The December 2016 FATF Mutual Evaluation Report on the United States’ Measures to Combat Money Laundering and Terrorist Financing repeatedly highlighted the need for U.S. regulators and the real estate industry to do more to address money laundering and terrorist financing risks.
The FATF report identified “high-end real estate” transactions as an area needing priority action. In the report, the FATF assessors recommend that FinCEN take further action after analyzing the outcomes from FinCEN’s 2016 GTOs for high-end cash transactions in several U.S. real markets.
The FATF assessors noted that 25 percent of the market in real estate does not involve financing—particularly in high-end transactions. Accordingly, they concluded that the U.S. regulatory “strategy of addressing [money laundering and terrorist financing] risk in the real estate sector through the financial sector has been of only limited value as it focused attention mostly on lower risk (the mass market) rather than the high-end market.”
The FATF report’s executive summary also noted that “Residential Mortgage Lenders and Originators [RMLOs]…do not seem to have a good understanding of [money laundering] vulnerabilities in their sector or the importance of their role in addressing them.” In the body of the report, the assessors elaborated that, “although banks have reasonably good AML/CFT programs overall, the same cannot be said of RMLOs, whose programs are still in the early implementation stage…” The assessors further noted that RMLOs’ “low understanding of risks is reflected in the very low number of SARs being reported by them, most of which were related to mortgage fraud.”
The FATF evaluation also looked closely at the role of real estate agents and other parties (including condominium associations and cooperative boards) in the high-end market. Although acknowledging the limited role of real estate agents, the report notes that “neither the real estate agents nor the RMLO sector appeared to understand what the [money laundering] risks in relation to high-end real estate are or what the appropriate mitigation measures would be.”
These finding about risks as well as the current compliance shortcomings point to continued and expanded focus by FinCEN on the real estate industry. Continued outreach and further rulemakings seem likely. We will have to wait and see whether enforcement actions are forthcoming as well. In the meantime, nonbank mortgage lenders should reassess their AML/CFT programs, including their SAR reporting policies and procedures, given the shortcomings cited in the FATF report.