Real estate and money laundering – spotlight on Canada


The real estate sector was at the centre of several discussions this year, mainly related to the perceived lack of transparency and high exposure to money laundering risk. Various initiatives have subsequently been initiated by US, UK and Canadian regulators related to high property valuations in New York, Miami, London and Vancouver respectively, including investigations on shell companies and offshore ownership and the announcement of temporary reporting requirements by FINCEN on US based title insurance firms (1).  Additionally, real estate associations are educating their members on money laundering risks.

Overview of AML regulation in Canadian real estate

Canadian AML and anti-terrorist laws enacted more than 15 years ago established significant obligations on real estate firms, such as identifying clients, keeping records, and reporting large cash deals and suspicious transactions to The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).  Approximately 20,000 Canadian real estate companies fall under these regulations which put them at risk of censure as follows:

  • If a report on a large cash deal or suspicious transaction is provided and it shows lack of compliance then there is a risk that FINTRAC will require an on-site examination.
  • If a report is not provided, then it may raise a bigger flag with FINTRAC and the on-site examination will be more likely to happen
  • If violations are discovered, then fines up to $100K per violation for individuals and up to $500K for the company may be levied.

Despite this, there have been significant gaps in the adoption of these requirements to date:

The Canadian Federal AML agency conducted a survey on the number of reports filed by 1,000 real estate companies from 2013-2016 and discovered that only one third of the reports that they had expected had been filed (2).

  • 25% of the respondents indicated that they had not yet fully implemented a compliance regime, with some stating they had just started or have yet to begin.
  • Canadian Federal AML agency conducted 800 examinations from 2012-2016 and concluded that 60% of those companies reviewed had “significant” or “very significant” deficiencies in their compliance processes.

These statistics reflect the struggle that the real estate sector faces in implementing a compliance regime. The regulations that the real estate sector falls under have the same requirements that apply to banks and casinos. So this does raise questions as to how can we expect real estate companies, which sometimes are just solo brokers, to implement a compliance regime?

Compounding this struggle is the lack of incentive for real estate companies to implement a compliance program. Since 2008, only 12 fines have been issued by FINTRAC in Canada, with most of them well under $100,000.

However, this lax enforcement may soon come to an end.  In September 2016, the Financial Action Task Force (FATF) published a report in which the Canadian real estate sector and FINTRAC are targeted, specifically authorizing FINTRAC to “request and obtain from any reporting entity further information related to suspicions of money laundering, predicated offences and terrorist financing” and directing FINTRAC to apply “more intensive supervisory measures” to the real estate sector while developing deeper expertise in this segment. The Canadian Real Estate Association (CREA) denounced the lack of answer from FINTRAC when asked for more guidance in terms of interpretation of this legal text.

In our view, FATF’s focus on Canada marks an overdue shift in regulatory focus on money laundering via the real estate sector, which for some time has been recognized as one proxy of many (including art, trade, jewelry) for money laundering and we expect other local regulators to tighten their compliance regimes for the real estate sector.

It is interesting to note that in the FINCEN trial period, US estate agents moved away from residential cash buyers and refocused on corporate deals. Faced with the prospect of compliance costs and fines associated with doing higher risk business, the sector opted to focus on the corporate segment where risks were generally lower. The recognition is that in order to meet regulatory standards for compliance, due diligence and KYC checks need to be performed before engaging in new business and the corporate segment seems to offer a lower risk alternative.

Learn how our Online Compliance look-up tool can help real estate professionals conduct the due diligence and investigation activities required to engage in new business relationships.

 

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