Private lending opens new opportunities for money laundering

Private lending opens new opportunities for money laundering

Private lending secured against a property’s title has traditionally made up a very minor portion of mortgages in terms of both volume and value (e.g. the bank of mom/dad/grandparents).

The hot Canadian housing market over the last decade, coupled with recent efforts by the Office of the Superintendent of Financial Institutions (OSFI) to increase stress testing and reduce financial exposure risk for federally regulated financial institutions, has pushed many borrowers to non-regulated lenders.

Ignoring the inherent consumer protection risks of unregulated lending, the proliferation of private lenders creates an opportunity for money launderers to participate undetected, and use real estate lending processes to mask proceeds of crime. These actors lend cash, and receive funds disbursed after the property sale from a financial institution, or loan payments transferred from the customer’s bank account. This money goes into the launderer’s bank account, effectively achieving the ‘placement’ phase of money laundering.

Compounding the problem of detecting this activity, the profession best-positioned to report this type of suspected money laundering – i.e. the lawyer that registers the mortgage(s) – has been granted an AML regulatory reporting exception by the Supreme Court of Canada that amounts to a glaring loophole which criminals can take advantage of.

The Department of Finance has indicated its intentions to revise the PCMLTFA to create legal professional reporting obligations that do not contravene attorney-client privilege. In the interim, land registries (and/or their private operators) across Canada might consider what efforts they can undertake to increase analysis and reporting on private lending activities.

Read more on the Globe and Mail’s investigative report here