In April 2016, FINTRAC fined a Canadian bank $1.1-million for failing to report a suspicious transaction. The fine was called an “administrative monitoring penalty” and was the first for a Canadian bank. Is the real estate industry next? Before we explore that question further let’s learn a bit more about FINTRAC.

SEE ALSO: Securefact April Round UpCanadian Bank fined $1.1-million for failing to report suspicious transaction.

About FINTRAC

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is Canada’s financial intelligence unit. Its mandate is to facilitate the detection, prevention and deterrence of money laundering and the financing of terrorist activities, while ensuring the protection of personal information under its control.

Quick Facts

  • Formed in 2000; reports to the Minister of Finance
  • In 2015 FINTRAC received 92,531 suspicious transaction reports – generally defined as transfers of $10,000 or more into or out of Canada. This was a 13% increase from last year
  • There are 31,000 businesses in Canada from which FINTRAC collects and analyzes transactions in an effort to combat money laundering and the financing of terrorist activities
  • Industries and organizations that are required to report suspicious transactions include: Life Insurance Companies, Brokers and Agents; Real Estate; Money Services Businesses; Accountants; Securities Dealers; Casinos; Financial Entities; Agents of the Crown that sell or redeem money orders; Dealers in precious metals and stones, and British Columbia notaries.

The organizations mentioned above are required to report suspicious transactions to FINTRAC as part of their compliance regime. A compliance regime is an operating program your real estate firm implements that should have the right policies, processes, training, reporting standards and technology in place that ensures and proves you are compliant.

You may think that because FINTRAC has 31,000 entities required to report suspicious transactions they’re going to focus only on banks and credit unions where most financial transactions are taking place. Financial institutions are the clearing house for most transactions so they should be well equipped to flag whether a company or individual is suspicious and could be laundering money or financing terrorist activity. While this may be true, real estate organizations are obligated to have a compliance regime in place and there’s one glaring problem that FINTRAC is concerned about.

Why is FINTRAC Concerned About the Canadian Real Estate Industry?

A potential FINTRAC storm is brewing for real estate broker/owners and brands. FINTRAC is concerned with the lack of suspicious reporting that is being done by broker/owners. In their 2016 Operational Brief it clearly puts forward the case that the real estate market (including developers) is a target for anti-money laundering criminals. Here are some key takeaways from the report:
  • The exploitation of real estate by criminals for money laundering purposes is well recognized internationally and underscores the importance of quality reporting on relevant suspicious transactions
  • The Financial Action Task Force (FATF)’s work on this topic indicates that the real estate sector is highly susceptible for many reasons: for example, easy price manipulation and a variety of complex options for selling/ purchasing/financing with anonymity. Although illicit funds seem to be laundered primarily through residential homes, corporate properties also play a role
  • FINTRAC, through its compliance examinations, has observed deficiencies in most aspects of the real estate sector’s compliance programs that render it more vulnerable of being used by criminals to launder illicit funds

What are these deficiencies that FINTRAC has observed in real estate firms? The short answer is that there are many and it depends on whether a real estate firm has a proper compliance regime in place. But, for FINTRAC the core issue is the lack of suspicious reporting being done by real estate firms. Yet the challenge for real estate brokers is knowing how to assess and gauge the risks associated to a transaction and the people and identities behind it.

From 2003 to 2013 there were five million real estate transactions through Multiple Listing Service (MLS) but there were only 279 suspicious transactions reported to FINTRAC. The sheer number and size of transactions that take place yearly suggests that there should be more suspicious reports being filed. Especially since there are thirty nine indicators of suspicious activities that need to be assessed for every transaction.

Clearly, the real estate market is a target for money laundering and combined with deficiencies and lack of reporting in Canada, FINTRAC, in 2015-16, increased the number of audits taking place. According to their 2016 report:

  • FINTRAC increased its examinations in the real estate sector by more than 33 percent across the country over the past year. In British Columbia, in particular, the Centre nearly quadrupled its examinations of the real estate sector over the past year, with the biggest impact in the Vancouver area
  • Going forward, FINTRAC will continue to focus its compliance efforts on higher risk sectors, including real estate, money services businesses and dealers in precious metals and stones. The Centre will also further engage reporting entities, their associations and other stakeholders in enhancing its guidance with regard to entities’ obligations, while improving transparency in relation to FINTRAC’s expectations
  • Finally, in collaboration with its domestic partners, the Centre will respond to the Financial Action Task Force’s (FATF’s) evaluation of Canada’s anti-money laundering and anti-terrorist financing regime

This recent sweep by FINTRAC has uncovered that many real estate firms don’t have the proper policies, controls, processes and best practices in place to comply with anti-money and anti-terrorist regulations. And now the media is starting to take notice.

SEE ALSO: Watchdog found ‘significant’ deficiencies at nearly 500 real estate firms

While no real estate brokerage intends to aid or facilitate money laundering or terrorist financing, the compliance spotlight and scrutiny on the industry will continue and perhaps intensify. While the severity of a potential FINTRAC storm is hard to predict, one may wonder if FINTRAC might impose a sizeable fine to a real estate brand to set an example like they did earlier this year to a Canadian bank.

So What’s Next?

Securefact is here to help the Real Estate industry weather a potential FINTRAC storm.

Our Financial Crimes Risk Management unit offers advisory services that help you interpret and comply with regulatory requirements, minimize risk and business disruption. Securefact’s technology solutions SIDni and LEV makes it cost effective and simple to validate and automate personal and commercial entities.

Members of the Securefact team are meeting with Real Estate broker/owners and compliance managers across Canada as part of a listening and information sharing tour.
Contact Moh Datoo to book a confidential consultation.

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This post has been written by members of Securefact’s AML Advisory and Financial Crime Risk Management division, consisting of industry experts, committed to managing your Financial Crime Risks and ensuring that you are compliant with the latest AML regulatory requirements.

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