AML Compliance, Real Estate, & Canada’s Wild West


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‘Shadow flipping,’ ‘wholesaling’ boost AML concerns even higher

Luxury real estate purchases—with their lax AML enforcement—have been a favorite of money launderers for a long time, but that joyride is getting squeezed a bit now due to high-profile negative press, global AML scandals, and renewed attention by authorities and politicians. And Canada is providing a fascinating case study.

Vancouver—dubbed Canada’s Wild West for real estate by some—is the epicenter due to its booming market, its luxury real estate, and its appeal to foreigners, some of whom are looking to spirit vast illicit sums out of cash out of their home countries. For example, according to a report in the Vancouver Sun, “the average price of a detached home in Vancouver is $1,816,487, according to the Real Estate Board of Greater Vancouver or about $1.37 million US.”

Part of the AML issue is the prevalence of all-cash transactions that are not vetted through adequate customer due-diligence processes. And even though Fintrac, Canada’s anti-money laundering agency, has slowly begun to turn more attention to enforcement in real estate, the industry is pushing back.

In April, Real Estate Professional (a Canadian trade magazine) ran a story in which real-estate agents vented about Fintrac “meddling” in their industry and about the colossal unfairness of real-estate agents being held accountable for AML Compliance.

The article quoted industry follower Bill Johnston as follows: “Downloading money laundering and terrorist detection obligations onto thousands of brokerages, financial institutions … and others is among the stupidest things the Harper government did. I am all for nabbing terrorists and money launderers, but the job should be assigned to professionals –e.g. RCMP, CSIS, etc.–not amateurs.”

The commenters on this real-estate trade site echo those frustrations—but they make no acknowledgement of the extraordinary ease and prevalence of money laundering through real-estate purchases in the absence of AML controls.

The Province newspaper, a British Columbia daily, has run numerous stories on the Vancouver real-estate market and its susceptibility to predatory practices, money laundering, and an anything-goes environment devoid of regulatory enforcement.

One of the most volatile topics in 2016 has been the surge in the practice called “shadow flipping,” or real-estate contract assignment. Shadow flipping is the practice of reselling a property before a deal closes—often with little to no disclosure to the seller. The Globe and Mail described the practice, parts of which are legal and parts of which are in legal and ethical gray areas.

‘Wholesaling’ provides easy cover for money laundering

There is a related but entirely unregulated angle, however, that is highly susceptible to money laundering, and that is the practice of “unlicensed wholesaling,” which Province reporter Sam Cooper describes as “an illicit and predatory business that is quickly growing in Metro Vancouver because enforcement is virtually non-existent.”

Because these so-called wholesalers are unlicensed, “they have no obligation to identify their background investors or reveal the source of funds to Canadian authorities who fight money laundering,” Cooper writes. Wholesalers go door to door or leave flyers offering “discreet” and “confidential” cash purchases, often under the guise of being a family looking to purchase and live in a home.

The process, according to Cooper’s confidential source, works like this: “The investor behind the unlicensed broker targets a block, often with older homes, and gives the wholesaler cash in a legal trust. The wholesaler persuades a homeowner to sell, offering immediate cash, no subjects, no home inspections, and savings on realtor fees.” The investor then moves the house through various contract flippers until it reaches an end buyer, many of whom are from abroad and are willing to pay a premium price for a quick and easy purchase in a hot market.

While it’s illegal for wholesalers to buy and sell privately on behalf of hidden investors with offshore cash, little to no enforcement has helped spur the practice of this wholesaling. That appears to be changing, however, due to a newly intense press spotlight, interest from prominent members of the Legislative Assembly, and housing markets in Vancouver and Toronto that are perceived as detrimental to many local interests and community health.

An interesting question not addressed in the various press coverage is the disposition of the cash paid to the original sellers of these wholesaled homes. Are the original sellers depositing it in their own bank accounts and thus generating AML flags based on their own actions? Where does that paper trail go? In the past, Fintrac has wielded a light hand relative to AML enforcement in the real-estate industry in Canada, but the public and press outcry has been picking up steam. Stay tuned…this looks to be an interesting AML topic for the future, and not just in Canada.

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