Money Laundering and Real Estate Transactions

Money laundering happens when a person conceals criminal sources of money or assets. It is a larger problem in Canada than most people are aware.

The results of a May 2019 Expert Panel on Money Laundering in BC Real Estate suggests conservative estimates of $46.7 billion was laundered in Canada in 2018 alone. Money Laundering undermines the rule of law and is also a contagious practice causing damage to reputations, institutions, and Canadian society as a whole.

“Money laundering and its effects corrode the very fabric of society. It impacts all spheres of a functioning democratic society: political and civil, social, and economic. It damages the quality of life of residents of the countries, provinces and cities where it is prevalent.”

 

Did you know people can launder money through real estate transactions?

money laundering in real estate

According to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), there are a variety of methods for laundering money, including through real estate transactions.

The large amounts paid for real estate make it an attractive option for laundering proceeds of crime. For example, by paying a mortgage down with illegitimate funds, criminals try to turn illegal proceeds into legitimate equity in real estate. Or, by paying real estate lease payments with cash from the proceeds of crime, the cash can become legitimate.

There are typically three stages to most of these methods including:

  1. Placement: introducing the proceeds from criminal activity into a legitimate financial system. This can happen through the purchase or sale of real estate.
  2. Layering: transferring proceeds from criminal activity into another form, using multiple financial transactions (i.e. layers) to create a complex audit trail of the source or ownership of the funds. These financial transactions can include buying and selling real estate.
  3. Integration: the blending of the proceeds from criminal activity back into the economy through refinancing or remortgaging property or reinvesting the money after the sale of property.

Red Flag 1: Someone offers you money or some other perceived benefit so they can use your credit to get a mortgage.

In this money laundering scenario, the property can be modest but can also be more luxurious than the individual could afford if they were to buy the property themselves. The individual buying the property—known as a straw buyer—goes through the process of purchasing a property using their credit rating but with the criminals’ money for the down payment, closing costs, and mortgage payments. The goal of the purchase is to place proceeds of crime back into the system using the individual’s real estate purchase on their behalf.

This scenario not only demonstrates a money-laundering scheme, it is also mortgage fraud. By misrepresenting themselves and their financial situations to the financial institution, the straw buyer has committed mortgage fraud.

In this money laundering scenario, when criminals use a straw buyer:

  • they disguise the true beneficial owner—the criminal or criminal enterprise—of the property.
  • they protect the identities of the criminals, as only the name of the straw buyer is associated with the real estate transaction.

This anonymity complicates police attempts to bring criminals to justice or seize illegal assets.

 

Red Flag 2: Someone offers to pay you large cash payments—often beyond market rates—for your residential property as part of a lease to own deal.

In this money laundering scenario, the purchase price is too good to be true. RECA cautions consumers to take great care, as criminals will often:

  • leave the property vacant or use it for illegal purposes
  • greatly harm the property
  • offer to pay off the balance owed after only a short period
  • ask to close the transaction with a private mortgage from you

 

Red Flag 3: You own a commercial property and someone offers to enter into a lease to own the commercial space and as part of the deal they offer to

  • pay very large cash lease payments, beyond market rates, that escalate over a short period of time
  • keep the property vacant, with no business operating at the property
  • pay the full sale price quickly with a private mortgage from you

In this money laundering scenario, it is clear the individual making the lease payments has access to large cash resources. The goal is to place as much money from criminal activity back into the system through the lease payments as possible. At the same time, equity in the property is created though the lease to own arrangement and eventual purchase. Running a business at the leased property is not the goal of the lease.


For you: Any person who is, or is suspected of, knowingly being involved in laundering proceeds of a crime can be charged under the Criminal Code of Canada.

If found guilty, the people involved can be sentenced to imprisonment for up to ten years. They can also be charged, and possibly convicted, on crimes related to the money laundering scheme.

Additionally, any property, including real estate, that is suspected of having been acquired from crime can be confiscated or seized, even without criminal conviction. Lawful ownership (though legal funds) must be shown or property forfeiture can happen.

 

For your real estate professional: Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), real estate professionals are required to report to FINTRAC all:

  • transactions (or attempted transaction) they suspect is related to an attempt to launder money
  • cash transactions, electronic funds transfers, and wire transfers of $10,000 or more (including taxes and fees) made in a single transaction or multiple transactions within a 24-hour period

Real estate professionals are required to know their clients, confirming identities and the existence of any entities used as collateral or signatories on transactions. They must keep all documentation relating to the property transaction as well as the individuals and entities involved in the transaction.

Not following this requirement could impact a professional’s reputation because failure to comply with PCMLTFA reporting guidelines could result in monetary and criminal penalties for real estate professionals.

 

For the housing market: money laundering through real estate purchases drives up market prices and decreases affordability for legitimate buyers.

 

For communities: the ability to easily launder money in a community attracts more and more criminals to that community. These criminals don’t bring their illegal funds alone, they also bring their criminal operations such as drug trafficking, corruption, and bribery.


RECA encourages consumers to protect themselves from becoming a part of a scheme to launder money. Criminals often prey on people who may not fully understand the red flags or the risks.

Never agree to take out a mortgage, or a line of credit on your home equity, for another person or business.

Also, consider the red flags when involved in leasing property or lending your own money.

You may also be interested in learning how to protect yourself from other types of mortgage fraud.



More Info: