Federal audit takes aim at "money-laundering real estate transactions" in Vancouver area

Federal audit takes aim at money-laundering

 real estate transactions in Vancouver area

 

Vancouver’s booming real estate industry is being targeted in a federal money-laundering audit that could potentially lead to massive fines and jail time for realtors.

Ottawa’s increased examination of Vancouver real estate deals has been under way for several months and has been revealed in a Province investigation that obtained rare internal data and risk-analysis reports from Canada’s financial intelligence unit, Fintrac.

Documents obtained under access to information law — and The Province’s interviews with a wide array of B.C. real estate professionals, money laundering experts and Fintrac officials — suggest dramatic under-reporting of large cash transactions and suspicious transactions that realtors and developers are responsible to make to the federal government.

“We have significantly increased our examinations in the Vancouver area,” a Fintrac official said. “Our compliance people are not happy.”

The Vancouver audit comes in the context of Fintrac documents that state Canada’s real estate sector is seen as “higher risk” for money laundering than all other sectors — such as banks, casinos, and money wiring services — that are required to report to Fintrac to combat money laundering.

These professionals must file reports for cash transactions over $10,000, and more importantly from Fintrac’s perspective, suspicious transactions.

Fintrac contracted Toronto accounting firm Grant Thornton to investigate all reporting sectors in 2014, but asked the firm to prioritize the real estate sector. Specific money laundering risks in Canadian real estate, according to the independent report obtained by The Province, include buyer concealment loopholes involving lawyers and legal trust funds, a “high number of cash transactions” and a lack of “quality or ethics infrastructure,” and “disengagement” with compliance rules.

“The purchase of Canadian real estate assets with offshore money and or by offshore persons was noted as a significant risk factor,” the report said.

Despite these alleged risks, data obtained by The Province shows that from January 2012 through May 2015 only two large cash transaction reports and five suspicious transaction reports were filed by realtors to Fintrac in the surging Vancouver, Richmond, West Vancouver and North Vancouver property markets.

In comparison, in that time period financial institutions in Vancouver reported 1,278,804 large cash transactions, and 8,246 suspicious transactions, according to Fintrac data. Fintrac is satisfied with reporting compliance from financial institutions, an official said. However, internal Fintrac documents say that banks are erring by not scrutinizing real estate as a high-risk money-laundering sector.

A previous investigation by The Province showed Vancouver’s airport leads North America by a wide margin in the millions of undeclared cash seized from Chinese citizens.

Canadian Border Services data showed that between June 2012 and December 2014 about $10 million in undeclared cash was discovered and then returned to Chinese citizens at YVR.

Experts told The Province those figures represent a fraction of the illicit money from China believed to be pouring into B.C. to be laundered in real estate, in the wake of an aggressive Chinese Communist Party anti-corruption campaign.

The same experts have told The Province that the two large cash transactions reported by Vancouver-area realtors do not add up with anecdotal reports of large cash buys taking place.

Kim Marsh, a private money laundering investigator and former RCMP international crime unit boss who tracks dirty money in Vancouver property for Chinese institutions that want to recover laundered assets, told The Province he currently has at least seven large cash transaction investigations open, compared to the two reports made since 2012 by Vancouver realtors. One file involves four expensive homes purchased for a Chinese buyer in Richmond through a Chinese lawyer within eight weeks, in 2014.

“Why weren’t they reported?” Marsh said.

“For Vancouver realtors to only file seven reports to Fintrac since 2012, that is suspicious,” said Ross Kay, a former realtor who now is a real estate consultant in Ontario.

However, the B.C. real estate industry argues that Fintrac has not provided any evidence of money-laundering risk or large cash transactions taking place in B.C., and that most realtors no longer handle cash over $10,000 because lawyers and notaries almost always handle the large sums in real estate deals. Lawyers are shielded from Fintrac reporting laws.

“I can only speak to what my brokerage does,” said Scott Russell, president of the B.C. Real Estate Association, who owns a Richmond brokerage. “And other brokerages I know don’t accept cash, so that could be the reason.”

Regarding suspicious transaction reporting, Russell said he was aware of Fintrac’s website guidelines but was hard pressed to think of red flags that would trigger a report with Fintrac.

“I’m trying to think of something,” he said. “We offer a level of protection because we don’t handle the cash, so I’m kind of challenged by it.”

Russell said Canadian realtors want to comply with Fintrac, but the government has not been good about consulting with the industry.

“We’re hearing that we are a targeted industry, so from my position, if it is more clear about where we are failing, then let us know,” Russell said. “You certainly have some information that I wasn’t aware of.”

The Province’s investigation, in a number of interviews with B.C. realtors, found a vast disconnect between the industry’s understanding of Fintrac’s legal expectations and the reporting regulations outlined on Fintrac’s website.

If realtors fail to report large cash transactions or suspicious deals they can be fined $500,000 per instance and face five-year jail terms, if they are found to be criminally complicit. But suspicious transaction report filing does not even seem to be on B.C. realtors’ radar.

Most realtors told The Province they believed they were fulfilling obligations by filing “Fintrac” forms for every deal with their brokerages. In these forms realtors attempt to verify the client’s identity and principal form of business.

However, this basic level of record keeping “is just a client ID and not a Fintrac report,” a Fintrac official told The Province.

Some realtors acknowledged they are not incentivized to probe deals.

“It would be very easy to fool an agent,” one experienced realtor told The Province. “We are busy by nature and we live off commissions. How much time would you spend investigating identity, profession, and source of income?”

Another prominent realtor with a large firm that markets Vancouver homes mostly to buyers from China said he understands his obligation with Fintrac is to simply file brokerage client identification forms based “on what we are told” and that the responsibility for determining whether the client information is true or false falls to Canadian government agencies.

Another brokerage manager said Fintrac’s reporting requirements are onerous and its website is flawed, and he claimed to have only ever met one B.C. brokerage manager who has filed a suspicious transaction report.

He said most brokerage managers are unaware of Fintrac’s website and its exhaustive list of red flags for fishy deals.

Fintrac’s website instructions state that if a realtor has a reasonable suspicion that questionable money is involved in a deal, it doesn’t matter if the realtor handles any money, how much the deal is for, or if the realtor receives a commission — the deal must be reported.

The manager criticized a lack of money-laundering prosecutions and fines made by Fintrac, while realtors have filed “millions of pages of forms that no one will ever see.”

“If the public knew how ineffective and costly Fintrac is, they would riot,” the manager said. He said he did not want to be named because “it would probably result in a Fintrac audit.”

Of about 100,000 realtors operating across Canada, Fintrac has fined only seven realtors, for about $10,000 in each case, an official confirmed.

Kay, the Ontario-based consultant, said he believes B.C. realtors are trying to steer attention away from suspicious transaction reporting requirements by claiming they never handle cash over $10,000. In Kay’s opinion, many of the residential property investment deals reportedly occurring in the Vancouver area would clearly include red flags.

“I’m shocked if B.C. realtors don’t get this,” Kay said. “My argument is that a non-Canadian buyer would meet so many of the warnings included in the Fintrac guide that it would be practically impossible not to report.”

A Fintrac official said part of the reason Vancouver is being probed is “the result of what we are seeing in the public environment there.”

“Our compliance people are saying, ‘We’ve tried to do a lot in educational awareness, and we have a lot more to do. And at the same time we’re glad examinations are ramping up.’”

scooper@theprovince.com