Real estate deals susceptible to laundering due to lax reporting

Watchdog ramps up enforcement after low number of ‘suspicious’ transactions flagged to authorities

Toronto’s booming real estate market is vulnerable to money laundering because real estate agents aren’t notifying authorities of suspicious property transactions, leading the national antimoney laundering agency, Fintrac, to step up its audits of the industry.

Real estate agents are required by federal law to file “suspicious transaction reports.” From 2013 to 2017, there were more than 2.5 million real estate transactions in Canada, according to the Canadian Real Estate Association. In that same five year period, real estate agents and developers made only 197 suspi- cious transactions reports.

“These reports are critical to the centre’s analytical process and the financial intelligence it generates for police, law enforcement and national security agencies,” writes Fintrac in its latest annual report.

“Because suspicious transaction reports have a narrative component, these reports have the potential to provide tremendous intelligence value to the centre.”

The small number of reports shows that relying on real estate agents to catch money launderers isn’t going to work, said John Pasalis, the founder of the real estate analytics website Realosophy. “It’s self-reporting,” he said. “People are not going to police themselves.”

Large commissions create a perverse financial incentive for agents, Pasalis says, deterring them from filing reports.

“In a lot of these cases, the agents know what’s going on,” he said. “The expectation that the people doing it are actually also going to raise their hand and say: ‘By the way, I’m helping someone launder money.’ I mean, it’s a little bit silly, right?”

This month, the parliamentary finance committee recommended stricter anti-money laundering rules for the real estate sector, which it said is “highly vulnerable” to money laundering.

“We see it as a serious issue,” Liberal MP Wayne Easter, chair of the committee, told the Star. “We want to stop those using the real estate industry for ulterior motives.”

Fintrac has stepped up its enforcement efforts, carrying out 152 “compliance evaluations” on real estate professionals in 2016-17, and the industry has responded. Suspicious transaction reports have more than tripled in the last three years, rising from 32 to 115.

“For 2018-2019, Fintrac has planned a significant number of compliance examinations in the real estate sector. Subsequent to these examinations should it be warranted, Fintrac will pursue additional actions to change non-compliant behaviour, including followup examinations, action plans, administrative monetary penalties, or disclosure of non-compliance to law enforcement,” said Fintrac spokesperson Dino Roberge in an email.

The Fintrac audits have focused on Vancouver, where organized crime groups have been using real estate to launder proceeds of drug imports. This has left the Toronto market open to abuse.

International and domestic authorities have been sounding the alarm for years that lax real estate regulations and a lack of transparency are facilitating money laundering and tax evasion across Canada.

The Financial Action Task Force (FATF), an international body that evaluates financial risk for corruption and crime, issued a critical report on Cana- da in 2016, saying this country is not compliant with international guidelines to prevent money laundering, terrorist financing and corruption — especially in the real estate sector.

“It is suspected that criminally inclined real estate professionals, notably real estate lawyers, are used to facilitate money laundering,” states the FATF report on Canada. “Organized crime groups involved in mortgage fraud appear to launder funds through banks, money services businesses, legitimate businesses and trust accounts.” The Canada Revenue Agency has also targeted the real estate sector for tax evasion. In the past three years, CRA audits have identified more than halfa-billion dollars in unpaid taxes from real estate deals.

In 2016, Fintrac published an operational brief on money laundering warning “the real estate sector is highly susceptible for many reasons — for example, easy price manipulation and a variety of complex options for selling/purchasing/ financing with anonymity.”

The brief included a list of “indicators of money laundering in real estate” that include red flags common in the Toronto real estate market: Under and over-valuation, large cash transactions, rapid flipping, anonymous ownership, inflated mortgages, funds from countries with weak anti-money laundering laws, banking secrecy or high levels of political corruption, private sales, complex ownership structures and the use of P.O. boxes instead of real addresses. The OECD and FATF have published similar lists, which include two additional indicators of money laundering not uncommon in Toronto property transactions: buyers charged or convicted for financial crimes and deals that involve disregard for the loss of deposit.

Though Canada is not widely recognized as a good place to launder money or evade taxes, the Panama Papers and Paradise Papers investigations have shown how dirty money is coming here, attracted by weak financial regulations and lax law enforcement.

“Criminals bring illicit funds into the Canadian financial system through methods and techniques that disguise them as legitimate financial transactions. This allows criminals to purchase assets and eventually sell them in order to enjoy the funds generated by what otherwise appear as honest activities,” the Fintrac brief states.

Those who bring dirty money to Canada aren’t getting caught and the few that do, don’t get convicted.

“Legal persons are hardly ever prosecuted for money laundering offences, mainly because of a shortage of adequate resources and expertise,” states the FATF report.

Of the 3,222 money laundering charges laid from 2006-07 to 2015-16, only 343 — or 11 per cent — led to a conviction. Eighty-six per cent, or 2,759 charges, were either withdrawn or stayed, according to data provided by Statistics Canada.

Fintrac says this illicit activity has systemic effects on anyone looking for a place to live in Toronto.