New Rules Threaten
Real-Estate Interests

The real-estate industry is taking on the government's plans to apply money-laundering rules to real-estate transactions, arguing that the rules being considered could hurt the industry, which has been one of the economy's strongest pillars.

The plans stem from efforts to combat the funding of international terrorism under the USA Patriot Act, which Congress enacted shortly after the Sept. 11, 2001 terrorist attacks. The act requires certain institutions -- banks, broker-dealers, mutual funds and futures commissions merchants -- to adopt by Oct. 1 programs and mechanisms to thwart money laundering. The Financial Crimes Enforcement Network, an office of the Treasury Department, is seeking to expand the definition of financial institutions to include "persons involved in real-estate closings and settlements."

Costs of Complying

But real-estate interests fear the financial and administrative costs of complying with the Patriot Act money-laundering rules will be unreasonably high. Those costs, they say, would eventually trickle down to buyers and sellers of houses and condominiums, as well as buyers and sellers of commercial properties such as apartment buildings or shopping centers -- in the form of fees and other added expenses.

"This could substantially increase settlement costs, stifling mortgage originations, real-estate transfers and capital formation, which would weaken an industry that has been a stabilizing factor in this time of economic uncertainty," says Clifton E. Rodgers Jr., senior vice president of the Real Estate Roundtable, a Washington-based lobbying group.

The Financial Crimes Enforcement Network believes the real-estate industry could be vulnerable to money laundering by virtue of dealing with what it calls high-value products.

The debate between real-estate interests and the government illustrates the nation's post-Sept. 11 struggle to respond to security concerns without hampering the flow of business or creating conditions that make routine transactions -- from obtaining a mortgage to going to the mall -- more burdensome and time-consuming for corporations as well as individuals. This balancing of security and economic concerns is especially acute as the nation's economy is in the midst of a fragile recovery.

The rules under consideration would require financial institutions, including persons involved in real-estate closings and settlements, to establish programs that include: development of internal policies, procedures and controls; the designation of a compliance officer; a continuing employee training program; and an independent audit function to test programs.

Compelling Evidence?

Members of the industry argue that there isn't compelling evidence that money laundering in real-estate transactions is so pervasive as to warrant that the law apply to real estate. They add that real estate is less susceptible to money laundering because of its illiquid nature and the industry already has practices in place to combat money laundering.

"Current regulations as well as state real-estate license laws already require record keeping and reporting of certain financial activities," says Catherine B. Whatley, president of the National Association of Realtors, a Washington-based trade group.

What's more, regulations will be costly to consumers, some in the industry say. "There is no doubt that additional costs [to comply] imposed on this industry will be passed on to home buyers and persons refinancing their homes," says Jonathan L. Kempner, president of the Mortgage Bankers Association of America, a Washington, D.C. trade group, in a letter mailed to the Financial Crimes Enforcement Network. "Moreover, extensive requirements will cause delays in real-estate settlements and closings," which he says could lead to a buyer losing his security deposit if a settlement deadline in a residential sales contract is missed or cause an interest-rate lock to expire, resulting in a higher interest rate for the borrower.

But the Financial Crimes Enforcement Network believes the real-estate industry could be vulnerable. The network cited a 1996 National Institute of Justice report, which said real-estate transactions offer "excellent money-laundering opportunities" and opportunities to "legitimate and repatriate illegal funds," as a reason for considering applying the rules to real estate.

Earlier this year, the network sought input from the industry to help determine how the rules should be applied to real estate. A spokeswoman says it is reviewing the 52 mailed comment letters it received. The network is expected to make a determination upon completing the review. Network officials declined to comment further, citing the continuing review of comments.

Count Me Out

Meantime, some industry groups, including the Mortgage Bankers Association, already are seeking exemptions and want the definition of real-estate parties limited to those, such as an escrow agent or a lawyer, who play a more direct role in a closing or settlement. Cendant Corp., a global travel and residential real-estate service provider, based in New York, wants real-estate licensers, brokers, licensed sales associations and brokerage franchisers excluded.

Jeffrey A. Moerdler, a real-estate partner with the New York office of law firm Mintz Levin Cohn Ferris Glovsky & Popeo PC, suggested that the network exempt certain transactions, like those below $10 million financed by an institutional lender. "The size of these smaller transactions may not justify the cost of performing due diligence in addition to that already conducted by financial institutions," says Mr. Moerdler, who also is a member of the American College of Real Estate Lawyers, Rockville, Md.

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