Real estate lawyers adding 'anti-terrorism' clauses to contracts and leases

In the wake of the Sept. 11 terrorist attacks, an executive order targeting supporters of terrorism has had implications for an unlikely group - real estate attorneys.

Executive Order 13224 froze the assets of persons designated as supporters of terrorism. A list of prohibited parties

Then the Treasury Department's Office of Foreign Assets Control (OFAC), which is charged with enforcing the order, announced that the real estate industry was a potential target for terrorists trying to launder money by investing in property.

In response, attorneys began implementing procedures for complying with the executive order, including checks of the government's watch list and the inclusion of "anti-terrorism" clauses in real estate contracts and leases to ensure that their clients weren't unwittingly handling terrorist funds.

The watch list, which is available free of charge and updated frequently, can be viewed at: http://www.ustreas.gov/offices/ enforcement/ofac/sdn.index.html

According to Kevin L. Shepherd, co-chair of Venable's real estate practice in Baltimore, "it's important that real estate lawyers be attuned to the requirements of the executive order and the importance of checking the terrorist list on the OFAC website."

Shepherd, who has spoken nationally on the subject, recommends that "attorneys and their clients scan the names of tenants, service contract vendors and anyone else with whom they have a contractual relationship, and document that process."

Harry Meyer, a partner in Hodgson Russ in Buffalo, N.Y. and chair of the New York State Bar real property law section, sees inserting anti-terrorism clauses into real estate contracts as an extra safeguard.

"I have found that [these] clauses are appearing in contracts with more frequency, to show the client is trying to avoid dealing with possible terrorist funds," Meyer said.

They have become commonplace in commercial real estate transactions, according to Richard Caron of Baker Hostetler in Orlando, Fla., whose clients include resort and condominium developers.

In fact, their inclusion has become part of an attorney's due diligence in flushing out potential issues about the other party, Shepherd said.

"If the other side balks at that [clause] - that gets your antenna up," he said.

What's in a name?

There are several ways that attorneys can comply with the requirements of Executive Order 13224. These can range from manually searching the watch list to using software programs or outsourcing the searches to title companies.

But even if parties' names don't appear on the list, Meyer believes inserting an anti-terrorism clause in all real estate documents is still a good idea.

Among other reasons, even a slight variation in a name - from Osama to Usama - may lead to a different result in a search, he said.

Compliance is especially important, Meyer added, because there's no amnesty program for those who inadvertently violate the law.

Criminal penalties can be as high as $250,000 for an individual and $500,000 for a business. Civil penalties include a possible fine of $11,000 for each violation.

According to Meyer, an anti-terrorism clause should require both the buyer and seller to warrant that they:

are not listed on the watch list;

are not entities that the attorney or client is prohibited from doing business with under anti-terrorism laws;

will not violate anti-terrorism laws; and

will not do business with any entity that may violate anti- terrorism laws.

Patriot Act concerns

Several real estate attorneys noted that despite the extra steps Executive Order 13244 has required, it is far easier to comply with than the anti-money laundering provisions in the Patriot Act.

In 2003, the Treasury Department issued an advance notice of proposed rule making to determine which individuals and businesses involved in "real estate closings and settlements" should be required to adopt anti-money laundering procedures.

A number of bar associations opposed the proposed rules, claiming they would impose onerous requirements on the real estate industry and jeopardize the attorney-client privilege.

So far, the Treasury Department has not issued anti-money laundering rules aimed at the real estate industry.

"Attorneys and title companies are breathing a sigh of relief," Shepherd said.