Gregg S. Robins
09/01/2005
In the post-9/11 world, the Patriot Act and similar legislation has fueled a rapid expansion of government oversight of business transactions, particularly in the financial services industry. Now directives designed to combat terrorist activities and money laundering are being applied to sectors that heretofore have been relatively unregulated.
Purveyors of luxury goods (including jewelry, fine art, automobiles, boats and aircraft), travel agents, online gambling sites and real estate deals are all drawing the attention of those who enforce the Patriot Act and similar measures, as evidence grows that terrorist money has made its way into these asset classes. (In 2004, law enforcement officials found that Hamas had invested in property near Washington, D.C.) Many of these businesses have made do with cursory credit checks and minimal compliance infrastructure in the past, but are likely at some point in the next few years to face significant costs as they are forced to comply with antiterrorism oversight mandates.
Real estate offers a striking example. Buildings are often seen as physical targets for terrorists, but are rapidly becoming assets in which they invest illicit funds. The Patriot Act contains a broad definition of financial institutions, including “persons involved in real estate closings and settlements,” and, supplemented by President Bush’s Executive Order 13224, it can be used to scrutinize those involved in real estate transactions. Experts believe it is only a matter of time before real estate sellers will be forced to implement compliance programs, which will add about 10 percent to the cost of transactions. No-documentation mortgages as well as the buying of real estate through a blind trust (in transactions where no beneficial owner is named) will become difficult. Brokers, real estate attorneys, mortgage issuers, title insurance companies, escrow agents, appraisers and the managers of real estate investment trusts will have to institute compliance measures.
Money launderers and terrorists will not be the only ones facing prison time if they run afoul of these measures. Noncompliance with antiterrorism or anti–money laundering regulations by nominally innocent participants in these transactions carries severe criminal penalties well beyond typical civil fines. The fallout from running afoul of the regulations can severely damage an institution’s business. Washington, D.C.-based Riggs Bank was hit with a record $25 million fine in 2004 for failing to report suspicious activities, including transactions that involved former Chilean dictator Augusto Pinochet and Saudi Embassy officials. The damage to its reputation so weakened it that it eventually sold out to PNC Financial Services. Real estate and luxury goods firms that find themselves unwitting conduits for money laundering or terrorist activities may face similar fates.
Forward-thinking businesses will try to enhance their reputations through early and comprehensive compliance. Such efforts may carry additional benefits, such as aiding in the marketing of goods and services, and possibly keep property insurance premiums down.
In other markets, individuals buying,
say, a new yacht or private plane will eventually find themselves subject to
stringent background checks. Even collectors of fine jewels will have to produce
background documentation. On June 3, the Financial Crimes Enforcement Network of
the Treasury Department issued mandates that require dealers in precious metals,
stones or jewels to establish anti–money laundering programs. I can foresee a
time when banks, real estate agents, auction houses and luxury retailers will
verify and investigate individual customers’ identities and backgrounds in
depth, in the way they now verify individual credit ratings. Vendors will pass
their additional compliance costs along to the buyers.
The identity
verification process critical to rooting out money launderers and terrorists
will present a further incentive for thieves to assume false identities. As a
result, screening tools will have to become much more sophisticated. The science
of confirming identity through biometric technology, which recognizes
characteristics such as fingerprints, faces or retinas, is already booming.
Cogent Systems, a biometric technology developer, recently headed a list
compiled by BusinessWeek of America’s fastest growing companies. The demand for
such technology is growing fast:
13 states have already introduced biometric
tests for those seeking to obtain a driver’s license.
 | Gregg S. Robins is a managing director of Netburn McGill, a consulting firm, and an executive fellow at the NYU Stern School of Business. |