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Anti Money Laundering Laws and the Real Estate Industry

2020-03-10


Over the last decade, Canada’s real estate market has been one of the most vulnerable sectors to money laundering. According to a study[1] by the B.C. government, an estimated $46.7 billion was laundered in Canada’s real estate in 2018. At the provincial level, the study also estimates about $5 billion is laundered in the B.C. real estate market annually, contributing to a significant strain on regulatory responsibilities and an increase in property prices.

Part of the challenge is many real estate practitioners, including developers, agents and brokers, are unaware of their regulatory obligations and fail to be compliant with Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). By not keeping up with regulatory requirements, they fail to adequately identify their clients, maintain proper records, and monitor their clients transactions — leaving them open to substantial fines and / or criminal charges.

This article provides updates on anti-money laundering (AML) regulatory requirements in the real estate sector, including Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) guidelines. It also identifies who has to have a compliance program, the basic components of a compliance program and clarifies the cost of non-compliance.

Who is a Reporting Entity in Real Estate?

Currently, more than 20,000 real estate practitioners in Canada fall under the ambit of the anti-money laundering act but few are aware of their obligations. Others aren’t aware they fall under the category of a reporting entity.

Reporting entities under FINTRAC include the following:

Real Estate Brokers and Sales Representatives

The PCMLTFA considers individuals or entities as real estate brokers or sales representatives when they act as agents for the purchase or sale of a real estate property and are provincially registered and licenced to do so. This includes the buying or selling of land, houses, commercial buildings, etc.

Real Estate Developers

As an individual or entity, you are considered a real estate developer if you have sold the following to the public in any calendar year after 2007:

  • At least five new houses or condominium units;
  • At least one new commercial or industrial building;
  • At least one new multi-unit residential building each of which contains five or more residential units;
  • At least two new multi-unit residential buildings that together contain five or more residential units.

When the above conditions are met, a real estate developer is expected to implement a compliance regime.

Overall, the requirements to report suspicious transactions and terrorist property to FINTRAC will remain the responsibility of both the employee and the employer (i.e. real estate agent, broker and developer) as per the PCMLTFA in all cases.

Exemptions for Developers, Real Estate Brokers and Sales Representatives

You are not required to comply with the PCMLTFA if the following applies to you as a real estate broker, sales representative or developer: 

  • You engage in property management activities such as leases and rental management transactions.
  • You are a real estate agent acting on behalf of a broker or developer. In this case, the broker or developer will be required to comply with the legislative requirements.
  • If you sell a property to a real estate brokerage, which will in turn sell the units to the end-buyer.

Compliance Program Requirements

A FINTRAC compliant compliance program has five distinct parts:

  1. Appointment of a Compliance Officer: This individual will be responsible for implementing the compliance program and will be the first point of contact for FINTRAC.
  2. Development of written policies and procedures: This document must outline what requirements need to be met and how your program will meet them. At a minimum, the policies and procedures must be up-to-date and address: the compliance regime, reporting suspicious transactions, terrorist property and large cash transactions, record keeping, ascertaining identities, use of personal information, business relationships and third-party determination.
  3. Risk Assessment: An assessment of the anti-money laundering risks specific to your business, along with measures that will be taken to mitigate such risks. A risk-based approach will assess your business-level and relationship-level risk exposure from the perspective of four factors including; products, services and delivery channels, geography, client and relationships and other relevant factors.
  4. Ongoing Training Program: A documented training program for all staff and agents, including those involved in real estate deals, must be implemented and tailored to your business.
  5. Effectiveness Review: At least a biennial testing program must be implemented with the objective of testing the AML program and ensuring it is effective and current. This assessment can be conducted by either internal or external auditors and FINTRAC expects a rapid remediation of identified gaps or deficiencies. 

Cost of Non-compliance

Deficiencies and / or non-compliance with the PCMLTFA can result in criminal and administrative monetary penalties. For example, in April 2016, FINTRAC levied a $1.1-million penalty against an unnamed Canadian bank for failing to report suspicious transactions and various money transfers.

As a reporting entity in the real estate sector, you are required to — among other obligations — identify clients, keep certain records (such as client information records and receipt of funds records), and report certain transactions (e.g. suspicious transaction and large cash transactions) to FINTRAC. Failure to comply with these legislative requirements can result in fines up to $100,000 per violation for individuals and up to $500,000 per violation for companies, depending on severity.

FINTRAC has the legislative authority to issue administrative monetary penalties where non-compliance is observed.  The PCMLTFA was also amended on June 21, 2019 to provide FINTRAC with the mandate to publish all administrative monetary penalties imposed.

Criminal Penalties

Reporting entities are also liable to criminal penalties and can be reported to law enforcement where cases of extensive non-compliance are uncovered. Criminal penalties may include the following:

  • Failure to report suspicious transactions: up to $2 million and / or 5 years imprisonment.
  • Failure to report a large cash transaction or an electronic funds transfer: up to $500,000 for the first offence, $1 million for subsequent offences.
  • Failure to meet record keeping requirements: up to $500,000 and / or 5 years imprisonment.
  • Failure to provide assistance or provide information during compliance examination: up to $500,000 and/or 5 years imprisonment.
  • Disclosing a suspicious transaction report was made, or disclosing the contents of such a report, with the intent to prejudice a criminal investigation: up to two years imprisonment.

Seek Assistance to Ensure You Are Compliant

Creating and maintaining a compliance program does not have to be daunting. Third-party AML professionals can help ensure your organization meets all regulatory requirements, starting with evaluating your need for a compliance program and preparing or assessing your compliance program. They also will evaluate your training regime, help you seamlessly integrate your program and keep your program relevant, up-to-date and efficient by conducting independent compliance effectiveness reviews.

Whether you are a large or small organization, advice and assistance may be required to successfully implement and maintain a compliance program.

Your Local Contacts

Toronto:

Claudius Otegbade, BSC (ACCTS), CFE, CFCS, CFI
+1 6474754554
[email protected]

Mondiu Jaiyessimi, MSC (ECONS), CAMS
6474754500
[email protected]

West:

Greg Draper, MBA, DIFA, FCPA, FCGA, CFF, CAMS, ICD.D
403.263.3385
[email protected]

Eastern Canada: 

Corey Anne Bloom, CPA, CA, CA•IFA, CFF, CFE, ACFE Regent Emeritus
514.228.7863
[email protected]


[1]Combatting Money Laundering in BC Real Estate – Expert Panel on Money Laundering in BC Real Estate