By Christine Duhaime

Last September, Global News reported the biggest real estate transaction in Canadian history – the sale of the top three floors of the Fairmont Pacific Rim Hotel in Vancouver. The price? A cool $55 million, paid entirely in cash according to the purchaser’s salesperson. The purchaser? According to the salesperson and news reports, a prince from the Middle East.

Investigators with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) may open a file on this transaction. Not because there are any obvious red flags or suspect behaviour but because as every regulator with financial crime oversight knows, almost no one complies with every regulatory requirement in every transaction. Non-compliance is usually not deliberate, but it flows from a combination of factors – the main one is that in Canada, financial crime compliance is legally complex and is particularly challenging for real estate professionals, who rarely hire external counsel to advise on compliance requirements until it’s too late.

A real estate transaction in Canada triggers the filing of reports to FINTRAC by real estate agents and banks. If the transaction involves the importation of currency, it also involves the Canada Border Services Agency (CBSA). The filing of the reports to FINTRAC invokes its jurisdiction over those reports, but FINTRAC also has jurisdiction over the transaction by its regulatory oversight of real estate agents and banks for anti-money laundering and counter terrorist financing purposes under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PCMLTFA).

According to the purchaser’s salesperson, the foreign prince bought the condo entirely with cash. I suspect this statement is not accurate and the salesperson meant to say that the prince did not finance the purchase of the condo. But if I’m wrong and the condo was purchased entirely with cash, then both the prince’s purchasing salesperson and the vendors’ agents (there were apparently four vendor’s agents) would have been required to file large cash transaction reports with FINTRAC. All of them “received” $10,000 or more allegedly in “cash,” triggering the reporting requirement to FINTRAC.

There is an exemption from the large cash transaction reporting requirement for real estate professionals if the cash is received from a bank. However, no Canadian bank would likely ever provide $55 million in cash to a client because it would require an extraordinary amount of bank resources for due diligence compliance and suspicious transaction reporting. All-cash real estate transactions do occur in Vancouver. A salesperson told me that his office recently received $1.2 million in cash from a client from China to close a house purchase. It was delivered to the agent’s office in a suitcase.

If the transaction was all-cash, FINTRAC would have received at least 10 large cash transaction reports about the prince from the real estate professionals (at least five reports for the deposit and at least another five at closing).

Assuming the condo was paid for in cash and the prince came to Vancouver with $55 million cash to close the transaction, he would have been required to declare the funds to the CBSA upon entry into Canada and complete a cross border currency importation declaration. That declaration is sent to FINTRAC and the details entered into FINTRAC’s database.

And finally, if the sale was a cash sale as the salesperson stated, all of the various deposits and closing payments deposited into banks by the real estate professionals involved in the transaction would have triggered another series of reports to FINTRAC by each bank that received $10,000 or more in cash.

Regardless of whether the condo purchase involved cash, if any of the reporting entities involved in the transaction (the real estate professionals, the banks or accountants – if any) had any suspicions regarding the funds, they would have been required to file a suspicious transaction report with FINTRAC.

Most reporting entities do not know what a suspicious transaction is under the PCMLTFA and as a result, they have a difficult time justifying to FINTRAC on an audit why they did, or did not, report a suspicious transaction.

A suspicious transaction is one that a salesperson has reasonable grounds to suspect is related to a money laundering or terrorist activity financing offence and involves a predicate offence. Most real estate professionals do not know what that actually means because they do not know what constitutes reasonable grounds in law or what a money laundering or terrorist activity financing offence is, or even what a predicate offence is. They also do not know that suspicious transaction monitoring requires screening for the identity of terrorist groups to determine whether they are dealing with funds owned by a terrorist group that may involve a terrorist activity financing offence. Nor do they know that there are lists of terrorists groups that they are required to consult, or how to locate those lists.

In fairness to real estate professionals, the PCMLTFA is poorly drafted and understanding money laundering and terrorist financing activity offenses is no easy task. It requires knowledge, not just of the PCMLTFA, but also of the Criminal Code of Canada, R.S.C., 1985, c. C-46. And because this area of law is complex, real estate professionals tend to fail to report suspicious transactions. With respect to terrorist financing specifically, on an audit by FINTRAC, real estate professionals have to show how they comply with the counter terrorist financing aspects of their obligations to report suspicious transactions under the PCMLTFA and this is an area in which they inevitably are deficient.

If any of the reporting entities involved in the transaction, including real estate professionals and banks, and anyone else in Canada (such as lawyers) that may have dealt with the $55 million, believed that any part of the funds were controlled or owned by, or on behalf of, a “listed person”, they would have been required to file a terrorist property report with FINTRAC, the RCMP and CSIS. Not only that, but the banks were also required to immediately freeze the funds and were prohibited from completing the transaction.

 

A “listed person” is a person, organization or entity (company, partnership, joint-venture, charity) designated as such pursuant to the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism.  If any of the people who dealt with the $55 million were not aware of who was on the listed person list, or how one accessed and verified who is on that list at the time of the transaction, they may have difficulty explaining to FINTRAC during an audit how they determined that the funds were not terrorist property. Most of the listed persons are from the Middle East. A $55 million transaction involving funds from the Middle East, whether paid in cash or not, will be of interest to FINTRAC and to the CBSA whether or not the prince filed a cross border currency importation declaration.

Under the PCMLTFA, every financial institution involved in the purchase of the condo would have been required to determine if the prince was a politically exposed person if he (or a company he incorporated or controls) opened a bank account in Canada for the purchase of the condo. Most members of the royal families from the Middle East are politically exposed persons because they typically hold high-ranking positions in government, the military or a state-owned organization, or they hold a judicial office or are closely related to such a person.

Politically exposed persons (PEPs) are more high risk for money laundering worldwide and as a result, banks must conduct enhanced due diligence with those clients, including ascertaining the leg

itimacy of their source of funds. PEPs are not reported to FINTRAC but FINTRAC will, on an audit, confirm that the person’s identity was ascertained and that their bank accounts are consistently monitored for signs of proceeds of crime from financial crimes. It is the latter, the financial activity in the bank accounts of PEPs, that is reported to FINTRAC, both as suspicious transactions where warranted, and as electronic funds transfers.

In the condo transaction, if a bank was involved, it likely determined that the prince was a politically exposed person and if it could not obtain comfort from the prince as to the source of funds, it may have filed a suspicious transaction report to FINTRAC. The bank is prohibited from informing real estate professionals or the PEP about a suspicious transaction report.

There is a second obligation regarding PEPs that arises under Canada’s Freezing Assets of Corrupt Foreign Officials Act (FACFOA). Those obligations require banks to determine on a continuing basis whether it has any money on deposit that is owned or controlled by certain listed PEPs from certain countries and to freeze those funds if it does. Banks involved in the purchase of the condo would have been obliged to determine whether the prince was on one of those PEP lists.

Real estate professionals and lawyers involved in the transaction involving the prince also had an obligation under FACFOA to determine if the funds in their control or possession were owned or controlled by a listed PEP – that’s because they were each required to inform the RCMP if they were dealing with a listed PEP.

Every bank involved in the purchase of the condo would have reported to FINTRAC when it received or sent any amount equal to or greater than $10,000 internationally. What that means is that when any salesperson involved in the transaction made an electronic deposit, transfer, wire or withdrawal associated with that transaction, it was reported to FINTRAC as an electronic funds transfer report if it was international. If law firms were involved and funds were electronically deposited into law firm trust accounts and subsequently withdrawn, wired or transferred, each of those transactions were also reported by banks to FINTRAC as electronic funds transfers if they were equal to or greater than $10,000 and were international.

Like most countries, Canada has an economic and trade sanctions regime in place. The regime applies to everyone in Canada, including real estate professionals and banks but the obligations are different for each group and under each sanctions program.

The sanctions programs generally involve cutting off access to the Canadian financial system by prohibiting transactions, the provision of services and sometimes goods, and dealing in any property of sanctioned people and entities. In Canada, there are sanctions against Iran (including people in Iran, property or funds in Canada owned or controlled by certain Iranians), Iraq, Libya, Sudan, Somalia, Tunisia, Egypt, Syria, Lebanon and several other countries.

With respect to Iran, for example, the sanctions program requires that banks determine whether they possess or control funds of sanctioned Iranian people, companies or affiliated entities and report that information. Real estate professionals must disclose to the RCMP and CSIS if they have funds they believe are owned or controlled by sanctioned Iranians, Iranian companies or people associated therewith that are sanctioned, in their possession or control.

Sanctions reports may be a suspicious transaction requiring the filing of a suspicious transaction report to FINTRAC.

If FINTRAC was reviewing this condo transaction, they would likely seek to confirm, with respect to the purchaser’s salesperson and all the vendors’ real estate professionals:

* That they have a written compliance plan in place that includes measures to address counter terrorist financing.

* That the compliance plan is based on a risk assessment that was undertaken.

* There is an appointed compliance officer in charge of anti-money laundering compliance.

* If the transaction was all cash (which I doubt), it was reported as a large cash transaction.

* The purchaser was properly identified and the records exist to establish identity.

* Whether the transaction involved beneficial ownership structures with share ownership obscured and the use of tax havens for the wiring in or out of funds.

* If the transaction involved beneficial ownership structures, that corporate records were obtained and retained showing the beneficial ownership of all the entities right through to share ownership of a natural person (not just legal person).

* Steps were taken to verify that the prince was not listed on any of the lists referred to above.

With respect to the banks involved, if FINTRAC was reviewing this transaction, they would likely seek to confirm that the banks:

* Took steps to confirm whether or not the prince is a PEP.

* Consulted the listed persons lists.* Consulted the sanctions lists.

The penalties for non-compliance with the PCMLTFA and sanctions law are substantial as follows:

* $2 million, imprisonment of up to five years, or both, for failing to report a suspicious transaction.

* Imprisonment of up to 10 years for failing to report a terrorist property report to the RCMP.

* $2 million, imprisonment of up to five years or both, for failing to report a terrorist property report to FINTRAC.

* $1 million for failing to file a large cash transaction report with FINTRAC.

* $1 million for failing to file an electronic funds transfer report with FINTRAC.

* $500,000, imprisonment of up to five years, or both, for failing to properly ascertain client identity.

* $500,000 for failing to keep required records.

* $500,000, imprisonment of up to five years, or both, for failing to have a compliance program.

* Imprisonment of up to 10 years for failures to comply with most of the sanctions programs.

Implementing a compliance program for real estate professionals can be expensive and time consuming but it pales in comparison with the legal costs and penalties facing real estate professionals for non-compliance with financial crime laws in Canada.

I suspect that this year FINTRAC is going to focus more on reporting compliance by real estate professionals and will also be directing its resources on ensuring that all reporting entities comply with counter terrorist financing obligations for the protection of all Canadians.

Christine Duhaime is a regulatory lawyer and financial crime and anti-money laundering specialist with Duhaime Law. She works in Toronto and Vancouver and can be reached by email at [email protected] and by phone at (604) 601-2046.