As seen in Toronto Builder
By: Lisa Gordon with Jayson Schwarz LLM
Home builders make it their business to know what their customers want, be it the latest in materials, finishes, upgrades or add-ons. But how well do they really know their purchasers when it comes to source of funding?
Money laundering and terrorist financing schemes are taking a huge toll on the Canadian economy. In its final report for fiscal year 2004-2005, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) identified over $2 billion in suspected money laundering and terrorist financing schemes. Worldwide, the International Monetary Fund estimates the value of money laundering to be about $500 billion U.S.
Under Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), real estate brokers and sales representatives are currently obligated to identify customers and report to FINTRAC when they receive $10,000 or more in cash. They must also file a report when they have reasonable grounds to suspect a shady deal. Up to this point, new home developers have not been subject to those requirements. But that may be about to change.
In a June 2005 consultation paper Finance Canada explored expanding the definition of real estate broker so that it includes “real estate developers who sell directly to the public.” This means builders and developers.
The paper’s key proposals include the expansion of client identification, due diligence and record keeping requirements, as well as the enhancement of coordination of Canada’s efforts to combat money laundering and terrorist financing. In addition to reporting large cash deposits, real estate brokers and sales representatives would now be required to identify clients and keep records on all transactions involving the receipt or payment of funds, the deposit or withdrawal of funds or the transfer of funds by any means. And, to “create a level playing field in respect of the application of the PCMLTFA to the real estate industry” in its entirety, the consultation paper could mean big changes for new home developers.
According to the Department of Finance, officials are now reviewing submissions from numerous public stakeholders about the proposals contained in this consultation paper. Official responses from various organizations, including the Canadian Home Builders’ Association, may be viewed online at www.fin.gc.ca/activty/consult/regime_e.html.
Toronto lawyer Jayson Schwarz thinks the home building industry should make a preemptive strike against money laundering and terrorist financing, before it is legislated to do so.
“What better way is there to launder money than in real estate, which constantly gains in value?” commented Schwarz, a BiLD member and a local expert on real estate law. “It’s everybody’s obligation to check finances, salaries and customer information. We all play a part in a transaction and we all need to be part of a solution. If something smells bad, then it probably is bad.”
Schwarz says the real danger for builders is that they will unwittingly become a player in a money laundering scheme. “You may not be guilty, but you will be guilty by association,” he says. “The fact that you are being investigated and mentioned in the press will be enough to seriously harm your business. We’ve got to make agents take ID and qualify people. They need to keep the records – call the employer, verify income, verify identity.”
Schwarz has spoken to a number of builders who feel it is someone else’s responsibility to be the watchdog. “This will not be acceptable to the government or the public. All levels – developers, builders, brokers, bankers and lawyers – have to work together to stop Canada being the washing machine of choice. If we do not act as an industry and set reasonable guidelines on our own, acceptable to us, it will be done for us and probably not in a way that will make us happy,” Schwarz commented.
The fact is that money laundering and other dirty money schemes are sending shock waves into the Canadian economy. It could be just a matter of time before the target of such a scheme becomes a new home developer. In Schwarz’s opinion, forewarned is forearmed.
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The consultation paper “Enhancing Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime” may be found online at www.fin.gc.ca/toce/2005/enhancing_e.html.
This article originally appeared in the Spring 2006 issue of Toronto Builder magazine, published for the Greater Toronto Home Builders’ Association by Naylor Publications Company.