-secret-billionaires. 86 See., e.g., U.S. Department of Justice, Press Release, Acting Manhattan U.S. Attorney Announces Settlement of Civil Forfeiture Claims Against Over $50 Million Laundered Through Black Market Peso Exchange (Nov. 12, 2020), available at https://www.justice.gov/usao-sdny/pr/actingmanhattan-us-attorney-announces-settlement-civilforfeiture-claims-against-over. 87 Cory Bennett and Bryan Bender, ‘‘How China acquires ‘The Crown Jewels’ of U.S. technology,’’ Politico (May 22, 2018), available at https:// www.politico.com/story/2018/05/22/china-us-techcompanies-cfius-572413. 88 Michael Brown and Pavneet Singh, ‘‘China’s Technology Transfer Strategy: How Chinese Investments in Emerging Technology Enable A Strategic Competitor to Access the Crown Jewels of U.S. Innovation,’’ Defense Innovation Unit Experimental (Jan. 2018), available at https:// nationalsecurity.gmu.edu/wp-content/uploads/ 2020/02/DIUX-China-Tech-Transfer-StudySelected-Readings.pdf; Paul Mozur and Jane Perlez, ‘‘China Tech investment flying under the radar, Pentagon warns,’’ The New York Times (Apr. 7, 2017). E:\FR\FM\16FEP2.SGM 16FEP2 12434 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules FinCEN therefore believes that unregistered PIVs generally present sufficient illicit finance risk to warrant inclusion in the definition of a transferee entity. These unregistered PIV may include entities such as private funds,89 certain market intermediaries,90 certain companies that primarily engage in the business of acquiring mortgages,91 certain funds maintained by charitable organizations,92 and certain church plans.93 d. Large Operating Companies The proposed definition would capture certain legal entities that are known as ‘‘large operating companies’’ in the CTA and BOI Reporting Rule context. Within that framework, a large operating company is an entity that: ‘‘employs more than 20 employees on a full-time basis in the United States;’’ ‘‘filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate;’’ and ‘‘has an operating presence at a physical office within the United States[.]’’ 94 When explaining why this exemption was added to the CTA, Senator Sherrod Brown noted: lotter on DSK11XQN23PROD with PROPOSALS2 The justification for the exemption of entities that have both physical operations and at least 20 employees in the United States is that those entities’ physical U.S. presence will make it easy for U.S. law enforcement to discover those entities’ true owners. Like other exemptions in the bill, this exemption should be narrowly construed to exclude entities that do not have an easily located physical presence in the United States, do not have multiple employees physically present on an ongoing basis in the United States, or use strategies that make it difficult for U.S. law enforcement to contact their workforce or discover the names of their beneficial owners.95 89 Private funds often are excluded from the definition of ‘‘investment company’’ under 15 U.S.C. 80a–3(c)(1) and/or 15 U.S.C. 80a–3(c)(7). 90 Certain market intermediaries are excluded from the definition of ‘‘investment company’’ under 15 U.S.C. 80a–3(c)(2). 91 Certain investment vehicles that are primarily engaged in ‘‘purchasing or otherwise acquiring mortgages and other liens on and interests in real estate’’ are excluded from the definition of ‘‘investment company’’ under 15 U.S.C. 80a– 3(c)(5)(C). 92 Certain investment vehicles maintained by certain charitable organizations are excluded from the definition of ‘‘investment company’’ under 15 U.S.C. 80a–3(c)(10). 93 Certain church plans are excluded from the definition of ‘‘investment company’’ under 15 U.S.C. 80a–3(c)(14). 94 31 U.S.C. 5336(a)(11)(B)(xxi). 95 Senator Sherrod Brown, ‘‘National Defense Authorization Act,’’ Congressional Record 166: 208, p. S7311 (Dec. 9, 2020), available at https:// www.congress.gov/116/crec/2020/12/09/CREC2020-12-09-pt1-PgS7296.pdf. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 Senator Brown cautioned however, that ‘‘[t]his exemption should be subject to continuous, careful review by Treasury . . . to detect and prevent its misuse.’’ 96 One of the primary purposes of the proposed rule is to identify transferee entities that engage in non-financed residential real estate transfers. While it may be easier for law enforcement to identify beneficial owners behind large operating companies in comparison to shell companies, the very fact that a legal entity has engaged in activity that FinCEN has identified as presenting an illicit finance risk—the use of identity obfuscating vehicles in a non-financed residential real estate transfer—is valuable information for law enforcement, both to support individual investigations and to allow for aggregated analysis of money laundering in the U.S. real estate sector. However, certain large operating companies may fall within other exclusions provided for in the proposed rule. For example, a company required to register its securities with the SEC under section 12 of the Securities Exchange Act of 1934 would be excluded. 2. Transferee Trusts The proposed rule defines ‘‘transferee trust’’ as any legal arrangement created when a person (generally known as a settlor or grantor) places assets under the control of a trustee for the benefit of one or more persons (each generally known as a beneficiary) or for a specified purpose, as well as any legal arrangement similar in structure or function to the above, whether formed under the laws of the United States or a foreign jurisdiction. The proposed rule further notes that a trust is deemed to be the transferee trust regardless of whether residential real property is titled in the name of the trust itself or in the name of the trustee in their capacity as the trustee of the trust. However, the proposed rule excludes trusts that are securities reporting issuers, which includes companies that must register securities with the SEC and become subject to periodic reporting and disclosure requirements. FinCEN considers these trusts to be more tightly supervised and, because they are required to make certain public disclosures, they present a lower illicit finance risk. For similar reasons, trusts that have a trustee that is a securities reporting issuer are not covered by the proposed rule. Furthermore, the proposed rule excludes statutory trusts from being transferee trusts; instead, a 96 Id. PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 statutory trust could be considered to be a transferee entity, unless one of the exemptions to the definition of ‘‘transferee entity’’ applies. Multiple 2021 ANPRM commenters highlighted the use of trusts to facilitate exploitation of the real estate market for the purpose of laundering money, were largely supportive of including them in any regulation, and suggested that transfers to trusts be covered, particularly since the CTA did not explicitly provide for reporting of beneficial ownership information from trusts.97 Other commenters recognized that trusts can present illicit finance risks but were only supportive of covering certain types.98 As discussed in detail above, FinCEN believes that non-financed residential real estate transfers to trusts present a high risk for money laundering. The reporting of all non-financed transfers of residential real estate in which the transferee is a trust would provide data relevant to a possible violation of law or regulation. 3. Beneficial Owners of Transferee Entities and Transferee Trusts The proposed Real Estate Report would collect information about the beneficial owners of transferee entities and transferee trusts. Where possible, FinCEN has aligned the proposed rule’s definitions of beneficial ownership with those contained in the CTA and its implementing regulations. a. Determining the Beneficial Owners of Transferee Entities Consistent with the CTA, the proposed rule provides that a beneficial owner of a transferee entity is ‘‘any 97 See, Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), pp. 3, 30, available at https://www.regulations.gov/comment/FINCEN2021-0007-0102; Coalition for Integrity, ANPRM Comment (Feb. 21, 2022), p. 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070127; The FACT Coalition, ANPRM Comment (Feb. 18, 2022), p. 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070122; Transparency International U.S., ANPRM Comment (Feb. 18, 2022), pp. 3, 8, available at https://www.regulations.gov/comment/FINCEN2021-0007-0115; American College of Trust and Estate Counsel, ANPRM Comment (Feb. 4, 2022), pp. 1–22, available at https://www.regulations.gov/ comment/FINCEN-2021-0007-0013; AntiCorruption Data Collective, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070153; California Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 1, available at https:// www.regulations.gov/comment/FINCEN-2021-00070126. 98 See American College of Trust and Estate Counsel, ANPRM Comment (Feb. 4, 2022), pp. 1– 22, available at https://www.regulations.gov/ docket/FINCEN-2021-0007/comments? filter=ACTEC; National Association of Realtors, ANPRM Comment (Feb. 18, 2022), p. 13, available at https://www.regulations.gov/comment/FINCEN2021-0007-0128. E:\FR\FM\16FEP2.SGM 16FEP2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules individual who, directly or indirectly, either exercises substantial control over the transferee entity or owns or controls at least 25 percent of the ownership interests of the transferee entity.’’ However, as the owners or directors of tax-exempt organizations do not hold a direct ownership stake in the organization, the reportable beneficial owners would be limited only to the individuals who exercise substantial control. Comments on the 2021 ANPRM were generally supportive of using the CTA’s definition of the beneficial owner in any potential regulation. However, one commenter suggested FinCEN use the definition of beneficial owner set out in the Residential Real Estate GTOs. FinCEN considered that definition as well as other definitions for beneficial ownership for transferee entities. However, FinCEN believes that the BOI Reporting Rule’s definition would be best suited to capture potentially obfuscated ownership of residential real property in high-risk non-financed transfers, particularly since it will always result in the identification of at least one beneficial owner via the ‘‘substantial control’’ component of the definition, even if no individual meets the 25 percent ‘‘ownership interests’’ threshold. In addition, the use of consistent definitions of beneficial ownership across regulations would reduce the potential for confusion. lotter on DSK11XQN23PROD with PROPOSALS2 b. Determining the Beneficial Owners of Transferee Trusts The proposed rule would collect information about the beneficial owners of trusts, defined as any individual who, at the time of the real estate transfer to the trust: (1) is a trustee; (2) otherwise has authority to dispose of transferee trust assets, such as may be the case with a trust protector; 99 (3) is a beneficiary who is the sole permissible recipient of income and principal from the transferee trust or who has the right to demand a distribution of, or to withdraw, substantially all of the assets of the transferee trust; (4) is a grantor or settlor of a revocable transferee trust; or 99 A trust protector is a person given power within the trust to take certain types of significant actions, such as the right to oversee the trustee’s decisions, to remove the trustee, or to amend or terminate the trust. See section 808 of the Uniform Trust Code (2003), available at https:// www.uniformlaws.org/viewdocument/committeearchive-76?CommunityKey=193ff839-7955-48468f3c-ce74ac23938d&tab=librarydocuments; Andrew T. Huber, ‘‘Trust Protectors: The Role Continues to Evolve,’’ American Bar Association (Jan.–Feb. 2017), available at https://www.americanbar.org/ groups/real_property_trust_estate/publications/ probate-property-magazine/2017/january_february_ 2017/2017_aba_rpte_pp_v31_1_article_huber_trust_ protectors/. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 (5) is the beneficial owner of a legal entity or trust that holds one of the positions described in (1)–(4), taking into account the exceptions that apply to transferee entities and transferee trusts. This proposed definition leverages the BOI Reporting Rule’s approach to ascertaining the beneficial owners of a trust. Although the BOI Reporting Rule does not require reporting of beneficial ownership information by most trusts, as most trusts are not ‘‘reporting companies’’ for purposes of the CTA, the rule does require certain information to be reported about the beneficial owners of trusts when an individual is considered to own or control a reporting company through a trust. In line with that approach, each of the defined beneficial owners of a transferee trust has either ownership or control over trust assets, including over any real property transferred to the trust. For example, an individual who is the sole permissible recipient of both income and principal from the trust, or has the right to demand a distribution of, or withdraw, substantially all of the assets from the trust, has an ownership or controlling interest in the assets held in trust. Other individuals with authority to dispose of trust assets, such as trustees and grantors or settlors that have retained the right to revoke the trust, will be considered as controlling the assets held in trust. In the case of legal entities or trusts with ownership or control of trust assets, the beneficial owners of those legal entities or trusts also would be beneficial owners of the trust. c. Beneficial Ownership as a Transactional Reporting Requirement The proposed rule would not require reporting persons to report changes to beneficial ownership of a transferee entity or transferee trust on an ongoing basis. The proposed rule is concerned only with real estate transfers, and it is not within the scope or intention of these regulations to require reporting persons to conduct ongoing monitoring of ownership of residential real property. While at least one 2021 ANPRM commenter supported the introduction of ongoing monitoring for change of ownership, most commenters did not address this issue. FinCEN assesses that it would likely represent a large and impractical burden to place an obligation on reporting persons that would require them to investigate changes to beneficial ownership of residential real estate that continues to be owned by a client transferee entity or trust, or to require transferee entities or transferee trusts to report changes in PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 12435 beneficial ownership to a real estate professional involved in their transfer of residential real property after the transfer has been concluded. C. Reportable Transfers The proposed rule would define a reportable transfer as a transfer of any ownership interest in residential real property to a transferee entity or transferee trust, with certain exceptions. These proposed exceptions are meant to reflect FinCEN’s intent to capture only higher risk transfers and therefore the definition exempts most financed transfers, as well as certain types of other low-risk transfers. Under the proposed rule, transfers would be reportable irrespective of the value of the property or the dollar value of the transaction; there is no dollar threshold for a reportable transfer. As such, gifts and other similar transfers of property may be reportable. Importantly, transfers would only be reportable if a reporting person is involved in the transfer and if the transferee is either a legal entity or trust. Transfers between individuals would not be reportable. 1. Exception for Financed Transfers First, certain financed transfers would be excepted. Specifically, the exception would apply to transfers involving an extension of credit to the transferee, but only if the credit is secured by the transferred residential real property and is extended by a financial institution that has both an obligation to maintain an AML program and a requirement to file SARs. Transfers financed by a private lender or the seller, neither of which are likely to have AML/CFT compliance programs and SAR filing obligations, would not fall within this exception. The purpose of the exception is to avoid duplication of required due diligence, as banks and other financial institutions subject to AML/CFT program requirements and SAR filing obligations must already extend them to any mortgages offered in a financed residential real estate transfer. Unlike in the non-financed space, these due diligence obligations of covered financial institutions mitigate the risks of money laundering through real estate for financed transactions and lead to reporting on suspicious transactions. Some commenters on the 2021 ANPRM highlighted that non-financed purchases make up a significant portion of the residential real estate market.100 100 See Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), p. 15, available at https:// www.regulations.gov/comment/FINCEN-2021-00070102; Transparency International U.S., ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// E:\FR\FM\16FEP2.SGM Continued 16FEP2 12436 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules Most commenters who addressed the issue were supportive of FinCEN covering non-financed transfers.101 Some explicitly stated that only nonfinanced transfers should be covered, but two comments stated that FinCEN should cover both non-financed and financed transfers.102 Two commenters were not supportive of covering nonfinanced transactions, either because they believe real estate professionals are already reporting on potential financial crimes through other FinCEN forms, such as the Form 8300, or because they believe most settlement agents already force funds through financial institutions that have traditional AML/ CFT program requirements.103 However, FinCEN believes that further regulation is needed and its experience with the Residential Real Estate GTOs program has shown that existing reporting through Form 8300s and the minimal involvement of financial institutions subject to AML/CFT program requirements are not sufficient to obviate the illicit finance threat posed by non-financed transfers of residential real property. lotter on DSK11XQN23PROD with PROPOSALS2 2. Exceptions for Low-Risk Transfers Exceptions also would exist for transfers that are the result of a grant, transfer, or revocation of an easement; transfers that occur as a result of the death of an owner of the residential real property; transfers that are the result of divorce or dissolution of marriage; or transfers to a bankruptcy estate. FinCEN views easements, which involve rights to use land for a specified purpose, as presenting little illicit finance risk. Transfers incidental to death, divorce, or bankruptcy are governed by www.regulations.gov/comment/FINCEN-2021-00070115. 101 See Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), p. 15, available at https:// www.regulations.gov/comment/FINCEN-2021-00070102; Transparency International U.S., ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070115; League of Southeastern Credit Unions & Affiliates, ANPRM Comment (Feb. 7, 2022), pp. 1– 4, available at https://www.regulations.gov/ comment/FINCEN-2021-0007-0011; Illinois Credit Union League, ANPRM Comment (Feb. 21, 2022), p. 1, available at https://www.regulations.gov/ comment/FINCEN-2021-0007-0137. 102 See Louise Shelley and Ross Delston, ANPRM Comment (Feb. 21, 2022), p. 1, available at https:// www.regulations.gov/comment/FINCEN-2021-00070151; Anti-Corruption Data Collective, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070153. 103 See Morgan, Lewis, & Bockius, ANPRM Comment (Feb. 18, 2022), pp. 2–3, available at https://www.regulations.gov/comment/FINCEN2021-0007-0123; Prosperus Title, ANPRM Comment (Feb. 18, 2022), 1–2, available at https:// www.regulations.gov/comment/FINCEN-2021-00070125. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 preexisting legal documents, such as wills, or generally involve the court system through probate, divorce, or bankruptcy proceedings. FinCEN believes these circumstances present a relatively low risk for purposes of laundering money. 3. No Exceptions Based on the Property’s Value or Purchase Price Residential real properties with a wide range of values are used by illicit actors to launder money, including residential real properties transferred for no consideration.104 Criminal networks interested in cleaning funds do not exclusively invest in luxury or highvalue property, but also launder money through low-value real estate. FinCEN believes that any dollar threshold would enable money launderers to structure payments to avoid reporting requirements. Accordingly, the proposed rule does not provide exceptions for transfers above or below a set dollar value. Furthermore, it is meant to capture both sales and nonsale transfers, such as gifts and transfers to trusts. The transfer of residential real property to a trust by the settlor or grantor may therefore be reportable, although FinCEN expects that such reporting will be significantly limited by the exception for transfers of financed residential real property and by the exception for transfers occurring as a result of death. The latter, in particular, would exempt transfers by an executor of the grantor or settlor’s property to a testamentary trust. FinCEN believes that the inclusion of low dollar value transfers in the proposed rule is unlikely to significantly increase the burden on potential reporting persons versus a scenario in which a dollar threshold is imposed. For example, according to the U.S. Census Bureau, residences costing less than $125,000 accounted for less than 0.5 percent of all new residences sold in 2022, and residences costing less than $300,000 accounted for 7 percent of all new residences sold in 2022.105 The American Land Title Association (ALTA) has indicated to FinCEN that a uniform reporting threshold, regardless of what the threshold is, would decrease compliance burdens for industry compared to thresholds that vary across jurisdictions. With respect to non-sale 104 For example, whereas the Residential Real Estate GTOs utilize a $300,000 threshold for most covered jurisdictions, a $50,000 threshold applies for the City and County of Baltimore to take into account local money laundering trends. 105 U.S. Census Bureau, ‘‘Table Q1. New Houses Sold by Sales Price: United States,’’ available at https://www.census.gov/construction/nrs/pdf/ quarterly_sales.pdf. PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 transfers made for no consideration, such as transfers made to a trust, FinCEN notes that the proposed rule provides the previously discussed exception for transfers that most often involve no consideration, such as those that occur due to death or divorce, which substantially narrows the scope of coverage. However, FinCEN welcomes comments on the potential burdens related to the reporting of nonsale transfers. 4. No Application to Transfers Without a Reporting Person FinCEN believes that the proposed rule would capture the majority of sale and non-sale transfers of residential real estate. However, transfers that do not involve a typical real estate-related professional as reflected in the cascade of potential reporting persons would not be captured. 5. No Application to Transfers to Natural Persons Transfers made directly to individuals would not be reportable under this regulation. Therefore, if the transferred property’s title is in the name of one or more individuals, with no ownership interests held by a transferee entity or a transferee trust, the transfer would not be reportable under the rule. Some 2021 ANPRM commenters recognized that non-financed transfers of residential real estate to individuals present money laundering risk and supported their coverage by any potential regulation.106 Other commenters, however, stated that the burden of covering natural person purchases would be too large for the industry to bear and expressed privacy concerns.107 All non-financed transfers of residential real estate are less regulated than financed transfers and are inherently more vulnerable to money 106 See Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), p. 24, available at https:// www.regulations.gov/comment/FINCEN-2021-00070102; The FACT Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070122; California Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), pp. 2–3, available at https://www.regulations.gov/comment/FINCEN2021-0007-0126; Coalition for Integrity, ANPRM Comment (Feb. 21, 2022), p. 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070127; Anti-Corruption Data Collective, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070153. 107 See National Federation of Independent Business, ANPRM Comment (Dec. 22, 2021), p. 1, available at https://www.regulations.gov/comment/ FINCEN-2021-0007-0007; American Land Title Association, ANPRM Comment (Feb. 17, 2022), p. 2–5, available at https://www.regulations.gov/ comment/FINCEN-2021-0007-0020. E:\FR\FM\16FEP2.SGM 16FEP2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules laundering. However, FinCEN has not yet conducted a review of residential real estate purchases by natural persons sufficient to conclude that those transactions present a high risk for money laundering. To be sure, illicit actors often use natural person nominees or straw purchasers—such as a spouse, relative, or employee—to acquire real estate while obscuring beneficial ownership.108 Such nominees or straw purchasers are unlikely to disclose that they are receiving ownership of real estate on behalf of the illicit actor. Requiring the reporting of information about transfers to individuals would significantly increase the number of reports filed and significantly increase burden on industry. Although the BSA would provide privacy protections for reports filed under the proposed rule, for the reasons stated above, FinCEN is not proposing to cover residential real estate purchases by natural persons at this time. lotter on DSK11XQN23PROD with PROPOSALS2 D. Reporting Persons The proposed rule would impose a filing and recordkeeping obligation on certain persons involved in real estate closings and settlements. The proposed rule would designate only one reporting person for any given reportable transfer. The reporting person would be identified in one of two ways: by way of a cascading reporting order or by way of a written agreement between the real estate professionals described in the cascading reporting order. 1. The Reporting Cascade Through the cascade, a real estate professional would be a reporting person required to file a report and keep records for a given transfer if the person performs a function described in the cascade and no other person performs a function described higher in the cascade. For example, if no person is involved in the transfer as described in the first tier of potential reporting persons, the reporting obligation would fall to the person involved in the transfer as described in the second tier of potential reporting persons, if any, and so on. The cascade includes only persons engaged as a business in the provision of real estate closing and settlement services within the United States. For any reportable transfer, a potential reporting person would need to determine whether there is another 108 See, e.g., U.S. Department of the Treasury, National Strategy for Combatting Terrorist and Other Illicit Financing (2020), pp. 17–18, available at https://home.treasury.gov/system/files/136/ National-Strategy-to-Counter-Illicit-Financev2.pdf. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 potential reporting person involved in the transfer who sits higher in the cascade. Although potential reporting persons will likely communicate with each other regarding the need to file a report, there would be no requirement to verify that any other potential reporting person in fact filed it. The proposed cascade is as follows: 109 First, real estate professionals providing certain settlement services in the settlement process—In the first instance, the reporting obligation would rest with real estate professionals providing certain settlement services at the termination of the settlement process. Specifically, the cascade first designates as a reporting person the person listed as the closing or settlement agent on a settlement (or closing) statement, which is common to the vast majority of residential real property transfers. This ensures that a potential reporting person familiar with the intricacies of the transfer, including transactional information and details about the parties involved, will be the most frequent reporting person. This, in turn, will ensure that the reports are more accurate and useful to law enforcement and will lessen the burden on reporting persons. In the event that no person is directly identified as a closing or settlement agent on the statement, the reporting obligation would fall on the person that prepared the closing or settlement statement. If no person prepared a closing or settlement statement, the reporting obligation falls to the person that files the deed or other instrument that transfers ownership of the residential real property. Second, the person that underwrites an owner’s title insurance policy for the transferee—If no person executes the specific settlement functions in the first tier of the cascade, the reporting obligation would then fall upon the person that underwrites the title insurance policy associated with the real property transfer. Such policies are typically underwritten by large title insurance companies that issue policies providing indemnity in the event the title of the transferred property is later determined to have a defect or 109 The types of businesses involved in a real estate closing or settlement vary depending on the type of transaction and on the jurisdiction. As such, the reporting cascade (see Proposed amendments infra 31 CFR 1031.320(c)) is itemized to capture a broad array of potential businesses. However, FinCEN believes that, for any transaction, the functions described in first three tiers of the reporting cascade would be performed by only one business, with no other separate business performing the other two functions. FinCEN therefore treats the reporting cascade as having five functional groupings. PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 12437 encumbrance.110 Title insurance companies have been the reporting persons for the Residential Real Estate GTOs since 2016 and have demonstrated the ability to gather information and file reports containing information similar to that which would be collected under the proposed rule. Given that the underwriting function is further removed from the termination of the settlement process than the settlement services described in the first tier of the cascade, and so further removed from information to be collected, FinCEN assesses that persons underwriting such policies should be second line reporting persons. Title insurance agents may serve as settlement agents and if serving such a first-tier function, would have easier access to the necessary information in that capacity. Third, the person that disburses the greatest amount of funds in connection with the reportable transfer—In the event that no person executes the specific settlement functions in the first tier of the cascade, and no person underwrites a title insurance policy, the third tier of the cascade would require reporting by the person that disburses the greatest amount of funds in connection with residential real property transfer. The proposed rule notes that such disbursement may be in any form, including from an escrow account (which is frequently used to settle real estate transfers), from a trust account, or from a lawyer’s trust account. Such reporting persons will have visibility into funds transfer information associated with the residential real property transfer and FinCEN believes that, by virtue of this, they should be able to obtain the information this proposed rule would collect with relatively little burden. However, this tier of the cascade would only cover persons involved in real estate settlements and closings who are disbursing funds via third-party accounts and excludes direct transfers from transferees to transferors and disbursements coming directly from banks. Fourth, the person that prepares an evaluation of the title status—In the event that no person participates in the transfer who falls within the first three tiers of the cascade, the reporting person would be the person who prepares an 110 The U.S. title insurance market is concentrated, with four national underwriters accounting for approximately 81 percent of total industry premiums as September 2022. Fitch Rating, U.S. Title Insurance Outlook 2023 (Dec. 2, 2022), available at https://www.fitchratings.com/ research/insurance/us-title-insurance-outlook-202302-12-2022. E:\FR\FM\16FEP2.SGM 16FEP2 12438 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules evaluation of the status of the title. Such an evaluation may take the form of a title check, which is typically performed by title insurance companies in lieu of providing actual insurance or an opinion letter, which is rendered by attorneys. Fifth, the person who prepares the deed—Finally, should no person identified in the first four tiers of the cascade participate in the real property transfer, the reporting obligation would fall to the preparer of the deed associated with the transfer. A deed is typically prepared by an attorney, but it may also be prepared by a non-attorney settlement or closing agent or by the transferee itself. lotter on DSK11XQN23PROD with PROPOSALS2 2. Capturing Both Sale and Non-Sale Transfers The reporting cascade is designed to capture both sales of residential real estate and non-sale transfers of residential real estate. It assigns a reporting obligation based on the functions fulfilled by the various real estate professionals involved in the closing and settlement process, regardless of whether the transfer is a sale or non-sale. FinCEN believes that it is necessary to capture non-sale transfers to ensure uniform coverage of non-financed transfers and to ensure that nominees do not purchase homes for criminal actors and then transfer the title on free of charge to a legal entity or trust. During a typical closing and settlement for a non-financed transfer of residential real estate, a transferee will offer to purchase a residential real property for a given price. This offer can occur through a representative, such as a real estate agent, attorney, or registered agent, or it may come directly from the transferee itself. If the transferor accepts the offered price, either directly or through a representative, the parties can proceed toward the settlement process, normally through a sales contract. It is at this point that title agencies or companies and escrow agents or companies typically become involved in the process. Title agencies will conduct an examination of the title to ensure it is free from defects, such as liens or other encumbrances. Escrow companies may at this point hold a deposit or ‘‘earnest money’’ from the transferee that the transferee would forfeit should it be responsible for breaking the purchase contract.111 A transferee may also, and 111 ‘‘Escrow is [a] transaction in which an impartial third-party acts in a fiduciary capacity for all or some of the parties . . . in performing [s]ettlement services according to local practice and VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 usually does, purchase a title insurance policy, which ensures that the title of the property is free from defects and indemnifies the transferee should a title defect later come to light. As noted above, a transferee may opt, in lieu of title insurance, to obtain a title check from the title insurance company or an opinion letter from an attorney.112 However, neither title insurance nor a title check is required to close or settle non-financed transfers of residential real property. The transfer can then move toward settlement, which is also sometimes referred to as ‘‘closing.’’ According to ALTA, settlement is ‘‘[t]he process of completing a real estate transaction in accordance with written instructions during which deeds, mortgages, leases, and other required instruments are executed and/or delivered, an accounting between the parties is made, the funds are disbursed, and the appropriate documents are recorded in the public record.’’ 113 At settlement, a closing or settlement agent—which is most often a title agent but can be a representative of an escrow company or an attorney—will prepare a ‘‘settlement statement,’’ which normally contains an itemized list of all of the fees or charges that the buyer and seller will pay during the settlement portion of the transfer.114 At settlement, the settlement statement and other closing documents are signed by the parties to the transfer and, if applicable, funds are disbursed to the custom.’’ American Land Title Association, ALTA Best Practices 4.0 (May 23, 2023), p. 4, available at https://www.alta.org/best-practices/download. cfm?bestPracID=97&type=pdf. 112 DarrowEverett LLP, ‘‘Are Attorney Opinion Letters a Viable Alternative to Title Insurance’’ (Feb. 23, 2023), available at https:// www.darroweverett.com/attorney-opinion-letteradvantages-risks-title-insurance/; Fannie Mae, B7– 2–06, Attorney Title Opinion Letter Requirements: Attorney Title Letter Opinion Requirements (Dec. 13, 2023), available at https://sellingguide.fanniemae.com/Selling-Guide/Originationthru-Closing/Subpart-B7-Insurance/Chapter-B7-2Title-Insurance/2522435591/B7-2-06-AttorneyTitle-Opinion-Letter-Requirements-04-06-2022.htm. 113 American Land Title Association, ALTA Best Practices 4.0 (May 23, 2023), p. 4, available at https://www.alta.org/best-practices/download. cfm?bestPracID=97&type=pdf. 114 ‘‘The title agent and settlement agent are often the same entity that performs two separate functions in a real estate transaction. The terms title agent and settlement agent are often used interchangeably.’’ American Land Title Association, ‘‘ALTA Urges CFPB to Preserve Role of Independent Third-party Settlement Agents’’ (Nov. 8, 2012), p. 26, available at https://www.alta.org/ news/news.cfm?20121108-ALTA-Urges-CFPB-toPreserve-Role-of-Independent-Third-partySettlement-Agents; see, e.g., American Land Title Association, ‘‘ALTA Model Settlement Statements,’’ available at https://www.alta.org/trid/#statements; Consumer Finance Protection Bureau, What is a HUD–1 Settlement Statement? (Sept. 4, 2020), available at https://www.consumerfinance.gov/askcfpb/what-is-a-hud-1-settlement-statement-en-178/. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 transferor. This typically occurs via an escrow account, but also occurs at times via a trust account or attorney trust account or via a direct transfer of funds between the transferee and transferor (though, due to its risky nature, this practice is not common). Following the execution of the settlement statement and other closing documents and the disbursal of funds, the settlement agent will file the deed (the instrument which effects the transfer of ownership of the property) with the relevant local land registry or recordation office. Deeds are typically prepared by attorneys, but may be prepared by the settlement agent, escrow officer, or the transferee itself.115 A transfer of residential real estate that does not involve a purchase, such as a transfer that is a gift or that is made to a trust, involves a closing and settlement process that is distinct from the process described above that exists for typical sales of residential real estate. For example, such non-sale transfers would not involve a settlement agent or settlement statement or the transfer of funds through escrow. They may, however, involve an attorney or other real estate professional who prepares or files the deed, provides title insurance, or provides a title evaluation. 3. Designation Agreements Although the reporting cascade would identify the real estate professional who would be primarily responsible for filing a Real Estate Report, the real estate professionals described in the reporting cascade may enter into a written agreement to designate another person in the reporting cascade as the reporting person. For example, if a real estate professional involved in the transfer provides certain settlement services in the settlement process, as described in the first tier of the cascade, that person may enter into a written designation agreement with a title insurance company underwriting the transfer as described in the second tier of the cascade, through which the two parties agree that the title insurance company would be the designated reporting person with respect to that transfer. The person who would otherwise be the reporting person must 115 See Redfin.com, ‘‘Steps to closing on a house,’’ available at https://www.redfin.com/guides/stepsto-closing-on-a-house; American Land Title Association, ALTA Best Practices 4.0 (May 23, 2023), p. 4, available at https://www.alta.org/bestpractices/download.cfm?bestPracID=97&type=pdf; see generally American Land Title Association, ‘‘ALTA Urges CFPB to Preserve Role of Independent Third-party Settlement Agents’’ (Nov. 8, 2012), available at https://www.alta.org/news/ news.cfm?20121108-ALTA-Urges-CFPB-to-PreserveRole-of-Independent-Third-party-SettlementAgents. E:\FR\FM\16FEP2.SGM 16FEP2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules be a party to the agreement; however, it is not necessary that all persons involved in the transfer who are described in the reporting cascade be parties to the agreement. While the agreement must be in writing and must identify the date of the agreement, the name and address of the transferor, the name and address of the transferee entity or transferee trust, the property, the name and address of the designated reporting person, and the name and address of all other parties to the agreement, there is no required format for the designation agreement. All parties to the agreement would be required to retain a copy for a period of five years. 4. Employees, Agents, and Partners If an employee, agent, or partner acting within the scope of such individual’s employment, agency, or partnership would be the reporting person in a reportable property transfer, then the individual’s employer, principal, or partnership is deemed to be the reporting person. In that case, it is the responsibility of the reporting person (i.e., the employer, principal, or partnership) to ensure that a report is filed. Accordingly, FinCEN expects that, in most cases, individuals will not be reporting persons. However, there may be certain cases (e.g., sole proprietorships) where the responsibility to file a report rests with an individual. lotter on DSK11XQN23PROD with PROPOSALS2 5. Consultations With Real Estate Professionals The cascade is designed to both prevent an increased burden on reporting persons by ensuring that multiple real estate professionals do not have to collect information and file a report about the same transfer, while at the same time minimizing opportunities for reporting evasion by ensuring a report is filed for most reportable transfers. In the course of developing this cascading reporting order, FinCEN held extensive discussions with real estate professionals and the IRS, which employs a somewhat similar cascading reporting structure for its Form 1099– S.116 These discussions suggest that potential reporting persons involved in a real estate closing or settlement would be aware of one another’s presence or absence in the process at the time of closing, and that the reporting chain would be easily interpreted by persons 116 See 29 CFR 1.6045–4 (Information reporting on real estate transactions with dates of closing on or after January 1, 1991). VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 involved in real estate closings and settlements. Several 2021 ANPRM commenters suggested the use of a reporting cascade.117 Some commenters recommended that title and escrow companies and agents, real estate agents and brokers, real estate attorneys, and other real estate professionals be the reporting persons in any potential regulation, to ensure that a broad swath of real estate professionals are included and to prevent reporting loopholes.118 One commenter suggested that title insurance companies that are already affiliated with heavily regulated financial institutions, such as banks, should not be required to report; FinCEN is not proposing this path because it is unclear who would decide this or how it would be determined.119 Another commenter stated that FinCEN should place any compliance 117 See Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), p. 11, available at https:// www.regulations.gov/comment/FINCEN-2021-00070102; Transparency International U.S., ANPRM Comment (Feb. 18, 2022), p. 10, available at https:// www.regulations.gov/comment/FINCEN-2021-00070115; Senator Sheldon Whitehouse, ANPRM Comment (Feb. 18, 2022), p. 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070118; The FACT Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070122; California Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070126; National Association of Realtors, ANPRM Comment (Feb. 18, 2022), p. 15, available at https:// www.regulations.gov/comment/FINCEN-2021-00070128. 118 See Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), p. 11, available at https:// www.regulations.gov/comment/FINCEN-2021-00070102; League of Southeastern Credit Unions & Affiliates, ANPRM Comment (Feb. 7, 2022), pp. 3– 4, available at https://www.regulations.gov/ comment/FINCEN-2021-0007-0011; American Land Title Association, ANPRM Comment (Feb. 17, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070020; Transparency International U.S., ANPRM Comment (Feb. 18, 2022), p. 10, available at https:// www.regulations.gov/comment/FINCEN-2021-00070115; The FACT Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070122; American Escrow Association, ANPRM Comment (Feb. 18, 2022), pp. 13–17, available at https://www.regulations.gov/comment/FINCEN2021-0007-0124; California Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, available at https://www.regulations.gov/comment/FINCEN2021-0007-0126; Illinois Credit Union League, ANPRM Comment (Feb. 21, 2022), p. 1, available at https://www.regulations.gov/comment/FINCEN2021-0007-0137; Palmera Consulting, ANPRM Comment (Feb. 21, 2022), p. 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070141; Louise Shelley and Ross Delston, ANPRM Comment (Feb. 21, 2022), p. 2, available at https:// www.regulations.gov/comment/FINCEN-2021-00070151. 119 See Prosperus Title, ANPRM Comment (Feb. 18, 2022), p. 1, available at https:// www.regulations.gov/comment/FINCEN-2021-00070125. PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 12439 obligations on the seller, but FinCEN believes this would place too much burden on individuals who are not real estate professionals.120 Two commenters suggested requiring only title insurance companies to report in the residential context, and only secondarily requiring escrow agents to report if title insurance is not purchased.121 Rather than to include or exclude any particular persons involved in real estate settlements and closings based on the titles they hold, FinCEN decided to design a reporting cascade based on the functions performed in a closing or settlement. This functional approach will ensure that the professional closest to the proposed information to be reported is most often the reporting person, thereby increasing efficiency and lessening overall burden. FinCEN notes that, as a result of this functional approach, specific real estate professionals such as real estate agents, brokers, and attorneys are not directly subject to obligations in the reporting cascade. They acquire reporting obligations only if they perform the specified functions. Several commenters on the 2021 ANPRM argued against inclusion of attorneys, claiming that attorney-client privilege should prevent attorneys involved in real estate closings and settlements from reporting information, including beneficial ownership information.122 In this proposed rule, FinCEN would require reporting by attorneys only when they perform certain functions—functions that generally may be performed by nonattorneys. Although some jurisdictions in the United States require a licensed attorney to perform certain closing or settlement functions, FinCEN believes that the functions described in the cascade may generally be performed by both attorneys and non-attorneys. Indeed, FinCEN believes that the same reporting obligations should apply to 120 See Morgan, Lewis, & Bockius, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070123. 121 See Anti-Corruption Data Collective, ANPRM Comment (Feb. 18, 2022), p. 1, 4, available at https://www.regulations.gov/comment/FINCEN2021-0007-0153; National Association of Realtors, ANPRM Comment (Feb. 18, 2022), p. 14, available at https://www.regulations.gov/comment/FINCEN2021-0007-0128. 122 See Joint Editorial Board for Uniform Real Property Acts, ANPRM Comment (Feb. 5, 2022), pp. 1–2, available at https://www.regulations.gov/ comment/FINCEN-2021-0007-0014; American Bar Association, ANPRM Comment (Feb. 7, 2022), pp. 1–12, available at https://www.regulations.gov/ comment/FINCEN-2021-0007-0018; Marisa N. Bocci, ANPRM Comment (Feb. 21, 2022), p. 5, available at https://www.regulations.gov/comment/ FINCEN-2021-0007-0150. E:\FR\FM\16FEP2.SGM 16FEP2 12440 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules attorneys and non-attorneys alike when they perform the same functions in reportable transfers of residential real property. Furthermore, FinCEN expects that reporting of factual information about a real estate transfer would not implicate attorney-client privilege, in most cases. Also, the proposed rule provides that potential reporting persons, including attorneys, may enter into designation agreements with other real estate professionals described in the cascade, thereby passing the reporting obligation to another professional. lotter on DSK11XQN23PROD with PROPOSALS2 E. Information To Be Reported 1. Description of Information The proposed rule requires reporting persons to report and maintain records of certain information regarding reportable transfers. This includes certain information about any reporting persons, transferee entities, transferee trusts, signing individuals, transferors, the residential real property, and reportable payments. To a large degree, this information is similar to the transactional information required to be reported through traditional SARs. FinCEN emphasizes that Real Estate Reports, like SARs, would be housed in FinCEN’s secure BSA Portal and would not be accessible to the general public; FinCEN imposes strict limits on the use and re-dissemination of the data it provides to its law enforcement and other agency partners. The following discussion addresses in more detail some of the types of information the rule proposes to collect. 1. Name and address: The proposed rule would collect the name and address of the principal place of business for reporting persons, transferee entities and transferee trusts, and transferors that are entities. For legal entities that are trustees of transferor trusts, the proposed rule would collect the place of trust administration. It would collect the name and a residential address for each individual who signed documents on behalf of the transferee (signing individuals), all beneficial owners of a transferee entity or transferee trust, individual transferors, and individuals who are trustees of transferor trusts. 2. Citizenship: The proposed rule would collect citizenship information for all beneficial owners of a transferee entity or transferee trust. FinCEN proposes to collect this information to better analyze the volume of illicit funds entering the United States via entities or trusts beneficially owned by non-U.S. persons. FinCEN cannot do this type of broad analysis without collecting citizenship information. For instance, traditional SARs already collect this VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 type of information and FinCEN was able to analyze SARs in aggregate to identify Russian investment in the U.S. economy, including the real estate sector, after the invasion of Ukraine.123 3. Unique identifying number: The proposed rule would collect a unique identifying number for each person (whether an individual or entity) whose name and address are required to be reported. For any individual for whom a unique identifying number would be collected, a unique identifying number can be an IRS Taxpayer Identification Number (TIN) or, if they do not have one, a foreign equivalent or a foreign passport number. For an entity, a unique identifying number can be an IRS TIN or, if the entity does not have one, a foreign equivalent or a foreign registration number. FinCEN chose to include the collection of TINs, such as Social Security Numbers (SSNs) or Employer Identification Numbers (EINs), for transferee entities, transferee trusts, beneficial owners of transferee entities and trusts, as well as for certain individuals signing documents on behalf of the transferee entity or trust during the residential real estate transfer, for a number of reasons. Reporting TINs provides law enforcement with the most efficient means to identify potential individuals involved in illicit activity and connect those persons to other transactions during investigations. Unlike names, addresses, and dates of birth, which can be common across multiple individuals, TINs are unique to a given individual, entity, or trust. Consequently, collections of TINs would cut down on flagging of individuals, entities, and trusts that are not the intended subject of an investigation, which will allow law enforcement to more efficiently pursue leads, conduct investigations, and identify illicitly acquired assets. FinCEN’s consultations with law enforcement have confirmed that law enforcement views access to TIN information as extremely helpful for streamlining investigative work. Law enforcement officials also indicated to FinCEN that it is relatively easy for illicit actors to create a false identity 123 See FinCEN, FIN–2023–Alert002, FinCEN Alert on Potential U.S. Commercial Real Estate Investments by Sanctioned Russian Elites, Oligarchs, and their Proxies (Jan. 25, 2023), available at https://www.fincen.gov/sites/default/ files/shared/FinCEN%20Alert%20Real%20 Estate%20FINAL%20508_1-2523%20FINAL%20FINAL.pdf; FinCEN, FIN–2022– Alert002, FinCEN Alert on Real Estate, Luxury Goods, and Other High-Value Assets Involving Russian Elites, Oligarchs, and their Family Members (Mar. 16, 2022), available at https:// www.fincen.gov/sites/default/files/2022-03/ FinCEN%20Alert%20Russian%20Elites%20High %20Value%20Assets_508%20FINAL.pdf. PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 using a combination of name, address, and date of birth, and often do so, thereby impeding an investigation from the outset. However, law enforcement noted that obtaining a false TIN was orders of magnitude more difficult and that collection of such information was therefore crucial to their investigations. Moreover, TINs are routinely collected in other BSA reports, including SARs.124 Accordingly, the proposed rule would collect TINs for certain persons involved in covered residential real estate transfers. 4. Representative capacity of signing individual: For any signing individual, the proposed rule would collect a description of the capacity in which the individual is authorized to act as the signing individual for the transferee entity or transferee trust, such as whether the signing individual is a legal representative. Additionally, if the signing individual is acting in that capacity as an employee, agent, or partner, the proposed rule would collect the name of the employer, principal, or partnership. 5. Information concerning payments: The proposed rule would collect the total consideration paid by all transferees regarding the residential real property, as well as the total amount paid by the transferee entity or trust, the method of each payment made by the transferee entity or transferee trust, the accounts and financial institutions used for each such payment, and, if the payor is anyone other than the transferee entity or transferee trust, the name of the payor on the payment form. With respect to the reporting of payments made by the transferee entity or transferee trust, the proposed rule seeks only to capture transactions where the greatest risk for money laundering is present—the movement of funds from accounts held or controlled by the transferee—and therefore exempts payments made from escrow or trust 124 FinCEN, FinCEN Suspicious Activity Report (FinCEN SAR) Electronic Filing Requirements (Aug. 2021), p. 62, available at https://bsaefiling. fincen.treas.gov/docs/XMLUserGuide_ FinCENSAR.pdf; see also FinCEN, Report of Cash Payments Over $10,000 Received in a Trade or Business (FinCEN Form 8300) Electronic Filing Requirements (Aug. 2021), p. 28, available at https://bsaefiling.fincen.treas.gov/docs/ XMLUserGuide_FinCEN8300.pdf (indicating Form8300s require TINs to be reported); FinCEN, FinCEN Currency Transaction Report (CTR) Electronic Filing Requirements (Aug. 2021), p. 27, available at https://bsaefiling.fincen.treas.gov/docs/ XMLUserGuide_FinCENCTR.pdf (indicating CTRs required TINs to be reported); FinCEN, FinCEN Report of Foreign Bank and Financial Accounts (FBAR) Electronic Filing Requirements (Aug. 2021), p. 29, available at https://bsaefiling. fincen.treas.gov/docs/XMLUserGuide_ FinCENFBAR.pdf (indicating FBARs require TINs to be reported). E:\FR\FM\16FEP2.SGM 16FEP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules accounts held by the reporting person. Accordingly, the rule would require the reporting of payments made from other escrow or trust accounts, payments made into any escrow or trust accounts (to prevent illicit actors from trying to circumvent the reporting requirement), and payments sent directly from the transferee to the transferor. For example, if the payment path is (1) from the transferee’s bank account to a trust account, (2) from that trust account to an escrow account held by the reporting person, and then (3) from that escrow account to the transferor, the reporting person would need to provide the payment details of the first leg of the payment path. FinCEN notes that the reporting requirement would include the reporting of payments that the reporting person may consider as being paid outside of closing, such as a payment made between a buyer and seller through bank accounts located outside of the United States. FinCEN proposes to collect payment information because financial information is key to ensuring that the reports meet the threshold for being highly valuable to law enforcement. The payment information behind real estate transfers conducted in a manner that has been identified as high risk for money laundering would help support law enforcement investigations, as it can help connect beneficial owners to suspicious activity or funding sources. The collection of this information may also serve as a deterrent to those thinking about attempting to launder money through the U.S. residential real estate sector. 6. Information concerning the residential real property: The proposed rule would require the address of the relevant property, if applicable, and a legal description, such as the section, lot, and block. This information would be reported for each property involved in the transfer. For example, if a fourunit town home is transferred to a transferee entity, all four addresses would be reported. Commenters on the 2021 ANPRM had diverse views on what information should or should not be collected under any potential regulation. Most commenters who thought that information should be collected were in favor of collecting transferee side information, including beneficial ownership information.125 However, 125 See Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), pp. 27–28, 44–45, available at https://www.regulations.gov/comment/ FINCEN-2021-0007-0102; Transparency International U.S., ANPRM Comment (Feb. 18, 2022), pp. 8–9, available at https:// www.regulations.gov/comment/FINCEN-2021-0007- VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 other commenters said that only basic information that is already collected in the course of a closing about the transferee should be collected, and that requiring real estate professionals to collect beneficial ownership information would be too burdensome.126 FinCEN recognizes that while most of the information that would be collected under this proposed rule is provided to the most frequent reporters in the normal course of a closing, beneficial ownership information is not. FinCEN addressed concerns about the burden of collecting beneficial ownership information in this proposed rule by making sure that reporting persons can collect this information through a form, which is then certified by the transferee as being accurate, as will be discussed further below. Some commenters advocated for the collection of transferor information as well.127 FinCEN opted to collect only minimal transferor information, as the primary party of interest to law enforcement is the new owner of property that has been transferred in a manner that presents money laundering concerns. Commenters also mentioned collecting certain funds payment information,128 identifying PEPs 0115; The FACT Coalition, ANPRM Comment (Feb. 18, 2022), p. 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070122; California Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070126. 126 See American Land Title Association, ANPRM Comment (Feb. 17, 2022), pp. 2–4, available at https://www.regulations.gov/comment/FINCEN2021-0007-0020; American Escrow Association, ANPRM Comment (Feb. 18, 2022), pp. 13–17, available at https://www.regulations.gov/comment/ FINCEN-2021-0007-0124. 127 See Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), pp. 27–28, available at https://www.regulations.gov/comment/FINCEN2021-0007-0102; Senator Sheldon Whitehouse, ANPRM Comment (Feb. 18, 2022), p. 4, available at https://www.regulations.gov/comment/FINCEN2021-0007-0118; The FACT Coalition, ANPRM Comment (Feb. 18, 2022), p. 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070122; California Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070126; Coalition for Integrity, ANPRM Comment (Feb. 21, 2022), p. 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070127. 128 See Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), pp. 27–28, available at https://www.regulations.gov/comment/FINCEN2021-0007-0102; Transparency International U.S., ANPRM Comment (Feb. 18, 2022), p. 9, available at https://www.regulations.gov/comment/FINCEN2021-0007-0115; Senator Sheldon Whitehouse, ANPRM Comment (Feb. 18, 2022), p. 4, available at https://www.regulations.gov/comment/FINCEN2021-0007-0118; The FACT Coalition, ANPRM Comment (Feb. 18, 2022), p. 4, available at https:// PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 12441 involved in the transfer,129 beneficial ownership verification,130 information about the property being transferred,131 and any representatives of the transferee in the transfer.132 Elements of each of these are included in the proposed rule, except for PEP identification and beneficial owner verification, which FinCEN believes would require reporting persons to undertake independent research that would represent a dramatically increased burden, compared to collecting information from the transferee. 2. Collection of Information FinCEN expects that the reporting person will have access to some, but not all, of the reportable information in the normal course of business. In particular, the reporting person may not have on hand the identifying information for the beneficial owners of the transferee entity or trust. The proposed rule therefore includes guidelines for how the reporting person should collect this information. The reporting person may collect the information directly from a transferee or a representative of the transferee, so long as the person certifies that the www.regulations.gov/comment/FINCEN-2021-00070122; California Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070126; Coalition for Integrity, ANPRM Comment (Feb. 21, 2022), p. 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070127; Anti-Corruption Data Collective, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070153. 129 See Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), pp. 27–28, available at https://www.regulations.gov/comment/FINCEN2021-0007-0102; Transparency International U.S., ANPRM Comment (Feb. 18, 2022), p. 9, available at https://www.regulations.gov/comment/FINCEN2021-0007-0115; The FACT Coalition, ANPRM Comment (Feb. 18, 2022), p. 4, available at https:// www.regulations.gov/comment/FINCEN-2021-00070122; California Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, available at https:// www.regulations.gov/comment/FINCEN-2021-00070126. 130 See Transparency International U.S., ANPRM Comment (Feb. 18, 2022), p. 9, available at https:// www.regulations.gov/comment/FINCEN-2021-00070115. 131 See Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), pp. 44–45, available at https://www.regulations.gov/comment/FINCEN2021-0007-0102; American Land Title Association, ANPRM Comment (Feb. 17, 2022), p. 6, available at https://www.regulations.gov/comment/FINCEN2021-0007-0020; Anti-Corruption Data Collective, ANPRM Comment (Feb. 18, 2022), p. 3, available at https://www.regulations.gov/comment/FINCEN2021-0007-0153. 132 See Global Financial Integrity, ANPRM Comment (Feb. 17, 2022), pp. 44–45, available at https://www.regulations.gov/comment/FINCEN2021-0007-0102; American Escrow Association, ANPRM Comment (Feb. 18, 2022), p. 16, available at https://www.regulations.gov/comment/FINCEN2021-0007-0124. E:\FR\FM\16FEP2.SGM 16FEP2 12442 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 information is correct to the best of their knowledge. The certification may be collected using a form that may be provided by FinCEN, similar to the one provided with respect to the CDD Rule, which requires certain financial institutions collect beneficial ownership information from legal entity customers, or the reporting person may incorporate a certification into a document of their own design, including existing closing documents used by the reporting person.133 FinCEN could have proposed that reporting persons must personally conduct extensive research to verify beneficial ownership and other information provided to them, but is proposing the use of a certification due to its comparative lesser burden on filers. The use of certifications will also ensure uniform information collection standards are met across reportable transfers. Any certification form signed in the course of a transfer must be retained by the reporting person for five years. Although the reporting person may rely on the information collected from other parties as described above, the reporting person may not report information that the reporting person knows, suspects, or has reason to suspect is inaccurate or incomplete. As an alternative, FinCEN considered requiring reporting persons to undertake the verification of the information to be reported. However, FinCEN is instead proposing the use of a written certification form because this approach would present a lower burden on reporting persons when compared with a scenario in which they would independently verify information through their own research. Allowing parties to the transfer and their representatives to provide information directly, while attesting to its accuracy, will reduce time and resources expended by reporting persons while ensuring that the most accurate information is provided to law enforcement and that compliance can be monitored more effectively. The proposed rule would also allow the flexibility of the reporting person collecting the information by any other means, so long as the transferee’s representative (whether a signing individual or other type of representative) attests to its accuracy. F. Filing Procedures A reporting person must electronically file a Real Estate Report with FinCEN, following the reporting form’s instructions, no later than 30 calendar days after the date on which 133 See 31 CFR 1010.230. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 the transferee entity or transferee trust receives the ownership interest in the residential real property. This is to ensure that reporting of time sensitive information about residential real estate closings and settlements is not unduly delayed. G. Records Retention Reporting persons must maintain a copy of any Real Estate Report they have filed and any certifications as to the identities of the beneficial owner(s) of a transferee entity or transferee trust for five years from the date of filing and keep them available at all times for inspection as authorized by law. All parties to a designation must similarly retain a copy of the agreement for five years from the date of signing and keep it available at all times for inspection as authorized by law. H. Exemptions The proposed rule would exempt reporting persons and Federal, State, local, or Tribal government authorities from the confidentiality provision in 31 U.S.C. 5318(g)(2) prohibiting the disclosure to any person involved in the transaction that the transaction has been reported.134 As noted above, FinCEN recognizes that financial institutions who file SARs are subject to restrictions prohibiting the disclosure of the existence of the SAR to any of its subjects. However, this would not be feasible with the proposed Real Estate Report, as reporting persons would need to collect information directly from the subjects of the Report. Moreover, all parties to a non-financed residential real estate transfer that is subject to the proposed rule would already be aware that a report would be filed, given that such filing is non-discretionary, rendering confidentiality unnecessary. Furthermore, persons involved in real estate closings and settlements are exempt from the requirement to maintain an AML program requirement.135 For the reasons discussed earlier, that exemption will continue to apply to persons involved in real estate closings and settlements under the proposed rule. However, the exemption does not apply to reporting persons who are financial institutions otherwise required to establish an AML/ CFT program under FinCEN’s regulations. V. Final Rule Effective Date FinCEN is proposing an effective date of one year from the date the final rule 134 31 U.S.C. 5318(a)(7) (which allows the Secretary to prescribe appropriate exemptions). 135 31 CFR 1010.205(b)(1)(v). PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 is issued. A one-year effective date is intended to provide real estate professionals with sufficient time to review and prepare for implementation of the rule. FinCEN solicits comment on the proposed effective date for this rule. VI. Request for Comment FinCEN seeks comments on the questions listed below, but invites any other relevant comments as well. FinCEN encourages commenters to reference specific question numbers to facilitate FinCEN’s review of comments. 1. What would the cost and hour burden of filing reports as detailed by this NPRM be for your profession? Please quantify, if possible, the anticipated burden this proposed rule would represent for the designated reporting persons. 2. What percentage of residential real property transfers involve transfers to the types of entities described in the regulation as ‘‘transferee entities’’ and ‘‘transferee trusts’’? 3. What are the benefits and drawbacks to having a cascading hierarchy of reporting persons, as proposed? 4. Will real estate professionals know or be able to discover the other real estate professionals performing functions in the closing process as laid out by the reporting cascade? 5. Please provide feedback on the order of the proposed cascading reporting hierarchy. Does it include those real estate professionals who are most able to obtain and report the required information? Should any person involved in real estate closings and settlements present in the proposed cascade be removed? Added? Why? 6. Are there potential loopholes in the proposed cascading reporting order? If so, how might they be overcome? For example, would specifically adding real estate agents and brokers close any reporting gaps? 7. How likely are potential reporting persons to enter into designation agreements? Are there any particular challenges associated with entering into such an agreement? With documenting that such an agreement has been made? 8. What are typical costs to close a residential real estate deal? What percentage of the sale price do these costs typically represent? 9. What sort of due diligence is normally conducted, before or at closing for residential properties, regarding (i) the parties to a transfer; (ii) the source of funds for any transfer; and (iii) other key aspects of the transfer? 10. What sort of existing recordkeeping or reporting requirements, unrelated to BSA E:\FR\FM\16FEP2.SGM 16FEP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules compliance, exist for non-financed residential real estate transfers? If any, what information must be recorded or reported, to whom, and for how long? What entity provides oversight? 11. Should FinCEN limit the scope of any final rule to only non-financed transfers? What are the benefits and drawbacks to doing so? 12. What adjustments, if any, should be made to the proposed definition of a reportable transfer? 13. Should the rule except transfers that involve a qualified extension of credit to ‘‘all’’ transferees or to ‘‘any’’ transferee? 14. What percentage of residential real estate transfers are non-financed? 15. What adjustments, if any, should be made to the proposed definition of ‘‘residential real property’’? Is the description of such property as ‘‘designed principally for occupancy by one to four families’’ a clear industry standard? 16. Are the beneficial owners of transferee entities or transferee trusts routinely identified by some participant in the transfer? 17. What information, if any, should be reported about transfers involving tax-exempt organizations? 18. What do persons involved in real estate closings and settlements do if they have any suspicions about a transfer of residential real property, customer, or the payments supporting the transfer? 19. What roles do attorneys play in non-financed sales and non-sale transfers of residential real estate? Are there attorney-client privilege concerns with reporting these transfers, as proposed in the rule? If so, what is the basis for these concerns? 20. Please describe the purpose of the use of an escrow account, trust account, or lawyers’ trust account in a real estate transfer. Do these accounts present money laundering concerns? Is the use of these accounts sufficiently captured in the proposed rule? Are there attorney-client privilege concerns around the use of lawyer’s trust accounts, and if so, what is the basis for these concerns? 21. How are opinion letters used in the real estate closing and settlement process? Are there attorney-client privilege concerns around the use of opinion letters? If so, what is the basis for those concerns? 22. Are there other attorney-client privilege concerns, such as around attorneys acting as settlement agents, drafting or filing deeds, or reporting any of the required information? What is the basis for those concerns? VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 23. How do factors related to parties to the transfer, the payments related to the transfer, and the property itself bear on money laundering risk assessment? What kinds of transfers and customers are highest and lowest risk? How are those risks mitigated and what are the associated costs of that mitigation? 24. Is it possible to estimate the extent to which residential real property values are affected by money laundering through real estate? 25. Please provide comments on the proposed definition of transferee entity. 26. Please provide comments on the proposed definition of transferee trust. 27. Please provide comments on the proposed definition of beneficial owners of transferee entities. 28. Please provide comments on the proposed definition of beneficial owners of transferee trusts. 29. Please provide comments on any other definition in the proposed rule. 30. Please provide comments on the proposed coverage of transfers of residential real estate to transferee entities and transferee trusts, including the benefits and drawbacks to covering each. 31. Are there any areas within the geographic scope of this proposed rule that have unique customs or requirements that should be taken into account? 32. Please comment on how aware real estate professionals involved in residential real property transfers are of other categories of real estate professionals that may be involved in a given closing or settlement. 33. What are the benefits of the rule as proposed? 34. Is the information FinCEN proposes to be reported regarding nonfinanced residential real estate transfers to transferee entities and transferee trusts sufficient, over- or underinclusive? What information should be added or removed and why? 35. Should FinCEN ask for citizenship information of beneficial owners of transferee entities and transferee trusts? Why or why not? 36. Is the information FinCEN proposes to be reported regarding reporting persons sufficient, over- or under-inclusive? What information should be added or removed and why? 37. Please provide comments on the proposed collection of TINs for transferors and transferees and their beneficial owners. 38. Is the information FinCEN proposes to be reported regarding signing individuals sufficient, over- or under-inclusive? What information should be added or removed and why? 39. Is the information FinCEN proposes to be reported regarding PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 12443 transferors sufficient, over- or underinclusive? What information should be added or removed and why? 40. Is the information FinCEN proposes to be reported regarding the description of the transferred property sufficient, over- or under-inclusive? What information should be added or removed and why? 41. Is the information FinCEN proposes to be reported regarding payments sufficient, over- or underinclusive? What information should be added or removed and why? Would it be useful to reporting persons to have space on the reporting form to explain or discuss suspected or observed suspicious activity? 42. Should FinCEN require information regarding additional information about the source of funds for covered residential real estate transfers? How would or should reporting persons go about ascertaining source of funds information? 43. How should FinCEN consider real estate transfers to foreign trusts and charitable trusts? Foreign non-profits? Do these present sufficient money laundering risk that they should be covered by any final rule? Why or why not? 44. If program or other requirements were limited to purchases above a certain price threshold, how would this affect: (i) the burden of implementing such potential rules; and (ii) the utility of such potential rules for addressing money laundering issues in the real estate market? 45. What are the key benefits for a reporting person, if any, assuming issuance of the rules? 46. Please list any legislative, regulatory, judicial, corporate, or market-related developments that have transpired since FinCEN issued the 2021 ANPRM that you view as relevant to FinCEN’s current proposed issuance of AML regulations. 47. Are there particular concerns that small businesses may have regarding the implementation of this proposed rule? 48. What would be the value of covering partially non-financed residential real estate transfers? What level of financing would be sufficient to alleviate that concern? 49. FinCEN understands that for certain residential real estate transfers involving multiple investors, such as with unregistered PIVs, or large operating companies, there may be multiple financing methods involved in a single residential transfer. Please detail in the context of the proposed rule how due diligence checks on partially financed residential real estate transfers involving multiple entities E:\FR\FM\16FEP2.SGM 16FEP2 12444 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules may differ from due diligence checks on fully financed residential real estate transfers multiple entities. 50. This NPRM is focused on residential real estate. Do the same considerations for type of purchaser covered and professionals required to report apply to the commercial real estate sector? VII. Regulatory Analysis This regulatory impact analysis (RIA) evaluates the anticipated effects of the proposed rule in terms of its expected costs and benefits to affected parties, among other economic considerations, as required by Executive Orders 12866, 13563, and 14094 (E.O. 12866 and its amendments).136 This RIA also includes assessments of the potential economic impact on small entities pursuant to the Regulatory Flexibility Act (RFA) and reporting and recordkeeping burdens under the Paperwork Reduction Act of 1995 (PRA), as well as analysis required under the Unfunded Mandates Reform Act of 1995 (UMRA).137 As discussed in greater detail below, the proposed rule is expected to promote national security objectives 138 and enhance compliance with international standards 139 by improving law enforcement’s ability to identify the natural persons associated with transactions conducted in the U.S. residential real estate sector and thereby diminish the ability of corrupt and other illicit actors to launder their proceeds through real estate purchases in the United States. More specifically, the collection of the proposed streamlined SARs, Real Estate Reports, in a repository that would be readily accessible to law enforcement is expected to increase the efficiency with which resources can be utilized to identify such natural persons, or 136 See infra Section VII.B. to its UMRA-related analysis, FinCEN has not anticipated material changes in expenditures for State, local, and Tribal governments, but because the proposed rule would impose new reporting and recordkeeping requirements on select entities in the private sector in connection with certain residential property transfers, FinCEN considers expenditures these private entities may incur as part of the regulatory impact in its assessment below. 138 See The White House, United States Strategy on Countering Corruption (Dec. 6, 2021), available at https://www.whitehouse.gov/wp-content/ uploads/2021/12/United-States-Strategy-onCountering-Corruption.pdf. 139 See Financial Action Task Force, The FATF Recommendations (Feb. 2012; last updated Nov. 2023), available at https://www.fatf-gafi.org/en/ publications/Fatfrecommendations/Fatfrecommendations.html; see also Financial Action Task Force, United States Mutual Evaluation Report (Dec. 2016), p.1., available at https://www.fatfgafi.org/content/dam/fatf-gafi/mer/MER-UnitedStates-2016.pdf.coredownload.inline.pdf. lotter on DSK11XQN23PROD with PROPOSALS2 137 Pursuant VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 beneficial owners, when they have conducted non-financed purchases of residential real property using legal entities or trusts. The following RIA first describes the economic analysis FinCEN undertook to inform its expectations of the proposed rule’s impact and burden.140 This is followed by certain pieces of additional and, in some cases, more specifically tailored analysis as required by E.O. 12866 and its amendments,141 the RFA,142 the UMRA,143 and the PRA,144 respectively. Requests for comment related to the RIA—regarding specific findings, assumptions, or expectations, or with respect to the analysis in its entirety—can be found in the final subsection 145 and have been previewed and cross-referenced throughout the RIA. A. Assessment of Impact This proposed rule has been determined to be a ‘‘significant regulatory action’’ under Section 3(f) of Executive Order 12866 because it may raise legal or policy issues. The following assessment indicates that the proposed rule may also be considered significant under Section 3(f)(1), as the proposed rule is expected to have an annual effect on the economy of $200 million or more.146 Consistent with certain identified best practices in regulatory analysis, the economic analysis conducted in this section begins with a review of FinCEN’s broad economic considerations, identifying the relevant market failures (or fundamental economic problems) that demonstrate the need or otherwise animate the impetus for the policy intervention as proposed.147 Next, the analysis turns to details of the current regulatory requirements and the background of market practices against which the proposed rule would introduce changes and establishes baseline estimates of the number of entities and residential real property transactions FinCEN expects could be affected in a given year. The analysis then briefly reviews the content of the proposed rules with a focus on the specifically relevant elements of the proposed definitions and requirements 140 See Section VII.A. Section VII.B. 142 See Section VII.C. 143 See Section VII.D. 144 See Section VII.E. 145 See Section VII.F. 146 Executive Order 12866 (Sept. 30, 1993), section 3(f)(1); see also Section VII.A.4. 147 Broadly, the anticipated economic value of a proposed rule can be measured by the extent to which it might reasonably be expected to resolve or mitigate the economic problems identified by such review. 141 See PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 that most directly inform how FinCEN contemplates compliance with the proposed requirements would be operationalized. Next, the analysis proceeds to outline the estimated costs to the respective affected parties that would be associated with such operationalization. Finally, the analysis concludes with a brief discussion of certain alternative policies FinCEN considered and could have proposed, including an evaluation of the relative economic merits of each against the expected value of the rule as proposed. 1. Broad Economic Considerations The proposed rule principally addresses two broad problems. First, is the problematic use of the United States’ residential real estate market to facilitate money laundering and illicit activity. Second, and related, is the difficulty of determining who beneficially owns legal entities or trusts that may engage in non-financed transactions, either because this data is not available to law enforcement or access is not sufficiently centralized to be meaningfully usable for purposes of market level riskmonitoring or swift investigation and prosecution. The second problem contributes to the first, making money laundering and illicit activity through residential real property more difficult to detect and prosecute, and thus more likely to occur. Although FinCEN is unable to quantify the economic benefits of the proposed rule, FinCEN expects that the proposed rule would generate benefits by mitigating those two problems. In other words, FinCEN expects that the proposed rule could make law enforcement investigations of illicit activity and money laundering in residential real estate less costly and more effective, and it would thereby generate value in the reduction of social costs associated with such activity. a. The Problem of Money Laundering and Illicit Activity via Residential Real Property First, and most significantly, real estate money laundering can facilitate a broad range of illicit activity, and such activity entails significant social costs. For example, crimes such as tax evasion deprive governments of funds that could otherwise be used for public services or infrastructure investment.148 Other crimes such as financial fraud deprive 148 Organization for Economic Co-Operation and Development (OECD), Report on Tax Fraud and Money Laundering Vulnerabilities in the Real Estate Sector (2007), available at https:// www.oecd.org/ctp/exchange-of-tax-information/ 42223621.pdf (finding that real estate is a preferred choice of criminals for hiding ill-gotten gains and that tax fraud schemes are often closely linked with these activities). E:\FR\FM\16FEP2.SGM 16FEP2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 victims of their property, chilling legitimate investment and business activity that can yield economic benefits. Crimes involving various forms of corruption can hinder economic development and discourage legitimate businesses from operating in affected areas.149 More generally, certain direct and indirect costs of crime include: 150 • funding that must be provided by local, state, tribal, territorial, and Federal Governments to support law enforcement, the judiciary, and correctional services; • financial losses sustained by crime victims, such as lost money and stolen or damaged property; • physical, psychological, and longterm financial harm incurred by crime victims and their families, lost productivity and wages, and lower quality of life as a result of victimization; and • heightened fear of crime, reduced ability to stem blight, loss of commercial and other investment, and increased burden on social service organizations in local communities.151 In addition to facilitating crime and its associated costs, money laundering creates distinct economic problems in the real estate markets in which it occurs. When a market is economically efficient, the public may rely upon the price(s) at which transactions occur to convey meaningful information,152 in 149 See, e.g., John McDowell and Gary Novis, ‘‘The Consequences of Money Laundering and Financial Crime,’’ Economic Perspectives: An Electronic Journal of the U.S. Department of State,’’ Focus (May 2001), available at https:// www.google.com/url?sa=t&rct=j&q=&esrc=s& source=web&cd=&ved=2ahUKEwi24f3B5d6AA xUvhIkEHcC4DpIQFnoECBMQAQ&url= https%3A%2F%2Fwww.hsdl.org%2 F%3Fview%26did%3D3549&usg=AOvVaw2pg7gw 7lpKPhWiw1Nq9mgF&opi=89978449. 150 U.S. Department of Justice, Bureau of Justice Statistics, ‘‘Costs of Crime,’’ available at https:// bjs.ojp.gov/costs-crime. 151 For an example in the context of money laundering via commercial real estate, see, e.g., Casey Michel, ‘‘A Ukrainian Oligarch Bought a Midwestern Factory and Let it Rot. What Was Really Going On?’’ Politico (Oct. 17, 2021), available at https://www.politico.com/news/ magazine/2021/10/17/ukrainian-oligarchmidwestern-factory-town-dirty-money-americanheartland-michel-kleptocracy-515948 (detailing how a corrupt Ukrainian tycoon laundered hundreds of millions of dollars by purchasing vast stretches of property in an economically depressed community in rural Illinois); see also U.S. Department of Justice, Press Release, Justice Department Seeks Forfeiture of Two Commercial Properties Purchased with Funds Misappropriated from PrivatBank in Ukraine (Aug. 6, 2020), available at https://www.justice.gov/opa/pr/justicedepartment-seeks-forfeiture-two-commercialproperties-purchased-funds-misappropriated (announcing forfeiture actions involving the same Ukrainian oligarch who, the DOJ alleged, purchased hundreds of millions of dollars in real estate and businesses across the country). 152 For an example of this principle applied to capital asset pricing, see, e.g., Eugene F. Fama, VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 some cases including information about buyers’ and sellers’ valuations. Such information enables people to make optimal allocation choices—whether to participate in a given market, what investments to make, or how much to produce, for example. In this setting, money laundering creates price distortion by adding noise to the price signal. When price distortion occurs, the information necessary to make optimal decisions may become difficult or impossible to decipher from observable market behavior. Misallocations of goods and services that harm both producers and consumers may ensue and, in the extreme, markets can break down. Some evidence that this occurs in the real estate market has been documented.153 One way to think about how this noise is introduced in the residential real property market is to consider a property transaction by which money is laundered as a bundled good.154 This would imply that the observable price at which the residential real property is transferred does not reflect simply the buyer’s private valuation of the property, but their willingness to pay for money laundering services as well. This implicit bundling can lead to economic inefficiencies in both the number of and counterparties with whom trades occur and the prices at which they occur. For example, if a residential real property seller is unaware that they are being compensated for both the transfer of their property as well as for their provision of money laundering services, the price at which they agree to the transfer will be inefficiently low.155 In ‘‘Efficient Capital Markets: A Review of Theory and Empirical Work,’’ The Journal of Finance, vol. 25, no. 2 (1970), pp. 383–417, available at https:// doi.org/10.2307/2325486. 153 See e.g., European Parliamentary Research Service, ‘‘Understanding money laundering through real estate transactions’’ (Feb. 2019), p. 7, available at https://www.europarl.europa.eu/RegData/etudes/ BRIE/2019/633154/EPRS_BRI(2019)633154_EN.pdf (finding that ‘‘[d]istortions of real estate prices and the concentration on limited sectors may have an impact beyond those areas and lead to increases in real estate prices, thus pricing people with legal sources of funds out of the market and reduc[ing] housing affordability, something that has been witnessed in several cities in both developed and developing countries . . . resulting in . . . displacement of less affluent households’’). 154 For a general description and examples of product bundling, see, e.g., William James Adams and Janet L. Yellen, ‘‘Commodity Bundling and the Burden of Monopoly,’’ The Quarterly Journal of Economics, vol. 90, no. 3 (1976), pp. 475–98; see also Yongmin Chen, ‘‘Equilibrium Product Bundling,’’ The Journal of Business, vol. 70, no. 1 (1997), pp. 85–103. 155 See U.S. Department of the Treasury, National Money Laundering Risk Assessment (Feb. 2022), p. 58, available at https://home.treasury.gov/system/ files/136/2022-National-Money-Laundering-RiskAssessment.pdf. Treasury explained in its 2022 PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 12445 the case where such a seller is unwilling to provide money laundering services at any price, this would have caused the bundled price reflecting their private valuations to be infinite, and as such no transaction would have occurred. Another kind of allocative inefficiency could occur if the seller is unable to distinguish between a buyer’s price that reflects a bundled value versus one that does not. Allocative efficiency requires that a good be traded with the counterparty whose willingness and ability to pay is highest. Therefore, in a case where a buyer with money laundering intent and a buyer with none both offer to transact at the same price, allocative efficiency would require the seller to trade their residential real property with the buyer without money laundering intent (because their private valuation of the property exceeds that of the money launderer by the proportion of the money launderer’s bid that reflects their willingness to pay for money laundering services instead). In cases where this inability to distinguish between buyers of a bundled product versus genuine homebuyers leads to extreme allocative inefficiency, buyers without money laundering intent can be ‘‘crowded out’’ of the residential real property market to deleterious effect. As a consequence of transactions occurring that inefficiently allocate housing, or transactions occurring at prices that are misaligned with equilibrium market prices, money laundering through residential real property purchases can have disparate effects on regional economic conditions depending on the nature of pre-existing housing supply-demand imbalances in a specific geographic market. For example, by creating additional demand in markets where the quantity of housing demanded already exceeds local supply, transactions for purposes of money laundering can exert additional upward pressure on home prices. While money laundering may appear to be concentrated in high-end real estate properties and luxury markets, its spillover effects, if left unchecked, could in some instances disproportionately affect low-income and otherwise high-risk communities, undermining other economic policy objectives aimed at helping these National Money Laundering Risk Assessment, ‘‘[g]iven the relative stability of the real estate sector as a store of value, the opacity of the real estate market, and gaps in industry regulation, the U.S. real estate market continues to be used as a vehicle for money laundering and can involve businesses and professions that facilitate (even if unwittingly) acquisitions of real estate in the money laundering process’’ (emphasis added). E:\FR\FM\16FEP2.SGM 16FEP2 12446 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules communities.156 As such, money laundering through real estate—though it represents only a relatively small percentage of GDP and takes place in a minority of real estate transfers—can catalyze significant market failures when concentrated in areas that are economically distressed or with low housing volume. In some cases, this distortion can contribute to housing bubbles in affected areas, which may eventually burst and lead to economic instability in impacted regions.157 lotter on DSK11XQN23PROD with PROPOSALS2 b. The Problem of High Search Costs The U.S. real estate sector is considered an attractive target for money laundering due to several factors that make it conducive to stashing and obscuring the origin of illicit funds.158 One significant factor is the opacity of beneficial ownership in non-financed real estate transfers to legal entities and trusts. Because these transfers can serve to obscure the identities of beneficial owners, they are acutely vulnerable to exploitation by illicit actors.159 This mechanism to obfuscate the origin of funds and associated natural persons can effectively incentivize the marginal bad actor to seek new sources of illicit 156 See, e.g., Money Laundering in Real Estate, Conference Report by the Terrorism, Transnational Crime and Corruption Center at George Mason University (Mar. 25, 2018), available at traccc.gmu.edu/wp-content/uploads/2020/09/2018MLRE-Report_0.pdf. 157 ‘‘Anti Money Laundering and Economic Stability,’’ International Monetary Fund Finance & Development Magazine (Dec. 2018), availability at https://www.imf.org/en/Publications/fandd/issues/ 2018/12/imf-anti-money-laundering-and-economicstability-straight. 158 See, e.g., Final Report: Commission of Inquiry into Money Laundering in British Columbia, Cullen Commission (June 2022), p. 772, available at https://cullencommission.ca/files/reports/ CullenCommission-FinalReport-Full.pdf. (highlighting structural and regulatory factors as incentives for using real estate to launder funds, including ‘‘minimal reporting of suspicious transactions . . . on the part of real estate professionals’’), citing Transparency International, ‘‘Doors Wide Open: Corruption and Real Estate in Four Key Markets’’ (2017), pp. 24, available at https://images.transparencycdn.org/images/2020Report-Real-estate-data-Shining-a-light-on-thecorrupt.pdf; Mohammed Ahmad Naheem, ‘‘Money Laundering and Illicit Flows from China—The Real Estate Problem,’’ Journal of Money Laundering Control (2017), p. 23, available at https:// www.emerald.com/insight/content/doi/10.1108/ JMLC-08-2015-0030/full/html. 159 See Financial Action Task Force, Guidance for a Risk Based Approach: Real Estate Sector (July 2022), pp. 17, 29, available at https://www.fatfgafi.org/content/dam/fatf-gafi/guidance/RBA-RealEstate-Sector.pdf.coredownload.pdf (‘‘[d]isparities with rules surrounding legal structures across countries means property can often be acquired abroad by shell companies or trusts based in secrecy jurisdictions, exacerbating the risk of money laundering.’’ International bodies, such as the FATF, have found that ‘‘[s]uccessful AML/CFT supervision of the real estate sector must contend with the obfuscation of true ownership provided by legal entities or arrangements[.]’’). VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 gain or exploit current sources with greater impunity. Opaque ownership in non-financed real estate transactions can be thought of in economic terms as effectively enhancing the liquidity of illgotten funds, thereby increasing the overall profitability of the original activity that engendered a need for money laundering. Similar economic problems exist when beneficial ownership information and real estate transaction information is available, but search costs to obtain that information to link a bad actor to illicit activity are so high as to frustrate or prevent investigative use. To the extent those costs mean that illicit activity is not subsequently investigated or prosecuted, this allows the individual to update their perceived probability of being detected or punished for that illicit activity downward. In a model where the expected value of illicit behavior is a function of both the expected payoff and the risk (or expected severity) of punishment, the problem of high search costs increases the expected value by decreasing the perceived risk of punishment. In cases where the expected value of a certain illicit behavior increases because the anticipated risk or severity of punishment decreased, potential illicit actors may be more likely to engage in such behavior. This updated belief can also lead an individual to mistakenly update their expectations about punishment risk or severity associated with other illegal activities.160 When this occurs, the coincidence of money laundering and other illicit activity may subsequently rise, which in turn may exacerbate the depressive effects of the original money laundering activities on the local economy in a self-reinforcing cycle.161 160 This activity is consistent with a representativeness heuristic bias. See Amos Tversky and Daniel Kahneman, ‘‘Judgment under Uncertainty: Heuristics and Biases: Biases in judgments reveal some heuristics of thinking under uncertainty,’’ Science, Vol. 185, no. 4157 (1974), pp. 1124–1131. 161 Louise Shelley, ‘‘Money Laundering into Real Estate,’’ in Convergence: Illicit Networks and National Security in the Age of Globalization, (Michael Miklaucic and Jacqueline Brewer eds., National Defense University Press 2013), p. 140 (noting how property purchased by money launderers that is left vacant may be allowed to decay so ‘‘criminal investors can subsequently buy neighboring properties at depressed costs, thereby increasing their territorial influence’’); see also Final Report: Commission of Inquiry into Money Laundering in British Columbia, Cullen Commission (June 2022), p. 774, available at https://cullencommission.ca/files/reports/ CullenCommission-FinalReport-Full.pdf (noting the ability of criminal actors to develop influence and power at a local level, such as in cases where a large real estate portfolio is owned in a small town or neighborhood). PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 FinCEN assesses that a regulatory requirement to ensure consistent reporting of non-financed real estate transfers made to legal entities and trusts on a nationwide basis would reduce law enforcement search costs for such information, thereby facilitating law enforcement and national security agency efforts to combat illicit activity. In this manner the proposed policy is expected to directly address the two main problems considered and in so doing create economic value. 2. Baseline and Affected Parties To assess the anticipated regulatory impact of the proposed rule, FinCEN took several factors about the current state of the residential real estate market into consideration. This is consistent with established best practices and certain requirements 162 that the expected economic effects of a proposed rule be measured against the status quo as a primary counterfactual. Among other factors, FinCEN’s economic analysis of regulatory impact considered the proposed rule in the context of existing regulatory requirements, relevant distinctive features of groups likely to be affected by the rule, and pertinent elements of current residential real estate market characteristics and common practices. Each of these elements is discussed in its respective subsection below. a. Regulatory Baseline While there are no specific Federal rules that would directly and fully duplicate, overlap, or conflict with the proposed rule,163 there are nevertheless components of the proposed requirements that mirror, or are otherwise consistent with, reporting and procedural requirements of existing FinCEN rules and orders, as well as those of other agencies. To the extent that a person would have previous compliance experience with these elements of the regulatory baseline, FinCEN expects that some costs associated with the proposed rule would be lower because the incremental changes in behavior from current practices would be smaller. FinCEN reviews the most proximate components from these existing rules and orders in greater detail below. i. Residential Real Estate GTOs Under the Residential Real Estate GTOs, title insurance companies are required to report: ‘‘(i) The dollar 162 Office of Management and Budget, Circular A– 4 (Nov. 9, 2023), available at https:// www.whitehouse.gov/wp-content/uploads/2023/11/ CircularA-4.pdf. 163 5 U.S.C. 603(b)(5). E:\FR\FM\16FEP2.SGM 16FEP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules amount of the transaction; (ii) the type of transaction; (iii) information identifying a party to the transaction, such as name, address, date of birth, and tax identification number; (iv) the role of a party in the transaction (i.e., originator or beneficiary); and (v) the name, address, and contact information for the domestic financial institution or nonfinancial trade or business.’’ 164 As discussed above,165 FinCEN recognizes that the Residential Real Estate GTOs collect beneficial ownership information on certain nonfinanced purchases of residential real property by legal entities that meet or exceed certain dollar thresholds in select geographic areas. However, the Residential Real Estate GTOs are narrow in that they are temporary, locationspecific, and limited in the transactions they cover. The proposed rule is wider in scope of coverage and, if finalized, would collect additional useful and actionable information previously not available through the Residential Real Estate GTOs. As such, the proposed nationwide reporting framework for certain residential real estate transfers, if finalized, would replace the current Residential Real Estate GTOs. Some evidence suggests that, despite the restricted scope of reporting persons under the existing Residential Real Estate GTOs to title insurance carriers only, certain additional categories of real estate professionals may already be familiar—and have experience—with gathering the currently required reportable information. For example, FinCEN observes that in some markets presently under a Residential Real Estate GTOs, realtors and escrow agents often assist Direct Title Insurance Carriers with their reporting obligations despite not being subject to any formal reporting requirements themselves. Some may even have multiple years’ worth of guidance and informational support by the regional or national trade association of which they are a member in how best to facilitate and enable compliance with existing FinCEN requirements. For instance, in 2021, the National Association of Realtors advised that while ‘‘[r]eal estate professionals do not have any affirmative duties under the Residential Real Estate GTOs,’’ such entities should nevertheless expect that ‘‘a title insurance company may request information from real estate professionals to help maintain its compliance with the Residential Real Estate GTOs. Real estate professionals are encouraged to cooperate and provide 164 85 FR 84104 (Dec. 23, 2020). discussion of Residential Real Estate GTOs, supra Section II.B.3; see also Section III.A. 165 See VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 information in their possession.’’ 166 Thus, the historical Residential Real Estate GTOs’ attempt to limit the definition of reporting persons to Direct Title Insurance Carriers does not seem to have completely forestalled the imposition of time, cost, and training burdens on other real estate transfer related entities. As such, the proposed cascade approach might not mark a complete departure from current practices and the related burdens of Residential Real Estate GTO requirements, as they may already in some ways be functionally applicable to multiple prospective reporting persons in the proposed cascade. ii. BOI Reporting Rule Furthermore, following the enactment of the CTA, beneficial ownership information of certain legal entities is required to be submitted to FinCEN. However, as set out in the preamble to this proposed rule, the information needed to ascertain money laundering risk in the residential real estate sector differs in key aspects from what will be collected under the CTA, and, accordingly, the information collected under this proposed rule differs from that collected under the CTA.167 For example, FinCEN believes that a critical part of the proposed rule is that it would alert law enforcement to the fact that a real estate transfer vulnerable to a known money laundering typology has taken place. While beneficial ownership information collected under the CTA may be available, that information concerns the ownership composition of a given entity at a given point in time. As such reporting does not dynamically extend to include information on the market transactions of the beneficially owned legal entity, it would not alert law enforcement officials focused on reducing money laundering that any real estate transfer has been conducted, which includes those particularly vulnerable to money laundering such as non-financed transfers of residential property. Furthermore, the scope of entities that are the focus of the real estate rule is broader than the CTA, as certain entities such as most types of trusts are not covered by the CTA. Because legal trusts generally do not have an obligation to 166 See National Association of Realtors, ‘‘AntiMoney Laundering Voluntary Guidelines for Real Estate Professionals’’ (Feb. 16, 2021), p. 3, available at https://www.narfocus.com/billdatabase/ clientfiles/172/4/1695.pdf. 167 See supra Section III.B, which provides a full discussion on the differences between the information collected for the CTA and the information collected under the proposed rule, both in terms of the depth of the information collected and the context in which it is collected. PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 12447 report beneficial ownership under the CTA, their incremental burden of compliance with the proposed Real Estate Report requirements may be moderately higher insofar as the activities of collecting, presenting, or certifying beneficial ownership information are less likely to have already been performed for other purposes. iii. CDD Rule The CDD Rule’s beneficial ownership requirement addressed a regulatory weakness that enabled persons looking to hide ill-gotten proceeds to potentially access the financial system anonymously. Among other things, covered financial institutions were required to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions; beneficial ownership and identification therefore became a component of AML requirements. FinCEN is also aware that financial institutions subject to the CDD Rule are required to collect some beneficial ownership information from legal entities that establish new accounts. However, those entities do not necessarily also own real estate and financial institutions are not required to file a report of that beneficial ownership information with FinCEN. In addition, the proposed rule covers non-financed transfers of residential real estate that do not involve financial institutions covered by the CDD Rule. The rule would also collect additional information relevant to the real estate transfers that is currently not collected under the CDD Rule. iv. Other In the course of current residential real estate transactions, some parties that under the proposed rule might be deemed ‘‘transferors’’ already prepare and report portions of the proposed requisite information to other regulators. For example, the IRS collects taxpayer information through Form 1099–S on seller-side proceeds from reportable real estate transfers for a broader scope of reportable real estate transactions than the proposed rule.168 This information, however, is generally unavailable for one of the primary purposes intended by FinCEN’s proposed rule, as there are significant statutory limitations on the ability of the IRS to share such 168 Reportable real estate for purposes of IRS Form 1099–S includes, for example, commercial and industrial buildings (without a residential component) and non-contingent interests in standing timber, which are not covered under the proposed rule. E:\FR\FM\16FEP2.SGM 16FEP2 12448 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 information with federal law enforcement or other federal agencies.169 In addition to these statutory limitations on IRS disclosure of taxpayer information, details about the buyer’s beneficial ownership (the focus of the proposed rule) largely fall outside the scope of transaction information reported on the Form 1099–S. However, IRS Form 1099–S is nonetheless relevant to the proposed rule’s regulatory baseline, given the process by which the filing may be prepared and submitted to the IRS. Similar to what is proposed for the Real Estate Report, the person responsible for filing the form IRS Form 1099–S can either be determined through a cascade of the various parties who may be involved in the closing or settlement process, or, alternatively, certain categories of the involved parties may enter into a written agreement at or before closing to designate who must file Form 1099–S for the transaction. The agreement must identify the designated person responsible for filing the form, but it is not necessary that all parties to the transaction, or that more than one party even, enter into the agreement.170 The agreement must: (1) identify by name and address the person designated as responsible for filing; (2) include the names and addresses of each person entering into the agreement; (3) be signed and dated by all persons entering into the agreement; (4) include the names and addresses of the transferor and transferee; and (5) include the address and any other information necessary to identify the property.171 The proposed rule’s designation agreement requires, and is limited to, the same five components that may be included in a designation agreement accompanying Form 1099–S. Therefore, the exercise of designation as well as the collection of information and signatures it involves, as contemplated by the proposed rule, may already occur in connection with certain transfers of residential real property and in these cases be leveraged at minimal additional expense. 169 See generally 26 U.S.C. 6103 (covering confidentiality and disclosure of returns and return information). 170 IRS, Instructions for Form 1099–S, available at https://www.irs.gov/instructions/i1099s; 26 CFR 1.6045–4(e). 171 Id. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 b. Baseline of Affected Parties i. Transferees 1. Legal Entities According to a recent study 172 that analyzed Ztrax data 173 covering 2,777 U.S. counties and over 39 million residential housing market transactions from 2015 to 2019, the proportion of average county-month non-financed residential real estate transactions by legal entities was approximately 11 percent during the five-year period analyzed. When the sample is divided into counties that, by 2019, were under Residential Real Estate GTOs versus those that were never under GTOs, the proportions of average county-month non-financed sales to total purchases are approximately 13.6 percent and 11.2 percent, respectively. Legal entities that purchase residential real estate vary by size and complexity of beneficial ownership structure. FinCEN analysis of the 2018 RHFS data found that micro investors or small business landlords who owned 1– 2 units owned 66 percent of all single family and multifamily structures with 2–4 units. Conversely, investors in the residential rental market who owned at least 1000 properties owned only 2 percent of single-family homes and multi-family structures. 2. Legal Trusts The proposed rule would extend the scope of reportable transactions to include non-financed purchases of residential real property by legal trusts when such a trust falls within the definition of ‘‘transferee trust’’ and is not exempted.174 Historically, residential real property purchases by transferee trusts have not been covered under the current Residential Real Estate GTOs and the entities themselves are typically 175 not subject to beneficial ownership reporting requirements under the CTA. Therefore, FinCEN expects that legal trusts would be more homogenously newly affected by the proposed rule than legal entities, 172 See Matthew Collin, Florian Hollenbach, and David Szakonyi, ‘‘The impact of beneficial ownership transparency on illicit purchases of U.S. property,’’ Brookings Global Working Paper #170, (Mar. 2022), p. 14, available at https:// www.brookings.edu/wp-content/uploads/2022/03/ Illicit-purchases-of-US-property.pdf. 173 Zillow, Transaction and Assessment Database (ZTRAX), available at https://www.zillow.com/ research/ztrax/. 174 See Section IV.B.2; see also infra proposed amendment 31 CFR 1031.230. 175 FinCEN notes that while most trusts are not reporting companies under the BOI Reporting Rule, a reporting company would be required to report a beneficial owner that owned or controlled the reporting company through a trust. PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 discussed above, as a cohort of affected parties.176 Establishing a baseline population of potentially affected transferee trusts based on the existing population of legal trusts is challenging for several reasons. These reasons include the general lack of comprehensive and aggregated data on the number,177 value, usage, and holdings of trusts formed in the United States, which in turn is a result of heterogeneous registration and reporting requirements, including instances where neither requirement currently exists. Because domestic trusts are created and administered under state law, and states have broad authority in how they choose to regulate trusts, there is variation in both the proportion of potential transferee trusts that are currently required to register as trusts in their respective states as well as the amount of information a given legal trust is required to report to its state about the nature of its assets or its structural complexity. Thus, limited comparable information may be available at a nationwide level besides what is reported for federal tax purposes and what is available is unlikely to represent the full population of potentially affected parties that would meet the proposed definition of transferee trust if undertaking the nonfinanced purchase of residential real property. International heterogeneity in registration and reporting requirements for foreign legal trusts creates similar difficulties in assessing the population of potentially affected parties that are not originally registered in the United States. Further complicating this assessment is the exogeneity and unpredictability of changes to foreign tax and other financial policies, which studies in other, related contexts have shown, generally affect foreign demand for real estate.178 While it is difficult to know exactly how many existing legal trusts there are, and within that population, how many 176 See Section VII.A.2.b.i.1. notes that while the U.S. Census Bureau does produce annual statistics on the population of certain trusts (NAICS 525—Funds, Trusts, and Other Financial Vehicles), such trusts are unlikely to be affected by the proposed rule and thus their population size is not informative for this analysis. 178 See, e.g., Cristian Badrinza and Tarun Ramadorai, ‘‘Home away from home? Foreign demand and London House prices,’’ Journal of Financial Economics 130 (3) (2018), pp. 532–555, available at https://doi.org/10.1016/j.jfineco.2018. 07.010; see also Caitlan S. Gorback and Benjamin J. Keys, ‘‘Global Capital and Local Assets: House Prices, Quantities, and Elasticities,’’ Technical Report, National Bureau of Economic Research (2020), available at https://www.nber.org/papers/ w27370. 177 FinCEN E:\FR\FM\16FEP2.SGM 16FEP2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules own residential real estate (as a potential indicator of what proportion of new trusts might have a view to purchase residential real property), there is nevertheless a consistency in the limited existing empirical evidence that would support a conjecture that proportionally few of the expected reportable transactions would be likely to involve a transferee trust. A recent study of U.S. single-property residential transactions that occurred between 2015 and 2019 identified a trust as the buyer in 3.3 percent of observed transfers. FinCEN also conducted additional analysis of publicly available data that might help to quantify the proportion of trust ownership in residential real estate. Based on the Department of Housing and Urban Development and Census Bureau’s Rental Housing Finance Survey (RHFS), identifiable trusts accounted for approximately 2.5 percent of rental housing ownership and approximately 8.2 percent of nonnatural person ownership of rental housing.179 To the extent that trusts’ current residential real property holdings are linear in the number of housing units and current holdings is a reliable proxy for future purchasing activity, FinCEN does not expect the proportion of nonfinanced residential real property transfers in which the transferee is a non-excepted legal trust to exceed 5 percent of potentially affected transactions. No further refinements to this upper-bound-like estimate, based on the number of existing trusts that may be affected, would be feasible without a number of additional assumptions about market behavior that FinCEN declines to impose in the absence of better/more data. The public is invited to provide such data, if available. lotter on DSK11XQN23PROD with PROPOSALS2 3. Excepted Transferees Exceptions to the general definitions of transferee entities and transferee trusts apply to certain highly regulated entities and trusts that are subject to BSA program requirements or to other significant regulatory reporting requirements. For example, PIVs that are investment companies and registered with the SEC under section 8 of the Investment Company Act of 1940 would be excepted, while unregistered PIVs engaging in reportable transfers would not. Unregistered PIVs would instead be required to provide the transaction’s 179 See U.S. Census Bureau, Rental Housing Finance Survey (2021), available at https:// www.census.gov/data-tools/demo/rhfs/’’/l‘‘/?s_ tableName=TABLE2. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 reporting person with the proposed specified information, particularly including the required information regarding their beneficial owners. FinCEN analysis of costs below assumes that any such unregistered PIV stood up for a reportable transfer would generally have, or have low-cost access to, the proposed information necessary for filing the proposed Real Estate Reports. FinCEN expects that a PIV that is not registered with the SEC—which can have at maximum four investors whose ownership percent is or exceeds 25 percent (the threshold for the ownership prong of the beneficial ownership test for entities)—would likely either (1) be an extension of that large investor, or (2) have a general partner who actively solicited known large investors. In either case, the unregistered PIV is likely to have most of the beneficial ownership information that would be required to complete the proposed Real Estate Report and access to the beneficial owner(s) to request the additional components of required information not already at hand. Operating companies subject to the Securities Exchange Act of 1934’s current and periodic reporting requirements, including certain special purpose acquisition companies (SPACs) and issuers of penny-stock, would also be excepted transferees under the proposed rule. FinCEN notes that the percent ownership threshold for beneficial ownership for SEC regulatory purposes is considerably lower than as defined in the CTA and related Exchange Act beneficial ownershiprelated disclosure obligations usually apply to more control persons at such a registered operating company.180 Additionally, disclosures about the acquisition of real estate, including material non-financed purchases of residential property, are already required in certain periodic reports filed with the SEC.181 Therefore, an incremental informational benefit from not excepting SEC-registered operating companies as transferees for the purposes of the proposed Real Estate Report reporting requirements may either not exist or, at best, be very low while the costs to operating companies of reporting and compliance with an additional federal regulatory agency are expected to be comparatively high. ii. Reporting Entities Because the proposed reporting cascade is ordered by function 180 See discussion of SEC-registered operating companies, supra Section IV.B.1.a. 181 See, e.g., U.S. Securities and Exchange Commission, Instructions to Item 2.01 on Form 8– K; see also 17 CFR 210.3–14. PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 12449 performed, or service provided, rather than by defined occupations or categories of service providers,182 attribution of work to the capacity in which a person is primarily employed is necessarily imprecise.183 To account for the need to map from services provided to entities providing such services as a prerequisite to estimating the number of potentially affected parties, FinCEN acknowledges, but abstracts from, the common observation that title agents and settlement agents are ‘‘often the same entity that performs two separate functions in a real estate transaction,’’ and that ‘‘the terms title agent and settlement agent are often used interchangeably.’’ 184 For purposes of the remaining RIA, FinCEN groups potential reporting persons by features of their primary occupation and treats them as functionally distinct members of the cascade.185 In total, FinCEN estimates there may be up to approximately 172,753 reporting persons and 642,508 employees of those persons that could be affected by the proposed rule. Of this total, the distribution of potential reporting persons as identified by primary occupation 186 is settlement agents (3.6 percent of potential reporting persons, 9.8 percent of the potentially affected labor force), title insurance companies (0.5 percent, 6.6 percent), real estate escrow agencies (10.9 percent, 10.5 182 See description of reporting cascade, supra Section IV.D.1; see also proposed 31 CFR 1031.320(c)(1). 183 Insofar as the various compliance burdens estimated below could be improved by either changes to the methodology or the sources of data incorporated, FinCEN is soliciting public input. 184 See Nam D. Pham, ‘‘The Economic Contributions of the Land Title Industry to the U.S. Economy,’’ ndp Consulting (Nov. 2012), p. 6, available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2921931. This study was included as an appendix to a 2012 American Land Title Association comment letter submitted to the Consumer Financial Protection Bureau (CFPB) on the Real Estate Settlement Procedures Act (RESPA). 185 FinCEN’s RIA assumes that the first three functions identified in the proposed waterfall (being listed as the closing or settlement agent, preparing the closing or settlement statement, and filing the deed or other instrument) would be performed, if at all, by a single person, such that there are five distinct members of the cascade. 186 FinCEN notes that the capacity in which a reporting person facilitates a residential real property transfer may not always be in the capacity of their primary occupation. However, as analysis here relies on the U.S. Census Bureau’s annual Statistics of U.S. Business Survey, which is organized by NAICS code, the following nominal primary occupations (NAICS codes) are used for grouping and counting purposes: Title Abstract and Settlement Offices (541191), Direct Title Insurance Carriers (524127), Other Activities Related to Real Estate (531390), Offices of Lawyers (541110), and Offices of Real Estate Agents and Brokers (531210). E:\FR\FM\16FEP2.SGM 16FEP2 12450 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules The scope of residential real estate transactions that would be affected by the proposed rule is jointly defined by the (1) the nature of the property transferred, (2) the nature of the consideration proffered, and (3) the legal organization of the party to whom the property is transferred.189 For purposes of identification, the defining attribute for the nature of the property is that it is principally designed or demonstrably intended to become, the residence of one to four families, including cooperatives and unimproved land.190 Additionally, the property must be located in the United States as defined in the BSA implementing regulations, including U.S. territories.191 Transfers that would be deemed reportable exclude all transactions where the transferees receive any extension of credit from a financial institution subject to AML/SAR Reporting program requirements that is secured by the residential real property being transferred. Reportable transfers would also generally exclude transfers associated with an easement, death, divorce, or bankruptcy and transfers for which there is no reporting person. Because certain transfer characteristics that would cause a transfer to be excluded are not consistently identified across sources of transfer data, FinCEN estimates of the number below may generally be considered an upper bound of the expected affected transactions. FinCEN considered several different sources of information and a mosaic of piecewise informative statistics to inform its estimate of the reportable transaction baseline. When considering existing home sales, FinCEN reviewed the National Association of Realtors Confidence Index Survey data on allcash residential home sales between October 2008 and April 2021. In this data, the upper bound of all-cash transactions for existing home sales over this period was 35 percent,192 which totaled to 7,500,000.193 FinCEN also used data from the U.S. Census Bureau to review the number of new home sales between 1988–2022. FinCEN utilized peak and trough values for new home sales and percent of cash transactions— as a proxy for non-financed transactions—from the historical range provided by the Census Bureau.194 In analysis of this data, FinCEN observed that the upper bound number of all-cash transactions for new home sales was 9.6 percent,195 which totaled to 1,283,000 for the analysis.196 Considering yet another source, FinCEN reviewed Redfin data covering a period between 2000 to 2022 on investor purchases of existing homes to consider as a proxy for legal entity and trust purchases.197 This data would suggest an upper bound of approximately 20 percent.198 However, Redfin investor purchase data is unlikely to capture all the legal entity and trust purchases that are covered under the proposed rule, is likely to include purchases by entities that would be exempt from the proposed rule, and only covers the purchase of 187 The estimate of potentially affected attorneys is calculated as ten percent of the total SUSB population of Offices of Lawyers. This estimate is based on the average from FinCEN analysis of U.S. legal bar association membership, performed primarily at the state level, identifying the proportion of (state) bar members that are members of the organization’s (state’s) real estate bar association. FinCEN considers this proxy more likely to overestimate than underestimate the number of potentially affected attorneys because, while not all members of a real estate bar association actively facilitate real estate transfers each year, it was considered less likely that an attorney would, in a given year, facilitate real estate transfers in a way that would make them a candidate reporting person for purposes of the proposed rule when such an attorney had not previously indicated an interest in real estate specific practice (by electing to join a real estate bar). 188 NAICS Code 531210 (Offices of Real Estate Agents and Brokers). 189 See discussion of affected transferees, supra Section VII.A.2.b.i. 190 See discussion, supra Section IV.A; see also proposed 31 CFR 1031.320(b). 191 31 CFR 1010.100(h). 192 See National Association of Realtors, ‘‘AllCash Sales are Rising Sharply Amid Intense Competition’’ (May 24, 2021), available at https:// www.nar.realtor/blogs/economists-outlook/all-cashsales-are-rising-sharply-amid-intense-buyercompetition. 193 See Calculated Risk, ‘‘NAR: Existing-Home Sales Decreased to 5.61 million SAAR in April’’ (May 19, 2022), available at https://www.calculated riskblog.com/2022/05/nar-existing-home-salesdecreased-to.html. 194 See U.S. Census Bureau, ‘‘Houses Sold by Type of Financing,’’ available at https://census.gov/ construction/nrs/xls/soldfinc_cust.xls. 195 Id. 196 Id. 197 See Lily Katz and Sheharyar Bokhari, ‘‘Investors Are Buying Roughly Half as Many Homes as They Were a Year Ago,’’ Redfin News (Feb. 25, 2023), available at https:// www.redfin.com/news/investor-home-purchases-q4- percent), attorneys 187 (9.3 percent, 16.7 percent), and other real estate professionals 188 (75.5 percent, 56.4 percent). For purposes of cost estimates throughout the remaining analysis, FinCEN computed the following fully loaded average hourly wages by the respective primary occupation categories: settlement agents, $70.33; title insurers, $70.46; real estate escrow agencies, $84.15; attorneys, $88.89; and other real estate professionals, $84.15. c. Market Baseline lotter on DSK11XQN23PROD with PROPOSALS2 i. Reportable Transfers VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 existing residential real estate (i.e., nonnew developments). FinCEN additionally made attempts to factor in the rule’s inclusion of U.S. territories by including the number of new and existing home sales in Puerto Rico in 2022 in the final estimate of total potentially reportable transfers.199 In 2022, FinCEN identified 9,962 existing home sales and 953 new home sales in Puerto Rico. Added to the previous totals, this brought the total number of estimated existing and new home sales in the United States to 7,509,962 and 1,283,953, respectively. To account for quit claims to LLCs with zero consideration—i.e., real estate transfers that would not be captured in Census or home sales data—FinCEN reviewed various county deed databases to estimate the annual number of quit claims to LLCs for zero-dollar consideration in the United States. FinCEN reviewed deed data from the following U.S. County databases: Cook County, Illinois; Cuyahoga County, Ohio; Monroe County, Ohio; Anderson County, Texas; Dallas County, Texas; Arapahoe County, Colorado; Routt County, Colorado; Berrien County, Michigan; Roscommon County, Texas; Garland County, Arkansas. Counties were selected based upon the ability to: (i) search for quit claim deeds, (ii) search for deeds with zero-dollar consideration, (iii) conduct a keyword search that included ‘‘LLC’’ in the title of the grantee, and (iv) search within the 2022 calendar year. FinCEN notes that its attempt to create a representative sample was likely limited by its search query requirements and the limitations of county databases in terms of searchability. This analysis was conducted across 10 counties in 6 states and the results are included below in Table 1: 200 BILLING CODE 4810–02–P 2022/. Note that ‘‘all-cash’’ is the term used by Redfin. FinCEN does not know how Redfin defines ‘‘all-cash.’’ 198 There was a paucity of publicly available information regarding the legal entity and trust components of overall non-financed residential real estate transfers. The Redfin estimate, supra note 198, was limited to investor purchases of existing homes only, and therefore still contains gaps. Nonetheless, the Redfin estimate was the most recently available data and provided the highest bound estimate on the role of non-natural persons in residential real estate transfers based on publicly available data. 199 See Lalaine C. Delmendo, ‘‘Puerto Rico Residential Real Estate Market Analysis 2023,’’ Global Property Guide (Apr. 11, 2023), available at https://www.globalpropertyguide.com/Caribbean/ Puerto-Rico/Price-History. 200 Counties were selected based on the ability to search for the above criteria via each county’s online database. E:\FR\FM\16FEP2.SGM 16FEP2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules 12451 Table 1: Deed Analysis Quit Claims to LLCs with No Consideration 3,069 County State Illinois Cook Ohio Cuyahoga Texas Total Deeds Percentage 139,428 2.20% 1,676 57,492 2.92% Dallas 185 123,689 0.15% Colorado Arapahoe 141 80,397 0.18% Michigan Berrien 96 7,762 1.24% Ohio Monroe 142 1,036 13.71% Texas Anderson 2 4,709 0.04% Michigan Roscommon 29 3,206 0.90% Colorado Routt 12 4,722 0.25% Arkansas Garland 6 9,220 0.07% 5,358 431,661 1.24% Totals: As a result, the total number of estimated quit claims to LLCs covered by the rule is approximately 110,389. While these sources do not provide a complete picture of the potential number of reportable transfers in the United States, they are useful in providing an approximate range for estimation and highlight the fact that the potential range of transfers each year is dependent on multiple potential factors and conditions. Overall, the sources FinCEN reviewed suggest that hundreds of thousands of transfers may be covered under the proposed rule. FinCEN also estimates that annually anywhere between 5.23 million—6.98 million existing homes that have been purchased would be exempt from the purview of the rule. Similarly, among new home sales, FinCEN estimates that annually a range of between 305 thousand—1.26 million transactions will be exempt (See Table 2 below). Table 2: Transactions Exempted Exemption Estimates Upper Bound Existing Home Sales exempted 5,230,313 6,984,265 New Home Sales exempted 305,848 1,259,231 BILLING CODE 4810–02–C VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 E:\FR\FM\16FEP2.SGM 16FEP2 EP16FE24.001</GPH> Lawer Bound EP16FE24.000</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Category 12452 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules FinCEN acknowledges the conditionality that likely exists between variables used in its analysis, but notes the limitations associated with publicly available data on non-financed, residential real estate purchases by legal entities and trusts. In the exercise above, FinCEN had to rely on independent estimates of specific characteristics (i.e., non-financed, legal entity) to estimate the potential number of covered transactions and exempted transactions. On the basis of available data, studies, and qualitative evidence, and in the absence of large, unforeseeable shocks to the U.S. residential housing market, FinCEN analysis suggests that the number of potentially reportable transfers would be between approximately 800,000 and 850,000 annually. ii. Current Market Characteristics FinCEN took certain potentially informative aspects of the current market for residential real property into consideration when forming its expectations about the anticipated economic impact of the proposed rule. Among other things, FinCEN considered trends in the observable rate of turnover in the stock of existing homes. Additionally, FinCEN reviewed recent studies and data from the academic literature estimating housing supply elasticities on previously developed versus newly developed land. FinCEN also considered recent survey results of the residential real estate holdings of high-net-worth individuals and the proportion of survey respondents who self-reported the intent to purchase additional residential real estate in the coming year. Further, FinCEN reviewed studies of trends in the financing and certain distributional characteristics of shared equity housing, which includes cooperatives that could be affected by the proposed rule. iii. Current Market Practices lotter on DSK11XQN23PROD with PROPOSALS2 1. Settlement and Closing FinCEN assessed the role of various persons in the real estate settlement and closing process to determine a quantifiable estimate of each profession or industry’s overall participation in that process. Accordingly, FinCEN conducted research based on publicly available sources to assess the general participation rate of the different types of reporting persons in the proposed rule’s cascade. As part of its analysis, FinCEN noted a recent blog post citing data from the ALTA that 80 percent of VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 homeowners purchase title insurance when buying a home.201 To better understand the distribution of the other types of persons providing residential real property transfer services to the transactions that would be affected by the proposed rules, FinCEN utilized county deed database records to approximate a randomly selected and representative sample of residential real estate transfers across the United States.202 FinCEN made efforts to collect deed data that reflected a representative, nation-wide sample, both in terms of the number and geographic dispersion of deeds, but acknowledge selection was nevertheless constrained in part by the feasibility to search by deed type, among other factors.203 To the extent that the same analysis would yield substantively different results if performed over a larger sample (with either more geographic locations, more observations per location, or both), the public is invited to share such data or the results of analysis based on such data. The final analysis included 100 deeds, of which 97 involved at least one of the following potential reporting persons: (i) Title Abstract and Settlement Offices, (ii) Direct Title Insurance Carriers, or (iii) Offices of Lawyers. A candidate reporting person was deemed to be involved with the creation of the deed if either (i) a company or firm performing one of these functions was included on the deed or (ii) an individual performing or employed by a company or firm performing one of these functions was included on the deed. FinCEN assessed the distribution of alternative entities identified on the remaining deeds, categorizing by reporting person type. Based on this qualitative analysis, FinCEN tentatively anticipates that 201 See American Land Title Association, Home Closing 101, ‘‘Why 20% of Homeowners May Not Sleep Tonight,’’ (June 3, 2020), available at https:// www.homeclosing101.org/why-20-percent-ofhomeowners-may-not-sleep-tonight/. 202 In total, FinCEN evaluated ten deeds from eleven different U.S. counties in 2022 (removing deeds that were deemed to be out of scope). The 11 counties selected for the purposes of this analysis included: Garland County, Arkansas; Routt County, Colorado; Sarasota County, Florida; Polk County, Georgia; Montgomery County, Maryland; Berrien County, Michigan; Middlesex County, New Jersey, Cuyahoga County, Ohio; Indiana County, Pennsylvania; Greenwood County, South Carolina; and Dallas County, Texas. 203 The process of searching deeds across different U.S. counties is challenging from a data perspective. For example, FinCEN’s research found that, in some counties, deeds could only be searched in-person; FinCEN was therefore unable to include these counties in the potential sample. Furthermore, certain other deeds were deemed not relevant for the scope of the rule and hence were excluded. PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 approximately three percent of reportable transaction might have a reporting person other than a settlement agent, title insurer, or attorney. 2. Records Search Currently, law enforcement searches a variety of state and commercial databases (that may or may not include beneficial ownership information), individual county record offices, and/or use subpoena authority to trace the suspected use of criminal proceeds in the non-financed purchase of residential real estate. Even after a significant investment of resources, the identities of the beneficial owners may not be readily ascertainable. This fragmented and limited approach can slow down and decrease the overall efficacy of investigations into money laundering through real estate. This was one reason that FinCEN introduced the Residential Real Estate GTOs, which law enforcement has reported have significantly expanded their ability to investigate this money laundering typology. At the same time, the Residential Real Estate GTOs had certain restrictions that limited its usefulness nationwide. The proposed rule builds on and is intended to replace the Residential Real Estate GTOs framework and creates reporting and recording requirements for specific residential real estate transfers that would apply nationwide. 3. Description of Proposed Requirements a. Transactions The proposed rule does not require residential real estate transfers to be reported if the transfer involves: (i) an extension of credit to the transferee that is secured by the transferred residential real property and is extended by a financial institution that has both an obligation to maintain an AML program and an obligation to report suspicious transactions under this chapter; (ii) a grant, transfer, or revocation of an easement; (iii) a transfer resulting from the death of an owner of residential real property; (iv) a transfer incident to divorce or dissolution of a marriage; (v) a transfer to a bankruptcy estate; or (vi) a transfer that does not involve a reporting person. b. Reporting Persons The proposed rule would require a reporting person, as determined by either the reporting cascade or as pursuant to a designation agreement,204 to complete and electronically file a 204 See discussion of designation agreement, supra Section IV.D.3. E:\FR\FM\16FEP2.SGM 16FEP2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules Real Estate Report containing certain information about the beneficial ownership of the legal entity(ies) or trust(s) involved in the non-financed exchange of residential real property. To facilitate the reporting person’s completion of the required report, the transferee engaged in the non-financed property transfer would need to provide a certified copy of their beneficial ownership information 205 via a form or other attestation to the completeness and accuracy of the reported information. estimates of reasonably anticipated, quantifiable costs to affected parties.208 FinCEN aggregate cost estimates suggest that first year costs will be between approximately $267.3 million and $476.2 million and that the current dollar value of the aggregate costs in subsequent years will be between approximately $245.0 million and $453.9 million annually. FinCEN also invites public comment on these estimates. c. Required Information i. Training FinCEN recognizes that the proposed rule would impose certain costs on businesses positioned to provide services to non-financed residential real property transfers even in the absence of direct participation in a specific covered transaction, including the costs of preparing informational material and training personnel about the proposed rule generally as well as certain firmspecific policies and procedures related to reporting, complying, and documenting compliance. To estimate expected training costs, FinCEN adopted a parsimonious model similar, in certain respects, to the methodology used by FinCEN when publishing the RIA for the 2016 CDD Rule (CDD Rule RIA).209 Taking into consideration, however, that, unlike reporting entities under the CDD rule, only one group of the proposed rule’s affected reporting persons has preexisting experience with other FinCEN The proposed rule would require certain professionals or businesses to report to FinCEN information about the transferor and the transferee behind the residential real estate transfer. This would include information on the legal entity or trust, its beneficial owners, and payment information. The collected information would be maintained by FinCEN in an existing database accessible to authorized users. 3. Expected Economic Effects This section describes the main economic effects FinCEN anticipates the various affected parties identified above 206 may experience. Because the primary value of the proposed rule would be in the extent to which it is able to address or ameliorate the economic problems discussed under the RIA’s broad economic considerations,207 the remainder of this section focuses primarily on the a. Costs to Entities in the Reporting Cascade 12453 reporting and compliance requirements, the estimates of anticipated training time here are revised upward from the CDD Rule RIA to 75 minutes for initial training and 30 minutes for annual refresher training. FinCEN’s method of estimation assumes that an employee who has received initial training once will then subsequently take the annual refresher training each following year. This assumption contemplates that more than half of the original training would not be firm-specific and remains useful to the employee regardless of whether they remain with their initial employer or change jobs within the same industry. As in the CDD Rule RIA high estimate model, FinCEN estimates that two-thirds of untrained employees receive the initial (lengthier) training each year. However, because the initial training is assumed to provide transferrable human capital in this setting, turnover is not relevant to the assignment to initial training in periods following Year 1. Thus, in the revised model, FinCEN calculates annual training costs as the combination of the expected costs of providing two-thirds of the previously untrained workforce per industry 210 with initial (lengthier) training and all previously trained employees with the refresher (shorter) training. Time costs are proxied by an industry-specific fully loaded average wage rate per industry. Table 3 below presents the corresponding per person estimated training costs by primary occupation without adjustment for wage growth. Table 3: Training Costs lotter on DSK11XQN23PROD with PROPOSALS2 Primary Business Categories Title Abstract and Settlement Offices Direct Title Insurance Carriers Other Activities Related to Real Estate Offices of Lawyers Offices of Real Estate Agents and Brokers 205 See description of required transferee beneficial ownership information, supra Section IV.E.6. 206 See Section VII.A.2.b. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 207 See 208 See PO 00000 Refresher (Year 2+) Initial Trainin2: Fully Loaded Hourly Wage Time (hours) Total Time (hours) Total (unadjusted) $70.33 1.25 $87.91 0.5 $35.16 $84.15 1.25 $105.18 0.5 $42.07 $70.46 1.25 $88.07 0.5 $35.23 $88.89 1.25 $111.11 0.5 $44.45 $70.46 1.25 $88.07 0.5 $35.23 Section VII.A.1. Section VII.A.2.b. Frm 00031 Fmt 4701 209 See 81 FR 29397 (May 11, 2016) (codified at 31 CFR 1010.230). 210 As previously grouped by NAICS code, see supra Section VII.A.2.b.ii. Sfmt 4725 E:\FR\FM\16FEP2.SGM 16FEP2 EP16FE24.002</GPH> Estimated Per Person Trainin2: Costs 12454 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules To model industry-specific hiring inflows in periods following Year 1, FinCEN converted the Bureau of Labor Statistics (BLS) projected 10-year cumulative employment growth rates for 2022–2032 211 for the NAICS code mostly closely associated with a given industry available. Additionally, inflation data from the Federal Reserve Bank of St. Louis was utilized to estimate annual wage growth given the opportunity cost of training is assumed to be equivalent to the wage of employees.212 Utilizing these inputs, and summing costs across all industries expected to be affected, FinCEN estimates that the aggregate initial year training costs would be approximately $44.3 million dollars and the undiscounted aggregate training costs in lotter on DSK11XQN23PROD with PROPOSALS2 211 U.S. Bureau of Labor Statistics, Employment Projections, ‘‘Employment by industry, occupation, and percent distribution, 2021 and projected 2031,’’ available at https://data.bls.gov/projections/ nationalMatrix?queryParams=541100&ioType=i (reflects projections for the closest NAICS code, across all occupations, and not on a specific occupation code basis [legal services]); U.S. Bureau of Labor Statistics, Employment Projections, ‘‘Employment by industry, occupation, and percent distribution, 2021 and projected 2031,’’ available at https://data.bls.gov/projections/nationalMatrix? queryParams=524120&ioType=i (direct insurance [except life, health, and medical] carriers); U.S. Bureau of Labor Statistics, Employment Projections, ‘‘Employment by industry, occupation, and percent distribution, 2021 and projected 2031,’’ available at https://data.bls.gov/projections/nationalMatrix? queryParams=531000&ioType=i (real estate). 212 See Federal Reserve Bank of St. Louis, 10-Year Breakeven Inflation Rate (as of July 18, 2023), available at https://fred.stlouisfed.org/series/ T10YIE. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 each of the subsequent years would range between approximately $20.2 and $27.3 million. ii. Reporting The total costs associated with reporting a given non-financed property transaction will likely vary with the specific facts and circumstances of the transfer. For instance, the cost of the time needed to prepare and file a report could differ depending on which party in the cascade is the reporting person because parties receive different compensating wages. The costs associated with the time to determine who is the reporting person will also vary by the number of potential parties who may assume the role and thus might be parties to a designation agreement. FinCEN estimates an average perparty cost to determine the reporting person of 30 (15) minutes for the party that assumes the role if a designation agreement is (not) required and 15 minutes each for all non-reporting parties (assuming each tier in the cascade corresponds to one reporting person). Therefore, the range of potential time costs associate with determining the reporting person is expected to be between 15 to 90 minutes.213 Recently, FinCEN received updated information from parties 213 This upper bound estimate is based on an assumption that, at maximum, five distinct functional roles could be concurrently provided to a reportable transfer. See supra note 186. PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 currently reporting under the Residential Real Estate GTO indicating that the previously estimated time cost of 20 minutes for that reporting requirement was less than half the average time expended per report in practice. Based on this feedback, the filing time burden FinCEN anticipates for the proposed rule accordingly incorporates a 45-minute estimate for the collection and reporting of the subset of Real Estate Report required information that is similar to information in reports filed under the Residential Real Estate GTOs, although FinCEN recognizes that certain transactions may require significantly more time.214 Mindful of these outliers, FinCEN estimates an average 2 hour per reportable transaction time cost to collect and review transferee and transaction-specific reportable information and related documents, and an average 30 minute additional time cost to reporting. Table 4 below presents FinCEN’s estimates of the various potential perparty per-transaction reporting costs associated with a preparing and filing the proposed Real Estate Report. 214 At present, FinCEN is unable to assess the extent to which the underlying distribution of completion times exhibits skew or the extent to which current timing outliers may more accurately represent the associated burden unique to newly affected transactions. FinCEN is therefore requesting additional data via public comments in the event that such data exists and would materially alter the related expected burden estimates below. E:\FR\FM\16FEP2.SGM 16FEP2 12455 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules Table 4: Transaction Reporting Costs Non-Reporting Party Primary Business Categories Title Abstract and Settlement Offices Direct Title Insurance Carriers Other Activities Related to Real Estate Offices of Lawyers Offices of Real Estate Agents and Brokers lotter on DSK11XQN23PROD with PROPOSALS2 DesignationIndependent Time (hours) Total Time (hours) Total Time (hours) Total $70.33 0.25 $17.58 0.25 $17.58 2.75 $193.40 $84.15 0.25 $21.04 0.25 $21.04 2.75 $231.40 $70.46 0.25 $17.61 0.25 $17.61 2.75 $193.76 $88.89 0.25 $22.22 0.25 $22.22 2.75 $244.45 $70.46 0.25 $17.61 0.25 $17.61 2.75 $193.76 iii. Recordkeeping The proposed rule would impose recordkeeping requirements on reporting persons as well as, in certain cases, members of a given reportable transaction’s cascade that are not the reporting person. The primary variation in expected recordkeeping costs would flow from the conditions under which the reporting person has assumed their 215 This estimate assumes the lowest number of cascade participants (1), the lowest number of estimated annual transfers (800,000), reported by the entity with the lowest estimated wage rate ($70.33/hr.). 216 This estimate assumes the maximum number of cascade participants (five (see note 186), each compensated at .25 times their respective average wage rate), the highest number of estimated annual transfers (850,000), reported by the entity with the highest estimated wage rate ($89.88/hr.). 18:00 Feb 15, 2024 DesignationRelated Fully Loaded Hourly Wage Based on the range of expected reportable transactions and the wages associated with different persons in the potential reporting cascade, FinCEN anticipates that the proposed rule’s reporting costs may be between approximately $158.2 million 215 and $314.2 million.216 Because FinCEN expects reporting persons to be able to rely on technology previously purchased and already deployed in the ordinary course of business (namely, computers and access to the internet) to comply with the proposed reporting requirements, no line item of incremental expected IT costs has been ascribed to reporting. VerDate Sep<11>2014 Designation-Related Reporting Party Jkt 262001 role. Additional variation in costs may result from differences in the dollar value assigned to the reporting person’s time costs as a function of their primary occupation.217 If the reporting person assumes the role as a function of their position in the proposed reporting cascade, this would imply that no meaningfully distinct person involved in the transfer provided the preceding service(s). In this case, the reporting person’s recordkeeping requirements would be limited to the retention of compliance documents (such as the transferee’s certification of beneficial ownership information) for a period of five years in a manner that preserves ready availability for inspection as authorized by law.218 Recordkeeping costs would therefore include those associated with creating and/or collecting the necessary documents, storing the records in an accessible format, and securely disposing of the records after the required retention period has elapsed. FinCEN anticipates that over the full recordkeeping lifecycle, each reportable transaction would, on average, require one hour of the reporting person’s time, as well as a record processing and maintenance cost of ten cents. Because FinCEN expects that records will primarily be produced and recorded electronically and estimates its own processing and maintenance costs at ten cents per record, it has applied the same expected cost per reportable transaction to reporting persons.219 On aggregate, this would result in recordkeeping costs between approximately $56.3 million and $75.6 million associated with one year’s reportable transactions. If the reporting person has instead assumed the role as the result of a designation agreement, the proposed rule would impose additional recordkeeping requirements on both the reporting person and at least one other member of the proposed reporting cascade. This is because the existence of a designation agreement implies the existence of one or more distinct alternative parties to the reportable transaction that provided a preceding service or services as described in the proposed cascade. While the proposed rule only stipulates that ‘‘the person who would otherwise be the reporting person but for the agreement’’ would also be anticipated to incur recordkeeping costs, FinCEN expects the minimum number of additional parties required to retain a readily accessible copy of the designation 217 See discussion of reporting entity hourly wage rates, supra Section VII.A.2.b.ii. 218 See discussion of recordkeeping requirements, supra Section IV.G; see also proposed amendment 31 CFR 1031.320(l). 219 This is based on the assumption that reporting persons may face comparable market rates for the same technological services. However, FinCEN invites the public to provide additional data on the market rates faced by potentially affected parties. PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 E:\FR\FM\16FEP2.SGM 16FEP2 EP16FE24.003</GPH> Estimated Per Transaction Reporting Costs 12456 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules agreement for a five-year period would, in practice, depend on the number of alternative reporting parties servicing the transaction in a capacity that precedes the designated reporting person’s in the proposed cascade, as it would otherwise be difficult to demonstrate the prerequisite sequence of conditions were met to establish the ‘‘but for’’ of the proposed requirement. Conservatively assuming that each service in the proposed cascade is provided by a separate party, this would impose an incremental recordkeeping cost on at least two parties per transaction and at most five.220 Because FinCEN estimates of reporting costs already assign the costs of preparing a designation agreement to the reporting person (when a transaction includes a designation agreement), the incremental recordkeeping costs it estimates here pertain solely to the electronic dissemination, signing, and storage of the agreement. This is assigned an average time cost of five minutes per signing party to read and sign the designation agreement, as well as a tencent record processing and maintenance cost per transaction. Thus, designation agreement-specific recordkeeping costs are expected to include a time cost of 10–50 minutes (assuming one signing party per tier of the cascade) and $0.20– $0.50 per reportable transaction that involves a designation. This corresponds to expected annual aggregate costs ranging from approximately $9.5 million 221 to $28.6 million.222 FinCEN notes that it assumes that rational parties to a reportable transaction would not enter into a designation agreement if the expected cost of doing so, including compliance with the proposed recordkeeping requirements, were not elsewhere compensated in the form of efficiency gains or other offsetting cost savings associated with other components of compliance with the proposed rule, such as training or reporting costs. As such, the estimates provided here should only be taken to reflect a pro forma accounting cost. Table 5 below presents FinCEN’s estimates of the various potential perparty per-transaction costs associated with the proposed Real Estate Report recordkeeping requirements. Table 5: Recordkeeping Costs Per Party Non-Reporting Party Primary Business Categories Fully Loaded Hourly Wage DesignationRelated Time (minutes) Total* Reporting Party DesignationRelated Time (minutes) DesignationIndependent Total* Time (hours) Title Abstract and $70.33 5 $5.96 5 $5.96 1 Settlement Offices Direct Title $84.15 5 $7.11 5 $7.11 1 Insurance Carriers Other Activities Related to Real $70.46 5 $5.97 5 $5.97 1 Estate $88.89 5 $7.51 5 $7.51 1 Offices of Lawyers Offices of Real Estate Agents and $70.46 5 $5.97 5 $5.97 1 Brokers * Total Record.keeping cost estimates include both labor (wages) and technology costs ($0.10) lotter on DSK11XQN23PROD with PROPOSALS2 b. Government Costs To implement the proposed rule, FinCEN expects to incur certain operating costs that would include approximately $8.5 million in the first year and approximately $7 million each year thereafter. These estimates include anticipated novel expenses related to 220 See supra note 186. estimate assumes the lowest estimated number of annual transfers occurs and that the designation agreement is between only the two reporting persons with the lowest and second lowest hourly wage rate. 221 This VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 Total* (unadjusted) $70.43 $84.25 $70.56 $88.99 $70.56 technological implementation,223 stakeholder outreach and informational support, compliance monitoring, and potential enforcement activities as well as certain incremental increases to preexisting administrative and logistic expenses. While such operating costs are not typically considered part of the general economic cost of a proposed rule, FinCEN acknowledges that this treatment implicitly assumes that resources commensurate with the novel operating costs exist. If this assumption does not hold, then operating costs 222 This estimate assumes the highest estimated number of annual transfers occurs and that all members of the cascade (compensated at their respective average wage rates) are party to the designation agreement. 223 Technological implementation for a new reporting form contemplates expenses related to development, operations, and maintenance of system infrastructure, including design, deployment, and support, such as a help desk. It includes an anticipated processing cost of $0.10 per submitted Real Estate Report. PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 E:\FR\FM\16FEP2.SGM 16FEP2 EP16FE24.004</GPH> Estimated Per Transaction Recordkeeping Costs Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules associated with a rule may impose certain economic costs on the public in the form of opportunity costs from the agency’s forgone alternative activities and those activities’ attendant benefits. Putting that into the context of this proposed rule, and benchmarking against FinCEN’s actual appropriated budget for fiscal year 2022 ($161 million),224 the corresponding opportunity cost would resemble forgoing approximately five percent of current activities annually. 4. Economic Consideration of Policy Alternatives a. Proposed Requirements Without the Option To Designate Instead of the rule as proposed, FinCEN could have required the reporting person to be determined strictly by the reporting cascade without an option to designate. Given the expectation that rational parties to a transaction would prefer to assign tasks to the party for whom it is least costly to complete, this alternative could only have been as cost effective as the proposed approach (which includes the option to designate) in the event that the reporting cascade would otherwise always assign requirements to the party with the lowest associated compliance costs. In all other cases, the alternative would be more costly. FinCEN therefore declined to propose a standalone reporting cascade. lotter on DSK11XQN23PROD with PROPOSALS2 b. Traditional SAR and AML Program Requirements Instead of the proposed streamlined reporting requirement, FinCEN could have proposed to impose the full traditional SAR and AML program requirements on the various real estate professionals included in the proposed reporting cascade. While this would almost certainly lead to the production of significantly more reports, and hence, potentially more transaction-related information available to law enforcement, the costs accompanying this alternative would be commensurately more significant and would likely disproportionately burden small businesses. Such weighting of costs towards smaller entities could increase transaction costs associated with residential real property transactions both directly via programrelated operational costs and indirectly via the potential anticompetitive effects of program costs. 224 FinCEN, Congressional Budget Justification and Annual Performance Plan and Report FY 2024 (2023), available at https://home.treasury.gov/ system/files/266/15.-FinCEN-FY-2024-CJ.pdf. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 c. Alternative Certification Requirements Instead of allowing the transferee legal entity or trust to certify to the reporting person that the beneficial ownership information they have provided is accurate to the best of their knowledge, FinCEN could have required the reporting person to certify the transferee’s beneficial ownership information. This alternative would likely be accompanied by a number of increased costs, including a potential need for longer, more detailed compliance training, lengthier time necessary to collect and review documents supporting the reported transferee beneficial ownership information required, and increased recordkeeping costs. There may also be costs associated with transactions that might not occur, if for example, a reporting person is unwilling or unable to certify the transferee’s information. If certain reporting persons are better positioned to absorb the risks associated with certifying transferee beneficial ownership information, this could also have an anticompetitive effect. In this scenario, it is foreseeable that smaller businesses could be at a disadvantage. B. Executive Orders 12866, 13563, and 14094 Executive Orders 12866, 13563, and 14094 (E.O. 12866 and its amendments) direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, and public health and safety effects; distributive impacts; and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. E.O. 13563 also recognizes that some benefits are difficult to quantify and provides that, where appropriate and permitted by law, agencies may consider and discuss qualitatively values that are difficult or impossible to quantify.225 This proposed rule has been designated a ‘‘significant regulatory action;’’ accordingly, it has been reviewed by the Office of Management and Budget (OMB). 225 Executive Order 13563, 76 FR 3821 (Jan. 21, 2011), section 1(c) (‘‘Where appropriate and permitted by law, each agency may consider (and discuss qualitatively) values that are difficult or impossible to quantify, including equity . . . and distributive impacts.’’) PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 12457 C. Regulatory Flexibility Act When an agency issues a rulemaking proposal, the RFA 226 requires the agency either to provide an initial regulatory flexibility analysis (IRFA) with a proposed rule or certify that the proposed rule would not have a significant economic impact on a substantial number of small entities. Although this proposed rule might apply to a substantial number of small entities, it is nonetheless not expected to have a significant economic impact given that FinCEN has attempted to minimize the burden on reporting persons by streamlining the reporting requirements and providing for an option to designate the reporting person. Accordingly, FinCEN certifies that the proposed rule would not have a significant economic impact on a substantial number of small entities. The basis for doing so is discussed in further detail below. 1. Estimate of the Number of Small Entities to Whom the Proposed Rule Will Apply As discussed above,227 the proposed rule would apply to a variety of individuals and employers in real estate-related businesses 228 insofar as such persons facilitate specifically nonfinanced transfers of residential property.229 The extent to which the proposed rule would apply to a person or business is therefore contingent on the extent to which they provide one of the services enumerated in the proposed reporting cascade 230 to a nonexempt,231 non-financed 232 transfer of residential property 233 to a transferee entity 234 or transferee trust.235 Because the rule proposes to introduce a streamlined reporting 226 5 U.S.C. 601 et seq. Section VII.2.b.ii. 228 FinCEN acknowledges that because non-profit organizations are not exempt as transferees, certain small non-profits may also be affected by the proposed rule if they engage in the non-financed transfer of residential property. However, because non-profit organizations are typically accustomed to preparing and maintaining governing documents and financial records for accountability purposes (e.g., with donors, to maintain tax-status, or for state regulatory purposes), it is generally expected that the beneficial ownership information that would need to be collected and provided to a reporting person would be relatively inexpensive to repackage for purposes of compliance with the proposed rule. 229 The proposed rule would not impose the full traditional SAR and AML program requirements on such businesses. See Section VII.A.5.b. 230 See Section IV.D.1. 231 See Section IV.C.2; see also Section IV.C.4; see also Section IV.C.5; see also Section VII.A.2.c.i. 232 See Section IV.C.1. 233 See Section IV.A.1. 234 See Section IV.B.1; see also Section IV.B.3. 235 See Section IV.B.2. 227 See E:\FR\FM\16FEP2.SGM 16FEP2 12458 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules requirement that is transaction-specific and tailored to a relatively small subset 236 of residential property transfers, and because only one member of the proposed reporting cascade would be required to file the proposed Real Estate Report per reportable transfer, the estimates below of the total potential number of small entities to whom the rule would apply will necessarily exceed the number of small entities that in practice will likely be affected by the rule, possibly by an order of magnitude or more. As previously explained,237 the proposed obligation to file a Real Estate Report follows a cascade stratified by the services provided to each non-financed residential transfer uniquely, not the primary occupation of the person providing the service. Therefore, while each tier of the proposed reporting cascade has, for purposes of estimating the broadest extent of persons to whom the rule could apply,238 been mapped to a primary business category, this should not be misinterpreted as an expectation that each business in each enumerated primary business category provides the specific services to the specific transactions that would trigger a compliance requirement under the proposed rule. FinCEN does not currently have comprehensive or reliable data from which to more generally 239 and accurately parse small lotter on DSK11XQN23PROD with PROPOSALS2 236 See Section VII.A.2.b.i.1; see also Section VII.A.2.C.i. 237 See description of services provided by cascade tier, supra Section IV.D.1; see also explanation of mapping services to primary occupation data, supra Section VII.A.2.b.ii. 238 Measured as all persons who by virtue of primary occupation could foreseeably provide at least one service identified in the cascade. 239 For example, in FinCEN’s deed analysis (see Section VII.A.2.c.iii.1), only three of one hundred transfers that would have been reportable under the proposed rule did not involve a settlement agent, VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 businesses that theoretically could, in the ordinary course of business, provide a cascade-identified service to a transfer deemed reportable from those small businesses that do so in practice, but welcomes public comments that would inform such an exercise.240 The number of small entities to whom the proposed rule would apply is additionally sensitive to both how firm size is determined and the vintage of data used for the estimates. As illustrated in the footnotes to Table 6 below, while the consensus across data sources and methodological approaches is that an upper bound of potentially affected small entities includes approximately 160,800 firms (by the following primary business classifications: approximately 6,300 Title and Settlement Agents, 800 Direct Title Insurance Carriers, 18,000 persons performing Other Activities Related to Real Estate, 15,700 Offices of Lawyers, and 120,000 Offices of Real Estate Agents and Brokers), the point estimates differ non-trivially by how ‘small’ is operationally defined, and do not do so unidirectionally 241 across methodologies and data sources. The differences between the smallest and title insurer, or attorney, suggesting that in most transactions a person primarily employed in other activities related to real estate, a real estate agent or broker, and their businesses may be unlikely to become the reporting person on a reportable transfer and thereby be affected by the proposed rule. However, because that finding speaks to the proportion of transactions that involved services from categories of primary business and not the proportion of businesses that provide cascadeidentified services to reportable transfers, FinCEN declines to make conclusive inferences from that study for this purpose of estimating the population of affected businesses. 240 See Section VII.F. 241 Meaning that no method of operationalizing the term ‘small’ or vintage of data consistently yields either the smallest or the largest numerical value of the population estimate. PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 largest estimated values per industry group can lead to small business impact analyses that differ in anticipated magnitudes of effect by over 28,900 firms collectively, meaning that an incremental change of $100 in cost per firm could vary in aggregate estimated impact on small businesses by almost $3 million. Because estimates of aggregate economic effects can thus depend to such an extent on methodological choices rather than business fundamentals, FinCEN instead considered economic effects estimated and presented at a per-firm by primary business category level of analysis as more informative. The following table (Table 6) further illustrates the extent to which an estimate of the population of potentially affected small entities depends on how the term ‘small’ is defined, as operationalized over the most recent vintages of data available from the Census Bureau,242 but it can also be used to approximate potential aggregate economic effects as a function of the per-firm cost analysis below while allowing the reader greater flexibility to impose the assumptions about the extent to which various small businesses would be implicated by the proposed rule, as each deems most reasonable. BILLING CODE 4810–02–P 242 For estimates based on the number of employees, FinCEN used the 2021 SUSB Annual Data Tables by Establishment Industry. U.S. Census Bureau, 2021 SUSB Annual Data Tables by Establishment Industry (Nov. 27, 2023), available at https://www.census.gov/data/tables/2021/econ/ susb/2021-susb-annual.html. For receipts databased estimates, FinCEN used the 2017 SUSB Annual Data Tables by Establishment Industry. U.S. Census Bureau, 2017 SUSB Annual Data Tables by Establishment Industry (May 2021), available at https://www.census.gov/data/tables/2017/econ/ susb/2017-susb-annual.html. E:\FR\FM\16FEP2.SGM 16FEP2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules 12459 Table 6: Proportion of Potentially Affected Small Entities by Definition of' Small' Firms Deemed 'Small' as Defined by Primary Business Categories NAICS Code Title Abstract and Settlement Offices Direct Title Insurance Carriers Other Activities Related to Real Estate Offices of Lawyers Offices of Real Estate Agents and Brokers Maximum <20 Annual Receipts Employees for 'Small' in 2021b Desif[flationa <500 Employees in 2021 Average Receipts below SBA threshold in 2017c 541191 $19.5 million 90.89% 97.29% 99.24% 524127 $47 million 90.05% 99.87% 95.35% 531390 $19.5 million 97.00% 99.70% 99.09% 541110 $15.5 million 95.45% 99.87% 99.32% 531210 $15 million 98.85% 99.90% 99.64% • 13 CFR 121.201. bThese estimates correspond to the following number of firms as reported in the SUSB 2021 data (<20, <500): Title and Abstract Settlement Offices, 6.023 and 6,571, respectively; Direct Title Insurance Carriers, 796 and 865, respectively; Other Activities Related to Real Estate, 18,185 and 18,692, respectively; Offices of Lawyers, 15,308 and 16,017, respectively; and Office of Real Estate Agents and Brokers, 128,951 and 130,331, respectively. 0 Data on firm receipts is only available in years that end in two or seven; to utilize SBA receipts thresholds, 2017 survey data is the most recent usable vintage. These estimates correspond to the following number of firms as reported in the SUSB 2017 data: Title Abstract and Settlement Offices (6,782), Direct Title Insurance Carriers (738), Other Activities Related to Real Estate (15,474), Offices of Lawyers (16,262), and Offices of Real Estates Agents and Brokers (106,461). At this time, it is unclear how individual small entities or categories of small entities may choose to respond to the proposed rule, as a broad range of potentially optimal behaviors and outcomes are possible. FinCEN has carefully considered the economic impact associated with the spectrum of possible scenarios a small entity might face and summarizes its expectations of economic impacts in the paragraphs below. To preliminarily clarify why certain costs are presented on a per-firm basis while others are presented per transaction, it is important to keep the distinction in mind between the anticipated costs of compliance, like training, that are independent of participation in reporting activity and those that are transaction-based, or conditional, on participation in a 243 See reportable transfer, like reporting and recordkeeping. Further, and within transaction-based costs, there are costs incurred by the reporting person that are independent of a designation agreement, costs incurred by the reporting person only when a designation agreement exists, and costs incurred by nonreporting persons when a designation agreement exists.243 The table below (Table 7) presents FinCEN estimates of the average annual payroll costs per employee at each of the types of small entities to whom the proposed rule would apply. This data provides a benchmark against which the anticipated costs of the proposed rule can be compared. FinCEN believes that an assessment of economic impact relative to individual payroll expenses is more appropriate for the purposes of this exercise because an analysis alternatively based on business receipts would need to rely upon the most recent SUSB that includes revenue data. That survey is approximately seven years old and predates the impacts of the COVID– 19 pandemic on the residential real estate market, the market which is the specific domain to which the proposed rule would apply. Payroll data is available for more recent vintages of the survey and is therefore more likely to reflect the number, distribution, and labor costs of the businesses to whom the proposed rule would apply. Furthermore, because estimated costs have been presented at a per-employee and per-transaction level throughout the RIA, FinCEN expects that the individual business reading the analysis, and best apprised of its own annual revenues, should have the requisite pieces of information necessary to individually assess the potential impact relative to its own unique facts and circumstances. Section VII.A.4.a. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 E:\FR\FM\16FEP2.SGM 16FEP2 EP16FE24.005</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 2. Expectations of Impact 12460 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules Table 7: Average Annual Payroll Expense per Employee at Small Entity by Primary Business Primary Business Categories Title Abstract and Settlement Offices Direct Title Insurance Carriers Other Activities Related to Real Estate Offices of Lawvers Offices of Real Estate Agents and Brokers Average Payroll/Number of Employees by Operational Definition of 'Small' Average Receipts <20 Employees <500 Employees below SBA (2021, (2021, threshold unadjusted) unadjusted) (2017, unadjusted) NAICS Code Maximum Annual Receipts for 'Small' Designation a 541191 $19.5 million $56,759.15 $63,006.04 $57,719.33 524127 $47 million $61,332.52 $77,798.41 $59,706.51 531390 $19.5 million $75,867.45 $83,902.18 $94,179.03 541110 $15.5 million $73,259.85 $90,790.19 $98,885.14 531210 $15 million $59,335.71 $61,692.48 $61,693.20 BILLING CODE 4810–02–C lotter on DSK11XQN23PROD with PROPOSALS2 a. Scenario 1: Little to No Effect Some small entities can reasonably be expected to experience little to no economic impact from the rule. The kinds of small entities that would face this scenario include both those unaffected because they ex ante do not participate in reportable transfers and those that ensure they do not ex post. Among other examples, this would be the case for all small entities that, in the ordinary course of business, do not provide services to the non-financed transfers of residential property to which the proposed rule pertains. FinCEN notes that, at present, there is no comprehensive data regarding the distribution of cascade-identified services used in connection with the proposed reportable transfers that is organized by firm size of the service providers and their primary business categories. It is therefore not known if, for example, the majority of parties to the proposed reportable transfers have historically obtained services from VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 predominantly larger firms in a given industry. While some evidence on the market concentration of title insurers suggests this might be the case for their services in real estate transactions more generally,244 it is unclear how transferable that observation would be to non-financed transactions exclusively. In cases where a small business in one of the identified primary business categories does not participate in non-financed, non-exempt transfers of residential property to a transferee entity or transferee trust, the proposed rule would not apply, and therefore no costs associated with training, reporting, or recordkeeping would be incurred. Alternatively, some small entities to whom the proposed rule would apply 244 A recent article indicated that the top ten title insurers in 2022 enjoyed an 88.4 percent market share. See American Land Title Association, ALTA Reports Full-Year, Q4 2022 Title Insurance Premium Volume (May 8, 2023), available at https://www.prnewswire.com/news-releases/altareports-full-year-q4-2022-title-insurance-premiumvolume-301817499.html. PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 (based on the previous provision of services to transactions that would become reportable) might, in light of the reporting requirement, preemptively adopt a business policy of not providing services to non-financed residential property transfers or otherwise form arrangements to ensure they do not become the reporting person. This would allow them to similarly forgo the need to implement training programs or incur compliance costs related to reporting or recordkeeping to the same extent as those small businesses who had never previously facilitated the proposed newly reportable transfers. Admittedly, these strategies may not be entirely cost-free as certain firms may incur some costs in the form of forgone transactions. Additionally, there may also be some transaction costs to forming the kinds of alternative arrangements, external business agreements, or partnerships necessary to ensure reportable transfers remain substantially unaffected, as desired. In many cases, FinCEN contemplates that a small business may ensure E:\FR\FM\16FEP2.SGM 16FEP2 EP16FE24.006</GPH> "13 CFR 121.201. Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules accordingly via relatively informal arrangements, such as verbally (or else, absent formal consideration), with longstanding providers of contemporaneous closing services to the types of residential property transactions that would otherwise require the small business to file a Real Estate Report under the proposed rule. While such arrangements might be formed at the minimal cost of a short phone call or in the course of an informal conversation, all of which would be considered de minimis costs, other forms of agreement might be more costly to certain small businesses. FinCEN notes that in keeping with the general principle of Coase Theorem,245 nothing prevents potential private bargaining arrangements by which an otherwise obligated reporting person might transfer the bulk of their responsibilities via an ex ante agreement to compensate their respective counterparty’s costs associated with a designation agreement,246 either via performance of the related documentation exercise or via financial consideration commensurate with the designation agreement-specific costs. A more detailed estimate of such costs is articulated in the scenario analysis that follows. b. Scenario 2: Partial Effect Other small entities may only be marginally affected. These kinds of small entities may include some that already have experience reporting under lotter on DSK11XQN23PROD with PROPOSALS2 245 See R.H. Coase, ‘‘The Problem of Social Cost,’’ The Journal of Law and Economics, vol. 3 (Oct. 1960). While Coase Theorem traditionally pertains to the resolution of externality problems by private parties given an initial allocation of property rights, the principle is expected in this context to apply similarly to the assignment of the proposed reporting requirement (and related costs) between businesses servicing a reportable transfer given an original assignment of the reporting responsibility. 246 See discussion of designation agreement specific recordkeeping costs, supra Section VII.A.4.a.iii. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 the Residential Real Estate GTO to the extent that such title insurers qualify as ‘small.’ 247 Such entities already have expended resources to establish a compliance infrastructure, and given the similarities between the requirements under the Residential Real Estate GTOs and the requirements that would be imposed under the proposed rule, some of those costs would not to be replicated to comply with the proposed rule. Therefore, the economic impact of the proposed rule on such entities will likely be less than it would be for entities who are not currently subject to the Residential Real Estate GTOs. The category of marginally affected small entities would also include entities that are categorically unlikely to become the reporting person when participating in reportable transfers. For example, small entities that facilitate a reportable transaction along with other members of the reporting cascade may, by the nature of the service they provide, always reside in a tier below other service-providing entities and/or because of being further removed from the details required for the proposed Real Estate Report, may be unlikely to be designated in place of higher tier cascade members. Similarly, the nature of the service they provide may make it less likely that a reportable transfer occurs in which their service is the only third-party service obtained. As such, the main costs incurred as a consequence of the proposed rule would be associated with training,248 which would still be necessary to ensure proper recordkeeping 249 associated with designation agreements and preparedness for reporting 250 in the rare 247 See Section II.B.3; see also Section VII.A.1.a.i. Table 3; see generally Section VII.A.4.a.i. 249 See Section VII.G; see also discussion of recordkeeping costs, supra Section VII.A.4.a.iii; see also discussion of recordkeeping costs, infra Section VII.C.2.c and Table 11. 250 See Section VII.E; see also discussion of expected reporting costs, supra Section VII.A.4.a.ii; 248 See PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 12461 event either is required. FinCEN notes that, as proposed, no designation agreement with a lower-tier service provider is required if a higher-tier party to a transaction files the required Real Estate Report, and entities in tiers lower than the reporting person are not required to verify or document verification that the higher-tier party filed the report. Therefore, to the extent that a marginally affected small entity of the type described here incurs reporting 251 or recordkeeping costs,252 it would only be in instances where the tiers above it were absent from a deal, in which case it may still have the ability to designate the reporting requirements if lower tier services are being provided by an additional party to the transaction. For small entities whose primary costs burden will be associated with employee training, such costs would represent an increase in payroll expense of approximately 0.2 percent per trained employee (see Tables 8 and 9 below, derived from Tables 3 and 7 above). Such a change is not expected to be economically significant. FinCEN further notes that while its RIA incorporates estimates that are informed by the previous CDD model of how training is operationalized, the proposed rule itself is silent on the manner, format, and duration of training, and the proportion of a business’s workforce that needs to be trained. Therefore, to the extent that a small business may effectively train a sufficient proportion of its workforce to the necessary degree of familiarity with the proposed rule’s reporting requirements to ensure appropriate compliance at costs lower than FinCEN estimates, it is expected to do so at its discretion. BILLING CODE 4810–02–P see also discussion of reporting costs, infra Section VII.C.2.c and Table 10. 251 Id. 252 Supra, note 250. E:\FR\FM\16FEP2.SGM 16FEP2 12462 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules Table 8: Initial Training Costs as a Fraction of Payroll Average Payroll/Number of Emolovees 'Small' as Defined by Per Person Initial Training Costs as a Fraction of Individual Annual Payroll Expense Primary Employment Title Abstract and Settlement Offices Direct Title Insurance Carriers Other Activities Related to Real Estate Offices of Lawyers Offices of Real Estate Agents and Brokers a NAICS Code Maximum Annual Receipts for 'Small' Designation Average < 20 < 500 Receipts Employees Employees below SBA threshold a (2021) (2021) (2017) 541191 $ 19.5 million 0.15% 0.14% 0.15% 524127 $ 47 million 0.17% 0.14% 0.18% 531390 $ 19.5 million 0.12% 0.10% 0.09% 541110 $ 15.5 million 0.15% 0.12% 0.11% 531210 $ 15 million 0.15% 0.14% 0.14% 13 CFR 121.201. Table 9: Refresher Training Costs as a Fraction of Payroll Per Person Refres her Training Costs (Unadjusted) as a Fraction of Individual Annual Payroll Expense Primary Employment NAICS Code Maximum Annual Receipts for 'Small' Designation < 20 Employees (2021, unadjusted) < 500 Employees (2021, unadjusted) Average Receipts below SBA threshold a (2017, unadjusted) 541191 $ 19.5 million 0.06% 0.06% 0.06% 524127 $ 47 million 0.07% 0.05% 0.07% 531390 $ 19.5 million 0.05% 0.04% 0.04% 541110 $ 15.5 million 0.06% 0.05% 0.04% 531210 $ 15 million 0.06% 0.06% 0.06% 13 CFR 121.201. c. Scenario 3: Full Effect The small entities that would be most affected are those that would, as a consequence of the proposed rule, incur VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 the full reporting requirement with certainty. This could occur because no other members of the proposed reporting cascade participate in a given reportable PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 transfer or because, when other cascade members participate in a reportable transfer, no designation agreement reassigns the reporting requirement away from the small entity. In this E:\FR\FM\16FEP2.SGM 16FEP2 EP16FE24.008</GPH> a 'Small' as Defined by EP16FE24.007</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Title Abstract and Settlement Offices Direct Title Insurance Carriers Other Activities Related to Real Estate Offices of Lawyers Offices of Real Estate Agents and Brokers Average Payroll/Number of Employees 12463 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules scenario, the small entity would incur the full or near full expected costs associated with training, reporting, and recordkeeping.253 Tables 10 and 11 below indicated that this would introduce a cost comparable to an approximately 0.5 percent increase in average small entity annual payroll expense for one employee per transaction.254 Table 10: Reporting Costs as a Fraction of Payroll Per Transaction Reporting Costs as a Fraction of Individual Annual Payroll Expense Primary Employment bl) .s I t: &p ~,A.. = Cl! z0 ="cl .9 ti:i = jg bl) (I) (I) ·;i ~ (I) 0 I ="cl .9 ti:i = jg -~~ (I) (I) ~ ·-e= A,; 0 bl) 0 0.. ~ I_..., § 5 -~-g = 0.. "cl o-= bl) ·- 00 (I) (I) (I) 0.03% 0.03% 0.03% 0.03% 0.03% 0.03% Direct Title Insurance Carriers Other Activities Related to Real Estate 0.03% 0.02% 0.03% 0.02% 0.04% 0.02% Offices of Lawyers Offices of Real Estate Agents and Brokers Title Abstract and Settlement Offices 0.03% 0.02% 0.02% 0.03% 0.03% 0.03% 0.34% 0.31% 0.34% Direct Title Insurance Carriers 0.38% 0.30% 0.39% Other Activities Related to Real Estate Offices of Lawyers Offices of Real Estate Agents and Brokers 0.26% 0.33% 0.23% 0.27% 0.21% 0.25% 0.33% 0.31% 0.31% 13 CFR 121.201. 253 In the event that the small entity is the reporting person because no other person described in the cascade is involved in the transfer, costs are reduced by the absence of additional time needed to determine the reporting person and the absence VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 of time associated with the preparation, circulation, and recordkeeping associated with a designation agreement. 254 FinCEN notes that because the proposed rule is intended to replace the current Residential Real PO 00000 Frm 00041 Fmt 4701 Sfmt 4725 Estate GTOs reporting requirement, framing the expected economic impact in terms of cost increases may overstate the anticipated incremental burden of compliance, particularly for small direct title insurance carriers. E:\FR\FM\16FEP2.SGM 16FEP2 EP16FE24.009</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 a Title Abstract and Settlement Offices Direct Title Insurance Carriers Other Activities Related to Real Estate Offices of Lawyers Offices of Real Estate Agents and Brokers Title Abstract and Settlement Offices Average Payroll/Number of Employees 'Small' as Defined by Average <20 < 500 Receipts Employees Employees below SBA threshold a (2021, (2021, unadjusted) unadjusted) (2017, unad;usted) 0.03% 0.03% 0.03% 0.03% 0.03% 0.04% 0.02% 0.02% 0.02% 0.03% 0.02% 0.02% 12464 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules Table 11: Recordkeeping Costs as a Fraction of Payroll Per Transaction Total Recordkeeping Costs as a Fraction of Individual Annual Payroll Expense Primary Employment oJ) -~ &e ~ ro ,P... = z 0 ="C .9 t,j =jg -~~ (l) I (l) Cl ="C .9 t,j =jg -~~ (l) I (l) ~ p... Cl gJl ·-e0 ="El 0. ~ 0 = 0. ~ ..s oJ) ..... fl) a (l) -~-g (l) (l) "C Title Abstract and Settlement Offices Direct Title Insurance Carriers Other Activities Related to Real Estate Offices of Lawyers Offices of Real Estate Agents and Brokers Title Abstract and Settlement Offices Average Payroll/Number of Employees 'Small' as Defined by Average <20 < 500 Receipts Employees Employees below SBA threshold a (2021, (2021, unadjusted) unadjusted) (2017, unadiusted) 0.011% 0.009% 0.010% 0.012% 0.009% 0.012% 0.008% 0.007% 0.006% 0.010% 0.008% 0.008% 0.010% 0.010% 0.010% 0.011% 0.009% 0.010% Direct Title Insurance Carriers Other Activities Related to Real Estate 0.012% 0.008% 0.009% 0.007% 0.012% 0.006% Offices of Lawyers Offices of Real Estate Agents and Brokers Title Abstract and Settlement Offices 0.010% 0.008% 0.008% 0.010% 0.010% 0.010% 0.12% 0.11% 0.12% Direct Title Insurance Carriers 0.14% 0.11% 0.14% Other Activities Related to Real Estate Offices of Lawyers Offices of Real Estate Agents and Brokers 0.09% 0.12% 0.08% 0.10% 0.07% 0.09% 0.12% 0.11% 0.11% 13 CFR 121.201. lotter on DSK11XQN23PROD with PROPOSALS2 BILLING CODE 4810–02–C Alternatively, a small entity, for reasons of its own, might adopt a business policy to always be the reporting person on reportable transactions. In this case it would incur the incremental additional costs associated with preparing 255 and circulating a designation agreement 256 whenever higher-tier parties to the transaction participate but its cost profile would otherwise resemble the other types of ‘full effect’ small entities. The economic impact does not appear to be significant in these cases, which would be expected to impose the highest costs.257 255 See description of designation agreement time costs, supra Section VII.A.4.a.ii. 256 See description of designation agreement time and technology costs, supra Section VII.A.4.a.iii; see also Table 8. 257 Because the RFA does not statutorily define ‘‘significant’’ the SBA has acknowledged that what VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 While the general consensus of this analysis across the potential scenarios that a small business could find itself in, as a consequence of the proposed rule, is that the related incremental costs are not likely to be economically significant, it may also be worth nothing that an economically significant cost generally need not imply that the economic impact on a given firm or is ‘‘significant’’ will vary depending on the economics of the industry or sector to be regulated. The agency is in the best position to gauge the small entity impacts of its regulations.’’ See Small Business Administration, How to Comply with the Regulatory Flexibility Act (updated Aug. 2017), page 18available at https://advocacy.sba.gov/wpcontent/uploads/2019/06/How-to-Comply-with-theRFA.pdf. Nevertheless, it has suggested that one potentially appropriate measure of an economically significant impact is one that ‘‘exceeds 5 percent of the labor costs of the entities in the sector.’’ Id. p 19. FinCEN analysis here identifies a maximum average per transaction cost of approximately 0.5 percent, which is a full order of magnitude smaller than the proposed SBA threshold. PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 industry would also be significant. While that could be the case, the former is not a sufficient condition for the latter. Because a non-financed residential property transfer involving one or more potential reporting persons, unless exempt, must be reported, the parties between whom the ownership transfers may have relatively little bargaining power over the extent to which incremental costs related to the proposed rule are passed-through. Parties may have few viable alternatives to compensating the reporting person for its additional compliance-related services other than to conduct the transaction with no reporting persons involved in the transfer. This may be undesirable to the parties engaged in the transfer for a number of risk and/or convenience-related reasons that outweigh the marginal increase in transaction fees. As such, even in a E:\FR\FM\16FEP2.SGM 16FEP2 EP16FE24.010</GPH> * Total Recordkeeping cost estimates include both labor (wages) and technology costs ($0.10) Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules scenario under which small entities would face the highest incremental costs,258 it still may not be the case that the direct economic impact on these small entities will be significant. 3. Certification Having considered the various possible outcomes (as grouped above by scenarios FinCEN anticipates as most likely) for small entities under the proposed reporting requirements, FinCEN certifies that the rule, if promulgated, will not have a significant economic impact on a substantial number of small entities. FinCEN invites comments from members of the public. D. Unfunded Mandates Reform Act Section 202 of the UMRA 259 requires that an agency prepare a statement before promulgating a rule that may result in expenditure by state, local, and Tribal governments, or the private sector, in the aggregate, of $177 million or more in any one year.260 Section 202 of the UMRA also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule. FinCEN believes that the preceding assessment of impact 261 satisfies the UMRA’s analytical requirements, but invites public comment on any additional factors that, if considered, would materially alter the conclusions of the RIA. lotter on DSK11XQN23PROD with PROPOSALS2 E. Paperwork Reduction Act The new reporting requirements in this proposed rule are being submitted to OMB for review in accordance with the PRA.262 Under the PRA, an agency may not conduct or sponsor, and a person is not required to respond to, a 258 For example, the full costs of newly implementing a training program, filing the proposed Real Estate Report (potentially on that includes a designation agreement), and complying with the proposed recordkeeping requirements. 259 See 2 U.S.C. 1532(a). 260 The U.S. Bureau of Economic Analysis reported the annual value of the gross domestic product (GDP) deflator in 1995 (the year in which UMRA was enacted) as 71.823; and in 2022 as 127.215. See U.S. Bureau of Economic Analysis, ‘‘Implicit Price Deflators for Gross Domestic Product,’’ Table 1.1.9, available at https:// apps.bea.gov/iTable/?reqid=19&step=2&isuri= 1&categories=survey%23eyJhcHBpZCI6MTks InN0ZXBzIjpbMSwyLDMsM10sImRh dGEiOltbIkNhdGVnb3JpZXMiLCJTdXJ2ZXkiXSxbIk 5JUEFfVGFibGVfTGlzdCIsIjEzIl0sWyJGaXJzdF 9ZZWFyIiwiMTk5NSJdLFsiTGFzdF9ZZWFy IiwiMjAyMSJdLFsiU2NhbGU iLCIwIl0sWyJTZXJpZXMiLCJBIl1dfQ. Thus, the inflation adjusted estimate for $100 million is 127.215 divided by 71.823 and then multiplied by 100, or $177 million. 261 See Section VII.A.5; see generally Section VII.A. 262 See 44 U.S.C. 3506(c)(2)(A). VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 collection of information unless it displays a valid control number assigned by OMB. Written comments and recommendations for the proposed collection can be submitted by visiting www.reginfo.gov/public/do/PRAMain. Find this document by selecting ‘‘Currently Under Review—Open for Public Comments’’ or by using the search function. Comments are welcome and must be received by April 16, 2024. In accordance with the requirements of the PRA and its implementing regulations, 5 CFR part 1320, the following details concerning the collections of information are presented to assist those persons wishing to comment. Reporting and Recordkeeping Requirements: The provisions in this proposed rule pertaining to the collection of information can be found in paragraph (a) of proposed 31 CFR 1031.320. The information that would be required to be reported by the proposed rule would be used by the U.S. Government to monitor and investigate money laundering in the U.S. residential real estate sector. The information required to be maintained by the proposed will be used by federal agencies to verify compliance by reporting persons with the provisions of the proposed rule. The collection of information is mandatory. OMB Control Numbers: 1506–XXX. Frequency: As required. Description of Affected Public: Residential Real Estate Settlement Agents, Title Insurance Carriers, Escrow Service Providers, Other Real Estate Professionals. Estimated Number of Responses: 850,000 263 Estimated Total Annual Reporting and Recordkeeping Burden: 4,604,167 burden hours 264 Estimated Total Annual Reporting and Recordkeeping Cost: $396,610,297.74 265 General Request for Comments under the Paperwork Reduction Act: Comments submitted in response to this notice will be summarized and included in a request for OMB approval. All 263 This estimate represents the upper bound estimate of reportable transfers per year as described in greater detail above in Section VII.A.2.c.i. 264 This estimate includes the upper bound estimates of the time burden of compliance, as described in greater detail above, with the proposed reporting and recordkeeping requirements. See Section VII.A.4.a.ii; Section VII.A.4.a.iii. 265 This estimate includes the upper bound estimates of the wage and technology costs of compliance, as described in greater detail above, with the proposed reporting and recordkeeping requirements. See Section VII.A.4.a.ii; Section VII.A.4.a.iii. PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 12465 comments will become a matter of public record. Comments are invited on the following categories: (a) whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency’s estimate of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; (d) ways to minimize the burden of the collection of information on reporting persons, including through the use of technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services required to provide information. F. Additional Requests for Comment 1. In addition, FinCEN generally invites comment on the accuracy of FinCEN’s regulatory analysis. FinCEN specifically requests comments— including data or studies—that provide additional insight on the following: What would be the short-term costs, burdens, and benefits associated with using a new reporting form to file the proposed information? The long term? What would be the costs, burdens, and benefits associated with collecting and storing the information detailed in this NPRM? 2. Would FinCEN’s proposed regulatory requirements be integrated into current compliance programs in ways that are significantly more (or less) costly than anticipated in the RIA? How much time would be needed to successfully integrate them into current systems and procedures? 3. Would reporting persons and their employers integrate implementation costs into their existing budgets in ways that substantially differ from the expectations described in the RIA? If so, how might this affect the reliability or accuracy of the estimated costs? 4. Is FinCEN correct in assuming that, in a single reportable real estate transaction, only one business would perform any of the functions described in the first three tiers of the reporting cascade? If not, please provide details about, or examples of instances where, multiple parties with functions described in the first three tiers of the cascade would participate in a single transaction. If multiple parties do participate, would this result in an impact on the burden of compliance with the rule? 5. Of the affected parties identified in this analysis, would certain nonfinancial trades or businesses incur higher costs compared to others under this proposed rule? Why? E:\FR\FM\16FEP2.SGM 16FEP2 12466 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 6. Please detail any aspects of the proposed rule that may cause a business to operate at a competitive disadvantage compared to any business that offers similar services but would be outside the scope of the proposed rule. 7. To what extent are the services identified in the proposed reporting cascade likely to be primarily provided by small businesses? 8. To what extent might the costs of compliance with the proposed rule dissuade certain small businesses from providing services to reportable transfers? How large is the economic value of such potentially foregone transactions to small businesses? If possible, please provide data that would enable the quantification of these costs. 9. Please detail any aspects of the proposed rule that may cause a small business to operate at a competitive disadvantage compared to other businesses that offers similar services. 10. To what extent might the parties who would be reporting persons under the proposed rule be able to pass the costs of compliance on to downstream customers/clients? Are there concerns about such an allocation of the economic burden of compliance? 11. To the extent that services in the proposed reporting cascade tiers are currently ordered such that a small business would precede a larger business, are there any economic costs to designation or significant transaction frictions that would prevent reassigning the obligation in cases where the larger business is better positioned to absorb compliance costs? List of Subjects in 31 CFR Part 1031 Administrative practice and procedure, Aliens, Authority delegations (Government agencies), Bankruptcy, Banks and banking, Brokers, Buildings and facilities, Business and industry, Condominiums, Cooperatives, Currency, Citizenship and naturalization, Electronic filing, Estates, Fair housing, Federal home loan banks, Federal savings associations, FederalStates relations, Foreign investments in U.S., Foreign persons, Foundations, Holding companies, Home improvement, Homesteads, Housing, Indian—law, Indians, Indians—tribal government, Insurance companies, Investment advisers, Investment companies, Investigations, Law enforcement, Lawyers, Legal services, Low and moderate income housing, Mortgage insurances, Mortgages, Penalties, Privacy, Real property acquisition, Reporting and recordkeeping requirements, Small businesses, Securities, Taxes, Terrorism, Time, Trusts and trustees, Zoning. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 Authority and Issuance For the reasons set forth in the preamble, chapter X of title 31 of the Code of Federal Regulations is proposed to be amended by adding part 1031 to read as follows: ■ PART 1031—RULES FOR PERSONS INVOLVED IN REAL ESTATE CLOSINGS AND SETTLEMENTS Subparts A–B [Reserved] Subpart C—Reports Required To Be Made by Persons Involved in Real Estate Closings and Settlements Sec. 1031.320 Reports of residential real property transfers. 1031.321 [Reserved] Authority: 12 U.S.C. 1829b, 1951–1959; 31 U.S.C. 5311–5314, 5316–5336; title III, sec. 314 Pub. L. 107–56, 115 Stat. 307; sec. 701 Pub. L. 114–74, 129 Stat. 599; sec. 6403, Pub. L. 116–283, 134 Stat. 3388. Subparts A–B [Reserved] Subpart C—Reports Required To Be Made by Persons Involved in Real Estate Closings and Settlements § 1031.320 Reports of residential real property transfers. (a) General. A residential real property transfer as defined in paragraph (b) of this section (‘‘reportable transfer’’) shall be reported to FinCEN by the reporting person identified in paragraph (c) of this section. The report shall include the information described in paragraphs (d) through (i) of this section. Terms not defined in paragraph (j) of this section are defined in 31 CFR 1010.100. The report required by this section shall be filed in the form and manner, and at the time, specified in paragraph (k) of this section. Records shall be retained as specified in paragraph (l) of this section and are not confidential as specified in paragraph (m) of this section. (b) Reportable transfer. (1) Except as set forth in paragraph (b)(2) of this section, a reportable transfer is a transfer to a transferee entity or transferee trust of an ownership interest in: (i) Real property located in the United States containing a structure designed principally for occupancy by one to four families; (ii) Vacant or unimproved land located in the United States zoned, or for which a permit has been issued, for the construction of a structure designed principally for occupancy by one to four families; or (iii) Shares in a cooperative housing corporation where such transfer does PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 not involve an extension of credit to all transferees that is: (A) Secured by the transferred residential real property; and (B) Extended by a financial institution that has both an obligation to maintain an anti-money laundering program and an obligation to report suspicious transactions under this chapter. (2) A reportable transfer does not include a: (i) Grant, transfer, or revocation of an easement; (ii) Transfer resulting from the death of an owner of residential real property; (iii) Transfer incident to divorce or dissolution of a marriage; (iv) Transfer to a bankruptcy estate; or (v) Transfer for which there is no reporting person. (c) Determination of reporting person. (1) Except as set forth in paragraphs (c)(2) and (3) of this section, the reporting person for a reportable transfer is the person engaged within the United States as a business in the provision of real estate closing and settlement services that is: (i) The person listed as the closing or settlement agent on the closing or settlement statement for the transfer; (ii) If no person is described in paragraph (c)(1)(i) of this section, the person that prepares the closing or settlement statement for the transfer; (iii) If no person is described in paragraph (c)(1)(i) or (ii) of this section, the person that files with the recordation office the deed or other instrument that transfers ownership of the residential real property; (iv) If no person described in paragraph (c)(1)(i), (ii), or (iii) of this section is involved in the transfer, then the person that underwrites an owner’s title insurance policy for the transferee with respect to the transferred residential real property, such as a title insurance company; (v) If no person described in paragraph (c)(1)(i), (ii), (iii), or (iv) of this section is involved in the transfer, then the person that disburses in any form, including from an escrow account, trust account, or lawyers’ trust account, the greatest amount of funds in connection with the residential real property transfer; (vi) If no person described in paragraph (c)(1)(i), (ii), (iii), (iv), or (v) of this section is involved in the transfer, then the person that provides an evaluation of the status of the title; or (vii) If no person described in paragraph (c)(1)(i), (ii), (iii), (iv), (v), or (vi) of this section is involved in the transfer, then the person that prepares the deed or, if no deed is involved, any E:\FR\FM\16FEP2.SGM 16FEP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules other legal instrument that transfers ownership of the residential real property. (2) Employees, agents, and partners. If an employee, agent, or partner acting within the scope of such individual’s employment, agency, or partnership would be the reporting person as determined in paragraph (c)(1) of this section, then the individual’s employer, principal, or partnership is deemed to be the reporting person. (3) Designation agreement. (i) The reporting person described in paragraph (c)(1) of this section may agree with any other person described in paragraph (c)(1) to designate such other person as the reporting person with respect to the reportable transfer. The person designated by such agreement shall be the reporting person with respect to the transfer. (ii) A designation agreement shall be in writing, and shall include: (A) The date of the agreement; (B) The name and address of the transferor; (C) The name and address of the transferee entity or transferee trust; (D) Information described in in paragraph (g) identifying transferred residential real property; (E) The name and address of the person designated through the agreement as the reporting person with respect to the transfer; and (F) The name and address of all other parties to the agreement. (d) Information concerning the reporting person. The reporting person shall report: (1) The full legal name of the reporting person; (2) The category of reporting person, as determined in paragraph (c) of this section; and (3) The street address that is the reporting person’s principal place of business in the United States. (e) Information concerning the transferee—(1) Transferee entities. For each transferee entity involved in a reportable transfer, the reporting person shall report: (i) The following information for the transferee entity: (A) Full legal name; (B) Trade name or ‘‘doing business as’’ name, if any; (C) Complete current address consisting of: (1) The street address that is the transferee entity’s principal place of business; and (2) If such principal place of business is not in the United States, the street address of the primary location in the United States where the transferee entity conducts business, if any; and VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 (D) Unique identifying number consisting of: (1) The Internal Revenue Service Taxpayer Identification Number (IRS TIN) of the transferee entity; (2) If the transferee entity has not been issued an IRS TIN, a tax identification number for the transferee entity that was issued by a foreign jurisdiction and the name of such jurisdiction; or (3) If the transferee entity has not been issued an IRS TIN or a foreign tax identification number, an entity registration number issued by a foreign jurisdiction and the name of such jurisdiction; (ii) The following information for each beneficial owner of the transferee entity: (A) Full legal name; (B) Date of birth; (C) Complete current residential street address; (D) Citizenship; and (E) Unique identifying number consisting of: (1) An IRS TIN; or (2) Where an IRS TIN has not been issued: (i) A tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (ii) The unique identifying number and the issuing jurisdiction from a nonexpired passport issued by a foreign government; and (iii) The following information for each signing individual, if any: (A) Full legal name; (B) Date of birth; (C) Complete current residential street address; (D) Unique identifying number consisting of: (1) An IRS TIN; or (2) Where an IRS TIN has not been issued: (i) A tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (ii) The unique identifying number and the issuing jurisdiction from a nonexpired passport issued by a foreign government to the individual; (E) Description of the capacity in which the individual is authorized to act as the signing individual; and (F) If the signing individual is acting in that capacity as an employee, agent, or partner, the name of the individual’s employer, principal, or partnership. (2) Transferee trusts. For each transferee trust in a reportable transfer, the reporting person shall report: (i) The following information for the transferee trust: (A) Full legal name, such as the full title of the agreement establishing the transferee trust; PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 12467 (B) Date the trust instrument was executed; (C) The street address that is the trust’s place of administration; (D) Unique identifying number, if any, consisting of: (1) IRS TIN; or (2) Where an IRS TIN has not been issued, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; and (E) Whether the transferee trust is revocable; (ii) The following information for each trustee that is a legal entity: (A) Full legal name; (B) Trade name or ‘‘doing business as’’ name, if any; (C) Complete current address consisting of: (1) The street address that is the trustee’s principal place of business; and (2) If such principal place of business is not in the United States, the street address of the primary location in the United States where the trustee conducts business, if any; (D) Name and business address of the trust officer assigned to the transferee trust; and (E) Unique identifying number consisting of: (1) The IRS TIN of the trustee; (2) In the case that a trustee has not been issued an IRS TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (3) In the case that a trustee has not been issued an IRS TIN or a foreign tax identification umber, an entity registration number issued by a foreign jurisdiction and the name of such jurisdiction; and (F) For purposes of this section, an individual trustee of the transferee trust is considered to be a beneficial owner of the trust. As such, information on individual trustees must be reported in accordance with the requirements set forth in paragraph (e)(2)(iii) of this section; (iii) The following information for each beneficial owner of the transferee trust: (A) Full legal name; (B) Date of birth; (C) Complete current residential street address; (D) Citizenship; (E) Unique identifying number consisting of: (1) An IRS TIN; or (2) Where an IRS TIN has not been issued: (i) A tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or E:\FR\FM\16FEP2.SGM 16FEP2 lotter on DSK11XQN23PROD with PROPOSALS2 12468 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules (ii) The unique identifying number and the issuing jurisdiction from a nonexpired passport issued by a foreign government; and (F) The category of beneficial owner, as determined in paragraph (j)(1)(ii) of this section; and (iv) The following information for each signing individual, if any: (A) Full legal name; (B) Date of birth; (C) Complete current residential street address; (D) Unique identifying number consisting of: (1) An IRS TIN; or (2) Where an IRS TIN has not been issued: (i) A tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (ii) The unique identifying number and the issuing jurisdiction from a nonexpired passport issued by a foreign government to the individual; (E) Description of the capacity in which the individual is authorized to act as the signing individual; and (F) If the signing individual is acting in that capacity as an employee, agent, or partner, the name of the individual’s employer, principal, or partnership. (3) Collection of beneficial ownership information from transferees. The reporting person may collect the information described in paragraphs (e)(1)(ii) and (e)(2)(iii) of this section from the transferee or a person representing the transferee in the reportable transfer, provided the transferee or their representative certifies in writing, to the best of their knowledge, the accuracy of the information. (f) Information concerning the transferor. For each transferor involved in a reportable transfer, the reporting person shall report: (1) The following information for a transferor who is an individual: (i) Full legal name; (ii) Date of birth; (iii) Complete current residential street address; and (iv) Unique identifying number consisting of: (A) An IRS TIN; or (B) Where an IRS TIN has not been issued: (1) A tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (2) The unique identifying number and the issuing jurisdiction from a nonexpired passport issued by a foreign government to the individual; (2) The following information for a transferor that is a legal entity: (i) Full legal name; VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 (ii) Trade name or ‘‘doing business as’’ name, if any; (iii) Complete current address consisting of: (A) The street address that is the legal entity’s principal place of business; and (B) If the principal place of business is not in the United States, the street address of the primary location in the United States where the legal entity conducts business, if any; and (iv) Unique identifying number consisting of: (A) An IRS TIN; (B) In the case that the legal entity has not been issued an IRS TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (C) In the case that the legal entity has not been issued an IRS TIN or a foreign tax identification number, an entity registration number issued by a foreign jurisdiction and the name of such jurisdiction; and (3) The following information for a transferor that is a trust: (i) Full legal name, such as the full title of the agreement establishing the trust; (ii) Date the trust instrument was executed; (iii) Unique identifying number, if any, consisting of: (A) IRS TIN; or (B) Where an IRS TIN has not been issued, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; (iv) For each individual who is a trustee of the trust: (A) Full legal name; (B) Current residential street address; and (C) Unique identifying number consisting of: (1) An IRS TIN; or (2) Where an IRS TIN has not been issued: (i) A tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (ii) The unique identifying number and the issuing jurisdiction from a nonexpired passport issued by a foreign government; and (v) For each legal entity that is a trustee of the trust: (A) Full legal name; (B) Trade name or ‘‘doing business as’’ name, if any; (C) Complete current address consisting of: (1) The street address that is the legal entity’s principal place of business; and (2) If the principal place of business is not in the United States, the street address of the primary location in the United States where the legal entity conducts business, if any; and PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 (D) Unique identifying number consisting of: (1) An IRS TIN; (2) In the case that the legal entity has not been issued an IRS TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (3) In the case that the legal entity has not been issued an IRS TIN or a foreign tax identification number, an entity registration number issued by a foreign jurisdiction and the name of such jurisdiction. (g) Information concerning the residential real property. The reporting person shall report the street address, if any, and the legal description, such as the section, lot, and block, of each residential real property that is the subject of the reportable transfer. (h) Information concerning payments. (1) The reporting person shall report the following information concerning each payment, other than a payment disbursed from an escrow or trust account held by a transferee entity or transferee trust, that is made by or on behalf of the transferee entity or transferee trust regarding a reportable transfer: (i) The amount of the payment, consisting of the total consideration paid by the transferee entity or transferee trust; (ii) The method by which the payment was made; (iii) If the payment was paid from an account held at a financial institution, the name of the financial institution and the account number; and (iv) The name of the payor on any wire, check, or other type of payment if the payor is not the transferee entity or transferee trust. (2) The reporting person shall report the total consideration paid or to be paid by all transferees regarding the reportable transfer. (i) Information concerning hard money, private, and other similar loans. The reporting person shall report whether the reportable transfer involved credit extended by a person that is not a financial institution with an obligation to maintain an anti-money laundering program and an obligation to report suspicious transactions under this chapter. (j) Definitions. For purposes of this section, the following terms have the following meanings. (1) Beneficial owner—(i) Beneficial owners of transferee entities. (A) The beneficial owners of a transferee entity are the individuals who would be the beneficial owners of the transferee entity on the date of closing if the transferee entity were a reporting E:\FR\FM\16FEP2.SGM 16FEP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules company under 31 CFR 1010.380(d) on the date of closing. (B) The beneficial owners of a transferee entity that is established as a non-profit corporation or similar entity, regardless of jurisdiction of formation, are limited to individuals who exercise substantial control over the entity, as defined in 31 CFR 1010.380(d)(1) on the date of closing. (ii) Beneficial owners of transferee trusts. The beneficial owners of a transferee trust are the individuals who fall into one or more of the following categories on the date of closing: (A) A trustee of the transferee trust. (B) An individual other than a trustee with the authority to dispose of transferee trust assets. (C) A beneficiary who is the sole permissible recipient of income and principal from the transferee trust or who has the right to demand a distribution of, or withdraw, substantially all of the assets from the transferee trust. (D) A grantor or settlor who has the right to revoke the transferee trust or otherwise withdraw the assets of the transferee trust. (E) A beneficial owner of any legal entity that holds at least one of the positions in the transferee trust described in paragraphs (j)(1)(ii)(A) through (D) of this section, except when the legal entity meets the criteria set forth in paragraphs (j)(10)(ii)(A) through (P) of this section. Beneficial ownership of any such legal entity is determined under 31 CFR 1010.380(d), utilizing the criteria for beneficial owners of a reporting company. (F) A beneficial owner of any trust that holds at least one of the positions in the transferee trust described in paragraphs (j)(1)(ii)(A) through (D) of this section, except when the trust meets the criteria set forth in paragraphs (j)(11)(ii)(A) through (D). Beneficial ownership of any such trust is determined under this paragraph (j)(1)(ii)(F), utilizing the criteria for beneficial owners of a transferee trust. (2) Closing or settlement agent. The term ‘‘closing or settlement agent’’ means any person, whether or not acting as an agent for a title agent or company, a licensed attorney, real estate broker, or real estate salesperson, who for another and with or without a commission, fee, or other valuable consideration and with or without the intention or expectation of receiving a commission, fee, or other valuable consideration, directly or indirectly, provides closing or settlement services incident to the transfer of residential real property. (3) Closing or settlement statement. The term ‘‘closing or settlement VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 statement’’ means the statement of receipts and disbursements for a transfer of residential real property. (4) Date of closing. The term ‘‘date of closing’’ means the date on which the transferee entity or transferee trust receives an ownership interest in residential real property. (5) Ownership interest. The term ‘‘ownership interest’’ means the rights held in residential real property that are demonstrated: (i) Through a deed, for a reportable transfer described in paragraph (b)(1)(i) or (ii) of this section; or (ii) Through stock, shares, membership, certificate, or other contractual agreement evidencing ownership, for a reportable transfer described in paragraph (b)(1)(iii) of this section. (6) Recordation office. The term ‘‘recordation office’’ means any State, local, or Tribal office for the recording of reportable transfers as a matter of public record. (7) Residential real property. The term ‘‘residential real property’’ means: (i) Real property located in the United States containing a structure designed principally for occupancy by one to four families; (ii) Vacant or unimproved land located in the United States zoned, or for which a permit has been issued, for the construction of a structure designed principally for occupancy by one to four families; or (iii) Shares in a cooperative housing corporation. (8) Signing individual. The term ‘‘signing individual’’ means each individual who signed documents on behalf of the transferee as part of the reportable transfer. However, it does not include any individual who signed documents as part of their employment with a financial institution that has both an obligation to maintain an anti-money laundering program and an obligation to report suspicious transactions under this chapter. (9) Statutory trust. The term ‘‘statutory trust’’ means any trust created or authorized under the Uniform Statutory Trust Entity Act or as enacted by a State. For the purposes of this subpart, statutory trusts are transferee entities. (10) Transferee entity. (i) Except as set forth in paragraph (j)(10)(ii) of this section, the term ‘‘transferee entity’’ means any person other than a transferee trust or an individual. (ii) A transferee entity does not include: (A) A securities reporting issuer defined in 31 CFR 1010.380(c)(2)(i); PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 12469 (B) A governmental authority defined in 31 CFR 1010.380(c)(2)(ii); (C) A bank defined in 31 CFR 1010.380(c)(2)(iii); (D) A credit union defined in 31 CFR 1010.380(c)(2)(iv); (E) A depository institution holding company defined in 31 CFR 1010.380(c)(2)(v); (F) A money service business defined in 31 CFR 1010.380(c)(2)(vi); (G) A broker or dealer in securities defined in 31 CFR 1010.380(c)(2)(vii); (H) A securities exchange or clearing agency defined in 31 CFR 1010.380(c)(2)(viii); (I) Any other Exchange Act registered entity defined in 31 CFR 1010.380(c)(2)(ix); (J) An insurance company defined in 31 CFR 1010.380(c)(2)(xii); (K) A State-licensed insurance producer defined in 31 CFR 1010.380(c)(2)(xiii); (L) A Commodity Exchange Act registered entity defined in 31 CFR 1010.380(c)(2)(xiv); (M) A public utility defined in 31 CFR 1010.380(c)(2)(xvi); (N) A financial market utility defined in 31 CFR 1010.380(c)(2)(xvii); (O) An investment company as defined in section 3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a– 3(a)) that is registered with the Securities and Exchange Commission (SEC) under section 8 of the Investment Company Act (15 U.S.C. 80a–8); and (P) Any legal entity whose ownership interests are controlled or wholly owned, directly or indirectly, by an entity described in paragraphs (j)(10)(ii)(A) through (O) of this section. (11) Transferee trust. (i) Except as set forth in paragraph (j)(11)(ii) of this section, the term ‘‘transferee trust’’ means any legal arrangement created when a person (generally known as a settlor or grantor) places assets under the control of a trustee for the benefit of one or more persons (each generally known as a beneficiary) or for a specified purpose, as well as any legal arrangement similar in structure or function to the above, whether formed under the laws of the United States or a foreign jurisdiction. A trust is deemed to be a transferee trust regardless of whether residential real property is titled in the name of the trust itself or in the name of the trustee in the trustee’s capacity as the trustee of the trust. (ii) A transferee trust does not include: (A) A trust that is a securities reporting issuer defined in 31 CFR 1010.380(c)(2)(i); E:\FR\FM\16FEP2.SGM 16FEP2 12470 Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 (B) A trust in which the trustee is a securities reporting issuer defined in 31 CFR 1010.380(c)(2)(i); (C) A statutory trust; or (D) An entity wholly owned by a trust described in paragraphs (j)(11)(ii)(A) through (C) of this section. (k) Filing procedures—(1) What to file. A reportable transfer shall be reported by completing a Real Estate Report and collecting and maintaining supporting documentation as required by this section. (2) Where to file. The Real Estate Report shall be filed electronically with FinCEN, as indicated in the instructions to the report. (3) When to file. A reporting person is required to file a Real Estate Report no later than 30 calendar days after the date of closing. VerDate Sep<11>2014 18:00 Feb 15, 2024 Jkt 262001 (l) Retention of records. A reporting person shall maintain a copy of any Real Estate Report filed by the reporting person and a copy of any certification described in paragraph (e)(3) of this section. In addition, all parties to a designation agreement described in paragraph (c)(3) of this section shall maintain a copy of such designation agreement. (m) Exemptions—(1) Confidentiality. Reporting persons, and any director, officer, employee, or agent of such persons, and Federal, State, local, or Tribal government authorities, are exempt from the confidentiality provision in 31 U.S.C. 5318(g)(2) that prohibits the disclosure to any person involved in a suspicious transaction that the transaction has been reported or any PO 00000 Frm 00048 Fmt 4701 Sfmt 9990 information that otherwise would reveal that the transaction has been reported. (2) Anti-money laundering program. A reporting person under this section is exempt from the requirement to establish an anti-money laundering program, in accordance with 31 CFR 1010.205(b)(1)(v). However, as provided in 31 CFR 1010.205(c), no such exemption applies for a financial institution that is otherwise required to establish an anti-money laundering program by this chapter. § 1031.321 [Reserved] Andrea M. Gacki, Director, Financial Crimes Enforcement Network. [FR Doc. 2024–02565 Filed 2–7–24; 8:45 am] BILLING CODE 4810–02–P E:\FR\FM\16FEP2.SGM 16FEP2

Agencies

[Federal Register Volume 89, Number 33 (Friday, February 16, 2024)]
[Proposed Rules]
[Pages 12424-12470]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-02565]



[[Page 12423]]

Vol. 89

Friday,

No. 33

February 16, 2024

Part II





Department of the Treasury





-----------------------------------------------------------------------





Financial Crimes Enforcement Network





-----------------------------------------------------------------------





31 CFR Chapter X





Anti-Money Laundering Regulations for Residential Real Estate 
Transfers; Proposed Rule

Federal Register / Vol. 89, No. 33 / Friday, February 16, 2024 / 
Proposed Rules

[[Page 12424]]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Chapter X

RIN 1506-AB54


Anti-Money Laundering Regulations for Residential Real Estate 
Transfers

AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: FinCEN is issuing a proposed rule to require certain persons 
involved in real estate closings and settlements to submit reports and 
keep records on identified non-financed transfers of residential real 
property to specified legal entities and trusts on a nationwide basis. 
Transfers made directly to an individual would not be covered by this 
proposed rule. The proposed rule describes the circumstances in which a 
report must be filed, who must file a report, what information must be 
provided, and when a report is due. These reports are expected to 
assist the U.S. Department of the Treasury; Federal, State, and local 
law enforcement; and national security agencies in addressing illicit 
finance vulnerabilities in the U.S. residential real estate sector and 
to curtail the ability of illicit actors to anonymously launder illicit 
proceeds through the purchase of residential real property, which 
threatens U.S. economic and national security.

DATES: Written comments on this proposed rule must be submitted on or 
before April 16, 2024.

ADDRESSES: Comments may be submitted by any of the following methods:
     Federal E-Rulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments. Refer to Docket Number 
FINCEN-2024-0005 and RIN 1506-AB54.
     Mail: Policy Division, Financial Crimes Enforcement 
Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-
2024-0005 and RIN 1506-AB54.
    Please submit comments by one method only.

FOR FURTHER INFORMATION CONTACT: The FinCEN Regulatory Support Section 
at 1-800-767-2825 or electronically at [email protected].

SUPPLEMENTARY INFORMATION:

I. Executive Summary

    The U.S. Department of the Treasury (Treasury) has long recognized 
the illicit finance risks posed by abuse of the U.S. real estate market 
and of legal entities and trusts by criminals and corrupt officials to 
launder ill-gotten gains through transfers of residential real estate. 
The abuse of U.S. residential real estate markets threatens U.S. 
economic and national security and can disadvantage individuals and 
small businesses that seek to compete fairly in the U.S. economy. The 
proposed rule is designed to enhance transparency nationwide in the 
U.S. residential real estate market and to assist Treasury, law 
enforcement, and national security agencies in protecting U.S. economic 
and national security interests by requiring certain persons involved 
in real estate closings and settlements to file reports and maintain 
records related to identified non-financed transfers of residential 
real estate to specified legal entities and trusts on a nationwide 
basis, including information regarding beneficial owners of those 
entities and trusts.
    Among the persons required by the Bank Secrecy Act (BSA) to 
maintain anti-money laundering (AML) programs are ``persons involved in 
real estate closings and settlements.'' \1\ Yet, for many years, FinCEN 
has exempted such persons from comprehensive regulation under the BSA 
and has issued a series of time-limited and geographically focused 
``geographic targeting orders'' (GTOs) to the real estate sector in 
lieu of more comprehensive regulation. Information received in response 
to FinCEN's GTOs relating to non-financed transfers of residential real 
estate (Residential Real Estate GTOs) have demonstrated the need for 
increased transparency and further regulation of this sector. This 
notice of proposed rulemaking (NPRM) thus proposes a new reporting 
requirement for non-financed residential real estate transactions, 
consistent with the BSA's longstanding directive to impose AML 
requirements on persons involved in real estate closings and 
settlements. At the same time, FinCEN has carefully considered the 
comments received in response to an advance notice of proposed 
rulemaking (ANPRM) on Anti-Money Laundering Regulations for Real Estate 
Transactions, and FinCEN appreciates the burdens that traditional AML 
program and SAR requirements may impose on persons involved in real 
estate transactions. This NPRM therefore proposes a streamlined 
reporting framework designed to minimize unnecessary burdens while also 
enhancing transparency. Although certain information collected under 
this proposed rule may also be available to law enforcement, in some 
instances, through the new beneficial ownership reporting requirements 
imposed by the Corporate Transparency Act (CTA), the CTA's reporting 
regime and this proposed rule serve different purposes.
---------------------------------------------------------------------------

    \1\ 31 U.S.C. 5312(a)(2)(U).
---------------------------------------------------------------------------

    In contrast to the beneficial ownership reporting requirements 
outlined in the CTA, this proposed rule is a tailored reporting 
requirement that would capture a particular class of activity that 
Treasury deems high-risk and that warrants reporting on a transaction-
specific basis. More specifically, the proposed rule would require 
certain persons involved in residential real estate closings and 
settlements to file, and to maintain a record of, a streamlined version 
of a Suspicious Activity Report (SAR), referred to here as a ``Real 
Estate Report.'' The persons subject to these reporting and 
recordkeeping requirements would be deemed reporting persons for 
purposes of the proposed rule and would be determined through a 
``cascading'' approach based on the function performed by the person in 
the real estate closing and settlement. The ``cascade'' is designed to 
minimize burdens on persons involved in real estate closings and 
settlements while avoiding gaps in reporting and incentives for 
evasion. To provide some flexibility in this cascade approach, real 
estate professionals would also have the option to designate a 
reporting person from among those in the cascade by agreement.
    The information required to be reported in the Real Estate Report 
would identify the reporting person, the legal entity or trust to which 
the residential real property is transferred, the beneficial owners of 
that transferee entity or transferee trust, the person that transfers 
the residential real property, and the property being transferred, 
along with certain transactional information about the transfer. The 
reporting person would be required to file the Real Estate Report no 
later than 30 days after the date of closing. Because of the 
streamlined nature of these Real Estate Reports compared to traditional 
SARs, as well as the flexible ``cascade'' framework, persons subject to 
this reporting requirement would not need to maintain the types of AML 
programs otherwise required of financial institutions under the BSA.\2\
---------------------------------------------------------------------------

    \2\ 31 U.S.C. 5318(h).

---------------------------------------------------------------------------

[[Page 12425]]

II. Background

A. Illicit Finance Risks in the U.S. Real Estate Sector

    As Secretary of the Treasury (Secretary) Yellen noted at the 2023 
Summit for Democracy, ``[c]orrupt actors have for decades anonymously 
stashed their ill-gotten gains in real estate. Those looking to exploit 
our system have been able to--with anonymity--store illicit proceeds in 
an appreciating asset . . . Treasury is working to remove that 
anonymity[.]'' \3\ The Secretary has made increasing transparency in 
the domestic and international financial system a national priority, 
noting that ``illicit proceeds . . . equaling an estimated two percent 
of U.S. gross domestic product (GDP) flow through the U.S. financial 
system each year. Permitting illicit actors to benefit from the 
stability and security of the U.S. financial system weakens financial 
transparency, distorts markets, and hurts ordinary Americans.'' \4\ 
Treasury's Strategic Plan for 2022 to 2026 makes clear that one 
indicator of success in combatting illicit actors' abuse of the U.S. 
financial system is achieving an ``updated regulatory framework for 
real-estate [sic] to effectively cover cash transactions.'' \5\
---------------------------------------------------------------------------

    \3\ U.S. Department of the Treasury, Remarks by Secretary Janet 
L. Yellen on Anti-Corruption as a Cornerstone of a Fair, 
Accountable, and Democratic Economy at the Summit for Democracy 
(Mar. 28, 2023), available at https://home.treasury.gov/news/press-releases/jy1371.
    \4\ Id; U.S. Department of the Treasury, Strategic Plan 2022-
2026 (2022), p. 23, available at https://home.treasury.gov/system/files/266/TreasuryStrategicPlan-FY2022-2026.pdf.
    \5\ Id. at p. 24.
---------------------------------------------------------------------------

    The United States' stable real estate market and strong property 
rights protections make U.S. residential real estate attractive to 
illicit actors looking to launder the proceeds of crime and corruption. 
This is particularly the case for non-financed transfers that are 
currently outside the purview of the due diligence requirements imposed 
on regulated financial institutions pursuant to the BSA. For purposes 
of this rule, a non-financed transfer is any transfer that does not 
involve an extension of credit to the transferee secured by the 
transferred residential real property \6\ and extended by a financial 
institution that has both an obligation to maintain an AML program and 
an obligation to report suspicious transactions. Money launderers 
exploit the absence of an obligation on any party to a non-financed 
transfer to conduct due diligence.
---------------------------------------------------------------------------

    \6\ For the purposes of this proposed rule, ``residential real 
property'' means: (1) real property located in the United States 
containing a structure designed principally for occupancy by one to 
four families; (2) vacant or unimproved land located in the United 
States zoned, or for which a permit has been issued, for the 
construction of a structure designed principally for occupancy by 
one to four families; or (3) shares in a cooperative housing 
corporation.
---------------------------------------------------------------------------

    As a result, and as the Administration's 2021 U.S. Strategy for 
Countering Corruption notes, the United States' real estate market is a 
significant destination for the laundered proceeds of illicit activity. 
Treasury's 2022 National Money Laundering Risk Assessment (2022 NMLRA) 
also reflects this. The 2022 NMLRA identifies a lack of transparency in 
non-financed real estate transfers in particular as a key weakness in 
the U.S. Anti-Money Laundering and Countering the Financing of 
Terrorism (AML/CFT) regulatory regime.\7\
---------------------------------------------------------------------------

    \7\ The White House, United States Strategy for Countering 
Corruption (Dec. 2021), p. 22, available at https://www.whitehouse.gov/wp-content/uploads/2021/12/United-States-Strategy-on-Countering-Corruption.pdf; U.S. Department of the 
Treasury, National Money Laundering Risk Assessment (Feb. 2022), p. 
5, available at https://home.treasury.gov/system/files/136/2022-National-Money-Laundering-Risk-Assessment.pdf.
---------------------------------------------------------------------------

    International bodies, such as the Financial Action Task Force 
(FATF) and non-government organizations, have likewise noted the 
sector's appeal for illicit actors intent on laundering funds.\8\ In 
particular, the FATF has recommended that the United States take 
appropriate action to address money laundering risks in relation to 
non-financed transfers of real estate.\9\ Furthermore, open-source 
investigative reports have demonstrated that criminal actors frequently 
employ legal entities, such as limited liability companies (LLCs), to 
launder money, including through real estate. In August 2021, Global 
Financial Integrity (GFI), a non-governmental organization, published a 
study estimating that at least $2.3 billion had been laundered through 
the U.S. real estate market from 2015 to 2020 and the ``use of 
anonymous shell companies and complex corporate structures continue[d] 
to be the number one money laundering typology'' involving real 
estate.\10\ Additionally, over 50 percent (30 of the 56 cases the study 
examined) involved politically exposed persons (PEPs), which the FATF 
has found ``may be able to use their political influence for profit 
illegally [and] . . . thus may present a risk higher than other 
customers.'' \11\ GFI also highlighted that legal entities and trusts 
are frequently used to make such purchases, and that purchases are 
rarely made in the name of the PEP. For example, a 2020 forfeiture 
complaint filed by the Department of Justice (DOJ) alleged that a 
former president of a country in Africa and his spouse used funds 
derived from corruption to purchase U.S. residential properties worth 
millions of dollars via a trust.\12\ Such crimes undermine the national 
security goals of the United States, one pillar of which is countering 
corruption.\13\ FinCEN's own December 2022 analysis revealed that 
between March and October 2022--the eight months following the invasion 
of Ukraine--Russian oligarchs sent millions of dollars to their 
children to purchase residential real estate in the

[[Page 12426]]

United States, often via legal entities, demonstrating the appeal of 
residential real estate even to the potential targets of U.S. 
sanctions.\14\
---------------------------------------------------------------------------

    \8\ The FATF is a global standard-setter of anti-money 
laundering and counter terrorist financing guidelines. The FATF has 
noted that ``[c]riminals gravitate towards sectors that apply or are 
believed to apply less comprehensive regulation and mitigation 
measures or where supervision is found to be lacking,'' and that 
``[t]he purchase of real estate allows for the movement of large 
amounts of funds all at once in a single transaction as opposed to 
multiple transactions of smaller values.'' See Financial Action Task 
Force, Guidance for a Risk Based Approach: Real Estate Sector (July 
2022), p. 18, available at https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf.
    \9\ See Financial Action Task Force, United States Mutual 
Evaluation Report (Dec. 2016), p. 1, available at https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MER-United-States-2016.pdf.coredownload.inline.pdf.
    \10\ Global Financial Integrity, ``Acres of Money Laundering: 
Why U.S. Real Estate is a Kleptocrat's Dream'' (Aug. 2021), pp. 13-
16, available at https://gfintegrity.org/report/acres-of-money-laundering-why-u-s-real-estate-is-a-kleptocrats-dream/. According to 
its website, GFI is ``a Washington, DC-based think tank focused on 
illicit financial flows, corruption, illicit trade and money 
laundering.'' See Global Financial Integrity, ``About,'' available 
at https://gfintegrity.org/about/.
    \11\ Financial Action Task Force, Guidance for a Risk Based 
Approach: Real Estate Sector (July 2022), pp. 29-30, available at 
https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf; see e.g., U.S. Department of 
Justice, Press Release, Over $1 billion in misappropriated 1MDB 
Funds Now Repatriated to Malaysia (Aug. 5, 2021), available at 
https://www.justice.gov/opa/pr/over-1-billion-misappropriated-1mdb-funds-now-repatriated-malaysia. The term ``PEP'' generally includes 
a current or former senior foreign political figure, their immediate 
family, and their close associates. See Federal Financial 
Institutions Examination Council, FFIEC BSA/AML Examination Manual, 
Politically Exposed Persons--Overview (v5 2015), p. 290; see also 
Board of Governors of the Federal Reserve System, Federal Deposit 
Insurance Corporation, Financial Crimes Enforcement Network, 
National Credit Union Administration, and Office of the Comptroller 
of the Currency, Joint Statement on Bank Secrecy Act Due Diligence 
Requirements for Customers Who May Be Considered Politically Exposed 
Persons (Aug. 21, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200821a1.pdf.
    \12\ See Complaint for Forfeiture, U.S. v. Real Property Located 
in Potomac, Maryland, Commonly Known as 9908 Bentcross Drive, 
Potomac, MD 20854 (D. Md. July 15, 2020) (Case No. 20-cv-02071).
    \13\ The White House, National Security Strategy (Oct. 2022), p. 
36, available at https://www.whitehouse.gov/wp-content/uploads/2022/10/Biden-Harris-Administrations-National-Security-Strategy-10.2022.pdf.
    \14\ See FinCEN, Financial Trend Analysis--Trends in Bank 
Secrecy Act Data: Financial Activity by Russian Oligarchs in 2022 
(Dec. 2022).
---------------------------------------------------------------------------

    As numerous public law enforcement actions illustrate, non-financed 
purchases of residential real estate by certain legal entities and 
trusts are acutely vulnerable to exploitation by illicit actors, due to 
a general lack of AML regulations covering or applicable to transfers 
conducted in this manner.\15\ While many non-financed residential real 
estate transfers may involve no illicit funds, a substantial proportion 
of such non-financed transactions are conducted by persons also engaged 
in activity characterized by other financial institutions as 
suspicious, and reporting on such non-financed residential real estate 
transactions is of significant value to law enforcement. For example, 
the individuals and entities identified in Residential Real Estate GTO 
reports correlate with traditional SAR filings by financial 
institutions: FinCEN has found that approximately 42 percent of non-
financed real estate transfers captured by the Residential Real Estate 
GTOs are conducted by individuals or legal entities on which a SAR has 
been filed. In other words, persons of potential interest to law 
enforcement due to their engagement in suspicious activity are also 
engaging in a type of transaction known to be used as a method of 
money-laundering: the non-financed purchase of residential real estate 
through a legal entity.
---------------------------------------------------------------------------

    \15\ See, e.g., U.S. v. Delgado, 653 F.3d 729 (8th Cir. 2011) 
(drug trafficking, money laundering); U.S. v. Fernandez, 559 F.3d 
303 (5th Cir. 2009) (drug trafficking, money laundering); Complaint 
for Forfeiture, U.S. v. All the Lot or Parcel of Land Located at 19 
Duck Pond Lane Southampton, New York 11968, Case No. 1:23-cv-01545 
(S.D.N.Y. Feb. 24, 2023) (sanctions evasion); Indictment and 
Forfeiture, U.S. v. Maikel Jose Moreno Perez, Case No. 1:23-cr-
20035-RNS (S.D. Fla. Jan. 26, 2023) (bribery, money laundering, 
conspiracy); Motion for Preliminary Order of Forfeiture and 
Preliminary Order of Forfeiture, U.S. v. Colon, Case No. 1:17-cr-47-
SB (D. Del. Nov. 18, 2022) (drug trafficking, money laundering); 
U.S. v. Andrii Derkach, Cr. No. 22-432 (E.D.N.Y. Sept. 26, 2022) 
(sanctions evasion, money laundering, bank fraud); Doc. No. 10 at p. 
1, U.S. vs. Ralph Steinmann and Luis Fernando Vuiz, Case No. 22-2-
306-CR-Gayles/Torres (S.D. Fla. July 12, 2022) (bribery, money 
laundering); U.S. v. Jimenez, 2022 U.S. Dist. LEXIS 77685, 2022 WL 
1261738 (S.D.N.Y. Apr. 28, 2022) (Case No. 1:18-cr-00879) (false 
claim fraud, wire fraud, money laundering, identity theft); 
Complaint for Forfeiture, U.S. v. Real Property Located in Potomac, 
Maryland, Commonly Known as 9908 Bentcross Drive, Potomac, MD 20854, 
Case No. 20-cv-02071 (D. Md. July 15, 2020) (public corruption, 
money laundering); Final Order of Forfeiture, U.S. v. Raul Torres, 
Case No. 1:19-cr-390 (N.D. Ohio Mar. 30, 2020) (operating an animal 
fighting venture, operating an unlicensed money services business, 
money laundering); U.S. v. Bradley, 2019 U.S. Dist. LEXIS 141157, 
2019 WL 3934684 (M.D. Tenn. Aug. 20, 2019) (Case No. 3:15-cr-00037-
2) (drug trafficking, money laundering); Indictment, U.S. v. Patrick 
Ifediba, et al., Case No. 2:18-cr-00103-RDP-JEO, Doc. 1 (N.D. Ala. 
Mar. 29, 2018) (health care fraud); Redacted Indictment, U.S. v. 
Paul Manafort, Case 1:18-cr-00083-TSE (E.D. Va. Feb. 26, 2018) 
(money laundering, acting as an unregistered foreign agent); U.S. v. 
Miller, 295 F. Supp. 3d 690 (E.D. Va. 2018) (wire fraud); U.S. v. 
Coffman, 859 F. Supp. 2d 871 (E.D. Ky. 2012) (mail, wire, and 
securities fraud); U.S. v. 10.10 Acres Located on Squires Rd., 386 
F. Supp. 2d 613 (M.D.N.C. 2005) (drug trafficking); Atty. Griev. 
Comm'n of Md. v. Blair, 188 A.3d 1009 (Md. Ct. App. 2018) (money 
laundering drug trafficking proceeds); State v. Harris, 861 A.2d 165 
(NJ Super. Ct. App. Div. 2004) (money laundering, theft); see also 
U.S. Department of Justice, Press Release, United States Reaches 
Settlement to Recover More Than $700 Million in Assets Allegedly 
Traceable to Corruption Involving Malaysian Sovereign Wealth Fund 
(Oct. 30, 2019), available at https://www.justice.gov/opa/pr/united-states-reaches-settlement-recover-more-700-million-assets-allegedly-traceable; U.S. Department of Justice, Press Release, Acting 
Manhattan U.S. Attorney Announces $5.9 Million Settlement of Civil 
Money Laundering And Forfeiture Claims Against Real Estate 
Corporations Alleged to Have Laundered Proceeds of Russian Tax Fraud 
(May 12, 2017), available at https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-attorney-announces-59-million-settlement-civil-money-laundering-and; U.S. Department of Justice, Press Release, 
Associate of Sanctioned Oligarch Indicted for Sanctions Evasion and 
Money Laundering: Fugitive Vladimir Vorontchenko Aided in Concealing 
Luxury Real Estate Owned by Viktor Vekselberg (Feb. 7, 2023), 
available at https://www.justice.gov/usao-sdny/pr/associate-sanctioned-oligarch-indicted-sanctions-evasion-and-money-laundering. 
Moreover, as the FATF noted in July 2022, ``[d]isparities with rules 
surrounding legal structures across countries means property can 
often be acquired abroad by shell companies or trusts based in 
secrecy jurisdictions, exacerbating the risk of money laundering.'' 
International bodies, such as the FATF have found that 
``[s]uccessful AML/CFT supervision of the real estate sector must 
contend with the obfuscation of true ownership provided by legal 
entities or arrangements[.]'' Financial Action Task Force, Guidance 
for a Risk Based Approach: Real Estate Sector (July 2022), p. 17, 
available at https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf.
---------------------------------------------------------------------------

    In addition to the law enforcement and national security concerns 
regarding abuse of the residential real estate sector, money laundering 
through residential real estate can distort real estate prices and 
potentially make it more difficult for legitimate buyers and sellers to 
participate in the market. In particular, the presence of illicit funds 
in the real estate sector can affect housing prices.\16\ Legitimate 
buyers are also adversely affected by illicit actors' preference to 
avoid financing, as sellers generally favor such ``all-cash'' offers 
due to the speed with which a sale can be closed.\17\
---------------------------------------------------------------------------

    \16\ See, e.g., Richard Vanderford, ``Fraudulent Covid Aid Drove 
Up U.S. House Prices, Report Says,'' The Wall Street Journal (June 
22, 2023).
    \17\ See The White House, United States Strategy for Countering 
Corruption (Dec. 2021), p. 7, available at https://www.whitehouse.gov/wp-content/uploads/2021/12/United-States-Strategy-on-Countering-Corruption.pdf; Financial Action Task Force, 
Guidance for a Risk Based Approach: Real Estate Sector (July 2022), 
p. 19, available at https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf.
---------------------------------------------------------------------------

    Due to the illicit finance risks presented and the attendant 
economic burdens of market abuse, FinCEN's public efforts to counter 
money laundering in the real estate sector have focused on the use of 
legal entities by illicit actors to obfuscate ownership of residential 
real property.\18\ The reasoning behind this focus on legal entities is 
discussed extensively in FinCEN's December 2021 Anti-Money Laundering 
Regulations for Real Estate Transactions ANPRM (2021 ANPRM), which 
highlighted how, as evidenced by open source investigative articles, 
law enforcement actions, and feedback from FinCEN's Residential Real 
Estate GTOs program, individuals intent on laundering money through 
residential real estate frequently take advantage of the opacity of 
shell companies or other legal entity structures to mask true 
beneficial ownership of a property and their involvement in real estate 
transfers.\19\
---------------------------------------------------------------------------

    \18\ See, e.g., FinCEN, Press Release, FinCEN Renews and Expands 
Real Estate Geographic Targeting Orders (Apr. 21, 2023), available 
at https://www.fincen.gov/news/news-releases/fincen-renews-and-expands-real-estate-geographic-targeting-orders-1 (announcing the 
renewal of an effort to combat illicit finance by collecting 
information on legal entity purchases of real estate); FinCEN, FIN-
2017-A003, Advisory to Financial Institutions and Real Estate Firms 
and Professionals (Aug. 22, 2017), p. 2 (noting that high-value 
residential real estate markets are vulnerable to penetration by 
foreign and domestic criminal organizations and corrupt actors, 
especially those misusing otherwise legitimate LLCs or other legal 
entities to shield their identities).
    \19\ 86 FR 69589 (Dec. 8, 2021).
---------------------------------------------------------------------------

B. FinCEN's Prior Regulation of the Real Estate Sector

1. Current Law
    Enacted in 1970, the Currency and Foreign Transactions Reporting 
Act, generally referred to as the BSA, is designed to combat money 
laundering, the financing of terrorism, and other illicit financial 
activity.\20\ The Secretary is authorized to administer the BSA and to 
require financial institutions to keep

[[Page 12427]]

records and file reports that ``are highly useful in criminal, tax, or 
regulatory investigations or proceedings'' or in the conduct of 
``intelligence or counterintelligence activities, including analysis, 
to protect against international terrorism.'' \21\ The Secretary 
delegated the authority to implement, administer, and enforce 
compliance with the BSA and its implementing regulations to the 
Director of FinCEN.\22\
---------------------------------------------------------------------------

    \20\ See 31 U.S.C. 5311. Certain parts of the Currency and 
Foreign Transactions Reporting Act, its amendments, and the other 
statutes relating to the subject matter of that Act, have come to be 
referred to as the BSA. The BSA is codified at 12 U.S.C. 1829b, 12 
U.S.C. 1951-1960, and 31 U.S.C. 5311-5314 and 5316-5336, and 
includes notes thereto, with implementing regulations at 31 CFR 
Chapter X. The Anti-Money Laundering Act of 2020, Section 6003(1) 
(Definitions), defines the BSA as section 21 of the Federal Deposit 
Insurance Act (12 U.S.C. 1829b), Chapter 2 of Title I of Public Law 
91-508 (12 U.S.C. 1951 et seq.), and 31 U.S.C. chapter 53, 
subchapter II.
    \21\ 31 U.S.C. 5311(1).
    \22\ Treasury Order 180-01, Paragraph 3(a) (Jan. 14, 2020), 
available at https://home.treasury.gov/about/general-information/orders-and-directives/treasury-order-180-01.
---------------------------------------------------------------------------

    The BSA requires each covered financial institution to establish an 
AML/CFT program, which must include, at a minimum, ``(A) the 
development of internal policies, procedures, and controls; (B) the 
designation of a compliance officer; (C) an ongoing employee training 
program; and (D) an independent audit function to test programs.'' \23\ 
The BSA also authorizes the Secretary to require covered financial 
institutions to report any suspicious transaction relevant to a 
possible violation of law or regulation (a ``suspicious activity 
report'' or ``SAR'').\24\ Among the financial institutions subject to 
those requirements under the BSA are ``persons involved in real estate 
closings and settlements.'' \25\
---------------------------------------------------------------------------

    \23\ 31 U.S.C. 5318(h)(1)(A)-(D).
    \24\ 31 U.S.C. 5318(g).
    \25\ 31 U.S.C. 5312(a)(2)(U).
---------------------------------------------------------------------------

    FinCEN's regulations implementing the BSA require banks, non-bank 
residential mortgage lenders and originators (RMLOs), and housing-
related Government Sponsored Enterprises (GSEs) to file SARs and 
establish AML/CFT programs.\26\ However, FinCEN's regulations exempt 
other persons involved in real estate closings and settlements from the 
requirement to establish AML/CFT programs, and the regulations do not 
impose a SAR filing requirement on such persons.\27\
---------------------------------------------------------------------------

    \26\ 31 CFR parts 1020, 1029, 1030.
    \27\ 31 CFR 1010.205(b)(1)(v).
---------------------------------------------------------------------------

2. FinCEN's Real Estate Exemption
    In 2002, FinCEN temporarily exempted certain financial 
institutions, including ``persons involved in real estate closings and 
settlements'' and ``loan and finance companies,'' from the requirement 
to establish an AML/CFT program. FinCEN explained that it would 
``continue studying the money laundering risks posed by these 
institutions in order to develop appropriate AML program 
requirements.'' \28\ That additional time was needed to consider the 
businesses that would be subject to such requirements, as well as the 
nature and scope of the AML/CFT risks associated with those 
businesses.\29\ FinCEN also explained its concern that many of these 
financial institutions were sole proprietors or small businesses, and 
FinCEN intended to avoid imposing ``unreasonable regulatory burdens 
with little or no corresponding anti-money laundering benefits.'' \30\
---------------------------------------------------------------------------

    \28\ 67 FR 21110, 21111 (Apr. 29, 2002).
    \29\ Id. FinCEN initially exempted persons involved in closings 
and settlements for six months, and then subsequently extended the 
temporary exemption indefinitely. Id.; 67 FR 67547, 67548 (Nov. 6, 
2002).
    \30\ 67 FR 21110, 21112 (Apr. 29, 2002).
---------------------------------------------------------------------------

    In 2003, FinCEN issued an ANPRM regarding the AML/CFT program 
requirement for ``persons involved in real estate closings and 
settlements'' (2003 ANPRM). The 2003 ANPRM solicited comments on the 
money laundering risks in real estate closings and settlements, how to 
define ``persons involved in real estate closings and settlements,'' 
whether any persons involved in real estate closings and settlements 
should be exempted from the AML/CFT program requirement, and how to 
structure the requirement in light of the size, location, and 
activities of persons in the real estate industry.\31\ FinCEN received 
52 comments on the 2003 ANPRM from individuals, various institutions 
and associations of interested parties, law firms, state bar 
associations, an office within DOJ, and an office within the Internal 
Revenue Service (IRS).\32\ Many comments suggested that the threat of 
money laundering through real estate warranted appropriate regulation, 
but commenters disagreed over the specific businesses that should be 
covered. FinCEN did not propose regulations in response to these 
comments, and persons involved in real estate closings and settlements 
continue to be exempt from the AML/CFT program requirement.
---------------------------------------------------------------------------

    \31\ 68 FR 17569 (Apr. 10, 2003).
    \32\ See FinCEN's website to review comments submitted, 
available at https://www.fincen.gov/comments-advance-notice-proposed-rule-anti-money-laundering-programs-persons-involved-real-estate.
---------------------------------------------------------------------------

3. FinCEN's Targeted Actions in the Real Estate Sector
    While maintaining the exemption for persons involved in real estate 
closings and settlements, FinCEN has taken targeted action to address 
certain vulnerabilities in the real estate sector. In a 2012 final 
rule, FinCEN eliminated an exemption for ``loan and finance 
companies,'' and required such companies--defined as RMLOs--to file 
SARs and comply with AML/CFT program obligations.\33\ In a 2014 final 
rule, FinCEN extended similar requirements to the housing-related 
GSEs--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.\34\ In 
a 2020 final rule, FinCEN also imposed additional AML/CFT obligations 
on banks lacking a federal functional regulator, ensuring that such 
entities would be subject to requirements to have an AML/CFT program 
and meet Customer Identification Program (CIP) and Customer Due 
Diligence (CDD) requirements, including the verification of beneficial 
owners of legal entity accounts, in addition to their existing SAR 
obligations (which would include reporting on transactions involving 
suspicious real estate transactions).\35\
---------------------------------------------------------------------------

    \33\ 77 FR 8148 (Feb. 14, 2012) (codified at 31 CFR part 1029).
    \34\ 79 FR 10365 (Feb. 25, 2014) (codified at 31 CFR part 1030).
    \35\ 85 FR 57129 (Sept. 15, 2020) (codified at 31 CFR 1020.210).
---------------------------------------------------------------------------

    To address non-financed transfers of residential real estate that 
do not involve a bank or other lender, FinCEN also began to issue 
Residential Real Estate GTOs in 2016.\36\ The Residential Real Estate 
GTOs require title insurance companies to file reports and maintain 
records concerning non-financed purchases of residential real estate 
above a certain price threshold by certain legal entities in select 
metropolitan areas of the United States.
---------------------------------------------------------------------------

    \36\ See 31 U.S.C. 5326; 31 CFR 1010.370; Treasury Order 180-01 
(Jan. 14, 2020), available at https://home.treasury.gov/about/general-information/orders-and-directives/treasury-order-180-01. In 
general, a GTO is an order administered by FinCEN which for a finite 
period of time imposes additional recordkeeping or reporting 
requirements on domestic financial institutions or other businesses 
in a given geographic area, based on a finding that the additional 
requirements are necessary to carry out the purposes of, or to 
prevent evasion of, the BSA. The statutory maximum duration of a GTO 
is 180 days, though it may be renewed.
---------------------------------------------------------------------------

    Information received in response to the Residential Real Estate 
GTOs has confirmed the money laundering risks involved in non-financed 
transfers of residential real estate and provided FinCEN and its law 
enforcement partners with additional data about that money laundering 
typology. The data obtained through the Residential Real Estate GTOs 
has connected non-financed residential real property purchases by 
certain legal entities with the true beneficial owners making the 
purchases, thereby decreasing the ability of criminals to hide their 
identities while laundering money through real estate. FinCEN regularly 
receives feedback from law enforcement

[[Page 12428]]

partners that they use the information to generate new investigative 
leads, identify new and related subjects in ongoing cases, and support 
prosecution and asset forfeiture efforts. Taking that input into 
account, FinCEN has renewed the time-limited Residential Real Estate 
GTOs multiple times and has expanded them to cover additional 
metropolitan areas and methods of payment, yielding additional insight 
into the risks in both the luxury and non-luxury residential real 
estate markets.\37\ The information on real estate purchases thus 
enables investigators to connect real estate transactions with other 
suspicious financial activity. Although the Residential Real Estate 
GTOs have been effective, they were intended to be a temporary 
information collection measure that is limited in duration, not a 
permanent solution to a nationwide problem.\38\ The proposed nationwide 
reporting framework for certain residential real estate transfers, if 
finalized, would replace the current Residential Real Estate GTOs.
---------------------------------------------------------------------------

    \37\ FinCEN found that money laundering risks existed at lower 
price thresholds, and thus the current Residential Real Estate GTOs 
set a $300,000 threshold for all covered jurisdictions, except for 
the City and County of Baltimore, for which the threshold is 
$50,000.
    \38\ See supra note 36.
---------------------------------------------------------------------------

4. The 2021 Real Estate ANPRM
    On December 8, 2021, FinCEN published an ANPRM requesting comment 
on potential AML regulations for certain real estate professionals.\39\ 
The 2021 ANPRM solicited public comment on whether and how to address 
money laundering vulnerabilities in the U.S. real estate market, 
including whether a transactional reporting requirement, triggered when 
a real estate purchase meets certain conditions, should be imposed on 
real estate professionals under the BSA. The 2021 ANPRM also solicited 
comment on whether, in lieu of a transactional reporting requirement, 
FinCEN should promulgate AML/CFT program requirements and SAR filing 
requirements for persons involved in real estate closings and 
settlements, similar to those that are in place for banks and other 
financial institutions. The 2021 ANPRM further sought comment 
concerning many aspects of real estate transfers, including: views on 
the scope of potential regulation of non-financed residential and 
commercial real estate transfers by legal entities and legal 
arrangements such as trusts; the sector's vulnerability to money 
laundering; differences in residential and commercial real estate 
transfers; due diligence best practices present in the industry; and 
the costs of any potential regulations.
---------------------------------------------------------------------------

    \39\ See 86 FR 69589 (Dec. 8, 2021).
---------------------------------------------------------------------------

    In response to the 2021 ANPRM, FinCEN received 151 public comments 
from a wide variety of stakeholders, including real estate industry 
associations, law firms and associations, non-governmental 
organizations, credit unions, Members of Congress, academics, and 
members of the public. Approximately 41 were unique comments and 110 
were uniform statements submitted by members of the title insurance 
industry.
    In general, commenters were split in their opinions on whether 
FinCEN should require transactional reports \40\ or require persons 
involved in real estate closings and settlements to have full AML/CFT 
program obligations.\41\ One commenter wrote that if FinCEN were to 
apply new reporting measures, it should work with the IRS to amend IRS 
Form 1099-S to include buyer-side information, along with the seller-
side information it already collects.\42\ Still other commenters 
suggested expanding the Residential Real Estate GTOs program to cover 
the entire nation either all at once or incrementally.\43\ FinCEN has 
considered all the comments that it received in response to the 2021 
ANPRM in drafting this proposed rule.
---------------------------------------------------------------------------

    \40\ National Association of Realtors, ANPRM Comment (Feb. 18, 
2022), pp. 1, 14, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0128.
    \41\ See Transparency International U.S., ANPRM Comment (Feb. 
18, 2022), p. 9, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0115; The FACT Coalition, ANPRM Comment (Feb. 18, 
2022), p. 3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0122; California Reinvestment Coalition, ANPRM 
Comment (Feb. 18, 2022), p. 2, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0126; Coalition for 
Integrity, ANPRM Comment (Feb. 21, 2022), pp. 3-4, available at 
https://www.regulations.gov/comment/FINCEN-2021-0007-0127; Louise 
Shelley and Ross Delston, ANPRM Comment (Feb. 21, 2022), p. 2, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0151.
    \42\ American Escrow Association, ANPRM Comment (Feb. 18, 2022), 
pp. 13-17, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0124.
    \43\ See Prosperus Title, ANPRM Comment (Feb. 18, 2022), p. 1, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0125; Marisa N. Bocci, ANPRM Comment (Feb. 21, 2022), p. 3, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0150; RESPRO, ANPRM Comment (Feb. 21, 2022), p. 2, available at 
https://www.regulations.gov/comment/FINCEN-2021-0007-0152.
---------------------------------------------------------------------------

III. FinCEN's Proposed Approach to a Real Estate Reporting Requirement

A. Streamlined SAR Requirement

    FinCEN has considered the extent to which non-financed residential 
real estate transactions should be subject to the standard AML program 
and SAR-filing requirements that the BSA applies to other financial 
institutions. By subjecting financial institutions to those 
requirements and expressly including ``persons involved in real estate 
closings and settlements'' among the types of financial institutions 
specified in the statute, the BSA appears to indicate an expectation 
that such persons comply with the same AML/CFT rules currently 
applicable to other types of financial institutions. Although FinCEN 
originally issued an exemption in 2002 that relieved persons involved 
in real estate closings and settlements from that obligation, that 
exemption was intended to be only temporary while FinCEN continued to 
study money laundering risks in the real estate sector.\44\
---------------------------------------------------------------------------

    \44\ See 67 FR 21110 (Apr. 29, 2002).
---------------------------------------------------------------------------

    After many years of study and several targeted and temporary 
actions to enhance transparency in the real estate sector, FinCEN is of 
the view that the money laundering risks for non-financed residential 
real estate transactions warrant comprehensive AML/CFT regulations. As 
explained above, such transactions can be used to facilitate and 
obscure illicit activity. And, as several commenters on the ANPRM have 
urged, AML programs and SAR-filing obligations would provide highly 
useful information to law enforcement about those transactions. FinCEN 
recognizes, however, that the standard AML program and SAR-filing 
requirements may be especially burdensome to persons involved in real 
estate transactions, as many of them may be small businesses or 
individuals who cannot easily implement an AML program designed to 
identify and report suspicious activity. Such programs, which require 
financial institutions to make risk-based judgments about transactions 
and suspicious activity, may also be ineffective if small businesses 
and individuals in the real estate sector have difficulty implementing 
them.
    For these reasons, FinCEN is proposing a streamlined reporting 
requirement that differs from the requirements typically imposed on 
other financial institutions. In particular, section 5318(g) of the BSA 
authorizes the Secretary to require financial institutions to report, 
via SARs, any ``suspicious transactions relevant to a possible 
violation of law or regulation.'' \45\ But the BSA affords the 
Secretary flexibility in implementing that requirement, and indeed 
directs the Secretary to consider ``the means by or

[[Page 12429]]

form in which the Secretary shall receive such reporting,'' including 
relevant ``burdens,'' ``efficiency,'' and ``benefits.'' \46\ A new 
provision added to the BSA by section 6202 of the Anti-Money Laundering 
Act of 2020 (AML Act) further directs FinCEN to ``establish streamlined 
. . . processes to, as appropriate, permit the filing of noncomplex 
categories of reports of suspicious activity.'' In assessing whether 
streamlined filing is appropriate, FinCEN must determine, among other 
things, that such reports would ``reduce burdens imposed on persons 
required to report[,]'' while at the same time ``not diminish[ing] the 
usefulness of the reporting to Federal law enforcement agencies, 
national security officials, and the intelligence community in 
combating financial crime, including the financing of terrorism[.]'' 
\47\
---------------------------------------------------------------------------

    \45\ 31 U.S.C. 5318(g)(1)(A).
    \46\ 31 U.S.C. 5318(g)(5)(B)(i)-(iii).
    \47\ See AML Act, section 6202 (codified at 31 U.S.C. 
5318(g)(D)(i)(1)). Section 6102(c) of the AML Act also amended 31 
U.S.C. 5318(a)(2) to give the Secretary the authority to ``require a 
class of domestic financial institutions or nonfinancial trades or 
businesses to maintain appropriate procedures, including the 
collection and reporting of certain information as the Secretary of 
the Treasury may prescribe by regulation, to . . . guard against 
money laundering, the financing of terrorism, or other forms of 
illicit finance.'' FinCEN believes this authority also provides an 
additional basis for the reporting requirement proposed in this 
NPRM.
---------------------------------------------------------------------------

    Based on that authority, FinCEN is proposing to streamline the SAR 
reporting requirement for purposes of this rule and to create a new 
form--the Real Estate Report--to reflect this streamlined approach. 
FinCEN believes that a streamlined reporting requirement, without an 
accompanying AML/CFT program, is appropriate, as the proposed rule 
would impose a requirement to report basic, standardized information 
about all relevant transactions, nationwide.
    FinCEN believes the proposed streamlined reporting requirement 
would enhance the usefulness of BSA reporting to Federal law 
enforcement agencies, national security officials, and the intelligence 
community for combating financial crimes. The information collected 
would contain crucial details about a typology of real estate transfers 
that present acute illicit finance risks and for which there is broad 
consensus that regulation is needed--information that would not 
otherwise be routinely identified and reported in a traditional SAR.
    FinCEN also believes that a streamlined filing requirement would 
reduce the potential burden on reporting persons. The filing 
requirement would be triggered when the conditions set forth in the 
proposed rule are met, which FinCEN believes will reduce the overall 
burden for most filers, compared to those that would be required when 
implementing a traditional AML program. The streamlined filing 
requirement, unlike the requirements for filing a traditional SAR, 
would entail no risk-based judgment about when to file and no narrative 
assessment. Thus, similar to a Currency Transaction Report (CTR), Form 
8300, or report filed under the Residential Real Estate GTOs, the 
proposed Real Estate Report would not require filers to make 
discretionary decisions.\48\ Because of this, while FinCEN's 
traditional SAR authority mandates that SARs be guided by a financial 
institution's AML/CFT program designed to ensure that those 
discretionary decisions are made appropriately, FinCEN believes that an 
AML/CFT program is not necessary for reporting persons to accurately 
prepare and file useful reports under the proposed rule.\49\ For this 
reason, the proposed rule would exempt persons involved in real estate 
closings and settlements from the BSA's requirement to establish AML/
CFT programs--effectively maintaining the current exemption for such 
persons under 31 U.S.C. 5318(h)(1), in light of the new reporting 
requirement.\50\
---------------------------------------------------------------------------

    \48\ Under the BSA and its implementing regulations, ``each 
financial institution other than a casino shall file a [CTR] of each 
deposit, withdrawal, exchange of currency or other payment or 
transfer, by, through, or to such financial institution which 
involves a transaction in currency of more than $10,000[.]'' 31 CFR 
1010.311; see also 31 U.S.C. 5313. Under the BSA, relevant IRS 
statutes, and associated implementing regulations, ``[a]ny 
[individual, trust, estate, partnership, association, company or 
corporation] who, in the course of a trade or business . . . 
receives currency in excess of $10,000 in 1 transaction (or 2 or 
more related transactions) shall . . . [file a Form 8300] with 
respect to the receipt of currency.'' 31 CFR 1010.330(a)(1)(i); see 
also 31 U.S.C 5331; 26 U.S.C. 7701(a)(1).
    \49\ See 31 U.S.C. 5318(g)(5)(C).
    \50\ See 31 CFR 1010.205(b)(v).
---------------------------------------------------------------------------

    The proposed rule would also exempt reporting persons from the 
confidentiality provisions that the BSA applies to suspicious activity 
reporting.\51\ These confidentiality provisions typically serve to 
ensure that banks and other such financial institutions do not alert 
SAR subjects to the fact that a SAR is being filed based on a suspicion 
with respect to the subject, potentially inducing a behavior change and 
reducing the utility of the SAR. However, as the triggering criteria 
for the filing of the proposed streamlined filing (a non-financed 
transfer to certain legal entities and trusts) would be known by all 
parties to the transfer, including those whose information will be 
collected and reported to FinCEN, the same confidentiality 
considerations do not apply.\52\
---------------------------------------------------------------------------

    \51\ See 31 U.S.C. 5318(g)(2).
    \52\ 31 U.S.C. 5318(a)(7).
---------------------------------------------------------------------------

B. The Corporate Transparency Act

    FinCEN notes that certain information collected under this proposed 
rule--most notably the beneficial ownership information of certain 
legal entities--will be collected and available to law enforcement in 
certain instances by virtue of the new beneficial ownership reporting 
requirements imposed by the CTA and implemented through the Beneficial 
Ownership Information Reporting Requirements Rule (BOI Reporting 
Rule).\53\ However, the CTA's reporting regime and this proposed rule 
would serve different purposes. This proposed rule is designed as a 
tailored reporting requirement that would capture a particular class of 
activity that Treasury deems high-risk--namely, non-financed 
residential real estate transfers to certain legal entities and 
trusts--and that, given the risk, warrants reporting on a transaction-
specific basis. The resulting reports could readily alert law 
enforcement to the persons involved in a transfer of assets that 
carries significant illicit finance risk. Indeed, as with traditional 
SARs, reports under this proposed rule would require reporting on 
specific real estate transactions and allow Treasury and law 
enforcement to connect money laundering through real estate with other 
types of potentially illicit activities and to conduct broad money 
laundering trend analysis. In contrast, the BOI Reporting Rule requires 
companies to file reports about the beneficial ownership of certain 
legal entities; however, this information is unlikely to shed light on 
purchases of real estate by criminal actors or allow law enforcement to 
map out purchases of residential real estate by individual criminals 
and money launderers as well as their networks. Although some 
information about real estate purchases may in some cases be separately 
available through other sources such as state land registries (as 
discussed

[[Page 12430]]

below), the inclusion of both beneficial ownership information and real 
estate transaction information in a single report as proposed in this 
NPRM will enable law enforcement to access information about potential 
criminal activity in a more timely and efficient manner.
---------------------------------------------------------------------------

    \53\ The BOI Reporting Rule implements the CTA's reporting 
provisions. In recognition of the fact that illicit actors 
frequently use corporate structures to obfuscate their identities 
and launder ill-gotten gains, the BOI Reporting Rule requires 
certain legal entities to file reports with FinCEN that identify 
their beneficial owners. See 87 FR 59498 (Sept. 30, 2022). Access by 
authorized recipients to BOI collected under the CTA are governed by 
other FinCEN regulations. See 88 FR 88732 (Dec. 22, 2023).
---------------------------------------------------------------------------

    In addition, the information to be reported under this proposed 
rule would differ from the information to be reported under the CTA in 
several ways. For instance, the proposed rule would require reporting 
of certain information about beneficial owners that is not required to 
be reported under the CTA reporting regime.\54\ A discussion of the 
content of the proposed Real Estate Report is included in Section IV.E. 
Furthermore, reports filed pursuant to the BOI Reporting Rule--
Beneficial Ownership Information Reports--and reports filed pursuant to 
this proposed rule--Real Estate Reports--would be housed in different 
databases with differing access privileges. The proposed Real Estate 
Reports would be stored electronically in the same database as 
traditional SAR and other BSA reports, in keeping with the nature, 
purposes, and use of those reports.
---------------------------------------------------------------------------

    \54\ For example, the CTA reporting regime will only indirectly 
require trusts to report their beneficial owners if an individual 
indirectly owns or controls a reporting company through a trust.
---------------------------------------------------------------------------

    Nevertheless, although they serve different purposes, the proposed 
rule adopts or adapts certain definitions from the BOI Reporting Rule 
where appropriate. These definitions are discussed in more detail in 
Section IV.B.

C. Lack of Alternative Sources of Relevant Information

    While other investigative methods and databases may be available to 
law enforcement seeking information on persons involved in non-financed 
transfers of residential real property, such sources of information are 
often incomplete, unreliable, and diffuse, resulting in a misalignment 
between these sources and the potential risks posed by the 
transfers.\55\ Furthermore, the non-uniformity of the title transfer 
processes across states and the fact that the recording of title 
information is largely done at the local level complicates and hinders 
investigative efforts. An investigator could spend months or even years 
going through the electronic or physical property records databases of 
the over 3,000 counties in the United States, only some of which have 
digitized their records. Furthermore, although certain data about non-
financed transfer could be obtained through the Residential Real Estate 
GTOs, those GTOs currently cover only 68 cities and counties are 
currently covered by the Residential Real Estate GTOs. In order to 
verify how many non-financed purchases of residential real estate a 
known illicit actor has made, law enforcement may have to issue 
subpoenas to each jurisdiction and potentially travel in-person to many 
counties to find the relevant information. Law enforcement is also 
likely to experience difficulty in finding beneficial ownership 
information for non-financed transfers of residential real estate to 
legal entities or trusts not registered in the United States. This is 
particularly key as international buyers contributed approximately $59 
billion to the existing-home U.S. residential real estate market from 
April 2021 to March 2022 and 44 percent of international purchases were 
non-financed, compared to 24 percent for all existing-home buyers.\56\
---------------------------------------------------------------------------

    \55\ See generally Sarah Mancini, Kate Lang, and Chi Wu, 
``Mismatched and Mistaken: How the Use of an Inaccurate Private 
Database Results in SSI Recipients Unjustly Losing Benefits,'' 
National Consumer Law Center (Apr. 2021), available at https://www.nclc.org/wp-content/uploads/2022/08/RptMismatchedFINAL041421.pdf.
    \56\ See National Association of Realtors, 2022 International 
Transactions in U.S. Residential Real Estate (July 2022), pp. 4-5, 
available at https://cdn.nar.realtor/sites/default/files/documents/2022-international-transactions-in-us-residential-real-estate-07-18-2022.pdf?_gl=1*3orrzx*_gcl_au*MTc4MTk3NTgzOS4xNjg3OTg1MTYy. The 
overall dollar value of international investment in residential real 
estate was comparatively low from 2021-2022 compared to the prior 
ten years due, in part, to investment and travel restrictions 
accompanying the COVID-19 pandemic. FinCEN believes this dollar 
value, in the absence of pandemic conditions, may therefore 
experience some mean reversion.
---------------------------------------------------------------------------

    The disjointed nature of existing local databases also poses a 
significant obstacle to a common investigative methodology employed by 
law enforcement when it searches for perpetrators of money laundering 
and other criminal activity--namely, identifying networks of 
individuals that have potentially engaged in suspicious activity. A 
search of the proposed Real Estate Reports would be far more efficient 
than searching incomplete commercial databases or potentially visiting 
thousands of county-level deed offices. FinCEN assesses that law 
enforcement would benefit from access to information about transfers 
that reflect an identified money laundering typology in one central 
location managed and hosted by the U.S. government. Finally, existing 
commercial databases do not collect important information that is the 
focus of this rule, including funds transfer information.

IV. Section-by-Section Analysis

    The proposed rule would impose reporting and recordkeeping 
requirements related to certain transfers of residential real property 
(reportable transfers). The reporting and recordkeeping obligations 
would primarily apply to ``reporting persons,'' who are certain persons 
involved in real estate closings and settlements. Generally, the 
reporting person would be identified on the basis of their order in a 
``cascade'' of specific functions performed by various persons involved 
in facilitating the closing or settlement of a real estate transaction. 
The proposed rule would also allow persons in the cascade to designate 
the reporting person amongst themselves.
    The reporting person would be required to report information 
identifying the transferee entity or trust, the beneficial owners of 
the transferee entity or trust, and certain individuals signing 
documents on behalf of the transferee entity or transferee trust 
(signing individual), as well as information concerning the reporting 
person, the transferor, the real estate transferred, and certain 
payment information. The reporting person would be required to file a 
Real Estate Report with FinCEN and maintain a copy of that report, 
along with a certification by the transferee's representative as to the 
identities of the beneficial owner(s) of the transferee, for a period 
of five years. If the persons involved in facilitating the closing or 
settlement enter into a designation agreement with regard to the 
reporting person, then the parties to the agreement would also be 
required to retain that agreement for a period of five years.\57\
---------------------------------------------------------------------------

    \57\ See 31 CFR 1010.430(d).
---------------------------------------------------------------------------

A. Residential Real Property in Reportable Transfers

1. Reportable Residential Real Property
    The proposed rule is meant to broadly capture residential real 
property such as single-family houses, townhouses, condominiums, and 
cooperatives, as well as apartment buildings designed for one to four 
families. These properties would be captured even if there is also a 
commercial element to the property, such as a single-family residence 
that is located above a commercial enterprise. The proposed rule would 
also include certain types of land on which a residence is not yet 
built. The criteria for whether property falls within the parameters of 
the rule can be met in one of three ways: (1) it is real property that 
includes a structure

[[Page 12431]]

designed principally for occupancy by one to four families; (2) it is 
land that is vacant or unimproved, and that is zoned, or for which a 
permit has been issued, for occupancy by one to four families; or (3) 
it is a share in a cooperative housing corporation. This definition 
modifies and expands the definition of ``residential real property'' 
used in the Residential Real Estate GTOs.
    Although shares of a cooperative are generally treated under state 
law as personal property rather than real property, FinCEN believes 
that the money laundering risks for residential cooperatives are 
similar to those of condominiums and other residential real property. A 
cooperative is a corporation, and the owners of the cooperative are the 
corporation's shareholders. Receiving ownership of shares in a 
cooperative therefore differs from receiving ownership of real 
property, as it does not include the filing of a deed specifying that 
ownership of a piece of real property has been transferred. However, 
the fundamental purpose of owning shares in a cooperative is to possess 
a piece of real property--generally a unit in an apartment owned by the 
cooperative. As the primary purpose for owning shares in a cooperative 
is to occupy real property, and because the market for cooperatives 
overlaps with the market for condominiums and other types of real 
property, FinCEN believes that it is appropriate to treat shares of a 
cooperative as residential real property for purposes of this rule. 
Without this treatment, money laundering risks may be unduly 
incentivized to shift investments to this segment of the real estate 
market.
    The proposed rule also makes clear that reportable residential real 
property includes property located in the United States, which is 
defined in the BSA implementing regulations to mean any State, the 
District of Columbia, the Indian lands (as that term is defined in the 
Indian Gaming Regulatory Act), and territory or possession of the 
United States.\58\ FinCEN believes this geographical scope is 
appropriate and that more limited coverage would likely push illicit 
activity into non-covered areas. Furthermore, a uniform national 
approach will provide consistency and predictability for businesses 
required to maintain records and make reports under this proposed rule.
---------------------------------------------------------------------------

    \58\ 31 CFR 1010.100(hhh).
---------------------------------------------------------------------------

2. Ownership Interests in Reportable Residential Real Property
    For purposes of the proposed rule, a person may hold an ownership 
interest in residential real property if the person has rights to the 
property that are demonstrated through a deed or, for an interest in a 
cooperative housing corporation, through stock, shares, membership, a 
certificate, or other contractual agreement evidencing ownership.
    Deeds are documents demonstrating title over property and recording 
changes in ownership and are effective when signed by the transferor 
and delivered to the transferee. They are generally publicly recorded, 
and although not all deeds are filed as such, the majority are, and 
there are benefits to doing so, such as preempting disputes over 
ownership and effecting the ability to sell the property.
    The ownership interests of a cooperative housing corporation are 
not reflected on a deed and are instead typically demonstrated through 
stock or shares. The holder of each ownership interest has the right to 
dispose of that stock or share, the value of which primarily reflects 
the value of the residence attached to the interest.

B. Transferees in Reportable Transfers

1. Transferee Entities
    The proposed regulation would require reporting only if a 
transferee of an ownership interest in residential real property is a 
transferee entity or a transferee trust, as those terms are defined. 
Such a transfer would be reportable even if one or more other 
transferees (i.e., those that are neither a transferee entity nor 
transferee trust) also receive an ownership interest in the same 
property as part of the same transaction. Generally, the proposed rule 
provides that a ``transferee entity'' is any person other than a 
transferee trust or an individual. For example, a transferee entity may 
be a corporation, partnership, estate, association, or limited 
liability company. However, the definition of a ``transferee entity'' 
contains exceptions for certain highly regulated entities.\59\
---------------------------------------------------------------------------

    \59\ For example, as discussed further below, individuals and 
trusts (outside of statutory trusts) are excepted from the 
definition of ``transferee entity.'' In addition, certain types of 
legal entities that are exempt from the requirement to report 
beneficial ownership information under the CTA are also excepted. 
Trusts are considered ``transferee trusts'' rather than ``transferee 
entities'' to ensure the proposed rule differentiates between legal 
entities and legal arrangements.
---------------------------------------------------------------------------

    The proposed definition is informed by comments submitted in 
response to the 2021 ANPRM. In general, the 2021 ANPRM commenters 
recognized the money laundering risks presented by transfers of 
residential real estate to certain legal entities and supported 
coverage of them in any potential regulation.\60\ Some commenters 
stated that only legal entities that are not covered by the CTA should 
be covered by any potential regulation of the real estate sector, as 
their beneficial ownership information will not be collected under the 
BOI Reporting Rule.\61\ However, as discussed below, FinCEN believes 
that this would leave a serious regulatory gap that would prevent the 
proposed rule from achieving its purpose of addressing illicit finance 
risk in the residential real estate sector. One commenter suggested 
that FinCEN use the definition of ``legal entity'' that appears in 
FinCEN's 2020 CDD Rule.\62\
---------------------------------------------------------------------------

    \60\ See Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), pp. 10, 24, 30, 39, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; American Land Title Association, 
ANPRM Comment (Feb. 17, 2022), p. 1, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0020; Transparency 
International U.S., ANPRM Comment (Feb. 18, 2022), pp. 3, 5, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0115; The FACT Coalition, ANPRM Comment (Feb. 18, 2022), pp. 2, 4, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0122; California Reinvestment Coalition, ANPRM Comment (Feb. 18, 
2022), pp. 2-3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0126; Coalition for Integrity, ANPRM Comment (Feb. 
21, 2022), p. 4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0127; Anti-Corruption Data Collective, ANPRM 
Comment (Feb. 18, 2022), p. 3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0153.
    \61\ See American Land Title Association, ANPRM Comment (Feb. 
17, 2022), p. 2, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0020.
    \62\ Financial & International Business Association, ANPRM 
Comment (Feb. 21, 2022), p. 2, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0142.
---------------------------------------------------------------------------

a. Regulated Entities
    Although this rule does not rely on the CTA for its legal 
authority, FinCEN is proposing to adopt many of the CTA's exemptions 
for purposes of this proposed definition, insofar as the policy 
rationales for those exemptions align with the goals of this proposed 
rule. The exemptions that FinCEN proposes to adopt would apply to legal 
entities that FinCEN believes have sufficient AML/CFT compliance 
obligations in the real estate context, and which are already subject 
to more government supervision, or have disclosure requirements that 
obviate the need for inclusion in this proposed rule.

[[Page 12432]]

The exclusions in the proposed rule that align with the CTA's 
exemptions largely turn on whether the entity in question is supervised 
by a government agency, is a government agency, or has disclosure 
requirements that may diminish illicit finance risk in the context of 
residential real property.\63\
---------------------------------------------------------------------------

    \63\ See 31 U.S.C. 5336(a)(11)(B)(xxi).
---------------------------------------------------------------------------

    Specifically, the proposed rule would exclude U.S. governmental 
authorities, securities reporting issuers, and certain banks, credit 
unions, depository institution holding companies, money service 
businesses, brokers or dealers in securities, securities exchange or 
clearing agencies, other Exchange Act registered entities, insurance 
companies, state-licensed insurance producers, Commodity Exchange Act 
registered entities, public utilities, financial market utilities, and 
registered investment companies, as well as any legal entity whose 
ownership interests are controlled or wholly owned, directly or 
indirectly, by any of the above.
    For example, in the residential real estate context, FinCEN 
assesses that the illicit finance risk of non-financed transfers is 
adequately diminished when a business must register its securities with 
the Securities and Exchange Commission (SEC) under Section 12 of the 
Securities Exchange Act of 1934 or must file Forms 10-K or other 
supplementary and periodic information under section 15(d) of the 
Securities Exchange Act of 1934. Persons who beneficially own more than 
five percent of a covered class of equity securities for these 
businesses must publicly file with the SEC certain information relating 
to such beneficial ownership.\64\ Persons who are a director or an 
officer or who beneficially own more than 10 percent of such registered 
equity security (insiders) also must publicly report their ownership 
and transactions.\65\
---------------------------------------------------------------------------

    \64\ See 15 U.S.C. 78m(d)(1), (g)(1); 17 CFR 240.13d-1.
    \65\ See U.S. Securities and Exchange Commission, ``Officers, 
Directors, and 10% Shareholders,'' available at https://www.sec.gov/education/smallbusiness/goingpublic/officersanddirectors.
---------------------------------------------------------------------------

b. Non-Profit Organizations
    The definition of transferee entity in the proposed rule should be 
read to include non-profit organizations.\66\
---------------------------------------------------------------------------

    \66\ Under U.S. tax law, non-profit organizations include tax-
exempt organizations: charitable organizations, churches and 
religious organizations, private foundations, and other non-profits 
such as civic leagues, social clubs, labor organizations, and 
business leagues, under Internal Revenue Code Section 501(c)(3), as 
well as political organizations subject to Section 527 to the 
Internal Revenue Code. See IRS, ``Exempt Organization Types,'' 
available at https://www.irs.gov/charities-non-profits/exempt-organization-types.
---------------------------------------------------------------------------

    FinCEN and at least four major federal financial institution 
regulators (the Federal Reserve Board of Governors, the Federal Deposit 
Insurance Corporation, the National Credit Union Administration, and 
the Office of the Comptroller of the Currency have made clear that the 
U.S. government does not view the charitable sector as a whole as 
presenting a uniform or unacceptably high risk of being used or 
exploited for money laundering, terrorist financing, or sanctions 
violations. The agencies have also recognized that the vast majority of 
charities and other non-profit organizations comply with the law and 
properly support charitable and humanitarian causes.\67\ The FATF also 
has made clear that only a small subset of non-profits sending funds 
cross-border should be considered high risk as it relates to serving as 
potential vehicles of terrorist financing.\68\
---------------------------------------------------------------------------

    \67\ Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation, FINCEN, National Credit Union 
Administration, and Office of the Comptroller of the Currency, Joint 
Fact Sheet on Bank Secrecy Act Due Diligence Requirements for 
Charities and Non-Profit Organizations (Nov. 19, 2020), available at 
https://www.fincen.gov/sites/default/files/shared/Charities%20Fact%20Sheet%2011_19_20.pdf.
    \68\ Financial Action Task Force, Risk of Terrorist Abuse of 
Non-Profit Organisations (June 2014), p. 8, available at https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Risk-of-terrorist-abuse-in-non-profit-organisations.pdf.coredownload.pdf.
---------------------------------------------------------------------------

    However, non-profit organizations (a subset of which are often 
referred to as charities), have proven vulnerable to abuse by certain 
illicit actors and have been implicated in illicit finance schemes, 
including fraud, money laundering, tax evasion, and terrorist 
financing.\69\ FinCEN's consultations with law enforcement indicate 
that charities are routinely the subjects of investigations involving 
fraud and money laundering, and a review of criminal cases involving 
illicit finance crimes and non-profit organizations shows that such 
organizations are vulnerable to exploitation by illicit actors. Indeed, 
charities purporting to support such causes as AIDS research, police 
and firefighters, disabled youth, childhood hunger, and veterans' 
issues have been investigated and prosecuted for fraud and money 
laundering.\70\ Further, non-profit organizations have been used by 
corrupt governmental officials to extort money from individuals seeking 
zoning approvals and permits; \71\ manipulated to engage in bribery of 
corrupt foreign officials; \72\ and exploited to finance terrorism.\73\
---------------------------------------------------------------------------

    \69\ See U.S. Department of the Treasury, ``Protecting 
Charitable Organizations,'' available at https://home.treasury.gov/policy-issues/terrorism-and-illicit-finance/protecting-charitable-organizations (noting that ``terrorists have exploited the 
charitable sector to raise and move funds, provide logistical 
support, encourage terrorist recruitment, or otherwise support 
terrorist organizations and operations''); U.S. Department of 
Justice, Press Release, Charity Founders Sentenced to Prison for 
Using Non-Profit to Steal from Donors and Cheat on Their Taxes (Nov. 
6, 2020), available at https://www.justice.gov/usao-sdca/pr/charity-founders-sentenced-prison-using-non-profit-steal-donors-and-cheat-their-taxes; see generally Organization for Economic Cooperation and 
Development, Report on Abuse of Charities for Money-Laundering and 
Tax Evasion (Feb. 2009), available at https://www.oecd.org/tax/exchange-of-tax-information/42232037.pdf; World Bank, Combatting the 
Abuse of Non-Profit Organizations (June 2015), available at https://elibrary.worldbank.org/doi/pdf/10.1596/978-0-8213-8547-0; Financial 
Action Task Force, Combating the Terrorist Financing Abuse of Non-
Profit Organisations (Nov. 2023), available at https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/BPP-Combating-TF-Abuse-NPO-R8.pdf.coredownload.inline.pdf.
    \70\ See U.S. v. Lyons, 472 F.3d 1055, 1061-1065 (9th Cir. 
2007); Dhafir v. U.S., 2015 U.S. Dist. LEXIS 197346, 2015 WL 
13727329 (N.D.N.Y. June 25, 2015).
    \71\ See generally U.S. v. Hairston, 46 F.3d 361 (4th Cir. 
1995).
    \72\ See generally U.S. v. Chi Ping Patrick Ho, 984 F.3d 191 (2d 
Cir. 2020) (in which a Chinese think tank registered in Hong Kong 
and in the United States as a public charity exploited a charity in 
Uganda to engage in money laundering and bribery under the Foreign 
Corrupt Practices Act).
    \73\ See Sotloff v. Qatar Charity, 2023 U.S. Dist. LEXIS 93911, 
2023 WL 3721683 (S.D. Fla. May 30, 2023) (financial support for 
Hamas, Al Qaeda, and ISIS); In re Terrorist Attacks on September 11, 
2001, U.S. Dist. LEXIS 247199*, *344 (S.D.N.Y. Apr. 27, 2020) 
(financial support for Al Qaeda); Strauss v. Credit Lyonnais, S.A., 
925 F. Supp. 2d 414, 415 (E.D.N.Y. 2013) (financial support for 
Hamas); U.S. Department of the Treasury, Press Release, Treasury 
Targets Hizballah Finance Official and Shadow Bankers in Lebanon 
(May 11, 2021), available at https://home.treasury.gov/news/press-releases/jy0170 (highlighting a non-profit providing funding for 
Hizballah).
---------------------------------------------------------------------------

    Illicit funds funneled through non-profit organizations are often 
invested in residential real estate. For instance, in July 2021, the 
11th Circuit affirmed the conviction and forfeiture judgments involving 
multiple non-profit organizations in Florida.\74\ The defendants that 
exploited the non-profits were convicted of conspiracy to commit wire 
fraud, operation of an illegal gambling business, conspiracy to commit 
money laundering, and money laundering.\75\ The court found that funds 
laundered through the non-profits were used to purchase three 
residential real estate properties in Florida, which were subsequently 
forfeited.\76\
---------------------------------------------------------------------------

    \74\ U.S. v. Masino, 2021 U.S. App. LEXIS 22615, 2021 WL 3235301 
(11th Cir. July 30, 2021); U.S. v. Masino, 2019 U.S. Dist. LEXIS 
34862, 2019 WL 1045179 (N.D. Fla. Mar. 5, 2019).
    \75\ U.S. v. Masino, 2021 U.S. App. LEXIS 22615, 2021 WL 3235301 
(11th Cir. July 30, 2021).
    \76\ U.S. v. Masino, 2019 U.S. Dist. LEXIS 34862, 2019 WL 
1045179 (N.D. Fla. Mar. 5, 2019), aff'd U.S. v. Masino, 2021 U.S. 
App. LEXIS 22615, 2021 WL 3235301 (11th Cir. July 30, 2021).
---------------------------------------------------------------------------

    One 2021 ANPRM commenter specifically stated that FinCEN should

[[Page 12433]]

cover purchases by non-profits.\77\ Another commenter detailed the 
regulations that cover non-profits and advocated against covering 
them.\78\ Having considered the circumstances and comments in totality, 
FinCEN believes that non-profit organizations are vulnerable to abuse 
by illicit actors seeking to launder illicit proceeds through 
residential real estate. Accordingly, they would be captured under the 
proposed definition of transferee entity.
---------------------------------------------------------------------------

    \77\ See The FACT Coalition, ANPRM Comment (Feb. 18, 2022), p. 
4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0122.
    \78\ See Kirton McConkie, ANPRM Comment (Feb. 7, 2022), pp. 1-8, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0017.
---------------------------------------------------------------------------

c. Unregistered Pooled Investment Vehicles
    Pooled investment vehicles (PIVs) that are not registered with the 
SEC may be transferee entities for purposes of the proposed rule. 
Broadly, PIVs can include investment companies registered with the SEC, 
such as mutual funds and exchange-traded funds, as well as unregistered 
investment companies, such as private real estate investment trusts, 
certain real estate funds, special purpose financing vehicles, and 
private funds (which are usually categorized by their sponsors 
according to the investment strategy they pursue, and include funds 
such as hedge funds, private equity funds, and venture capital 
funds).\79\ Under the proposed rule, PIVs that are investment companies 
and are registered with the SEC would be exempt from the definition of 
a transferee entity. The difference between registered and unregistered 
PIVs turns in part on whether the PIV is or is not excluded from 
registration requirements as an investment company under the Investment 
Company Act of 1940.\80\ PIVs that meet these exclusion requirements, 
and are therefore not registered with the SEC, do not have disclosure 
and reporting requirements that govern similar but public PIVs, such as 
mutual funds or exchange-traded funds.
---------------------------------------------------------------------------

    \79\ The term ``pooled investment vehicle'' has a particular 
definition in Rule 206(4)-8 under the Investment Advisers Act of 
1940. See 17 CFR 275.206(4)-8. However, the term is used more 
broadly in this NPRM. For information on private funds, see U.S. 
Securities and Exchange Commission, ``Private Fund Adviser 
Overview,'' available at https://www.sec.gov/divisions/investment/guidance/private-fund-adviser-resources. Section 202(a)(29) of the 
Advisers Act defines the term ``private fund'' as an issuer that 
would be an investment company, as defined in section 3 of the 
Investment Company Act of 1940 (15 U.S.C. 80a-3), but for section 
3(c)(1) or 3(c)(7) of that Act. Section 3(c)(1) excludes a 
privately-offered issuer having fewer than a certain number of 
beneficial owners. Section 3(c)(7) excludes a privately-offered 
issuer the securities of which are owned exclusively by ``qualified 
purchasers'' (generally, persons and institutions owning a specific 
amount of investments). See U.S. Securities and Exchange Commission, 
``Investment Company Registration and Regulation Package,'' 
available at https://www.sec.gov/investment/fast-answers/divisionsinvestmentinvcoreg121504#P84_14584.
    \80\ Id.
---------------------------------------------------------------------------

    Furthermore, unregistered PIVs are not subject to comprehensive 
AML/CFT regulation and are therefore vulnerable to abuse by illicit 
actors. The risks they present may be significant--the private fund 
sector, for example, holds approximately $20 trillion assets under 
management--a number that has more than doubled over the past decade 
and is comparable to the holdings of highly regulated U.S. banks.\81\ 
In recent years, private funds have been used by sanctioned persons, 
corrupt officials, tax evaders, and other criminal actors as a gateway 
to the U.S. financial system. This includes funds stolen from 
Malaysia's sovereign wealth fund, 1MDB; \82\ Venezuela's state-owned 
oil and natural gas company, PDVSA; \83\ and funds from a large-scale 
cryptocurrency fraud scam.\84\
---------------------------------------------------------------------------

    \81\ See U.S. Securities and Exchange Commission, ``Private Fund 
Statistics,'' available at https://www.sec.gov/divisions/investment/private-funds-statistics. This figure reflects the assets of private 
funds managed by registered investment advisers only. Form PF is 
filed by certain investment advisers registered with the SEC to 
report confidential information about the private funds they advise. 
Form PF is not filed by investment advisers that advise private 
funds but that are not registered with the SEC. Form PF provides the 
SEC and Financial Stability Oversight Council (FSOC) with important 
information about the basic operations and strategies of private 
funds and has helped establish a baseline picture of the private 
fund industry for assessing systemic risk.
    \82\ Peter Grant, ``1MDB probe may be good news for Park Lane 
Hotel Investors,'' The Wall Street Journal (July 26, 2016), 
available at https://www.wsj.com/articles/1mdb-probe-may-be-good-news-for-park-lane-hotel-investors-1469554543.
    \83\ See generally Criminal Complaint, U.S. v. Guruceaga, Case 
No. 1:18-cr-20685 (S.D. Fla. July 23, 2018).
    \84\ U.S. Department of Justice, Press Release, Former Partner 
of Locke Lord LLP Convicted in Manhattan Federal Court Of Conspiracy 
To Commit Money Laundering And Bank Fraud In Connection with Scheme 
To Launder $400 Million Of OneCoin Fraud Proceeds (Nov. 21, 2019), 
available athttps://www.justice.gov/usao-sdny/pr/former-partner-
locke-lord-llp-convicted-manhattan-federal-court-conspiracy-commit-
money#:~:text=SCOTT%2C%20a%20former%20equity%20partner,and%20operated
%20for%20that%20purpose.
---------------------------------------------------------------------------

    Unregistered PIVs have also been used to hide criminal proceeds in 
real estate. In one particular example, a criminal actor had a 
substantial ownership interest in a private fund and used it to both 
obfuscate and provide a veneer of legitimacy to illicit funds to make 
U.S. real estate purchases.\85\ Illicit actors may also hold a 
minority, non-controlling interest in an unregistered PIV, resulting in 
the unregistered PIV channeling that investor's illicit funds into real 
estate, as unregistered PIVs are not generally required to establish 
the identities of investors or look into the investor's source of 
funds.\86\
---------------------------------------------------------------------------

    \85\ See, e.g., Peter Grant, ``1MDB probe may be good news for 
Park Lane Hotel Investors,'' The Wall Street Journal (July 6, 2016), 
available at https://www.wsj.com/articles/1mdb-probe-may-be-good-news-for-park-lane-hotel-investors-1469554543; Complaint, U.S. v. 
``The Wolf of Wall Street'' Motion Picture, Case No. 2:16-cv-05362-
DSF-PLA (C.D. Cal. 2016); Will Parker, ``Meet the secretive Kazakh 
company backing the Upper West Side's latest skyscraper,'' The Real 
Deal: Real Estate News (Apr. 14, 2018), available at https://therealdeal.com/new-york/2018/04/13/meet-the-secretive-kazakh-company-backing-the-upper-west-sides-latest-skyscraper/; Miranda 
Patrucic, Vlad Lavrov, and Ilya Lozovsky, ``Kazakhstan's Secret 
Billionaires,'' OCCRP (Nov. 5, 2017), available at https://www.occrp.org/en/paradisepapers/kazakhstans-secret-billionaires.
    \86\ See., e.g., U.S. Department of Justice, Press Release, 
Acting Manhattan U.S. Attorney Announces Settlement of Civil 
Forfeiture Claims Against Over $50 Million Laundered Through Black 
Market Peso Exchange (Nov. 12, 2020), available at https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-attorney-announces-settlement-civil-forfeiture-claims-against-over.
---------------------------------------------------------------------------

    Outside of the real estate sector, the lack of comprehensive AML/
CFT coverage for unregistered PIVs has posed major national security 
challenges, enabling U.S. adversaries to invest in, and thereby gain 
access to, sensitive and emerging U.S. technologies.\87\ In fact, 
according to a 2018 Department of Defense report, unregistered PIVs 
such as private funds and special purpose vehicles have allowed 
jurisdictions whose interests compete with the United States to 
``access the crown jewels of U.S. innovation,'' including in the realms 
of artificial intelligence, sensors, virtual reality, self-driving 
vehicles, robotics, microchips, and facial and other image recognition 
technologies, without such activity being reviewed by the Committee on 
Foreign Investment in the United States or other relevant government 
authority, where required.\88\
---------------------------------------------------------------------------

    \87\ Cory Bennett and Bryan Bender, ``How China acquires `The 
Crown Jewels' of U.S. technology,'' Politico (May 22, 2018), 
available at https://www.politico.com/story/2018/05/22/china-us-tech-companies-cfius-572413.
    \88\ Michael Brown and Pavneet Singh, ``China's Technology 
Transfer Strategy: How Chinese Investments in Emerging Technology 
Enable A Strategic Competitor to Access the Crown Jewels of U.S. 
Innovation,'' Defense Innovation Unit Experimental (Jan. 2018), 
available at https://nationalsecurity.gmu.edu/wp-content/uploads/2020/02/DIUX-China-Tech-Transfer-Study-Selected-Readings.pdf; Paul 
Mozur and Jane Perlez, ``China Tech investment flying under the 
radar, Pentagon warns,'' The New York Times (Apr. 7, 2017).

---------------------------------------------------------------------------

[[Page 12434]]

    FinCEN therefore believes that unregistered PIVs generally present 
sufficient illicit finance risk to warrant inclusion in the definition 
of a transferee entity. These unregistered PIV may include entities 
such as private funds,\89\ certain market intermediaries,\90\ certain 
companies that primarily engage in the business of acquiring 
mortgages,\91\ certain funds maintained by charitable 
organizations,\92\ and certain church plans.\93\
---------------------------------------------------------------------------

    \89\ Private funds often are excluded from the definition of 
``investment company'' under 15 U.S.C. 80a-3(c)(1) and/or 15 U.S.C. 
80a-3(c)(7).
    \90\ Certain market intermediaries are excluded from the 
definition of ``investment company'' under 15 U.S.C. 80a-3(c)(2).
    \91\ Certain investment vehicles that are primarily engaged in 
``purchasing or otherwise acquiring mortgages and other liens on and 
interests in real estate'' are excluded from the definition of 
``investment company'' under 15 U.S.C. 80a-3(c)(5)(C).
    \92\ Certain investment vehicles maintained by certain 
charitable organizations are excluded from the definition of 
``investment company'' under 15 U.S.C. 80a-3(c)(10).
    \93\ Certain church plans are excluded from the definition of 
``investment company'' under 15 U.S.C. 80a-3(c)(14).
---------------------------------------------------------------------------

d. Large Operating Companies
    The proposed definition would capture certain legal entities that 
are known as ``large operating companies'' in the CTA and BOI Reporting 
Rule context. Within that framework, a large operating company is an 
entity that: ``employs more than 20 employees on a full-time basis in 
the United States;'' ``filed in the previous year Federal income tax 
returns in the United States demonstrating more than $5,000,000 in 
gross receipts or sales in the aggregate;'' and ``has an operating 
presence at a physical office within the United States[.]'' \94\ When 
explaining why this exemption was added to the CTA, Senator Sherrod 
Brown noted:
---------------------------------------------------------------------------

    \94\ 31 U.S.C. 5336(a)(11)(B)(xxi).

    The justification for the exemption of entities that have both 
physical operations and at least 20 employees in the United States 
is that those entities' physical U.S. presence will make it easy for 
U.S. law enforcement to discover those entities' true owners. Like 
other exemptions in the bill, this exemption should be narrowly 
construed to exclude entities that do not have an easily located 
physical presence in the United States, do not have multiple 
employees physically present on an ongoing basis in the United 
States, or use strategies that make it difficult for U.S. law 
enforcement to contact their workforce or discover the names of 
their beneficial owners.\95\
---------------------------------------------------------------------------

    \95\ Senator Sherrod Brown, ``National Defense Authorization 
Act,'' Congressional Record 166: 208, p. S7311 (Dec. 9, 2020), 
available at https://www.congress.gov/116/crec/2020/12/09/CREC-2020-12-09-pt1-PgS7296.pdf.

    Senator Brown cautioned however, that ``[t]his exemption should be 
subject to continuous, careful review by Treasury . . . to detect and 
prevent its misuse.'' \96\
---------------------------------------------------------------------------

    \96\ Id.
---------------------------------------------------------------------------

    One of the primary purposes of the proposed rule is to identify 
transferee entities that engage in non-financed residential real estate 
transfers. While it may be easier for law enforcement to identify 
beneficial owners behind large operating companies in comparison to 
shell companies, the very fact that a legal entity has engaged in 
activity that FinCEN has identified as presenting an illicit finance 
risk--the use of identity obfuscating vehicles in a non-financed 
residential real estate transfer--is valuable information for law 
enforcement, both to support individual investigations and to allow for 
aggregated analysis of money laundering in the U.S. real estate sector.
    However, certain large operating companies may fall within other 
exclusions provided for in the proposed rule. For example, a company 
required to register its securities with the SEC under section 12 of 
the Securities Exchange Act of 1934 would be excluded.
2. Transferee Trusts
    The proposed rule defines ``transferee trust'' as any legal 
arrangement created when a person (generally known as a settlor or 
grantor) places assets under the control of a trustee for the benefit 
of one or more persons (each generally known as a beneficiary) or for a 
specified purpose, as well as any legal arrangement similar in 
structure or function to the above, whether formed under the laws of 
the United States or a foreign jurisdiction. The proposed rule further 
notes that a trust is deemed to be the transferee trust regardless of 
whether residential real property is titled in the name of the trust 
itself or in the name of the trustee in their capacity as the trustee 
of the trust. However, the proposed rule excludes trusts that are 
securities reporting issuers, which includes companies that must 
register securities with the SEC and become subject to periodic 
reporting and disclosure requirements. FinCEN considers these trusts to 
be more tightly supervised and, because they are required to make 
certain public disclosures, they present a lower illicit finance risk. 
For similar reasons, trusts that have a trustee that is a securities 
reporting issuer are not covered by the proposed rule. Furthermore, the 
proposed rule excludes statutory trusts from being transferee trusts; 
instead, a statutory trust could be considered to be a transferee 
entity, unless one of the exemptions to the definition of ``transferee 
entity'' applies.
    Multiple 2021 ANPRM commenters highlighted the use of trusts to 
facilitate exploitation of the real estate market for the purpose of 
laundering money, were largely supportive of including them in any 
regulation, and suggested that transfers to trusts be covered, 
particularly since the CTA did not explicitly provide for reporting of 
beneficial ownership information from trusts.\97\ Other commenters 
recognized that trusts can present illicit finance risks but were only 
supportive of covering certain types.\98\ As discussed in detail above, 
FinCEN believes that non-financed residential real estate transfers to 
trusts present a high risk for money laundering. The reporting of all 
non-financed transfers of residential real estate in which the 
transferee is a trust would provide data relevant to a possible 
violation of law or regulation.
---------------------------------------------------------------------------

    \97\ See, Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), pp. 3, 30, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; Coalition for Integrity, ANPRM Comment (Feb. 
21, 2022), p. 4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0127; The FACT Coalition, ANPRM Comment (Feb. 18, 
2022), p. 4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0122; Transparency International U.S., ANPRM 
Comment (Feb. 18, 2022), pp. 3, 8, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0115; American College 
of Trust and Estate Counsel, ANPRM Comment (Feb. 4, 2022), pp. 1-22, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0013; Anti-Corruption Data Collective, ANPRM Comment (Feb. 18, 
2022), p. 3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0153; California Reinvestment Coalition, ANPRM 
Comment (Feb. 18, 2022), p. 1, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0126.
    \98\ See American College of Trust and Estate Counsel, ANPRM 
Comment (Feb. 4, 2022), pp. 1-22, available at https://www.regulations.gov/docket/FINCEN-2021-0007/comments?filter=ACTEC; 
National Association of Realtors, ANPRM Comment (Feb. 18, 2022), p. 
13, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0128.
---------------------------------------------------------------------------

3. Beneficial Owners of Transferee Entities and Transferee Trusts
    The proposed Real Estate Report would collect information about the 
beneficial owners of transferee entities and transferee trusts. Where 
possible, FinCEN has aligned the proposed rule's definitions of 
beneficial ownership with those contained in the CTA and its 
implementing regulations.
a. Determining the Beneficial Owners of Transferee Entities
    Consistent with the CTA, the proposed rule provides that a 
beneficial owner of a transferee entity is ``any

[[Page 12435]]

individual who, directly or indirectly, either exercises substantial 
control over the transferee entity or owns or controls at least 25 
percent of the ownership interests of the transferee entity.'' However, 
as the owners or directors of tax-exempt organizations do not hold a 
direct ownership stake in the organization, the reportable beneficial 
owners would be limited only to the individuals who exercise 
substantial control.
    Comments on the 2021 ANPRM were generally supportive of using the 
CTA's definition of the beneficial owner in any potential regulation. 
However, one commenter suggested FinCEN use the definition of 
beneficial owner set out in the Residential Real Estate GTOs.
    FinCEN considered that definition as well as other definitions for 
beneficial ownership for transferee entities. However, FinCEN believes 
that the BOI Reporting Rule's definition would be best suited to 
capture potentially obfuscated ownership of residential real property 
in high-risk non-financed transfers, particularly since it will always 
result in the identification of at least one beneficial owner via the 
``substantial control'' component of the definition, even if no 
individual meets the 25 percent ``ownership interests'' threshold. In 
addition, the use of consistent definitions of beneficial ownership 
across regulations would reduce the potential for confusion.
b. Determining the Beneficial Owners of Transferee Trusts
    The proposed rule would collect information about the beneficial 
owners of trusts, defined as any individual who, at the time of the 
real estate transfer to the trust: (1) is a trustee; (2) otherwise has 
authority to dispose of transferee trust assets, such as may be the 
case with a trust protector; \99\ (3) is a beneficiary who is the sole 
permissible recipient of income and principal from the transferee trust 
or who has the right to demand a distribution of, or to withdraw, 
substantially all of the assets of the transferee trust; (4) is a 
grantor or settlor of a revocable transferee trust; or (5) is the 
beneficial owner of a legal entity or trust that holds one of the 
positions described in (1)-(4), taking into account the exceptions that 
apply to transferee entities and transferee trusts.
---------------------------------------------------------------------------

    \99\ A trust protector is a person given power within the trust 
to take certain types of significant actions, such as the right to 
oversee the trustee's decisions, to remove the trustee, or to amend 
or terminate the trust. See section 808 of the Uniform Trust Code 
(2003), available at https://www.uniformlaws.org/viewdocument/committee-archive-76?CommunityKey=193ff839-7955-4846-8f3c-ce74ac23938d&tab=librarydocuments; Andrew T. Huber, ``Trust 
Protectors: The Role Continues to Evolve,'' American Bar Association 
(Jan.-Feb. 2017), available at https://www.americanbar.org/groups/real_property_trust_estate/publications/probate-property-magazine/2017/january_february_2017/2017_aba_rpte_pp_v31_1_article_huber_trust_protectors/.
---------------------------------------------------------------------------

    This proposed definition leverages the BOI Reporting Rule's 
approach to ascertaining the beneficial owners of a trust. Although the 
BOI Reporting Rule does not require reporting of beneficial ownership 
information by most trusts, as most trusts are not ``reporting 
companies'' for purposes of the CTA, the rule does require certain 
information to be reported about the beneficial owners of trusts when 
an individual is considered to own or control a reporting company 
through a trust. In line with that approach, each of the defined 
beneficial owners of a transferee trust has either ownership or control 
over trust assets, including over any real property transferred to the 
trust. For example, an individual who is the sole permissible recipient 
of both income and principal from the trust, or has the right to demand 
a distribution of, or withdraw, substantially all of the assets from 
the trust, has an ownership or controlling interest in the assets held 
in trust. Other individuals with authority to dispose of trust assets, 
such as trustees and grantors or settlors that have retained the right 
to revoke the trust, will be considered as controlling the assets held 
in trust. In the case of legal entities or trusts with ownership or 
control of trust assets, the beneficial owners of those legal entities 
or trusts also would be beneficial owners of the trust.
c. Beneficial Ownership as a Transactional Reporting Requirement
    The proposed rule would not require reporting persons to report 
changes to beneficial ownership of a transferee entity or transferee 
trust on an ongoing basis. The proposed rule is concerned only with 
real estate transfers, and it is not within the scope or intention of 
these regulations to require reporting persons to conduct ongoing 
monitoring of ownership of residential real property. While at least 
one 2021 ANPRM commenter supported the introduction of ongoing 
monitoring for change of ownership, most commenters did not address 
this issue. FinCEN assesses that it would likely represent a large and 
impractical burden to place an obligation on reporting persons that 
would require them to investigate changes to beneficial ownership of 
residential real estate that continues to be owned by a client 
transferee entity or trust, or to require transferee entities or 
transferee trusts to report changes in beneficial ownership to a real 
estate professional involved in their transfer of residential real 
property after the transfer has been concluded.

C. Reportable Transfers

    The proposed rule would define a reportable transfer as a transfer 
of any ownership interest in residential real property to a transferee 
entity or transferee trust, with certain exceptions. These proposed 
exceptions are meant to reflect FinCEN's intent to capture only higher 
risk transfers and therefore the definition exempts most financed 
transfers, as well as certain types of other low-risk transfers. Under 
the proposed rule, transfers would be reportable irrespective of the 
value of the property or the dollar value of the transaction; there is 
no dollar threshold for a reportable transfer. As such, gifts and other 
similar transfers of property may be reportable. Importantly, transfers 
would only be reportable if a reporting person is involved in the 
transfer and if the transferee is either a legal entity or trust. 
Transfers between individuals would not be reportable.
1. Exception for Financed Transfers
    First, certain financed transfers would be excepted. Specifically, 
the exception would apply to transfers involving an extension of credit 
to the transferee, but only if the credit is secured by the transferred 
residential real property and is extended by a financial institution 
that has both an obligation to maintain an AML program and a 
requirement to file SARs. Transfers financed by a private lender or the 
seller, neither of which are likely to have AML/CFT compliance programs 
and SAR filing obligations, would not fall within this exception. The 
purpose of the exception is to avoid duplication of required due 
diligence, as banks and other financial institutions subject to AML/CFT 
program requirements and SAR filing obligations must already extend 
them to any mortgages offered in a financed residential real estate 
transfer. Unlike in the non-financed space, these due diligence 
obligations of covered financial institutions mitigate the risks of 
money laundering through real estate for financed transactions and lead 
to reporting on suspicious transactions.
    Some commenters on the 2021 ANPRM highlighted that non-financed 
purchases make up a significant portion of the residential real estate 
market.\100\

[[Page 12436]]

Most commenters who addressed the issue were supportive of FinCEN 
covering non-financed transfers.\101\ Some explicitly stated that only 
non-financed transfers should be covered, but two comments stated that 
FinCEN should cover both non-financed and financed transfers.\102\ Two 
commenters were not supportive of covering non-financed transactions, 
either because they believe real estate professionals are already 
reporting on potential financial crimes through other FinCEN forms, 
such as the Form 8300, or because they believe most settlement agents 
already force funds through financial institutions that have 
traditional AML/CFT program requirements.\103\ However, FinCEN believes 
that further regulation is needed and its experience with the 
Residential Real Estate GTOs program has shown that existing reporting 
through Form 8300s and the minimal involvement of financial 
institutions subject to AML/CFT program requirements are not sufficient 
to obviate the illicit finance threat posed by non-financed transfers 
of residential real property.
---------------------------------------------------------------------------

    \100\ See Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), p. 15, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; Transparency International U.S., ANPRM 
Comment (Feb. 18, 2022), p. 3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0115.
    \101\ See Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), p. 15, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; Transparency International U.S., ANPRM 
Comment (Feb. 18, 2022), p. 3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0115; League of 
Southeastern Credit Unions & Affiliates, ANPRM Comment (Feb. 7, 
2022), pp. 1-4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0011; Illinois Credit Union League, ANPRM Comment 
(Feb. 21, 2022), p. 1, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0137.
    \102\ See Louise Shelley and Ross Delston, ANPRM Comment (Feb. 
21, 2022), p. 1, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0151; Anti-Corruption Data Collective, ANPRM 
Comment (Feb. 18, 2022), p. 3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0153.
    \103\ See Morgan, Lewis, & Bockius, ANPRM Comment (Feb. 18, 
2022), pp. 2-3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0123; Prosperus Title, ANPRM Comment (Feb. 18, 
2022), 1-2, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0125.
---------------------------------------------------------------------------

2. Exceptions for Low-Risk Transfers
    Exceptions also would exist for transfers that are the result of a 
grant, transfer, or revocation of an easement; transfers that occur as 
a result of the death of an owner of the residential real property; 
transfers that are the result of divorce or dissolution of marriage; or 
transfers to a bankruptcy estate. FinCEN views easements, which involve 
rights to use land for a specified purpose, as presenting little 
illicit finance risk. Transfers incidental to death, divorce, or 
bankruptcy are governed by preexisting legal documents, such as wills, 
or generally involve the court system through probate, divorce, or 
bankruptcy proceedings. FinCEN believes these circumstances present a 
relatively low risk for purposes of laundering money.
3. No Exceptions Based on the Property's Value or Purchase Price
    Residential real properties with a wide range of values are used by 
illicit actors to launder money, including residential real properties 
transferred for no consideration.\104\ Criminal networks interested in 
cleaning funds do not exclusively invest in luxury or high-value 
property, but also launder money through low-value real estate. FinCEN 
believes that any dollar threshold would enable money launderers to 
structure payments to avoid reporting requirements. Accordingly, the 
proposed rule does not provide exceptions for transfers above or below 
a set dollar value. Furthermore, it is meant to capture both sales and 
non-sale transfers, such as gifts and transfers to trusts. The transfer 
of residential real property to a trust by the settlor or grantor may 
therefore be reportable, although FinCEN expects that such reporting 
will be significantly limited by the exception for transfers of 
financed residential real property and by the exception for transfers 
occurring as a result of death. The latter, in particular, would exempt 
transfers by an executor of the grantor or settlor's property to a 
testamentary trust.
---------------------------------------------------------------------------

    \104\ For example, whereas the Residential Real Estate GTOs 
utilize a $300,000 threshold for most covered jurisdictions, a 
$50,000 threshold applies for the City and County of Baltimore to 
take into account local money laundering trends.
---------------------------------------------------------------------------

    FinCEN believes that the inclusion of low dollar value transfers in 
the proposed rule is unlikely to significantly increase the burden on 
potential reporting persons versus a scenario in which a dollar 
threshold is imposed. For example, according to the U.S. Census Bureau, 
residences costing less than $125,000 accounted for less than 0.5 
percent of all new residences sold in 2022, and residences costing less 
than $300,000 accounted for 7 percent of all new residences sold in 
2022.\105\ The American Land Title Association (ALTA) has indicated to 
FinCEN that a uniform reporting threshold, regardless of what the 
threshold is, would decrease compliance burdens for industry compared 
to thresholds that vary across jurisdictions. With respect to non-sale 
transfers made for no consideration, such as transfers made to a trust, 
FinCEN notes that the proposed rule provides the previously discussed 
exception for transfers that most often involve no consideration, such 
as those that occur due to death or divorce, which substantially 
narrows the scope of coverage. However, FinCEN welcomes comments on the 
potential burdens related to the reporting of non-sale transfers.
---------------------------------------------------------------------------

    \105\ U.S. Census Bureau, ``Table Q1. New Houses Sold by Sales 
Price: United States,'' available at https://www.census.gov/construction/nrs/pdf/quarterly_sales.pdf.
---------------------------------------------------------------------------

4. No Application to Transfers Without a Reporting Person
    FinCEN believes that the proposed rule would capture the majority 
of sale and non-sale transfers of residential real estate. However, 
transfers that do not involve a typical real estate-related 
professional as reflected in the cascade of potential reporting persons 
would not be captured.
5. No Application to Transfers to Natural Persons
    Transfers made directly to individuals would not be reportable 
under this regulation. Therefore, if the transferred property's title 
is in the name of one or more individuals, with no ownership interests 
held by a transferee entity or a transferee trust, the transfer would 
not be reportable under the rule.
    Some 2021 ANPRM commenters recognized that non-financed transfers 
of residential real estate to individuals present money laundering risk 
and supported their coverage by any potential regulation.\106\ Other 
commenters, however, stated that the burden of covering natural person 
purchases would be too large for the industry to bear and expressed 
privacy concerns.\107\
---------------------------------------------------------------------------

    \106\ See Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), p. 24, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; The FACT Coalition, ANPRM Comment (Feb. 18, 
2022), p. 3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0122; California Reinvestment Coalition, ANPRM 
Comment (Feb. 18, 2022), pp. 2-3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0126; Coalition for 
Integrity, ANPRM Comment (Feb. 21, 2022), p. 4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0127; Anti-Corruption 
Data Collective, ANPRM Comment (Feb. 18, 2022), p. 3, available at 
https://www.regulations.gov/comment/FINCEN-2021-0007-0153.
    \107\ See National Federation of Independent Business, ANPRM 
Comment (Dec. 22, 2021), p. 1, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0007; American Land 
Title Association, ANPRM Comment (Feb. 17, 2022), p. 2-5, available 
at https://www.regulations.gov/comment/FINCEN-2021-0007-0020.
---------------------------------------------------------------------------

    All non-financed transfers of residential real estate are less 
regulated than financed transfers and are inherently more vulnerable to 
money

[[Page 12437]]

laundering. However, FinCEN has not yet conducted a review of 
residential real estate purchases by natural persons sufficient to 
conclude that those transactions present a high risk for money 
laundering. To be sure, illicit actors often use natural person 
nominees or straw purchasers--such as a spouse, relative, or employee--
to acquire real estate while obscuring beneficial ownership.\108\ Such 
nominees or straw purchasers are unlikely to disclose that they are 
receiving ownership of real estate on behalf of the illicit actor. 
Requiring the reporting of information about transfers to individuals 
would significantly increase the number of reports filed and 
significantly increase burden on industry. Although the BSA would 
provide privacy protections for reports filed under the proposed rule, 
for the reasons stated above, FinCEN is not proposing to cover 
residential real estate purchases by natural persons at this time.
---------------------------------------------------------------------------

    \108\ See, e.g., U.S. Department of the Treasury, National 
Strategy for Combatting Terrorist and Other Illicit Financing 
(2020), pp. 17-18, available at https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf.
---------------------------------------------------------------------------

D. Reporting Persons

    The proposed rule would impose a filing and recordkeeping 
obligation on certain persons involved in real estate closings and 
settlements. The proposed rule would designate only one reporting 
person for any given reportable transfer. The reporting person would be 
identified in one of two ways: by way of a cascading reporting order or 
by way of a written agreement between the real estate professionals 
described in the cascading reporting order.
1. The Reporting Cascade
    Through the cascade, a real estate professional would be a 
reporting person required to file a report and keep records for a given 
transfer if the person performs a function described in the cascade and 
no other person performs a function described higher in the cascade. 
For example, if no person is involved in the transfer as described in 
the first tier of potential reporting persons, the reporting obligation 
would fall to the person involved in the transfer as described in the 
second tier of potential reporting persons, if any, and so on. The 
cascade includes only persons engaged as a business in the provision of 
real estate closing and settlement services within the United States.
    For any reportable transfer, a potential reporting person would 
need to determine whether there is another potential reporting person 
involved in the transfer who sits higher in the cascade. Although 
potential reporting persons will likely communicate with each other 
regarding the need to file a report, there would be no requirement to 
verify that any other potential reporting person in fact filed it.
    The proposed cascade is as follows: \109\
---------------------------------------------------------------------------

    \109\ The types of businesses involved in a real estate closing 
or settlement vary depending on the type of transaction and on the 
jurisdiction. As such, the reporting cascade (see Proposed 
amendments infra 31 CFR 1031.320(c)) is itemized to capture a broad 
array of potential businesses. However, FinCEN believes that, for 
any transaction, the functions described in first three tiers of the 
reporting cascade would be performed by only one business, with no 
other separate business performing the other two functions. FinCEN 
therefore treats the reporting cascade as having five functional 
groupings.
---------------------------------------------------------------------------

    First, real estate professionals providing certain settlement 
services in the settlement process--In the first instance, the 
reporting obligation would rest with real estate professionals 
providing certain settlement services at the termination of the 
settlement process. Specifically, the cascade first designates as a 
reporting person the person listed as the closing or settlement agent 
on a settlement (or closing) statement, which is common to the vast 
majority of residential real property transfers. This ensures that a 
potential reporting person familiar with the intricacies of the 
transfer, including transactional information and details about the 
parties involved, will be the most frequent reporting person. This, in 
turn, will ensure that the reports are more accurate and useful to law 
enforcement and will lessen the burden on reporting persons. In the 
event that no person is directly identified as a closing or settlement 
agent on the statement, the reporting obligation would fall on the 
person that prepared the closing or settlement statement. If no person 
prepared a closing or settlement statement, the reporting obligation 
falls to the person that files the deed or other instrument that 
transfers ownership of the residential real property.
    Second, the person that underwrites an owner's title insurance 
policy for the transferee--If no person executes the specific 
settlement functions in the first tier of the cascade, the reporting 
obligation would then fall upon the person that underwrites the title 
insurance policy associated with the real property transfer. Such 
policies are typically underwritten by large title insurance companies 
that issue policies providing indemnity in the event the title of the 
transferred property is later determined to have a defect or 
encumbrance.\110\ Title insurance companies have been the reporting 
persons for the Residential Real Estate GTOs since 2016 and have 
demonstrated the ability to gather information and file reports 
containing information similar to that which would be collected under 
the proposed rule. Given that the underwriting function is further 
removed from the termination of the settlement process than the 
settlement services described in the first tier of the cascade, and so 
further removed from information to be collected, FinCEN assesses that 
persons underwriting such policies should be second line reporting 
persons. Title insurance agents may serve as settlement agents and if 
serving such a first-tier function, would have easier access to the 
necessary information in that capacity.
---------------------------------------------------------------------------

    \110\ The U.S. title insurance market is concentrated, with four 
national underwriters accounting for approximately 81 percent of 
total industry premiums as September 2022. Fitch Rating, U.S. Title 
Insurance Outlook 2023 (Dec. 2, 2022), available at https://www.fitchratings.com/research/insurance/us-title-insurance-outlook-2023-02-12-2022.
---------------------------------------------------------------------------

    Third, the person that disburses the greatest amount of funds in 
connection with the reportable transfer--In the event that no person 
executes the specific settlement functions in the first tier of the 
cascade, and no person underwrites a title insurance policy, the third 
tier of the cascade would require reporting by the person that 
disburses the greatest amount of funds in connection with residential 
real property transfer. The proposed rule notes that such disbursement 
may be in any form, including from an escrow account (which is 
frequently used to settle real estate transfers), from a trust account, 
or from a lawyer's trust account. Such reporting persons will have 
visibility into funds transfer information associated with the 
residential real property transfer and FinCEN believes that, by virtue 
of this, they should be able to obtain the information this proposed 
rule would collect with relatively little burden. However, this tier of 
the cascade would only cover persons involved in real estate 
settlements and closings who are disbursing funds via third-party 
accounts and excludes direct transfers from transferees to transferors 
and disbursements coming directly from banks.
    Fourth, the person that prepares an evaluation of the title 
status--In the event that no person participates in the transfer who 
falls within the first three tiers of the cascade, the reporting person 
would be the person who prepares an

[[Page 12438]]

evaluation of the status of the title. Such an evaluation may take the 
form of a title check, which is typically performed by title insurance 
companies in lieu of providing actual insurance or an opinion letter, 
which is rendered by attorneys.
    Fifth, the person who prepares the deed--Finally, should no person 
identified in the first four tiers of the cascade participate in the 
real property transfer, the reporting obligation would fall to the 
preparer of the deed associated with the transfer. A deed is typically 
prepared by an attorney, but it may also be prepared by a non-attorney 
settlement or closing agent or by the transferee itself.
2. Capturing Both Sale and Non-Sale Transfers
    The reporting cascade is designed to capture both sales of 
residential real estate and non-sale transfers of residential real 
estate. It assigns a reporting obligation based on the functions 
fulfilled by the various real estate professionals involved in the 
closing and settlement process, regardless of whether the transfer is a 
sale or non-sale. FinCEN believes that it is necessary to capture non-
sale transfers to ensure uniform coverage of non-financed transfers and 
to ensure that nominees do not purchase homes for criminal actors and 
then transfer the title on free of charge to a legal entity or trust.
    During a typical closing and settlement for a non-financed transfer 
of residential real estate, a transferee will offer to purchase a 
residential real property for a given price. This offer can occur 
through a representative, such as a real estate agent, attorney, or 
registered agent, or it may come directly from the transferee itself. 
If the transferor accepts the offered price, either directly or through 
a representative, the parties can proceed toward the settlement 
process, normally through a sales contract. It is at this point that 
title agencies or companies and escrow agents or companies typically 
become involved in the process. Title agencies will conduct an 
examination of the title to ensure it is free from defects, such as 
liens or other encumbrances. Escrow companies may at this point hold a 
deposit or ``earnest money'' from the transferee that the transferee 
would forfeit should it be responsible for breaking the purchase 
contract.\111\ A transferee may also, and usually does, purchase a 
title insurance policy, which ensures that the title of the property is 
free from defects and indemnifies the transferee should a title defect 
later come to light. As noted above, a transferee may opt, in lieu of 
title insurance, to obtain a title check from the title insurance 
company or an opinion letter from an attorney.\112\ However, neither 
title insurance nor a title check is required to close or settle non-
financed transfers of residential real property.
---------------------------------------------------------------------------

    \111\ ``Escrow is [a] transaction in which an impartial third-
party acts in a fiduciary capacity for all or some of the parties . 
. . in performing [s]ettlement services according to local practice 
and custom.'' American Land Title Association, ALTA Best Practices 
4.0 (May 23, 2023), p. 4, available at https://www.alta.org/best-practices/download.cfm?bestPracID=97&type=pdf.
    \112\ DarrowEverett LLP, ``Are Attorney Opinion Letters a Viable 
Alternative to Title Insurance'' (Feb. 23, 2023), available at 
https://www.darroweverett.com/attorney-opinion-letter-advantages-risks-title-insurance/; Fannie Mae, B7-2-06, Attorney Title Opinion 
Letter Requirements: Attorney Title Letter Opinion Requirements 
(Dec. 13, 2023), available at https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B7-Insurance/Chapter-B7-2-Title-Insurance/2522435591/B7-2-06-Attorney-Title-Opinion-Letter-Requirements-04-06-2022.htm.
---------------------------------------------------------------------------

    The transfer can then move toward settlement, which is also 
sometimes referred to as ``closing.'' According to ALTA, settlement is 
``[t]he process of completing a real estate transaction in accordance 
with written instructions during which deeds, mortgages, leases, and 
other required instruments are executed and/or delivered, an accounting 
between the parties is made, the funds are disbursed, and the 
appropriate documents are recorded in the public record.'' \113\ At 
settlement, a closing or settlement agent--which is most often a title 
agent but can be a representative of an escrow company or an attorney--
will prepare a ``settlement statement,'' which normally contains an 
itemized list of all of the fees or charges that the buyer and seller 
will pay during the settlement portion of the transfer.\114\ At 
settlement, the settlement statement and other closing documents are 
signed by the parties to the transfer and, if applicable, funds are 
disbursed to the transferor. This typically occurs via an escrow 
account, but also occurs at times via a trust account or attorney trust 
account or via a direct transfer of funds between the transferee and 
transferor (though, due to its risky nature, this practice is not 
common). Following the execution of the settlement statement and other 
closing documents and the disbursal of funds, the settlement agent will 
file the deed (the instrument which effects the transfer of ownership 
of the property) with the relevant local land registry or recordation 
office. Deeds are typically prepared by attorneys, but may be prepared 
by the settlement agent, escrow officer, or the transferee itself.\115\
---------------------------------------------------------------------------

    \113\ American Land Title Association, ALTA Best Practices 4.0 
(May 23, 2023), p. 4, available at https://www.alta.org/best-practices/download.cfm?bestPracID=97&type=pdf.
    \114\ ``The title agent and settlement agent are often the same 
entity that performs two separate functions in a real estate 
transaction. The terms title agent and settlement agent are often 
used interchangeably.'' American Land Title Association, ``ALTA 
Urges CFPB to Preserve Role of Independent Third-party Settlement 
Agents'' (Nov. 8, 2012), p. 26, available at https://www.alta.org/news/news.cfm?20121108-ALTA-Urges-CFPB-to-Preserve-Role-of-Independent-Third-party-Settlement-Agents; see, e.g., American Land 
Title Association, ``ALTA Model Settlement Statements,'' available 
at https://www.alta.org/trid/#statements; Consumer Finance 
Protection Bureau, What is a HUD-1 Settlement Statement? (Sept. 4, 
2020), available at https://www.consumerfinance.gov/ask-cfpb/what-is-a-hud-1-settlement-statement-en-178/.
    \115\ See Redfin.com, ``Steps to closing on a house,'' available 
at https://www.redfin.com/guides/steps-to-closing-on-a-house; 
American Land Title Association, ALTA Best Practices 4.0 (May 23, 
2023), p. 4, available at https://www.alta.org/best-practices/download.cfm?bestPracID=97&type=pdf; see generally American Land 
Title Association, ``ALTA Urges CFPB to Preserve Role of Independent 
Third-party Settlement Agents'' (Nov. 8, 2012), available at https://www.alta.org/news/news.cfm?20121108-ALTA-Urges-CFPB-to-Preserve-Role-of-Independent-Third-party-Settlement-Agents.
---------------------------------------------------------------------------

    A transfer of residential real estate that does not involve a 
purchase, such as a transfer that is a gift or that is made to a trust, 
involves a closing and settlement process that is distinct from the 
process described above that exists for typical sales of residential 
real estate. For example, such non-sale transfers would not involve a 
settlement agent or settlement statement or the transfer of funds 
through escrow. They may, however, involve an attorney or other real 
estate professional who prepares or files the deed, provides title 
insurance, or provides a title evaluation.
3. Designation Agreements
    Although the reporting cascade would identify the real estate 
professional who would be primarily responsible for filing a Real 
Estate Report, the real estate professionals described in the reporting 
cascade may enter into a written agreement to designate another person 
in the reporting cascade as the reporting person. For example, if a 
real estate professional involved in the transfer provides certain 
settlement services in the settlement process, as described in the 
first tier of the cascade, that person may enter into a written 
designation agreement with a title insurance company underwriting the 
transfer as described in the second tier of the cascade, through which 
the two parties agree that the title insurance company would be the 
designated reporting person with respect to that transfer. The person 
who would otherwise be the reporting person must

[[Page 12439]]

be a party to the agreement; however, it is not necessary that all 
persons involved in the transfer who are described in the reporting 
cascade be parties to the agreement.
    While the agreement must be in writing and must identify the date 
of the agreement, the name and address of the transferor, the name and 
address of the transferee entity or transferee trust, the property, the 
name and address of the designated reporting person, and the name and 
address of all other parties to the agreement, there is no required 
format for the designation agreement. All parties to the agreement 
would be required to retain a copy for a period of five years.
4. Employees, Agents, and Partners
    If an employee, agent, or partner acting within the scope of such 
individual's employment, agency, or partnership would be the reporting 
person in a reportable property transfer, then the individual's 
employer, principal, or partnership is deemed to be the reporting 
person. In that case, it is the responsibility of the reporting person 
(i.e., the employer, principal, or partnership) to ensure that a report 
is filed. Accordingly, FinCEN expects that, in most cases, individuals 
will not be reporting persons. However, there may be certain cases 
(e.g., sole proprietorships) where the responsibility to file a report 
rests with an individual.
5. Consultations With Real Estate Professionals
    The cascade is designed to both prevent an increased burden on 
reporting persons by ensuring that multiple real estate professionals 
do not have to collect information and file a report about the same 
transfer, while at the same time minimizing opportunities for reporting 
evasion by ensuring a report is filed for most reportable transfers. In 
the course of developing this cascading reporting order, FinCEN held 
extensive discussions with real estate professionals and the IRS, which 
employs a somewhat similar cascading reporting structure for its Form 
1099-S.\116\ These discussions suggest that potential reporting persons 
involved in a real estate closing or settlement would be aware of one 
another's presence or absence in the process at the time of closing, 
and that the reporting chain would be easily interpreted by persons 
involved in real estate closings and settlements.
---------------------------------------------------------------------------

    \116\ See 29 CFR 1.6045-4 (Information reporting on real estate 
transactions with dates of closing on or after January 1, 1991).
---------------------------------------------------------------------------

    Several 2021 ANPRM commenters suggested the use of a reporting 
cascade.\117\ Some commenters recommended that title and escrow 
companies and agents, real estate agents and brokers, real estate 
attorneys, and other real estate professionals be the reporting persons 
in any potential regulation, to ensure that a broad swath of real 
estate professionals are included and to prevent reporting 
loopholes.\118\ One commenter suggested that title insurance companies 
that are already affiliated with heavily regulated financial 
institutions, such as banks, should not be required to report; FinCEN 
is not proposing this path because it is unclear who would decide this 
or how it would be determined.\119\ Another commenter stated that 
FinCEN should place any compliance obligations on the seller, but 
FinCEN believes this would place too much burden on individuals who are 
not real estate professionals.\120\ Two commenters suggested requiring 
only title insurance companies to report in the residential context, 
and only secondarily requiring escrow agents to report if title 
insurance is not purchased.\121\
---------------------------------------------------------------------------

    \117\ See Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), p. 11, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; Transparency International U.S., ANPRM 
Comment (Feb. 18, 2022), p. 10, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0115; Senator Sheldon 
Whitehouse, ANPRM Comment (Feb. 18, 2022), p. 4, available at 
https://www.regulations.gov/comment/FINCEN-2021-0007-0118; The FACT 
Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0122; California 
Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0126; National Association of Realtors, ANPRM Comment (Feb. 18, 
2022), p. 15, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0128.
    \118\ See Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), p. 11, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; League of Southeastern Credit Unions & 
Affiliates, ANPRM Comment (Feb. 7, 2022), pp. 3-4, available at 
https://www.regulations.gov/comment/FINCEN-2021-0007-0011; American 
Land Title Association, ANPRM Comment (Feb. 17, 2022), p. 3, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0020; Transparency International U.S., ANPRM Comment (Feb. 18, 
2022), p. 10, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0115; The FACT Coalition, ANPRM Comment (Feb. 18, 
2022), p. 3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0122; American Escrow Association, ANPRM Comment 
(Feb. 18, 2022), pp. 13-17, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0124; California 
Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0126; Illinois Credit Union League, ANPRM Comment (Feb. 21, 2022), 
p. 1, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0137; Palmera Consulting, ANPRM Comment (Feb. 21, 2022), p. 4, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0141; Louise Shelley and Ross Delston, ANPRM Comment (Feb. 21, 
2022), p. 2, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0151.
    \119\ See Prosperus Title, ANPRM Comment (Feb. 18, 2022), p. 1, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0125.
    \120\ See Morgan, Lewis, & Bockius, ANPRM Comment (Feb. 18, 
2022), p. 3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0123.
    \121\ See Anti-Corruption Data Collective, ANPRM Comment (Feb. 
18, 2022), p. 1, 4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0153; National Association of Realtors, 
ANPRM Comment (Feb. 18, 2022), p. 14, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0128.
---------------------------------------------------------------------------

    Rather than to include or exclude any particular persons involved 
in real estate settlements and closings based on the titles they hold, 
FinCEN decided to design a reporting cascade based on the functions 
performed in a closing or settlement. This functional approach will 
ensure that the professional closest to the proposed information to be 
reported is most often the reporting person, thereby increasing 
efficiency and lessening overall burden. FinCEN notes that, as a result 
of this functional approach, specific real estate professionals such as 
real estate agents, brokers, and attorneys are not directly subject to 
obligations in the reporting cascade. They acquire reporting 
obligations only if they perform the specified functions.
    Several commenters on the 2021 ANPRM argued against inclusion of 
attorneys, claiming that attorney-client privilege should prevent 
attorneys involved in real estate closings and settlements from 
reporting information, including beneficial ownership information.\122\ 
In this proposed rule, FinCEN would require reporting by attorneys only 
when they perform certain functions--functions that generally may be 
performed by non-attorneys. Although some jurisdictions in the United 
States require a licensed attorney to perform certain closing or 
settlement functions, FinCEN believes that the functions described in 
the cascade may generally be performed by both attorneys and non-
attorneys. Indeed, FinCEN believes that the same reporting obligations 
should apply to

[[Page 12440]]

attorneys and non-attorneys alike when they perform the same functions 
in reportable transfers of residential real property. Furthermore, 
FinCEN expects that reporting of factual information about a real 
estate transfer would not implicate attorney-client privilege, in most 
cases. Also, the proposed rule provides that potential reporting 
persons, including attorneys, may enter into designation agreements 
with other real estate professionals described in the cascade, thereby 
passing the reporting obligation to another professional.
---------------------------------------------------------------------------

    \122\ See Joint Editorial Board for Uniform Real Property Acts, 
ANPRM Comment (Feb. 5, 2022), pp. 1-2, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0014; American Bar 
Association, ANPRM Comment (Feb. 7, 2022), pp. 1-12, available at 
https://www.regulations.gov/comment/FINCEN-2021-0007-0018; Marisa N. 
Bocci, ANPRM Comment (Feb. 21, 2022), p. 5, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0150.
---------------------------------------------------------------------------

E. Information To Be Reported

1. Description of Information
    The proposed rule requires reporting persons to report and maintain 
records of certain information regarding reportable transfers. This 
includes certain information about any reporting persons, transferee 
entities, transferee trusts, signing individuals, transferors, the 
residential real property, and reportable payments. To a large degree, 
this information is similar to the transactional information required 
to be reported through traditional SARs. FinCEN emphasizes that Real 
Estate Reports, like SARs, would be housed in FinCEN's secure BSA 
Portal and would not be accessible to the general public; FinCEN 
imposes strict limits on the use and re-dissemination of the data it 
provides to its law enforcement and other agency partners.
    The following discussion addresses in more detail some of the types 
of information the rule proposes to collect.
    1. Name and address: The proposed rule would collect the name and 
address of the principal place of business for reporting persons, 
transferee entities and transferee trusts, and transferors that are 
entities. For legal entities that are trustees of transferor trusts, 
the proposed rule would collect the place of trust administration. It 
would collect the name and a residential address for each individual 
who signed documents on behalf of the transferee (signing individuals), 
all beneficial owners of a transferee entity or transferee trust, 
individual transferors, and individuals who are trustees of transferor 
trusts.
    2. Citizenship: The proposed rule would collect citizenship 
information for all beneficial owners of a transferee entity or 
transferee trust. FinCEN proposes to collect this information to better 
analyze the volume of illicit funds entering the United States via 
entities or trusts beneficially owned by non-U.S. persons. FinCEN 
cannot do this type of broad analysis without collecting citizenship 
information. For instance, traditional SARs already collect this type 
of information and FinCEN was able to analyze SARs in aggregate to 
identify Russian investment in the U.S. economy, including the real 
estate sector, after the invasion of Ukraine.\123\
---------------------------------------------------------------------------

    \123\ See FinCEN, FIN-2023-Alert002, FinCEN Alert on Potential 
U.S. Commercial Real Estate Investments by Sanctioned Russian 
Elites, Oligarchs, and their Proxies (Jan. 25, 2023), available at 
https://www.fincen.gov/sites/default/files/shared/FinCEN%20Alert%20Real%20Estate%20FINAL%20508_1-25-23%20FINAL%20FINAL.pdf; FinCEN, FIN-2022-Alert002, FinCEN Alert on 
Real Estate, Luxury Goods, and Other High-Value Assets Involving 
Russian Elites, Oligarchs, and their Family Members (Mar. 16, 2022), 
available at https://www.fincen.gov/sites/default/files/2022-03/FinCEN%20Alert%20Russian%20Elites%20High%20Value%20Assets_508%20FINAL.pdf.
---------------------------------------------------------------------------

    3. Unique identifying number: The proposed rule would collect a 
unique identifying number for each person (whether an individual or 
entity) whose name and address are required to be reported. For any 
individual for whom a unique identifying number would be collected, a 
unique identifying number can be an IRS Taxpayer Identification Number 
(TIN) or, if they do not have one, a foreign equivalent or a foreign 
passport number. For an entity, a unique identifying number can be an 
IRS TIN or, if the entity does not have one, a foreign equivalent or a 
foreign registration number. FinCEN chose to include the collection of 
TINs, such as Social Security Numbers (SSNs) or Employer Identification 
Numbers (EINs), for transferee entities, transferee trusts, beneficial 
owners of transferee entities and trusts, as well as for certain 
individuals signing documents on behalf of the transferee entity or 
trust during the residential real estate transfer, for a number of 
reasons. Reporting TINs provides law enforcement with the most 
efficient means to identify potential individuals involved in illicit 
activity and connect those persons to other transactions during 
investigations. Unlike names, addresses, and dates of birth, which can 
be common across multiple individuals, TINs are unique to a given 
individual, entity, or trust. Consequently, collections of TINs would 
cut down on flagging of individuals, entities, and trusts that are not 
the intended subject of an investigation, which will allow law 
enforcement to more efficiently pursue leads, conduct investigations, 
and identify illicitly acquired assets. FinCEN's consultations with law 
enforcement have confirmed that law enforcement views access to TIN 
information as extremely helpful for streamlining investigative work. 
Law enforcement officials also indicated to FinCEN that it is 
relatively easy for illicit actors to create a false identity using a 
combination of name, address, and date of birth, and often do so, 
thereby impeding an investigation from the outset. However, law 
enforcement noted that obtaining a false TIN was orders of magnitude 
more difficult and that collection of such information was therefore 
crucial to their investigations. Moreover, TINs are routinely collected 
in other BSA reports, including SARs.\124\ Accordingly, the proposed 
rule would collect TINs for certain persons involved in covered 
residential real estate transfers.
---------------------------------------------------------------------------

    \124\ FinCEN, FinCEN Suspicious Activity Report (FinCEN SAR) 
Electronic Filing Requirements (Aug. 2021), p. 62, available at 
https://bsaefiling.fincen.treas.gov/docs/XMLUserGuide_FinCENSAR.pdf; 
see also FinCEN, Report of Cash Payments Over $10,000 Received in a 
Trade or Business (FinCEN Form 8300) Electronic Filing Requirements 
(Aug. 2021), p. 28, available at https://bsaefiling.fincen.treas.gov/docs/XMLUserGuide_FinCEN8300.pdf 
(indicating Form-8300s require TINs to be reported); FinCEN, FinCEN 
Currency Transaction Report (CTR) Electronic Filing Requirements 
(Aug. 2021), p. 27, available at https://bsaefiling.fincen.treas.gov/docs/XMLUserGuide_FinCENCTR.pdf 
(indicating CTRs required TINs to be reported); FinCEN, FinCEN 
Report of Foreign Bank and Financial Accounts (FBAR) Electronic 
Filing Requirements (Aug. 2021), p. 29, available at https://bsaefiling.fincen.treas.gov/docs/XMLUserGuide_FinCENFBAR.pdf 
(indicating FBARs require TINs to be reported).
---------------------------------------------------------------------------

    4. Representative capacity of signing individual: For any signing 
individual, the proposed rule would collect a description of the 
capacity in which the individual is authorized to act as the signing 
individual for the transferee entity or transferee trust, such as 
whether the signing individual is a legal representative. Additionally, 
if the signing individual is acting in that capacity as an employee, 
agent, or partner, the proposed rule would collect the name of the 
employer, principal, or partnership.
    5. Information concerning payments: The proposed rule would collect 
the total consideration paid by all transferees regarding the 
residential real property, as well as the total amount paid by the 
transferee entity or trust, the method of each payment made by the 
transferee entity or transferee trust, the accounts and financial 
institutions used for each such payment, and, if the payor is anyone 
other than the transferee entity or transferee trust, the name of the 
payor on the payment form. With respect to the reporting of payments 
made by the transferee entity or transferee trust, the proposed rule 
seeks only to capture transactions where the greatest risk for money 
laundering is present--the movement of funds from accounts held or 
controlled by the transferee--and therefore exempts payments made from 
escrow or trust

[[Page 12441]]

accounts held by the reporting person. Accordingly, the rule would 
require the reporting of payments made from other escrow or trust 
accounts, payments made into any escrow or trust accounts (to prevent 
illicit actors from trying to circumvent the reporting requirement), 
and payments sent directly from the transferee to the transferor. For 
example, if the payment path is (1) from the transferee's bank account 
to a trust account, (2) from that trust account to an escrow account 
held by the reporting person, and then (3) from that escrow account to 
the transferor, the reporting person would need to provide the payment 
details of the first leg of the payment path. FinCEN notes that the 
reporting requirement would include the reporting of payments that the 
reporting person may consider as being paid outside of closing, such as 
a payment made between a buyer and seller through bank accounts located 
outside of the United States. FinCEN proposes to collect payment 
information because financial information is key to ensuring that the 
reports meet the threshold for being highly valuable to law 
enforcement. The payment information behind real estate transfers 
conducted in a manner that has been identified as high risk for money 
laundering would help support law enforcement investigations, as it can 
help connect beneficial owners to suspicious activity or funding 
sources. The collection of this information may also serve as a 
deterrent to those thinking about attempting to launder money through 
the U.S. residential real estate sector.
    6. Information concerning the residential real property: The 
proposed rule would require the address of the relevant property, if 
applicable, and a legal description, such as the section, lot, and 
block. This information would be reported for each property involved in 
the transfer. For example, if a four-unit town home is transferred to a 
transferee entity, all four addresses would be reported.
    Commenters on the 2021 ANPRM had diverse views on what information 
should or should not be collected under any potential regulation. Most 
commenters who thought that information should be collected were in 
favor of collecting transferee side information, including beneficial 
ownership information.\125\ However, other commenters said that only 
basic information that is already collected in the course of a closing 
about the transferee should be collected, and that requiring real 
estate professionals to collect beneficial ownership information would 
be too burdensome.\126\ FinCEN recognizes that while most of the 
information that would be collected under this proposed rule is 
provided to the most frequent reporters in the normal course of a 
closing, beneficial ownership information is not. FinCEN addressed 
concerns about the burden of collecting beneficial ownership 
information in this proposed rule by making sure that reporting persons 
can collect this information through a form, which is then certified by 
the transferee as being accurate, as will be discussed further below.
---------------------------------------------------------------------------

    \125\ See Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), pp. 27-28, 44-45, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; Transparency International U.S., 
ANPRM Comment (Feb. 18, 2022), pp. 8-9, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0115; The FACT 
Coalition, ANPRM Comment (Feb. 18, 2022), p. 4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0122; California 
Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0126.
    \126\ See American Land Title Association, ANPRM Comment (Feb. 
17, 2022), pp. 2-4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0020; American Escrow Association, ANPRM 
Comment (Feb. 18, 2022), pp. 13-17, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0124.
---------------------------------------------------------------------------

    Some commenters advocated for the collection of transferor 
information as well.\127\ FinCEN opted to collect only minimal 
transferor information, as the primary party of interest to law 
enforcement is the new owner of property that has been transferred in a 
manner that presents money laundering concerns.
---------------------------------------------------------------------------

    \127\ See Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), pp. 27-28, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; Senator Sheldon Whitehouse, ANPRM Comment 
(Feb. 18, 2022), p. 4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0118; The FACT Coalition, ANPRM Comment 
(Feb. 18, 2022), p. 4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0122; California Reinvestment Coalition, 
ANPRM Comment (Feb. 18, 2022), p. 3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0126; Coalition for 
Integrity, ANPRM Comment (Feb. 21, 2022), p. 4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0127.
---------------------------------------------------------------------------

    Commenters also mentioned collecting certain funds payment 
information,\128\ identifying PEPs involved in the transfer,\129\ 
beneficial ownership verification,\130\ information about the property 
being transferred,\131\ and any representatives of the transferee in 
the transfer.\132\ Elements of each of these are included in the 
proposed rule, except for PEP identification and beneficial owner 
verification, which FinCEN believes would require reporting persons to 
undertake independent research that would represent a dramatically 
increased burden, compared to collecting information from the 
transferee.
---------------------------------------------------------------------------

    \128\ See Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), pp. 27-28, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; Transparency International U.S., ANPRM 
Comment (Feb. 18, 2022), p. 9, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0115; Senator Sheldon 
Whitehouse, ANPRM Comment (Feb. 18, 2022), p. 4, available at 
https://www.regulations.gov/comment/FINCEN-2021-0007-0118; The FACT 
Coalition, ANPRM Comment (Feb. 18, 2022), p. 4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0122; California 
Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0126; Coalition for Integrity, ANPRM Comment (Feb. 21, 2022), p. 4, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0127; Anti-Corruption Data Collective, ANPRM Comment (Feb. 18, 
2022), p. 3, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0153.
    \129\ See Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), pp. 27-28, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; Transparency International U.S., ANPRM 
Comment (Feb. 18, 2022), p. 9, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0115; The FACT 
Coalition, ANPRM Comment (Feb. 18, 2022), p. 4, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0122; California 
Reinvestment Coalition, ANPRM Comment (Feb. 18, 2022), p. 3, 
available at https://www.regulations.gov/comment/FINCEN-2021-0007-0126.
    \130\ See Transparency International U.S., ANPRM Comment (Feb. 
18, 2022), p. 9, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0115.
    \131\ See Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), pp. 44-45, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; American Land Title Association, ANPRM 
Comment (Feb. 17, 2022), p. 6, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0020; Anti-Corruption 
Data Collective, ANPRM Comment (Feb. 18, 2022), p. 3, available at 
https://www.regulations.gov/comment/FINCEN-2021-0007-0153.
    \132\ See Global Financial Integrity, ANPRM Comment (Feb. 17, 
2022), pp. 44-45, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0102; American Escrow Association, ANPRM Comment 
(Feb. 18, 2022), p. 16, available at https://www.regulations.gov/comment/FINCEN-2021-0007-0124.
---------------------------------------------------------------------------

2. Collection of Information
    FinCEN expects that the reporting person will have access to some, 
but not all, of the reportable information in the normal course of 
business. In particular, the reporting person may not have on hand the 
identifying information for the beneficial owners of the transferee 
entity or trust. The proposed rule therefore includes guidelines for 
how the reporting person should collect this information.
    The reporting person may collect the information directly from a 
transferee or a representative of the transferee, so long as the person 
certifies that the

[[Page 12442]]

information is correct to the best of their knowledge. The 
certification may be collected using a form that may be provided by 
FinCEN, similar to the one provided with respect to the CDD Rule, which 
requires certain financial institutions collect beneficial ownership 
information from legal entity customers, or the reporting person may 
incorporate a certification into a document of their own design, 
including existing closing documents used by the reporting person.\133\
---------------------------------------------------------------------------

    \133\ See 31 CFR 1010.230.
---------------------------------------------------------------------------

    FinCEN could have proposed that reporting persons must personally 
conduct extensive research to verify beneficial ownership and other 
information provided to them, but is proposing the use of a 
certification due to its comparative lesser burden on filers. The use 
of certifications will also ensure uniform information collection 
standards are met across reportable transfers. Any certification form 
signed in the course of a transfer must be retained by the reporting 
person for five years. Although the reporting person may rely on the 
information collected from other parties as described above, the 
reporting person may not report information that the reporting person 
knows, suspects, or has reason to suspect is inaccurate or incomplete. 
As an alternative, FinCEN considered requiring reporting persons to 
undertake the verification of the information to be reported. However, 
FinCEN is instead proposing the use of a written certification form 
because this approach would present a lower burden on reporting persons 
when compared with a scenario in which they would independently verify 
information through their own research. Allowing parties to the 
transfer and their representatives to provide information directly, 
while attesting to its accuracy, will reduce time and resources 
expended by reporting persons while ensuring that the most accurate 
information is provided to law enforcement and that compliance can be 
monitored more effectively. The proposed rule would also allow the 
flexibility of the reporting person collecting the information by any 
other means, so long as the transferee's representative (whether a 
signing individual or other type of representative) attests to its 
accuracy.

F. Filing Procedures

    A reporting person must electronically file a Real Estate Report 
with FinCEN, following the reporting form's instructions, no later than 
30 calendar days after the date on which the transferee entity or 
transferee trust receives the ownership interest in the residential 
real property. This is to ensure that reporting of time sensitive 
information about residential real estate closings and settlements is 
not unduly delayed.

G. Records Retention

    Reporting persons must maintain a copy of any Real Estate Report 
they have filed and any certifications as to the identities of the 
beneficial owner(s) of a transferee entity or transferee trust for five 
years from the date of filing and keep them available at all times for 
inspection as authorized by law.
    All parties to a designation must similarly retain a copy of the 
agreement for five years from the date of signing and keep it available 
at all times for inspection as authorized by law.

H. Exemptions

    The proposed rule would exempt reporting persons and Federal, 
State, local, or Tribal government authorities from the confidentiality 
provision in 31 U.S.C. 5318(g)(2) prohibiting the disclosure to any 
person involved in the transaction that the transaction has been 
reported.\134\ As noted above, FinCEN recognizes that financial 
institutions who file SARs are subject to restrictions prohibiting the 
disclosure of the existence of the SAR to any of its subjects. However, 
this would not be feasible with the proposed Real Estate Report, as 
reporting persons would need to collect information directly from the 
subjects of the Report. Moreover, all parties to a non-financed 
residential real estate transfer that is subject to the proposed rule 
would already be aware that a report would be filed, given that such 
filing is non-discretionary, rendering confidentiality unnecessary.
---------------------------------------------------------------------------

    \134\ 31 U.S.C. 5318(a)(7) (which allows the Secretary to 
prescribe appropriate exemptions).
---------------------------------------------------------------------------

    Furthermore, persons involved in real estate closings and 
settlements are exempt from the requirement to maintain an AML program 
requirement.\135\ For the reasons discussed earlier, that exemption 
will continue to apply to persons involved in real estate closings and 
settlements under the proposed rule. However, the exemption does not 
apply to reporting persons who are financial institutions otherwise 
required to establish an AML/CFT program under FinCEN's regulations.
---------------------------------------------------------------------------

    \135\ 31 CFR 1010.205(b)(1)(v).
---------------------------------------------------------------------------

V. Final Rule Effective Date

    FinCEN is proposing an effective date of one year from the date the 
final rule is issued. A one-year effective date is intended to provide 
real estate professionals with sufficient time to review and prepare 
for implementation of the rule. FinCEN solicits comment on the proposed 
effective date for this rule.

VI. Request for Comment

    FinCEN seeks comments on the questions listed below, but invites 
any other relevant comments as well. FinCEN encourages commenters to 
reference specific question numbers to facilitate FinCEN's review of 
comments.
    1. What would the cost and hour burden of filing reports as 
detailed by this NPRM be for your profession? Please quantify, if 
possible, the anticipated burden this proposed rule would represent for 
the designated reporting persons.
    2. What percentage of residential real property transfers involve 
transfers to the types of entities described in the regulation as 
``transferee entities'' and ``transferee trusts''?
    3. What are the benefits and drawbacks to having a cascading 
hierarchy of reporting persons, as proposed?
    4. Will real estate professionals know or be able to discover the 
other real estate professionals performing functions in the closing 
process as laid out by the reporting cascade?
    5. Please provide feedback on the order of the proposed cascading 
reporting hierarchy. Does it include those real estate professionals 
who are most able to obtain and report the required information? Should 
any person involved in real estate closings and settlements present in 
the proposed cascade be removed? Added? Why?
    6. Are there potential loopholes in the proposed cascading 
reporting order? If so, how might they be overcome? For example, would 
specifically adding real estate agents and brokers close any reporting 
gaps?
    7. How likely are potential reporting persons to enter into 
designation agreements? Are there any particular challenges associated 
with entering into such an agreement? With documenting that such an 
agreement has been made?
    8. What are typical costs to close a residential real estate deal? 
What percentage of the sale price do these costs typically represent?
    9. What sort of due diligence is normally conducted, before or at 
closing for residential properties, regarding (i) the parties to a 
transfer; (ii) the source of funds for any transfer; and (iii) other 
key aspects of the transfer?
    10. What sort of existing recordkeeping or reporting requirements, 
unrelated to BSA

[[Page 12443]]

compliance, exist for non-financed residential real estate transfers? 
If any, what information must be recorded or reported, to whom, and for 
how long? What entity provides oversight?
    11. Should FinCEN limit the scope of any final rule to only non-
financed transfers? What are the benefits and drawbacks to doing so?
    12. What adjustments, if any, should be made to the proposed 
definition of a reportable transfer?
    13. Should the rule except transfers that involve a qualified 
extension of credit to ``all'' transferees or to ``any'' transferee?
    14. What percentage of residential real estate transfers are non-
financed?
    15. What adjustments, if any, should be made to the proposed 
definition of ``residential real property''? Is the description of such 
property as ``designed principally for occupancy by one to four 
families'' a clear industry standard?
    16. Are the beneficial owners of transferee entities or transferee 
trusts routinely identified by some participant in the transfer?
    17. What information, if any, should be reported about transfers 
involving tax-exempt organizations?
    18. What do persons involved in real estate closings and 
settlements do if they have any suspicions about a transfer of 
residential real property, customer, or the payments supporting the 
transfer?
    19. What roles do attorneys play in non-financed sales and non-sale 
transfers of residential real estate? Are there attorney-client 
privilege concerns with reporting these transfers, as proposed in the 
rule? If so, what is the basis for these concerns?
    20. Please describe the purpose of the use of an escrow account, 
trust account, or lawyers' trust account in a real estate transfer. Do 
these accounts present money laundering concerns? Is the use of these 
accounts sufficiently captured in the proposed rule? Are there 
attorney-client privilege concerns around the use of lawyer's trust 
accounts, and if so, what is the basis for these concerns?
    21. How are opinion letters used in the real estate closing and 
settlement process? Are there attorney-client privilege concerns around 
the use of opinion letters? If so, what is the basis for those 
concerns?
    22. Are there other attorney-client privilege concerns, such as 
around attorneys acting as settlement agents, drafting or filing deeds, 
or reporting any of the required information? What is the basis for 
those concerns?
    23. How do factors related to parties to the transfer, the payments 
related to the transfer, and the property itself bear on money 
laundering risk assessment? What kinds of transfers and customers are 
highest and lowest risk? How are those risks mitigated and what are the 
associated costs of that mitigation?
    24. Is it possible to estimate the extent to which residential real 
property values are affected by money laundering through real estate?
    25. Please provide comments on the proposed definition of 
transferee entity.
    26. Please provide comments on the proposed definition of 
transferee trust.
    27. Please provide comments on the proposed definition of 
beneficial owners of transferee entities.
    28. Please provide comments on the proposed definition of 
beneficial owners of transferee trusts.
    29. Please provide comments on any other definition in the proposed 
rule.
    30. Please provide comments on the proposed coverage of transfers 
of residential real estate to transferee entities and transferee 
trusts, including the benefits and drawbacks to covering each.
    31. Are there any areas within the geographic scope of this 
proposed rule that have unique customs or requirements that should be 
taken into account?
    32. Please comment on how aware real estate professionals involved 
in residential real property transfers are of other categories of real 
estate professionals that may be involved in a given closing or 
settlement.
    33. What are the benefits of the rule as proposed?
    34. Is the information FinCEN proposes to be reported regarding 
non-financed residential real estate transfers to transferee entities 
and transferee trusts sufficient, over- or under-inclusive? What 
information should be added or removed and why?
    35. Should FinCEN ask for citizenship information of beneficial 
owners of transferee entities and transferee trusts? Why or why not?
    36. Is the information FinCEN proposes to be reported regarding 
reporting persons sufficient, over- or under-inclusive? What 
information should be added or removed and why?
    37. Please provide comments on the proposed collection of TINs for 
transferors and transferees and their beneficial owners.
    38. Is the information FinCEN proposes to be reported regarding 
signing individuals sufficient, over- or under-inclusive? What 
information should be added or removed and why?
    39. Is the information FinCEN proposes to be reported regarding 
transferors sufficient, over- or under-inclusive? What information 
should be added or removed and why?
    40. Is the information FinCEN proposes to be reported regarding the 
description of the transferred property sufficient, over- or under-
inclusive? What information should be added or removed and why?
    41. Is the information FinCEN proposes to be reported regarding 
payments sufficient, over- or under-inclusive? What information should 
be added or removed and why? Would it be useful to reporting persons to 
have space on the reporting form to explain or discuss suspected or 
observed suspicious activity?
    42. Should FinCEN require information regarding additional 
information about the source of funds for covered residential real 
estate transfers? How would or should reporting persons go about 
ascertaining source of funds information?
    43. How should FinCEN consider real estate transfers to foreign 
trusts and charitable trusts? Foreign non-profits? Do these present 
sufficient money laundering risk that they should be covered by any 
final rule? Why or why not?
    44. If program or other requirements were limited to purchases 
above a certain price threshold, how would this affect: (i) the burden 
of implementing such potential rules; and (ii) the utility of such 
potential rules for addressing money laundering issues in the real 
estate market?
    45. What are the key benefits for a reporting person, if any, 
assuming issuance of the rules?
    46. Please list any legislative, regulatory, judicial, corporate, 
or market-related developments that have transpired since FinCEN issued 
the 2021 ANPRM that you view as relevant to FinCEN's current proposed 
issuance of AML regulations.
    47. Are there particular concerns that small businesses may have 
regarding the implementation of this proposed rule?
    48. What would be the value of covering partially non-financed 
residential real estate transfers? What level of financing would be 
sufficient to alleviate that concern?
    49. FinCEN understands that for certain residential real estate 
transfers involving multiple investors, such as with unregistered PIVs, 
or large operating companies, there may be multiple financing methods 
involved in a single residential transfer. Please detail in the context 
of the proposed rule how due diligence checks on partially financed 
residential real estate transfers involving multiple entities

[[Page 12444]]

may differ from due diligence checks on fully financed residential real 
estate transfers multiple entities.
    50. This NPRM is focused on residential real estate. Do the same 
considerations for type of purchaser covered and professionals required 
to report apply to the commercial real estate sector?

VII. Regulatory Analysis

    This regulatory impact analysis (RIA) evaluates the anticipated 
effects of the proposed rule in terms of its expected costs and 
benefits to affected parties, among other economic considerations, as 
required by Executive Orders 12866, 13563, and 14094 (E.O. 12866 and 
its amendments).\136\ This RIA also includes assessments of the 
potential economic impact on small entities pursuant to the Regulatory 
Flexibility Act (RFA) and reporting and recordkeeping burdens under the 
Paperwork Reduction Act of 1995 (PRA), as well as analysis required 
under the Unfunded Mandates Reform Act of 1995 (UMRA).\137\
---------------------------------------------------------------------------

    \136\ See infra Section VII.B.
    \137\ Pursuant to its UMRA-related analysis, FinCEN has not 
anticipated material changes in expenditures for State, local, and 
Tribal governments, but because the proposed rule would impose new 
reporting and recordkeeping requirements on select entities in the 
private sector in connection with certain residential property 
transfers, FinCEN considers expenditures these private entities may 
incur as part of the regulatory impact in its assessment below.
---------------------------------------------------------------------------

    As discussed in greater detail below, the proposed rule is expected 
to promote national security objectives \138\ and enhance compliance 
with international standards \139\ by improving law enforcement's 
ability to identify the natural persons associated with transactions 
conducted in the U.S. residential real estate sector and thereby 
diminish the ability of corrupt and other illicit actors to launder 
their proceeds through real estate purchases in the United States. More 
specifically, the collection of the proposed streamlined SARs, Real 
Estate Reports, in a repository that would be readily accessible to law 
enforcement is expected to increase the efficiency with which resources 
can be utilized to identify such natural persons, or beneficial owners, 
when they have conducted non-financed purchases of residential real 
property using legal entities or trusts.
---------------------------------------------------------------------------

    \138\ See The White House, United States Strategy on Countering 
Corruption (Dec. 6, 2021), available at https://www.whitehouse.gov/wp-content/uploads/2021/12/United-States-Strategy-on-Countering-Corruption.pdf.
    \139\ See Financial Action Task Force, The FATF Recommendations 
(Feb. 2012; last updated Nov. 2023), available at https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Fatf-recommendations.html; see also Financial Action Task Force, United 
States Mutual Evaluation Report (Dec. 2016), p.1., available at 
https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MER-United-States-2016.pdf.coredownload.inline.pdf.
---------------------------------------------------------------------------

    The following RIA first describes the economic analysis FinCEN 
undertook to inform its expectations of the proposed rule's impact and 
burden.\140\ This is followed by certain pieces of additional and, in 
some cases, more specifically tailored analysis as required by E.O. 
12866 and its amendments,\141\ the RFA,\142\ the UMRA,\143\ and the 
PRA,\144\ respectively. Requests for comment related to the RIA--
regarding specific findings, assumptions, or expectations, or with 
respect to the analysis in its entirety--can be found in the final 
subsection \145\ and have been previewed and cross-referenced 
throughout the RIA.
---------------------------------------------------------------------------

    \140\ See Section VII.A.
    \141\ See Section VII.B.
    \142\ See Section VII.C.
    \143\ See Section VII.D.
    \144\ See Section VII.E.
    \145\ See Section VII.F.
---------------------------------------------------------------------------

A. Assessment of Impact

    This proposed rule has been determined to be a ``significant 
regulatory action'' under Section 3(f) of Executive Order 12866 because 
it may raise legal or policy issues. The following assessment indicates 
that the proposed rule may also be considered significant under Section 
3(f)(1), as the proposed rule is expected to have an annual effect on 
the economy of $200 million or more.\146\ Consistent with certain 
identified best practices in regulatory analysis, the economic analysis 
conducted in this section begins with a review of FinCEN's broad 
economic considerations, identifying the relevant market failures (or 
fundamental economic problems) that demonstrate the need or otherwise 
animate the impetus for the policy intervention as proposed.\147\ Next, 
the analysis turns to details of the current regulatory requirements 
and the background of market practices against which the proposed rule 
would introduce changes and establishes baseline estimates of the 
number of entities and residential real property transactions FinCEN 
expects could be affected in a given year. The analysis then briefly 
reviews the content of the proposed rules with a focus on the 
specifically relevant elements of the proposed definitions and 
requirements that most directly inform how FinCEN contemplates 
compliance with the proposed requirements would be operationalized. 
Next, the analysis proceeds to outline the estimated costs to the 
respective affected parties that would be associated with such 
operationalization. Finally, the analysis concludes with a brief 
discussion of certain alternative policies FinCEN considered and could 
have proposed, including an evaluation of the relative economic merits 
of each against the expected value of the rule as proposed.
---------------------------------------------------------------------------

    \146\ Executive Order 12866 (Sept. 30, 1993), section 3(f)(1); 
see also Section VII.A.4.
    \147\ Broadly, the anticipated economic value of a proposed rule 
can be measured by the extent to which it might reasonably be 
expected to resolve or mitigate the economic problems identified by 
such review.
---------------------------------------------------------------------------

1. Broad Economic Considerations
    The proposed rule principally addresses two broad problems. First, 
is the problematic use of the United States' residential real estate 
market to facilitate money laundering and illicit activity. Second, and 
related, is the difficulty of determining who beneficially owns legal 
entities or trusts that may engage in non-financed transactions, either 
because this data is not available to law enforcement or access is not 
sufficiently centralized to be meaningfully usable for purposes of 
market level risk-monitoring or swift investigation and prosecution. 
The second problem contributes to the first, making money laundering 
and illicit activity through residential real property more difficult 
to detect and prosecute, and thus more likely to occur. Although FinCEN 
is unable to quantify the economic benefits of the proposed rule, 
FinCEN expects that the proposed rule would generate benefits by 
mitigating those two problems. In other words, FinCEN expects that the 
proposed rule could make law enforcement investigations of illicit 
activity and money laundering in residential real estate less costly 
and more effective, and it would thereby generate value in the 
reduction of social costs associated with such activity.
a. The Problem of Money Laundering and Illicit Activity via Residential 
Real Property
    First, and most significantly, real estate money laundering can 
facilitate a broad range of illicit activity, and such activity entails 
significant social costs. For example, crimes such as tax evasion 
deprive governments of funds that could otherwise be used for public 
services or infrastructure investment.\148\ Other crimes such as 
financial fraud deprive

[[Page 12445]]

victims of their property, chilling legitimate investment and business 
activity that can yield economic benefits. Crimes involving various 
forms of corruption can hinder economic development and discourage 
legitimate businesses from operating in affected areas.\149\ More 
generally, certain direct and indirect costs of crime include: \150\
---------------------------------------------------------------------------

    \148\ Organization for Economic Co-Operation and Development 
(OECD), Report on Tax Fraud and Money Laundering Vulnerabilities in 
the Real Estate Sector (2007), available at https://www.oecd.org/ctp/exchange-of-tax-information/42223621.pdf (finding that real 
estate is a preferred choice of criminals for hiding ill-gotten 
gains and that tax fraud schemes are often closely linked with these 
activities).
    \149\ See, e.g., John McDowell and Gary Novis, ``The 
Consequences of Money Laundering and Financial Crime,'' Economic 
Perspectives: An Electronic Journal of the U.S. Department of 
State,'' Focus (May 2001), available at https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwi24f3B5d6AAxUvhIkEHcC4DpIQFnoECBMQAQ&url=https%3A%2F%2Fwww.hsdl.org%2F%3Fview%26did%3D3549&usg=AOvVaw2pg7gw7lpKPhWiw1Nq9mgF&opi=89978449.
    \150\ U.S. Department of Justice, Bureau of Justice Statistics, 
``Costs of Crime,'' available at https://bjs.ojp.gov/costs-crime.
---------------------------------------------------------------------------

     funding that must be provided by local, state, tribal, 
territorial, and Federal Governments to support law enforcement, the 
judiciary, and correctional services;
     financial losses sustained by crime victims, such as lost 
money and stolen or damaged property;
     physical, psychological, and long-term financial harm 
incurred by crime victims and their families, lost productivity and 
wages, and lower quality of life as a result of victimization; and
     heightened fear of crime, reduced ability to stem blight, 
loss of commercial and other investment, and increased burden on social 
service organizations in local communities.\151\
---------------------------------------------------------------------------

    \151\ For an example in the context of money laundering via 
commercial real estate, see, e.g., Casey Michel, ``A Ukrainian 
Oligarch Bought a Midwestern Factory and Let it Rot. What Was Really 
Going On?'' Politico (Oct. 17, 2021), available at https://www.politico.com/news/magazine/2021/10/17/ukrainian-oligarch-midwestern-factory-town-dirty-money-american-heartland-michel-kleptocracy-515948 (detailing how a corrupt Ukrainian tycoon 
laundered hundreds of millions of dollars by purchasing vast 
stretches of property in an economically depressed community in 
rural Illinois); see also U.S. Department of Justice, Press Release, 
Justice Department Seeks Forfeiture of Two Commercial Properties 
Purchased with Funds Misappropriated from PrivatBank in Ukraine 
(Aug. 6, 2020), available at https://www.justice.gov/opa/pr/justice-department-seeks-forfeiture-two-commercial-properties-purchased-funds-misappropriated (announcing forfeiture actions involving the 
same Ukrainian oligarch who, the DOJ alleged, purchased hundreds of 
millions of dollars in real estate and businesses across the 
country).
---------------------------------------------------------------------------

    In addition to facilitating crime and its associated costs, money 
laundering creates distinct economic problems in the real estate 
markets in which it occurs. When a market is economically efficient, 
the public may rely upon the price(s) at which transactions occur to 
convey meaningful information,\152\ in some cases including information 
about buyers' and sellers' valuations. Such information enables people 
to make optimal allocation choices--whether to participate in a given 
market, what investments to make, or how much to produce, for example. 
In this setting, money laundering creates price distortion by adding 
noise to the price signal. When price distortion occurs, the 
information necessary to make optimal decisions may become difficult or 
impossible to decipher from observable market behavior. Misallocations 
of goods and services that harm both producers and consumers may ensue 
and, in the extreme, markets can break down. Some evidence that this 
occurs in the real estate market has been documented.\153\
---------------------------------------------------------------------------

    \152\ For an example of this principle applied to capital asset 
pricing, see, e.g., Eugene F. Fama, ``Efficient Capital Markets: A 
Review of Theory and Empirical Work,'' The Journal of Finance, vol. 
25, no. 2 (1970), pp. 383-417, available at https://doi.org/10.2307/2325486.
    \153\ See e.g., European Parliamentary Research Service, 
``Understanding money laundering through real estate transactions'' 
(Feb. 2019), p. 7, available at https://www.europarl.europa.eu/RegData/etudes/BRIE/2019/633154/EPRS_BRI(2019)633154_EN.pdf (finding 
that ``[d]istortions of real estate prices and the concentration on 
limited sectors may have an impact beyond those areas and lead to 
increases in real estate prices, thus pricing people with legal 
sources of funds out of the market and reduc[ing] housing 
affordability, something that has been witnessed in several cities 
in both developed and developing countries . . . resulting in . . . 
displacement of less affluent households'').
---------------------------------------------------------------------------

    One way to think about how this noise is introduced in the 
residential real property market is to consider a property transaction 
by which money is laundered as a bundled good.\154\ This would imply 
that the observable price at which the residential real property is 
transferred does not reflect simply the buyer's private valuation of 
the property, but their willingness to pay for money laundering 
services as well. This implicit bundling can lead to economic 
inefficiencies in both the number of and counterparties with whom 
trades occur and the prices at which they occur.
---------------------------------------------------------------------------

    \154\ For a general description and examples of product 
bundling, see, e.g., William James Adams and Janet L. Yellen, 
``Commodity Bundling and the Burden of Monopoly,'' The Quarterly 
Journal of Economics, vol. 90, no. 3 (1976), pp. 475-98; see also 
Yongmin Chen, ``Equilibrium Product Bundling,'' The Journal of 
Business, vol. 70, no. 1 (1997), pp. 85-103.
---------------------------------------------------------------------------

    For example, if a residential real property seller is unaware that 
they are being compensated for both the transfer of their property as 
well as for their provision of money laundering services, the price at 
which they agree to the transfer will be inefficiently low.\155\ In the 
case where such a seller is unwilling to provide money laundering 
services at any price, this would have caused the bundled price 
reflecting their private valuations to be infinite, and as such no 
transaction would have occurred. Another kind of allocative 
inefficiency could occur if the seller is unable to distinguish between 
a buyer's price that reflects a bundled value versus one that does not. 
Allocative efficiency requires that a good be traded with the 
counterparty whose willingness and ability to pay is highest. 
Therefore, in a case where a buyer with money laundering intent and a 
buyer with none both offer to transact at the same price, allocative 
efficiency would require the seller to trade their residential real 
property with the buyer without money laundering intent (because their 
private valuation of the property exceeds that of the money launderer 
by the proportion of the money launderer's bid that reflects their 
willingness to pay for money laundering services instead). In cases 
where this inability to distinguish between buyers of a bundled product 
versus genuine homebuyers leads to extreme allocative inefficiency, 
buyers without money laundering intent can be ``crowded out'' of the 
residential real property market to deleterious effect.
---------------------------------------------------------------------------

    \155\ See U.S. Department of the Treasury, National Money 
Laundering Risk Assessment (Feb. 2022), p. 58, available at https://home.treasury.gov/system/files/136/2022-National-Money-Laundering-Risk-Assessment.pdf. Treasury explained in its 2022 National Money 
Laundering Risk Assessment, ``[g]iven the relative stability of the 
real estate sector as a store of value, the opacity of the real 
estate market, and gaps in industry regulation, the U.S. real estate 
market continues to be used as a vehicle for money laundering and 
can involve businesses and professions that facilitate (even if 
unwittingly) acquisitions of real estate in the money laundering 
process'' (emphasis added).
---------------------------------------------------------------------------

    As a consequence of transactions occurring that inefficiently 
allocate housing, or transactions occurring at prices that are 
misaligned with equilibrium market prices, money laundering through 
residential real property purchases can have disparate effects on 
regional economic conditions depending on the nature of pre-existing 
housing supply-demand imbalances in a specific geographic market. For 
example, by creating additional demand in markets where the quantity of 
housing demanded already exceeds local supply, transactions for 
purposes of money laundering can exert additional upward pressure on 
home prices.
    While money laundering may appear to be concentrated in high-end 
real estate properties and luxury markets, its spillover effects, if 
left unchecked, could in some instances disproportionately affect low-
income and otherwise high-risk communities, undermining other economic 
policy objectives aimed at helping these

[[Page 12446]]

communities.\156\ As such, money laundering through real estate--though 
it represents only a relatively small percentage of GDP and takes place 
in a minority of real estate transfers--can catalyze significant market 
failures when concentrated in areas that are economically distressed or 
with low housing volume. In some cases, this distortion can contribute 
to housing bubbles in affected areas, which may eventually burst and 
lead to economic instability in impacted regions.\157\
---------------------------------------------------------------------------

    \156\ See, e.g., Money Laundering in Real Estate, Conference 
Report by the Terrorism, Transnational Crime and Corruption Center 
at George Mason University (Mar. 25, 2018), available at 
traccc.gmu.edu/wp-content/uploads/2020/09/2018-MLRE-Report_0.pdf.
    \157\ ``Anti Money Laundering and Economic Stability,'' 
International Monetary Fund Finance & Development Magazine (Dec. 
2018), availability at https://www.imf.org/en/Publications/fandd/issues/2018/12/imf-anti-money-laundering-and-economic-stability-straight.
---------------------------------------------------------------------------

b. The Problem of High Search Costs
    The U.S. real estate sector is considered an attractive target for 
money laundering due to several factors that make it conducive to 
stashing and obscuring the origin of illicit funds.\158\ One 
significant factor is the opacity of beneficial ownership in non-
financed real estate transfers to legal entities and trusts. Because 
these transfers can serve to obscure the identities of beneficial 
owners, they are acutely vulnerable to exploitation by illicit 
actors.\159\ This mechanism to obfuscate the origin of funds and 
associated natural persons can effectively incentivize the marginal bad 
actor to seek new sources of illicit gain or exploit current sources 
with greater impunity. Opaque ownership in non-financed real estate 
transactions can be thought of in economic terms as effectively 
enhancing the liquidity of ill-gotten funds, thereby increasing the 
overall profitability of the original activity that engendered a need 
for money laundering.
---------------------------------------------------------------------------

    \158\ See, e.g., Final Report: Commission of Inquiry into Money 
Laundering in British Columbia, Cullen Commission (June 2022), p. 
772, available at https://cullencommission.ca/files/reports/CullenCommission-FinalReport-Full.pdf. (highlighting structural and 
regulatory factors as incentives for using real estate to launder 
funds, including ``minimal reporting of suspicious transactions . . 
. on the part of real estate professionals''), citing Transparency 
International, ``Doors Wide Open: Corruption and Real Estate in Four 
Key Markets'' (2017), pp. 24, available at https://images.transparencycdn.org/images/2020-Report-Real-estate-data-Shining-a-light-on-the-corrupt.pdf; Mohammed Ahmad Naheem, ``Money 
Laundering and Illicit Flows from China--The Real Estate Problem,'' 
Journal of Money Laundering Control (2017), p. 23, available at 
https://www.emerald.com/insight/content/doi/10.1108/JMLC-08-2015-0030/full/html.
    \159\ See Financial Action Task Force, Guidance for a Risk Based 
Approach: Real Estate Sector (July 2022), pp. 17, 29, available at 
https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/RBA-Real-Estate-Sector.pdf.coredownload.pdf (``[d]isparities with rules 
surrounding legal structures across countries means property can 
often be acquired abroad by shell companies or trusts based in 
secrecy jurisdictions, exacerbating the risk of money laundering.'' 
International bodies, such as the FATF, have found that 
``[s]uccessful AML/CFT supervision of the real estate sector must 
contend with the obfuscation of true ownership provided by legal 
entities or arrangements[.]'').
---------------------------------------------------------------------------

    Similar economic problems exist when beneficial ownership 
information and real estate transaction information is available, but 
search costs to obtain that information to link a bad actor to illicit 
activity are so high as to frustrate or prevent investigative use. To 
the extent those costs mean that illicit activity is not subsequently 
investigated or prosecuted, this allows the individual to update their 
perceived probability of being detected or punished for that illicit 
activity downward. In a model where the expected value of illicit 
behavior is a function of both the expected payoff and the risk (or 
expected severity) of punishment, the problem of high search costs 
increases the expected value by decreasing the perceived risk of 
punishment. In cases where the expected value of a certain illicit 
behavior increases because the anticipated risk or severity of 
punishment decreased, potential illicit actors may be more likely to 
engage in such behavior. This updated belief can also lead an 
individual to mistakenly update their expectations about punishment 
risk or severity associated with other illegal activities.\160\ When 
this occurs, the coincidence of money laundering and other illicit 
activity may subsequently rise, which in turn may exacerbate the 
depressive effects of the original money laundering activities on the 
local economy in a self-reinforcing cycle.\161\
---------------------------------------------------------------------------

    \160\ This activity is consistent with a representativeness 
heuristic bias. See Amos Tversky and Daniel Kahneman, ``Judgment 
under Uncertainty: Heuristics and Biases: Biases in judgments reveal 
some heuristics of thinking under uncertainty,'' Science, Vol. 185, 
no. 4157 (1974), pp. 1124-1131.
    \161\ Louise Shelley, ``Money Laundering into Real Estate,'' in 
Convergence: Illicit Networks and National Security in the Age of 
Globalization, (Michael Miklaucic and Jacqueline Brewer eds., 
National Defense University Press 2013), p. 140 (noting how property 
purchased by money launderers that is left vacant may be allowed to 
decay so ``criminal investors can subsequently buy neighboring 
properties at depressed costs, thereby increasing their territorial 
influence''); see also Final Report: Commission of Inquiry into 
Money Laundering in British Columbia, Cullen Commission (June 2022), 
p. 774, available at https://cullencommission.ca/files/reports/CullenCommission-FinalReport-Full.pdf (noting the ability of 
criminal actors to develop influence and power at a local level, 
such as in cases where a large real estate portfolio is owned in a 
small town or neighborhood).
---------------------------------------------------------------------------

    FinCEN assesses that a regulatory requirement to ensure consistent 
reporting of non-financed real estate transfers made to legal entities 
and trusts on a nationwide basis would reduce law enforcement search 
costs for such information, thereby facilitating law enforcement and 
national security agency efforts to combat illicit activity. In this 
manner the proposed policy is expected to directly address the two main 
problems considered and in so doing create economic value.
2. Baseline and Affected Parties
    To assess the anticipated regulatory impact of the proposed rule, 
FinCEN took several factors about the current state of the residential 
real estate market into consideration. This is consistent with 
established best practices and certain requirements \162\ that the 
expected economic effects of a proposed rule be measured against the 
status quo as a primary counterfactual. Among other factors, FinCEN's 
economic analysis of regulatory impact considered the proposed rule in 
the context of existing regulatory requirements, relevant distinctive 
features of groups likely to be affected by the rule, and pertinent 
elements of current residential real estate market characteristics and 
common practices. Each of these elements is discussed in its respective 
subsection below.
---------------------------------------------------------------------------

    \162\ Office of Management and Budget, Circular A-4 (Nov. 9, 
2023), available at https://www.whitehouse.gov/wp-content/uploads/2023/11/CircularA-4.pdf.
---------------------------------------------------------------------------

a. Regulatory Baseline
    While there are no specific Federal rules that would directly and 
fully duplicate, overlap, or conflict with the proposed rule,\163\ 
there are nevertheless components of the proposed requirements that 
mirror, or are otherwise consistent with, reporting and procedural 
requirements of existing FinCEN rules and orders, as well as those of 
other agencies. To the extent that a person would have previous 
compliance experience with these elements of the regulatory baseline, 
FinCEN expects that some costs associated with the proposed rule would 
be lower because the incremental changes in behavior from current 
practices would be smaller. FinCEN reviews the most proximate 
components from these existing rules and orders in greater detail 
below.
---------------------------------------------------------------------------

    \163\ 5 U.S.C. 603(b)(5).
---------------------------------------------------------------------------

i. Residential Real Estate GTOs
    Under the Residential Real Estate GTOs, title insurance companies 
are required to report: ``(i) The dollar

[[Page 12447]]

amount of the transaction; (ii) the type of transaction; (iii) 
information identifying a party to the transaction, such as name, 
address, date of birth, and tax identification number; (iv) the role of 
a party in the transaction (i.e., originator or beneficiary); and (v) 
the name, address, and contact information for the domestic financial 
institution or nonfinancial trade or business.'' \164\
---------------------------------------------------------------------------

    \164\ 85 FR 84104 (Dec. 23, 2020).
---------------------------------------------------------------------------

    As discussed above,\165\ FinCEN recognizes that the Residential 
Real Estate GTOs collect beneficial ownership information on certain 
non-financed purchases of residential real property by legal entities 
that meet or exceed certain dollar thresholds in select geographic 
areas. However, the Residential Real Estate GTOs are narrow in that 
they are temporary, location-specific, and limited in the transactions 
they cover. The proposed rule is wider in scope of coverage and, if 
finalized, would collect additional useful and actionable information 
previously not available through the Residential Real Estate GTOs. As 
such, the proposed nationwide reporting framework for certain 
residential real estate transfers, if finalized, would replace the 
current Residential Real Estate GTOs.
---------------------------------------------------------------------------

    \165\ See discussion of Residential Real Estate GTOs, supra 
Section II.B.3; see also Section III.A.
---------------------------------------------------------------------------

    Some evidence suggests that, despite the restricted scope of 
reporting persons under the existing Residential Real Estate GTOs to 
title insurance carriers only, certain additional categories of real 
estate professionals may already be familiar--and have experience--with 
gathering the currently required reportable information. For example, 
FinCEN observes that in some markets presently under a Residential Real 
Estate GTOs, realtors and escrow agents often assist Direct Title 
Insurance Carriers with their reporting obligations despite not being 
subject to any formal reporting requirements themselves. Some may even 
have multiple years' worth of guidance and informational support by the 
regional or national trade association of which they are a member in 
how best to facilitate and enable compliance with existing FinCEN 
requirements. For instance, in 2021, the National Association of 
Realtors advised that while ``[r]eal estate professionals do not have 
any affirmative duties under the Residential Real Estate GTOs,'' such 
entities should nevertheless expect that ``a title insurance company 
may request information from real estate professionals to help maintain 
its compliance with the Residential Real Estate GTOs. Real estate 
professionals are encouraged to cooperate and provide information in 
their possession.'' \166\ Thus, the historical Residential Real Estate 
GTOs' attempt to limit the definition of reporting persons to Direct 
Title Insurance Carriers does not seem to have completely forestalled 
the imposition of time, cost, and training burdens on other real estate 
transfer related entities. As such, the proposed cascade approach might 
not mark a complete departure from current practices and the related 
burdens of Residential Real Estate GTO requirements, as they may 
already in some ways be functionally applicable to multiple prospective 
reporting persons in the proposed cascade.
---------------------------------------------------------------------------

    \166\ See National Association of Realtors, ``Anti-Money 
Laundering Voluntary Guidelines for Real Estate Professionals'' 
(Feb. 16, 2021), p. 3, available at https://www.narfocus.com/billdatabase/clientfiles/172/4/1695.pdf.
---------------------------------------------------------------------------

ii. BOI Reporting Rule
    Furthermore, following the enactment of the CTA, beneficial 
ownership information of certain legal entities is required to be 
submitted to FinCEN. However, as set out in the preamble to this 
proposed rule, the information needed to ascertain money laundering 
risk in the residential real estate sector differs in key aspects from 
what will be collected under the CTA, and, accordingly, the information 
collected under this proposed rule differs from that collected under 
the CTA.\167\
---------------------------------------------------------------------------

    \167\ See supra Section III.B, which provides a full discussion 
on the differences between the information collected for the CTA and 
the information collected under the proposed rule, both in terms of 
the depth of the information collected and the context in which it 
is collected.
---------------------------------------------------------------------------

    For example, FinCEN believes that a critical part of the proposed 
rule is that it would alert law enforcement to the fact that a real 
estate transfer vulnerable to a known money laundering typology has 
taken place. While beneficial ownership information collected under the 
CTA may be available, that information concerns the ownership 
composition of a given entity at a given point in time. As such 
reporting does not dynamically extend to include information on the 
market transactions of the beneficially owned legal entity, it would 
not alert law enforcement officials focused on reducing money 
laundering that any real estate transfer has been conducted, which 
includes those particularly vulnerable to money laundering such as non-
financed transfers of residential property.
    Furthermore, the scope of entities that are the focus of the real 
estate rule is broader than the CTA, as certain entities such as most 
types of trusts are not covered by the CTA. Because legal trusts 
generally do not have an obligation to report beneficial ownership 
under the CTA, their incremental burden of compliance with the proposed 
Real Estate Report requirements may be moderately higher insofar as the 
activities of collecting, presenting, or certifying beneficial 
ownership information are less likely to have already been performed 
for other purposes.
iii. CDD Rule
    The CDD Rule's beneficial ownership requirement addressed a 
regulatory weakness that enabled persons looking to hide ill-gotten 
proceeds to potentially access the financial system anonymously. Among 
other things, covered financial institutions were required to identify 
and verify the identity of beneficial owners of legal entity customers, 
subject to certain exclusions and exemptions; beneficial ownership and 
identification therefore became a component of AML requirements.
    FinCEN is also aware that financial institutions subject to the CDD 
Rule are required to collect some beneficial ownership information from 
legal entities that establish new accounts. However, those entities do 
not necessarily also own real estate and financial institutions are not 
required to file a report of that beneficial ownership information with 
FinCEN. In addition, the proposed rule covers non-financed transfers of 
residential real estate that do not involve financial institutions 
covered by the CDD Rule. The rule would also collect additional 
information relevant to the real estate transfers that is currently not 
collected under the CDD Rule.
iv. Other
    In the course of current residential real estate transactions, some 
parties that under the proposed rule might be deemed ``transferors'' 
already prepare and report portions of the proposed requisite 
information to other regulators. For example, the IRS collects taxpayer 
information through Form 1099-S on seller-side proceeds from reportable 
real estate transfers for a broader scope of reportable real estate 
transactions than the proposed rule.\168\ This information, however, is 
generally unavailable for one of the primary purposes intended by 
FinCEN's proposed rule, as there are significant statutory limitations 
on the ability of the IRS to share such

[[Page 12448]]

information with federal law enforcement or other federal 
agencies.\169\ In addition to these statutory limitations on IRS 
disclosure of taxpayer information, details about the buyer's 
beneficial ownership (the focus of the proposed rule) largely fall 
outside the scope of transaction information reported on the Form 1099-
S.
---------------------------------------------------------------------------

    \168\ Reportable real estate for purposes of IRS Form 1099-S 
includes, for example, commercial and industrial buildings (without 
a residential component) and non-contingent interests in standing 
timber, which are not covered under the proposed rule.
    \169\ See generally 26 U.S.C. 6103 (covering confidentiality and 
disclosure of returns and return information).
---------------------------------------------------------------------------

    However, IRS Form 1099-S is nonetheless relevant to the proposed 
rule's regulatory baseline, given the process by which the filing may 
be prepared and submitted to the IRS. Similar to what is proposed for 
the Real Estate Report, the person responsible for filing the form IRS 
Form 1099-S can either be determined through a cascade of the various 
parties who may be involved in the closing or settlement process, or, 
alternatively, certain categories of the involved parties may enter 
into a written agreement at or before closing to designate who must 
file Form 1099-S for the transaction. The agreement must identify the 
designated person responsible for filing the form, but it is not 
necessary that all parties to the transaction, or that more than one 
party even, enter into the agreement.\170\ The agreement must: (1) 
identify by name and address the person designated as responsible for 
filing; (2) include the names and addresses of each person entering 
into the agreement; (3) be signed and dated by all persons entering 
into the agreement; (4) include the names and addresses of the 
transferor and transferee; and (5) include the address and any other 
information necessary to identify the property.\171\ The proposed 
rule's designation agreement requires, and is limited to, the same five 
components that may be included in a designation agreement accompanying 
Form 1099-S. Therefore, the exercise of designation as well as the 
collection of information and signatures it involves, as contemplated 
by the proposed rule, may already occur in connection with certain 
transfers of residential real property and in these cases be leveraged 
at minimal additional expense.
---------------------------------------------------------------------------

    \170\ IRS, Instructions for Form 1099-S, available at https://www.irs.gov/instructions/i1099s; 26 CFR 1.6045-4(e).
    \171\ Id.
---------------------------------------------------------------------------

b. Baseline of Affected Parties
i. Transferees
1. Legal Entities
    According to a recent study \172\ that analyzed Ztrax data \173\ 
covering 2,777 U.S. counties and over 39 million residential housing 
market transactions from 2015 to 2019, the proportion of average 
county-month non-financed residential real estate transactions by legal 
entities was approximately 11 percent during the five-year period 
analyzed. When the sample is divided into counties that, by 2019, were 
under Residential Real Estate GTOs versus those that were never under 
GTOs, the proportions of average county-month non-financed sales to 
total purchases are approximately 13.6 percent and 11.2 percent, 
respectively.
---------------------------------------------------------------------------

    \172\ See Matthew Collin, Florian Hollenbach, and David 
Szakonyi, ``The impact of beneficial ownership transparency on 
illicit purchases of U.S. property,'' Brookings Global Working Paper 
#170, (Mar. 2022), p. 14, available at https://www.brookings.edu/wp-content/uploads/2022/03/Illicit-purchases-of-US-property.pdf.
    \173\ Zillow, Transaction and Assessment Database (ZTRAX), 
available at https://www.zillow.com/research/ztrax/.
---------------------------------------------------------------------------

    Legal entities that purchase residential real estate vary by size 
and complexity of beneficial ownership structure. FinCEN analysis of 
the 2018 RHFS data found that micro investors or small business 
landlords who owned 1-2 units owned 66 percent of all single family and 
multifamily structures with 2-4 units. Conversely, investors in the 
residential rental market who owned at least 1000 properties owned only 
2 percent of single-family homes and multi-family structures.
2. Legal Trusts
    The proposed rule would extend the scope of reportable transactions 
to include non-financed purchases of residential real property by legal 
trusts when such a trust falls within the definition of ``transferee 
trust'' and is not exempted.\174\ Historically, residential real 
property purchases by transferee trusts have not been covered under the 
current Residential Real Estate GTOs and the entities themselves are 
typically \175\ not subject to beneficial ownership reporting 
requirements under the CTA. Therefore, FinCEN expects that legal trusts 
would be more homogenously newly affected by the proposed rule than 
legal entities, discussed above, as a cohort of affected parties.\176\
---------------------------------------------------------------------------

    \174\ See Section IV.B.2; see also infra proposed amendment 31 
CFR 1031.230.
    \175\ FinCEN notes that while most trusts are not reporting 
companies under the BOI Reporting Rule, a reporting company would be 
required to report a beneficial owner that owned or controlled the 
reporting company through a trust.
    \176\ See Section VII.A.2.b.i.1.
---------------------------------------------------------------------------

    Establishing a baseline population of potentially affected 
transferee trusts based on the existing population of legal trusts is 
challenging for several reasons. These reasons include the general lack 
of comprehensive and aggregated data on the number,\177\ value, usage, 
and holdings of trusts formed in the United States, which in turn is a 
result of heterogeneous registration and reporting requirements, 
including instances where neither requirement currently exists. Because 
domestic trusts are created and administered under state law, and 
states have broad authority in how they choose to regulate trusts, 
there is variation in both the proportion of potential transferee 
trusts that are currently required to register as trusts in their 
respective states as well as the amount of information a given legal 
trust is required to report to its state about the nature of its assets 
or its structural complexity. Thus, limited comparable information may 
be available at a nationwide level besides what is reported for federal 
tax purposes and what is available is unlikely to represent the full 
population of potentially affected parties that would meet the proposed 
definition of transferee trust if undertaking the non-financed purchase 
of residential real property.
---------------------------------------------------------------------------

    \177\ FinCEN notes that while the U.S. Census Bureau does 
produce annual statistics on the population of certain trusts (NAICS 
525--Funds, Trusts, and Other Financial Vehicles), such trusts are 
unlikely to be affected by the proposed rule and thus their 
population size is not informative for this analysis.
---------------------------------------------------------------------------

    International heterogeneity in registration and reporting 
requirements for foreign legal trusts creates similar difficulties in 
assessing the population of potentially affected parties that are not 
originally registered in the United States. Further complicating this 
assessment is the exogeneity and unpredictability of changes to foreign 
tax and other financial policies, which studies in other, related 
contexts have shown, generally affect foreign demand for real 
estate.\178\
---------------------------------------------------------------------------

    \178\ See, e.g., Cristian Badrinza and Tarun Ramadorai, ``Home 
away from home? Foreign demand and London House prices,'' Journal of 
Financial Economics 130 (3) (2018), pp. 532-555, available at 
https://doi.org/10.1016/j.jfineco.2018.07.010; see also Caitlan S. 
Gorback and Benjamin J. Keys, ``Global Capital and Local Assets: 
House Prices, Quantities, and Elasticities,'' Technical Report, 
National Bureau of Economic Research (2020), available at https://www.nber.org/papers/w27370.
---------------------------------------------------------------------------

    While it is difficult to know exactly how many existing legal 
trusts there are, and within that population, how many

[[Page 12449]]

own residential real estate (as a potential indicator of what 
proportion of new trusts might have a view to purchase residential real 
property), there is nevertheless a consistency in the limited existing 
empirical evidence that would support a conjecture that proportionally 
few of the expected reportable transactions would be likely to involve 
a transferee trust. A recent study of U.S. single-property residential 
transactions that occurred between 2015 and 2019 identified a trust as 
the buyer in 3.3 percent of observed transfers. FinCEN also conducted 
additional analysis of publicly available data that might help to 
quantify the proportion of trust ownership in residential real estate. 
Based on the Department of Housing and Urban Development and Census 
Bureau's Rental Housing Finance Survey (RHFS), identifiable trusts 
accounted for approximately 2.5 percent of rental housing ownership and 
approximately 8.2 percent of non-natural person ownership of rental 
housing.\179\
---------------------------------------------------------------------------

    \179\ See U.S. Census Bureau, Rental Housing Finance Survey 
(2021), available at https://www.census.gov/data-tools/demo/rhfs/''/
l``/?s_tableName=TABLE2.
---------------------------------------------------------------------------

    To the extent that trusts' current residential real property 
holdings are linear in the number of housing units and current holdings 
is a reliable proxy for future purchasing activity, FinCEN does not 
expect the proportion of non-financed residential real property 
transfers in which the transferee is a non-excepted legal trust to 
exceed 5 percent of potentially affected transactions. No further 
refinements to this upper-bound-like estimate, based on the number of 
existing trusts that may be affected, would be feasible without a 
number of additional assumptions about market behavior that FinCEN 
declines to impose in the absence of better/more data. The public is 
invited to provide such data, if available.
3. Excepted Transferees
    Exceptions to the general definitions of transferee entities and 
transferee trusts apply to certain highly regulated entities and trusts 
that are subject to BSA program requirements or to other significant 
regulatory reporting requirements.
    For example, PIVs that are investment companies and registered with 
the SEC under section 8 of the Investment Company Act of 1940 would be 
excepted, while unregistered PIVs engaging in reportable transfers 
would not. Unregistered PIVs would instead be required to provide the 
transaction's reporting person with the proposed specified information, 
particularly including the required information regarding their 
beneficial owners. FinCEN analysis of costs below assumes that any such 
unregistered PIV stood up for a reportable transfer would generally 
have, or have low-cost access to, the proposed information necessary 
for filing the proposed Real Estate Reports. FinCEN expects that a PIV 
that is not registered with the SEC--which can have at maximum four 
investors whose ownership percent is or exceeds 25 percent (the 
threshold for the ownership prong of the beneficial ownership test for 
entities)--would likely either (1) be an extension of that large 
investor, or (2) have a general partner who actively solicited known 
large investors. In either case, the unregistered PIV is likely to have 
most of the beneficial ownership information that would be required to 
complete the proposed Real Estate Report and access to the beneficial 
owner(s) to request the additional components of required information 
not already at hand.
    Operating companies subject to the Securities Exchange Act of 
1934's current and periodic reporting requirements, including certain 
special purpose acquisition companies (SPACs) and issuers of penny-
stock, would also be excepted transferees under the proposed rule. 
FinCEN notes that the percent ownership threshold for beneficial 
ownership for SEC regulatory purposes is considerably lower than as 
defined in the CTA and related Exchange Act beneficial ownership-
related disclosure obligations usually apply to more control persons at 
such a registered operating company.\180\ Additionally, disclosures 
about the acquisition of real estate, including material non-financed 
purchases of residential property, are already required in certain 
periodic reports filed with the SEC.\181\ Therefore, an incremental 
informational benefit from not excepting SEC-registered operating 
companies as transferees for the purposes of the proposed Real Estate 
Report reporting requirements may either not exist or, at best, be very 
low while the costs to operating companies of reporting and compliance 
with an additional federal regulatory agency are expected to be 
comparatively high.
---------------------------------------------------------------------------

    \180\ See discussion of SEC-registered operating companies, 
supra Section IV.B.1.a.
    \181\ See, e.g., U.S. Securities and Exchange Commission, 
Instructions to Item 2.01 on Form 8-K; see also 17 CFR 210.3-14.
---------------------------------------------------------------------------

ii. Reporting Entities
    Because the proposed reporting cascade is ordered by function 
performed, or service provided, rather than by defined occupations or 
categories of service providers,\182\ attribution of work to the 
capacity in which a person is primarily employed is necessarily 
imprecise.\183\ To account for the need to map from services provided 
to entities providing such services as a prerequisite to estimating the 
number of potentially affected parties, FinCEN acknowledges, but 
abstracts from, the common observation that title agents and settlement 
agents are ``often the same entity that performs two separate functions 
in a real estate transaction,'' and that ``the terms title agent and 
settlement agent are often used interchangeably.'' \184\ For purposes 
of the remaining RIA, FinCEN groups potential reporting persons by 
features of their primary occupation and treats them as functionally 
distinct members of the cascade.\185\ In total, FinCEN estimates there 
may be up to approximately 172,753 reporting persons and 642,508 
employees of those persons that could be affected by the proposed rule. 
Of this total, the distribution of potential reporting persons as 
identified by primary occupation \186\ is settlement agents (3.6 
percent of potential reporting persons, 9.8 percent of the potentially 
affected labor force), title insurance companies (0.5 percent, 6.6 
percent), real estate escrow agencies (10.9 percent, 10.5

[[Page 12450]]

percent), attorneys \187\ (9.3 percent, 16.7 percent), and other real 
estate professionals \188\ (75.5 percent, 56.4 percent). For purposes 
of cost estimates throughout the remaining analysis, FinCEN computed 
the following fully loaded average hourly wages by the respective 
primary occupation categories: settlement agents, $70.33; title 
insurers, $70.46; real estate escrow agencies, $84.15; attorneys, 
$88.89; and other real estate professionals, $84.15.
---------------------------------------------------------------------------

    \182\ See description of reporting cascade, supra Section 
IV.D.1; see also proposed 31 CFR 1031.320(c)(1).
    \183\ Insofar as the various compliance burdens estimated below 
could be improved by either changes to the methodology or the 
sources of data incorporated, FinCEN is soliciting public input.
    \184\ See Nam D. Pham, ``The Economic Contributions of the Land 
Title Industry to the U.S. Economy,'' ndp Consulting (Nov. 2012), p. 
6, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2921931. This study was included as an 
appendix to a 2012 American Land Title Association comment letter 
submitted to the Consumer Financial Protection Bureau (CFPB) on the 
Real Estate Settlement Procedures Act (RESPA).
    \185\ FinCEN's RIA assumes that the first three functions 
identified in the proposed waterfall (being listed as the closing or 
settlement agent, preparing the closing or settlement statement, and 
filing the deed or other instrument) would be performed, if at all, 
by a single person, such that there are five distinct members of the 
cascade.
    \186\ FinCEN notes that the capacity in which a reporting person 
facilitates a residential real property transfer may not always be 
in the capacity of their primary occupation. However, as analysis 
here relies on the U.S. Census Bureau's annual Statistics of U.S. 
Business Survey, which is organized by NAICS code, the following 
nominal primary occupations (NAICS codes) are used for grouping and 
counting purposes: Title Abstract and Settlement Offices (541191), 
Direct Title Insurance Carriers (524127), Other Activities Related 
to Real Estate (531390), Offices of Lawyers (541110), and Offices of 
Real Estate Agents and Brokers (531210).
    \187\ The estimate of potentially affected attorneys is 
calculated as ten percent of the total SUSB population of Offices of 
Lawyers. This estimate is based on the average from FinCEN analysis 
of U.S. legal bar association membership, performed primarily at the 
state level, identifying the proportion of (state) bar members that 
are members of the organization's (state's) real estate bar 
association. FinCEN considers this proxy more likely to overestimate 
than underestimate the number of potentially affected attorneys 
because, while not all members of a real estate bar association 
actively facilitate real estate transfers each year, it was 
considered less likely that an attorney would, in a given year, 
facilitate real estate transfers in a way that would make them a 
candidate reporting person for purposes of the proposed rule when 
such an attorney had not previously indicated an interest in real 
estate specific practice (by electing to join a real estate bar).
    \188\ NAICS Code 531210 (Offices of Real Estate Agents and 
Brokers).
---------------------------------------------------------------------------

c. Market Baseline
i. Reportable Transfers
    The scope of residential real estate transactions that would be 
affected by the proposed rule is jointly defined by the (1) the nature 
of the property transferred, (2) the nature of the consideration 
proffered, and (3) the legal organization of the party to whom the 
property is transferred.\189\ For purposes of identification, the 
defining attribute for the nature of the property is that it is 
principally designed or demonstrably intended to become, the residence 
of one to four families, including cooperatives and unimproved 
land.\190\ Additionally, the property must be located in the United 
States as defined in the BSA implementing regulations, including U.S. 
territories.\191\ Transfers that would be deemed reportable exclude all 
transactions where the transferees receive any extension of credit from 
a financial institution subject to AML/SAR Reporting program 
requirements that is secured by the residential real property being 
transferred. Reportable transfers would also generally exclude 
transfers associated with an easement, death, divorce, or bankruptcy 
and transfers for which there is no reporting person. Because certain 
transfer characteristics that would cause a transfer to be excluded are 
not consistently identified across sources of transfer data, FinCEN 
estimates of the number below may generally be considered an upper 
bound of the expected affected transactions.
---------------------------------------------------------------------------

    \189\ See discussion of affected transferees, supra Section 
VII.A.2.b.i.
    \190\ See discussion, supra Section IV.A; see also proposed 31 
CFR 1031.320(b).
    \191\ 31 CFR 1010.100(h).
---------------------------------------------------------------------------

    FinCEN considered several different sources of information and a 
mosaic of piecewise informative statistics to inform its estimate of 
the reportable transaction baseline. When considering existing home 
sales, FinCEN reviewed the National Association of Realtors Confidence 
Index Survey data on all-cash residential home sales between October 
2008 and April 2021. In this data, the upper bound of all-cash 
transactions for existing home sales over this period was 35 
percent,\192\ which totaled to 7,500,000.\193\ FinCEN also used data 
from the U.S. Census Bureau to review the number of new home sales 
between 1988-2022. FinCEN utilized peak and trough values for new home 
sales and percent of cash transactions--as a proxy for non-financed 
transactions--from the historical range provided by the Census 
Bureau.\194\ In analysis of this data, FinCEN observed that the upper 
bound number of all-cash transactions for new home sales was 9.6 
percent,\195\ which totaled to 1,283,000 for the analysis.\196\ 
Considering yet another source, FinCEN reviewed Redfin data covering a 
period between 2000 to 2022 on investor purchases of existing homes to 
consider as a proxy for legal entity and trust purchases.\197\ This 
data would suggest an upper bound of approximately 20 percent.\198\ 
However, Redfin investor purchase data is unlikely to capture all the 
legal entity and trust purchases that are covered under the proposed 
rule, is likely to include purchases by entities that would be exempt 
from the proposed rule, and only covers the purchase of existing 
residential real estate (i.e., non-new developments).
---------------------------------------------------------------------------

    \192\ See National Association of Realtors, ``All-Cash Sales are 
Rising Sharply Amid Intense Competition'' (May 24, 2021), available 
at https://www.nar.realtor/blogs/economists-outlook/all-cash-sales-are-rising-sharply-amid-intense-buyer-competition.
    \193\ See Calculated Risk, ``NAR: Existing-Home Sales Decreased 
to 5.61 million SAAR in April'' (May 19, 2022), available at https://www.calculatedriskblog.com/2022/05/nar-existing-home-sales-decreased-to.html.
    \194\ See U.S. Census Bureau, ``Houses Sold by Type of 
Financing,'' available at https://census.gov/construction/nrs/xls/soldfinc_cust.xls.
    \195\ Id.
    \196\ Id.
    \197\ See Lily Katz and Sheharyar Bokhari, ``Investors Are 
Buying Roughly Half as Many Homes as They Were a Year Ago,'' Redfin 
News (Feb. 25, 2023), available at https://www.redfin.com/news/investor-home-purchases-q4-2022/. Note that ``all-cash'' is the term 
used by Redfin. FinCEN does not know how Redfin defines ``all-
cash.''
    \198\ There was a paucity of publicly available information 
regarding the legal entity and trust components of overall non-
financed residential real estate transfers. The Redfin estimate, 
supra note 198, was limited to investor purchases of existing homes 
only, and therefore still contains gaps. Nonetheless, the Redfin 
estimate was the most recently available data and provided the 
highest bound estimate on the role of non-natural persons in 
residential real estate transfers based on publicly available data.
---------------------------------------------------------------------------

    FinCEN additionally made attempts to factor in the rule's inclusion 
of U.S. territories by including the number of new and existing home 
sales in Puerto Rico in 2022 in the final estimate of total potentially 
reportable transfers.\199\ In 2022, FinCEN identified 9,962 existing 
home sales and 953 new home sales in Puerto Rico. Added to the previous 
totals, this brought the total number of estimated existing and new 
home sales in the United States to 7,509,962 and 1,283,953, 
respectively.
---------------------------------------------------------------------------

    \199\ See Lalaine C. Delmendo, ``Puerto Rico Residential Real 
Estate Market Analysis 2023,'' Global Property Guide (Apr. 11, 
2023), available at https://www.globalpropertyguide.com/Caribbean/Puerto-Rico/Price-History.
---------------------------------------------------------------------------

    To account for quit claims to LLCs with zero consideration--i.e., 
real estate transfers that would not be captured in Census or home 
sales data--FinCEN reviewed various county deed databases to estimate 
the annual number of quit claims to LLCs for zero-dollar consideration 
in the United States. FinCEN reviewed deed data from the following U.S. 
County databases: Cook County, Illinois; Cuyahoga County, Ohio; Monroe 
County, Ohio; Anderson County, Texas; Dallas County, Texas; Arapahoe 
County, Colorado; Routt County, Colorado; Berrien County, Michigan; 
Roscommon County, Texas; Garland County, Arkansas. Counties were 
selected based upon the ability to: (i) search for quit claim deeds, 
(ii) search for deeds with zero-dollar consideration, (iii) conduct a 
keyword search that included ``LLC'' in the title of the grantee, and 
(iv) search within the 2022 calendar year. FinCEN notes that its 
attempt to create a representative sample was likely limited by its 
search query requirements and the limitations of county databases in 
terms of searchability. This analysis was conducted across 10 counties 
in 6 states and the results are included below in Table 1: \200\
---------------------------------------------------------------------------

    \200\ Counties were selected based on the ability to search for 
the above criteria via each county's online database.
---------------------------------------------------------------------------

BILLING CODE 4810-02-P

[[Page 12451]]

[GRAPHIC] [TIFF OMITTED] TP16FE24.000

    As a result, the total number of estimated quit claims to LLCs 
covered by the rule is approximately 110,389.
    While these sources do not provide a complete picture of the 
potential number of reportable transfers in the United States, they are 
useful in providing an approximate range for estimation and highlight 
the fact that the potential range of transfers each year is dependent 
on multiple potential factors and conditions. Overall, the sources 
FinCEN reviewed suggest that hundreds of thousands of transfers may be 
covered under the proposed rule.
    FinCEN also estimates that annually anywhere between 5.23 million--
6.98 million existing homes that have been purchased would be exempt 
from the purview of the rule. Similarly, among new home sales, FinCEN 
estimates that annually a range of between 305 thousand--1.26 million 
transactions will be exempt (See Table 2 below).
[GRAPHIC] [TIFF OMITTED] TP16FE24.001

BILLING CODE 4810-02-C

[[Page 12452]]

    FinCEN acknowledges the conditionality that likely exists between 
variables used in its analysis, but notes the limitations associated 
with publicly available data on non-financed, residential real estate 
purchases by legal entities and trusts. In the exercise above, FinCEN 
had to rely on independent estimates of specific characteristics (i.e., 
non-financed, legal entity) to estimate the potential number of covered 
transactions and exempted transactions.
    On the basis of available data, studies, and qualitative evidence, 
and in the absence of large, unforeseeable shocks to the U.S. 
residential housing market, FinCEN analysis suggests that the number of 
potentially reportable transfers would be between approximately 800,000 
and 850,000 annually.
ii. Current Market Characteristics
    FinCEN took certain potentially informative aspects of the current 
market for residential real property into consideration when forming 
its expectations about the anticipated economic impact of the proposed 
rule. Among other things, FinCEN considered trends in the observable 
rate of turnover in the stock of existing homes. Additionally, FinCEN 
reviewed recent studies and data from the academic literature 
estimating housing supply elasticities on previously developed versus 
newly developed land.
    FinCEN also considered recent survey results of the residential 
real estate holdings of high-net-worth individuals and the proportion 
of survey respondents who self-reported the intent to purchase 
additional residential real estate in the coming year.
    Further, FinCEN reviewed studies of trends in the financing and 
certain distributional characteristics of shared equity housing, which 
includes co-operatives that could be affected by the proposed rule.
iii. Current Market Practices
1. Settlement and Closing
    FinCEN assessed the role of various persons in the real estate 
settlement and closing process to determine a quantifiable estimate of 
each profession or industry's overall participation in that process. 
Accordingly, FinCEN conducted research based on publicly available 
sources to assess the general participation rate of the different types 
of reporting persons in the proposed rule's cascade. As part of its 
analysis, FinCEN noted a recent blog post citing data from the ALTA 
that 80 percent of homeowners purchase title insurance when buying a 
home.\201\
---------------------------------------------------------------------------

    \201\ See American Land Title Association, Home Closing 101, 
``Why 20% of Homeowners May Not Sleep Tonight,'' (June 3, 2020), 
available at https://www.homeclosing101.org/why-20-percent-of-homeowners-may-not-sleep-tonight/.
---------------------------------------------------------------------------

    To better understand the distribution of the other types of persons 
providing residential real property transfer services to the 
transactions that would be affected by the proposed rules, FinCEN 
utilized county deed database records to approximate a randomly 
selected and representative sample of residential real estate transfers 
across the United States.\202\ FinCEN made efforts to collect deed data 
that reflected a representative, nation-wide sample, both in terms of 
the number and geographic dispersion of deeds, but acknowledge 
selection was nevertheless constrained in part by the feasibility to 
search by deed type, among other factors.\203\ To the extent that the 
same analysis would yield substantively different results if performed 
over a larger sample (with either more geographic locations, more 
observations per location, or both), the public is invited to share 
such data or the results of analysis based on such data.
---------------------------------------------------------------------------

    \202\ In total, FinCEN evaluated ten deeds from eleven different 
U.S. counties in 2022 (removing deeds that were deemed to be out of 
scope). The 11 counties selected for the purposes of this analysis 
included: Garland County, Arkansas; Routt County, Colorado; Sarasota 
County, Florida; Polk County, Georgia; Montgomery County, Maryland; 
Berrien County, Michigan; Middlesex County, New Jersey, Cuyahoga 
County, Ohio; Indiana County, Pennsylvania; Greenwood County, South 
Carolina; and Dallas County, Texas.
    \203\ The process of searching deeds across different U.S. 
counties is challenging from a data perspective. For example, 
FinCEN's research found that, in some counties, deeds could only be 
searched in-person; FinCEN was therefore unable to include these 
counties in the potential sample. Furthermore, certain other deeds 
were deemed not relevant for the scope of the rule and hence were 
excluded.
---------------------------------------------------------------------------

    The final analysis included 100 deeds, of which 97 involved at 
least one of the following potential reporting persons: (i) Title 
Abstract and Settlement Offices, (ii) Direct Title Insurance Carriers, 
or (iii) Offices of Lawyers. A candidate reporting person was deemed to 
be involved with the creation of the deed if either (i) a company or 
firm performing one of these functions was included on the deed or (ii) 
an individual performing or employed by a company or firm performing 
one of these functions was included on the deed. FinCEN assessed the 
distribution of alternative entities identified on the remaining deeds, 
categorizing by reporting person type. Based on this qualitative 
analysis, FinCEN tentatively anticipates that approximately three 
percent of reportable transaction might have a reporting person other 
than a settlement agent, title insurer, or attorney.
2. Records Search
    Currently, law enforcement searches a variety of state and 
commercial databases (that may or may not include beneficial ownership 
information), individual county record offices, and/or use subpoena 
authority to trace the suspected use of criminal proceeds in the non-
financed purchase of residential real estate. Even after a significant 
investment of resources, the identities of the beneficial owners may 
not be readily ascertainable. This fragmented and limited approach can 
slow down and decrease the overall efficacy of investigations into 
money laundering through real estate. This was one reason that FinCEN 
introduced the Residential Real Estate GTOs, which law enforcement has 
reported have significantly expanded their ability to investigate this 
money laundering typology. At the same time, the Residential Real 
Estate GTOs had certain restrictions that limited its usefulness 
nationwide. The proposed rule builds on and is intended to replace the 
Residential Real Estate GTOs framework and creates reporting and 
recording requirements for specific residential real estate transfers 
that would apply nationwide.
3. Description of Proposed Requirements
a. Transactions
    The proposed rule does not require residential real estate 
transfers to be reported if the transfer involves: (i) an extension of 
credit to the transferee that is secured by the transferred residential 
real property and is extended by a financial institution that has both 
an obligation to maintain an AML program and an obligation to report 
suspicious transactions under this chapter; (ii) a grant, transfer, or 
revocation of an easement; (iii) a transfer resulting from the death of 
an owner of residential real property; (iv) a transfer incident to 
divorce or dissolution of a marriage; (v) a transfer to a bankruptcy 
estate; or (vi) a transfer that does not involve a reporting person.
b. Reporting Persons
    The proposed rule would require a reporting person, as determined 
by either the reporting cascade or as pursuant to a designation 
agreement,\204\ to complete and electronically file a

[[Page 12453]]

Real Estate Report containing certain information about the beneficial 
ownership of the legal entity(ies) or trust(s) involved in the non-
financed exchange of residential real property. To facilitate the 
reporting person's completion of the required report, the transferee 
engaged in the non-financed property transfer would need to provide a 
certified copy of their beneficial ownership information \205\ via a 
form or other attestation to the completeness and accuracy of the 
reported information.
---------------------------------------------------------------------------

    \204\ See discussion of designation agreement, supra Section 
IV.D.3.
    \205\ See description of required transferee beneficial 
ownership information, supra Section IV.E.6.
---------------------------------------------------------------------------

c. Required Information
    The proposed rule would require certain professionals or businesses 
to report to FinCEN information about the transferor and the transferee 
behind the residential real estate transfer. This would include 
information on the legal entity or trust, its beneficial owners, and 
payment information. The collected information would be maintained by 
FinCEN in an existing database accessible to authorized users.
3. Expected Economic Effects
    This section describes the main economic effects FinCEN anticipates 
the various affected parties identified above \206\ may experience. 
Because the primary value of the proposed rule would be in the extent 
to which it is able to address or ameliorate the economic problems 
discussed under the RIA's broad economic considerations,\207\ the 
remainder of this section focuses primarily on the estimates of 
reasonably anticipated, quantifiable costs to affected parties.\208\ 
FinCEN aggregate cost estimates suggest that first year costs will be 
between approximately $267.3 million and $476.2 million and that the 
current dollar value of the aggregate costs in subsequent years will be 
between approximately $245.0 million and $453.9 million annually. 
FinCEN also invites public comment on these estimates.
---------------------------------------------------------------------------

    \206\ See Section VII.A.2.b.
    \207\ See Section VII.A.1.
    \208\ See Section VII.A.2.b.
---------------------------------------------------------------------------

a. Costs to Entities in the Reporting Cascade
i. Training
    FinCEN recognizes that the proposed rule would impose certain costs 
on businesses positioned to provide services to non-financed 
residential real property transfers even in the absence of direct 
participation in a specific covered transaction, including the costs of 
preparing informational material and training personnel about the 
proposed rule generally as well as certain firm-specific policies and 
procedures related to reporting, complying, and documenting compliance.
    To estimate expected training costs, FinCEN adopted a parsimonious 
model similar, in certain respects, to the methodology used by FinCEN 
when publishing the RIA for the 2016 CDD Rule (CDD Rule RIA).\209\ 
Taking into consideration, however, that, unlike reporting entities 
under the CDD rule, only one group of the proposed rule's affected 
reporting persons has pre-existing experience with other FinCEN 
reporting and compliance requirements, the estimates of anticipated 
training time here are revised upward from the CDD Rule RIA to 75 
minutes for initial training and 30 minutes for annual refresher 
training. FinCEN's method of estimation assumes that an employee who 
has received initial training once will then subsequently take the 
annual refresher training each following year. This assumption 
contemplates that more than half of the original training would not be 
firm-specific and remains useful to the employee regardless of whether 
they remain with their initial employer or change jobs within the same 
industry. As in the CDD Rule RIA high estimate model, FinCEN estimates 
that two-thirds of untrained employees receive the initial (lengthier) 
training each year. However, because the initial training is assumed to 
provide transferrable human capital in this setting, turnover is not 
relevant to the assignment to initial training in periods following 
Year 1. Thus, in the revised model, FinCEN calculates annual training 
costs as the combination of the expected costs of providing two-thirds 
of the previously untrained workforce per industry \210\ with initial 
(lengthier) training and all previously trained employees with the 
refresher (shorter) training. Time costs are proxied by an industry-
specific fully loaded average wage rate per industry.
---------------------------------------------------------------------------

    \209\ See 81 FR 29397 (May 11, 2016) (codified at 31 CFR 
1010.230).
    \210\ As previously grouped by NAICS code, see supra Section 
VII.A.2.b.ii.
---------------------------------------------------------------------------

    Table 3 below presents the corresponding per person estimated 
training costs by primary occupation without adjustment for wage 
growth.
[GRAPHIC] [TIFF OMITTED] TP16FE24.002


[[Page 12454]]


    To model industry-specific hiring inflows in periods following Year 
1, FinCEN converted the Bureau of Labor Statistics (BLS) projected 10-
year cumulative employment growth rates for 2022-2032 \211\ for the 
NAICS code mostly closely associated with a given industry available. 
Additionally, inflation data from the Federal Reserve Bank of St. Louis 
was utilized to estimate annual wage growth given the opportunity cost 
of training is assumed to be equivalent to the wage of employees.\212\ 
Utilizing these inputs, and summing costs across all industries 
expected to be affected, FinCEN estimates that the aggregate initial 
year training costs would be approximately $44.3 million dollars and 
the undiscounted aggregate training costs in each of the subsequent 
years would range between approximately $20.2 and $27.3 million.
---------------------------------------------------------------------------

    \211\ U.S. Bureau of Labor Statistics, Employment Projections, 
``Employment by industry, occupation, and percent distribution, 2021 
and projected 2031,'' available at https://data.bls.gov/projections/nationalMatrix?queryParams=541100&ioType=i (reflects projections for 
the closest NAICS code, across all occupations, and not on a 
specific occupation code basis [legal services]); U.S. Bureau of 
Labor Statistics, Employment Projections, ``Employment by industry, 
occupation, and percent distribution, 2021 and projected 2031,'' 
available at https://data.bls.gov/projections/nationalMatrix?queryParams=524120&ioType=i (direct insurance [except 
life, health, and medical] carriers); U.S. Bureau of Labor 
Statistics, Employment Projections, ``Employment by industry, 
occupation, and percent distribution, 2021 and projected 2031,'' 
available at https://data.bls.gov/projections/nationalMatrix?queryParams=531000&ioType=i (real estate).
    \212\ See Federal Reserve Bank of St. Louis, 10-Year Breakeven 
Inflation Rate (as of July 18, 2023), available at https://fred.stlouisfed.org/series/T10YIE.
---------------------------------------------------------------------------

ii. Reporting
    The total costs associated with reporting a given non-financed 
property transaction will likely vary with the specific facts and 
circumstances of the transfer. For instance, the cost of the time 
needed to prepare and file a report could differ depending on which 
party in the cascade is the reporting person because parties receive 
different compensating wages. The costs associated with the time to 
determine who is the reporting person will also vary by the number of 
potential parties who may assume the role and thus might be parties to 
a designation agreement.
    FinCEN estimates an average per-party cost to determine the 
reporting person of 30 (15) minutes for the party that assumes the role 
if a designation agreement is (not) required and 15 minutes each for 
all non-reporting parties (assuming each tier in the cascade 
corresponds to one reporting person). Therefore, the range of potential 
time costs associate with determining the reporting person is expected 
to be between 15 to 90 minutes.\213\ Recently, FinCEN received updated 
information from parties currently reporting under the Residential Real 
Estate GTO indicating that the previously estimated time cost of 20 
minutes for that reporting requirement was less than half the average 
time expended per report in practice. Based on this feedback, the 
filing time burden FinCEN anticipates for the proposed rule accordingly 
incorporates a 45-minute estimate for the collection and reporting of 
the subset of Real Estate Report required information that is similar 
to information in reports filed under the Residential Real Estate GTOs, 
although FinCEN recognizes that certain transactions may require 
significantly more time.\214\ Mindful of these outliers, FinCEN 
estimates an average 2 hour per reportable transaction time cost to 
collect and review transferee and transaction-specific reportable 
information and related documents, and an average 30 minute additional 
time cost to reporting.
---------------------------------------------------------------------------

    \213\ This upper bound estimate is based on an assumption that, 
at maximum, five distinct functional roles could be concurrently 
provided to a reportable transfer. See supra note 186.
    \214\ At present, FinCEN is unable to assess the extent to which 
the underlying distribution of completion times exhibits skew or the 
extent to which current timing outliers may more accurately 
represent the associated burden unique to newly affected 
transactions. FinCEN is therefore requesting additional data via 
public comments in the event that such data exists and would 
materially alter the related expected burden estimates below.
---------------------------------------------------------------------------

    Table 4 below presents FinCEN's estimates of the various potential 
per-party per-transaction reporting costs associated with a preparing 
and filing the proposed Real Estate Report.

[[Page 12455]]

[GRAPHIC] [TIFF OMITTED] TP16FE24.003

    Based on the range of expected reportable transactions and the 
wages associated with different persons in the potential reporting 
cascade, FinCEN anticipates that the proposed rule's reporting costs 
may be between approximately $158.2 million \215\ and $314.2 
million.\216\
---------------------------------------------------------------------------

    \215\ This estimate assumes the lowest number of cascade 
participants (1), the lowest number of estimated annual transfers 
(800,000), reported by the entity with the lowest estimated wage 
rate ($70.33/hr.).
    \216\ This estimate assumes the maximum number of cascade 
participants (five (see note 186), each compensated at .25 times 
their respective average wage rate), the highest number of estimated 
annual transfers (850,000), reported by the entity with the highest 
estimated wage rate ($89.88/hr.).
---------------------------------------------------------------------------

    Because FinCEN expects reporting persons to be able to rely on 
technology previously purchased and already deployed in the ordinary 
course of business (namely, computers and access to the internet) to 
comply with the proposed reporting requirements, no line item of 
incremental expected IT costs has been ascribed to reporting.
iii. Recordkeeping
    The proposed rule would impose recordkeeping requirements on 
reporting persons as well as, in certain cases, members of a given 
reportable transaction's cascade that are not the reporting person. The 
primary variation in expected recordkeeping costs would flow from the 
conditions under which the reporting person has assumed their role. 
Additional variation in costs may result from differences in the dollar 
value assigned to the reporting person's time costs as a function of 
their primary occupation.\217\
---------------------------------------------------------------------------

    \217\ See discussion of reporting entity hourly wage rates, 
supra Section VII.A.2.b.ii.
---------------------------------------------------------------------------

    If the reporting person assumes the role as a function of their 
position in the proposed reporting cascade, this would imply that no 
meaningfully distinct person involved in the transfer provided the 
preceding service(s). In this case, the reporting person's 
recordkeeping requirements would be limited to the retention of 
compliance documents (such as the transferee's certification of 
beneficial ownership information) for a period of five years in a 
manner that preserves ready availability for inspection as authorized 
by law.\218\ Recordkeeping costs would therefore include those 
associated with creating and/or collecting the necessary documents, 
storing the records in an accessible format, and securely disposing of 
the records after the required retention period has elapsed. FinCEN 
anticipates that over the full recordkeeping lifecycle, each reportable 
transaction would, on average, require one hour of the reporting 
person's time, as well as a record processing and maintenance cost of 
ten cents. Because FinCEN expects that records will primarily be 
produced and recorded electronically and estimates its own processing 
and maintenance costs at ten cents per record, it has applied the same 
expected cost per reportable transaction to reporting persons.\219\ On 
aggregate, this would result in recordkeeping costs between 
approximately $56.3 million and $75.6 million associated with one 
year's reportable transactions.
---------------------------------------------------------------------------

    \218\ See discussion of recordkeeping requirements, supra 
Section IV.G; see also proposed amendment 31 CFR 1031.320(l).
    \219\ This is based on the assumption that reporting persons may 
face comparable market rates for the same technological services. 
However, FinCEN invites the public to provide additional data on the 
market rates faced by potentially affected parties.
---------------------------------------------------------------------------

    If the reporting person has instead assumed the role as the result 
of a designation agreement, the proposed rule would impose additional 
recordkeeping requirements on both the reporting person and at least 
one other member of the proposed reporting cascade. This is because the 
existence of a designation agreement implies the existence of one or 
more distinct alternative parties to the reportable transaction that 
provided a preceding service or services as described in the proposed 
cascade. While the proposed rule only stipulates that ``the person who 
would otherwise be the reporting person but for the agreement'' would 
also be anticipated to incur recordkeeping costs, FinCEN expects the 
minimum number of additional parties required to retain a readily 
accessible copy of the designation

[[Page 12456]]

agreement for a five-year period would, in practice, depend on the 
number of alternative reporting parties servicing the transaction in a 
capacity that precedes the designated reporting person's in the 
proposed cascade, as it would otherwise be difficult to demonstrate the 
prerequisite sequence of conditions were met to establish the ``but 
for'' of the proposed requirement. Conservatively assuming that each 
service in the proposed cascade is provided by a separate party, this 
would impose an incremental recordkeeping cost on at least two parties 
per transaction and at most five.\220\ Because FinCEN estimates of 
reporting costs already assign the costs of preparing a designation 
agreement to the reporting person (when a transaction includes a 
designation agreement), the incremental recordkeeping costs it 
estimates here pertain solely to the electronic dissemination, signing, 
and storage of the agreement. This is assigned an average time cost of 
five minutes per signing party to read and sign the designation 
agreement, as well as a ten-cent record processing and maintenance cost 
per transaction. Thus, designation agreement-specific recordkeeping 
costs are expected to include a time cost of 10-50 minutes (assuming 
one signing party per tier of the cascade) and $0.20-$0.50 per 
reportable transaction that involves a designation. This corresponds to 
expected annual aggregate costs ranging from approximately $9.5 million 
\221\ to $28.6 million.\222\ FinCEN notes that it assumes that rational 
parties to a reportable transaction would not enter into a designation 
agreement if the expected cost of doing so, including compliance with 
the proposed recordkeeping requirements, were not elsewhere compensated 
in the form of efficiency gains or other offsetting cost savings 
associated with other components of compliance with the proposed rule, 
such as training or reporting costs. As such, the estimates provided 
here should only be taken to reflect a pro forma accounting cost.
---------------------------------------------------------------------------

    \220\ See supra note 186.
    \221\ This estimate assumes the lowest estimated number of 
annual transfers occurs and that the designation agreement is 
between only the two reporting persons with the lowest and second 
lowest hourly wage rate.
    \222\ This estimate assumes the highest estimated number of 
annual transfers occurs and that all members of the cascade 
(compensated at their respective average wage rates) are party to 
the designation agreement.
---------------------------------------------------------------------------

    Table 5 below presents FinCEN's estimates of the various potential 
per-party per-transaction costs associated with the proposed Real 
Estate Report recordkeeping requirements.
[GRAPHIC] [TIFF OMITTED] TP16FE24.004

b. Government Costs
    To implement the proposed rule, FinCEN expects to incur certain 
operating costs that would include approximately $8.5 million in the 
first year and approximately $7 million each year thereafter. These 
estimates include anticipated novel expenses related to technological 
implementation,\223\ stakeholder outreach and informational support, 
compliance monitoring, and potential enforcement activities as well as 
certain incremental increases to pre-existing administrative and 
logistic expenses.
---------------------------------------------------------------------------

    \223\ Technological implementation for a new reporting form 
contemplates expenses related to development, operations, and 
maintenance of system infrastructure, including design, deployment, 
and support, such as a help desk. It includes an anticipated 
processing cost of $0.10 per submitted Real Estate Report.
---------------------------------------------------------------------------

    While such operating costs are not typically considered part of the 
general economic cost of a proposed rule, FinCEN acknowledges that this 
treatment implicitly assumes that resources commensurate with the novel 
operating costs exist. If this assumption does not hold, then operating 
costs

[[Page 12457]]

associated with a rule may impose certain economic costs on the public 
in the form of opportunity costs from the agency's forgone alternative 
activities and those activities' attendant benefits. Putting that into 
the context of this proposed rule, and benchmarking against FinCEN's 
actual appropriated budget for fiscal year 2022 ($161 million),\224\ 
the corresponding opportunity cost would resemble forgoing 
approximately five percent of current activities annually.
---------------------------------------------------------------------------

    \224\ FinCEN, Congressional Budget Justification and Annual 
Performance Plan and Report FY 2024 (2023), available at https://home.treasury.gov/system/files/266/15.-FinCEN-FY-2024-CJ.pdf.
---------------------------------------------------------------------------

4. Economic Consideration of Policy Alternatives
a. Proposed Requirements Without the Option To Designate
    Instead of the rule as proposed, FinCEN could have required the 
reporting person to be determined strictly by the reporting cascade 
without an option to designate. Given the expectation that rational 
parties to a transaction would prefer to assign tasks to the party for 
whom it is least costly to complete, this alternative could only have 
been as cost effective as the proposed approach (which includes the 
option to designate) in the event that the reporting cascade would 
otherwise always assign requirements to the party with the lowest 
associated compliance costs. In all other cases, the alternative would 
be more costly. FinCEN therefore declined to propose a standalone 
reporting cascade.
b. Traditional SAR and AML Program Requirements
    Instead of the proposed streamlined reporting requirement, FinCEN 
could have proposed to impose the full traditional SAR and AML program 
requirements on the various real estate professionals included in the 
proposed reporting cascade. While this would almost certainly lead to 
the production of significantly more reports, and hence, potentially 
more transaction-related information available to law enforcement, the 
costs accompanying this alternative would be commensurately more 
significant and would likely disproportionately burden small 
businesses. Such weighting of costs towards smaller entities could 
increase transaction costs associated with residential real property 
transactions both directly via program-related operational costs and 
indirectly via the potential anticompetitive effects of program costs.
c. Alternative Certification Requirements
    Instead of allowing the transferee legal entity or trust to certify 
to the reporting person that the beneficial ownership information they 
have provided is accurate to the best of their knowledge, FinCEN could 
have required the reporting person to certify the transferee's 
beneficial ownership information. This alternative would likely be 
accompanied by a number of increased costs, including a potential need 
for longer, more detailed compliance training, lengthier time necessary 
to collect and review documents supporting the reported transferee 
beneficial ownership information required, and increased recordkeeping 
costs. There may also be costs associated with transactions that might 
not occur, if for example, a reporting person is unwilling or unable to 
certify the transferee's information. If certain reporting persons are 
better positioned to absorb the risks associated with certifying 
transferee beneficial ownership information, this could also have an 
anticompetitive effect. In this scenario, it is foreseeable that 
smaller businesses could be at a disadvantage.

B. Executive Orders 12866, 13563, and 14094

    Executive Orders 12866, 13563, and 14094 (E.O. 12866 and its 
amendments) direct agencies to assess the costs and benefits of 
available regulatory alternatives and, if regulation is necessary, to 
select regulatory approaches that maximize net benefits (including 
potential economic, environmental, and public health and safety 
effects; distributive impacts; and equity). E.O. 13563 emphasizes the 
importance of quantifying both costs and benefits, reducing costs, 
harmonizing rules, and promoting flexibility. E.O. 13563 also 
recognizes that some benefits are difficult to quantify and provides 
that, where appropriate and permitted by law, agencies may consider and 
discuss qualitatively values that are difficult or impossible to 
quantify.\225\
---------------------------------------------------------------------------

    \225\ Executive Order 13563, 76 FR 3821 (Jan. 21, 2011), section 
1(c) (``Where appropriate and permitted by law, each agency may 
consider (and discuss qualitatively) values that are difficult or 
impossible to quantify, including equity . . . and distributive 
impacts.'')
---------------------------------------------------------------------------

    This proposed rule has been designated a ``significant regulatory 
action;'' accordingly, it has been reviewed by the Office of Management 
and Budget (OMB).

C. Regulatory Flexibility Act

    When an agency issues a rulemaking proposal, the RFA \226\ requires 
the agency either to provide an initial regulatory flexibility analysis 
(IRFA) with a proposed rule or certify that the proposed rule would not 
have a significant economic impact on a substantial number of small 
entities. Although this proposed rule might apply to a substantial 
number of small entities, it is nonetheless not expected to have a 
significant economic impact given that FinCEN has attempted to minimize 
the burden on reporting persons by streamlining the reporting 
requirements and providing for an option to designate the reporting 
person. Accordingly, FinCEN certifies that the proposed rule would not 
have a significant economic impact on a substantial number of small 
entities. The basis for doing so is discussed in further detail below.
---------------------------------------------------------------------------

    \226\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

1. Estimate of the Number of Small Entities to Whom the Proposed Rule 
Will Apply
    As discussed above,\227\ the proposed rule would apply to a variety 
of individuals and employers in real estate-related businesses \228\ 
insofar as such persons facilitate specifically non-financed transfers 
of residential property.\229\ The extent to which the proposed rule 
would apply to a person or business is therefore contingent on the 
extent to which they provide one of the services enumerated in the 
proposed reporting cascade \230\ to a non-exempt,\231\ non-financed 
\232\ transfer of residential property \233\ to a transferee entity 
\234\ or transferee trust.\235\
---------------------------------------------------------------------------

    \227\ See Section VII.2.b.ii.
    \228\ FinCEN acknowledges that because non-profit organizations 
are not exempt as transferees, certain small non-profits may also be 
affected by the proposed rule if they engage in the non-financed 
transfer of residential property. However, because non-profit 
organizations are typically accustomed to preparing and maintaining 
governing documents and financial records for accountability 
purposes (e.g., with donors, to maintain tax-status, or for state 
regulatory purposes), it is generally expected that the beneficial 
ownership information that would need to be collected and provided 
to a reporting person would be relatively inexpensive to repackage 
for purposes of compliance with the proposed rule.
    \229\ The proposed rule would not impose the full traditional 
SAR and AML program requirements on such businesses. See Section 
VII.A.5.b.
    \230\ See Section IV.D.1.
    \231\ See Section IV.C.2; see also Section IV.C.4; see also 
Section IV.C.5; see also Section VII.A.2.c.i.
    \232\ See Section IV.C.1.
    \233\ See Section IV.A.1.
    \234\ See Section IV.B.1; see also Section IV.B.3.
    \235\ See Section IV.B.2.
---------------------------------------------------------------------------

    Because the rule proposes to introduce a streamlined reporting

[[Page 12458]]

requirement that is transaction-specific and tailored to a relatively 
small subset \236\ of residential property transfers, and because only 
one member of the proposed reporting cascade would be required to file 
the proposed Real Estate Report per reportable transfer, the estimates 
below of the total potential number of small entities to whom the rule 
would apply will necessarily exceed the number of small entities that 
in practice will likely be affected by the rule, possibly by an order 
of magnitude or more. As previously explained,\237\ the proposed 
obligation to file a Real Estate Report follows a cascade stratified by 
the services provided to each non-financed residential transfer 
uniquely, not the primary occupation of the person providing the 
service. Therefore, while each tier of the proposed reporting cascade 
has, for purposes of estimating the broadest extent of persons to whom 
the rule could apply,\238\ been mapped to a primary business category, 
this should not be misinterpreted as an expectation that each business 
in each enumerated primary business category provides the specific 
services to the specific transactions that would trigger a compliance 
requirement under the proposed rule. FinCEN does not currently have 
comprehensive or reliable data from which to more generally \239\ and 
accurately parse small businesses that theoretically could, in the 
ordinary course of business, provide a cascade-identified service to a 
transfer deemed reportable from those small businesses that do so in 
practice, but welcomes public comments that would inform such an 
exercise.\240\
---------------------------------------------------------------------------

    \236\ See Section VII.A.2.b.i.1; see also Section VII.A.2.C.i.
    \237\ See description of services provided by cascade tier, 
supra Section IV.D.1; see also explanation of mapping services to 
primary occupation data, supra Section VII.A.2.b.ii.
    \238\ Measured as all persons who by virtue of primary 
occupation could foreseeably provide at least one service identified 
in the cascade.
    \239\ For example, in FinCEN's deed analysis (see Section 
VII.A.2.c.iii.1), only three of one hundred transfers that would 
have been reportable under the proposed rule did not involve a 
settlement agent, title insurer, or attorney, suggesting that in 
most transactions a person primarily employed in other activities 
related to real estate, a real estate agent or broker, and their 
businesses may be unlikely to become the reporting person on a 
reportable transfer and thereby be affected by the proposed rule. 
However, because that finding speaks to the proportion of 
transactions that involved services from categories of primary 
business and not the proportion of businesses that provide cascade-
identified services to reportable transfers, FinCEN declines to make 
conclusive inferences from that study for this purpose of estimating 
the population of affected businesses.
    \240\ See Section VII.F.
---------------------------------------------------------------------------

    The number of small entities to whom the proposed rule would apply 
is additionally sensitive to both how firm size is determined and the 
vintage of data used for the estimates. As illustrated in the footnotes 
to Table 6 below, while the consensus across data sources and 
methodological approaches is that an upper bound of potentially 
affected small entities includes approximately 160,800 firms (by the 
following primary business classifications: approximately 6,300 Title 
and Settlement Agents, 800 Direct Title Insurance Carriers, 18,000 
persons performing Other Activities Related to Real Estate, 15,700 
Offices of Lawyers, and 120,000 Offices of Real Estate Agents and 
Brokers), the point estimates differ non-trivially by how `small' is 
operationally defined, and do not do so unidirectionally \241\ across 
methodologies and data sources. The differences between the smallest 
and largest estimated values per industry group can lead to small 
business impact analyses that differ in anticipated magnitudes of 
effect by over 28,900 firms collectively, meaning that an incremental 
change of $100 in cost per firm could vary in aggregate estimated 
impact on small businesses by almost $3 million. Because estimates of 
aggregate economic effects can thus depend to such an extent on 
methodological choices rather than business fundamentals, FinCEN 
instead considered economic effects estimated and presented at a per-
firm by primary business category level of analysis as more 
informative.
---------------------------------------------------------------------------

    \241\ Meaning that no method of operationalizing the term 
`small' or vintage of data consistently yields either the smallest 
or the largest numerical value of the population estimate.
---------------------------------------------------------------------------

    The following table (Table 6) further illustrates the extent to 
which an estimate of the population of potentially affected small 
entities depends on how the term `small' is defined, as operationalized 
over the most recent vintages of data available from the Census 
Bureau,\242\ but it can also be used to approximate potential aggregate 
economic effects as a function of the per-firm cost analysis below 
while allowing the reader greater flexibility to impose the assumptions 
about the extent to which various small businesses would be implicated 
by the proposed rule, as each deems most reasonable.
---------------------------------------------------------------------------

    \242\ For estimates based on the number of employees, FinCEN 
used the 2021 SUSB Annual Data Tables by Establishment Industry. 
U.S. Census Bureau, 2021 SUSB Annual Data Tables by Establishment 
Industry (Nov. 27, 2023), available at https://www.census.gov/data/tables/2021/econ/susb/2021-susb-annual.html. For receipts data-based 
estimates, FinCEN used the 2017 SUSB Annual Data Tables by 
Establishment Industry. U.S. Census Bureau, 2017 SUSB Annual Data 
Tables by Establishment Industry (May 2021), available at https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.
---------------------------------------------------------------------------

BILLING CODE 4810-02-P

[[Page 12459]]

[GRAPHIC] [TIFF OMITTED] TP16FE24.005

2. Expectations of Impact
    At this time, it is unclear how individual small entities or 
categories of small entities may choose to respond to the proposed 
rule, as a broad range of potentially optimal behaviors and outcomes 
are possible. FinCEN has carefully considered the economic impact 
associated with the spectrum of possible scenarios a small entity might 
face and summarizes its expectations of economic impacts in the 
paragraphs below. To preliminarily clarify why certain costs are 
presented on a per-firm basis while others are presented per 
transaction, it is important to keep the distinction in mind between 
the anticipated costs of compliance, like training, that are 
independent of participation in reporting activity and those that are 
transaction-based, or conditional, on participation in a reportable 
transfer, like reporting and recordkeeping. Further, and within 
transaction-based costs, there are costs incurred by the reporting 
person that are independent of a designation agreement, costs incurred 
by the reporting person only when a designation agreement exists, and 
costs incurred by non-reporting persons when a designation agreement 
exists.\243\
---------------------------------------------------------------------------

    \243\ See Section VII.A.4.a.
---------------------------------------------------------------------------

    The table below (Table 7) presents FinCEN estimates of the average 
annual payroll costs per employee at each of the types of small 
entities to whom the proposed rule would apply. This data provides a 
benchmark against which the anticipated costs of the proposed rule can 
be compared. FinCEN believes that an assessment of economic impact 
relative to individual payroll expenses is more appropriate for the 
purposes of this exercise because an analysis alternatively based on 
business receipts would need to rely upon the most recent SUSB that 
includes revenue data. That survey is approximately seven years old and 
predates the impacts of the COVID-19 pandemic on the residential real 
estate market, the market which is the specific domain to which the 
proposed rule would apply. Payroll data is available for more recent 
vintages of the survey and is therefore more likely to reflect the 
number, distribution, and labor costs of the businesses to whom the 
proposed rule would apply. Furthermore, because estimated costs have 
been presented at a per-employee and per-transaction level throughout 
the RIA, FinCEN expects that the individual business reading the 
analysis, and best apprised of its own annual revenues, should have the 
requisite pieces of information necessary to individually assess the 
potential impact relative to its own unique facts and circumstances.

[[Page 12460]]

[GRAPHIC] [TIFF OMITTED] TP16FE24.006

BILLING CODE 4810-02-C
a. Scenario 1: Little to No Effect
    Some small entities can reasonably be expected to experience little 
to no economic impact from the rule. The kinds of small entities that 
would face this scenario include both those unaffected because they ex 
ante do not participate in reportable transfers and those that ensure 
they do not ex post.
    Among other examples, this would be the case for all small entities 
that, in the ordinary course of business, do not provide services to 
the non-financed transfers of residential property to which the 
proposed rule pertains. FinCEN notes that, at present, there is no 
comprehensive data regarding the distribution of cascade-identified 
services used in connection with the proposed reportable transfers that 
is organized by firm size of the service providers and their primary 
business categories. It is therefore not known if, for example, the 
majority of parties to the proposed reportable transfers have 
historically obtained services from predominantly larger firms in a 
given industry. While some evidence on the market concentration of 
title insurers suggests this might be the case for their services in 
real estate transactions more generally,\244\ it is unclear how 
transferable that observation would be to non-financed transactions 
exclusively. In cases where a small business in one of the identified 
primary business categories does not participate in non-financed, non-
exempt transfers of residential property to a transferee entity or 
transferee trust, the proposed rule would not apply, and therefore no 
costs associated with training, reporting, or recordkeeping would be 
incurred.
---------------------------------------------------------------------------

    \244\ A recent article indicated that the top ten title insurers 
in 2022 enjoyed an 88.4 percent market share. See American Land 
Title Association, ALTA Reports Full-Year, Q4 2022 Title Insurance 
Premium Volume (May 8, 2023), available at https://www.prnewswire.com/news-releases/alta-reports-full-year-q4-2022-title-insurance-premium-volume-301817499.html.
---------------------------------------------------------------------------

    Alternatively, some small entities to whom the proposed rule would 
apply (based on the previous provision of services to transactions that 
would become reportable) might, in light of the reporting requirement, 
preemptively adopt a business policy of not providing services to non-
financed residential property transfers or otherwise form arrangements 
to ensure they do not become the reporting person. This would allow 
them to similarly forgo the need to implement training programs or 
incur compliance costs related to reporting or recordkeeping to the 
same extent as those small businesses who had never previously 
facilitated the proposed newly reportable transfers. Admittedly, these 
strategies may not be entirely cost-free as certain firms may incur 
some costs in the form of forgone transactions. Additionally, there may 
also be some transaction costs to forming the kinds of alternative 
arrangements, external business agreements, or partnerships necessary 
to ensure reportable transfers remain substantially unaffected, as 
desired. In many cases, FinCEN contemplates that a small business may 
ensure

[[Page 12461]]

accordingly via relatively informal arrangements, such as verbally (or 
else, absent formal consideration), with longstanding providers of 
contemporaneous closing services to the types of residential property 
transactions that would otherwise require the small business to file a 
Real Estate Report under the proposed rule.
    While such arrangements might be formed at the minimal cost of a 
short phone call or in the course of an informal conversation, all of 
which would be considered de minimis costs, other forms of agreement 
might be more costly to certain small businesses. FinCEN notes that in 
keeping with the general principle of Coase Theorem,\245\ nothing 
prevents potential private bargaining arrangements by which an 
otherwise obligated reporting person might transfer the bulk of their 
responsibilities via an ex ante agreement to compensate their 
respective counterparty's costs associated with a designation 
agreement,\246\ either via performance of the related documentation 
exercise or via financial consideration commensurate with the 
designation agreement-specific costs. A more detailed estimate of such 
costs is articulated in the scenario analysis that follows.
---------------------------------------------------------------------------

    \245\ See R.H. Coase, ``The Problem of Social Cost,'' The 
Journal of Law and Economics, vol. 3 (Oct. 1960). While Coase 
Theorem traditionally pertains to the resolution of externality 
problems by private parties given an initial allocation of property 
rights, the principle is expected in this context to apply similarly 
to the assignment of the proposed reporting requirement (and related 
costs) between businesses servicing a reportable transfer given an 
original assignment of the reporting responsibility.
    \246\ See discussion of designation agreement specific 
recordkeeping costs, supra Section VII.A.4.a.iii.
---------------------------------------------------------------------------

b. Scenario 2: Partial Effect
    Other small entities may only be marginally affected. These kinds 
of small entities may include some that already have experience 
reporting under the Residential Real Estate GTO to the extent that such 
title insurers qualify as `small.' \247\ Such entities already have 
expended resources to establish a compliance infrastructure, and given 
the similarities between the requirements under the Residential Real 
Estate GTOs and the requirements that would be imposed under the 
proposed rule, some of those costs would not to be replicated to comply 
with the proposed rule. Therefore, the economic impact of the proposed 
rule on such entities will likely be less than it would be for entities 
who are not currently subject to the Residential Real Estate GTOs. The 
category of marginally affected small entities would also include 
entities that are categorically unlikely to become the reporting person 
when participating in reportable transfers.
---------------------------------------------------------------------------

    \247\ See Section II.B.3; see also Section VII.A.1.a.i.
---------------------------------------------------------------------------

    For example, small entities that facilitate a reportable 
transaction along with other members of the reporting cascade may, by 
the nature of the service they provide, always reside in a tier below 
other service-providing entities and/or because of being further 
removed from the details required for the proposed Real Estate Report, 
may be unlikely to be designated in place of higher tier cascade 
members. Similarly, the nature of the service they provide may make it 
less likely that a reportable transfer occurs in which their service is 
the only third-party service obtained. As such, the main costs incurred 
as a consequence of the proposed rule would be associated with 
training,\248\ which would still be necessary to ensure proper 
recordkeeping \249\ associated with designation agreements and 
preparedness for reporting \250\ in the rare event either is required. 
FinCEN notes that, as proposed, no designation agreement with a lower-
tier service provider is required if a higher-tier party to a 
transaction files the required Real Estate Report, and entities in 
tiers lower than the reporting person are not required to verify or 
document verification that the higher-tier party filed the report. 
Therefore, to the extent that a marginally affected small entity of the 
type described here incurs reporting \251\ or recordkeeping costs,\252\ 
it would only be in instances where the tiers above it were absent from 
a deal, in which case it may still have the ability to designate the 
reporting requirements if lower tier services are being provided by an 
additional party to the transaction.
---------------------------------------------------------------------------

    \248\ See Table 3; see generally Section VII.A.4.a.i.
    \249\ See Section VII.G; see also discussion of recordkeeping 
costs, supra Section VII.A.4.a.iii; see also discussion of 
recordkeeping costs, infra Section VII.C.2.c and Table 11.
    \250\ See Section VII.E; see also discussion of expected 
reporting costs, supra Section VII.A.4.a.ii; see also discussion of 
reporting costs, infra Section VII.C.2.c and Table 10.
    \251\ Id.
    \252\ Supra, note 250.
---------------------------------------------------------------------------

    For small entities whose primary costs burden will be associated 
with employee training, such costs would represent an increase in 
payroll expense of approximately 0.2 percent per trained employee (see 
Tables 8 and 9 below, derived from Tables 3 and 7 above). Such a change 
is not expected to be economically significant. FinCEN further notes 
that while its RIA incorporates estimates that are informed by the 
previous CDD model of how training is operationalized, the proposed 
rule itself is silent on the manner, format, and duration of training, 
and the proportion of a business's workforce that needs to be trained. 
Therefore, to the extent that a small business may effectively train a 
sufficient proportion of its workforce to the necessary degree of 
familiarity with the proposed rule's reporting requirements to ensure 
appropriate compliance at costs lower than FinCEN estimates, it is 
expected to do so at its discretion.
BILLING CODE 4810-02-P

[[Page 12462]]

[GRAPHIC] [TIFF OMITTED] TP16FE24.007

[GRAPHIC] [TIFF OMITTED] TP16FE24.008

c. Scenario 3: Full Effect
    The small entities that would be most affected are those that 
would, as a consequence of the proposed rule, incur the full reporting 
requirement with certainty.
    This could occur because no other members of the proposed reporting 
cascade participate in a given reportable transfer or because, when 
other cascade members participate in a reportable transfer, no 
designation agreement reassigns the reporting requirement away from the 
small entity. In this

[[Page 12463]]

scenario, the small entity would incur the full or near full expected 
costs associated with training, reporting, and recordkeeping.\253\ 
Tables 10 and 11 below indicated that this would introduce a cost 
comparable to an approximately 0.5 percent increase in average small 
entity annual payroll expense for one employee per transaction.\254\
---------------------------------------------------------------------------

    \253\ In the event that the small entity is the reporting person 
because no other person described in the cascade is involved in the 
transfer, costs are reduced by the absence of additional time needed 
to determine the reporting person and the absence of time associated 
with the preparation, circulation, and recordkeeping associated with 
a designation agreement.
    \254\ FinCEN notes that because the proposed rule is intended to 
replace the current Residential Real Estate GTOs reporting 
requirement, framing the expected economic impact in terms of cost 
increases may overstate the anticipated incremental burden of 
compliance, particularly for small direct title insurance carriers.
[GRAPHIC] [TIFF OMITTED] TP16FE24.009


[[Page 12464]]


[GRAPHIC] [TIFF OMITTED] TP16FE24.010

BILLING CODE 4810-02-C
    Alternatively, a small entity, for reasons of its own, might adopt 
a business policy to always be the reporting person on reportable 
transactions. In this case it would incur the incremental additional 
costs associated with preparing \255\ and circulating a designation 
agreement \256\ whenever higher-tier parties to the transaction 
participate but its cost profile would otherwise resemble the other 
types of `full effect' small entities. The economic impact does not 
appear to be significant in these cases, which would be expected to 
impose the highest costs.\257\
---------------------------------------------------------------------------

    \255\ See description of designation agreement time costs, supra 
Section VII.A.4.a.ii.
    \256\ See description of designation agreement time and 
technology costs, supra Section VII.A.4.a.iii; see also Table 8.
    \257\ Because the RFA does not statutorily define 
``significant'' the SBA has acknowledged that what is 
``significant'' will vary depending on the economics of the industry 
or sector to be regulated. The agency is in the best position to 
gauge the small entity impacts of its regulations.'' See Small 
Business Administration, How to Comply with the Regulatory 
Flexibility Act (updated Aug. 2017), page 18available at https://advocacy.sba.gov/wp-content/uploads/2019/06/How-to-Comply-with-the-RFA.pdf. Nevertheless, it has suggested that one potentially 
appropriate measure of an economically significant impact is one 
that ``exceeds 5 percent of the labor costs of the entities in the 
sector.'' Id. p 19. FinCEN analysis here identifies a maximum 
average per transaction cost of approximately 0.5 percent, which is 
a full order of magnitude smaller than the proposed SBA threshold.
---------------------------------------------------------------------------

    While the general consensus of this analysis across the potential 
scenarios that a small business could find itself in, as a consequence 
of the proposed rule, is that the related incremental costs are not 
likely to be economically significant, it may also be worth nothing 
that an economically significant cost generally need not imply that the 
economic impact on a given firm or industry would also be significant. 
While that could be the case, the former is not a sufficient condition 
for the latter.
    Because a non-financed residential property transfer involving one 
or more potential reporting persons, unless exempt, must be reported, 
the parties between whom the ownership transfers may have relatively 
little bargaining power over the extent to which incremental costs 
related to the proposed rule are passed-through. Parties may have few 
viable alternatives to compensating the reporting person for its 
additional compliance-related services other than to conduct the 
transaction with no reporting persons involved in the transfer. This 
may be undesirable to the parties engaged in the transfer for a number 
of risk and/or convenience-related reasons that outweigh the marginal 
increase in transaction fees. As such, even in a

[[Page 12465]]

scenario under which small entities would face the highest incremental 
costs,\258\ it still may not be the case that the direct economic 
impact on these small entities will be significant.
---------------------------------------------------------------------------

    \258\ For example, the full costs of newly implementing a 
training program, filing the proposed Real Estate Report 
(potentially on that includes a designation agreement), and 
complying with the proposed recordkeeping requirements.
---------------------------------------------------------------------------

3. Certification
    Having considered the various possible outcomes (as grouped above 
by scenarios FinCEN anticipates as most likely) for small entities 
under the proposed reporting requirements, FinCEN certifies that the 
rule, if promulgated, will not have a significant economic impact on a 
substantial number of small entities. FinCEN invites comments from 
members of the public.

D. Unfunded Mandates Reform Act

    Section 202 of the UMRA \259\ requires that an agency prepare a 
statement before promulgating a rule that may result in expenditure by 
state, local, and Tribal governments, or the private sector, in the 
aggregate, of $177 million or more in any one year.\260\ Section 202 of 
the UMRA also requires an agency to identify and consider a reasonable 
number of regulatory alternatives before promulgating a rule. FinCEN 
believes that the preceding assessment of impact \261\ satisfies the 
UMRA's analytical requirements, but invites public comment on any 
additional factors that, if considered, would materially alter the 
conclusions of the RIA.
---------------------------------------------------------------------------

    \259\ See 2 U.S.C. 1532(a).
    \260\ The U.S. Bureau of Economic Analysis reported the annual 
value of the gross domestic product (GDP) deflator in 1995 (the year 
in which UMRA was enacted) as 71.823; and in 2022 as 127.215. See 
U.S. Bureau of Economic Analysis, ``Implicit Price Deflators for 
Gross Domestic Product,'' Table 1.1.9, available at https://apps.bea.gov/iTable/?reqid=19&step=2&isuri=1&categories=survey%23eyJhcHBpZCI6MTksInN0ZXBzIjpbMSwyLDMsM10sImRhdGEiOltbIkNhdGVnb3JpZXMiLCJTdXJ2ZXkiXSxbIk5JUEFfVGFibGVfTGlzdCIsIjEzIl0sWyJGaXJzdF9ZZWFyIiwiMTk5NSJdLFsiTGFzdF9ZZWFyIiwiMjAyMSJdLFsiU2NhbGUiLCIwIl0sWyJTZXJpZXMiLCJBIl1dfQ. Thus, the 
inflation adjusted estimate for $100 million is 127.215 divided by 
71.823 and then multiplied by 100, or $177 million.
    \261\ See Section VII.A.5; see generally Section VII.A.
---------------------------------------------------------------------------

E. Paperwork Reduction Act

    The new reporting requirements in this proposed rule are being 
submitted to OMB for review in accordance with the PRA.\262\ Under the 
PRA, an agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by OMB. Written comments and recommendations 
for the proposed collection can be submitted by visiting 
www.reginfo.gov/public/do/PRAMain. Find this document by selecting 
``Currently Under Review--Open for Public Comments'' or by using the 
search function. Comments are welcome and must be received by April 16, 
2024. In accordance with the requirements of the PRA and its 
implementing regulations, 5 CFR part 1320, the following details 
concerning the collections of information are presented to assist those 
persons wishing to comment.
---------------------------------------------------------------------------

    \262\ See 44 U.S.C. 3506(c)(2)(A).
---------------------------------------------------------------------------

    Reporting and Recordkeeping Requirements: The provisions in this 
proposed rule pertaining to the collection of information can be found 
in paragraph (a) of proposed 31 CFR 1031.320. The information that 
would be required to be reported by the proposed rule would be used by 
the U.S. Government to monitor and investigate money laundering in the 
U.S. residential real estate sector. The information required to be 
maintained by the proposed will be used by federal agencies to verify 
compliance by reporting persons with the provisions of the proposed 
rule. The collection of information is mandatory.
    OMB Control Numbers: 1506-XXX.
    Frequency: As required.
    Description of Affected Public: Residential Real Estate Settlement 
Agents, Title Insurance Carriers, Escrow Service Providers, Other Real 
Estate Professionals.
    Estimated Number of Responses: 850,000 \263\
---------------------------------------------------------------------------

    \263\ This estimate represents the upper bound estimate of 
reportable transfers per year as described in greater detail above 
in Section VII.A.2.c.i.
---------------------------------------------------------------------------

    Estimated Total Annual Reporting and Recordkeeping Burden: 
4,604,167 burden hours \264\
---------------------------------------------------------------------------

    \264\ This estimate includes the upper bound estimates of the 
time burden of compliance, as described in greater detail above, 
with the proposed reporting and recordkeeping requirements. See 
Section VII.A.4.a.ii; Section VII.A.4.a.iii.
---------------------------------------------------------------------------

    Estimated Total Annual Reporting and Recordkeeping Cost: 
$396,610,297.74 \265\
---------------------------------------------------------------------------

    \265\ This estimate includes the upper bound estimates of the 
wage and technology costs of compliance, as described in greater 
detail above, with the proposed reporting and recordkeeping 
requirements. See Section VII.A.4.a.ii; Section VII.A.4.a.iii.
---------------------------------------------------------------------------

    General Request for Comments under the Paperwork Reduction Act: 
Comments submitted in response to this notice will be summarized and 
included in a request for OMB approval. All comments will become a 
matter of public record. Comments are invited on the following 
categories: (a) whether the collection of information is necessary for 
the proper performance of the functions of the agency, including 
whether the information shall have practical utility; (b) the accuracy 
of the agency's estimate of the burden of the collection of 
information; (c) ways to enhance the quality, utility, and clarity of 
the information to be collected; (d) ways to minimize the burden of the 
collection of information on reporting persons, including through the 
use of technology; and (e) estimates of capital or start-up costs and 
costs of operation, maintenance, and purchase of services required to 
provide information.

F. Additional Requests for Comment

    1. In addition, FinCEN generally invites comment on the accuracy of 
FinCEN's regulatory analysis. FinCEN specifically requests comments--
including data or studies--that provide additional insight on the 
following: What would be the short-term costs, burdens, and benefits 
associated with using a new reporting form to file the proposed 
information? The long term? What would be the costs, burdens, and 
benefits associated with collecting and storing the information 
detailed in this NPRM?
    2. Would FinCEN's proposed regulatory requirements be integrated 
into current compliance programs in ways that are significantly more 
(or less) costly than anticipated in the RIA? How much time would be 
needed to successfully integrate them into current systems and 
procedures?
    3. Would reporting persons and their employers integrate 
implementation costs into their existing budgets in ways that 
substantially differ from the expectations described in the RIA? If so, 
how might this affect the reliability or accuracy of the estimated 
costs?
    4. Is FinCEN correct in assuming that, in a single reportable real 
estate transaction, only one business would perform any of the 
functions described in the first three tiers of the reporting cascade? 
If not, please provide details about, or examples of instances where, 
multiple parties with functions described in the first three tiers of 
the cascade would participate in a single transaction. If multiple 
parties do participate, would this result in an impact on the burden of 
compliance with the rule?
    5. Of the affected parties identified in this analysis, would 
certain nonfinancial trades or businesses incur higher costs compared 
to others under this proposed rule? Why?

[[Page 12466]]

    6. Please detail any aspects of the proposed rule that may cause a 
business to operate at a competitive disadvantage compared to any 
business that offers similar services but would be outside the scope of 
the proposed rule.
    7. To what extent are the services identified in the proposed 
reporting cascade likely to be primarily provided by small businesses?
    8. To what extent might the costs of compliance with the proposed 
rule dissuade certain small businesses from providing services to 
reportable transfers? How large is the economic value of such 
potentially foregone transactions to small businesses? If possible, 
please provide data that would enable the quantification of these 
costs.
    9. Please detail any aspects of the proposed rule that may cause a 
small business to operate at a competitive disadvantage compared to 
other businesses that offers similar services.
    10. To what extent might the parties who would be reporting persons 
under the proposed rule be able to pass the costs of compliance on to 
downstream customers/clients? Are there concerns about such an 
allocation of the economic burden of compliance?
    11. To the extent that services in the proposed reporting cascade 
tiers are currently ordered such that a small business would precede a 
larger business, are there any economic costs to designation or 
significant transaction frictions that would prevent reassigning the 
obligation in cases where the larger business is better positioned to 
absorb compliance costs?

List of Subjects in 31 CFR Part 1031

    Administrative practice and procedure, Aliens, Authority 
delegations (Government agencies), Bankruptcy, Banks and banking, 
Brokers, Buildings and facilities, Business and industry, Condominiums, 
Cooperatives, Currency, Citizenship and naturalization, Electronic 
filing, Estates, Fair housing, Federal home loan banks, Federal savings 
associations, Federal-States relations, Foreign investments in U.S., 
Foreign persons, Foundations, Holding companies, Home improvement, 
Homesteads, Housing, Indian--law, Indians, Indians--tribal government, 
Insurance companies, Investment advisers, Investment companies, 
Investigations, Law enforcement, Lawyers, Legal services, Low and 
moderate income housing, Mortgage insurances, Mortgages, Penalties, 
Privacy, Real property acquisition, Reporting and recordkeeping 
requirements, Small businesses, Securities, Taxes, Terrorism, Time, 
Trusts and trustees, Zoning.

Authority and Issuance

0
For the reasons set forth in the preamble, chapter X of title 31 of the 
Code of Federal Regulations is proposed to be amended by adding part 
1031 to read as follows:

PART 1031--RULES FOR PERSONS INVOLVED IN REAL ESTATE CLOSINGS AND 
SETTLEMENTS

Subparts A-B [Reserved]
Subpart C--Reports Required To Be Made by Persons Involved in Real 
Estate Closings and Settlements
Sec.
1031.320 Reports of residential real property transfers.
1031.321 [Reserved]

    Authority:  12 U.S.C. 1829b, 1951-1959; 31 U.S.C. 5311-5314, 
5316-5336; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307; sec. 
701 Pub. L. 114-74, 129 Stat. 599; sec. 6403, Pub. L. 116-283, 134 
Stat. 3388.

Subparts A-B [Reserved]

Subpart C--Reports Required To Be Made by Persons Involved in Real 
Estate Closings and Settlements


Sec.  1031.320   Reports of residential real property transfers.

    (a) General. A residential real property transfer as defined in 
paragraph (b) of this section (``reportable transfer'') shall be 
reported to FinCEN by the reporting person identified in paragraph (c) 
of this section. The report shall include the information described in 
paragraphs (d) through (i) of this section. Terms not defined in 
paragraph (j) of this section are defined in 31 CFR 1010.100. The 
report required by this section shall be filed in the form and manner, 
and at the time, specified in paragraph (k) of this section. Records 
shall be retained as specified in paragraph (l) of this section and are 
not confidential as specified in paragraph (m) of this section.
    (b) Reportable transfer. (1) Except as set forth in paragraph 
(b)(2) of this section, a reportable transfer is a transfer to a 
transferee entity or transferee trust of an ownership interest in:
    (i) Real property located in the United States containing a 
structure designed principally for occupancy by one to four families;
    (ii) Vacant or unimproved land located in the United States zoned, 
or for which a permit has been issued, for the construction of a 
structure designed principally for occupancy by one to four families; 
or
    (iii) Shares in a cooperative housing corporation where such 
transfer does not involve an extension of credit to all transferees 
that is:
    (A) Secured by the transferred residential real property; and
    (B) Extended by a financial institution that has both an obligation 
to maintain an anti-money laundering program and an obligation to 
report suspicious transactions under this chapter.
    (2) A reportable transfer does not include a:
    (i) Grant, transfer, or revocation of an easement;
    (ii) Transfer resulting from the death of an owner of residential 
real property;
    (iii) Transfer incident to divorce or dissolution of a marriage;
    (iv) Transfer to a bankruptcy estate; or
    (v) Transfer for which there is no reporting person.
    (c) Determination of reporting person. (1) Except as set forth in 
paragraphs (c)(2) and (3) of this section, the reporting person for a 
reportable transfer is the person engaged within the United States as a 
business in the provision of real estate closing and settlement 
services that is:
    (i) The person listed as the closing or settlement agent on the 
closing or settlement statement for the transfer;
    (ii) If no person is described in paragraph (c)(1)(i) of this 
section, the person that prepares the closing or settlement statement 
for the transfer;
    (iii) If no person is described in paragraph (c)(1)(i) or (ii) of 
this section, the person that files with the recordation office the 
deed or other instrument that transfers ownership of the residential 
real property;
    (iv) If no person described in paragraph (c)(1)(i), (ii), or (iii) 
of this section is involved in the transfer, then the person that 
underwrites an owner's title insurance policy for the transferee with 
respect to the transferred residential real property, such as a title 
insurance company;
    (v) If no person described in paragraph (c)(1)(i), (ii), (iii), or 
(iv) of this section is involved in the transfer, then the person that 
disburses in any form, including from an escrow account, trust account, 
or lawyers' trust account, the greatest amount of funds in connection 
with the residential real property transfer;
    (vi) If no person described in paragraph (c)(1)(i), (ii), (iii), 
(iv), or (v) of this section is involved in the transfer, then the 
person that provides an evaluation of the status of the title; or
    (vii) If no person described in paragraph (c)(1)(i), (ii), (iii), 
(iv), (v), or (vi) of this section is involved in the transfer, then 
the person that prepares the deed or, if no deed is involved, any

[[Page 12467]]

other legal instrument that transfers ownership of the residential real 
property.
    (2) Employees, agents, and partners. If an employee, agent, or 
partner acting within the scope of such individual's employment, 
agency, or partnership would be the reporting person as determined in 
paragraph (c)(1) of this section, then the individual's employer, 
principal, or partnership is deemed to be the reporting person.
    (3) Designation agreement. (i) The reporting person described in 
paragraph (c)(1) of this section may agree with any other person 
described in paragraph (c)(1) to designate such other person as the 
reporting person with respect to the reportable transfer. The person 
designated by such agreement shall be the reporting person with respect 
to the transfer.
    (ii) A designation agreement shall be in writing, and shall 
include:
    (A) The date of the agreement;
    (B) The name and address of the transferor;
    (C) The name and address of the transferee entity or transferee 
trust;
    (D) Information described in in paragraph (g) identifying 
transferred residential real property;
    (E) The name and address of the person designated through the 
agreement as the reporting person with respect to the transfer; and
    (F) The name and address of all other parties to the agreement.
    (d) Information concerning the reporting person. The reporting 
person shall report:
    (1) The full legal name of the reporting person;
    (2) The category of reporting person, as determined in paragraph 
(c) of this section; and
    (3) The street address that is the reporting person's principal 
place of business in the United States.
    (e) Information concerning the transferee--(1) Transferee entities. 
For each transferee entity involved in a reportable transfer, the 
reporting person shall report:
    (i) The following information for the transferee entity:
    (A) Full legal name;
    (B) Trade name or ``doing business as'' name, if any;
    (C) Complete current address consisting of:
    (1) The street address that is the transferee entity's principal 
place of business; and
    (2) If such principal place of business is not in the United 
States, the street address of the primary location in the United States 
where the transferee entity conducts business, if any; and
    (D) Unique identifying number consisting of:
    (1) The Internal Revenue Service Taxpayer Identification Number 
(IRS TIN) of the transferee entity;
    (2) If the transferee entity has not been issued an IRS TIN, a tax 
identification number for the transferee entity that was issued by a 
foreign jurisdiction and the name of such jurisdiction; or
    (3) If the transferee entity has not been issued an IRS TIN or a 
foreign tax identification number, an entity registration number issued 
by a foreign jurisdiction and the name of such jurisdiction;
    (ii) The following information for each beneficial owner of the 
transferee entity:
    (A) Full legal name;
    (B) Date of birth;
    (C) Complete current residential street address;
    (D) Citizenship; and
    (E) Unique identifying number consisting of:
    (1) An IRS TIN; or
    (2) Where an IRS TIN has not been issued:
    (i) A tax identification number issued by a foreign jurisdiction 
and the name of such jurisdiction; or
    (ii) The unique identifying number and the issuing jurisdiction 
from a non-expired passport issued by a foreign government; and
    (iii) The following information for each signing individual, if 
any:
    (A) Full legal name;
    (B) Date of birth;
    (C) Complete current residential street address;
    (D) Unique identifying number consisting of:
    (1) An IRS TIN; or
    (2) Where an IRS TIN has not been issued:
    (i) A tax identification number issued by a foreign jurisdiction 
and the name of such jurisdiction; or
    (ii) The unique identifying number and the issuing jurisdiction 
from a non-expired passport issued by a foreign government to the 
individual;
    (E) Description of the capacity in which the individual is 
authorized to act as the signing individual; and
    (F) If the signing individual is acting in that capacity as an 
employee, agent, or partner, the name of the individual's employer, 
principal, or partnership.
    (2) Transferee trusts. For each transferee trust in a reportable 
transfer, the reporting person shall report:
    (i) The following information for the transferee trust:
    (A) Full legal name, such as the full title of the agreement 
establishing the transferee trust;
    (B) Date the trust instrument was executed;
    (C) The street address that is the trust's place of administration;
    (D) Unique identifying number, if any, consisting of:
    (1) IRS TIN; or
    (2) Where an IRS TIN has not been issued, a tax identification 
number issued by a foreign jurisdiction and the name of such 
jurisdiction; and
    (E) Whether the transferee trust is revocable;
    (ii) The following information for each trustee that is a legal 
entity:
    (A) Full legal name;
    (B) Trade name or ``doing business as'' name, if any;
    (C) Complete current address consisting of:
    (1) The street address that is the trustee's principal place of 
business; and
    (2) If such principal place of business is not in the United 
States, the street address of the primary location in the United States 
where the trustee conducts business, if any;
    (D) Name and business address of the trust officer assigned to the 
transferee trust; and
    (E) Unique identifying number consisting of:
    (1) The IRS TIN of the trustee;
    (2) In the case that a trustee has not been issued an IRS TIN, a 
tax identification number issued by a foreign jurisdiction and the name 
of such jurisdiction; or
    (3) In the case that a trustee has not been issued an IRS TIN or a 
foreign tax identification umber, an entity registration number issued 
by a foreign jurisdiction and the name of such jurisdiction; and
    (F) For purposes of this section, an individual trustee of the 
transferee trust is considered to be a beneficial owner of the trust. 
As such, information on individual trustees must be reported in 
accordance with the requirements set forth in paragraph (e)(2)(iii) of 
this section;
    (iii) The following information for each beneficial owner of the 
transferee trust:
    (A) Full legal name;
    (B) Date of birth;
    (C) Complete current residential street address;
    (D) Citizenship;
    (E) Unique identifying number consisting of:
    (1) An IRS TIN; or
    (2) Where an IRS TIN has not been issued:
    (i) A tax identification number issued by a foreign jurisdiction 
and the name of such jurisdiction; or

[[Page 12468]]

    (ii) The unique identifying number and the issuing jurisdiction 
from a non-expired passport issued by a foreign government; and
    (F) The category of beneficial owner, as determined in paragraph 
(j)(1)(ii) of this section; and
    (iv) The following information for each signing individual, if any:
    (A) Full legal name;
    (B) Date of birth;
    (C) Complete current residential street address;
    (D) Unique identifying number consisting of:
    (1) An IRS TIN; or
    (2) Where an IRS TIN has not been issued:
    (i) A tax identification number issued by a foreign jurisdiction 
and the name of such jurisdiction; or
    (ii) The unique identifying number and the issuing jurisdiction 
from a non-expired passport issued by a foreign government to the 
individual;
    (E) Description of the capacity in which the individual is 
authorized to act as the signing individual; and
    (F) If the signing individual is acting in that capacity as an 
employee, agent, or partner, the name of the individual's employer, 
principal, or partnership.
    (3) Collection of beneficial ownership information from 
transferees. The reporting person may collect the information described 
in paragraphs (e)(1)(ii) and (e)(2)(iii) of this section from the 
transferee or a person representing the transferee in the reportable 
transfer, provided the transferee or their representative certifies in 
writing, to the best of their knowledge, the accuracy of the 
information.
    (f) Information concerning the transferor. For each transferor 
involved in a reportable transfer, the reporting person shall report:
    (1) The following information for a transferor who is an 
individual:
    (i) Full legal name;
    (ii) Date of birth;
    (iii) Complete current residential street address; and
    (iv) Unique identifying number consisting of:
    (A) An IRS TIN; or
    (B) Where an IRS TIN has not been issued:
    (1) A tax identification number issued by a foreign jurisdiction 
and the name of such jurisdiction; or
    (2) The unique identifying number and the issuing jurisdiction from 
a non-expired passport issued by a foreign government to the 
individual;
    (2) The following information for a transferor that is a legal 
entity:
    (i) Full legal name;
    (ii) Trade name or ``doing business as'' name, if any;
    (iii) Complete current address consisting of:
    (A) The street address that is the legal entity's principal place 
of business; and
    (B) If the principal place of business is not in the United States, 
the street address of the primary location in the United States where 
the legal entity conducts business, if any; and
    (iv) Unique identifying number consisting of:
    (A) An IRS TIN;
    (B) In the case that the legal entity has not been issued an IRS 
TIN, a tax identification number issued by a foreign jurisdiction and 
the name of such jurisdiction; or
    (C) In the case that the legal entity has not been issued an IRS 
TIN or a foreign tax identification number, an entity registration 
number issued by a foreign jurisdiction and the name of such 
jurisdiction; and
    (3) The following information for a transferor that is a trust:
    (i) Full legal name, such as the full title of the agreement 
establishing the trust;
    (ii) Date the trust instrument was executed;
    (iii) Unique identifying number, if any, consisting of:
    (A) IRS TIN; or
    (B) Where an IRS TIN has not been issued, a tax identification 
number issued by a foreign jurisdiction and the name of such 
jurisdiction;
    (iv) For each individual who is a trustee of the trust:
    (A) Full legal name;
    (B) Current residential street address; and
    (C) Unique identifying number consisting of:
    (1) An IRS TIN; or
    (2) Where an IRS TIN has not been issued:
    (i) A tax identification number issued by a foreign jurisdiction 
and the name of such jurisdiction; or
    (ii) The unique identifying number and the issuing jurisdiction 
from a non-expired passport issued by a foreign government; and
    (v) For each legal entity that is a trustee of the trust:
    (A) Full legal name;
    (B) Trade name or ``doing business as'' name, if any;
    (C) Complete current address consisting of:
    (1) The street address that is the legal entity's principal place 
of business; and
    (2) If the principal place of business is not in the United States, 
the street address of the primary location in the United States where 
the legal entity conducts business, if any; and
    (D) Unique identifying number consisting of:
    (1) An IRS TIN;
    (2) In the case that the legal entity has not been issued an IRS 
TIN, a tax identification number issued by a foreign jurisdiction and 
the name of such jurisdiction; or
    (3) In the case that the legal entity has not been issued an IRS 
TIN or a foreign tax identification number, an entity registration 
number issued by a foreign jurisdiction and the name of such 
jurisdiction.
    (g) Information concerning the residential real property. The 
reporting person shall report the street address, if any, and the legal 
description, such as the section, lot, and block, of each residential 
real property that is the subject of the reportable transfer.
    (h) Information concerning payments. (1) The reporting person shall 
report the following information concerning each payment, other than a 
payment disbursed from an escrow or trust account held by a transferee 
entity or transferee trust, that is made by or on behalf of the 
transferee entity or transferee trust regarding a reportable transfer:
    (i) The amount of the payment, consisting of the total 
consideration paid by the transferee entity or transferee trust;
    (ii) The method by which the payment was made;
    (iii) If the payment was paid from an account held at a financial 
institution, the name of the financial institution and the account 
number; and
    (iv) The name of the payor on any wire, check, or other type of 
payment if the payor is not the transferee entity or transferee trust.
    (2) The reporting person shall report the total consideration paid 
or to be paid by all transferees regarding the reportable transfer.
    (i) Information concerning hard money, private, and other similar 
loans. The reporting person shall report whether the reportable 
transfer involved credit extended by a person that is not a financial 
institution with an obligation to maintain an anti-money laundering 
program and an obligation to report suspicious transactions under this 
chapter.
    (j) Definitions. For purposes of this section, the following terms 
have the following meanings.
    (1) Beneficial owner--(i) Beneficial owners of transferee entities. 
(A) The beneficial owners of a transferee entity are the individuals 
who would be the beneficial owners of the transferee entity on the date 
of closing if the transferee entity were a reporting

[[Page 12469]]

company under 31 CFR 1010.380(d) on the date of closing.
    (B) The beneficial owners of a transferee entity that is 
established as a non-profit corporation or similar entity, regardless 
of jurisdiction of formation, are limited to individuals who exercise 
substantial control over the entity, as defined in 31 CFR 
1010.380(d)(1) on the date of closing.
    (ii) Beneficial owners of transferee trusts. The beneficial owners 
of a transferee trust are the individuals who fall into one or more of 
the following categories on the date of closing:
    (A) A trustee of the transferee trust.
    (B) An individual other than a trustee with the authority to 
dispose of transferee trust assets.
    (C) A beneficiary who is the sole permissible recipient of income 
and principal from the transferee trust or who has the right to demand 
a distribution of, or withdraw, substantially all of the assets from 
the transferee trust.
    (D) A grantor or settlor who has the right to revoke the transferee 
trust or otherwise withdraw the assets of the transferee trust.
    (E) A beneficial owner of any legal entity that holds at least one 
of the positions in the transferee trust described in paragraphs 
(j)(1)(ii)(A) through (D) of this section, except when the legal entity 
meets the criteria set forth in paragraphs (j)(10)(ii)(A) through (P) 
of this section. Beneficial ownership of any such legal entity is 
determined under 31 CFR 1010.380(d), utilizing the criteria for 
beneficial owners of a reporting company.
    (F) A beneficial owner of any trust that holds at least one of the 
positions in the transferee trust described in paragraphs (j)(1)(ii)(A) 
through (D) of this section, except when the trust meets the criteria 
set forth in paragraphs (j)(11)(ii)(A) through (D). Beneficial 
ownership of any such trust is determined under this paragraph 
(j)(1)(ii)(F), utilizing the criteria for beneficial owners of a 
transferee trust.
    (2) Closing or settlement agent. The term ``closing or settlement 
agent'' means any person, whether or not acting as an agent for a title 
agent or company, a licensed attorney, real estate broker, or real 
estate salesperson, who for another and with or without a commission, 
fee, or other valuable consideration and with or without the intention 
or expectation of receiving a commission, fee, or other valuable 
consideration, directly or indirectly, provides closing or settlement 
services incident to the transfer of residential real property.
    (3) Closing or settlement statement. The term ``closing or 
settlement statement'' means the statement of receipts and 
disbursements for a transfer of residential real property.
    (4) Date of closing. The term ``date of closing'' means the date on 
which the transferee entity or transferee trust receives an ownership 
interest in residential real property.
    (5) Ownership interest. The term ``ownership interest'' means the 
rights held in residential real property that are demonstrated:
    (i) Through a deed, for a reportable transfer described in 
paragraph (b)(1)(i) or (ii) of this section; or
    (ii) Through stock, shares, membership, certificate, or other 
contractual agreement evidencing ownership, for a reportable transfer 
described in paragraph (b)(1)(iii) of this section.
    (6) Recordation office. The term ``recordation office'' means any 
State, local, or Tribal office for the recording of reportable 
transfers as a matter of public record.
    (7) Residential real property. The term ``residential real 
property'' means:
    (i) Real property located in the United States containing a 
structure designed principally for occupancy by one to four families;
    (ii) Vacant or unimproved land located in the United States zoned, 
or for which a permit has been issued, for the construction of a 
structure designed principally for occupancy by one to four families; 
or
    (iii) Shares in a cooperative housing corporation.
    (8) Signing individual. The term ``signing individual'' means each 
individual who signed documents on behalf of the transferee as part of 
the reportable transfer. However, it does not include any individual 
who signed documents as part of their employment with a financial 
institution that has both an obligation to maintain an anti-money 
laundering program and an obligation to report suspicious transactions 
under this chapter.
    (9) Statutory trust. The term ``statutory trust'' means any trust 
created or authorized under the Uniform Statutory Trust Entity Act or 
as enacted by a State. For the purposes of this subpart, statutory 
trusts are transferee entities.
    (10) Transferee entity. (i) Except as set forth in paragraph 
(j)(10)(ii) of this section, the term ``transferee entity'' means any 
person other than a transferee trust or an individual.
    (ii) A transferee entity does not include:
    (A) A securities reporting issuer defined in 31 CFR 
1010.380(c)(2)(i);
    (B) A governmental authority defined in 31 CFR 1010.380(c)(2)(ii);
    (C) A bank defined in 31 CFR 1010.380(c)(2)(iii);
    (D) A credit union defined in 31 CFR 1010.380(c)(2)(iv);
    (E) A depository institution holding company defined in 31 CFR 
1010.380(c)(2)(v);
    (F) A money service business defined in 31 CFR 1010.380(c)(2)(vi);
    (G) A broker or dealer in securities defined in 31 CFR 
1010.380(c)(2)(vii);
    (H) A securities exchange or clearing agency defined in 31 CFR 
1010.380(c)(2)(viii);
    (I) Any other Exchange Act registered entity defined in 31 CFR 
1010.380(c)(2)(ix);
    (J) An insurance company defined in 31 CFR 1010.380(c)(2)(xii);
    (K) A State-licensed insurance producer defined in 31 CFR 
1010.380(c)(2)(xiii);
    (L) A Commodity Exchange Act registered entity defined in 31 CFR 
1010.380(c)(2)(xiv);
    (M) A public utility defined in 31 CFR 1010.380(c)(2)(xvi);
    (N) A financial market utility defined in 31 CFR 
1010.380(c)(2)(xvii);
    (O) An investment company as defined in section 3(a) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-3(a)) that is registered 
with the Securities and Exchange Commission (SEC) under section 8 of 
the Investment Company Act (15 U.S.C. 80a-8); and
    (P) Any legal entity whose ownership interests are controlled or 
wholly owned, directly or indirectly, by an entity described in 
paragraphs (j)(10)(ii)(A) through (O) of this section.
    (11) Transferee trust. (i) Except as set forth in paragraph 
(j)(11)(ii) of this section, the term ``transferee trust'' means any 
legal arrangement created when a person (generally known as a settlor 
or grantor) places assets under the control of a trustee for the 
benefit of one or more persons (each generally known as a beneficiary) 
or for a specified purpose, as well as any legal arrangement similar in 
structure or function to the above, whether formed under the laws of 
the United States or a foreign jurisdiction. A trust is deemed to be a 
transferee trust regardless of whether residential real property is 
titled in the name of the trust itself or in the name of the trustee in 
the trustee's capacity as the trustee of the trust.
    (ii) A transferee trust does not include:
    (A) A trust that is a securities reporting issuer defined in 31 CFR 
1010.380(c)(2)(i);

[[Page 12470]]

    (B) A trust in which the trustee is a securities reporting issuer 
defined in 31 CFR 1010.380(c)(2)(i);
    (C) A statutory trust; or
    (D) An entity wholly owned by a trust described in paragraphs 
(j)(11)(ii)(A) through (C) of this section.
    (k) Filing procedures--(1) What to file. A reportable transfer 
shall be reported by completing a Real Estate Report and collecting and 
maintaining supporting documentation as required by this section.
    (2) Where to file. The Real Estate Report shall be filed 
electronically with FinCEN, as indicated in the instructions to the 
report.
    (3) When to file. A reporting person is required to file a Real 
Estate Report no later than 30 calendar days after the date of closing.
    (l) Retention of records. A reporting person shall maintain a copy 
of any Real Estate Report filed by the reporting person and a copy of 
any certification described in paragraph (e)(3) of this section. In 
addition, all parties to a designation agreement described in paragraph 
(c)(3) of this section shall maintain a copy of such designation 
agreement.
    (m) Exemptions--(1) Confidentiality. Reporting persons, and any 
director, officer, employee, or agent of such persons, and Federal, 
State, local, or Tribal government authorities, are exempt from the 
confidentiality provision in 31 U.S.C. 5318(g)(2) that prohibits the 
disclosure to any person involved in a suspicious transaction that the 
transaction has been reported or any information that otherwise would 
reveal that the transaction has been reported.
    (2) Anti-money laundering program. A reporting person under this 
section is exempt from the requirement to establish an anti-money 
laundering program, in accordance with 31 CFR 1010.205(b)(1)(v). 
However, as provided in 31 CFR 1010.205(c), no such exemption applies 
for a financial institution that is otherwise required to establish an 
anti-money laundering program by this chapter.


Sec.  1031.321   [Reserved]

Andrea M. Gacki,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2024-02565 Filed 2-7-24; 8:45 am]
BILLING CODE 4810-02-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.