Title III of the Uniting And Strengthening America By Providing Tools Required To Intercept And Obstruct Terrorism Act of 2001 ("Patriot Act") amended the former Bank Secrecy Act and created new minimum due diligence obligations for certain defined financial institutions. These financial institutions are required, inter alia, to establish an anti-money laundering program and a customer identification program. Real estate businesses of at least two types are defined financial institutions under the Patriot Act. The first includes "persons involved in real estate closings and settlements." The second includes unregistered investment companies. 31 U.S.C. § 5312(a)(2)(I),(U).
Regulatory Activity Under The Patriot Act
Despite enactment, section 352 of the Patriot Act, which imposes on defined financial institutions the obligation to institute an anti-money laundering program, is not currently applicable to persons involved in real estate closings and settlements and unregistered investment companies. These entities are subject to a temporary exemption from the anti-money laundering program requirement of the Patriot Act until such time as final regulations are issued by the Financial Crimes Enforcement Network ("FinCEN") of the United States Department of Treasury, which is the agency charged with the administration of these parts of the Patriot Act. Financial Crimes Enforcement Network; Anti-Money Laundering Programs For Financial Institutions, 67 Fed. Reg. 21110 (Apr. 29, 2002); Financial Crimes Enforcement Network; Anti-Money Laundering Programs For Financial Institutions, 67 Fed. Reg. 67547 (Nov. 6, 2002).
The customer identification provisions contained in section 326 of the Patriot Act similarly are not currently applicable to persons involved in real estate closings and settlements and unregistered investment companies. Unlike section 352 of the Patriot Act, which affirmatively requires financial institutions to establish anti-money laundering programs, section 326 only directs the Secretary of the Treasury to promulgate regulations "setting forth the minimum standards for financial institutions and their customers regarding the identity of the customer that shall apply in connection with opening an account at a financial institution." 31 U.S.C. § 5318(l)(1). FinCEN has issued regulations requiring certain financial institutions to implement customer identification programs, but to date has not issued customer identification program regulations for persons involved in real estate closings and settlements and unregistered investment companies. Although there is no current timetable for the issuance of such regulations, FinCEN informally has indicated that such regulations are forthcoming.
Nevertheless, FinCEN has undertaken some regulatory activity with respect to persons involved in real estate closings and settlements and unregistered investment companies. On April 10, 2003, FinCEN issued an advance notice of proposed rulemaking with respect to persons involved in real estate closings and settlements that seeks information on the industry. Financial Crimes Enforcement Network; Anti-Money Laundering Program Requirements For "Persons Involved In Real Estate Closings And Settlements," 68 Fed. Reg. 17569 (Apr. 10, 2003). This information elicited in response will be used to craft anti-money laundering and customer identification regulations. The advance notice of proposed rulemaking did not define the term persons involved in real estate closings and settlements but indicated that the future definition may include real estate brokers, attorneys who represent the purchaser or the seller, banks, mortgage brokers (or other financial companies), title insurance companies, escrow agents, appraisers, and such investment vehicles as real estate investment trusts, real estate limited partnerships, or entities commonly referred to as "syndicates" of real estate investors.
Similarly, on September 26, 2002, FinCEN issued a proposed regulation on anti-money laundering programs for unregistered investment companies. Financial Crimes Enforcement Network; Anti-Money Laundering Programs For Unregistered Investment Companies; 67 Fed. Reg. 60617 (Sept. 26, 2002). As described in the proposed regulation, unregistered investment companies will likely include "a company that invests primarily in real estate and/or interests therein." This definition, however, covers only those investment companies that (a) permit an owner to redeem his or her ownership interest within two years of the purchase of that interest; (b) has total assets (including received subscriptions to invest) as of the end of the most recently completed calendar quarter the value of which is $1,000,000 or more; and (c) is organized under the law of a state or the United States, is organized, operated, or sponsored by a U.S. person, or sells ownership interests to a U.S. person.
Basic Anti-Money Laundering And Customer Identification Program Requirements
When it issues its final anti-money laundering regulations, FinCEN will require the four core elements mandated by statute:
FinCEN's final regulations on customer identification also will track the requirements of the statute, which require financial institutions to
Although FinCEN has not specified which lists of known or suspected terrorists must be checked, it will, at a minimum, include the "Specially Designated Nationals And Blocked Persons List" ("SDN list") maintained by the Office of Foreign Assets Control of the United States Department of the Treasury ("OFAC"). The SDN list includes individuals and entities covered by one or more of the embargoes or sanctions programs administered by OFAC.
The Interface Between The Patriot Act Customer Screening Requirement And OFAC Administered Embargoes And Trade Sanctions
As described above, defined financial institutions soon will be under an affirmative obligation to implement customer identification programs that have customer screening as a core element. The affirmative obligation imposed on financial institutions as a result of the Patriot Act, however, is not the sole reason to screen customers. As a general rule, U.S. persons (companies and individuals), including U.S. entities involved in real estate, are prohibited from engaging in any transactions with entities subject to U.S. embargoes or trade sanctions. Although these embargoes and sanctions programs do not impose an affirmative customer screening obligation as does the Patriot Act, companies employing best practices nevertheless screen their customers to avoid the considerable liability that can be imposed under the sanctions laws. Most of this screening is done using sophisticated screening software and is largely invisible to the customer or investor.
An entity may be subject to a U.S. embargo or trade sanction either by being named on the SDN list or other list of restricted parties. The entity also may be subject to a U.S. embargo or trade sanction by being part of a government or nation against which the U.S. maintains a "territory based" embargo or sanction ( e.g., Cuba, Iran, Sudan). As a corollary, U.S. persons generally are not prohibited from engaging in a transaction with an entity that is not the subject of U.S. embargoes or sanctions, even if the entity trades with companies or entities that are subject to U.S. embargoes or sanctions. Exceptions to this rule include the following:
Current Implementation Practices
Financial institutions responsible for investing in real estate in the United States are implementing anti-money laundering and customer identification programs in advance of the expected regulations. Financial institutions implement these requirements in a variety of different ways. For example, some financial institution screen the name of the customer or investor against the SDN list and other lists. If the customer or investor is beneficially owned or controlled by another person or entity, these institutions attempt to determine the identity of that entity and screen it against the SDN list and other lists. If the investor is part of an offshore fund, and the identity of the investor or its beneficial owners is difficult to obtain, some financial institutions will accept certifications from the fund or a foreign financial institution that the fund or foreign financial institution performed the customer screening and can ensure that the investor is not on the SDN list or any other list. This procedure may change once FinCEN issues its final customer identification regulations.
In sum, the Patriot Act has imposed new obligations on defined financial institutions, including institutions involved in foreign investment in U.S. real estate. Although the new obligations are not currently applicable, responsible companies are preparing anti-money and customer identification programs in advance of the regulations, often as a supplement to their existing customer screening programs.
Jeffrey M. Telep is counsel with King & Spalding LLP's International Trade Group. He focuses his practice on international trade regulation and litigation, advising clients on Customs law, including the North American Free Trade Agreement, economic sanctions and embargoes, and anti-money laundering laws, including the USA Patriot Act. He may be reached at (202) 626-2390.