Monday, October 26, 2020

Money laundering hikes B.C. real estate prices: report

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The cost of buying a home in B.C. increased by as much as five per cent last year due to more than $5 billion in dirty money from organized crime laundered through the province’s real estate sector, according to a new expert panel report.

Former deputy attorney general Maureen Maloney chaired the panel on money laundering, which released a report Thursday that concluded it “cautiously estimates that almost five per cent of the value of real estate transactions in the province result from money laundering investment.”

In addition, she concluded: “The estimated impact of that would be to increase housing prices by about five per cent.”

“Successfully reducing money laundering investment in B.C. real estate should have modest but observable impact on housing affordability,” read the Maloney report.

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She said actual figures are difficult to calculate — at one point dubbing them “estimating the inestimable” — but that the prevalence of dirty cash and organized crime trying to avoid taxes has distorted the economy.

However, her report concluded $47 billion in money laundering occurred in Canada in 2018.

Of that, $7.4 billion was in B.C., making it only the fourth-highest in the country behind Ontario, Alberta and the Prairies.

Money laundering hikes B.C. real estate prices: report 1
Estimated amounts of money laundering in Canada by region using an economic model by an expert task force in B.C. chaired by Maureen Maloney released on May 9, 2019. BC GOVERNMENT

And of that, $5.3 billion was in real estate, altering the market upwards by an estimated five per cent. Maloney’s report concedes it could be higher or lower depending on the type of property, and although it was not broken down by geographic region it could likely heavily impact the Lower Mainland and Whistler.

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It is also more likely to affect single-family homes than condos in the Lower Mainland, according to the report.

“It is also not clear how much demand would fall if significant inroads were made into reducing money laundering,” read Maloney’s report.

“The housing affordability problem cannot be solved by reducing money laundering but reducing money laundering can certainly help,” Maloney wrote.

Finance Minister Carole James and Attorney General David Eby both said Thursday they are moving quickly to address concerns highlighted in the reports.

“The party is over,” said Eby. “It may be spring but winter is finally coming for those who rely on bulk cash transactions on for their business model.”

He called the figures “shocking” and said cabinet is still considering whether to call a public inquiry on money laundering.

Eby cited several examples of money laundering, including a self-declared “student” who bought 15 properties in the same Vancouver condo building in 2001 for $2.9 million. Those units are now worth $11 million.

A “homemaker” bought five luxury homes worth $21 million between 2014 and 2017, with one mortgage. Another “homemaker” bought a dozen downtown town row houses for $4.1 million (now worth $15 million) between 2004 and 2007.

Another example was a Vancouver-area luxury car reseller known to police who is the principal owner of three homes with a value of $8.6 million purchased through three numbered companies and a mortgage lender with rates that decrease for each property.

“This looks like somebody that, theoretically, a regulator, say the Canada Revenue Agency, should be having a look at, and we have no confidence that would happen or is happening,” said Eby.

Another example was a $3.5 property on a Gulf Islands acquired with “funds allegedly embezzled from a $90 million loan fraud at an Indian bank,” said Eby.

Eby, who has been pushing the money laundering file since before the 2017 provincial election, said the cases are examples of things he already knew were happening but didn’t realize was actually due to money laundering.

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“These are things people told me they believed were happening,” said Eby.

“There was one person buying multiple homes and the homes would sell frequently that nobody ever moved in.

“I’ll be honest, at a town hall (in his constituency) I had someone stand up and say, ‘It’s money laundering.’ And I said, ‘You know there’s a lot of wealthy people around the world … it doesn’t necessarily mean it’s money laundering.’

“I wish I could have that answer back.”

James said the economic figures were staggering.

“Our economy should work for hard working people in this province, not fraudsters and not criminal organizations,” said James. “Our housing market should provide shelter for families not illegal proceeds of crime.”

The report estimates that money laundering in B.C. was $6.3 billion in 2015 and $7.4 billion in 2018, but says no estimates are available for the years of 2016 and 2017. Those are the years when the Vancouver real estate market really spiked with values in some areas increasing by over 40 and 50 per cent and capital outflows from China at record highs before regulators in Beijing made it more difficult to take money out of China and various levels of government in Canada implemented various taxes that slowed the local real estate market.

The Real Estate Board of Greater Vancouver said it is already attempting to address concerns with proactive recommendations for greater transparency and reporting that it made to Eby last month.

That was echoed by the Real Estate Council of B.C., which regulates real estate agents.

“I think we have heard that from the industry and we are working on more education,” said executive officer Erin Seeley.

She cited a partnership started last month between the Council and Fintrac to facilitate more and better reporting. The crux will be a mandate that teaches and compels real estate agents to “know their clients” in the way that financial institutions must, according to basic anti-money laundering guidelines, as opposed to merely “identify(ing) the client,” said Sealey.

Vic Jang, president of Sutton Group Westcoast Realty Ltd., said he and colleagues have been shaking their heads for some time. “It’s very tough when a realtor asks a client what they do and they say, ‘I’m an investor or a homemaker,’ and what do you say? ‘I think you are lying to me’?

“We, as realtors in the market, aren’t trained to have to ask for proof of an employer or a last tax assessment or paycheque,” said Jang. “Yes, there are Fintrac rules, and when we are sitting with a client, we are acting based on our judgment.

“We talk about (different scenarios such as) if you have a buyer who suggests giving cash or being creative in a deal, there are ways to report. But what do we do if someone uses six different realtors to buy six condos in some building?

He cited the role of banks and lawyers in facilitating transactions, but emphasizes that it has been many lapses “in totality. What this has all created is not very good for the market of real estate. It went from going on relatively OK to insanity,” said Jang, who has been an agent in Vancouver for 33 years.

Maloney said the government’s new beneficial ownership database will help break through the wall of numbered companies and offshore shell companies, as a major step forward to combating the issue. She also called for more data sharing and an intelligence unit within the B.C. government to keep on top of the issue.

A second report also released Thursday by former RCMP investigator Peter German said that the proceeds of crime, the desire for large amounts of capital to flee China and other countries, and a robust underground economy trying to evade taxes were “three rivers of money (that) coalesce in Vancouver’s property market and in consumer goods.”

An exact amount of criminal oversea owners wasn’t determined by the report due to the “poor quality” of data, as well as gatekeepers such as lawyers, accountants, notaries and other professionals that take advantage of B.C.’s opaque land title rules, according to German’s report.

“It is alarming to know that Greater Vancouver has also acted as a laundromat for foreign organized crime, including a Mexican cartel, Iranian and Mainland Chinese organized crime, all seeking a safe and effective locale in which to wash their proceeds of crime,” read the report written by German.

It also noted that “some registered charges on property titles are being used by organized crime to enforce illegal loans and payback schemes” including private mortgages used to enforce criminal obligations.

“What is even more troubling are attempts to enforce these illegal bargains in the civil courts, presumably on the assumption that justice is blind to what is occurring,” read the German report.

He pointed to red flags for dirty money laundering, such as purchases by nominees or straw men third parties (making up three per cent of purchases), and cash purchases, private mortgages (nine per cent or 90,000 properties).

Realtors did not do a good job reporting suspicious real estate transactions, said German. Even so, Ottawa’s financial regulatory agency, Fintrac, did get 9,500 suspicious reports on real estate transactions, but most of them came from banks and other agencies, said German.

But Fintrac doesn’t share information with B.C. police, his report noted. And German had previously revealed there are no RCMP officers in the money laundering unit currently actively investigating cases in B.C., with the few available focused on the easier civil forfeiture process.

He also highlighted in his report the lack of controls on land title databases that allowed people to list their own professions, including examples like “domestic diva,” “super dad” and even, oddly, “launderer.”

Another gap is the use of trust accounts by lawyers, which German cited in his report are essentially a black hole of solicitor client privilege because investigators can only trace suspicious money until it reaches the lawyer, who holds it in trust for a client and then it becomes untraceable.

German was not asked to provide recommendations. However, it has been suggested publicly already that B.C. could demand the source of large cash transactions be required to be disclosed in several, if not all, sectors of the economy.

German wrote one of the reports — which is technically several chapters out of a larger report that government has been releasing chapter-by-chapter in recent weeks — to detail activity in the luxury automobile and horse racing sectors.

Maloney’s report was tasked with investigating “compliance and enforcement of existing laws, consumer protection, financial services regulations, regulation of real estate professionals and jurisdictional gaps between B.C. and the federal government.”

Both reports were commissioned in September 2018.

The examination of real estate and money laundering comes after investigative reports in recent months on casinos, luxury automobiles, horse racing and the financial sector.

Money laundering is taking place in the luxury car market in B.C., sometimes with the use of bags of cash, a May 7 report by German found.

It exposed how luxury automobile dealers can accept large sums of suspicious cash without reporting it to federal authorities. German also shed light on a grey market that exports thousands of luxury cars outside B.C. using straw buyers, obtaining $85 million in provincial sales tax exemptions since 2013.

Eby promised a crackdown on the tax loophole, though other changes will need to come from the federal government.

Money laundering has been under a heavy spotlight in B.C., a result of revelations uncovered in a 2017 Postmedia investigation that found potentially millions of dollars were being laundered through Lower Mainland casinos.

The revelations sparked the first review by German and calls by Eby for more federal police officers with financial crime expertise and better sharing of information on suspicious money transactions.

The German review into casinos, released in June, showed certain Lower Mainland casinos unwittingly served as “laundromats” for the proceeds of organized criminal enterprises, in some cases linked to drug trafficking. Eby promised sweeping reforms.

A separate Postmedia investigation, published this February, found that money-laundering prosecutions were rare and difficult in B.C.

Multiple police investigations with ties money laundering since 2015 had resulted in at least 17 arrests, but no charges.

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