Legal Briefs
Act Accordingly
Property owners and managers should understand how to comply with the U.S.A. Patriot Act.
By James R. Janz, JD |
Whether we like it or not, the fear of terrorism continues to impact the way
Americans live, travel, and work. To help protect U.S. citizens against future
attacks, the government currently is modifying and extending specific
provisions of the U.S.A. Patriot Act, which originally was signed into law
after Sept. 11, 2001. The Patriot Act has created new guidelines that affect
nearly every industry, and an extension is likely to continue to impact how commercial
real estate professionals, among others, conduct business.
In short, the Patriot Act imposes detailed record-keeping
and reporting requirements on certain individuals and businesses to help the
government identify suspicious activity and to prevent money laundering and
financing for terrorism. Commercial real estate property owners and landlords
can benefit from understanding these requirements and the ways in which they
can and should comply with these regulations.
Buyer and Tenant Screening
Owners' and landlords' duties start by thoroughly
investigating buyers and tenants prior to entering into contracts, leases, or
other transactions. Landlords can use the rules issued by the U.S. Treasury
Department's Office of Foreign Assets Control that identify specially
designated nationals, including known or suspected terrorists, international
narcotics traffickers, persons who threaten international stabilization
efforts, and other suspect individuals and entities. U.S. business
professionals, including property owners and landlords, real estate settlement
agents, and title insurers, are prohibited from engaging in transactions or
dealing in property or interests in property with specially designated
nationals unless previously authorized. The OFAC rules subject these
individuals to economic sanctions and freezing of assets under U.S.
jurisdiction.
To comply with OFAC regulations, commercial property
owners and landlords should review the specially designated nationals list at
www.treas.gov/ofac to determine if any parties in the transaction are listed by
name, and if necessary, utilize a private search service to obtain further
information. If a potential match is suspected, commercial real estate
professionals should contact OFAC's Compliance Program Division at (800)
540-6322 for further guidance.
Commercial landlords should develop standard due
diligence policies that incorporate specially designated national screening as
part of all transactions. In addition, specific compliance programs can be
tailored to reflect the particular degree of exposure owners and landlords have
to specially designated nationals based on location, clientele, and other
indicators.
Cooperation Is Key
In cases where a buyer or tenant is suspected of an
illegal activity and the government launches an investigation, the Patriot Act
restricts the information owners or landlords may disclose about the
investigation. This law also authorizes Federal Bureau of Investigation
representatives to obtain tangible items from leased property including books,
records, papers, and other documents. The Patriot Act may require owners,
landlords, or custodians to allow the FBI to install phone and Internet
tracking devices.
The law acknowledges the burdens owners and landlords
bear when complying with government investigations and provides for reasonable
compensation for expenditures incurred during the investigation. The law also
generally provides any persons who assist law enforcement in investigations and
surveillance activities with immunity from prosecution.
Tenant Information Privacy Policies
The Gramm-Leach-Bliley Act, which pertains to the release
of nonpublic personal financial information, also can be taxing for property
owners and landlords. The act originally was designed to reform the banking
industry, but it has reached into real estate transactions due, in part, to the
Federal Reserve Board's interpretation of the law. The board has determined
that covered financial activities include the act of leasing real property - or
acting as an agent, broker, or adviser - without operating, maintaining, or
repairing the property.
If applicable, the GLBA requires landlords to disclose
their privacy policies and procedures to prospective tenants before releasing
the tenant's significant nonpublic personal information to nonaffiliated third
parties, such as credit-reporting or collection agencies. Consumers must be
allowed to object to the disclosure and given an opportunity to opt out before
any personal information is released.
However, the law is unclear about the GLBA's technical
application, including whether it applies to commercial leases or only to
residential leases. Many industry analysts feel the act applies mostly to
individual customers, not businesses. However, there is further debate as to
whether the nature of certain leasing activities invokes the act. The Federal
Trade Commission and other government agencies are evaluating the GLBA's scope
and application. In the meantime, commercial landlords should observe GLBA
requirements and implement disclosure policies where tenant financial
information for individuals would be released to nonaffiliated third
parties.
Other Considerations
In addition to the Patriot Act, OFAC, and GLBA
regulations, new standards are emerging that are transforming commercial real
estate transactions. To be prepared for these changes, owners and landlords
should follow a few important steps.
• Review leases and purchase agreements. Commercial real
estate professionals should carefully evaluate these documents in light of
current security standards and compliance policies under the Patriot Act, OFAC,
and GLBA. An increasing number of transaction documents include clauses that
require buyers and tenants to state that they are not a specially designated national
or part of a terrorist organization and that they never have been indicted,
convicted, or detained on charges involving money laundering.
• Prepare an action plan.
Commercial real estate owners and landlords should be prepared if they
encounter problems in transactions or are subject to governmental
investigations. This includes procedures for communicating with authorities,
complying with subpoenas, retaining records, and complying with federal and
state laws.
• Consider security measures. Property owners should
assess the costs and benefits of security measures for persons and buildings,
such as metal detectors, X-ray machines, and imaging technology. In addition,
it is important to develop an emergency evacuation plan and also to investigate
terrorism insurance.
Stay Informed
As the threat of terrorism continues nationwide,
commercial property owners and landlords should be aware of their duties to
comply with the Patriot Act's regulations. Making use of legal counsel,
industry resources, and policy groups to help understand these obligations is
essential as the rules often change or are reinterpreted.