Fintrac pushes brokers, banks to find criminals, money launderers hiding in real estate: guidance

By Brian Monroe
November 17, 2016

Canada’s financial intelligence unit is alerting financial institutions to the risks of criminals trying to launder money through real estate, in guidance meant to expand the universe of reporting entities and increase the number of suspicious activity reports to provide better leads for investigators.

The Financial Transactions and Reports Analysis Centre of Canada (Fintrac) issued an “Operational Brief” this week focused on criminals using shell companies and luxury real estate to store and legitimize assets, in parallel with global trends. The agency also wanted to bolster the “minimal filings” reported now by parties involved in real estate transactions on suspected money laundering through the sector.  

Moreover, Fintrac wanted to make it clear the obligations go beyond those specifically in real estate.

The guidance covers real estate brokers, agents and developers, as well as other types of reporting entities’ such as banks, securities dealers, trust/loan companies, life insurance companies/brokers/agents, credit unions, “Caisses Populaires,” British Columbia notaries, and accountants that are also involved in financial transactions related to real estate.

Fintrac highlights several issues, including that “financial institutions and securities dealers may under-report because of an erroneous belief that brokers/agents/developers have already submitted suspicious transaction reports.”

In fact, real estate involves many distinct types of financial transactions that may warrant the reporting of suspicious transaction reports.

For example, the “suspicions surrounding deposits for a purchase may be primarily visible to and reported by real estate agents, brokers and developers, whereas those related to loans may be more visible to and reported by financial institutions,” according to Fintrac.

Here are some of the real estate red flags highlighted by Fintrac:

  • Client negotiates a purchase for the market value or above, but requests that a lower value be recorded on documents, and pays the difference “under the table.”
  • Loan/mortgage amount is above the market value of the property/real estate.
  • Client purchases property in someone else’s name such as an associate, nominee, from a company, corporation, trust or a relative (other than a spouse).
  • Client inadequately explains the last minute substitution of the purchasing party’s name.
  • Transaction is completed anonymously, in collusion or innocently, through lawyer or notary. Deposits are made into lawyer’s or notary’s trust account.
  • Company purchasing real estate has a complex ownership structure.
  • Company or individual has no e-mail address, physical address, home or business telephone number (disconnected or fake), company logo, contact person.

Canada’s FIU follows lead of U.S.

Canada’s focus on illicit funds and red flags tied to real estate follows similar moves by the United States’ financial intelligence unit, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

In July, FinCEN expanded its use of a powerful regional tool, the geographic targeting order (GTO), to capture more information on the beneficial owners working with non-bank entities in the real estate sector involved in cash deals, widening prior orders in two major metropolitan areas in Florida and New York, and adding new locales in Texas and California.

Those orders built on an initiative FinCEN started in January to better uncover the nebulous owners of luxury real estate hiding behind anonymous shell companies that could be tied to organized criminal groups, corrupt politicians or even terror groups.

The bureau at the time stated it was more aggressively implementing the use of GTOs in a bid to force title insurance companies to capture and report on individuals behind high-end real estate purchases in all the boroughs of New York City, two more counties in South Florida, five counties in California and a county in Texas.

Roughly a quarter of the beneficial owners of certain real estate transactions identified under the two prior GTOs had already had a suspicious activity report (SAR) filed on them, FinCEN said in July. As well, the prior GTOs helped link previously unconnected activity to the true purchasers of luxury real estate in Manhattan and Miami.

More reports could mean more connections

With a greater focus on real estate red flags, Canada could find more connections to criminals hidden among trillions of dollars in sales.

Overall, the Canadian real estate industry consists of approximately 100,000 brokers and sales representatives working through many real estate boards and associations across the country.

Canadian Mortgage and Housing (CMHC) statistics indicate that in a 10-year period, over $9 trillion of mortgage credits were negotiated and up to approximately 5 million sales took place through Multiple Listing Services (MLS).

But there is a corresponding lack of reports of aberrant activity for such a large sector, according to Fintrac.

In contrast, the agency “received, during approximately the same 10-year period (2003 to 2013), 127 suspicious transaction reports nationally by real estate brokers, agents or developers, and 152 by other types of reporting entities also involved in real estate transactions, such as banks, securities dealers, trust/loan companies, etc.”

According to Fintrac, that needs to change.

Fintrac also states that how firms operationalize the guidance, along with the strength of their overall anti-money laundering (AML) programs, will be used to “assess compliance with reporting obligations.”