Introduction
Anyone in the commercial
real estate industry since September 11, 2001, has probably
gotten used to lenders requesting a social security
number and a driver's license picture before opening
a bank account or borrowing money. The same or similar
rules and restrictions that apply to lenders, however,
may soon apply to most real estate professionals, including
owners, brokers, property managers, brokers and title
agents, and even real estate attorneys.
Executive
Order 13224
On September 24, 2001,
President Bush issued Executive Order 13224 (the "Order"),
which in part prohibits "any transaction or dealing
by United States persons or within the United States
in property or interests in property" of suspected
terrorists or those who are associated with suspected
terrorists. The Order applies not only to transactions
with suspected terrorists, but also those who assist
in, sponsor or provide support or services for, or
are associated with suspected terrorists, and those
who are owned or controlled by, or act for or on behalf
of suspected terrorists. The Order does not clarify
whether persons are responsible for past transactions
as well as future ones.
The Treasury Department's
Office of Foreign Assets Control maintains the Specially
Designated Nationals (SDN) List, which sets forth
persons with whom all U.S. citizens are prohibited
from doing business. See http://www.treas.gov/offices/enforcement/ofac/sdn/.
The SDN list is long, contains small print, and is
updated regularly. Due to the cumbersome nature of
the SDN list, there are many software programs available
which purport to track names on the SDN list.
A "transaction"
with a suspected terrorist could include, without
limitation, leasing, brokerage, financing, purchasing,
selling, forming a limited liability company, limited
partnership or other legal entity, investing or even
entering into a property management arrangement with
someone. The Order applies to owners, landlords, tenants,
property managers, brokers, title agents, and last,
but not least, real estate attorneys.
Willful violations of
the Order can result in criminal penalties, including
substantial fines and/or lengthy imprisonment. All
other violations are subject to substantial monetary
penalties.
USA PATRIOT ACT
The USA PATRIOT ACT
(the International Money Laundering and Anti-Terrorist
Financing Act of 2001, amending the Bank Secrecy Act
of 1970) (the "Act") supplements Executive
Order 13224 by requiring that all "financial
institutions" implement a customer identification
program and an anti-money laundering program. According
to the Act the term "financial institution"
includes "persons involved in real estate closings
and settlements." This requirement has generated
a lot of questions including how to define "persons
involved in real estate closings and settlements"
and what is required of such persons.
The Department of Treasury,
Financial Crimes Enforcement Network, and Anti-Money
Laundering Program promulgated proposed regulations
on April 10, 2003, defining financial institutions
to include "persons involved in real estate closings
and settlements." These proposed regulations
are awaiting codification in 31 CFR pt. 103, and will
include at a minimum:
o
The development of internal policies, procedures and
controls;
o
The designation of a compliance officer;
o
An ongoing employee training program; and
o
An independent audit function to test programs.
Penalties for non-compliance with the Act are:
o
10 to 30 years imprisonment for willful violations;
o
$50,000 to $10,000,000 for criminal violations;
o
$11,000 to $1,000,000 per violation civil penalty;
and
o
Related penalties under the Trading With Enemy Act
may reach $1,000,000
per violation and $100,000 individual fines.
What has not yet been
clarified by the Treasury Department is specifically
what persons are included in "persons involved
in real estate closings and settlements." It
seems likely, at a minimum, that this definition includes
those persons in the real estate industry who actually
deal with the money of others, such as title agents,
real estate managers, brokers and real estate attorneys.
The bottom line with respect to both the Order and
the Act is that it is advisable for all persons to
whom they potentially apply, which is just about anyone
involved in the real estate industry, to immediately
set up a compliance program. While neither the Order
nor the Act provide specific criteria for compliance
therewith, some suggested steps are:
o
Obtaining SDN searching and tracking software;
o
Designating a compliance officer within your company;
o
Preparing written internal policies, procedures and
controls, which should include:
o
checking the SDN list on a regular basis; and
o
"know your customer" procedures to enable
you to know who you are dealing
with, such as the furnishing identification;
o
Periodically training employees in administration
of your internal policies, procedures
and controls;
o
Documenting performance of your policies, procedures
and controls with respect
to each person;
o
Checking the SDN list for both pending transactions
and past transactions;
o
Periodically auditing compliance with your internal
policies, procedures and controls;
and
o
Adding a provision in all agreements that requires
all parties thereto to warrant:
o
that they are not a "suspected terrorist"
as defined in Executive Order 13224;
o
that they are not on the SDN list; and
o
that they are not an entity with which you are prohibited
from doing business
with under the anti-terrorism laws.
If you get a match on
the SDN list with someone with whom you are doing
business, you should, at minimum, do the following,
in the following order:
o
Freeze and segregate any funds or other assets of
such person from any other
assets;
o
As many SDN software programs search not only the
SDN list, but also related
lists such as the FBI's Most Wanted List, make sure
your match was
actually with the SDN list.
o
Use any identifying information available to you to
determine if the match is an
accurate match to the person you with whom you are
doing business;
o
Call your counsel; and
o
Call the Treasury Department's Office of Foreign Assets
Control at
(202)-622-2490.
For most people in the
real estate industry, these procedures will mean additional
work and expense in an already heavily regulated industry,
and the chance of actually doing business with a person
on the SDN list will seem very small. However, even
one instance of doing business with someone on the
SDN list could result in substantial financial risk
and possibly imprisonment. Awareness of these requirements
and implementation of these procedures could make
the difference, and it is always a good idea to know
with whom you are doing business.•
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