A federal judge in Texas has vacated the Financial Crimes Enforcement Network’s (FinCEN) nationwide anti-money laundering (AML) rule — creating a legal vacuum and uncertainty among title and real estate professionals.

While the ruling eliminates a significant compliance burden that industry groups had criticized, legal observers warn that FinCEN retains broad authority over real estate transactions — and could ultimately impose stricter requirements.

“FinCEN clearly has the authority to regulate persons involved in real estate transactions,” James Vivenzio, a partner at Seattle-based law firm Perkins Coie and former director for the Bank Secrecy Act (BSA) and anti-money laundering policy at the Office of the Comptroller of the Currency (OCC), told HousingWire in a recent interview. “And typically, the way FinCEN regulates financial institutions is they will require them to establish a BSA compliance program and also require them to file suspicious activity reports.”

The AML rule, which took effect March 1, mandated reporting for any non-financed residential real estate transfer where ownership was held by an entity or trust — with no geographic or price threshold.

Jamie Schafer, a fellow partner at Perkins Coie, said the trajectory of legal challenges will likely mirror those under the Corporate Transparency Act (CTA).

“With the Corporate Transparency Act, there was a temporary order that went all the way to the Supreme Court and then was reversed in the Supreme Court and then FinCEN took action,” she said. “So, we could see quite a lot of flip flopping, just based on the precedent we have.”

Flowers Title Companies LLC challenged the AML rule under the Administrative Procedure Act, arguing that FinCEN lacked authority under the Bank Secrecy Act to impose such sweeping reporting requirements.

The court found that FinCEN failed to demonstrate that non-financed residential real estate transfers to entities or trusts are categorically suspicious.

A separate challenge brought by Fidelity National Financial in the Middle District of Florida had previously resulted in the rule being upheld.

AML act authority

The 2020 Anti-Money Laundering Act gave FinCEN additional authorities, including the ability to impose reporting requirements in a “streamlined and non-complex manner.”

Vivenzio — who was involved in drafting those provisions while in government — said the concept originated from an OCC interpretive letter that permitted banks to automate certain filings.

“The provision actually references structuring transactions as a category of transactions for FinCEN to consider this for, clearly kind of giving a nod to the OCC interpretive letter from the earlier year,” he said. “The idea was that FinCEN can actually determine what is suspicious and kind of mandate that banks file in a streamlined, non-complex manner.

“And that was the idea behind that particular provision in the AML act that was struck down by this court.”

‘Be careful what you ask for’

The Department of Treasury has for years identified the real estate sector as a major vector of money laundering in its national threat risk assessments — suggesting that federal oversight in some form is likely to persist regardless of the Texas ruling.

Vivenzio cautioned that the vacated rule represented a relatively light-touch approach compared to what FinCEN could impose in the future.

“I would just be careful what you ask for, because again, FinCEN clearly has the authority to regulate persons involved in real estate transactions,” he said. “And in this particular instance, rather than requiring these persons to actually have to establish entire AML programs that include [suspicious activity report] monitoring processes, FinCEN instead used this different approach to just require reporting on a narrow category of transactions.

“Now, ultimately, that was struck down. But clearly, FinCEN has the authority to regulate in this area, and they can certainly come down even harder and require more reporting or more burden.”

Vivenzio added that the vacated rule was likely intended as a less burdensome alternative.

Schafer agreed and said the U.S. Treasury is unlikely to abandon the issue.

“I think the practical reality is that the Department of Treasury has been issuing national money laundering threat risk assessments for many, many years that have identified the real estate sector as a major vector of money laundering,” she said. “So, we would expect that this will continue to be an area that is targeted. If this particular rule were overturned, I think we would expect the department to still look for other opportunities to revise the rule, to limit it in some way as necessary.

“But I don’t expect that the Department of Treasury is just going to kind of wash its hands of regulating the real estate industry.”

Best practices for title and real estate

For title insurance and real estate operations that have already built compliance protocols around the now-vacated rule, experts recommend maintaining that infrastructure rather than abandoning it entirely.

“I think a similar approach to how folks handled CTA during the time when the Corporate Transparency Act was in flux,” Schafer said. “I think this is likely to be in flux for some time. The application in particular districts, in particular segments of the industry or plaintiff groups, is going to change over time. I certainly wouldn’t be advising any of our clients to be throwing away the work that they’ve done to put in place compliance.”

She advised against making voluntary filings but emphasized the importance of building flexibility into transaction agreements.

“Players in the market should continue to include in all relevant agreements provisions that require compliance with the rule, because the rule could come back into play at any time,” Schafer said. “They should be agreements that continue to contemplate potential delays on the basis of collecting information that may be required under the rule, so that nobody finds themselves running afoul of a commercial term because the rule comes back into effect.”

For filings made during the period when the rule was active, Schafer said reporting parties need not worry about privacy-related claims.

“They should not be liable for any sort of privacy or other related claims because they were required at that time to make the filings,” she said. “In fact, had the brokerages or whoever was the reporting the person not made the filings, they would have been viable under the law as it was applicable at the time, regardless of the fact that this ruling came out later.”

Vivenzio noted that FinCEN has historically shown flexibility when legal challenges disrupt compliance timelines.

“Whenever FinCEN had to restart the CTA process as a result of some of the legal decisions that were coming in, FinCEN always granted extensions of time and and they considered the impact that the court decision had on filers,” he said. “And so, I would expect that there will be a similar process in place should FinCEN ultimately prevail here.”