Casinos, real estate flagged as vulnerable to money laundering as far back as 2014

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Canada’s money-laundering watchdog was cautioned as far back as 2014 that the country’s banking, real estate and casino sectors were vulnerable to sophisticated criminals washing vast sums of illicit cash. But a detailed report on the significant weak spots was never finished because the author was reassigned.

The 154-page draft analysis prepared by an employee at the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC) assessed the vulnerability of 11 sectors to this type of crime and found serious red flags, such as low compliance rates with rules around reporting suspicious activity.

Casinos were among the areas of higher risk, businesses which the British Columbia government now estimates have laundered hundreds of millions of dollars in the province in recent years. The report also flagged the country’s “safe and stable” real estate sector as an easy target for criminals.

It is the latest in a trickle of confidential reports from different federal agencies that explored the nature and severity of money laundering in Canada’s westernmost province.

B.C. Attorney-General David Eby said he is angry that the FinTRAC report never saw the light of day and says this type of analysis could have awoken Ottawa and the previous provincial government to the massive problem in his province, which he now estimates involves billions of dollars in illicit cash.

“It’s really frustrating to know that a report was prepared but not finished on exactly those issues, because I believe that had it gone forward, we might not have been in the position we are in today,” he told The Globe and Mail recently.

“It’s another example of what appears, to me, to be a number of people inside various watchdogs and regulators who have identified concerns and, for one reason or another, those concerns have not made it out to the public or perhaps even up to the political level.

"And that’s a major issue.”

The author is not named in the December, 2014, report, which was recently released only after a 2½ year fight between Ottawa-based researcher Ken Rubin and the agency. Before the employee could finish it, FinTRAC reassigned him to work on “higher priority files” during a period when the agency was facing a “heavy workload," according to the agency’s correspondence with Mr. Rubin.

“Unfortunately, work on the piece was not re-initiated and the document, which remained in draft form, was never reviewed or validated for accuracy, including proper identifications and references of the sources used,” the Access to Information response letter sent to Mr. Rubin late last year stated.

Mr. Rubin first sought any unpublished documents from FinTRAC in May, 2016, and shared the money-laundering analysis with The Globe after receiving the recent response from the agency.

The report was heavily redacted in the sections explaining the steps Canada should take to improve the oversight of each industry. Before it was finally handed over, documents show the agency consulted with the RCMP, Finance Canada and the federal Office of the Superintendent of Financial Institutions. The analysis was stamped as “Protected B” security level, which means if it was made public it could “cause serious injury to an individual, organization or government,” according to Ottawa’s regime for safeguarding sensitive information.

The assessment was completed just as Metro Vancouver’s property market began skyrocketing and before reports of suspicious transactions in B.C. casinos peaked in July, 2015, when more than $27-million in questionable cash reportedly passed through these establishments.

FinTRAC would not agree to an interview, stating via e-mail that the information in the report was “gathered by an employee for his own awareness of the known money laundering risks in Canada based on open source material and was not intended to be published.”

Last year, Mr. Eby appointed Peter German, a former deputy commissioner of the RCMP and former regional deputy commissioner at Correctional Service Canada, to look into money laundering in B.C. His first report studied the vulnerability of the province’s casinos. The second, due by the end of next month, will focus on B.C.'s overheated real estate market as well as its luxury car and horse racing industries.

The 2014 report noted that 82 per cent of FinTRAC’s follow-up compliance assessments and examinations in the real estate sector found medium or high deficiencies over three fiscal years starting in 2011. Casinos, during that same span, saw medium-to-high deficiency rates in compliance of 62 per cent.

The FinTRAC report also stated only a third of the roughly 7,600 active real estate brokerages were properly reporting back to it and that Canada’s property market is “safe and stable, easily accessed, and this would include for funds which may be from illicit activities."

“The competitiveness of the market and the sheer number of [real estate] agents puts pressure on individual agents to secure deals,” it stated. “The smaller agent has more incentive to ignore due diligence/[anti-money laundering] requirements, inherent risk."

The author of the report wrote that no one knows whether background checks on clients – a key way to determining whether the purchaser is suspicious – are standard in the industry.

Beneficial – also known as hidden – ownership is perhaps the most important tool criminals use to abuse the real estate sector by concealing the true source of their funds as well as the ultimate owner of a property, the report noted. It singled out the use of shell companies and trusts as mechanisms for keeping the name of a landlord secret.

The draft analysis identified six “significant challenges in the supervision of the real estate sector,” but they were redacted.

B.C. is still considering a law cracking down on beneficial ownership and last fall asked the public for feedback on its plan to create a public registry to track those who fundamentally own and control any real estate in the province through corporations, trustees or partners.

The FinTRAC document relied on intelligence from the RCMP; an independent 2014 review of the sectors by consulting firm Grant Thornton; the intergovernmental Financial Action Task Force; and Finance Canada; as well as FinTRAC’s own compliance data to assess the systemic risks of the country’s financial system to money laundering.

In the summer of 2015, FinTRAC did publish an assessment of the risks facing 27 areas of Canada’s legitimate economy.

The assessment gave corporations, domestic banks, express trusts and businesses such as currency exchanges each a “very high vulnerability rating” for money laundering. The paper did not go into more than a paragraph or two of detail on the nature of the risks facing each sector, in contrast to the several pages on each area in the draft document from the previous year.

FinTRAC’s last published annual report, for the 2017 fiscal year, shows the real estate sector has been targeted for the most examinations over each of the past three years. The agency said it changed the way it assesses compliance in 2017, so comparing earlier statistics with the current number of compliance examinations “may not accurately reflect sector-wide improvements or weaknesses.”

Denis Meunier, an anti-money laundering consultant and deputy director of financial intelligence at the agency from 2008 to 2011, said the low rates of compliance in the report should have raised flags with FinTRAC’s top brass and their bosses at Finance Canada to “take measures to address this either legislatively or applying more enforcement.

“This is a call for action in terms of finding the right tools to get these sectors to be in higher levels of compliance,” he said.

Bill Blair, the federal Minister of Border Security and Organized Crime Reduction, said after a joint news conference with Mr. Eby in Vancouver recently that he had not seen the draft FinTRAC report and could not comment. He did tell reporters that Ottawa is committed to doing a better job of sharing intelligence on money laundering across all agencies. (His office did not say last month whether he has since requested the 2014 draft FinTRAC report.)

“This has been a clear concern for governments and for law enforcement over many years and a number of important steps have been taken subsequent to that information being available and we have begun the process of making improvements,” he said. “But, at the same time, we recognize that there is still a great deal of work to be done.”