Real Estate Spotlight Series: Tackling money laundering in Canada

The suspicion that runaway property prices in major Canadian cities are driven, at least in part, by illicit international investment won’t go away. According to a report by Transparency International, almost half of the most valuable residences in Greater Vancouver area are held through corporate structures that hide their ultimate owner, including a third that are owned by shell companies.

Many of these, of course, will be legitimate transactions, but some will not. Money laundering through real estate is on the increase – according to the United Nations, it has reached the scale of around US$1.6 trillion a year (that’s 3% of the world’s total GDP). While governments and regulators around the world have been increasingly focused on tackling the more traditional routes for money laundering – resulting in a raft of new anti-money laundering (AML) legislation – money laundering through real estate transactions has remained, until now, largely untouched.

Why has real estate become a target for money launderers? The answer (although not the solution) is relatively simple – money launderers are opportunists and the real estate sector is a weak link when it comes to regulation. A property purchase can move significant amounts of money around the world in a single transaction – and relatively lax due diligence mean that it’s easy to hide the identity of the parties involved.

Transparency International’s assessment of AML requirements in Canada and three other countries – the US, UK and Australia – found a number of failings that leave the real estate sector open to money laundering. Canada was by no means the worst offender – its defenses were judged stronger than those in the US and Australia – but significant loopholes remain. There’s no requirement for real estate professionals to identify the beneficial owner of a company that buys real estate, for example, and while 20,000 Canadian real estate agents, brokers and developers, and accountants are obliged to report large cash deals and suspicious transactions to the Financial Transactions and Reports Analysis Centre for Canada (FINTRAC), enforcement of AML requirements in Canada has been poor.

But that looks likely to change very soon. Around the world, regulators and governments have begun to pay much greater attention to the real estate sector as a conduit for money laundering. Their solution to the problem is to look at ways of applying AML requirements already targeted at banks to professionals in the real estate chain.

Canada is no exception.  In 2016, the Financial Action Task Force (FATF) ordered FINTRAC to improve its supervision of the real estate sector, and authorized it to request and retain from any reporting entity information related to suspicions of money laundering. This has been a grey area in practice – recently, for example, the Ontario Senior Court refused an application that would have forced two banks to disclose financial information relating to one of their client,  which is facing a private prosecution relating to suspected money laundering.

But while the argument rages over what the FATF viewpoint might mean in practice, the message is clear – real estate professionals will be expected to address money laundering risks.

Over the past few months we have complied a new report, setting out how AML requirements in major markets are increasingly seeping into real estate. Money Laundering and Real Estate outlines the steps that have already been taken by regulators and governments to address money laundering, and provides a timely warning that real estate professionals need to be well-prepared to meet ever more stringent AML requirements in the near future.

In practice, this means that real estate professionals, including agents, brokers and management companies, will need to have the processes and systems in place to meet AML compliance requirements such as Know Your Customer, Politically Exposed Persons checks and beneficial ownership due diligence.  That will require investment, in education and training as well as IT. But it’s not something that the real estate sector can avoid; AML legislation will happen, it’s only a matter of time.

Download the full report