Canada's new money laundering rules target developers

By Monte Stewart - Business Edge
Published: 09/05/2008 - Vol. 8, No. 18

Canada's real estate developers face tougher transaction-reporting rules as Ottawa attempts to crack down on money laundering.

By Feb. 20, 2009, developers must comply with amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

Development companies that fail to report transactions properly under Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) guidelines will face fines up to $500,000. Executives could be fined up to $100,000 per person.

"It will have a significant impact on real estate developers," says Kyle Wilson, a lawyer with Vancouver-based Clark Wilson LLP, who assists developers with property acquisitions.

Developers are part of the final phase of legislative changes that have been in the works since 2006. Realtors began complying with the tighter reporting rules this past June, and all new regulations accompanying the act will kick in by September 2009.

Every real estate developer who has sold at least five homes, one commercial or industrial building, or a condo or apartment complex will be subject to the act's client-identification, record-keeping and reporting requirements when they sell a property.

In a money-laundering scheme, "dirty" money derived from criminal activity is washed in clean, or legal, transactions that are difficult to trace.

The new rules are designed to bring Canada's anti-money-laundering rules up to international standards. Former prime minister Jean Chretien's Liberal government began the push against money laundering in 1999.

Wilson says the new rules are designed to improve enforcement of the law and FINTRAC's intelligence-gathering, but they will also place a greater regulatory burden on developers and reporting agencies, including banks and loan companies. Developers will face some of the same rules with which realtors are already complying.

Like realtors, they will have to document proof of identity of people and companies involved in every transaction and keep that information on file for five years in case FINTRAC, a federal agency that polices financial transactions, should want to review it.

Wilson, who recently published an article about the new rules on his firm's real estate website (www.bc realinks.com), says many developers probably do not have the necessary reporting policies and procedures in place. "I thought it was important to bring it to developers' attention and give them time to implement policies and procedures in time for the February 2009 implementation," he says. "If they fall within the definition of being a real estate developer, they're going to have to make sure that not only developers, but also their staff and all of the people working for them are familiar with the requirements. They're going to have to train staff.

"It will be, on the front end, probably a lot of work in terms of getting policies in place. On the back end, I think it will become fairly commonplace. It'll just be another routine step that they'll have to follow at the office."

Companies could face additional upfront costs for labour, a manual that explains the changes and, possibly, legal advice.

Rick Charlton, a national director with the Toronto-based National Association of Industrial and Office Properties, says Ottawa has not done enough to inform developers about the revised act.

"Well, I wasn't even aware of it, so I suggest they should (do more)," says Charlton, who is based in Calgary. "It's obviously going to add a level of administration to what we do. Whether or not we can absorb that in-house or not is the question. It won't be a positive impact, obviously."

Any developer who receives $10,000 or more in cash for a single deal must keep a large-cash transaction record and report the details to FINTRAC, unless the money is obtained from a financial institution or public body. Developers must also report suspicious transactions to FINTRAC, if it is believed the money will be laundered or directed to terrorists.

Jeff Fisher, Pacific region deputy executive-director of the Urban Development Institute (UDI), which represents developers across the country, says some of his group's members are also unaware of the new rules. "There could have been more guidance (from Ottawa). It's understandable. You have people that are unfamiliar with the industry writing regulations that are applying to that industry. There's a communication gap."

Real estate brokers and agents have aired similar complaints. Fisher says UDI members are still navigating their way through the new rules and potential impact. "It applies to some developers differently in terms of how the sales are done if you have in-house sales, versus if you have a real estate agent involved," he says.

"The ones that I've been talking to have certainly been notifying their sales departments, which is where this is all going to be done, in terms of what they need to do and the questions that they need to ask and, also, the reasons why they're asking them."

Fisher says developers' first concern is to navigate the process and then deal with any extra costs.

Several reports have suggested real estate transactions are vulnerable to money laundering. But Fisher says developers do not feel like they are being blamed for the problem, because the new rules apply to a variety of professions and industries.

Charlton, who is also a vice-president with WAM Development Group Inc., says protecting Canada's interests is a good idea, but each province already has legislation that determines how real estate communities can act.

Residential brokers, he notes, are probably at the most risk to money laundering, considering the many cases of mortgage fraud that they have faced.

"At least to my knowledge, you don't see that (mortgage fraud) on the commercial side, because on the commercial side, we're dealing with higher quality and more sophisticated lenders, purchasers, developers and long-term holders of real estate," says Charlton. Until more details are known, it's too soon to tell whether small developers will have a harder time complying with the new rules than larger firms, he adds.

"It's going to depend on what kind of workload is required by the smaller developers to comply," Charlton says.

Source: Business Edge