The Final Report of Public Inquiry into Money Laundering in British Columbia was delivered and commissioned by Mr. Austin Cullen (the “Commissioner”, and the “Report”, respectively). The Report outlines concerns with money laundering in British Columbia. Specifically, the Commissioner describes the current regulatory framework across multiple sectors, outlined weaknesses that allow for money laundering, and provided recommendations for fortifying loopholes.
In overviewing the real estate sector, the Report briefly considers real estate licensees (real estate agents), however the bulk of its recommendations target mortgage brokers. The Report addresses in detail the weak regulatory framework currently in place, and uses Mr. Chaudhury, an unregistered mortgage broker, as a case study to show gaps wide enough to allow the pocketing of 6 million in fees on fraudulent transactions over 10 years.
The Report recommends more responsibility for the real estate sector to report instances of suspected money laundering, and more resources to investigate and punish real estate licensees and mortgage brokers who breach their governing legislation. In the case of mortgage brokers, it further recommends tougher administrative penalties to reduce the financial incentive of facilitating potential money laundering.
Real estate licensees
Licensing requirements
The Real Estate Services Act [“RESA”] governs licensees. RESA requires that anyone engaging in real estate services be licensed under the legislation, whether they be a managing broker, associate broker or a representative. The Report highlights there is a clear gap in this licensing scheme: those who sell on behalf of developers, and business-scale “for sale/lease by owner” operations. The Report recommends both become subject to a licensing requirement under RESA (recommendations 8 and 9).
Regulation of real estate by the British Columbia Financial Services Authority [“BCFSA”]_
As of 2021, the BCFSA has combined multiple authorities to regulate the entire real estate sector; which has helped streamline investigations. However, the Report highlights some difficulties that still remain in investigating potential instances of money laundering in real estate: difficulty finding and retaining qualified investigators, lack of funding, and an increased volume of complaints have made it difficult to pursue public complaints. Further, the BCFSA has limited access to government data that could be critical in conducting investigations. This data includes purchase and sale agreements from the Property Taxation Branch, records of the Residential Tenancy Branch, and raw data maintained by the Land Title Survey Authority, all of which the BCFSA cannot readily access. The Report recommends the BCFSA gain access to said data, and be provided with adequate funding to carry out its investigations (recommendations 10 and 13).
The Financial Action Task Force (“FATF”) created a report on money laundering in the Canadian real estate sector, finding that many real estate agents are unaware of the risks of money laundering, and their obligations to report it to the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”).
Real estate agents are required to report suspicious transactions under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act [“PCMLTFA”]. The majority of responsibilities to report under the PCMLTFA fall to the managing broker of a brokerage, however individual licensees also have responsibilities. For example, any cash payments of over $10,000 must be reported to FINTRAC. Licensees also have a responsibility to report suspicious transactions. However, licensees report confusion over what constitutes ‘suspicious’, and a persistent misguided belief that money laundering is limited to transactions paid in cash.
These issues, coupled with a hesitancy to report on clients has, per the Report, led to an under-reporting of potential money laundering. Generally, the issue is most pronounced in smaller brokerages which lack the resources to create substantial anti-money laundering procedures, and have increased competitive incentive to take on risky transactions. Further, as it stands, real estate licensees have no obligation to inquire into the source of funds for a real estate purchase.
Given the above, the Report recommends that source of funding inquiries become obligatory at the outset of the relationship (recommendation 11). It suggests that FINTRAC require this, however if it does not, that the BCFSA should step in. Further, it suggests that the BCFSA create a requirement that a brokerage demonstrate the existence of an anti-money laundering compliance plan before approving a licensing application (recommendation 12).
Mortgage Brokers and Private lending
While the Report does highlight areas of issue for real estate licensees, the dominant concern is over the regulation of mortgage brokers. Mortgage brokers are regulated under the Mortgage Brokers Act (“MBA’), a piece of legislation the Report describes as ‘antiquated’. For example, where RESA has been updated to impose substantial penalties and fines, the MBA continues to limit administrative penalties to $50,000. The Maloney Report on money laundering in BC real estate describes that the MBA has failed to “keep pace with national and international consumer protection standards, changes in the financial services market, and issues such as money laundering in the real estate market”.
Part of the difficulty in regulating mortgage brokers, the Commissioner explains¸ is an unclear definition of what actually constitutes mortgage brokerage activity that requires and individual to be registered and regulated under the MBA. For example, the definition in the MBA creates a grey-area for those who may carry on a business of lending money secured by mortgages, but who do so less than 10 times per year. The Commissioner recommends the definition be amended to clarify who must register under the MBA (recommendation 14). The Report also suggests greater scrutiny of applicant registrants through extended criminal background checks (recommendation 15). The Commissioner would further amend the MBA to require brokerages to submit annual information to the Registrar to monitor industry trends (recommendation 16).
As with real estate licensees, the Report highlights a general trend of under-reporting suspicious transactions that could suggest money laundering. Notably, mortgage brokers, unlike real-estate licensees, are not required to report under the PCMLTFA despite the fact they are well-positioned to discover evidence of fraud. The Commissioner recommends increased education for all brokers to detect and report fraud and money laundering, and requiring reporting under the PCMLTFA (recommendations 19 and 25)
Where other financial professionals who give advice or sell financial products have obligations, such as duty of loyalty or “know your client” due diligence, the MBA imposes no such obligations on mortgage brokers. As with real estate licensees, mortgage brokers also have no obligation to inquire into the source of funds being used. The Commissioner recommends imposing such obligations under the PCMLTFA. (recommendation 26).
Analogous to the real estate licensee context outlined above, much of the responsibility for ensuring adherence to the regulatory structure falls to “designated individuals”. These individuals, like managing brokers in the licensee context, ensure regulatory obligations of the brokerage are met. However, unlike the licensee context, the BCFSA has no rule making power over the individuals, and they have no outlined duties in the MBA. The Commissioner recommends rectifying both issues (recommendations 17 and 18)
The Report also takes care to highlight the potential for amassing large sums of money through breaching the MBA. It highlights the case of Jay Chaudhary, who earned over $6 million in fees while working as an unregistered broker, forging documents to provide his clients with access to credit they would never have otherwise received. In comparison to his earnings, the current $50,000 maximum administrative penalty is dwarfed. The Report recommends the penalties be increased to $250,000, aligning with the RESA. Further, it suggests the MBA include the power to make disgorgement orders for profits made by unregistered persons engaged in mortgage brokerage activities, such as Mr. Chaudhary.
The Report goes on to suggest further transparency in all areas of mortgage lending, including private lending such as: requiring all mortgage charges be reported (recommendation 27); preventing beneficial owners in land from obscuring their ownership (recommendation 28); targeting private lenders for registration, making them subject to oversight and enforcement (recommendation 29); and allowing their registrar access to land title data (recommendations 30).
In addition to the above, the Report highlights the court system as a potential tool for money laundering through debt or foreclosure proceedings. Accordingly, it recommends a source-of-funds declaration be filed in recovery of a debt (recommendation 31). To complement this, it suggests legislation to allow the court to refuse to grant the orders sought by a plaintiff in a debt action or foreclosure petition if unsatisfied with said declaration (recommendation 32).
Overall, 17 of the Report’s 101 recommendations relate solely to mortgage brokers, far more than any other individual sector. The Commissioner is making his point clear: that the mortgage broker industry requires an overhaul, and it is one he anticipates in the near future. The provincial Ministry of Finance began completed consultation in 2020 to elicit feedback to modernize the MBA. If the Report’s recommendations are adopted, mortgage brokers can expect tighter regulations, more robust investigations, and harsher penalties in the near future.
The much-anticipated Report was subject to news coverage, most of which covered the more salacious details of bags of cash entering casinos and whistleblowers claiming government corruption. However, BC’s Attorney General agreed with the Report’s findings, suggesting that the province will move forward in implementing the Report’s recommendations to better fortify the province’s real estate marker against money laundering.[1] While changes may not be immediate, real estate professionals, particularly mortgage brokers, can likely expect to see the recommendations taking the form of updated legislation in the near future.
Real estate agents
Licensing:
Recommendation 8 recommends that the Province amend the Real Estate Services Regulation to bring the employees of developers within the licensing scheme.
Recommendation 9 recommends that the Province bring business-scale “for lease by owner” and “for sale by owner” operations into the licensing scheme for real estate service providers.
Real estate regulation by the BCFSA:
Recommendation 10 recommends that the Ministry of Finance consult with the British Columbia Financial Services Authority regarding its data needs and put in place measures to accommodate those needs, in a manner that respects the relevant privacy interests arising in this context.
Recommendation 11 recommends that the British Columbia Financial Services Authority (BCFSA) make inquiries with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to determine whether it plans to institute a source-of-funds inquiry requirement for licensees. If FINTRAC does not plan to do so, I recommend that the BCFSA require real estate licensees to ask clients about their source of funds at the outset of the client relationship, and record the information provided.
Recommendation 12 recommends that the British Columbia Financial Services Authority use its rule-making authority to mandate that brokerages demonstrate the existence of an anti–money laundering compliance program as a condition of licensing.
Recommendation 13 recommends that the Province allocate sufficient resources to the British Columbia Financial Services Authority to ensure that it has the capacity to address allegations of serious misconduct in a timely way.
Mortgage Brokers
Recommendation 14 recommends that the Province amend the Mortgage Brokers Act definition of “mortgage broker” to harmonize it with the requirement for registration.
Recommendation 15 recommends that the Registrar of Mortgage Brokers make it a requirement that applicants for registration provide an extended criminal and police background check, showing not only convictions and outstanding charges but also past charges relating to financial misconduct, as well as police database information about the person.
Recommendation 16 recommends that, in its revision of the Mortgage Brokers Act, the Province include a requirement that brokerages submit annual information returns to give the Registrar of Mortgage Brokers better insight into industry trends and risks.
Recommendation 17 recommends that the Province give the British Columbia Financial Services Authority rule-making authority in respect of mortgage brokers.
Recommendation 18 recommends that the Province amend the Mortgage Brokers Act to create a managing broker role with clearly defined responsibilities.
Recommendation 19 recommends that the Registrar of Mortgage Brokers require education for both managing brokers and sub-brokers, focusing on the detection and reporting of fraud and money laundering in the industry.
Recommendation 20 recommends that the Province amend the Mortgage Brokers Act to allow for larger financial penalties, up to $250,000, to align with penalties available under the Real Estate Services Act.
Recommendation 21 recommends that the Province amend the Mortgage Brokers Act to give the Registrar of Mortgage Brokers the power to make an order of disgorgement of profits for registered mortgage brokers found to have engaged in misconduct and for unregistered persons engaged in mortgage brokering activities.
Recommendation 22 recommends that the British Columbia Financial Services Authority impose a positive obligation on real estate licensees to report suspected unregistered mortgage brokering to it.
Recommendation 23 recommends that the Province amend the Mortgage Brokers Act to eliminate the automatic stay pending appeal found in section 9(2) of the Act.
Recommendation 24 recommends that the British Columbia Financial Services Authority work with the new dedicated provincial money laundering intelligence and investigation unit to develop an information-sharing partnership.
Recommendation 25 recommends that the provincial Minister of Finance urge her federal counterpart to make mortgage brokers reporting entities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
Recommendation 26 recommend that the Province create a positive obligation on mortgage lenders to make source-of-funds inquiries of investors providing capital for the lending business, if such obligations are not included in the federal reforms to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and associated Regulations.
Recommendation 27 recommends that the Province amend Form B (the form for registration of a mortgage under section 225 of the Land Title Act) so that all legal owners of mortgage charges are reported, and that this information be available through the land titles registry.
Recommendation 28 recommends that Province amend the definition of “interest in land” in the Land Owner Transparency Act to include mortgages, in order to ensure that the beneficial owners of a charge cannot obscure their ownership.
Recommendation 29 recommends that the Province enact legislation directed at private mortgage lenders providing for registration, oversight, and enforcement. This regime should be separate from the scheme applicable to those engaged in brokering loans.
Recommendation 30 recommends that the Province ensure that the regulator of private mortgage lenders has access to land title data, including new mortgage registrations, in a form that allows it to identify private lenders that ought to be registered with the regulator but are not.
Private lending
Recommendation 31 recommends that the Province implement a mandatory source-of-funds declaration to be fled with the court in every claim for the recovery of a debt, such that no action in debt or petition in foreclosure can be fled (except by an exempted person or entity) in the absence of such a declaration.
Recommendation 32 recommends that the Province enact legislation authorizing the court, in its discretion, to refuse to grant the order(s) sought by the plaintiff in a debt action or foreclosure petition if it is not satisfied that the declaration is truthful and accurate, or if it concludes that the funds advanced by the lender were derived from criminal activity.
[1] B.C. needs new, dedicated unit to successfully solve ‘staggering’ money laundering problem: report | CBC News
