COMMON CENTS

Would You Know a Suspicious Transaction If You Saw One?

By Jennifer Fiddian-Green

In red-hot housing markets, where housing prices have increased by up to 30% within the last year, it can often be difficult to spot the difference between legitimate home purchases and illegal money looking for a place to hide. That’s why the Canada Revenue Agency (CRA), along with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)—Canada’s anti-money laundering (AML) regulator—has launched an investigation into the prevalence of tax evasion, money laundering and terrorist financing in Metro Vancouver.
According to leaked government documents, the purpose of the investigation is to “increase visibility” in the real estate market and “lead to more tax compliance.” The CRA will be auditing individuals who seem to be living beyond their means, as well as exploring possible instances of house flipping, identifying builders who don’t comply with filing regulations and measuring compliance with non-resident filing requirements. These issues, combined with generally low levels of “suspicious transaction” reporting by real estate agents, are making the real estate industry vulnerable to money laundering.
Even if you’re not based in a large city centre, you would be wise to review Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), along with relevant guidelines set out by FINTRAC, to ensure you have the proper compliance measures in place.

Know Your Responsibilities
Under PCMLTFA, most real estate developers, brokers and sales representatives should have a sound compliance program in place to assess the risks associated with money laundering and terrorist financing—and should regularly monitor high-risk areas. Your program should comprise:

• The appointment of a compliance officer,
• The development and application of written compliance policies and procedures,
• The assessment and documentation of risks of money laundering and terrorist financing, and measures to mitigate high risk,
• Implementation and documentation of an ongoing compliance training program, and
• A documented review of the effectiveness of policies and procedures, training program and risk assessment.

Importantly, you must also foster a culture of compliance—one that is adopted, promoted and supported by management and real estate professionals alike.
This means sitting down as a team to identify areas of money laundering and terrorist financing risks, make sure proper measures are in place, and outline ways to execute those measures.

Identifying Risks
Historic laxity in suspicious transaction reporting—combined with the complex forms today that real estate based money laundering can take—makes it difficult to identify when it is happening and to understand your business’ inherent risk. That said, watch for the following red flags:

• Cash payments
• Purchases by straw buyers or in the name of family members
• Property seemingly beyond a buyer’s means
• Quick property turnaround
• Quick property liquidation
• Complex ownership by corporate entities
• Properties purchased, then left vacant

Look for evidence that funding sources are being misrepresented.  This can be difficult as money laundering is rarely cut and dry, and many not relate to cash.

Putting Proper AML Measures In Place
To protect your business and demonstrate AML compliance, make sure you know the parties you are dealing with and have an understanding of the source of their funds. Ensure you have thorough, well-documented records, including how you’ve ascertained buyer identities and looked into pos-sible third-party representation. You must also record:

• Large cash transactions and receipts,
• Client information,
• Copies of official corporate records (binding provisions),
• Copies of suspicious transaction reports,
• The purpose and intended nature of your business relationships, and
• Measures taken to monitor business relationships and information obtained as a result.

This documentation will demonstrate the extent of your AML compliance efforts and the strength of your compliance regime should FINTRAC choose to audit it.

Avoid Penalties
A strong compliance regime will help you protect your organization, avoid significant financial sanctions, and mitigate criminal and terrorist infiltration of Canada’s housing markets. FINTRAC has imposed $113,000 of fines on the real estate sector, and PCMLTFA penalties—such as failure to report suspicious transactions—can be up to $1 million and/or jail time.
With these hefty consequences—and the government’s pending investigation—in mind, it’s critical to implement a strong AML compliance regime now.

Jennifer Fiddian-Green is a partner with Grant Thornton LLP and leads the firm’s national Forensic and Dispute Resolution practice as well as the Anti-Money Laundering Services practice. Jennifer is a qualified investigation and forensic accountant, as well as, an anti-money laundering (AML) specialist.

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