money laundering real estate

As a founding member of the Financial Action Task Force (FATF), Canada has an established reputation as a global leader in setting standards for anti-money laundering (AML) and counter-terrorist financing (CTF) policy. In fact, in its sixth follow-up report released in February 2014, the FATF determined that Canada could be removed from the regular follow-up process due to its strong record in addressing deficiencies previously found in the initial 2008 mutual evaluation report.

However, a recent Globe and Mail article has raised concerns regarding Canada’s AML/CTF regime. The newspaper reported that investors from China are evading a Chinese law by transferring funds to purchase real estate in Vancouver. A study conducted recently by Vancouver-based Macdonald Realty found that 70 percent of clients who paid over $3 million for homes in Vancouver were from China.

CBC also published a FINTRAC report that found the “purchase of Canadian real estate assets with offshore money and/or by offshore persons was noted as a significant risk factor”. The report noted a lack of “quality and ethics infrastructure” in the sector as a critical concern.

Current AML Rules for Real Estate in Canada

Under Canada’s present money laundering and terrorist financing law, brokers, sales representatives, and developers are required to report to FINTRAC when it comes to real estate. They are expected to report any suspicious transactions, suspected terrorist property, and any large amounts of cash received in the amount of $10,000 or more. British Columbia notaries, who are frequently involved with real estate transactions in that province, are also subject to the same requirements.

Where Are the Gaps?

The Province, a British Columbia newspaper, revealed that there appears to be massive under-reporting of large cash transactions and suspicious transactions in the real estate sector. It was found that from January 2012 to May 2015, only two large cash transactions and five suspicious transactions were reported to FINTRAC by realtors in the very lucrative Greater Vancouver property market. During the same period, financial institutions in Vancouver reported 1,278,804 large cash transactions and 8,246 suspicious transactions, based on FINTRAC data. The newspaper also discovered that $10 million in undeclared cash was discovered by the Canada Border Services Agency and returned to Chinese citizens at Vancouver’s airport between June 2012 and December 2014.

What are the gaps in the system that are allowing this activity to go on seemingly unchecked?

Low level of industry awareness
There seems to be a gap between FINTRAC’s expectations and requirements and how they are implemented in the field. Most real estate agents interviewed by The Province believed that they were meeting FINTRAC requirements by filling out forms that are used to verify the client’s identity and principal form of business. However, a FINTRAC official informed the publication that this amounted to “just a client ID and not a FINTRAC report.” This could be the result of a lack of clear guidance from FINTRAC on how to comply with the regulations.

Adequate background checks
The Financial Post reported that $1.06 trillion is believed to have been moved out of China between 2002 and 2011. China began its aggressive crackdown on corruption by government officials in 2012, and the government released a list of its top 100 fugitives earlier this year in the hopes that they will be caught and brought to trial. The majority of these are believed to be in the U.S. and Canada and are likely to be seeking ways to hide their ill-gotten funds through investments such as real estate property.

According to the Canadian Real Estate Association, realtors are required to collect, record, and retain their clients’ personal information, which is typically obtained from a driver’s license, passport, or residency card. However, there is no requirement to check the validity of the documents or the identity, leaving an open opportunity for money launderers.

What’s Next?

Based on the evidence, there are several areas in Canada’s money laundering and terrorist financing regime that require some attention.

Improved communications and awareness
Increased and effective communication with businesses like real estate brokerage firms, law firms, and banks from FINTRAC will help promote greater awareness of the current expectations and requirements under existing regulations. Outreach efforts to these groups will help strengthen the relationship with the regulator in order to encourage greater vigilance and willingness to report any potentially suspicious transactions.

Christine Duhaime is a Vancouver-based lawyer and anti-money laundering specialist. She believes strongly that there is a lot of room for improvement in how the real estate industry deals with this issue.

“When it comes to realtors and lawyers we are very loose about anti-money-laundering law,” said Duhaime.

Greater scrutiny
With a high level of real estate investment in Vancouver believed to be coming from Chinese investors, there is a need for much stronger due diligence in order to prevent possible money laundering. The know your customer (KYC) process, commonly known and used in the financial services industry, should be required for all real estate transactions, particularly those involving foreign money. A thorough KYC check should include verification against lists of known politically exposed persons (PEPs) such as government officials and watchlists of sanctioned individuals that include fugitives from the law.

Fishbowl discussions
The effect of heavy foreign investment in Vancouver’s real estate has indeed generated a lot of discussion and controversy, especially because it is widely believed that this has resulted in a housing market that is completely out of reach for most average income earners in the region. The issue has drawn so much attention that the Association of Certified Anti-Money Laundering Specialists (ACAMS) will be holding a town hall meeting on housing affordability and financial crime issues in Vancouver on October 5, 2015.

Money laundering is not an invisible crime. It affects many, especially in the case of the city of Vancouver and surrounding communities. More must be done by regulators, government, and industry in order to deal with this growing problem.

What do you think should be done to combat money laundering in Canada’s real estate market?