Nearly half of B.C.’s most expensive homes secretly owned, raising fears of money laundering

SAM COOPER
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Published on: December 9, 2016 |

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Critics say the B.C. government must work to close loopholes that allow homeowners in the province to hide their identities behind false fronts such as shell companies.

NDP housing critic David Eby and Green MLA Andrew Weaver called for changes after reading about a Transparency International report that slams Canada for failing to close loopholes that allow homes to be owned through shell companies, trusts and nominees. The report shows almost half of Vancouver’s 100 most expensive houses were bought using shell companies or other methods that obscure the identity of the owners.

Report author Adam Ross found that use of tactics to obscure ownership has increased in the past five years in B.C.  He also concluded the prevalence of opaque ownership in B.C. luxury real estate makes it impossible to measure how much offshore cash is invested in B.C. homes, even though B.C. is attempting to collect data on foreign ownership.

“I hope (the B.C. government) acknowledges that the information they collect now is of limited value,” Ross said.

In examining Vancouver’s 100 most valuable homes, his report found that 46 per cent — amounting to more than
 $1 billion in assets — have opaque ownership. Of the 100 properties, 29 are held through shell companies, at least 11 are owned through nominees (listed as students or housewives on land titles), and at least six are disclosed as being held in trust for anonymous beneficiaries, the report says.

Image plots some of the high-end City of Vancouver homes that are not directly owned. TRANSPARENCY INTERNATIONAL CANADA.

For its part, the B.C. Ministry of Finance pointed to B.C. government changes to the property transfer tax form this year that require foreign buyers to disclose their citizenship. Property buyers are also asked to disclose one particular form of ownership transfer, a so-called bare trust, and whether any of the trustees involved are foreign. And corporations must also provide identification and citizenship for directors, a statement from the ministry said.

But Ross said there are many ways to get around the reporting requirements outlined by the Finance Ministry. For example, some trusts do not have to be disclosed or revealed on land titles. They are private contracts, administered by lawyers adhering to anonymity clauses.

Its believed millions of trusts exist in Canadian companies and property ownerships which even the Canadian Revenue Agency is not informed of, Ross said. Therefore, his research suggests that trusts can be layered on top of ownership structures that are reported to government agencies, providing another layer of anonymity. Ross said a “one line” citizenship disclosure for property transfer documents required by Victoria “is insufficient.”

“An influx of overseas capital is one of several causes of rising property prices (in Vancouver and Toronto), but the extent and impact of foreign investment remains unknown since very little data is collected on property owners,” the report says. “Individuals can use shell companies, trusts and nominees to hide their beneficial interest in Canadian real estate.”

4833 Belmont was bought in 2016 for $31.1 million to a student, most likely a nominee for the true ‘beneficial’ owner, the report says. PNG

NDP MLA Eby said the Transparency International report alarmed him.

“You could own a company through a trust, and that trust could be controlled by your lawyer as a director … and there is no way for the government to identify you as the beneficial owner,” Eby said. “The simple way to fix this is the change recommended in the Transparency International report. Change the Land Title Act and require the beneficial, meaning the actual owner, has to be named on the title.”

Green MLA Weaver said that investors still have ways to evade Victoria’s land title and bare trust disclosure requirements.

“A lot of the disclosure is voluntary, and you can get around that,” Weaver said. “What really needs to be done is to track where the money is coming from, more efficiently.”

The majority owner of a Point Grey mansion at 4833 Belmont that sold earlier this year for a record $31.1 million is a student, property records show.

Transparency International is a non-government coalition that studies global corruption and advocates legal reforms to fight financial crimes. Its report says that compared to other advanced economies, Canada has weak transparency laws.

“Though Canada is not known as a global hub for money laundering 
and tax evasion, our legal framework and lax enforcement environment make it easy for individuals to misuse private companies and trusts,” it says. “Anonymous companies and trusts are the getaway cars of financial crime. … Canada is an increasingly attractive destination for those looking to park and invest the proceeds of crime.”

The report notes that Canada has for unknown reasons failed to live up to its international commitments to close loopholes that are abused by financial criminals, and a resulting “secrecy regime” has emerged.

To illustrate the point, the report notes that “as a testament to the secrecy afforded in Canada, the law firm at the centre of the Panama Papers leak, Mossack Fonseca, marketed Canada to its clients as an attractive place to set up anonymous companies.”

Trusts and shell companies can be used in B.C., the report states, to avoid property transfer taxes. Ross said there are legitimate reasons for commercial real estate to be transferred through companies without triggering property tax. But this “tax loophole is also available to owners of residential property that is held through shell companies,” the report states.

Ross said crime groups in Canada are believed to hide ownership with the means outlined in the report, and a host of factors he looked at suggest the methods are also used by foreign buyers. 

The report notes that a 2016 report from the Paris-based Financial Action Task Force, an inter-government anti-money laundering agency, says corrupt officials from China are known to use obscure ownership structures to launder money in Vancouver real estate. 

It is also impossible, the report states, to judge how many nominees are represented in the sample of 100 luxury homes.

A nominee is a person who appears as owner on title of a home but is not the real buyer. For the purposes of the report, Ross classified people listed on the land title as either “student” or “housewife” as nominees. 

Of the 42 of the 100 luxury properties that changed hands in the past five years, 26 per cent were owned on paper by students or homemakers, the report says. But “only one of the 58 homes bought before 2011 is owned through an obvious nominee,” the report says. 

The report cites a recent Postmedia story that revealed a student from China had bought a Point Grey mansion for $31.1 million.

“Though the value of the transaction was unique, the deal is part of a wider trend whereby unemployed individuals are acquiring luxury property in the city with other people’s capital,” the report says. “These individuals have no source of employment income and are likely nominees for family or friends.”

5695 Newton Wynd is owned by a B.C. numbered company with only one director listed, a lawyer. That, the report says, shields the true owner behind lawyer-client privilege.  ARLEN REDEKOP ARLEN REDEKOP /VANCOUVER SUN

 The use of nominee owners is a common tool for laundering money through real estate, according to an RCMP case study, the report says. Also, “beneficial owners can use nominees to avoid or evade tax by claiming principal residence or first-time homebuyer exemptions,” the report says. 

Shell companies, defined as companies with no business operations that are only used to hold assets, are ripe for abuse in B.C., Ross said.

“A recent study found that of 60 countries around the world — including known tax havens and secrecy jurisdictions — only in Kenya and a select few U.S. states is it easier to set up an untraceable company than it is in Canada,” the report states. “In Canada, more rigorous identity checks are done for individuals getting library cards than for those setting up companies.”

The report recommends the federal government establish a central registry of companies and trusts and their true beneficial owners, which is a measure already taken in the United Kingdom and due to be established in other first-world economies.

“Anonymous companies and trusts deprive treasuries of billions of dollars in tax revenues each year, add considerable cost to law enforcement, and hinder asset recovery,” the report says.

The majority owner of a Point Grey mansion at 4833 Belmont that sold earlier this year for a record $31.1 million is a student, property records show.

Another major theme of the report, Ross said in an interview, is the “gatekeeper” role that Canadian lawyers have in obscure ownership structures.

Lawyers are involved in setting up most shell companies and trusts, and frequently act as nominee shareholders and directors, and hold money in trust for clients, and “are therefore in a unique position to know what they are used for and who they benefit,” the report states.

The report highlights lawyers are exempted from reporting to Canada’s anti-money laundering agency, Fintrac, under a 2015 Supreme Court of Canada ruling.

Canadian lawyers won the case by arguing that attorney-client privilege prevented them from reporting transactions to Fintrac.

One of the case studies in the Transparency International report suggests lawyers are often central to money-laundering schemes. 

In 2009, Toronto lawyer Simon Rosenfeld was convicted of money-laundering charges, the report says. He was arrested after laundering hundreds of thousands through shell companies for an undercover police officer posing as a Columbian drug cartel operative. Rosenfeld bragged to the officer that for lawyers Canada was “20 times safer” than the U.S. to launder money in, and it was a “La La” land where financial crime went unpunished. Rosenfeld also claimed five Vancouver lawyers were running major money laundering operations. The judge noted that Rosenfeld exploited attorney-client privilege “to enhance his money laundering services.”

And the undercover officer testified, “in almost every case we are doing, lawyers are central.”

Ross said that he believes the federal government must find a way to include Canadian lawyers in Fintrac reporting, or many of the loopholes his report reveals, will remain open.

“Looking at these 100 homes is a good indication that we have no way of knowing who really owns property in B.C.,” Ross said. “It should be ringing alarm bells for most Canadians … this is the perfect storm for people outside Canada to come to the weakest link for potential money laundering in real estate.”