Friday, March 31, 2017

How Chinese Investors Are Using Drug Cartel Tactics in the Canadian Real Estate Market

How Chinese Investors Are Using Drug Cartel Tactics in the Canadian Real Estate Market

Money is moving from China to Vancouver in some "inappropriate" ways, and the Chinese government isn't happy about it.

Canada's freakshow real estate market has been drawing a lot of international attention as of late. A few weeks back I talked to an infamous Wall Street short seller who is betting against one Canadian mortgage lender, and claims our housing bubble may be ready to burst.
When I asked why he thinks we're in for a bumpy ride, Marc Cohodes pointed to Chinese capital outflow restrictions, which limit citizens from moving more than $50,000 out of the country per year. He said investors from China are breaking those rules in order to move massive amounts of money into Vancouver real estate, and the Chinese government could choose to crack down on this at any moment.
It turns out Vancouver-based anti-fraud lawyer Christine Duhaime has been keeping a close eye on Chinese millionaires who are maneuvering around those rules when migrating to Canada. Working for clients like the Bank of China, she's successfully gone after at least one person who defaulted on $10 million in Chinese bank loans, and who also spent $8 million on Lower Mainland property. Last month she tweeted the case was "of global significance for China."
Of course the extent to which international millionaires, particularly from China, impact Vancouver's housing market is still up for debate. Preliminary data from the BC provincial government pegs foreign investment at just five percent across Metro Vancouver, though many observers have called out those self-reported numbers as pretty much useless.
But for the Chinese millionaires who do choose to work around capital outflow restrictions, Duhaime says one of the most common and widespread methods is "smurfing." She says it's a tactic also used by Colombian drug lords, and court documents show at least one Canadian bank has helped a woman buy a home this way. VICE reached out to Duhaime to learn more about how this all works, and what Chinese authorities are doing about it.
VICE: Can you break down the basics of smurfing for us?Christine Duhaime: The analogy I use is from the drug trafficking world when they're dealing with bulky amounts of cash. What smurfing does is take these large amounts of money, and breaks it up to reduce the volume of it in order to avoid being detected. A large transaction would require threshold reporting of cash, whereas many little transactions fall below the reporting requirement for anti-money laundering. In the case of drug lords, instead of taking a gym bag full of money to the bank, what they'll do is employ many people to go to all sorts of different banks with smaller amounts of bills and change it over so it's useable to the gang.
How is this tactic used to move money out of China? 
In China, each person is limited to moving up to $50,000 out of the country each year. People move money all the time, sometimes legitimately, in order to get around these currency controls. The way I have seen it being used is that a person will hire or use many, many smurfs who will each fill out a bank form to wire $50,000 each on behalf of another person. In these bank forms, they claim to be the owner of the funds, when in reality they are not. One employment law case found a person from China had a large sum of money that was moved to Vancouver this way. A whole number of people each went to a bank, each made deposits so she could buy her house. When you have transaction after transaction of exactly $50,000, that is suspicious.
Vancouver, still expensive. Photo 
Is this a widespread thing? How would you know?It has to be widespread for this reason: you can't send money out of China with your government identity past the $50,000 point. I have boxes of evidence in my office of wires that Chinese foreign nationals have sent over several years to Canada, all in different names of people and all for the same person. In the situations I have seen, it was employees of the Chinese foreign national that were used to smurf money out of China to Vancouver to buy luxury homes. There are other ways to move more money out with permission from the Chinese government, if there's a legitimate reason like you're involved in litigation or owe alimony payments. But almost nobody ever goes for that permission because they don't want the government to know how much they have, or they do not want to disclose how they came to acquire such a large amount of money.
Is there an above-board way to do this?I can't imagine any. And the reason is because each of those people fill out a form in which they say they're the owner of the $50,000, so they're lying on a bank form. To ask multiple people to do that for you is not an easy thing, it's not a natural way to move money around.
Do you think the Chinese government is going to crack down on this kind of thing?The Chinese are very concerned about it, they definitely don't like it. They are already cracking down on it. And not only that, they are tracing where the funds went that were smurfed out to identify instances where there may be financial crime involved. One of the things that is surprising about people who smurf is that it can be detected going years back. They've approached some countries around the world about who they want back. They've managed to succeed in some cases, to bring people home to prosecute.