Canadian real estate sector open to money laundering due to weak AML regime, watchdog says

Canada’s real estate sector is a prime target for money laundering by foreign nationals, due to “insufficient rules and enforcement practices,” anti-corruption watchdog Transparency International (TI) said in a report on laundering and real estate published last week.

The report identified regulatory weaknesses in Canada, Australia, the United States, and United Kingdom related to due-diligence and reporting by gatekeepers – such as real estate agents, lawyers, and accountants – who facilitate real estate transactions that can enable money laundering.

In Canada, Transparency International said it analysed land-title records for Vancouver’s 100 most valuable residential properties, and found that “nearly half were held through structures that hide their beneficial owners”. One third of the properties were owned through shell companies, with at least 11 percent showing a nominee listed on the title, the report added.

“The ease with which anonymous companies or trusts can acquire property and launder money is directly related to the insufficient rules and enforcement practices in attractive markets,” Transparency International (TI) said. “In many cases, property is purchased through anonymous shell companies or trusts without undergoing proper due diligence by the professionals involved in the deal.”

In a statement to Regulatory Intelligence, the Financial Transactions and Reports Analysis Center (FINTRAC), Canada’s anti-money laundering (AML) regulator, stressed that Canada’s real estate sector had specific AML obligations, which include establishing a compliance program, developing policies and procedures, identifying clients, keeping records, and reporting certain types of financial transactions, including suspicious transactions and large cash transactions of C$10,000 or more. The agency highlighted its recent operational brief for the real estate sector (PDF), which aimed to help reporting entities involved in real estate meet their AML obligations.

“FINTRAC works continuously to improve the understanding of the [Proceeds of Crime (Money Laundering) and Terrorist Financing Act] PCMLTFA obligations within the real estate sector by providing guidance to the industry,” the agency said.

Inadequate regulatory measures

Canadian authorities have failed to mitigate money laundering risks in real estate, the Transparency International report said, noting that Canada’s 2015 AML self-assessment (PDF) highlighted the criminal use of shell companies and identified real estate agents and developers as highly exposed to money laundering risk. “Despite that risk, the current legal framework does not include adequate mitigation measures, such as making it mandatory for these professionals to identify customers’ beneficial owners,” the anti-corruption watchdog said. “Until now, the findings of the risk assessment do not seem to have been used to inform the adoption of new rules and guidelines by supervisory agencies.”
TI detailed the following anti-money laundering (AML) weaknesses that were specific to Canada:

• Inadequate coverage of AML provisions: Canadian AML laws do cover real estate agents, brokers, developers, British Columbia notaries, and accountants, but lawyers, law firms, and Quebec notaries are “not obliged to conduct due diligence or submit suspicious or large-cash transaction reports,” TI said. Additionally, Canadian lawyers and their firms are not required to establish AML programs or conduct due diligence on clients involved in real estate transactions. In 2015, the Supreme Court of Canada ruled that such a requirement was unconstitutional, because it interfered with lawyer-client confidentiality. TI noted that provincial self- governing law societies have introduced know-your-customer (KYC) provisions for lawyers and firms, but stressed that “the lack of an anti-money laundering obligation is a major loophole”.

• Insufficient beneficial ownership identification for legal entities, trusts, and other legal arrangements: Canadian AML regulations do not require non-financial professionals involved in real estate closings to identify beneficial owners when conducting customer due diligence, the report noted. “Very often anonymous companies invest in real estate in a foreign country without having to register with the company register or disclose any data regarding their ownership and control structure to either the company or land registry,” the report said. “If in the country where the company was incorporated such data are also not collected or recorded (for example in the U.S. state of Delaware) or not made available (as in Jersey), it becomes nearly impossible to know who the real owner of a company is and consequently who the owner of a given property is, whether or not the source of their funds is licit.”

• Few checks on foreign-company access to real estate: Foreign companies are not subject to registration requirements when purchasing Canadian property, and Canadian land-title offices do not hold beneficial ownership information. “Only information about the title holder – which can be a shell company, a trust or a nominee – is recorded,” TI said. A September 2016 evaluation report (PDF) by the Financial Action Task Force (FATF), the international AML standard-setter, noted cases of Chinese officials laundering illicit funds through property in Vancouver. The Chinese government has identified Canada as a top destination for funds taken by corrupt officials.

• Over-reliance on financial institution due diligence: Noting that Canada’s AML framework relied heavily on financial institutions to conduct background checks for real estate transactions, TI stressed that increasingly common cash purchases were escaping scrutiny. “This is particularly the case in purchases of high-end property by foreigners,” it said. “These transactions may represent an increased risk of money laundering where foreign buyers come from countries with high levels of illicit financial outflows.”

• Insufficient transaction reporting: While all Canadian reporting entities – including real estate representatives, developers, British Columbia notaries, and accountants – are required to submit a suspicious transaction report (STR) when they suspect money laundering, such reporting is negligible in the real estate sector, the report noted. Out of approximately 5 million residential property sales (PDF) in the decade between 2004 and 2014, Canadian property brokers, and other entities involved in real estate closings, filed only 279 STRs, according to a November 2016 operational brief (PDF) by the Financial Transactions and Reports Analysis Center (FINTRAC), Canada’s financial intelligence unit (FIU).

• Weak or no checks on politically exposed persons and their associates: Canadian real estate agents and developers, notaries, lawyers, and accountants are not required to conduct enhanced due diligence in the case of politically exposed persons (PEPs) and associates, TI noted. “Recent high profile international corruption cases have demonstrated that corrupt politically exposed persons (PEPs) have obtained property around the world,” the report said.

• No fit-and-proper test: Entry standards for Canadian real estate professionals differ across provincial jurisdictions and professions, but there is no requirement for individuals involved in property transactions to register with FINTRAC or to undertake fit-and-proper tests. Policymakers should consider introducing mandatory AML registration, accompanied by a fit-and-proper test, for those involved in real estate, Transparency International said. “The ‘fit and proper’ test would check that real estate agents and others operating in the sector meet the requirements of anti-money laundering regulations and are able to understand and fulfil their obligations under the law.”
• Insufficient enforcement: Fines in Canada for AML non-compliance have typically been in the thousands of dollars, which is lower than a commission on a single property sale, TI noted. The FATF’s recent evaluation of Canada also criticised FINTRAC’s sanctioning regime as inadequately dissuasive.

Published 05-Apr-2017 by
Daniel Seleanu, Regulatory Intelligence

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