War On Terror


New federal law to identify bad money may ensnare real estate pros.

Nothing about the transaction suggested a link to terrorists. The attorney for the buyer of the small retail center you listed provided $30,000 in earnest money, which you passed along to your broker. The buyer, a nondescript Canadian holding company, raised no red flags.

But in fact the holding company was on the federal government's list of companies prohibited from doing business in the United States, its investment suspected as part of a scheme for laundering terrorist money through U.S. real estate assets. Now you face a $55,000 penalty from an agency in the U.S. Treasury Department called the Office of Foreign Asset Control.

A far-fetched scenario? Perhaps not.

Since enactment of the federal USA PATRIOT Act and other measures to combat terrorism in the aftermath of the Sept. 11, 2001, terrorist attacks, the federal government has ratcheted up its controls over who can do business in this country. That's putting responsibility on financial institutions and others, including real estate professionals, to ensure they're not taking money from individuals or businesses on the federal government's list of restricted entities.

"The government wants very much to make sure bad money isn't going through real estate," says Jeffrey Sklar, managing director of SHC Consulting Group in Bellmore, N.Y., and a certified anti-money laundering specialist.

The brunt of anti-terrorism funding efforts falls on financial institutions, not real estate professionals. With the USA PATRIOT Act, the Bank Secrecy Act, and the issuance of Executive Order 13224, financial institutions must set up customer identification and anti-money laundering programs that enable them to verify and maintain records on who's opening an account and to determine whether the account holders are "specially designated nationals" or "blocked persons"-i.e., suspected terrorists or their financiers on the government's watch list, a 150-page publication known as the SDN list.

If financial institutions inadvertently take money from a listed entity, the federal government can impose penalties. And it hasn't been hesitant to do that. Between Jan. 2 and April 2, the government levied fines totaling hundreds of thousands of dollars on some two dozen financial institutions, including JP Morgan Chase & Co., Bank One Corp., and Bank of New York Co., for accepting illegal funds transfers, according to information available from OFAC on the Treasury's Web site.

Real estate brokers are under the gun, too, even though federal requirements for setting up customer identification and anti-money laundering programs don't apply to them. They can be hit with federal sanctions if they provide any service benefiting a person or entity on the list. Property managers can be hit, too, if any of their tenants are on the list.

"Any professional whose practice involves transactions with foreigners or foreign properties should be aware of whom he or she is dealing with," says David Lereah, NAR's chief economist and senior vice president who oversees regulatory and industry relations.

Penalties can be steep-up to several million dollars for willful violations-and can be assessed even for unknowing violations. The federal government hasn't adopted specific due diligence procedures for compliance with federal rules by real estate professionals, but OFAC has outlined steps anyone under its jurisdiction, which includes real estate professionals, can take to protect themselves against violations. Here are the basic ones:

Scan your customer lists against the list of restricted entities (the SDN list) regularly for matches. A number of private companies offer OFAC compliance consulting and software to help you scan your lists for matches and generate reports. To identify some of these companies, search "OFAC compliance" on Google or another major Internet search site.

If a match is identified, take steps to confirm it as valid. To test validity, examine how closely your client's information-address, date of birth, any ID numbers-match entry details on the SDN list. If there appears to be a valid match, contact the OFAC Compliance Hotline at 800/540-6322.

Despite the government's increased focus on weeding out terrorism funding, the chances of running into a restricted entity in a sale or lease transaction remain small. "Since we began checking the list for our clients in January, we've never found a match," says Stan Schiller, executive vice president of Property Assessment Advisors Inc. in Chicago, whose company enables property managers to comply with OFAC requirements.

But with foreign ownership of U.S. assets increasing-195 percent growth from 1992 to 2002, NAR Research says you could conceivably run into a terrorist financier. "We know there are business fronts out there," says Schiller.

Will your burden increase?

A provision enacted two years ago in the USA PATRIOT Act requires financial institutions and "persons involved in real estate closings and settlements" to implement a customer identification program to help ensure they don't do business with an entity with ties to terrorist or money-laundering operations.

Does the U.S. Treasury Department, which administers the Act, consider real estate brokers and sales associates "persons involved in real estate closings and settlements?" As of late April it didn't, and there are no signs it will change its thinking. The department in April 2003 sought public input on who should be included in the definition. NAR told Treasury that established financial record-keeping and reporting requirements on financial institutions and in real estate licensing laws are sufficient protection. "It would be premature to impose a new regulatory burden on the real estate brokerage industry, which is composed mainly of small businesses that lack training in, and resources for, such law enforcement activities," NAR said in its input.

Treasury appears to be in agreement. "We don't see any effort [by Treasury] to include real estate brokers in that definition in the near future," say NAR analysts.

But stay tuned. With some provisions of the USA PATRIOT Act subject to reauthorization next year (none concerning money laundering or financial institutions), the issue could get caught up in the coming debate.

Farm agency says no to banks in real estate

The Farm Credit Administration has sided with the National Association of REALTORS in denying an application from a farm lender to manage a farm for an absentee owner under a contract arrangement. The move, therefore, blocks a financial institution from entering property management.

"The FCA's decision is a major victory for real estate," says NAR President Walt McDonald. "We will not stand by and allow banking institutions to push their way into real estate via a back door." NAR met with FCA officials this spring on this issue and submitted a letter to the agency in response to farm lenders seeking FCA permission to offer management services. FCA regulates banks in the national farm credit system.

  • OFAC SDN list
  • OFAC restricted entities and enforcement summary
  • What you should know about OFAC
  • Foreign investment in U.S. assets