FinCEN Real Estate and Investment Advisor Rules and Gift Card Fraud

This week, John and Elliot discuss FinCEN’s new final rules for reporting on residential real estate transactions and the program requirement for investment advisors. They also look at HSI’s Project Red Hook, its efforts to stem gift card fraud schemes, and a report from the University of Sussex, which rates the US as the preferred hub for corrupt financial transactions.

FinCEN Real Estate and Investment Advisor Rules and Gift Card Fraud - Transcript

Elliot Berman: Hi, John. How are you this week?

John Byrne: I'm good, Elliot. Good morning. Here in Northern Virginia, it's going to be over 100 degrees today, so I got my little jog out this morning, and just a little humble brag, it's the my 11,000th day of running.

Elliot Berman: Wow.

John Byrne: But I'm back inside cause it's going to be hot.

Elliot Berman: Here in eastern Wisconsin, we had low nineties earlier in the week, but today when we're recording on Wednesday we had a front come through yesterday with some pretty severe weather and now we're back down in the 70s, although the humidity went down after the front went through, so it feels warmer, but it doesn't feel 100 and anything, so that's a good thing.

John Byrne: As we are recording this, hot off the presses FinCEN has a couple of interesting announcements that I'll let you describe. We'll talk about them, but the bottom line is, by the time you listen to this conversation, on Friday, there will have been a couple of days for people to dive deep into each of these very important announcements and make decisions regarding training and other things. What did FinCEN do today?

Elliot Berman: Today, they issued the final rule on residential real estate transfers, which is a reporting rule, and you and I will talk about that in a moment, and they issued a reminder to financial institutions to remain vigilant to suspicious transactions associated with synthetic opioids.

John Byrne: One other thing FinCEN did today, besides the real estate one, which is very important, is the final rule for investment advisors. So we're going to talk about as well.

Elliot Berman: Yes, you're right. Sorry.

John Byrne: It only came 22 years after it was first discussed, better late than never.

Elliot Berman: And I'm sure that there's been no problems whatsoever in that space in those 22 years.

John Byrne: That's right. That's right. Since you mentioned just very quickly on the synthetic opioids FinCEN reminded everybody about All the outreach they're doing through FinCEN Exchange, which is an excellent program that they've engaged in with financial institutions and others in the private sector around the country.

They also remind you. that they've previously issued resources on the trafficking of fentanyl and analogs and other synthetic opioids. So basically, like you said, it's a reminder to report suspicious transactions, but there's a lot of other resource material that was available prior to this. So that's important.

But let's let's dive into the real estate. Who's covered? It's a reporting requirement. It's not a requirement for AML programs and policies. But what are some of the things that we, again, we just saw this an hour ago. What are some of the things that jump out at you?

Elliot Berman: What's covered is transfers where it's residential property, the transfer is not financed. Most of the transactions that you and I have been involved in we go and we get a mortgage from a an FI that has an AML program requirement. And either we're the buyer or we're transferring the property to a buyer that's a person. So those aren't covered.

And then it's property being transferred to a legal entity or a trust. And then there's a bunch of exemptions which we can talk about in a minute. It's focusing in on the use of entities to avoid disclosure of who the buyer is. You gotta keep that big picture idea in mind, and that moves us forward through why it's a reporting obligation.

Who has to report? It's somebody in the list of peoples who help facilitate the transactions. There's a long list in the new rule of the people who touch the transaction, agents who prepare closing statements and others. The reporting cascade consists of a list of seven different functions that a professional may perform. You find the person available at the highest on that list and they're obligated.

I think the most important part for the people in the real estate business is that they can contract among themselves for who has the responsibility. So rather than figure out each time who's going to do this, their contracts with each other will have a provision that says, you or I are taking on the obligation to do the required reporting.

John Byrne: Now the effective date is not until December 1st of 2025. FinCEN also said they will publish a notice at a later date regarding the form of this report, what that's supposed to look like. But toward the end of the quick fact sheet they say that the report must be filed by the later date of either the final day of the month following the month in which the report will transfer occurred or 30 calendar days after.

Then in the next paragraph, it says the reporting person is not required to retain a copy of the report. However, they must keep for five years a copy of a certification signed by the transferee or transferee's representative that certifies the beneficial ownership information, as well as a copy of any designation agreement signed.

Again, folks need to, in this world, or who are advising folks in this world, go through the actual rule, not just the fact sheet, to help your clients address this. And there obviously is plenty of time, and again, a form has not yet been published.

Elliot Berman: I think the last thing that's worth mentioning is there's a bunch of exemptions, something happening through a bankruptcy estate, something happening as a result of the death of an individual. Many estate plans will include the transfer of residential real estate into a trust for the benefit of, future generations or other purposes.

There are transfers that are supervised by courts in the United States, those and others are on a specified list of exemptions. So I think from the fact sheet this final rule is well focused on the purpose, which is to see who the beneficial owners are of real estate going into entities.

So again, the devil will be in the details. As you pointed out, there's plenty of time to figure out what's going to go on, particularly when the form pops up. I think the biggest challenge is it's bringing people into this reporting regime who have not had this kind of reporting obligation in the past. They will have to figure out how to put their own processes in place to ensure that it happens. And the open question is how will enforcement occur?

John Byrne: It's also going to be interesting for our friends in the investigative journalism space. I think they're going to see some value in a lot of the transparencies here and they are going to try to keep this world honest. So they'll continue to do that.

The other one the final rule for investment advisors interestingly enough, I mentioned this several times and to people that know me many times, that when I was with the American Bankers Association and we were dealing with the Patriot Act, we were asked as the banking industry, what we wanted to see in terms of requirements going forward, given we had to deal with the ramifications of 9/11 and terrorist activity.

And we said, cover everybody that has a financial footprint. And we specifically agreed that investment advisors should be in that group. That was in 2001. Obviously way late to the game here, but FinCEN in their description mentions very specifically that the final rule that was issued again today is in response to the investment advisor reference in the Treasury risk assessment from February of 2024.

And that risk assessment, to remind everybody, highlights a number of cases in which sanctioned persons, fraudsters, and other criminals have exploited the investment advisor industry. This final rule will not be implemented until January 1st of 2026. So more than enough time.

So just a couple things. The definition is investment advisors that are registered with the SEC, investment advisors that report to the SEC as exempt reporting advisors or ERAs. The rule requires both of these categories to implement a risk based and reasonably designed AML CFT program, which is what's in that broader proposal that we talked about several weeks ago when that was issued by the banking agencies, file certain reports, including SARS.

Keep records relating to transmittal of funds and fulfil certain other obligations that are applicable to financial institutions that are subject to BSA, such as special information sharing procedures. So putting them under for the first time, the umbrella of the Bank Secrecy Act and the requirements that many traditional financial institutions have.

And again, these don't need to be implemented until January 1st, 2026. The fact sheet is a short, four pages, quick outline, but read the reg. Obviously a number of folks listening to this either are part of that world or they are advising that world. So this is going to be some work to get people up to speed on this and get institutions ready for enforcement, another year and a half from now.

Elliot Berman: And as you pointed out, but just to make the clear distinction between the real estate rule, which is a reporting rule, this is a program rule. And many more moving parts.

John Byrne: And obviously one of the things we're going to do here at AML RightSource is do additional programming in this space as we identify people within those communities to give you more specific and practical information going forward. So that's something either we'll do that in blogs or webinars or podcasts.

We haven't figured that out yet, but obviously we'll stay on top of this. I'm going to turn it back to you, but I want to mention one other thing on my end very quickly is Homeland Security this week under what they call Project Red Hook, and that's dealing with organized retail crime and other things. They put together a program and information on gift card fraud, and they say that they're teaming up with others in law enforcement, so the FBI, IRS:CI, and others, to raise awareness specific of how Chinese organized crime groups are exploiting gift cards to launder money.

So a lot of good information there on the Homeland Security website. Again, they named this Project Red Hook, so you can you can Google that, or you can just go to the website, and they give you some broad information on how gift card fraud occurs with tampering, online attacks, but also what are some of the indicators to look for both as customers and as AML professionals. So something else to take a look at.

Elliot Berman: And then the University of Sussex in the UK did a study which analyzes data spanning four decades across more than 70 jurisdictions and takes a look at the evolution of illicit global finance networks and compares them to shifting regulations.

The conclusion of the study is that over the past 20 years, Washington has successfully pressured other nations to reform their financial systems while largely neglecting to implement equivalent measures domestically. So it criticizes the US for aggressive stance in demanding financial transparencies from other countries while failing to reciprocate by exchanging banking information. And the conclusion of the study is that the US has overtaken Switzerland as the preferred hub for corrupt financial transactions. When we talked about this yesterday, I think our comment was, I'm not sure we're cheering, yay, we're number one.

But these are issues that you and I have talked about. I think the real estate reporting rule is an example of moving in the right direction, but our BOI registry is not publicly available. It's certainly a step in the right direction, but by no means is it a complete solution. And because of the way businesses are organized in the United States, we have states which have deep secrecy laws as it relates to incorporators and beneficial owners.

John Byrne: You mentioned that and we've talked about corruption. What I forgot to mention are the two announcements today from the Treasury and from FinCEN. They also point out that residential real estate reporting and investment advisor coverage are both things that deliver on key issues in the Biden Harris administration's US strategy on countering corruption. So that was the guidance document for the crafting of these things. In addition to threat assessments, the US strategy on countering corruption, which are obviously high level and then some specific goals. It's in that document as well.

I taught my students this summer. We talked about that as a key aspect of policy direction. So I just wanted to mention that as well. Elliot, what's our webinar for September?

Elliot Berman: It's about the use of adverse media monitoring in KYC and EDD. And it will be live streamed at 1:00 PM Eastern Time on September 26th. Got some excellent experts who will be chatting with me about that to provide helpful insights into what AMM can do and key elements and how to bring it online in an effective way. And what do you have coming up?

John Byrne: I got a couple of interviews that I'm doing this week that we'll post in the next few weeks. One, I mentioned before, Deborah Lehr, who is the head of the Antiquities Coalition. She's going to bring us up to speed on what's going on in that world and her views on the need to include the art industry under the same coverage that antiquities will eventually have under federal law.

And then later this week, I'm going to be talking to the primary author of a policy brief just done by the FACT Coalition regarding environmental crime. It's a short brief on that and how it relates to illicit finance. They also have told me that in the very near future, there'll be a lengthy report issued by the FACT Coalition.

So those two interviews scheduled this week, or to have them this week. We'll run them in the next few weeks. Again, anybody out there that has a somebody they want us to talk to, a topic, a theme, an issue, send us send us your thoughts.

Elliot Berman: Okay, John, you have a good rest of the week and I will talk to you next week.

John Byrne: Take care. Stay safe.

Elliot Berman: You too. Bye bye.