By Tony Zerucha
Canada is not alone when it comes to weak enforcement of money laundering through real estate, Accuity’s global head of strategic affairs Henry Balani said.
Mr. Balani said Accuity provides sanction tools and consulting advice for financial services companies including real estate firms. Working across Canada, Australia, the United States and the United Kingdom, they ensure transactions are screened for AML provisions
Money launderers find real estate to be a popular way of moving funds, Mr. Balani said, citing United Nations estimates of its worth at USD $1.6 trillion (roughly three per cent of global GDP) each year. Transparency International agrees. In a G20 paper on national approaches to tackling the problem, the global coalition combating corruption said Canada is not alone in its insufficient approach to a growing issue.
There are several reasons why real estate is a magnet for money laundering, Mr. Balani said. One is the structure of most transactions. They are usually done through offshore or shell companies that shield the identities the ultimate beneficial owners (UBO).
“They don’t necessarily declare who the UBOs are,” Mr. Balani said. “It’s easy to structure real estate transactions through those shell companies.”
The global nature of real estate means foreign capital often flows from the nation of origin through places like New York and on to their final destination. That is often the case when Chinese investors buy up property in Vancouver and Toronto.
The Canadian government requires little from foreign companies and actually encourages the practice by offering a path to permanent residency and citizenship for people investing certain amounts in a business or property, Mr. Balani said.
Real estate agents often ignore their responsibilities, he added. While financial institutions are required to file suspicious transaction reports when they see all-cash or hurried transactions, agents are reluctant to risk commissions by asking too many questions. They are likely to get away with it as banks are much more likely to be penalized than real estate firms are.
“The real estate industry, in general, has a legal obligation to report suspicious transactions but they have poor training and little incentive to report,” Mr. Balani said. With many players involved – agents, brokers, lawyers, banks, insurance companies, it’s easy to shirk responsibility while doing just enough to avoid sanction.
Public pressure can help increase government attention on money laundering in real estate, Mr. Balani said. As more people are priced out of markets they should be pressuring legislators to take action.
“Historically money launderers have looked at high-end real estate,” he explained. “The mid and lower tiers haven’t gone up as much but that is changing.”
The Financial Action Task Force (FATF) aims to help countries combat money laundering, Mr. Balani said. An inter-governmental body established in 1989 by the Ministers of its Member jurisdictions, the FATF’s objectives include setting standards and promoting effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. The FATF is a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
“It’s a pan-governmental organization that guides countries to counter money laundering,” Mr. Balani said. “They work with the IMF and World Bank to provide guidance to member countries.”
An FATF assessment of Canada’s approach to dealing with the issue exposed significant deficiencies and a lack of controls to identify money laundering through real estate, Mr. Balani said. Negative assessments can land a country on a grey or blacklist and that can affect economic development opportunities.
The suggestion that money laundering through real estate costs $1.6 trillion may be underestimating the problem, Mr. Balani said.
“I believe it is actually much higher, three times, four times higher. The fines and enforcements you see against banks you don’t see against the real estate industry. Since 2013 there have been three specific enforcement actions related to money laundering in Canada, five in the United States, three in Canada and none in Australia.”
And when a fine may amount to $11,000 and the chances of being dinged are so low, whats the incentive to comply?
“It’s nothing compared to a commission,” Mr. Balani said.