The Real Deal New York

Why title insurance firms are paying close attention to the latest Russian sanctions bill

If Senate legislation passes, it would expand FinCEN's GTO program nationwide
By David Jeans | September 19, 2018 09:00AM

From left: Lindsey Graham, Bob Menendez, and the Foreign Security Council (Credit: Getty Images and Wikipedia)

A U.S. Treasury Department program that spotlights anonymous real estate purchases in a number of gateway cities could become a nationwide law if a Russian sanctions bill is passed.

The little-known provision in the Defending American Security from Kremlin Aggression Act of 2018, a bipartisan bill introduced to the Senate last month, would force title insurance companies to report the identities of people using limited liability companies behind high-priced real estate transactions across the country.

The provision signals a resounding push in Congress for greater transparency in real estate transactions, in line with multiple bills that seek to clamp down on bad actors using anonymous limited liability companies to launder money in the U.S.

“This is definitely a serious effort,” said David Murray, a former director of the Treasury Department’s Office of Illicit Finance. “The fact they managed to get this in, I think it’s a pretty big deal.”

Currently, the so-called Geographic Targeting Orders, a temporary program implemented by the Treasury Department’s Financial Crimes Enforcement Network, applies to a dozen counties where title insurance companies must disclose beneficial owners of anonymous LLC’s used to purchase real estate with cash. Those rules initially applied to transactions of more than $3 million in Manhattan and over $1 million in Miami. It’s now in San Francisco, Los Angeles, San Antonio and Honolulu.

Under the proposed legislation, which is co-sponsored by Sens. Lindsey Graham (R-SC) and Bob Menendez (D-NJ), the program would become a law applied nationally. The draft law, which Sen. Graham called the “sanctions bill from hell,” seeks to clamp down on Russian interference in the midterm elections and impose sanctions on several Russian nationals. The title insurance rule was one of several anti-money laundering reform items included in the bill.

Corporate transparency advocates have welcomed the title insurance provision, but say it does not get to the heart of preventing money laundering in the United States: that beneficial ownership should be disclosed at the time an LLC is incorporated.

“We don’t think it replaces the need for more comprehensive reform,” said Gary Kalman, who heads the FACT Coalition, a corporate transparency advocacy group. “But it is clearly an important step forward.”

The title insurance industry agrees that the core issue lies with the fact that LLCs can be operated anonymously, and that beneficial ownership disclosure at the time an LLC is formed would remove the need for title insurance companies to find out who is behind a company.

“This isn’t something new for the industry in any way,” said Steven Gottheim, a senior counsel for the American Land Title Association. He said the GTO program has “not come cheaply” to the title insurance industry, but could not provide clear figures on the total cost.

Gottheim said that while he believes the bill was “cobbled together as a wishlist” for anti-money laundering reform, the inclusion of the title insurance rule heightens the conversation of the future of the GTO program.

The industry has long-bristled with the temporary nature of the GTO program and the added resources needed to conduct due diligence on anonymous LLC’s. The program, which was renewed last month, has been extended four times since it began in January 2016.

But among lawmakers, the GTO program has widely been viewed as a success: Over 30 percent of beneficial owners identified in the program had been previously cited in suspicious activity reports filed by financial institutions, which flagged possible money laundering or fraud, according to a February 2017 report. Another report in June found the number of companies using all cash to buy homes in Miami had fallen 95 percent since the program was introduced.

In its current form, the bill must pass through multiple hoops before becoming law and is yet to be scheduled for debate. Another roadblock was thrown in its path last week when President Trump signed an executive order that authorizes National Security director Dan Coats to investigate foreign interference in the midterm elections and impose sanctions, but does not target Russia specifically.

Lawmakers seeking to take more pointed action against Russia saw this as falling short of imposing legislative sanctions against Moscow. “I doubt it will be a substitute for legislation,” Sen. Graham told The New York Times.

An aide with the Senate Foreign Relations Committee told TRD that the title insurance provision would “very likely expose several Russian oligarchs as beneficial owners.”

“The Graham-Menendez bill seeks to take the current Treasury program and expand it from those cities to nationwide,” the aide said. “The goal would be to create more transparency around who is stashing their assets in U.S. real estate.”

But despite the likelihood of the bill becoming law, the presence of the title insurance provision is the first significant effort by Congress to build on the Treasury Department’s temporary GTO program, and enforce it nationwide.

“If I was a foreign criminal, I would absolutely park my money in U.S. real estate because I can do it anonymously and because it’s a really safe investment,” said Murray, the former Treasury Department official. “[The bill] would make what is only in a few markets, nationwide, and would increase transparency of residential real estate transactions dramatically.”