No evidence to show money laundering pushed up housing unaffordability

Real estate sector is “highly vulnerable” as criminals invest in property to hide their proceeds of crime and realtors do not report many suspicious transactions as required under federal anti-money-laundering laws.

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Even though BC real estate is “highly vulnerable” to money laundering, real estate agents report few suspicious transactions and the federal regulator should provide more guidance on what to report, according to BC’s report on money laundering released Wednesday.

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But the report said “money laundering is not the cause of housing unaffordability,” and author Austin Cullen wrote that the area needs more study.

“I am unable to conclude that money laundering is a significant cause” of unaffordable housing in BC, he wrote.

“If money laundering went to zero, people with $ 750,000 still would not be able to afford a detached house on Vancouver’s west side,” said University of BC professor Tom Davidoff of the Sauder School of Business’s real estate division.

And Cullen’s conclusion also aligns with what the BC Real Estate Association told the commission, that “affordability in BC is and will continue to be dependent on supply,” said association CEO Trevor Koot.

But criminals do buy property to hide proceeds-of-crime, Cullen said in his report, finding there exists “persistent adherence of some real estate professionals to outdated attitudes and myths about what money laundering is and how it occurs in their industry.”

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“Evidence I heard demonstrates money laundering risks can be exacerbated by those who seek to bend the rules or ignore or downplay their professional obligations,” he wrote. “Realtors have a poor record of anti-money-laundering reporting and compliance” and their “misplaced beliefs have led to complacency and a reluctance to comply with their anti-money-laundering obligations,” he said.

For instance, in the 2015-16 fiscal year, the Financial Transactions and Reports Analysis Center, or FINTRAC, the federal oversight agency for realtors and others in finance industries, received only seven reports of suspicious transactions from BC real estate licensees, a number that jumped to 37 in 2019-20 but dropped to 15 in 2020-21, he wrote.

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Cullen also said “there is significant frustration in the industry about the lack of guidance” and called on FINTRAC to change its message to realtors to help them better understand their anti-money-laundering responsibilities.

FINTRAC offers courses, forums and guidance to businesses, including in real estate, to educate on compliance requirements under the anti-money-laundering law, spokeswoman Melanie Goulette Nadon said in an email.

And it has published a brief specifically for the real estate sector, sent welcome letters in 2020 to 169 new real estate brokerages informing them of their reporting obligations, and has conducted 650 compliance exams in the real estate sector across Canada, she said.

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Cullen said rather than property buyers paying for their new home with bags of cash, they can wash their wealth by investing in real estate, which provides “the criminal with a safe place to store their wealth and a facade of legitimacy when the property is eventually sold. ”

“Buying and selling a series of properties can further obscure the criminal origins of the funds,” he wrote.

Criminals can also launder illicit funds by taking out a mortgage on a place and then repaying it with proceeds of crime in increments of less than $ 10,000, which would not trigger a requirement for a large cash transaction report to FINTRAC.

Or they could put a lien on a property to obtain cash for say, gambling, but then list the reason for the loan as for renovations. When the loan is repaid, the owner receives “clean” funds.

Davidoff said a better way to reduce money laundering and to improve affordability is to ensure that non-Canadian owners of property pay a property tax based on the value of the property because rich non-resident investors are paying a relatively small amount of property taxes proportionate to the value of the house.

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