British Columbia is continuously flagged as a prime location for money laundering, particularly within real estate. About $5 to 7 billion come into the province illegally on an annual basis. This is roughly five per cent of the province’s real estate market or 12 per cent of the Metro Vancouver market. And with the industry being a key facilitator of this activity comes soaring housing prices that impact everybody.

Vancouver startup, Iluminai, is trying to help resolve this with a compliance tool that traces money coming into real estate and flags suspicious activities. The goal is to help realtors determine which transactions might be related to money laundering.

“Just in Vancouver, that’s 2,500 homes bought every year with money of people who didn’t earn it and didn’t pay taxes on it. That’s a huge amount of marginal demand,” Friedrich Klaus, co-founder of Iluminai, points out.

Of course, fraud isn’t unique to B.C. For instance, according to the June 2022 Cullen Report, Ontario real estate sees roughly six times the amount of money laundering in comparison. 

The FINTRAC process and B.C. realtors

As of June 2021, real estate brokers became subject to more and stricter requirements around continuous monitoring of their client base to avoid fraud. Brokers are mandated to look for signs of potential financial crime involvement through home purchases as attempts to launder money and report suspicious transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

“Money laundering in real estate is one of the greatest challenges this nation has ever faced and, in my opinion, the greatest threat to the legitimacy of our system of government. So, FINTRAC had to do something to strengthen the requirements,” Klaus shares.

He points out that managing brokers face stiff fines (upwards of $250,000) for compliance failures. Andrew Carros, COO at Engel & Völkers Vancouver, is all too familiar with this challenge.

“They want us to look for more things, one of them being politically exposed persons. Explaining that to clients without really digging and getting too personal is difficult,” Carros explains. “Why is it so important for us to know if this person was the mayor of Nelson? Or even more so, the daughter of the mayor of Nelson?

“When you’re trying to discuss (risk) with your clients, it’s an awkward conversation because they think you’re reporting them to the government. But you’re not — you’re just reporting the fact that you’ve done the due diligence you’re supposed to do to understand who they are, what they’re doing, and what their purpose is.”

Carros points out that the bigger issue is actually his realtors’ understanding of why brokers must ask that question: “They don’t really understand what the purpose behind it is … the confusion isn’t why we’re asking — the confusion is how do we get this information and how do we do it legitimately to follow the guidelines of what the government is telling us to do? And they don’t give this very directly to the real estate industry.”

Klaus weighs in: “The brokers have an asymmetrical relationship with risk and reward — they bear all the compliance risk and risk of fines, and the agents make most or all of the money.”

There are several forms that realtors must complete once they’ve onboarded a client. They make many assessments of their customer’s risk of being involved with money laundering, I.D. verification and include simple questions about the source of funds for their purchase.

“This is the most glaring error of the system because agents know that if they assess one of their customers as a higher risk of money laundering, that deal could be subject to a near-unlimited amount of scrutiny and reporting,” Klaus comments. “Agents are incentivized to close the deal and get paid their commissions. They can also be quite transient and therefore not particularly incentivized to be mindful of the risks they create for their managing brokers.”

FINTRAC challenges

Carros knows that FINTRAC exists to ensure brokerages know their clients and aren’t working for people trying to break the law.

“In the real estate world, we have no problem with that idea. I think it’s phenomenal,” he shares. “The problem is that they’re asking a lot out of us without much guidance, training, or tools we need to fully satisfy the requirements.

“I think the government has a bit of misunderstanding about this business. Albeit a very professional business, like a lawyer or doctor, we do not share the same structure or the same open relationship with our clients, which is what they want us to have.”

While Carros believes he has strong, open relationships with clients in his brokerage, he doesn’t think this applies to the industry across Canada.

“The qualifications for people coming into the business are not as high as they would be for other industries,” he explains. “So, if they really want us to do this correctly, and they’re dealing with people without any schooling whatsoever on anything to do with this stuff, they should be providing these tools.”

Regardless of who provides the tools, though, realtors need to verify information when they meet a client — including seeing them in person, asking them specific questions, and identifying them at the appropriate risk level based on their background.

“There’s a lot on what determines a medium-risk or a high-risk client. And sometimes it’s as simple as a country’s sanctions or where the person is from,” Carros points out.

As of June 2021, every client is considered a business relationship, meaning brokers are expected to keep up with every single file they bring in on an ongoing basis.

“It’s actually very unrealistic to believe that’s what people can do. We’re too busy with today to think about every client we’ve ever had,” Carros says. “When you look at a long list of clients, it’s impossible for us to do this effectively.”

Klaus says this is where Iluminai comes in.

The problems and pain points

When Iluminai approached Carros with its tool, he was skeptical because he’d already seen many FINTRAC tools in the market. He’d found they make the process easier by recording the right information, yet they don’t consider the context of why that information is needed.

For example: “Taking a picture of somebody’s I.D. and saying that I’ve done enough because it’s being recorded in a specific way doesn’t really follow the guidelines of what they’re asking us to do,” he points out. “Iluminai opened the door to something that just doesn’t exist right now for us, and (FINTRAC compliance) is mandatory, so I don’t even feel like I have a choice.”

Until he tried Iluminai, Carros had never heard of anyone figuring out how to functionally ensure they’re monitoring business relationships moving forward, getting information on sanctions lists, or staying informed about PIDs (property identification numbers). This information is hard to get, and anybody who’s trying to hide something will find a way to do so, he says.

“If they know they have a sanction or they know they’re politically exposed and that could be a risk, they’re not going to tell you. So, it’s up to us to be untrained detectives,” he says.

Before Iluminai, Carros and his realtors relied on Google. After trying Iluminai, he’s noticed, “It’s the only tool I have ever seen that allows me to have insights not being brought to me by my advisors.”

In its current state of development, Iluminai manages and monitors customer data. “We run nightly checks against about 1,400 sources of intelligence, as well as our own insights, which we generate with the help of some (open-source intelligence) partners and journalists,” explains Klaus. “We are actively building tools to leverage trading analytics to identify pump-and-dump fraud in microcap markets.”

Carros chose to try Iluminai because “If FINTRAC auditors walk into my office, I can say ‘There’s my customized brochure, this is what we do. These are the forms I put together. Here’s my list.’ Then (when they say) I should have more high-risk (clients), I can say, ‘Here’s my training. Here’s the system I have for ongoing monitoring.’

“I have proof of purchase — I’m showing them that I care. I think that’s what they’re asking us to do, and that’s the reason I decided to move forward on this.”

If something comes up, Iluminai sends out an alert. While this is more of a red flag than a confirmed case of fraud, it helps realtors become aware of potential risks. As well, Carros has added different questionnaires to ensure his realtors are asking the correct questions.

“It’s really the advisors who are in control of their client information. I don’t meet most of these clients. I know my advisors, I know how they work, and I’m very adamant about how I do things — but, even though I’m trying to do my absolute best, I’m shorthanded,” he points out.

Klaus recognizes the challenge brokerages like Carros’ face in maintaining compliance. “For managing brokers to comply with the ongoing monitoring requirements of the (Proceeds of Crime, Money Laundering and Terrorist Financing Act), brokers would have to spend around $20 and 20 minutes per previous customer, about once a year. Some brokerages have 20,000 former customers. Some brokerages do 1,000 deals a year or more. So, in theory, the mountain to climb every year becomes higher and more expensive.”

He estimates that about 95 per cent of brokerages have not put any program in place that would be described as compliant with FINTRAC’s ongoing monitoring requirements. “The complexity and lack of resources available to them about how they would even start is mind-boggling,” he comments.

How Iluminai is performing so far

Iluminai is available across Canada and is currently in use at about 15 brokerages. The tool is also under a recent LOI with NexOne, a Quebec company to deploy it to its customers, which is about 15 per cent of the. country’s real estate market. So far, things are going well.

“We’ve got really good feedback from small to medium-sized businesses,” Klaus says. “They have thousands of transactions and customers they need to go through, which would otherwise take them thousands if not tens of thousands of hours to do the Googling and the research, and then record it somewhere.”

Recently, the tool identified someone that just won a byelection. “We identified a Canadian politician on a politically-exposed person list in the time it took for this person to be reported in the news. A politician in Canada is probably a pretty safe bet for owning a home, but it shows that the tool’s working,” Klaus shares.

As for how Carros feels it’s going, he says, “It’s the first time I’ve found a tool that actually does the business monitoring it’s supposed to do, which is to check up on your clients on an ongoing basis, basically for the rest of time.”

Whether it works over the long term, only time will tell.

What’s next for Iluminai

The Real Estate Board of Greater Vancouver is working with Iluminai to get the tool into as many brokerages as possible and to help other boards provide it.

“Vancouver is probably one of the most forward-thinking real estate boards from technology and regulatory standpoints … it would be great to have our tool implemented on a national level,” says Klaus. “CREA and BCREA have been very good about looking at technology from a regulatory compliance standpoint.”

As well, Iluminai has just signed a customer in the commercial real estate space and is working with a consulting firm for mortgage brokers.

“They all have similar regulations,” notes Klaus. “We’re looking to right-size our tool for all of those industries — a commercial realtor is a big corporation; they’re going to need a little more complexity, while mortgage brokers are not going to need as much.”