Geographic Targeting Orders (GTOs) were recently reissued by FinCEN and could pose regulatory requirements to banks. But what do they need to know?
The US Treasury’s Financial Crimes Enforcement Network (FinCEN) initially issued real estate GTOs to help combat real estate being used in money laundering. The GTOs require US title insurance companies within specific geographical areas to report on any transactions over a certain monetary threshold. In October 2022, it renewed and expanded its GTOs.
Alessa, an AML compliance software developer, has issued a report exploring what financial institutions need to know about the GTOs.
It stated that while GTO reporting requirements apply to US title insurance companies, other US financial institutions can incorporate the geographical areas identified by FinCEN into their existing KYC processes, as part of an overall risk-based approach to better assess, manage and mitigate money laundering and terrorist financing.
It stated that the first GTO was issued in 2016 to collect data on money laundering and other illicit activity related to real estate. It orders firms to identify natural persons or beneficial owners behind shell companies used in non-financed purchases of residential real estate. These must be filed within 30 days.
A GTO is triggered if a purchase exceeds $300,000 and is completed without a loan or financing, and the property is purchased by a legal entity (including a corporation, limited liability company, partnership, or other similar business entity formed under U.S. law or in a foreign jurisdiction).
These transactions include cash transactions, including cashier’s checks, certified checks, traveller’s checks, personal checks, business checks, money orders in any form, funds transfers, or virtual currency.
Alessa stated that GTOs are temporary orders that are effective for 180 days, but they can be renewed or re-issued.
The GTOs cover the District of Columbia, as well as major metropolitan areas in Florida, New York City, California, Hawaii, Nevada, Washington, Massachusetts, Illinois, Maryland, Virginia, Connecticut and Texas.
Alessa added that the terms of FinCEN’s recent GTO are effective from October 27 2022 and will end April 24 2023. The purchase threshold will remain at $300,000 everywhere but the City and Country of Baltimore, where the threshold is $50,000.
What do financial institutions need to know
The RegTech company explained that while the requirements are aimed at US title insurance companies, other institutions, such as banks and credit unions, should monitor the latest GTO locations. It urged them to complete a risk assessment to identify potential areas of exposure and incorporate this information into AML compliance programs.
This might include amending policies and procedures, conducting timely training, communicating relevant information to impacted staff and keeping board directors aware of pertinent developments.
It added, “This also includes having processes and procedures in place, such as robust geographic screening that covers GTO watch areas, customer due diligence and identification of beneficial owners of properties in GTO designated places, and ongoing monitoring for changes to GTO locations and ownership in GTO territories.”
Additionally, it stated that institutions should include reasonable due diligence to determine whether any identified GTO-related activity would require suspicious activity reporting. According to FinCEN, at least 30% of GTO triggered transactions involve a purchaser previously reported as suspicious.
Alessa offered multiple ways financial institutions can spot suspicious activity. These include transactions that hide the identity of beneficial owners through nominees or intermediaries, and the purchase of real estate in cash or through opaque legal entities.
Another example are transactions where the deal does not make business sense or involves a significant loss to the company. More examples can be found here.
The best way to spot red flags is by knowing the customer’s identity and understanding the nature and purpose of the transaction. The most efficient way of doing this is through a robust, digital KYC program.
It concluded, “Through the renewal of its GTO program, FinCEN has been able to obtain valuable data that is used to assist law enforcement in tracking illicit funds laundered through the real estate sector. Furthermore, FinCEN has noted the usefulness of the information obtained from GTO reporting and it is likely that GTOs will continue to be renewed and further expanded in the future.
“Moreover, in late 2021, the Biden Administration announced their intention to focus on corruption in the real estate market. Therefore, in their role as gatekeepers to the financial system and as the front line of defence against financial crime, financial institutions would be well advised to stay on top of developments in this area by monitoring regulatory changes as well as conduct periodic risk assessments to identify areas where they may be impacted, either directly or indirectly, by FinCEN’s Geographic Targeting OrderGTO program.”
Read the full report here.
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