Money Laundering And The Obligations Of Real Estate Agents

Money Laundering And The Obligations Of Real Estate Agents

Roger Pettingell Sarasota Real Estate

A real estate brokerage in Burnaby, B.C. was recently fined $230,423 for failing to comply with its obligations under Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

The violations included failing to submit a suspicious transaction report to FINTRAC, the anti-money laundering and anti-terrorist financing regulator, when “there were reasonable grounds to suspect that transactions were related to a money laundering offence.” The company also failed to ensure that its appointed compliance officer was responsible for implementing a compliance program, and failed to consistently apply compliance policies and procedures, including record keeping.

The fine may be the tip of the iceberg for Canada’s real estate industry as calls for a crack-down on money laundering in real estate intensify. Recently the Cullen Commission, led by former Supreme Count Justice Austin Cullen, completed a three-year investigation into money laundering in real estate and other industries in B.C. It found that billions of dollars are “washed” every year – and that’s just in B.C. The report says everyone from the federal and provincial governments to the police, the real estate and mortgage industries, banks, lawyers and casinos must do a much better job to address the problem.

“The B.C. real estate sector is highly vulnerable to money laundering. These vulnerabilities are exacerbated by the persistent adherence of some real estate professionals to outdated attitudes and myths about what money laundering is and how it occurs in their industry,” says the Cullen Commission report. “While money laundering in the real estate sector does not conjure up dramatic images of hockey bags full of cash being emptied onto the desks of Realtors, that does not mean money laundering is not occurring.”

It notes that proceeds from crime are often invested in real estate, “providing the criminal with a safe place to store their wealth and a façade of legitimacy when the property is eventually sold. Buying and selling a series of properties can further obscure the criminal origins of the funds.”

But although real estate licensees are obliged by law to do so, reporting suspicious real estate transactions to the regulator is “virtually non-existent and is nowhere near commensurate with the level of money laundering risk in the sector,” says the report. For example, only 15 reports were filed in 2020-21.

“Most real estate agents and brokers have no background in compliance or anti-money laundering measures, and there is significant frustration in the industry about a lack of guidance. There is a need for clear, simple guidance from FINTRAC about when transactions must be reported,” says the report.

Realtors have long resisted the idea that they should be on the front lines investigating suspicious transactions. They say the regulations are confusing and cumbersome, and complain that the FINTRAC audit system “failed to educate brokerages on how to improve their anti-money laundering system or reporting process beyond ‘bureaucratic trivia’ such as using the right abbreviations and terms,” says the report.

Realtors told the commission that “the existing FINTRAC guidance was excessively long, complicated and theoretical, and that its applicably to the on-the-ground experience of real estate agents and brokers was too opaque.”
The British Columbia Real Estate Association said in a submission to the commission that Realtors are concerned about the confidentiality they owe their clients and may feel that they are betraying their trust if they file a suspicious transaction report.

There is currently no requirement in the regulations for Realtors to ask clients about the source of their funds for the transaction. “As a result, real estate professionals have to use their judgment to assess the money laundering risk of a particular client or transaction and decide whether enhanced inquiries are required. It seems to me to be intuitive that, given the reluctance expressed by Realtors to ask these types of questions, they will often err on the side of not pursing the issue. It seems to me the simplest way to overcome these scruples and to gain insight into source of funds is to make such an inquiry mandatory,” says Cullen. He says the U.K. has such a requirement, where clients are asked about their source of funds by their estate agent, mortgage broker and financial institution.

Real estate agents also complain that dealing with financial report obligations is “doing the government’s job” or that it’s lawyers and/or the financial institutions that should carry the burden, since they deal with most of the money in a transaction.

“These objections ignore the insight into a transaction and a client’s motivations that are available to real estate licensees, and in some cases uniquely to them,” says the report. “While financial institutions do have some responsibilities (under the legislation), their lens into a transaction is limited. Financial institutions do not have the same amount of face-to-face interaction with clients that real estate licensees do. They are usually not privy to the stated buying preferences of clients, their expressed financial status or the presence of third parties in a transaction.”

So like it or not, real estate agents and brokers are likely to get even more pressure to report suspicious transactions. The Cullen Commission also recommended requiring that employees of real estate developers be licenced. They currently do not need a real estate license and therefore fall outside of the reporting obligations. The Ontario Real Estate Association is also calling on its provincial government to require “employees of developers and For Sale By Owner operators” to become regulated.

Despite the amount of money laundering that’s going on in the B.C. real estate sector, Cullen says, “While the impact of money laundering and anti-money laundering measures on real estate prices is something that would benefit from further study, I am unable to conclude that money laundering is a significant cause of housing unaffordability in the residential real estate market.”


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