Anti-Money Laundering and Suspicious Activity Reporting Proposed for Housing Government Sponsored Enterprises

On November 3, 2011, the Financial Crimes Enforcement Network (“FinCEN”) announced proposed rules requiring the federal housing-related government sponsored enterprises (the “GSEs”) to develop anti-money laundering (“AML”) programs and to file suspicious activity reports (“SARs”) with FinCEN. The GSEs currently file fraud reports with their regulator—the Federal Housing Finance Agency (“FHFA”)—which then files the SARs with FinCEN. The proposed regulations would streamline the process, requiring GSEs to filing SARs directly with FinCEN.

The notice of proposed rulemaking (the “Notice”) details increasing attention by FinCEN to the use of real estate finance to launder money, including attempts by criminals to invest through direct purchases, or through paying down existing loans. Similarly, the rulemaking describes how fraud may occur at multiple points in the mortgage life-cycle, including origination, loan modification, or home equity conversion. It also describes common fraudulent schemes, including false statements by borrowers, use of straw buyers, and inflated appraisals, among other things.

Because of rampant mortgage fraud, FinCEN proposes to bring the GSEs within the definition of “financial institution” for purposes of the AML and SAR regulations (but not for broader purposes under the Bank Secrecy Act). This would require each of the GSEs to establish an AML program, including:

• The development of internal policies, procedures and controls;
• The designation of a compliance officer;
• The establishment of an ongoing employee training program; and
• The institution of an independent testing function to test programs.

In addition, FinCEN proposes that the GSEs file SARs directly, rather than filing with the FHFA as currently required. As a result of being designated “financial institutions,” the GSEs, as well as their directors, officers, employees, and agents will have the benefit of the liability safe harbor for SAR filings under the Bank Secrecy Act. The safe harbor is intended to encourage reporting in order to give FinCEN a broader database to enable it to recognize and prevent suspected fraud, money laundering, and other financial crimes involving or related to the products and services offered by the GSEs.

The period for submitting comments on the Notice will be open for sixty days following its publication in the Federal Register.