Canada’s dirty money detection system ‘broken all the way through’
Money laundering experts say there is no way for Canadians to know how much dirty money is being laundered in Vancouver real estate through Canadian lawyers.
As a Province investigation revealed Monday, Canada’s financial intelligence unit Fintrac has ramped up an audit of Vancouver’s booming property market because of concerns that realtors may be turning a blind eye to money laundering.
Realtors face jail time and fines up to $500,000 per offence if Fintrac finds they have failed in their legal obligations to report suspicious deals.
But apart from Fintrac’s probe of realtor reporting, some experts say an even bigger money-laundering risk in B.C. real estate is a loophole involving lawyers and trust funds.
After fighting for years in the courts for an exemption from Fintrac’s reporting requirements, Canadian lawyers claimed a decisive victory in February when the Supreme Court of Canada ruled the federal government could not hold lawyers to the same standards as other Fintrac-regulated sectors because that would violate solicitor-client privilege.
The result is that lawyers do not have to report suspicious transactions to Fintrac, and do not face the same federal scrutiny that realtors do, all amid concerns of vast flows of illicit offshore wealth into Canadian property.
“Now that the Supreme Court has ruled that lawyers are exempt from money-laundering laws, I feel they have opened a huge hole for illicit funds to flow into Canada,” the owner of a Vancouver real estate company told The Province. “I suggest to you there would be a high percentage of lawyers who would not care where money came from.”
Fintrac documents and a 2015 Canadian department of finance report say both the real estate and legal sectors are at risk for money laundering, specifically because “real estate transactions usually involve lawyers and their trust accounts,” and these legal trusts “can knowingly or unknowingly provide legitimacy and/or obscure the source of illegally-sourced funds.”
Also, documents show the real estate and legal sectors are vulnerable to illicit foreign investment and “politically exposed persons” — which means rich foreigners with government connections.
Christine Duhaime, a Vancouver anti-money laundering lawyer, said Canada appears to be the only developed nation that gives lawyers a pass on federal money-laundering reporting. Canadian lawyers can be wired any amount of offshore funds which can be placed in trust and used to buy Canadian assets without informing Fintrac, and with no questions asked by banks, Duhaime said.
“When it comes to realtors and lawyers we are very loose about anti-money-laundering law,” Duhaime said. “The problem is, not all lawyers are self-policing on financial issues. And the realtors I talk to in Vancouver don’t a have a clue what a suspicious transaction is or when to file one.”
The B.C. Law Society was asked if it could respond to criticism against the Fintrac reporting exemption, and provide data on B.C. real estate transactions and money spent on real estate from legal trusts.
In a written response, without providing figures, spokesman David Jordan said the society requires lawyers to keep accurate records of all monetary trust transactions, which are subject to review by the Law Society.
Jordan said lawyers are prohibited by the Law Society from handling more than $7,500 in cash in any transaction, “except in limited circumstances,” and he reiterated the Supreme Court’s ruling that exempts lawyers from reporting to Fintrac.
“A lawyer must not engage in any activity that the lawyer knows or ought to know assists in or encourages any dishonesty, crime or fraud,” Jordan wrote.
“The law societies are above the law,” said Kim Marsh, a private money-laundering investigator and former RCMP international crime unit head. “Now the (money-laundering detection) system is broken all the way through. I don’t think anyone predicted this, but the effects are showing up in Vancouver’s real estate market.”
Duhaime said she can understand if real estate brokerages hesitate to engage with Fintrac rules, because installing a robust reporting system would cost the average firm about $1.5 million.
It was only after international banks faced billions in fines that financial institutions spent the money to set up and staff effective anti-money-laundering regimes, Duhaime said.
“I think we look terrible in Vancouver because we have turned a blind eye to what looks like a lot of illicit money coming in from Asia,” Duhaime said. “I think a lot of realtors will have to be fined by Fintrac in order to change things.”
A Fintrac official said the current real estate examinations in Vancouver should be complete within six months, and then it will be clear if any realtors are to be fined or charged.