Puerto Rican privacy groups say new anti-money laundering rule will hurt real estate transactions.

Several local privacy advocates have filed a federal lawsuit challenging a new anti-money laundering rule issued by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network. (Wikipedia)

By THE STAR STAFF

A new anti-money laundering law that was slated to go into effect nationwide on Sunday will disrupt hundreds of legitimate real estate transactions and force individuals to provide sensitive personal information, according to a complaint from a coalition of Puerto Rico-based privacy groups.

Privacy advocates, including the Puerto Rico Privacy Association, ViveApto Trust, and Pilar Fiduciary Services LLC, have filed a federal lawsuit challenging a new anti-money laundering rule issued by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

The rule, known officially as the Anti-Money Laundering Regulations for Residential Real Estate Transfers, requires parties involved in non-financed residential real estate transfers -- transactions that do not involve a mortgage -- to disclose the beneficial owners of legal entities and trusts involved in such deals. According to FinCEN’s own estimates, the rule could affect up to 850,000 transactions annually, a dramatic increase from the roughly 20,000 transactions previously covered by more limited geographic targeting orders.

“This rule targets ordinary homebuyers, not criminals,” a member of the Puerto Rico Privacy Association said. “It forces people to give up their privacy and puts their most sensitive information at risk, all in the name of fighting money laundering.” 

The plaintiffs argue that the new regulation is “unprecedented” and “unbounded,” sweeping up millions of lawful transactions and imposing what they call “draconian” reporting requirements. They claim the rule will trample privacy rights by forcing disclosure of sensitive ownership information, including, in some cases, the identities of minor children. Plaintiffs further allege that the rule creates significant cybersecurity risks, as settlement agents, brokers, notaries, and other parties -- many of whom lack sophisticated data protections -- will be required to store this data for at least five years, making it vulnerable to hacking and data breaches.

The complaint also contends that the rule is especially harmful in Puerto Rico, where property buyers often use trusts or legal entities to maintain privacy and safety, particularly in light of increased scrutiny and, at times, hostility toward outside investment under the island’s tax incentive laws. The complaint argues that existing Puerto Rico regulations already allow substantial identity mapping and that the new federal rule would strip away the remaining privacy safeguards.

“The rule imposes these draconian reporting requirements even though there is nothing inherently suspicious about purchasing property without taking out a loan. There are many legitimate reasons for parties to avoid financing, including -- most obviously -- the opportunity to save hundreds of thousands of dollars (or more) in lending costs and interest payments,” the suit notes. “By the same token, there are many innocuous reasons for purchasing real estate through a trust or entity that shields beneficial ownership. A party may structure a transaction in an attempt to limit liability, further a broader investment strategy, promote tax planning, or maintain privacy for the sake of personal safety.” 

Legally, the suit claims that FinCEN has exceeded its statutory authority under the Bank Secrecy Act because the new rule applies broadly to all non-financed residential transfers, rather than being limited to transactions that are “suspicious” or potentially connected to illegal activity. The plaintiffs also argue that the regulation violates the Fourth Amendment’s protection against unreasonable searches, as it compels the collection and disclosure of private information without any individualized suspicion or judicial oversight.

In addition to seeking to vacate the rule, the plaintiffs are asking the court to declare the regulation unlawful and unenforceable, and to issue an injunction preventing its enforcement, particularly as it pertains to Puerto Rico-based parties.

The case highlights growing tensions between government efforts to fight illicit finance and concerns over data privacy and constitutional rights in the digital age. As of Sunday’s press deadline, neither the Treasury Department nor FinCEN had commented publicly on the lawsuit.