IMPACT ANALYSIS: Canadian AML rewrite set to extend compliance burdens to real estate sector

A leading question facing the Canadian government as it works to reform the country’s anti-money laundering (AML) laws is how to tackle money laundering and terrorist financing risks in the real estate sector.

Earlier this year, the federal government issued for consultation proposed amendments to country’s main anti-laundering law, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). The amendments would apply uniformly to all of Canada’s provinces and territories. Industry and government bodies have weighed in on the reforms, issuing recommendations and other input.

The Standing Committee on Finance of the House of Commons recently issued a report entitled Confronting Money Laundering and Terrorist Financing: Moving Canada Forward. The report outlines recommendations amendments to the anti-laundering act and is part of a broader statutory review of the regulatory regime. Pressure to enact The vulnerability of Canada’s real estate industry to money laundering risks, has been the subject of much debate.

While financial institutions such as banks have become subject to ever-growing compliance requirements pertaining to “Know Your Client” due diligence and beneficial ownership information, other participants in the real estate sector are not subject to AML compliance oversight. The discrepancy has raised concerns that money laundering is being conducted through regulatory loopholes. Non-federally regulated lenders such as alternative mortgage lenders have been singled out as a class that should be subject to more stringent AML compliance requirements.

In addition, international agencies such as the Financial Action Task Force (FATF) and Transparency International (TI) have repeatedly called on Canadian agencies to amend AML rules to expand oversight of the real estate industry, which both agencies regard as a high risk for money laundering in Canada. TI, in particular, has asserted that AML compliance in Canada needs to extend beyond financial services firms. The organization has argued that real estate brokerages, property developers and real estate lawyers could be manipulated to facilitate financial crime.

In previous reports, TI has recommended that these entities be subject to reporting requirements for KYC and beneficial ownership. In recent testimony to the House of Commons on the PCMLTFA, TI recommended that the regime should be amended to require real estate entities to identify and maintain accurate records on beneficial ownership. Such an amendment would impose AML compliance obligations on real estate entities on par with those of other federally regulated financial services firms.

Expanding AML obligations The report from the Standing Committee on Finance of the House of Commons explores ways to strengthen anti-money laundering measures in the real estate sector and for alternative mortgage lenders. Some entities currently are subject to compliance obligations under the PCMLTFA. These include real-estate brokers, sales representatives and developers. Other entities such as mortgage insurers and alternative mortgage lenders comprise a significant part of the real estate sector, yet are not overseen as federally regulated financial institutions, or subject to FINTRAC reporting requirements.

These entities have come to be regarded as highly vulnerable to money laundering and terrorist financing risks. Alternative mortgage lenders have become a particular area of concern for regulators in recent years, as more Canadians have turned to these entities, which are not subject to bank rules on underwriting and AML reporting, to seek mortgages.

Earlier this year, the Department of Finance released a report on inherent risks of money laundering and terrorist financing in Canada. Money laundering perpetrated through mortgage fraud was identified as a high threat. The federal government expressed suspicions that unregulated entities such as alternative mortgage lenders are being used as vehicles to launder money in Canada. More alarmingly, the Canadian government also believes that banks, money services businesses, trusts and legitimated businesses are also being used to launder illicit funds. The perceived vulnerability of Canada’s financial system to money laundering has spurred calls for change.

Industry associations such as the Canadian Real Estate Association have called on Canadian lawmakers to expand the types of reporting entities that must report suspicious transactions to FINTRAC, and thereby meet the range of regulatory compliance obligations under the PCMLTFA such as “Know Your Client” requirements. Provincial governments have also given input to the Committee as well. The Government of British Columbia has further recommended that the PCMLTFA be amended to require real estate brokers, representatives, developer and lenders to identify beneficial ownership before conducting real estate transactions.

Compliance considerations The rewrite of the PCMLTFA is focused on updating the Canadian regime to tackle modern day money laundering and terrorist financing risks. While the use of real estate to launder illicit funds is a concern for other countries, the perceived shortcomings in the Canadian AML regime have attracted significant attention. Laundering through real estate transactions has become a major concern for international agencies as well as the Canadian government.

As a result, Canadian lawmakers are moving to close regulatory loopholes through proposed reforms to enable oversight bodies such as FINTRAC to receive higher quality intelligence. These changes will undoubtedly elevate AML compliance requirements for existing as well as new categories of reporting entities. Federally regulated financial institutions such as banks are likely already familiar with AML compliance obligations and most will have the expertise needed to maintain specialized compliance programs.

Similarly, FINTRAC regulated entities such as real estate brokers and large developers, which are also required to comply with some obligations under the PCMLTFA, may be familiar with AML regulatory expectations. However, other entities in the real estate market such as alternative mortgage lenders, management companies and mortgage insurers could be wading into uncharted territory. These firms need to start evaluating how they can meet AML compliance requirements such as KYC and beneficial ownership due diligence.

Moreover, these firms should also ensure that they are able to comply with FINTRAC reporting requirements for suspicious transactions and that their internal controls are set up to undergo compliance reviews by the agency. In its most recent annual report, FINTRAC indicated that it will continue to step up efforts to conduct targeted compliance reviews at individual businesses.

New categories of regulated entities will likely receive extra attention from the agency in future reviews. As a result, real estate businesses must move towards developing and implementing comprehensive AML compliance programs immediately. At a foundational level, businesses should familiarize themselves with what would be expected of them by AML regulators. FINTRAC outlines compliance program requirements under the PCMLTFA.

The guidance covers policies and procedures, ongoing training, risk assessment and review guidelines. As supplementary information on best practices internationally, guidance from the Wolfsberg Group on managing money laundering risks (PDF) can also be used as a reference in designing risk-based compliance programs. Retaining the right expertise, at a senior level, will also crucial in ensuring the effectiveness of any compliance program.

Similar to financial institutions, real estate businesses will likely need to employ experienced personnel beyond the AML officer role. Firms will need to have executives in leadership roles with the necessary expertise to implement compliance programs that address risks pertinent to their businesses, whether it be mortgage insurance, property management or other services related to real estate.

Updating the PCMLTFA to address modern day money laundering risks, particularly in the real estate sector, has proven to be a massive multi-year effort by lawmakers. Bringing the real estate industry in compliance with the proposed reforms, when they are enacted, may prove to be an even bigger task.

Published 06-Dec-2018 by Helen Chan, Regulatory Intelligence
Produced by Thomson Reuters Accelus Regulatory Intelligence 07-Dec-2018

If you are interested in learning more about this news update, please read more here