by Jessica Swesey
Inman News Features
A little-noticed provision of the U.S. Patriot Act could force real estate brokers to set up costly anti-money laundering programs.
The provision requires financial institutions, which, by definition, include persons involved in real estate closings and settlements, to install programs that aim to help the government prevent, detect and prosecute international money laundering and terrorism financing.
If the government decides real estate brokers are involved in real estate closing and settlements and should not be exempt from the requirements, they would be required to designate or hire a compliance officer, develop internal policies, procedures and controls, establish an employee-training program and implement an independent audit function to test the anti-money laundering programs.
Money laundering is the process of converting funds obtained from illegal activities into funds that appear to have been legally earned. The U.S. Treasury Department says this “cleaning” process could occur in the real estate industry through large cash down payments or when multiple properties are bought and resold, making it more difficult to trace the origin of the funds.
The government has set up anti-money laundering regulations like those in the Patriot Act to gather information about big-money transactions it believes could be schemes for cleaning money.
The Treasury Department is seeking comment on the money-laundering risks in real estate closings and settlements, the definition of who is involved in such transactions, who should be exempt from the requirements, and how money-laundering program requirements should be structured for those who are involved in such transactions and are not exempt from the requirements.
The National Association of Realtors said the burden of compliance would outweigh any benefit of detecting money-laundering schemes.
NAR believes real estate licensees shouldn’t be considered a “financial institution” because they don’t receive or distribute money on behalf of the parties to a real estate transaction, other than holding earnest money.
The Treasury Department delayed the mandates for real estate closing and settlement parties in April 2002 and again in November 2002 to more closely examine the affected industries and the extent to which anti-money laundering program requirements should be applied to them.
NAR met with the department last year to express its concerns and will be meeting with officials again during the comment period, which ends June 9.