money laundering via real estate

Money laundering via real estate scrutinized

FINTRAC releases guidance for reporting suspicious financial transactions
Tuesday, January 10, 2017

Canada’s oversight body for suspicious financial activity is calling for heightened vigilance to detect money laundering via real estate. Recent guidance from the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) sets out 39 indicators that should prompt parties involved in facilitating real estate deals to contemplate purchasers’ or vendors’ motives.

“FINTRAC, through its compliance examinations, has observed deficiencies in most aspects of the real estate sector’s compliance programs that render it more vulnerable of being used by criminals to launder illicit funds,” states a briefing document released in November 2016. “Although illicit funds seem to be laundered primarily through residential homes, corporate properties also play a role.”

Indeed, qualities that make real estate attractive relative to other investment asset classes may also appeal to criminals. Income properties can leverage ill-begotten seed money to generate ongoing returns, house other profitable illegal activities and/or provide a means for future money laundering through renovation and retrofit projects that simultaneously increase building value.

FINTRAC received 279 reports of questionable practices related to real estate in the 10-year period between 2003 and 2013 — a volume that the new guide characterizes as “minimal filings” suggesting “a clear need for operational guidance” among the extensive range of disciplines obligated under Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) to report suspicious transactions or attempted suspicious transactions.

Mandated parties include: real estate brokers, agents or developers directly involved in a sale; financing entities; and professional services, such as lawyers, notaries and accountants. Beyond that, non-designated observers, including buyers and sellers themselves, are urged to voluntarily submit information that could point to nefarious intent.

Canadian concern is in sync with the international Financial Action Task Force premise that real estate can be relatively easily manipulated to convert unlawful revenue into seemingly legitimate gains. In general, the sector has a comfort level with complicated ownership structures involving anonymous numbered companies and sometimes volatile market dynamics that can help disguise price fixing.

Transactions encompass a number of distinct steps — from deposits to lending to loan repayment — where laundering could occur. Thus, FINTRAC needs the full slate of mandated reporters to build a complete picture.

“Reaching reasonable grounds to suspect that a transaction or attempted transaction is related to the commission or attempted commission of a money laundering offence, and submitting a suspicious transaction report to FINTRAC, requires more than a gut feel or hunch, but does not require evidence that money laundering is actually occurring,” the guidance document counsels.

The 39 indicators outline tactics that should encourage watchfulness and checks for associated patterns of conduct. These are grouped into broader categories of suspicious practices such as: extreme efforts to maintain anonymity; discrepancies between the market value and the loan amount or the officially recorded sale price; unusual loan terms; property flipping; the push for speedy transactions; and circumventing conventional players such as brokers and financial institutions. Observers are also instructed to be wary of foreign buyers or sources of funds from “a jurisdiction with strict bank secrecy laws, weak anti-money laundering schemes or with a high level of political corruption.”

Cash payments are frequently a red flag, but FINTRAC emphasizes that they should not be the only trigger for taking a closer look. “What is required is to consider the facts related to a transaction and its context that can, when taken together, stand out as unusual,” the guidance document reiterates.

Collectively, the 39 indicators form a checklist that parties obligated to report to FINTRAC are urged to consult and incorporate into training programs. In turn, FINTRAC will use the indicators to assess compliance with reporting obligations and whether dubious activities could have reasonably been detected.

With penalties for failing to report up to $2 million and/or five years of imprisonment, individuals and entities designated in the PCMLTFA legislation are urged to pay attention. “Reporting entities should build and maintain training programs that ensure the submission of high-quality suspicious transaction reports,” the guidance document advises.

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