By Kevin Kim, Associate Attorney
Wall Street institutions and retail banks are not the only targets for
money launderers. Real estate loans are one of the top schemes used by
criminals, fraudsters and money launders as an end to execute their plans.
Banks and other institutional financial institutions dedicate substantial
resources to ensure they are not taken advantage of by these types of
schemes. Lately, criminals have been targeting private businesses as a
means to launder their money. For example, in 2014, the FBI, IRS and US
Treasury Department uncovered a multimillion dollar money laundering scheme
in downtown Los Angeles' fashion district in which drug money had
been laundered through retail and wholesale fashion businesses .
In 2012, the U.S. Treasury Department, through the Financial Crimes Enforcement
Network ("FinCEN") expanded the applicability of the Bank Secrecy
Act ("BSA") and Anti-Money Laundering ("AML") regulations
to include loan and financial institutions including non-bank residential
mortgage loan originators ("Lenders"). This expansion imposes
specific BSA and AML protocols to any Lender who makes or acquires loans
secured by deeds of trust or mortgages on residential properties. This
includes mortgage Lenders, bridge Lenders, and other investment purpose
loans secured by residential property. Lenders are at clear risk for money
laundering, fraud and tax evasion. In general loans provide a straightforward
and simple artifice to launder money. Seemingly normal applicants will
apply for a purchase loan to acquire property, inject a large sum of money
for a down payment, and make regular payments; unbeknownst to the lender,
the borrower is laundering ill-gotten money through the loan in the form
of loan payments. Alternatively, the borrower may try making cash payments
to evade taxes. Many private Lenders are unaware that their borrowers
could be criminals, money launderers or using their financing to evade
taxes. For these reasons, the Treasury Department expanded the BSA / AML
regulations in light of these risks.
Specifically, FinCEN imposed these obligations on Lenders because Lenders,
like banks, are at risk for fraud, money laundering, tax evasion and even
criminal / terrorist financing. Many criminal and terrorist organizations
can defraud Lenders by creating seemingly legitimate businesses and obtain
substantial sums from Lenders and other financial institutions. One of
the simplest schemes is to acquire a home or borrow against a home acquired
with ill-gotten money. Another way is to make loan payments with ill-gotten
money. This allows them to eliminate their "dirty money" and
in return obtain "clean money" from the Lender. However, Lenders,
like banks, are in a unique position to identify and assess money laundering
risks and fraud because they work closely with the borrower when preparing
due diligence and the underwriting for the loans. For these reasons, FiNCEN
requires Lenders to establish AML compliance programs ("AML Program"),
train their employees on money-laundering and fraud, and file suspicious
activity reports ("SAR") with FinCEN.
Identifying Money Laundering / Fraud and Reporting Suspicious Activity
Money launderers and fraudsters will use various artifices to launder their
illicit funds through a loan secured by residential property. Traditionally,
many Lenders associate mortgage fraud with borrowers who intend on defrauding
the Lender; for example, using a dishonest appraiser, misrepresenting
their ownership, or simply absconding with loan funds and abandoning the
property. Experienced Lenders will be able to easily identify most instances
of mortgage fraud, and have already taken the necessary steps to insulate
However, money launderers also target Lenders to utilize real estate loans
as a means to launder their illicit funds. For example, launderers will
often use straw men borrowers to lend their identities for purposes of
obtaining a loan. In these types of laundering schemes, everything appears
to be legitimate. Payments are made on a regular basis and the bank accounts
are legitimate. However, in reality, the payments are illicit funds and
the strawman borrower will usually sell, refinance or rent the secured
property to produce "clean" money. Finally, the most common
means of money laundering and tax evasion is by making loan payments.
Loan payments in cash, series of money orders, checks or other forms of
payment are often ways to launder money or to avoid taxes. The borrower
will often structure the payments to avoid suspicion from the financial
institution or banks.
According to FinCEN's AML regulations, Lenders must report suspicious
transactions that involve $5,000 or more (in the aggregate or individually)
by filing an SAR with FinCEN's BSA e-filing system. This threshold
can be confusing at times. Some Lenders have inquired whether this applies
to all transactions exceeding $5,000.00. This is not the case. Loan and
finance companies are only required to file SARs for transactions that
are suspicious in nature and that exceed $5,000. Suspicious transactions
are typically those transactions that are designed to commit or assist
in tax evasion, identity theft, and fraud. Thus, if a Lender suspects
any activity by a borrower, or third party involved in the loan transaction
to be indicative of mortgage fraud, general fraud, tax evasion, money
laundering and/or criminal activity, the Lender is obligated to report
it by filing an SAR.
There are certain red flags that will tip off Lenders that their loans
are actually being used to launder illicit money. The most common is structuring.
Structuring refers to a money laundering tactic used to evade BSA reporting
requirements by breaking up a single sum of money into amounts that are
below the threshold for reporting. It is used to avoid taxes, avoid detection
of fraud, and potentially avoid detection of illicit funds.
A simple example of structuring that applies to Lenders is a borrower delivers
a balloon payment in the form of twenty money orders for $1,800 each issued
on different dates. Money order issuers are obligated to file reports
for all money orders over $2,000. Thus, when the borrower purchased the
money orders, it is unlikely the money order issuer would have filed any
reports, especially if the borrower went to multiple locations to make
purchase such money orders. Thus, the Lender is obligated to file an SAR
because the payment appears to show the intent that the borrower sought
to avoid money servicing reporting requirements for money orders exceeding
$2,000.00 and presents suspicious activity consistent with fraud or tax
evasion. Another example is borrowers who deliver loan payments exceeding
$5,000 in cash over three days. Although it is not a single payment, it
exceeds the aggregated threshold of $5,000 in a period of time that creates
suspicion as to the source of the loan payment.
Additional red flags that can hold Lenders identify suspicious activities
are as follows:
· An undercapitalized single purpose entity.
· Indications or behavior that the parties are not acting on their
own behalf and are trying to hide the identity of the actual borrower.
· Borrower is not interested in improving the terms of the loan.
· Large cash down payments that exceed $10,000 in cash (requires
SAR for cash transaction)
· Certificates of Deposits used to secure a loan.
· Recent large deposits on bank statements prior to loan application.
· Frequent and repeated problem loan payoff, especially if in cash.
· Large wire transfers from unrelated sources.
· Borrower identification discrepancies including handwriting discrepancies.
· Lack of arms-length transaction: Seller is broker or relative
· Excessive real estate commission
· Irregularities in employment and income documentation such as
even dollar amounts in past year earnings, inconsistent employment documentation
(W-2s, employer contact, etc).
Lenders that are unsure whether a specific transaction presents suspicion,
it is strongly advised that the Lender contact a banking and finance attorney
that can assess the situation and provide the necessary guidance as to
filing a SAR.
Anti-Money Laundering Compliance Programs
FinCEN also requires all loan and finance companies, including Lenders
to create and implement an anti-money laundering internal compliance program
which establishes certain company guidelines dictated by FinCEN. The core
tenets of an AML program are the following: (1) establish internal controls
and procedures compliance with AML regulations; (2) designate a compliance
officer; (3) compliance training; and (4) independent testing.
Internal Controls and Procedures. FinCEN regulations require Lenders to establish anti-money laundering
policies, procedures and internal controls that are proportionate with
the size and complexity of the Lender and should be based on the risks
associated with its products, customers and services provided. The company
should regularly review and update this internal policy and keep an updated
manual. This will not only comply with FinCEN regulations, but it will
give management an indispensable tool to identify and mitigate financial
risks. Some core functions that should be included in an AML program include:
establishing a customer identification program, creating a records retention
program, and establishing a due diligence program to ensure high risk
transactions, customers and activities are avoided, reported and stopped.
Compliance Officer and Training. Lenders must also designate a compliance officer to ensure the company's
AML Program is properly deployed, maintained and followed. This includes
monitoring borrowers, brokers, agents and employees to ensure the AML
program is implemented effectively. The compliance office must also train
other key employees such as loan officers and underwriters concerning
the risks and indicators of money laundering.
Independent Testing. BSA/AML regulations also require that independent testing or audits be
conducted by an internal audit department or qualified independent third
party to test for specific compliance with BSA /AML regulations and evaluate
internal risk control mechanisms and compliance with the AML Program,
such as customer/borrower identification methods, record retention, and
Many Lenders may view FinCEN's BSA and AML regulations as burdensome
or against the interest of their borrowers. Some may feel filing SARs
are the same as reporting their borrowers to the authorities. This is
not the case. Filing an SAR does not automatically result in a criminal
or regulatory investigation. Furthermore, filings are held in confidence
by FinCEN. However, failure to file SARs and/or report suspicious activity
could result in penalties if the Lender was aware of fraud and it went
Penalties for Non-Compliance
Many Lenders and other financial institutions are unaware they are subject
to BSA/AML regulations. Some disregard the requirements because it is
inconvenient and others disregard them because it is cost prohibitive.
FinCEN has dictated specific penalties for non-compliance. Further, they
can be applied retroactively. In other words, if FinCEN discovers fraud
and/or money-laundering that implicates Lenders, FinCEN can impose civil
penalties up to $1,000 per day for each day of non-compliance. Willful
violations may result in civil penalties of up to $100,000 for the RMLO,
its owners, officers and possibly its employees. Furthermore, any property
involved in a transaction or traceable to the proceeds of the criminal
activity including property secured as collateral for a loan, can be seized
and/or subject to forfeiture. Unfortunately, Lenders that do not establish
these BSA/AML protocols will be unaware of any money-laundering or fraudulent
activity until it is too late. Not only does this risk civil penalties,
but they risk complete forfeiture of collateral and potential criminal
For these reasons, it is strongly advised that all Lenders establish the
required AML program and get in the practice of filing SARs. FinCEN has
created a website dedicated to non-bank mortgage companies and brokers
to assist with complying with the BSA/AML regulations.
Financial institutions are all subject to risks of fraud and money-laundering.
Lenders are no different. As the primary means of residential financing,
Lenders are high risk targets for mortgage fraud and money laundering.
To ensure Lenders comply with the BSA/AML regulations, they must establish
an AML program that includes a regularly updated manual on AML regulations
and SAR filings; and they must ensure they file SARs for various types
of suspicious transactions or activity. These basic requirements will
ensure the Lender is well equipped to identify, report and avoid potential
fraudulent activity including money-laundering and mortgage fraud. Furthermore,
federal law provides protection for Lenders from civil liability for all
reports of suspicious transactions made to the appropriate authorities,
regardless of whether such reports are filed pursuant to the SAR instructions.
Creating the compliance program, updating the manual, educating employees
and filing SARs can be a confusion and daunting task. Geraci Law Firm's
banking and finance attorneys can assist you in establishing your compliance
program, educating your employees and even filing SARs on your behalf.
We have the expertise necessary to identify money laundering activities,
fraudulent transactions and potentially dangerous borrowers.
For more information, please
contact Geraci Law Firm.