Anti-money Laundering – A New Era of Regulation Impacts Property Market

Canada's mortgage industry, long seen as a potential conduit for money laundering, is facing a new set of regulations that promise to tighten the screws on illicit financial flows. In theory, the new FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) requirements for lenders, mortgage brokers, and real estate agents—focused on enhanced due diligence, reporting suspicious transactions, and meticulous record-keeping—should make it significantly harder for criminal actors to launder money through the housing market. But just how much of an impact will these rules have?

Enhanced Due Diligence and Reporting

In May 2024, FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) updated its requirements for mortgage brokers and real estate agents to enhance anti-money laundering (AML) and anti-terrorism financing (ATF) measures. The changes go into effect in October 2024. Here are the key changes:

1. Beneficial Ownership Verification

Mortgage brokers and real estate agents must now take reasonable steps to determine and verify the beneficial ownership of entities, meaning they must identify individuals who own or control 25% or more of a corporation, trust, or other entity involved in the transaction.

2. Enhanced Due Diligence

Professionals must establish and implement enhanced due diligence for high-risk clients and transactions. This includes conducting more thorough checks on politically exposed persons (PEPs) and heads of international organizations (HIOs). Transactions that involve complex ownership structures or clients and companies from countries are considered to have high money laundering risks.

This could be significant for the market because many of Canada’s new immigrants come from high-risk and sanctioned countries. The top sources of permanent residents to Canada are:

1. India

2. Philippines (High Risk)

3. China (Sanctions)

4. Nigeria (High Risk)

5. Cameroon (High Risk)

6. Afghanistan

7. Eritrea

8. Iran (Sanctions)

9. Pakistan

10. France

3. Record-keeping

Professionals face increased obligations for record-keeping. Brokers and agents must maintain client identification records, business relationship information, and Suspicious Activity Reports (SARs). They must also ensure all client records and transactions are up to date and stored securely to protect client privacy.

3. Transaction Reporting

Professionals need to submit Suspicious Activity Reports (SARs) for large cash transactions, electronic funds transfers (EFTs), and suspicious transactions. These must be filed promptly with FINTRAC.

4. Ongoing Monitoring

Professionals are expected to monitor client and business relationships continuously. This includes revisiting and reassessing a client’s risk profile as new information arises as transactions progress. So we can expect they will refresh some of their due diligence every few months, and certainly before mortgage funding or property purchase completion. Clients might perceive this as intrusive, and it will add an administrative burden to industry professionals.

5. Training and Compliance Programs

Agency and brokerage firms must have internal AML/ATF compliance programs. This includes appointing a compliance officer, training employees, and performing regular audits to ensure the firm complies with FINTRAC regulations.

6. Virtual and Non-Face-to-Face Transactions

Professionals are expected to increase scrutiny of virtual or non-face-to-face transactions due to the higher risks they pose for money laundering. They will need to apply enhanced due diligence measures, especially when identity verification is done remotely, and ensure the technology used for such verification meets FINTRAC's standards.

This raises the question of the global pandemic property market boom. Was it the result of changes in buyer behaviour? Or was it caused by a flood of illicit money taking advantage of new digital processes that regulatory rules had not yet adapted to?

Summary

These changes certainly raise the barrier for would-be money launderers. Coupled with increased reporting obligations, where brokers must alert FINTRAC to suspicious transactions, the measures could lead to more prosecutions and deterrence. However, the actual reduction in money laundering is difficult to quantify.

Challenges in Implementation

One reason for caution is that the effectiveness of the new rules depends on compliance. Much hinges on the ability of mortgage brokers and real estate agents, particularly smaller, independent players, to adhere to these rigorous standards. Any laxity in implementation could undermine the intended outcomes. Additionally, sophisticated money launderers, often steps ahead of regulatory changes, are likely to evolve their methods to circumvent the tightened rules.

A Global Problem

Moreover, money laundering is an inherently global problem, and Canada's efforts, while laudable, may only address a fraction of the issue. Without coordinated international enforcement, funds can still be washed through a labyrinth of offshore accounts and foreign markets before being placed in Canada, diminishing the impact of domestic regulations.

The Long-Term Outlook

While the FINTRAC measures represent a commendable step toward curbing money laundering in Canada's mortgage sector, the precise reduction remains speculative. The real test will be in implementation and enforcement over the coming years, with results likely emerging only after a sustained period of monitoring and adjustment. For now, Canada’s housing market is marginally safer, but the fight against dirty money is far from over.