Money Laundry and Real Estate

This is one of two blogs on this topic.  This one briefly reviews the Money Laundry report issued by Peter German and the provincial government.  The second will look into some of the programs designed to tackle this issue.

I have to say, when listing to the press conference and reviewing the report I had two reactions.  First, it filled in the holes for me as to how you could buy real estate with "dirty" money.  Finally I understand, and was sadden to see lawyers' trust accounts play a significant role.  Law societies and the government need to work together to plug this loop-hole (more of a pipeline).

My second reaction was, "this is nuts."  Clearly the provincial and federal governments have been grossly negligent on this matter, likely for decades.

In a Press Conference the BC Government release part 2 of the Dirty Money report done by Peter German (lawyer and former RCMP executive) outlining the role of money laundering in BC.  This reports estimates that 7.4 billion was laundered in BC in 2018.  5 Billion has been attributed to real estate with a large part of the balance through casinos and to a lesser degree luxury vehicles.

Some of the examples given at the press conference include:

  • A student with an address of an out of province office purchased 15 condos in the same building for $2.9 million.
  • A homemaker (presumably not employed) purchased more than 12 row houses over 3 years valued at $4.1 million.
  • Another homemaker purchased five luxury homes over 3 years for $21 million.
  • 494 different properties with between 4 and 29 mortgages registered and repaid in rapid succession (not the activity of ligament home owners).
  • Hundreds of properties where the owner’s listed address is a law firm or off-shore financial centre.

As a realtor, I have to say that I did not fully understand the process in which this was happening.  I completely understood how “dirty” money was being “cleaned” through the casinos and then might be invested, or “parked,” in real estate.  As the CEO, Darlene Hyde, of BCREA (BC Real Estate Association) said in this Globe and Mail article in April, money laundering is largely invisible to us Realtors. 

The German report, and the Q&A of the press conference (sorry, I was unable to find a link to the Q&A part of the conference) has filled in the blanks for me.  We Realtors are only involved in a minor part of the receipt of funds, the deposit on the offer.  Here on the Island that is often less than 5% of the purchase price.  Lawyers are involved in receiving the vast majority of the funds and do not have to report the source.

In a 2015 Supreme Court proceeding, brought by the Federation of Law Societies of Canada, lawyers are not required to report or monitor financial information of their clients under the Attorney-Client Privilege rules.  So, if a lawyer receives an EFT (electronic funds transfer) they are not required to look into the legitimacy of the source of the funds, nor report any suspicious activity.  Notaries do follow the requirements of FINTRAC and report on financial transactions.

We Realtors are required to fill out a Financial Transactions and Reports Analysis Centre of Canada form (FINTRAC) to report suspicious activity.  However, we generally view this activity to be less than effective.  One, as mentioned above, if dirty money is involved it is unlikely the Realtor will see it.  Two, the form only requires us to see a driver’s licence, which does not identify nationality or citizenship.  For people that have told me they are an immigrant, or those I suspect may be immigrants, largely due to poor English, I require them to show me their passport or permanent resident card.  FINTRAC does not require me to do this.

Also, I learned in the press conference that FINTRAC is not sharing its data with other agencies fighting money laundering.  Lastly, only FINTRAC forms where a realtor suspects inappropriate activity get submitted.  I would prefer all FINTRAC forms get submitted and then the government compare the client’s information against their databases to see if there is a red flag.  They certainly know better than us Realtors if a person has had suspicious activity in the past.  Personally, I think that FINTRAC (the federal government) is being lazily ineffective by dropping the ball in the laps of Realtors.

Further, amongst international money laundering countries, the fact that our FINTRAC is completed by realtors rather than lawyers is seen as a very poor practice, I believe it is since they receive the bulk of the funds and see the source of those funds (more on that below).  This article also notes that when a suspicious report is filed with FINTRAC, they don't have the authorization to request additional information from the reporting entity, thereby limiting the information they can provide to the police.  Which limits the ability of the police to investigate.

Therefore, for me, the FINTRAC process and the lack of requiring lawyers to do financial reporting are two prime practices that should be examined in terms of money laundering.  The report mentions other factors such as financial reporting is not consistent across segments of the economy and data is not shared among government agencies and there are no investigative resources dedicated to money laundering.

Here is the Executive Summary of the Dirty Money – Part 2 report, along with a summary of underground banks.  Underground banks can take cash deposits of dirty money and then through a series of transfers and transactions, including to lawyers' trust accounts, can "clean" the funds.

Following are some items on the depth of the problem and the process that leads to this activity from the Executive Summary.

  • Unfinanced purchases “cash buys” comprise 17-21% of residential transactions.  They are more common among higher-risk buyers such as companies (29-38%), trusts (58%), nominees (20-28%) and offshore buyers (32-40%).

    • “Cash buys” does not mean bags of cash, as is the case with casinos, just no financing and likely an electronic funds transfer to a lawyer.  FINTRAC now requires us Realtors and Notaries to record the names (client and institution) and account number for certified cheques or bank drafts.  I am unaware of a brokerage on the Island that will accept cash and we have report any cash payment of $10,000 or more. 
  • Private lending is a major money laundering vulnerability.  Private lenders are not subject to any Anti-Money Laundering (AML) oversight.  Unregulated lenders were a common feature in the sample of properties examined many of which had known or suspected ties to criminal activity.  They also had other money laundering indicators as unusual loan-to-value ratios and interest rates.  Plus many instances where the titleholder had obtained multiple mortgages which are quickly repaid.  Not normal activity for a regular home owner.
    • “Extending the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (POCMLTFA) to include certain classes of unregulated lenders (such as Mortgage Investment Entities, or those whose lending is above a certain threshold) could deter the use of mortgages as a conduit for money laundering.”
  • Only 1% of titles list the title holder with an address outside of Canada, which likely greatly underestimates the total.  There are about 2% (1800) properties owned by offshore companies.  The lack of transparency for BC registered companies provides an opportunity to hide foreign investors whose source of funds may be questionable.
  • The 2015 Supreme Court’s ruling exempting the legal profession from financial reporting present a significant hurdle.  Through the practice was in place long before that.  When I became a Realtor in 2009 we Realtors did the FINTRAC.  Though this document, 2001, indicates that legal council were required to the rules of FINTRAC (item 5.b).  I am not aware when this practice changed.

    The SCC left it to Parliament to develop a work around, which has not happened.  This leaves lawyers’ trust account, as they do not scrutinize the source of funds, open to being a vehicle to receive dirty money and therefore launder it.  In the international community Canada is seen as an outlier in this regard.  In BC we have some of the strongest rules for lawyers, yet there is no external reporting and no visibility with respect to what is in a lawyer’s trust account and how it got there.

    “There are a plethora of rules concerning the reporting of deposits made to realtors and brokers, and yet closing funds (95% of the purchase) can arrive to a (lawyer’s) trust account through a ubiquitous electronic transmission that says virtually nothing about the source of the funds.”

    “Further, in B.C. lawyers can represent one party to a sale and be under no obligation to report suspicious transactions, while a B.C. notary may represent the other party to the same transaction and be under an obligation to report.”
  • On a side note, I have had Canadian clients, working overseas, purchase property and obtain a mortgage form a Canadian bank.  Not only did the bank require a detailed tracking of the source of the funds, the funds needed to be in their account 30 days before closing.  Plus, my clients needed to be physically present to sign documents.
  • “The absence of mandatory cash reporting to FinTRAC was a recurring theme in this Review.  Canada has adopted a financial reporting model which includes some sectors of the economy and excludes others.  This ignores the fact that an effective response to organised crime must be uniform across sectors.”  (emphasis added)
  • And lastly, also from the summary; “In response to the threat posed by organised crime and money laundering, enforcement and regulatory agencies in British Columbia are woefully unprepared.  We learned that there are currently no federally funded Royal Canadian Mounted Police (RCMP) resources in B.C. dedicated to criminal money laundering investigations.  This is particularly disappointing when one considers that the issue of money laundering has been front page news in B.C. for almost two years. How can this be?  The answer is hardly simple and involves understanding the siloed nature of the federal response to money laundering.”  (emphasis added)

I wonder if we had some increased and dedicated resources in the past that this would have been front page news many years ago, even decades, and we could be so much further along to fixing the problem.  Perhaps the housing affordability crises on the mainland could have largely been avoided.  Again, I think our governments have dropped the ball on this big time.

In another blog I will look at some of the steps and programs to address the issue, some very recent and in process of being implemented.

     About Gerry                                         Service and Integrity Above All

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