PATRIOT Act and Anti-Terrorism Laws:

Real Estate Industry Stand Up and Take Notice

By Tara K Gorman, Esq.

Non-compliance with anti-terrorism laws could be expensive and land you in prison. In the aftermath of 9/11 and the very clear and present threat of terrorism, the government has enacted rather sweeping statutory and regulatory requirements intended to weed out money laundering and the funding of "Prohibited Persons" as defined in Executive Order 13224 (Order) issued by President Bush on September 24, 2001. The goal of the Order is to prevent and suppress acts of terrorism in the United States and around the world.

The Order, as well as other anti-money laundering (AML) and anti-terrorist financing laws, directly affect the real estate industry – although many building owners, property managers, brokers and title agents don't know that these laws exist or the full impact of non-compliance.

Laws Relating to Terrorism or Money Laundering

·         Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001 and relating to Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism;

·         Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56, the "PATRIOT Act"); and

·         Money Laundering Control Act of 1986 ("MCLA") which makes it a crime to launder proceeds of certain criminal offenses called "specified unlawful activities" such as narcotics trafficking, Medicare fraud and embezzlement, more specifically defined in Title 18, U.S.C. §§ 1956 and 1957 and Title 18 U.S.C. 1961, the Racketeer Influenced and Corrupt Organizations Act.

The Order applies to all real estate transactions! All U.S. persons and entities are prohibited from any business transaction directly or indirectly involving any person or entity on the Treasury's Office of Foreign Assets Control's (OFAC) Specially Designated Nationals (SDN) List. Thus, landlords, tenants, guarantors, brokers, property managers, title agents, attorneys, and their respective agents and affiliates are obligated to comply with the Order. And the PATRIOT Act is not far behind in its application to the real estate industry.

In order to prevent, detect and prosecute international money laundering and financing of terrorism, Title III of the PATRIOT Act, (the International Money Laundering and Anit-Terrorist Financing Act of 2001, which amended the Bank Secrecy Act of 1970) requires all financial institutions to establish minimum anti-money laundering programs. "Persons involved in real estate closings and settlements" is the last financial institution to be defined. The Anti-Money Laundering Program Requirements for "Persons Involved in Real Estate Closings and Settlements" was issued on April 10, 2003 and is to be codified as 7. C.F.R. pt. 103 in the near future.

At such time as "persons involved in real estate closings and settlements" is added to the definition of "financial institutions" under the PATRIOT Act, persons involved in real estate closings and settlements will be required to establish anti-money laundering programs that included, at a minimum:

·         The development of internal polices, procedures and controls;

·         The designation of a compliance officer;

·         An ongoing employee training program; and

·         An independent audit function to test programs.

Penalties for Non-Compliance

OFAC administers and enforces the Order and OFAC regulations. The penalties for non compliance are stiff:

·         10 – 30 years imprisonment for willful violations

·         $50,000 to $10,000,000 for criminal violations

·         $11,000 - $1,000,000 for each violation civil penalty

·         Related penalties under Trading with Enemy Act may reach $1,000,000 per violation and $100,000 individual fines

What Does this Mean for You?

This means set up a compliance program, and fast! The most important aspect of any compliance program is to understand the mission of OFAC and the regulations it administers. OFAC is tasked with enforcing economic and trade sanctions against foreign states, terrorists, and international narcotics. The first step of any compliance program is to ensure that you are not doing business with any person, entity or group (including officers, directors, partners, members with 25%+ ownership interest) listed as a terrorist or terrorist entity on the SDN List. That's not as easy as it sounds.

·         SDN List is amended frequently, the last time was September 14, 2004

·         It is now more than 160+ pages long, three columns and in an incredibly small font! http://www.ustreas.gov/offices/eotffc/ofac/sdn/index.html

·         SDN List includes numerous aliases and "doing business as" designations

It is a practical impossibility to comply via manual searches of the SDN List because it is updated so frequently and the number of aliases and “doing business as” designations would be difficult to track accurately.  There are multiple software programs and companies whose sole purpose is tracking names on the SDN List. The software program you choose should be capable of data matching, database management, flexibility, precision, and most importantly should be updated as often as the SDN List is updated.

What to do if You Get a "Hit"?

If you find that a party you are doing business with is a "hit" or a "match" against the SDN List, you must first do a bit of due diligence before reporting the name to OFAC.

·         Was it an SDN List "hit"? Make sure that the "hit" is against the SDN List and not against additional lists that are not enforced by OFAC. Many software programs check against the SDN List as well as other lists such as the Denied Persons List, the Entities List (both, Bureau of Industry and Security), FBI's Most Wanted List (FBI), and Debarred Parties List (Office of Defense Trade Controls at the U.S. Department of State). Contact your software provider to ensure that the "hit" was indeed a SDN List "hit".

·         Evaluate the quality of the "hit." If it was an SDN List "hit" – evaluate the quality of the hit by comparing the name of your party with the name on the SDN List. For example, is the name of your party an individual and the name on the SDN List an organization or a company – if so, that's not a quality hit.

·         How much of the name matches the name on the SDN List? Does the whole name match or just the last name?

·         Compare the name on the SDN List with all of the information you have on your party.  Compare the address, nationality, passport, tax ID or cedula number, place of birth, date of birth, former name, and aliases.

·         Are there a number of similarities or exact matches? If so, contact OFAC's Compliance Programs Division hotline at 1-800-540-6322.

What Else Can You Do?

Most likely, the majority of the parties you deal with will not be on the SDN List. However, you, along with all of the parties you do business with, are subject to regulatory action by the government in business dealings. Even if you don't find that the parties you do business with listed on the SDN List, it is a good idea to protect yourself by adding an anti-terrorism compliance clause to every document you enter into – leases, amendments, purchase and sale agreements, consents to subleases, brokerage agreements, loan documents, construction contracts, vendor contracts – everything. The anti-terrorism clause should require the party to represent and warrant that (i) it is not listed on the SDN List, (ii) it is not an entity that you are prohibited to do business with under anti-terrorism laws, (iii) it will not violate anti-terrorism laws, and (iv) it will not do business with any entity that will violate anti-terrorism laws. In addition, the anti-terrorism clause should state that the party shall provide you with a certification or other evidence confirming its compliance with the anti-terrorism clause and anti-terrorism laws and that the party will indemnify you in the event that it violates the anti-terrorism clause or anti-terrorism laws. A representation and warranty is necessary because you cannot rely on a "best of knowledge" standard anymore. Even though you would like to think you know all you need to know about the parties you do business with, you are not only required to ask, but to independently check the SDN List.

The anti-terrorism laws and compliance requirements can be daunting. However, being aware of the requirements and taking a few simple steps to set up an effective compliance program can save you time and money and keep you out of jail.