Federal government tackles money laundering through real estate

The US Treasury Department has issued a new rule aimed at preventing fraudulent parties from using real estate transactions to launder money.

The final rule issued Wednesday requires real estate professionals to report the true identities of cash homebuyers who purchase homes in the U.S. through shell companies or other entities. While these buyers can remain anonymous, the rule requires that their identities be disclosed to the Financial Crimes Enforcement Network.

The aim of the new rule is to prevent illegal actors such as drug cartels, international criminals or sanctioned foreign oligarchs from laundering money through the housing market using anonymous transactions. Similar reporting rules already apply to banks and other mortgage providers.

“The Treasury Department has worked diligently to thwart attempts to use the United States to hide and launder ill-gotten gains,” the Treasury Secretary said. Janet L. Yellen in a statement. The new requirements will “close critical loopholes in the U.S. financial system that bad actors use to facilitate serious crimes such as corruption, drug trafficking, and fraud.”

A separate final rule the Treasury Department also issued on Wednesday adds certain investment advisers to the list of financial professionals who must notify FinCEN of suspicious transactions.

The new reporting rule for cash-only real estate transactions will come into effect on December 1, 2025, while the new rule for investment advisers will come into effect on January 1, 2026.

“These steps make it harder for criminals to exploit our strong residential real estate and investment advisory sectors,” Yellen said.

Cash-only real estate transactions are on the rise

A growing portion of residential real estate transactions in the US are completed in cash, even though there is likely nothing criminal or illegal about the vast majority of them.

According to the National Association of Realtors®, 32% of home sales were settled in cash in January, the highest percentage in nearly a decade.

With mortgage rates rising, many homebuyers with the means are opting for cash payments to avoid the sky-high interest rates on their mortgages.

Post-COVID-19 migration patterns have also likely led to more cash sales: Families who moved out of more expensive states like California and New York often kept enough profit from the sale of their old home that they could immediately buy a new home in a cheaper area.

The purpose of the Treasury Department’s new reporting rule is not to discourage or punish cash transactions for homes, but to create transparency by requiring disclosure of the buyer’s true identity.

That’s because cash real estate transactions have long been known as a potential vehicle for money launderers or other illicit actors. Criminals or foreign entities otherwise excluded from the U.S. financial system have been known to use illicit funds to purchase homes and use them to generate seemingly legitimate funds through rental income or flipping.

Other schemes involve purchasing expensive homes in the US as a form of bribery, with the true source of the money and the ultimate owner remaining secret.

In a recent case, the Justice Department seized a mansion in the posh Holmby Hills neighborhood of Los Angeles that prosecutors say was purchased as a bribe for the family of a former Armenian minister.

The 11-bedroom castle-style mansion was purchased in 2011 for $14.4 million by a trust for the sons of Gagik Khachatryan.

The sons alleged that the purchase was financed by loans from an Armenian businessman. Prosecutors say the loans, which were repeatedly made without repayment, were a hidden bribe to Khachatryan, who at the time was in charge of taxes and customs in Armenia.

Last month, the DOJ finalized a civil forfeiture settlement that gives the U.S. possession of the mansion, which is currently for sale for $39.7 million.

How the new rule will work

Under the new regulations, any real estate professional involved in the sale of a home for cash to a shell company or trust must file a report with FinCEN, naming the ultimate owner of the entity buying the home.

The closing agent, an independent third party that facilitates many closings, is the primary person charged with preparing the report. If there is no closing agent, the reporting duty falls to a “cascading” list of professionals involved in the property transfer process, but only one report needs to be filed for each transaction.

These reports must contain certain information about the buyer, the seller, the subject property, and the total amount of the sale. FinCEN does not require the reports for certain common, low-risk property transfers, such as those resulting from death, divorce, bankruptcy, or transfer to an estate planning trust.

The Treasury Department, following feedback from the real estate industry, has relaxed the final rule somewhat, allowing the reporting person to reasonably rely on information about the buyer provided by other parties, as long as they have no knowledge of facts that would call that information into question.

The American Land Title Association, a trade association that represents title insurers, said it was still reviewing the new regulations, but that “it appears the agency has incorporated several key industry recommendations to streamline the regulations and alleviate some of the burden on real estate professionals.”

However, the group added that the new regulations could increase costs for companies involved in real estate transactions by up to half a billion dollars annually.

“We share the goal of protecting the U.S. real estate market from money laundering and plan to work with FinCEN, as we have done effectively over the past eight years, to reduce the cost of this regulation and the impact on our small businesses – estimated at more than $500 million annually – while providing law enforcement with the information they need to do their jobs,” ALTA said in a statement to Realtor.com®.