Canadians are world-class when it comes to real estate… money laundering. Not just when it comes to laundering foreign capital, but the domestic stuff as well. That’s the take from the data shared by Global Financial Integrity (GFI). The Washington, DC-based anti-corruption organization found significant cash laundered through real estate. They only really scratched the surface of the numbers, but it’s pretty damning as is.
About The Study
The study looked at cases of money laundering through real estate in the news. The sample of information was then used to tally up the amount of laundering through real estate. They also looked at the source of the funds, and the method used to conceal it. It adds up to a huge number, but doesn’t tell the whole story.
Sampling is a common and frequently used method statisticians use to project trends. An example of this would be unemployment statistics, which are used around the world. It gives a good picture of things, but not the whole picture. In this case, the data may skew the origin of money, since they’re only looking at newsworthy cases. However, partial data is a good starting point to explore what may be a much deeper trend.
Canada Has Found Almost A Billion of Real Estate Laundered Recently
Canadians have been caught laundering almost a billion worth of real estate recently. From 2015 to 2020, the news ran stories on US$626.3 million ($822.7 million) of real estate bought with laundered cash. Over 88% of it was residential real estate. It’s a big chunk of money, but here’s the shocking part — only 35 cases were examined here. That averages out to $17 million per case, if you’re curious.
Over one in ten of those should have never been able to launder a single loonie. The study reveals they met the criteria of politically exposed persons (PEPs). These are people that have prominent roles in foreign governments. The Financial Action Task Force (FATF) warns PEPs are a high risk for laundering. They should therefore be subject to a higher level of vetting. Somehow that higher level of vetting doesn’t mean much in Canada. One PEP laundered $8.6 million before they were caught. A little higher than the $10,000 threshold that is supposed to trigger more questions.
The Source of Funds For Money Laundering With Real Estate Was Most Often Canada
Canada is the country where most of the laundered funds came from. The study revealed 48.6% of cases involved Canadian sourced funds being laundered. Just cracking down at the border won’t be enough, it would seem.
International sources were most often from China, and the US. The largest international source was China, representing 22.9% of cases — about half as many as Canadian sourced laundering. The US was the third with 11.4%, half the size of China. Remember, this is in the context of the study and major cases where people were caught.
Canadian Real Estate Money Laundering: Capital Origin
What country the capital laundered through real estate came from in the GFI study’s cases. Percent of cases, not dollar volume.
Source: GFI; Better Dwelling.
Canadian Real Estate Laundered Through Anonymous Companies, and Mortgages
The strategies used reveal it’s really hard to crack down on this sort of thing. The majority of money laundering is done through company structures, used in 51.4% of the cases. Third-party processing (45.7% of cases), and mortgage schemes (34.3%) round out the top three. The fourth is a booming business — private lending (17.1%). At one point, one in ten dollars used to purchase a Greater Toronto condo was from private lenders.
Canadian Real Estate Money Laundering: Method Used
The strategies used to launder the capital through real estate, expressed as a percent of cases.
Source: GFI; Better Dwelling.
A few years ago, Transparency International was generous enough to let me help with a report on how these issues work together. Canada doesn’t track the beneficial owner of a company, so it doesn’t know who owns it. They couldn’t figure it out if they tried, since the information was never collected. It only tracks the directors, who may or may not be involved with the company.
Fun fact: This might be a callback to old British rule, designed to conceal the assets of the wealthy from scrutiny. Recently revealed documents show the Queen herself lobbied for an exemption from corporate disclosure laws when corporate transparency became a boiling point issue in the 1970s. But, that’s another story for another day.
Private mortgages are also not subject to anti-money laundering rules. The unregulated lender is not required to identify the person beyond their own policies to avoid losing money. That typically involves just making sure they have enough equity to cover any losses in the event of a default. Some lenders are better than others, but strictly due to their own policies — not regulation.
A shocking amount of companies use private lenders to buy homes. We found billions worth of transactions in just the Greater Toronto Area. To sum it up, Canada doesn’t know who bought billions worth of homes, or who borrowed the money to fund the purchases. It’s a great system, subject to no flaws, I’m sure.
Canada’s housing minister recently shared that he had just stumbled upon our report. Though he also just announced he’s not seeking re-election this fall, so we might be back to square one. Funny how that always works out. Anyway, back to how people launder using real estate in Canada.
Other interesting methods cited in the report also appear to be highly unregulated as well. Renovations were used in 5.7% of cases, where the cost is often inflated. This is a common method in kleptocracies, typically using government projects. Leasing schemes (5.7%), immigrant investors programs (2.9%), and overvaluation (2.9%) were also found. These are all extremely difficult methods to crack down on. They also happen to be harder to identify in markets with faster-rising prices. Though they ironically can also accelerate home price growth itself. It depends on how much wilful blindness exists.
The Study Greatly Under Estimates Canada’s Laundering Problem
The study highlights gaping holes in the system and significant activity, but only scratches the surface. Don’t just look at this number and think, “oh, that’s a drop in the bucket considering all activity.” Once again, they only measured cases where the issue was identified, and big enough for the news. Areas without enforcement, due to a lack of resources or desire, are not captured.
For example, Canada is known for laundering money from countries with capital export controls. Places like China, Iran, and (to a lesser extent) India are a few of the big ones. In order to transfer money in excess of the capital controls, it needs to be laundered into the country. There’s even evidence of Canadian banks helping with this process. Not just turning a blind eye to the income, but actually helping to conceal transfers.
Sidenote: I say India to a lesser extent only because the controls are much higher than most other countries. Indians rules allow exporting 5x more than the amount one can export from China. However, I still have a lot of questions when someone buys a mansion in cash.
It’s important to specify all cash laundered is illegal, but it’s not all nefariously earned. Laundering the proceeds of criminal activity using the Vancouver model? Bad laundering. Laundering your legally earned life savings out of Iran because you don’t want to live there anymore? A little more grey.
The problem is both of these systems use the same method of concealment. When you’re hiding the true source of income, it’s impossible to determine what’s legit and what isn’t. Is that a student laundering cash? Or is that student one of El Chapo’s generals using fake IDs at a small BC college? Hard to tell, especially if vetting slows a political agenda to import capital.
That said, the numbers provided are pretty damning. Just the big cases add up to a sum large enough to get global attention. That’s before even looking at the amount of capital that slips through poor AML measures. Problematic, considering a small amount of money laundering can impact home prices.
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