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| Opportunities & Exposures: Policy |
Consumed with Guilt
Gregg S. Robins
09/01/2005
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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.
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