Despite being unable to determine the exact impact money laundering has on home prices, the real estate sector is of top concern to the Commission of Inquiry into Money Laundering in B.C.
Of the 101 recommendations Commissioner Austin Cullen made in his June 15 final report, 40 are directly related to real estate, and several others are ancillary, such as proposals to strengthen anti-money laundering (AML) policies within financial institutions and the asset forfeiture legal regime, as well as greater controls on notaries and lawyers, who process transactions.
Despite the apparent problems in the industry, Cullen poured cold water on prior attempts to peg a precise price increase on homes due to money laundering.
While his executive summary states, "money laundering is not the cause of housing unaffordability," he clarifies within the report that he examined whether it is "the" cause or "a main" cause — as it may be perceived publicly. Cullen found no such proof but nevertheless concluded the real estate sector is vulnerable.
Cullen said the reasons for increases in housing costs "are many, and they are complicated." He cites housing supply and demand and interest rates as more proven factors.
Cullen examined the 2019 expert panel report of professors Maureen Maloney, Tsur Somerville, and Brigitte Unger titled Combatting Money Laundering in BC Real Estate, which did prescribe a figure for money laundering in real estate — about a 3.7% to 7.5% increase in prices. But Cullen noted that the estimate came with caveats and uncertainties. The model the panel used was "an exercise in speculation and, ultimately, guesswork," said Cullen.
Cullen took time to separate what he perceives as a common mistake in the public discourse — that foreign investment and money laundering go hand in hand.
Cullen relied on the Canada Mortgage Housing Corporation's conclusion foreign investment was not a significant driver of real estate prices in Vancouver, based on home ownership data from 2010-2016.
He noted, however, that defining foreign investment can be difficult and "witnesses disagreed about whether foreign investment plays a significant role in Vancouver's housing prices."
Simon Fraser University professor Joshua Gordon and University of B.C. professor emeritus David Ley testified how foreign capital can explain the decoupling of local incomes to home prices in B.C. However, such capital may not show up as direct foreign investment in home ownership data; instead, it is foreign money transferred into homes owned by newly established residents or via beneficial ownership structures that can obscure the real picture.
"It became clear as the evidence developed before me that there is disagreement in the academic community about what should be considered 'foreign ownership.' Is it limited to beneficial ownership by persons or entities based or resident outside Canada? Or does it extend to purchases made largely with funds earned outside of Canada?" asked Cullen, to which he replied to his questions that "resolving these complex issues is somewhat outside the ambit of my mandate."
Cullen noted Gordon's position that it is difficult to determine the origins of foreign capital and, with respect to China, the money being transferred is often escaping capital export controls set by the Chinese government.
He dispelled the notion that foreign investment, particularly from China, is money laundering. And Cullen expressed concern that, in his view, public discourse had reached such a conclusion.
Cullen noted racist stereotyping of investments in real estate originating from China, as University of B.C. professor Henry Yu testified to, must be weeded out from "legitimate policy questions relating to foreign ownership of real estate in the province."
Cullen concluded that he could make no conclusive finding on money laundering or foreign investment, however defined, is a "primary cause" of home price increases in B.C. and steps to address money laundering should not be viewed as a "panacea for housing unaffordability."
Ultimately, more study is required on the matter, concluded Cullen.
Ron Usher, general counsel for the Society of Notaries Public, said the conclusions may frustrate some members of the public, however they are not surprising given it is difficult to track money laundering.
"I think people were understandably very interested in that. But I think it's appropriate for him to say, 'We just don't have information.' Well, of course, we don't because, you know, people don't tick a box on a form saying, 'I got this money from money laundering or a predicate crime,'" said Usher, who followed the daily testimony over two years as an intervenor.
Recommendations run deep into real estate sector
Despite not finding answers to such a significant question in the public discourse over the past 10 years, Cullen lays bare 40 recommendations for the real estate industry, now regulated by the 2021-established B.C. Financial Services Authority (BCFSA).
His recommendations suggest that real estate licensees are largely uneducated on AML measures and that both managing brokers and sub-brokers require education "focusing on the detection and reporting of fraud and money laundering in the industry."
Cullen also recommends the BCFSA, a government regulator, put in place measures for better data collection and that it implores real estate licensees and notaries to record source of funds information should the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) not do so on a federal level. He also wants BCFSA to mandate AML programs at each brokerage as a licensing condition.
Seventeen recommendations directly relate to mortgage brokers, who are overseen by the Registrar of Mortgage Brokers within the BCFSA.
Cullen wants brokers to have extended criminal record checks and more clearly defined responsibilities, including new reporting mandates under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
Cullen also recommends all legal owners of mortgage charges are reported and that this information be available through the public land titles registry of the Land Title and Survey Authority. Presently, one is unable to conclusively determine, from flings, all of the owners of a registered mortgage charge.
Cullen is also calling for greater penalties and repayment of profits from proven unscrupulous brokers.
As for real estate licensees, Cullen has recommended employees of developers be brought within the licensing scheme. Today, many developer representatives effectively sell homes ("pre-sale" units) without any regulatory oversight.
Cullen also identified some legal matters to resolve, such as how courts cannot refuse to enforce debts made with funds of suspicious origin. As such, he recommends a source of funds declaration in foreclosure proceedings, at the judge's discretion. This recommendation stems from Cullen's examination of numerous foreclosure filings by alleged money launderer and casino cash provider Paul Jin.
Meanwhile, sunshine policies are a prominent set of recommendation for Cullen, namely by populating the B.C.'s Land Owner Transparency Registry with historic data within three years. He also recommends the Land Title and Survey Authority have a clear and enduring AML mandate, including the ability to "more readily" share data with other agencies.
Finally, with all such measures, Cullen recommends the Ministry of Finance analyze how such changes may impact housing prices.
Cullen thirsty for more data
Cullen emphasizes in his report the need for a beneficial ownership registry for both real estate and corporations, with the latter requiring a pan-Canadian approach. Contrary to some witnesses he heard from, such as journalists and Transparency International Canada, Cullen says a small search fee ($5) for beneficial ownership land titles is acceptable if government deems it so for operational purposes. However, Cullen suggests no such fees exist for a beneficial ownership registry of corporations. No fees should apply to law enforcement and regulators, noted Cullen.
With respect to data, Usher said tools such as land title registries, which are "secure and reliable," are increasingly being used by government agencies. He said Canada Revenue Agency could more easily track land purchases these days to weed out tax evasion and money laundering.
"It's easy to come up with lots of rules," said Usher.
"What we really need is a formal process of a notice of acquisition of real estate for CRA and a notice of disposition of real estate for CRA for every transaction.
"We need to get the right information from the right people at the right time," said Usher.