Canadian Real Estate Has A Money Laundering and Fraud Problem: Intelligence Report

Intel just confirmed, Canadian real estate is a haven for money laundering and fraud. Criminal Intelligence Service Canada (CISC), a national intelligence agency, quietly produced an anti-money laundering report in 2020. The report focuses on the scope and extent of money laundering in Canada. The agency found real estate was used extensively as a tool for criminal activity. Organized crime is engaged in everything from laundering, to helping regular families forge mortgage documents. All of this creates extra demand for housing, helping to push home prices higher — and rents as well.

Canadian Real Estate Is A Popular Money Laundering Tool

Canadian real estate is often exploited for money laundering due to opaque laws. According to the report, the proceeds of crime are used to buy the property through various schemes. Using illicit funds for down payments or mortgage payments are two straightforward methods.

However, CISC warns more sophisticated methods are also being used. Those include “manipulating property values and obtaining loans against the overvalued real estate that are paid using proceeds of crime.” 

Less obvious methods are also seeing a rise in use. Examples include using illicit funds for renovations or to pay “rent” to a known party. Since many renovations can be paid with cash and a home could be sold for recovery, it’s a cheap way to launder a lot of cash.

Paying rent is one of the more interesting ones they don’t elaborate on, but we will on another day. The gist is, one party rents a property out to a known party that pays inflated rent. It’s a huge problem, especially when the launderer is sophisticated enough to create a false paper trail. This can involve taking out ads in legitimate rental places, so they can “prove” how they obtained a tenant.

Money laundering involves moving as much money as possible, so obviously they inflate the rent value. Regular landlords and tenants, unaware, can begin to use these numbers as comps. This can inflate rents very rapidly. It’s a similar concept we previously covered on how a little money laundering can inflate home prices.

Corrupt and Unwitting Professionals Help Launder Through Real Estate

How is this being done in a “regulated” industry? With a little expert help from regulated professionals, explains CISC. “Depending on the sophistication of the transaction, criminals may engage the assistance of corrupt or unwittingly-used professionals, such as appraisers, real estate agents, accountants, lawyers, or notaries, to complete their transaction,” explains CISC.

“The specialized knowledge and skills of these service providers are used to obscure the source of funds and the beneficial ownership of the property.”

Organized Crime Groups Have Become Experts In Canadian Real Estate

First off, it’s important to note that organized crime isn’t the same as a “gang.” In Canada, the definition is a group of three or more people that commission crimes with direct or indirect material benefits. They’re often transnational groups with hierarchical management, like corporations. These aren’t your typical street thugs, but street thugs might be employees. 

CISC found 8 major organized crime groups engaged in real estate laundering. Most are in BC and Alberta, and “are reported to be involved in mortgage fraud.”

The agency warns, “several of these groups have expertise in the real estate market or collude with professionals in the industry to accomplish their fraudulent activities. Given the propensity for organized crime to launder money through Canadian real estate, real estate frauds will continue to occur, as tactics such as overvaluation of property and property-flipping help to facilitate money laundering.” 

Ontario is notably absent from that mention, but that doesn’t mean it isn’t an issue there. CISC has identified 176 organized crime groups, 50% with international money laundering links. The province is home to the largest share of these groups. Together, Ontario, BC, and Quebec represent 76% of money laundering organizations.

Not calling out the province isn’t a dismissal of Ontario as a place for real estate money laundering. It means they don’t have a lead on real estate laundering operations at the organized level. This likely has more to do with the province’s opaque system and a lack of political will to curb the issue.

The 2020 report also warns as home prices rise in other places, activity will spread. Uh… crap.

Fraud For Profit (and Fun!) With Canadian Real Estate

Real estate fraud breaks down into two major categories — profit or shelter. Fraud for profit includes illegal property flipping, overvaluation, and mortgage or title fraud. It’s hard to identify the extent due to concealment methods. This includes straw buyers or unregulated lenders that don’t provide any tracking details.

Fraud for profit is even harder with self-regulating players in the industry. A network of professionals (some willing, some unwittingly) helps conceal the activity. CISC notes between 2013 and 2017, about 2.5 million real estate transactions occurred. Those transactions only resulted in 200 suspicious transaction reports during that period. 

Data from FINTRAC, Canada’s financial intel agency, shows how oddly small this is. They received 200,000 suspicious transaction reports in 2017. That means over four years, only 0.1% of the transactions in a typical year were real estate related? FYI, suspicious transactions hit 468,000 reports for 2020-2021, doubling over five years.

Organized Crime May Have Helped You Lie On That Mortgage Application

Fraud for shelter is much more common, and you might even know people engaged in it. Fraud for shelter schemes often involves falsifying documents to inflate a mortgage. As more people FOMO into home buying before they’re ready, this fraud segment is soaring higher.

One such scheme is the “Brampton Loan,” anti-money laundering slang for falsifying income. A typical arrangement involves mortgage brokers charging a 1% fee for false documents. The documents “prove” the borrower has higher income than reported to the government. Covering the actual payments is a little more tricky. Those funds can come from illicit activity, tax evasion, or plain ole over-leveraging. People flat out just ask brokers if they’ll do it, sometimes referred to as “creative” mortgage work. 

It’s named after Brampton, Ontario. A small city in Greater Toronto, informally known as Canada’s mortgage fraud capital. It’s a modest suburb where the median household makes $87,300/year, with a median home price of $1.15 million. Hey, maybe a $600k downpayment is common in the largely unremarkable suburb, but that doesn’t change how many large busts of mortgage fraud are found.

Fraud for shelter isn’t just surging in use, but expected to grow further with prices. CISC warns, “criminals with specialization in mortgage brokering are likely to target the growing population of borrowers who are unable to obtain loans from regulated institutions and assist them with fraudulent applications or direct them to colluding with shadow-lenders who will then charge inflated interest rates.”

Canada is taking steps to reduce the wide-open doors for money laundering. However, it waited for it to become a boiling point issue, internationally known. A small amount of laundering can inflate home prices due to basic market mechanics. We’re not talking about small numbers in Canada though, it’s actual GDP points of activity.

Measures like beneficial ownership registries are a step in the right direction. Currently Canada has no idea who owns a home or company, the data was never required. By implementing this, laundering becomes more difficult, but not impossible. In the meantime, home prices inflated away since this discussion first happened in 2020. To help buyers cope with the impact, they were given cheap rates and more leverage. Heck, the government will even buy a part of the home with you.

In other words, an intelligence agency warned criminals are laundering through real estate. Canada gave money launderers an end date at which they would need to dispose of the property… then gave home buyers more leverage to buy property. We may have just witnessed the first bailout of money launderers. Well, the first bail out of money launderers without a European bank license.