Ian Mulgrew: Money-laundering inquiry should focus on real estate sector
Credit to Author: Ian Mulgrew| Date: Fri, 09 Aug 2019 10:00:09 +0000
What should we expect from the looming provincial one-man commission of inquiry into money-laundering?
Named on May 15 by Premier John Horgan, Commissioner Austin Cullen is charged with looking at the full scope of money-laundering including through the real estate sector, gambling, financial institutions and the corporate and professional sectors.
He’s also supposed to examine regulatory authorities and barriers to effective law enforcement.
Even with the ability to compel witnesses and order the production of documents and records, the retired associate chief justice of the B.C. Supreme Court would have to be Superman or the Flash to do that in roughly 21 months.
The province is to be commended — no other jurisdiction is even attempting to move the yardsticks forward like this on such an amorphous issue. Pretty well everything including housing unaffordability and the opioid crisis has been blamed on money-laundering.
Public sector players, casino operators, real estate boards, developers, commercial and residential realtors, brokers, luxury watch hawkers, car salesmen, card dealers … the usual suspects and list of people of interest are endless.
Expect a lot of lawyers representing private firms and individuals to oppose providing information arguing privilege, challenging the inquiry’s mandate and constitutional authority.
Cullen could be stymied if only because the time it will require to resolve such legal squabbles will push the inquiry well past the May 2021 delivery date for his final report.
He risks wandering into an inter-jurisdictional morass.
As a result, the smart money says Cullen should focus on real estate and back the creation of a robust, transparent land ownership registry — because it’s provincial jurisdiction.
The biggest problems are in real estate and trade-based money laundering (the inflating and deflating of contracts and similar legerdemain), not casinos — though drug kingpins playing baccarat admittedly are sexier than accountants and lawyers massaging paper.
Recent raids on Ontario organized crime groups revealed they were using casinos in that province in exactly the same way they do here — but the scale there is proportionately penny ante.
Canada has such weak rules over corporate transparency and the beneficial ownership of assets that it is apparently renowned among global scofflaws for providing “snow-washing.”
At the moment, third-party due diligence is crippled by the masked ownership of domestic companies and trusts. It is the most important single factor facilitating money-laundering in real estate: Tens of billions in the metropolitan Toronto and Vancouver markets in the last decade alone involved opaque trusts and nominees.
In 2016, Transparency International Canada — an arm of the international anticorruption organization — revealed that no one really knew who owned almost half of Vancouver’s most valuable properties.
Earlier this year, it produced another report on the Greater Toronto Area — since 2008, $28.4 billion in housing has been acquired by companies, the true ownership of many anonymous, shielded by shells, trusts and nominees.
Yet these properties weren’t bought with duffel bags stuffed with cash. The money was, by and large, processed by banks: It came from Belize, Cyprus, Macau or wherever by wire or other money transfer.
The banks are spending hundreds of millions of dollars annually on anti-money laundering compliance, so why didn’t they catch it? A transparent reliable land registry would remove one of the private sector’s excuses.
Unfortunately, in spite of its introduction of the Land Owner Transparency Act, the province doesn’t always follow through.
About 18 months ago, as an example, it became more costly and difficult to do property searches in B.C. to determine ownership. Such financial barriers defeat the purpose of a registry.
The problems are myriad — real estate agents, brokers and developers are not required to conduct beneficial ownership or source-of-funds checks and transactions can be structured through lawyers exempt from anti-money laundering legislation. Real estate industry players have a dismal record of compliance — something the regulatory agencies have done little to remedy.
A proper transparent, public registry would at least prevent financial institutions and regulators from claiming wilful blindness. Most importantly, it would allow crowd-sourced compliance: an activist, a competitor or a busybody would all have the ability to embarrass a miscreant or expose the regulator for not doing its job.
Even though it’s flawed, Cullen should mine the data available from the B.C. Land Title Survey Authority.
A money launderer is unlikely to have said yes, “I own this property,” but even if he or she used false fronts to claim ownership, that information can be collected, collated and analyzed.
Cullen could at least establish what is truly going on and identify suspects — students, babies, penniless property owners.
Studies indicate organized crime rings actually buy and sell from themselves: doing their own laundry.
If Cullen tracks transactions (even under adopted identities), quantifies what’s going on, shows who’s transacting with whom and checks declarations of primary residency, then he might embarrass those involved.
That’s where the inquiry could have leverage, really put people on the spot.
The U.S. has moved to regulate cash purchases by corporate entities but the only jurisdiction that has gone further than B.C. in addressing these concerns is the U.K. It has created a public registry for corporations so they know who is behind numbered companies and they hope to have a land registry by 2021 so they know who owns what.
They were motivated by the same issues that drove the government to appoint Cullen — public fears that foreign capital was distorting the local housing market and money-laundering was disrupting ordinary lives.
In London, it was mostly Russians.
There’s no sense in the province trying to develop a corporate registry like the U.K. To do that, B.C. would need the other provinces and the federal government on board.
Given the NDP has done nothing but embarrass the feds on this file, that’s a hard sell.
In my opinion, Cullen’s goal should be to try to provide evidence-based information to answer the question everyone is asking — just how big is the problem?
At the moment, who knows? There’s no way of telling without any degree of accuracy.
The real $64,000 question, however, will be how much is the ultimate solution?
Financial crime enforcement and prosecution are hugely expensive.
I think Cullen would be doing well if he provides a framework and major fillip for a national discussion about the need for a corporate registry and public land ownership registries to combat money-laundering.
On real estate, he could make a difference.