Patriot Act Could Affect Real Estate Transactions

December 2003

While by now most people have heard of the Patriot Act and its attempts to curb terrorism, they do not realize, that it may apply to every day commercial and residential real estate closings. Title III of the Patriot Act amends several anti-money laundering provisions of the Bank Secrecy Act (“BSA”) for the purpose of enabling the government to better prevent, identify and prosecute the financing of terrorism. As amended, the BSA on its face now requires all “financial institutions” (the definition of which includes “persons involved in real estate closings and settlements”) to establish anti-laundering programs that, at a minimum, include:

• The development of internal policies, procedures and controls.
• The designation of a compliance officer.
• An ongoing employee-training program.
• An independent audit function to test programs.

The Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Treasury Department, which administers the Patriot Act, temporarily has exempted persons involved in real estate closings and settlements from complying with the Act. FinCEN, however, is in the process of drafting regulations that will clarify whether such persons will be included in the definition of “financial institution.” FinCEN plans to issue final regulations in late 2004.

FinCEN publications on this subject to date suggest that the phrase “persons involved in real estate closings and settlements” could be interpreted very broadly to include real estate brokers, attorneys, title insurance companies, escrow agents, appraisers, inspectors and even the business participants in commercial transactions. FinCEN has stated, however, that the Patriot Act will not apply to buyers and sellers of their own residential property.

The final regulations issued by FinCEN could encompass a great number of persons not currently subject to regulation. As such, we will continue to monitor the rulemaking process and provide further updates as appropriate.

This legal update is for informational purposes only as a service to clients and other friends, is not a complete summary of the rules relating to the subject matter discussed above, and is neither to be construed as legal advice nor intended as basis for decisions in specific situations. For more information about this subject matter or other recent developments, please contact the attorneys in our Real Estate practice group or any other attorney in our firm with whom you normally consult by calling (303) 825-4200.