American Bar Association Section of Real Property, Probate and Trust Law 2008 Annual Spring Symposia May 1-2, 2008 - Washington, D.C. Living with the Patriot Act May 1, 2008 Stephen A. Linde, Esq. Cohen & Perfetto, LLP New York, New York
LIVING WITH THE PATRIOT ACT American Bar Association 19 th Annual Real Property and Estate Planning Symposia Washington, D.C., May 1-2, 2008 INTRODUCTION The legacy of the September 11 terrorist attacks is a tragic one, and will influence American life for a long time to come. It was inevitable that the President and Congress would seek legislative solutions for various problems, real and perceived, relating to international terrorism. It was no surprise that international money laundering and the financing of terrorist activities would come under increased scrutiny. Regulation of money laundering is of course nothing new, and traditional financial institutions such as banks have long been subject to regulation by the Treasury Department aimed at preventing criminal activity under the Bank Secrecy Act 1 (the "BSA"). Traditionally, the real estate industry has not been subject to such regulations. The USA Patriot Act 2, signed into law by President Bush on October 26, 2001, changed that. The Patriot Act added new categories of individuals and entities to the list of persons covered by the BSA. Among others, the Act now covers "persons involved in real estate closings and settlements" 3. Clearly, most participants in real estate transactions have not traditionally been viewed as posing a risk of facilitating money laundering or financing terrorism, nor have these persons viewed themselves and their activities as posing risks of promoting terrorism. Nonetheless, the Patriot Act requires such persons to be conscious of the issue, and engage in new forms of diligence. The Act mandated that the Treasury Department promulgate regulations requiring entities on the expanded list of covered institutions, including participants in real estate transactions, to implement compliance programs under the money laundering laws. However, final regulations have not been issued to date. But the enactment of the Patriot Act and the possibility of regulation created a new burden for participants in real estate transactions. The scope of who is covered is not clear, but this will be a concern to buyers and sellers of real estate, traditional and non-traditional real estate lenders, equity funds and their promoters, landlords in lease transactions, and the brokers, attorneys and other professionals who participate in these activities. 1 31 U.S.C. 5311 et seq. 2 Public Law 107-56, 115 Stat. 272 (2001). USA Patriot Act is actually an acronym for the Act s full name, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001. The Act was extended in 2006. 3 31 U.S.C. 5312 (a)(2)(u).
OFAC RESTRICTIONS The money laundering laws are administered by the Treasury Department's Office of Foreign Assets Control ("OFAC"). OFAC operates under Treasury Regulations published in the Code of Federal Regulations 4. These regulations prohibit United States persons from dealing with specified countries subject to governmental sanctions, their governments and agents, and specified persons connected with activities that threaten national security, including terrorism and drug trafficking. Such persons are generally known as "Specially Designated Nationals" and are listed on the "List of Specially Designated Nationals and Blocked Persons" maintained by OFAC. This list is commonly referred to as the "OFAC List". What happens if money is received from a prohibited source? Funds received directly or indirectly from a prohibited source must be segregated and placed in a special interest-bearing account. Such funds are "blocked assets", which cannot be accessed or used with OFAC permission. If such is the case, the funds cannot be used in a real estate transaction. KNOW WHO YOU ARE DEALING WITH The main burden of the Patriot Act and money laundering laws is to know who you are dealing with. As a participant in a real estate transaction, what can you do to protect yourself? I. Determine All Relevant Parties Relevant parties will include not only a purchaser, owner or borrower, but its owners, controlling persons and investors who provide funds for a transaction. Not surprisingly, information beyond the purchaser, owner or borrower level is often difficult to obtain. For large publicly owned companies, it is not feasible. This is the case not only because of the large numbers of shareholders or other owners involved, but the identity of the owners (other than the largest ones) will not be known to the company and is constantly changing. II. Use the OFAC Web Site The OFAC web site contains compliance guidelines and the OFAC List, and can be consulted to determine if a person is on the list. The list can be accessed at http://www.treas/gov/offices/enforcement/ofac/regulations/index.html. In using the OFAC list, care must be taken to avoid missing a prohibited person by inputting a misspelled name. In particular, names from languages written in other than English characters can be spelled in different ways and searching for alternative spellings of a name is advised. 4 31 C.F.R parts 500-599.
Material from the OFAC web site, including a recent version of the OFAC list, is attached as Exhibit A. III. Title Insurance Company Searches In a purchase and sale or mortgage loan transaction, one can obtain an OFAC search from the title insurance company, and many title companies perform such searches and include them in their title reports as a matter of course. A sample search is included as Exhibit B. The limitation on such searches is that they will be done for the name of the seller and buyer in a purchase and sale transaction and for the name of the borrower in a loan transaction. Unless specifically asked, a title insurance company will not search the names of the parties' principals, investors and others in the transaction who may be providing funds. If the funds are coming from other sources, the title insurance company search will not be sufficient and should only be considered a starting point. Query, however, whether the title company search of only the name of a buyer, seller or borrower would protect the title company as a participant in a real estate transaction. IV. Document Representations and Warranties Representations and warranties concerning compliance with the Patriot Act and similar statutes governing money laundering, drug trafficking and trading with enemy countries have become common in real estate documents. These provisions usually take the form of representations that a party to a transaction and related persons are neither covered by the statutes and that money has not come from improper sources. As discussed above, a public corporation or other public entity usually would not be willing to give a representation or warranty except at the entity level. Few public companies would have the inclination, assuming they had the resources, to investigate officers, directors and shareholders. In the case of a significant public company, the representation as to the company should provide enough comfort to parties dealing with it as the risk is small that a transaction would violate the statutes where the company was in compliance but knowledge as to its managers and owners was not available. Representations and warranties in private documents will not bind the government, but are useful as due diligence mechanisms for real estate transactions. The need to give representations and warranties may cause the providing party to do an investigation in order to represent truthfully. For the recipient, the provisions may give substantial comfort where the providing party is known to the recipient and reputable counsel is involved. The value of these provisions will of course have to be considered in the context of whether the transaction parties are perceived to present a risk of terrorist or other suspect activities.
Representations and warranty provisions are useful in minimizing the risk of a problem before a transaction closes, but will not solve the problem of having received funds that are not permitted. If it turns out that funds should have been blocked, the recipient had no right to receive them in the first place. With the only option being to place tainted funds in a segregated account subject to OFAC control, remedies for a breach of an OFAC or other money laundering representation would be limited. Having the right to exit a pending transaction or not close would work when feasible, but would not help in the case of a transaction that had closed with monies distributed. Traditional remedies like damages and lease default remedies will not make a party whole. Neither would standard real estate document provisions for indemnification provide a remedy; if the non-defaulting party had no right to receive the funds, it would not likely be able to obtain them indirectly through an indemnification provision. Exhibit C contains sample provisions that could be used in purchase and sale agreements, loan documents and leases.
EXHIBIT C DOCUMENT CLAUSES I. PURCHASE AND SALE AGREEMENT CLAUSES Buyer makes the following representations and warranties to Seller as of the date hereof: Buyer represents that none of Buyer, its owners or investors, or any of their respective officers, directors, members, partners or managers is a Prohibited Person (as defined below), has conducted any business or has engaged in any transaction or dealing with any Prohibited Person (as defined below) or has engaged in any transaction relating to any property or interests in property blocked pursuant to the Executive Order (as defined below), has engaged in any transaction that evades or avoids any of the requirements or prohibitions set forth in the Executive Order or the USA PATRIOT Act (the "PATRIOT Act"). Buyer represents that it and its owners and investors and all of their respective officers, directors, members, partners or managers are in compliance with all applicable orders, rules and regulations issued by, and recommendations of, the U.S. Department of the Treasury and OFAC (as defined below) pursuant to the International Emergency Economic Powers Act, 50 U.S.C. 1701 et seq. ("IEEPA") and the PATRIOT Act. Buyer represents that none of its owners or investors is a "Prohibited Foreign Shell Bank" (as defined in the PATRIOT Act), or is named on any available lists of known or suspected terrorists, terrorist organizations or of other
sanctioned persons issued by the United States government and/or the government(s) of any jurisdiction(s) in which Buyer is doing business; "Prohibited Person" means any Person: (a) listed in the Annex to, or is otherwise subject to the provisions of, the Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, and relating to Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (the "Executive Order"); (b) that is owned or controlled by, or acting for or on behalf of, any person or entity that is listed in the Annex to, or is otherwise subject to the provisions of the Executive Order; (c) that commits, threatens or conspires to commit or supports "terrorism" as defined in the Executive Order; (d) that is named as a "specifically designated national (SDN)" on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control ("OFAC") at its official website, http://www.treas.gov.ofac/t11sdn.pdf or at any replacement website or other replacement official publication of such list or is named on any other U.S. or foreign government or regulatory list issued post-09/11/01; (e) that is covered by IEEPA, OFAC or any other law, regulation or executive order relating to the imposition of economic sanctions against any country, region or individual pursuant to United States law or United Nations resolution; or (f) that is an affiliate (including any principal, officer, immediate family member or close associate) of a person or entity described in one or more of clauses (a) (e) of this definition of Prohibited Person.
II. LOAN AGREEMENT CLAUSES Definitions Anti-Terrorism Law means any law relating to terrorism or money-laundering, including Executive Order No. 13224 and the U.S. Patriot Act. Prohibited Person means (i) a Person that is listed in the Annex to, or is otherwise subject to the provisions of, Executive Order No. 13224, (ii) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the Annex to, or is otherwise subject to the provisions of, Executive Order No. 13224, (iii) a Person with whom Lender is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law, (iv) a Person who commits, threatens or conspires to commit or supports terrorism as defined in Executive Order No. 13224, (v) a Person that is named as a specially designated national and blocked person on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control at its official website, http://www.treas.gov/ofac/t11sdn.pdf or at any replacement website or at any other official publication of such list, and (vi) a Person who is affiliated with a Person described in clauses (i) (v) above. USA Patriot Act means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56). Clause Anti-Terrorism Law. Borrower covenants, represents and warrants as follows: (i) neither Borrower nor any Guarantor is or, to the best of Borrower s knowledge, will be in violation of any Anti-Terrorism Law; (ii) neither Borrower nor any Guarantor is or, to the best of their knowledge, will be a Prohibited Person; (iii) neither Borrower nor any Guarantor (A) conducts any business or engages in any transaction or dealing with any Prohibited Person, including the making or receiving any contribution of funds, goods or services to or for the benefit of any Prohibited Person, (B) deals in, or otherwise engages in any transaction relating to, any property or interests in property blocked pursuant to Executive Order No. 13224 or (C) engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law; neither Borrower nor any Guarantor will engage in any of the foregoing activities in the future; (iv) no tenant at the Property is a Prohibited Person; (v) Borrower covenants and agree to deliver to Lender any certification or other evidence requested from time to time by Lender in its sole reasonable discretion, confirming Borrower s and Guarantors compliance with this Section ; and (vi) Borrower has implemented procedures, and will consistently apply those procedures throughout the term of the Loan, to ensure the foregoing representations and warranties remain true and correct during the term of the Loan.
III. LEASE CLAUSE Anti-Terrorism Statute Compliance. Tenant hereby represents and warrants to Landlord that Tenant is not: (1) in violation of any Anti-Terrorism Law; (2) conducting any business or engaging in any transaction or dealing with any prohibited Person, including the making or receiving or any contribution of funds, goods or services to or for the benefit of any Prohibited Person; (3) dealing in, or otherwise engaging in any transaction relating to, any property or interest in property blocked pursuant to Executive Order No. 13221; (4) engaging in or conspiring to engage in any transaction that evades or avoids, or had the purpose of evading or avoiding, or attempts to violate any of the prohibitions set forth in any Anti-Terrorism Law; or (5) a Prohibited Person, nor are any of its partners, members, managers, officers or directors a Prohibited Person. As used herein, Antiterrorism Law is defined as any law relating to terrorism, anti-terrorism, money laundering or anti-money laundering activities, including Executive Order No. 13224 and Title 3 of the USA Patriot Act. As used herein Executive Order No. 13224 is defined as Executive Order No. 13224 on Terrorist Financing effective September 24, 100`, and relating to Blocking Property and Prohibiting Transactions With Persons Who Commit, or Support Terrorism Prohibited Person is defined as (1) a person or entity that is listed in the Annex to Executive Order 13224; (ii) a person or entity with whom Tenant or Landlord is prohibited from dealing or otherwise engaging in any transaction by any Anti Terrorism Law, or (iii) a person or entity that is named as a specially designated national and blocked person on the most current list published by the U.S. Treasury Department Office Of Foreign Assets Control as its official website, http://www.treas.gov/ofac/t11sdn.pdf or at any replacement website or other official publication of such list. USA Patriot Act is defined as the Uniting and Strengthening America by Providing Appropriate Tools.