Canada

Are Smurfs and Canadian Banks Ruining The Canadian Real Estate Market?

Smurfing Blueprint

One of the banking industry’s biggest secrets is one that typically only drug dealers, terrorists, and people evading capital controls ever use – smurfing. Smurfing, sometimes known as structuring, is the process of breaking down money into small amounts to avoid regulatory scrutiny, before transferring said money to a safe haven. Unfortunately, there’s a good chance Vancouver and Toronto’s real estate markets are getting caught in the middle of this, and there’s mounting evidence the big 5 banks are knowingly assisting.

Smurfing In China (Capital Exports Explained)

China has capital export limits that prohibit any individual from exporting more than US$50,000 per person, per year. Think about that for a minute. The benchmark price for a home in Vancouver is $1,513,800, which makes the minimum down payment $302,760 – roughly $228,409 Canadian dollars more than can be exported from China at today’s exchange rate. As shocking as that is, it became mind blowing when National Bank’s Peter Routledge estimated that 33% of Vancouver’s homes are being sold to foreign buyers from China – which would require an awful lot of smurfs.

What Does My Bank Have To Do With It

The first thing you need to know is that smurfing can’t happen without a lot of people opening a lot of bank accounts. In 2014 a little light was shed when a wrongful dismissal suit (Ogden v. CIBC) went to the BC Supreme Court. The details of the case read like a drama, but this jewel of information was said in passing “a CIBC client wanted to send $150,000 from China to Canada, the money had to come from three accounts belonging to three different account holders in China and be transferred to three separate accounts belonging to three separate account holders in Canada.”

Fun fact, Ogden was awesome at bringing foreign money into Canada, bringing in an estimated “$60,000,000” in Canadian mortgages for overseas investors at her branch.

So while Canadian banks aren’t breaking any laws, they aren’t exactly following all of China’s laws either. When a Chinese investor want a mortgage in Canada, some bank employees will explain that in order to get around the Chinese export laws, they will need to find several people, and have them each open a Canadian bank account. Each one of them will then receive up to a USD$50,000 wire transfer from a smurf in China. Once a sufficient amount of money has been exported from China via the smurfs, the money from each account is amalgamated into the investor’s Canadian account. This is a loophole that allows Chinese money to flow into the Canadian real estate market in a short time, while not technically breaking any laws in Canada. Here’s another great quote pulled from the trial transcript:

“each individual was restricted to transferring no more than $50,000 USD abroad annually out of China. Working around these regulations was a challenge and a complicated process, but it was a practice CIBC supported.
— Ogden v. CIBC:164

But Chinese Investors WANT Canadian real estate

An interesting narrative that’s being told is that Canadian real estate is a great investment, which is why it’s attracting so many investors to Vancouver and Toronto. Turns out when you look at the yuan value of homes in Toronto over the past 5 years, the average real estate investor would have realized a loss of 1.82%. That’s right, a loss. This excludes closing costs and mortgage interest, which would have made it even worse.

So just how much money?

Capital fleeing China has been an accelerating problem, with an estimated $504 billion in the second half of 2015. Goldman Sachs revealed in a research note on Monday that by their estimate, 70% of the net outflows were from individuals buying foreign assets like real estate. This has been showing up most notably in markets like Vancouver, Sydney, and London. Goldman further revealed that the first quarter showed an estimated $123 billion fled, up almost 13% from the year before. So while the market may appear to be crazy right now, it might actually get crazier in the second half.

China’s capital flow month by month. Source: State Administration of Foreign Exchange, People’s Republic of China and the People’s Bank of China, Better Dwelling

What Happens Next

It’s important to note that the originating capital in China likely isn’t from some nefarious source, they’re mostly just average millionaires seeking a lower tax jurisdiction for their money. Smurfing isn’t a problem for Canada if we’re just winning some sort of lottery where the wealthiest people in the world all of a sudden decided they want to actually live in the houses they are purchasing here. Afterall, the more the merrier!

However, if these investors are using our homes as a midway point to get their cash to an offshore haven, they’re really just inflating our home prices – making it harder for Canadians to purchase homes. These inflated homes would then have to be passed person to person in what Marc Cohodes explained earlier this week, is “a Ponzi”.

Canadians who have purchased homes at inflated prices might be in an even worse situation if China decides to crack down on export laws, stopping the inflow of money to our real estate market. If this happens it will force fire sales and foreclosures, sending inventory skyrocketing. This will leave a large number of Canadians carrying mortgages on overpriced homes. If you’re thinking the foreign investors are just as likely to lose money as you are, you might want to revisit that thoguht. Our banks can seamlessly move the money from Canada to one of their offshore branches like TD Bermuda, CIBC First Caribbean, BMO CaymanScotiabank Cayman Islands, and RBC Cayman.

Open immigration is one of the things that makes Canada a great place to live, just ask our founder who’s family immigrated here not all that long ago. In fact, Toronto and Vancouver are vibrant multi-cultural cities because of our liberal immigration policies. The majority of people immigrating here are likely moving here for legitimate purposes… but there’s 10,800 empty homes in Vancouver that might indicate we have a bit of a smurfing problem.

Let’s have an honest discussion about real estate.

Like us on Facebook and we’ll let you know when the next post goes live.

Discuss On Facebook

19 Comments

  • Reply
    Ahmed 11 months ago

    Wow, the down payment math definitely makes it crystal clear this is mass fraud.

  • Reply
    Mark 11 months ago

    Aren’t we suppose to have the safest banks in the world? What the hell!

  • Reply
    Andrew 11 months ago

    I think the real question here is… Does Canada or China plan on doing anything about this? If not, there’s not much we can do.

    • Reply
      Jeff 11 months ago

      There’s not a lot China can do about it, Canada’s free trade agreement prohibits China from nationalizing any assets located in Canada. We pretty much crafted a trade deal explicitly for this purpose, then we make fun of the fluster Chinese minister to draw attention away from how bad the deal was.

      I’m not sure why the Canadian mainstream media is constantly patting themselves on the back for taking the bait our government throws them for distractions.

  • Reply
    Gary Baldwinson 11 months ago

    We should not care too much how the money is getting here. It is what the money is doing when arriving.
    Immigrant Investors to Canada should be forced to open legitimate businesses that support our economy not destroy the housing market and turn it into a wild futures market.
    Same with all incoming investment.
    Easily done if you simply co-ordinate taxation with real estate records.
    If the purchaser does not have a reasonable tax Nexus in Canada then their property becomes a business and subject to capital gains tax and it should be a 50% tax for foreign real estate owners.

    • Reply
      Jenny 11 months ago

      We have senators with husbands stashing millions off shore, reporters with 10s of millions of dollars in property (which doesn’t even make sense unless, hm…), and a banking system designed to filter money into offshore havens. You really think we’re going to go after foreign money?

  • Reply
    Gary Baldwinson 11 months ago

    If you walk along Coal harbor at 9:00 to 11:00 when 80% of all apartment lights are usually on, you will see that most of the buildings are 80 to 90% dark. This represents parked money just like a bank. However if you are searching for a rental in Vancouver you will find nothing at a reasonable rate.
    I support a dark window tax of 50% of reasonable rental value.
    If you do not live here than you are not spending $50,000.00 a year in the local economy, restaurants, shops, haircuts,etc. Just because you pay your property tax does not give you the right to park money in our precious real estate and take up the space.
    People must get it into their heads that real estate is for Living, not for Speculation.

    • Reply
      David Timmings 10 months ago

      I’m not sure I understand why such individuals would like to learn your lesson? Wouldn’t it not benefit them at all and force them to pay a tax?

      It’s great to want to teach people a lesson, but foolish not to recognize how unlikely they would learn such a lesson.

      Off the top of my head, I have this analogy. What if you made 20% return on your mutual funds, say you bought a Britain Based Fund. Analogous to your proposal, the British government should ask you to return another 50% of your after tax earnings because you don’t run a British business and have no business profiting from them.

      I heard omega 3 is good for the brain.

      • Reply
        Too much omega 3 6 months ago

        With your logic foreign students should not be paying a premium when they do their post secondary education here in Canada. Post secondary education is considered an investment too.

        There is a good reason to protect the real estate market in Canada. You compare different markets and different type investments. You have to also consider private and public goods and trading .

  • Reply
    Canadian Housing Bubble Is Fueled By Household Debt | Better Dwelling 9 months ago

    […] bubble is a lot different from the rest of Canada. They have money laundering, shadow flipping, and have had artificial building restraints until recently. It’s sexy to […]

  • Reply
    Canada Fails To Commit To New Anti-Corruption Measures, Real Estate Soars | Better Dwelling 9 months ago

    […] Smurfing, or structuring, is one of the most effective ways of moving money to Canada – it’s also a method popular with drug dealers, and human traffickers. Large amounts of cash are broken down into deposits small enough to not attract regulatory scrutiny. That cash is then assembled into a single account, or used to pay a mortgage. While it sounds complicated, it’s not. Heck, Canadian banks will even help you figure it out. […]

  • Reply
    Home Buyers Pay For Canada's Failure To Stem Foreign Tax Evasion - CanadaNewsHunt 8 months ago

    […] Smurfing, or structuring, is one of the most effective ways of moving money to Canada — it’s also a method popular with drug dealers and human traffickers. Large amounts of cash are broken down into deposits small enough to not attract regulatory scrutiny. That cash is then assembled into a single account or used to pay a mortgage. While it sounds complicated, it’s not. Heck, Canadian banks will even help you figure it out. […]

  • Reply
    Home Buyers Pay For Canada's Failure To Stem Foreign Tax Evasion - 1000 Islands Gananoque Chamber of Commerce1000 Islands Gananoque Chamber of Commerce 8 months ago

    […] Smurfing, or structuring, is one of the most effective ways of moving money to Canada — it’s also a method popular with drug dealers and human traffickers. Large amounts of cash are broken down into deposits small enough to not attract regulatory scrutiny. That cash is then assembled into a single account or used to pay a mortgage. While it sounds complicated, it’s not. Heck, Canadian banks will even help you figure it out. […]

  • Reply
    CSIS Warns of Chinese Influence On Canadian Real Estate...20 Years Ago | Better Dwelling 7 months ago

    […] street goons. Police forces around the world allege they do everything, from drug trafficking to smurfing. Although they do have much more legitimate operations, like making movies and real estate […]

  • Reply
    CSIS Warns of Chinese Influence On Canadian Real Estate…20 Years Ago – Better Dwelling | CSIS News 7 months ago

    […] street goons. Police forces around the world allege they do everything, from drug trafficking to smurfing. Although they do have much more legitimate operations, like making movies and real estate […]

  • Reply
    Chinese Gangs and Canadian Real Estate, The Odd Correlation | Better Dwelling 4 months ago

    […] buyers engage in the same technique that drug dealers, human traffickers, and counterfeiters do, smurfing. Smurfing is when a large amount of capital is broken down into smaller, more discrete amounts. […]

  • Reply
    Vancouver's real estate market could crash thanks to China 4 months ago

    […] Smurfing is a controversial process where a large amount of money is wired in small sums. These sums are designed to be small enough to avoid the scrutiny of financial regulators. People get family, friends, strangers for a fee, underground banks, etc. to transfer the money to separate bank accounts abroad. Those separate bank accounts are then assembled into a downpayment. The process repeats until you run out of money or the house is yours. It’s a soft-form of money laundering, but the money isn’t necessarily ill-gotten. Since there’s nothing to demonstrate the money is from the proceeds of crime, the Canadian government is more than happy to have the money flow in to Canada. […]

  • Reply
    Vancouver's actual property market may crash due to China – Social Marketing Game 4 months ago

    […] Smurfing is a controversial process where a large amount of money is wired in small sums. These sums are designed to be sufficiently small to keep away from the scrutiny of economic regulators. Folks get household, associates, strangers for a price, underground banks, and many others. to switch the cash to separate financial institution accounts overseas. These separate financial institution accounts are then assembled right into a downpayment. The method repeats till you run out of cash or the home is yours. It’s a soft-form of cash laundering, however the cash isn’t essentially ill-gotten. Since there’s nothing to reveal the cash is from the proceeds of crime, the Canadian authorities is more than pleased to have the cash movement in to Canada. […]

Leave a Reply

Your email address will not be published. Required fields are marked *