Judge nixes FinCEN residential real estate rule

A federal judge in Texas has struck down a rule from the Treasury Department’s Financial Crimes Enforcement Network that recently went into effect requiring professionals engaged in real estate closings and settlements to report information to FinCEN about nonfinanced transfers of residential real estate to legal entities or trusts as a way to deter money laundering.

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FinCEN had proposed the rule in February 2024, even as it was encountering pushback on its beneficial ownership information reporting rule under the Corporate Transparency Act, which it has now largely abandoned for U.S. companies. The residential real estate rule took effect March 1 and aimed to prevent criminals and corrupt officials from setting up opaque legal entities and trusts to launder illicit funds through transfers of residential real estate. A real estate company called Flowers Title Companies LLC filed suit against the Treasury Department, claiming the rule violated the Administrative Procedure Act and exceeded FinCEN’s statutory authority under the Bank Secrecy Act. Judge Jeremy Kernodle agreed with the plaintiff and struck down the rule Friday, writing, “But the agency fails to explain or show how non-financed residential real estate transactions are categorically ‘suspicious.'”

“FinCEN’s explanations are vague, conclusory, and unpersuasive,” he added. “The fact that some bad actors have conducted non-financed real estate transactions does not make such transactions categorically ‘suspicious.’ If it did, then nearly every type of transaction imaginable would be ‘suspicious,’ and § 5318(g)(1) would grant FinCEN far-reaching powers no one has contemplated.”

The rule required real estate professionals involved in closings and settlements to submit a “Real Estate Report” for nonfinanced residential real estate transfers among entities or trusts. The report would contain information that could be valuable to law enforcement, including the identities of the true, “beneficial” owners of the entities and trusts involved.  Proponents of the rule blasted the judge’s decision.

“In striking down this rule, the district court in Texas has just sided with cartels, money launderers, and U.S. adversaries and given them free license to continue moving their dirty cash through U.S. real estate,” said Ian Gary, executive director of the Financial Accountability and Corporate Transparency Coalition, in a statement. “Two other federal courts have recently upheld the rule as lawful and constitutional. We therefore expect the government to swiftly appeal this outlier decision and the appellate court to overturn it.”

Two other federal district courts in Florida and Texas reached the opposite conclusion and issued summary judgment orders in favor of the government against similar challenges, the FACT Coalition noted. Another lawsuit in Puerto Rico on similar legal grounds has not yet been resolved.