This new anti-money laundering rule could shake up the housing market
The U.S. Treasury Department is set to announce a new rule that would eliminate anonymous luxury-home purchases—closing a loophole that has allegedly allowed foreign criminals to launder money.
The proposed rule could be announced later this month. It would require real estate professionals like title insurers to report the identities of all-cash real estate buyers to the Treasury's Financial Crimes Enforcement Network (FinCEN).
The bill aims to enhance transparency in real estate transactions and limit organized crime's reach.
The high-end real estate market has seen a 24% drop in activity over the last three months compared to the same period in 2022, according to Redfin data.
The proposed rule change could result in a further slowdown in the high-end luxury real estate market as foreign investors look to park their money in other countries.
Foreign investments in U.S. real estate
In March, Treasury Secretary Janet Yellen said that for decades, criminals have been using anonymous, all-cash real estate purchases to hide illicit cash as another way of laundering money.
She estimates that as much as $2.3 billion was laundered through the country's real estate market between 2015 and 2020.
"Corrupt actors have for decades anonymously stashed their ill-gotten gains in real estate," said Secretary Yellen. "Those looking to exploit our system have been able to – with anonymity – store illicit proceeds in an appreciating asset."
According to the National Association of Realtors (NAR), international buyers purchased $59 billion worth of U.S. real estate from April 2021 to March 2022 – up 8.5% from the previous year.
Notably, the average home price of $598,200 was the highest ever recorded by NAR, and all-cash sales accounted for 44% of all international buyer transactions – nearly twice the rate of all existing-home buyers.
"Foreign buyers, however, are likely to step up purchases, as those making all-cash offers will be immune from changes in interest rates," said NAR Chief Economist Lawrence Yun.
If any portion of the $59 billion comes from illicit gains—which seems likely—the new regulation could make waves in an already volatile real estate market saddled with record prices.
The current system
Banks have long been required to trace the source of customer funds and report any suspicious transactions. But there's never been a nationwide rule in place for the country's real estate industry.
FinCEN instead implemented geographic targeting orders (GTOs) in 2016 to monitor transactions in several cities, including New York, Miami, and Los Angeles.
With GTOs in place, the Government Accountability Office in 2020 found that nearly 7% of transactions within the monitored regions were by individuals or entities connected to ongoing FBI cases. However, a lack of funding has kept FinCEN from fully implementing its programs.
"FinCEN needs more people and more computers to process the information," said David Szakonyi, a political science professor at George Washington University.
The proposed FinCEN rule will be open to the public for feedback once it is officially announced.