By Robert S. Kutner, Esq. Partner, Casner & Edwards
I am writing this article on September 11, 2013. It was 12 years ago today that the face of terrorism came to the United States. It returned again this year, on Marathon Monday, April 15. Among the responses of the United States government in 2001 was the enactment of the “Patriot Act” and issuance by President Bush of Executive Order 13224, both intended to combat terrorism. While not focusing on real estate, both the Patriot Act and the Executive Order contain provisions that may affect certain real estate transactions.
The Executive Order
Twelve days after the bombing of the World Trade Center in New York, Executive Order 13224 was issued. The Patriot Act was signed into law on October 26, 2001. The Executive Order gave the government specific authorization to implement procedures intended to impede funding of terrorists. Among its provisions are that assets of foreign nationals and entities may be blocked if they “commit or pose a significant risk of committing acts of terrorism.” The Order also authorizes the U.S. government to block assets of individuals and entities that provide “support, services or assistance to, or otherwise associate with terrorists and terrorist organizations.” Attached to the Order was a “Restricted Parties List” that was determined by the Secretary of State. In the years since 2001, that list has been expanded from several pages to more than 100. No explanation is provided concerning why a particular name was added to the list. Once assets are “blocked” they may not be used for any purpose and may not leave the country. In essence, the assets are frozen in place.
Both the Executive Order and the Patriot Act focus on methods for “following the money.” The U.S. Treasury is authorized to track money and property of foreign nationals. It is also authorized to track individuals known to deal with terrorists to ensure that the assets are not used to benefit terrorism. The Treasury is authorized to track money flows and track money laundering that potentially benefits terrorists. Both the Order and the Act target banks, savings institutions, securities brokers and dealers and persons involved in real estate settlements. They supplement anti-money laundering laws that had already been enacted. While the reference to persons involved in real estate settlements is intended to focus on banks and mortgage lenders, the term could potentially be extended to real estate brokers and salespersons.
Focusing their efforts on transactions involving larger amounts of money, the Act and Order requires financial institutions to track their customers as part of a Customer Identification Program and to compare their list of customers with a list prepared by the Office of Foreign Asset control (OFAC) and the Bureau of Export Administration (BAX). The OFAC administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States.
Financial institutions that are categorized as “Tier One Entities” under the Patriot Act are required to identify persons seeking to open an account; maintain records of the information used to verify identity (e.g. passport, driver’s license). Each “financial institution” must establish an anti-money laundering program that includes the following elements:
According to the National Association of REALTORS®, managers of commercial properties do not need to implement a Customer Identification Program. Nevertheless, it is recommended that commercial property managers periodically review the treasury’s list of “Specifically Designated Nationals and Blocked Persons” to determine that current and prospective tenants are not on the list.
Investors in a REIT, joint venture, tenants-in-common, or similar investment should have a process for evaluating investment partners with the Office of Foreign Asset Control. Primary beneficial owners of a corporation or LLC, particularly those with more than a 25% interest should be vetted.
Failure to comply with the requirements of the Act carries substantial penalties. Corporations can face up to $500,000 in penalties and individuals may suffer $250,000 in penalties and 10 years imprisonment for willful violations. Real estate investors are encouraged to exercise due diligence by conducting detailed inquiries about how the money will be used and information about the persons and entities with whom you are investing.
Additional information about the OFAC may be found at the treasury department web site: www.treas.gov/ offices/enforcement/ofac/. Due to the large number of people in the United States, it is not uncommon to generate false “matches” by name. Additional information will be required to
determine if a person with a particular name is the person on the OFAC list.