The USA Patriot Act: How It Affects Real Estate


 Tom Cullen  |    January 22, 2007
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In response to the terrorist attacks on September 11, 2001, the United States Congress enacted the USA Patriot Act. The thrust of the legislation is to "deter and punish terrorist acts in the United States and around the world [and] to enhance law enforcement investigatory tools." For the most part, the act does not affect the real estate industry. It does, however, contain some anti-money laundering provisions affecting financial institutions, and it prohibits real estate professionals from engaging in any transaction involving blocked property or providing brokerage services to terrorists or terrorist organizations.

Financial institutions 

The USA Patriot Act has increased the level of the federal government’s scrutiny of financial transactions in an effort to isolate and block the financial dealings of terrorists. In a general sense, every business has a duty to be vigilant in ensuring that they are not dealing with terrorists. Financial institutions, however, are required to screen their customers to see if they are linked to any restricted entities or terrorist organizations and implement an anti-money laundering program.

The act’s broad definition of financial institution includes not only traditional financial institutions such as banks, savings associations and credit unions, but also such entities as money services, precious metal dealers, travel agencies and insurance companies. A financial institution is also defined as "persons engaged in real estate closing and settlements." As a result, entities such as title insurance companies, escrow closing companies, real estate closing companies, and even individuals involved in the closings process may also be included. Arguably, this could include real estate brokers, salespersons, appraisers and attorneys. Currently, the United States Treasury has "temporarily exempted" many non-traditional financial institutions from the act’s requirements. This includes real estate professionals who, at this time, do not need to implement an anti-money laundering program. It is anticipated that the Treasury Department will issue final rules that will further define "financial institutions" for purposes of the act’s compliance sometime in 2004.

Money laundering/customer identification programs 

All entities that are considered a financial institution must establish an anti-money laundering program that includes: (1) the development of customer identification program (CIP) policies, procedures and controls, (2) the designation of a compliance officer, (3) an ongoing training program, and (4) an independent audit system. The CIP program must collect identifying information about a customer who opens an account, verify the customer’s identification, maintain records to verify customer’s identity and determine whether the customer appears on any list of suspected terrorists or terrorist organizations. Thus, financial institutions may ask a real estate professional’s customer or client for personal information, such as a social security number, driver’s license or other identification verification documents.

Office of Foreign Asset Control (OFAC) 

In addition to the anti-money laundering program component, the USA Patriot act prohibits transactions with certain entities. Before completing a transaction, financial institutions must comply with specific due diligence procedures. They must check a list of known or suspected terrorists maintained by the federal government and report suspicious transactions and cash transfers in excess of $10,000. The official list of terrorists is found at www.treas.gov/ofac under the section heading "Specially Designated Nationals (SDN) and Blocked Persons." The list is nearly 300 pages long. When it appears that a customer is on the SDN list, the financial institution should contact OFAC’s Compliance Hotline at 1-800-540-6322 for further guidance.

Real estate professionals also are prohibited from engaging in transactions with parties identified on the SDN list. This is particularly important for professionals whose practice involves transactions with foreigners or foreign properties. It is also recommended that commercial property managers periodically check the SDN list to ensure that current and prospective tenants are not on the list. These provisions are enforced through substantial fines and potential prison terms. All real estate professionals should be aware of their obligation to comply with OFAC regulations and of the significant civil and criminal penalties that may be imposed when entities do not comply.

For further information about the USA Patriot Act, go to the United States Department of Justice website at www.lifeandliberty.gov.

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