Quarterly: Summer 2004 - GWCAR - Greater Washington Commercial Association of REALTORS

CBQ >> Summer 2004 Issue

The Patriot Act, Brokers and Their Clients

By Viktor Pregel
Watt, Tieder, Hoffar & Fitzgerald, LLP

The Patriot Act has become a hot topic for real estate professionals since its passage in the wake of the 9/11 terrorist attacks. Though the act covers a variety of law-enforcement methods necessary for the battle against terrorism, certain provisions of the act are designed to make it easier to squeeze the flow of money to and from terrorist organizations. Real estate has historically been a popular investment vehicle for criminal organizations. Terrorist groups, which in many ways copy organized crime networks, also have a history of using real estate as a depository for their funds, a long-term investment and a way to launder money.

One of the requirements of the act is that "financial institutions" (as defined by the Treasury Department) institute a Customer Identification Program (CIP) in order to limit terrorist organizations' ability to launder money. A CIP must include steps that serve to determine the real identity of a financial institution's customers.

As the act is currently interpreted, real estate professionals engaged in brokerage or property management are not considered "financial institutions" under the act (unless the companies they work for are regulated by certain government agencies such as the Treasury Department). Therefore, such professionals are not required to institute a program within their organizations to combat money laundering. Though real estate professionals are commonly involved in transactions where one or more of the participants is a financial institution, the current application of the act would not require a real estate professional to create anti-money laundering programs even when involved in such a transaction.

However, the Treasury Department has proposed a change to the definition of "financial institution" so as to include real estate brokers. If this change in the rules were to occur, brokers would be required to institute CIP programs in order to confirm the actual identities of their clients. At this point in time, that change in the definition of "financial institution" has not been adopted.

For the real estate professional, the most pertinent part of the Patriot Act deals with the ban on transactions involving blocked property, persons or entities. The Office of Foreign Asset Control (OFAC), an agency of the Treasury Department, maintains the list of Specially Designated Nationals and Blocked Persons (SDN). OFAC is also responsible for enforcing the prohibition of American persons or entities from doing business with persons or entities listed on the SDN. At this time, OFAC has implemented clear compliance guidelines for banks and the insurance, import/export, tourism and securities industries. Unfortunately, there are currently no clear OFAC guidelines for compliance by the real estate industry.

However, there are some basic guidelines that have been gleaned from OFAC's handling of other industries:

If the real estate professional or his/her company has not yet done so, the SDN should be checked to confirm that any current customers or clients are not on the list. The list can be found at www.treas.gov/offices/eotffc/ofac/.

Before conducting business with a new person/entity, whether a buyer, seller, tenant or landlord, a real estate agent should consult the SDN list.

On a regular basis, a real estate professional should check their list of current clients or customers against the SDN list to ensure that old clients have not been added to the list as part of an update.

Any hits on the SDN list should be confirmed to be sure that they are not "false positives." The evaluation of any such hits should determine the quality of the match by examining how closely the information matches the entry on the SDN list, including address, date of birth and identification numbers, if any.

Finally, if it appears that a client or customer is listed on the SDN after all these steps mentioned above have been taken, the real estate professional should call OFAC's Compliance Hotline at 800.540.6322 in order to obtain guidance as to what should be the next step.

Admittedly, OFAC has not laid out clear guidelines for the real estate industry. Hopefully, in the future, OFAC will give detailed instructions as to what level of due diligence real estate professionals must perform in order to meet Patriot Act requirements.

Until that occurs, the best policy is to use an abundance of caution. Real estate professionals should make a serious effort to know their clients and customers and to eliminate any possibility that those clients and customers are on the SDN list. As in most other things, putting one's head in the sand is not a good strategy and can lead to disaster if it turns out that a client or customer has ties to terrorism.

Viktor Pregel is a commercial real estate attorney with Watt, Tieder, Hoffar & Fitzgerald, LLP. He represents lenders, underwriters, borrowers, issuers, purchasers, sellers, landlords and tenants in a variety of commercial transactions. He may be reached at vpregel@wthf.com.