Real estate may be an easy way for criminals to launder money. According to Transparency International, this is a major problem in several countries, including Canada. Transparency International’s March 2017 report, is entitled “Doors Wide Open: Corruption and Real Estate in Four Key Markets”, (the “Report”). The Report looks at the main problems related to real estate and money laundering in Canada, the United Kingdom (UK), Australia, and the United States (US), and concludes that current rules and practices are inadequate to mitigate the risks and detect money laundering in the real estate sector. You can read the report at: www.transparency.org/whatwedo/publication/doors_wide_open_corruption_and_real_estate_in_four_key_markets. There is also a related problem of housing affordability for Canadian residents.
Affordability
Provincial governments are increasingly concerned about housing affordability. Much of the increase in housing prices are reportedly caused by speculators, often foreign buyers, and quite often, criminals looking to launder money. There are many stories of neighbourhoods which remain dark at night, because they have been bought by speculators.
In direct response to the housing affordability problem, in July 2016, British Columbia imposed an additional 15% tax on residential home acquisitions in the Greater Vancouver Regional District (also known as the Metro Vancouver Regional District), for individuals and entities which are not Canadian citizens or residents. There are exemptions for work-permit holders. For similar reasons, in April 2017, Ontario introduced a 15% non-resident tax on residential property located in the Greater Golden Horseshoe Region, for individuals and entities which are not Canadian citizens or residents.
Money laundering
In addition to the affordability problem, money laundering is also a major concern. As an example, money launderers could use the real estate market to launder money, by using illicit funds as a down-payment on the purchase of real estate. Once they mange to do this, the property can then be sold to realize capital gains from what appears to be a legitimate activity. Alternatively, rental income earned from the property would also appear to be legitimate income.
Real estate buyers do not have to provide details of their beneficial owners or their corporate structures. The owner recorded in the land registry system can be a shell company, for example, as only the registered title owner is recorded v. The beneficial owner may be an individual or some other person or entity.
A beneficial owner is a person or entity which is entitled to the benefit of property or other assets, even if their names are not on the title or they are not the registered or documented owner of the asset. For instance, an asset may be bought by a corporation, but there is an underlying trust agreement which provides that another individual truly owns the asset, and is entitled to any income or benefits from the property.
The Report cites the example of property ownership in the Greater Vancouver area. In Transparency International Canada’s analysis of land titles, nearly half of the 100 most valuable properties in Greater Vancouver are held through structures that hide their beneficial owners. Nearly a third of the properties are held through shell companies.
The Report identified 10 problems:
- Canada, like the other 3 countries examined in the Report, fails to extend due diligence to the full range of non-professionals and businesses that may might be involved in the purchase and sale of real estate.
- Only in the UK are professionals involved in real estate closings required to identify beneficial owners. Canada and the other 2 countries do not have this requirement.
- There are few requirements or checks on foreign ownership or individuals who wish to buy real estate. At the time the Report was published, none of the countries required foreign companies to provide information on their beneficial owners when purchasing property. The UK has committed to adopting legislation to establish a registry of beneficial ownership by April 2018.
The UK has already taken steps to achieve this goal, including a public consultation to solicit views on this subject.
- There is an over-reliance on due diligence by financial institutions, with the result that cash transactions are going unnoticed. In Canada, the anti-money laundering regime does not cover lawyers and Quebec notaries, although these individuals play an important role in real estate transactions.
Lawyers are exempt from reporting obligations under Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “AML Act”) because of a 2015 Supreme Court of Canada case which held that these obligations under the AML Act would conflict with a person’s constitutional right to lawyer-client confidentiality. You can read the case here: Canada (Attorney General) v Federation of Law Societies of Canada.
Note however, that Canadian law societies, the self-regulating bodies for the legal profession, have implemented rules forbidding lawyers from accepting large sums of cash from clients, and/or reporting the same to their law societies. The measures implemented by the law societies are widely criticized as inadequate by many who believe that exempting lawyers from reporting to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) creates a loophole which money launderers can exploit. (See “5” below, for example).
- There are insufficient rules on suspicious transaction reports and weak implementation. In Canada, real estate agents and developers, accountants and British Columbia notaries (these professionals are included in the definition of reporting entities in the AML Act) must submit suspicious transaction reports to FINTRAC, if they have reasonable grounds to suspect that a real estate transaction is connected to a money laundering or terrorist financing offence. Lawyers and Quebec notaries do not have this obligation.
- There are no checks on politically exposed persons (PEPs). Canada does not require professionals involved in real estate closings to verify whether parties to the transactions are PEPs.
A PEP is a person who is a past, present or incumbent of a specified or prescribed public role, and prescribed family members of that person. PEPs include heads of state, government ministers and judges.
Reporting entities have prescribed obligations under the AML Act, when dealing with a PEP, as these dealings are inherently high-risk.
- None of the 4 countries have any “fit and proper” tests for professionals working in the real estate sector, in order to assess whether these professionals are aware of their anti-money laundering obligations.
- There is limited understanding of and action on money laundering risks in the sector. National money laundering assessments conducted in all 4 countries have reported high risks of money laundering in the real estate sector. Nonetheless, governments in the 4 countries have been slow to implement mitigation strategies to address the risks identified.
- There is inconsistent supervision of the real estate sector. FINTRAC takes a risk-based approach to supervision of anti-money laundering obligations, but enforcement of the rules in the real estate sector is still limited.
- There is a lack of sanctions. In all 4 countries, supervisory bodies publish little information on their enforcement efforts in the real estate sector. Administrative and criminal sanctions appear to be rare. Several financial institutions have been sanctioned for involvement in money laundering, but very little is known about sanctions of real estate agents, lawyers, accountants and notaries, for facilitating money laundering in the real estate sector.
In summary, of the 10 areas identified above, Canada has severe deficiencies in 4 areas, and significant loopholes exist in the remaining areas.
Although Canada has a robust anti-money laundering and anti-terrorist financing regime, there is much room for improvement.
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