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Canadian Home Builders' Association's Submission in Response to Finance Canada's Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime consultation:
Who We Are
The Canadian Home Builders' Association (CHBA) represents Canada's housing industry. It has over 7,000 members organized into eight provincial and about 60 local associations across Canada. Its members include new home builders, residential renovators, developers, trades contractors, rental building owners and managers, building product managers and suppliers, mortgage lenders and other professionals in the housing industry.
The comments offered in the review express the Association's views on behalf of new home builder and developer members who sell dwellings to the public (this is the targeted reporting entity, as noted below).
Context and Perspective
The views expressed about the proposals in the Consultation Paper are based on the following factors:
- Public policy position:
- The contribution and efforts by individuals and businesses to achieve public policy objectives (e.g., to maintain collective high ethical standards and a legitimate economy) must be balanced against the burden of compliance. The burden of compliance should take into account existing efforts and costs borne by various economic sectors, including the housing sector. In this regard, CHBA's position is that the Department should acknowledge the extensive efforts that new home builders and developers contribute now in support of the public policy objectives in general and law enforcement in particular. These include calculating, reporting and remitting Canada Pension Plan (CCP) deductions, income tax withholdings, Employment Insurance deductions, Workers' Compensation premiums and Goods and Services Tax/Harmonized Sales Tax (GST/HST) payments, completing the Contract Payment Reporting System (CPRS), a system required for Canada Revenue Agency (CRA) as part of its effort to identify and stop the underground economy in the housing sector and related criminal activities (e.g., tax evasion), and liability for GST reimbursements paid to homeowners under false premises.
- Appropriate and fair use of resources and expertise:
- To help achieve cost-effective interventions to combat money laundering and terrorist financing, the proposed measures should take into account the expertise required to implement them and the relevant expertise of new home builders and developers. Specifically, the Department should acknowledge that new home builders and developers are not part of Canada's police force, and they do not have, and should not be required to provide, the resources to identify and conduct investigations into criminal activity.
- Well-targeted efforts:
- Also to help achieve cost-effective interventions, the Department should target sectors and areas where money laundering and terrorist financing are likely to occur. It is doubtful that criminals will be inclined to deal with the legitimate housing industry. The Department should avoid the strategy used by CRA of setting up onerous reporting systems like the CPRS which, in the opinion of CHBA, encumbers legitimate businesses in the housing sector with extensive reporting requirements on legitimate activities of other legitimate businesses, with little demonstrable significant progress in stopping the illegal activities in the underground economy – precisely the objective it was officially intended to meet.
- Relative economic capacity of the housing industry:
- The Department should take into account the cost of compliance of the proposed measures against the ability of the housing industry to bear this cost. The structure of the housing industry is relevant to this issue.
The housing industry is comprised of a large number of small firms. While Canada does have some large volume home builders, by far, most new home building companies are small both in terms of number of houses built per year, net annual income and staffing. This means that most new home building companies do not have the resources – financial or staff - to set up and carry out investigations that are not core to their business.
- The Department has confirmed that its proposals on reporting entities do not include residential renovators; nor does it include business financing, regardless of the source. It includes only sales of dwellings.
Review of Specific Proposals
The following section reviews each of the proposals in the Consultation Paper that apply to new home builders and developers. The format of the review is first a paraphrased summary of the relevant proposal following by comments about it.
The government proposes to expand the definition of "real estate broker or sales representative" regulations to include real estate developers. The amendments would subject this sector to the same client identification, record keeping and reporting requirements as real estate agents must perform.
- Impact on the housing industry:
This is the most significant proposal to new home builders and developers since it expands the reporting entities to include them (the specific wording in the Consultation paper is "real estate developers who sell directly to the public", and the Department has confirmed that this includes new home builders and developers who sell dwellings to the public). The Department's rationale for proposing this expansion of reporting entities from real estate agents (the current requirement) to real estate developers is that money laundering in the real estate sector also exists in respect of the sale of new homes and buildings. If this proposal were adopted, all new home builders and developers in Canada would be responsible for complying with current requirements applicable to real estate agents under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and new proposals that are adopted. In general terms, reporting entities must identify customers, keep records and report suspicious transactions, as defined.
- Difficulties in identifying real estate developers who sell to the pubic:
- The Department of Finance may presume that real estate developers who sell to the public, as defined, can be easily identified through some kind of centralized database. This is not the case. Unlike the requirement for real estate brokers and agents to be provincially licensed, licensing cannot be used as a basis for identifying real estate developers. Provincial licensing of new home builders is used only in Quebec and BC (except for owner-builders who are exempt). Similarly, not all new home builders carry new home warranty coverage. New home warranty coverage is mandatory for licensed/registered new home builders in BC, Ontario and Quebec, but it is voluntary in other provinces. Some new home builders are members of CHBA and some are not; some developers are members of the Urban Development Institute (UDI) and some are not. Furthermore, and more important, some new home builders and renovators operate in the underground economy. None of the above-mentioned systems would identify them, and other government or regulatory systems, like Business Numbers, Workers' Compensation Board (WCB) records or tax records may not identify them either. Identifying real estate developers who sell to the public for purposes ranging from notifying this group to enforcing compliance with adopted proposals will be a challenge.
- Questionable impact of proposed requirements on new home builders and developers who process sales through lawyers:
- The Consultation Paper acknowledges that lawyers are involved in real estate transactions but regulations remove them from the application of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Since new home builders and developers involve lawyers in all sales, the impact of their involvement on information gathering, record keeping and reporting requirements on new home builders and developers is not clear.
- Questionable benefit of requiring thousands of legitimate real estate developers to be reporting entities relative to the cost of compliance:
- In view of the large number of reporting entities that would be added as a result of this proposal, and therefore the significant impact in terms of work requirements on them, the proposal should be contingent on some evidence that new home builders and developers are targets or unwitting vehicles of money laundering and terrorist financing. If this is not the case, or if no evidence exists, the rationale for this major expansion of reporting entities is unknown and CHBA would not support the proposal. Furthermore, the proposed expansion of reporting entities may miss those who are more likely to be involved in some sort of illegal behaviour, particularly those operating in the underground economy. In other words, the proposal would require a major ongoing work effort by thousands of legitimate businesses with likely limited results in terms of stopping money laundering. Conversely, it would avoid examining those where the prospects of making progress in stopping various kinds of criminal or unethical activity (tax evasion, money laundering, ignoring Workers' Compensation Act and other safety requirements, etc.) is greater. The issue of potential success and usefulness, as well as the cost-effectiveness of the proposed measures must be addressed and reflected in the proposals. In short, the proposals are presented without any reference to the feasibility and cost-effectiveness of the proposals nor to an evaluation or any evidence-based analysis that indicates their prospect of success in combating money laundering.
Comments on the following proposals assume that real estate developers will be reporting entities.
The government proposes to expand client identification and record-keeping requirements applicable to real estate brokers or sales representatives beyond large cash transactions. The requirement would also apply to any of the following activities on behalf of a client in the course of a real estate transaction:
- Receiving or paying funds,
- Depositing or withdrawing funds, or
- Transferring funds by any means.
The current regulations require action by reporting entities only when they receive cash over $10,000. The proposal removes this criterion and, by virtue of the phrase ("receiving funds"), means that it would include virtually every new dwelling sale in Canada, i.e., over 200,000 per year, based on recent years production levels. This huge scope must be borne in mind when the following proposals are considered.
Proposals 1.3 and 1.10 have been considered together since they are similar in terms of their requirements. Each is summarized below:
The government proposes to require accountants, accounting firms and real estate brokers or sales representatives, when engaged in the activities listed in proposals 1.1 and 1.2, to carry out the following actions:
- Verify the identity of the client by referring to a government-issued identity document.
- Take reasonable measures to obtain the name, address and principal business or occupation of any third party on whose behalf a transaction is carried out and beneficial owners of any entity involved, as well as their relationship to the originator of the transaction, as outlined in proposals 1.9, 1.10 and 1.11.
The government proposes to require that, in every situation where customer identification requirements are triggered, reporting entities also obtain third party and beneficial owner information and take reasonable measures to verify this information. The proposal provides the following information on third parties and beneficial owners.
- Third Parties: Reporting entities would be required to determine whether the customer is acting on behalf of a third party and obtain, verify and keep records of the name, address and occupation of all third parties, as well as their relationship to the customer.
- Beneficial Owners: This includes the following entities:
- Corporations and Business Customers: When the customer is a business, reporting entities would be required to obtain, verify and keep records of the name, address and occupation of all natural persons who own or control, directly or indirectly (for example through the ownership of a legal entity), more than 10 per cent of a corporation or partnership.
- Non-Profit Organizations (NPOs): When the customer is an NPO, reporting entities would be required to obtain, verify and keep records of the name, address and occupation of all senior officers and directors. They would also be required to determine whether the NPO is soliciting, as defined under the Canada Not-for-profit Corporations Act, and keep a record of this information. They would also need to take reasonable measures to determine whether the NPO is a charity registered with the Canada Revenue Agency (CRA) and, if so, obtain and keep records of the CRA registration number and confirmation of the registration by referring to the CRA website or other means.
- Trusts: Reporting entities would be required to obtain, verify and keep records of the name, address and occupation of all settlers and all living beneficiaries of the trust. Reporting entities would also be required to take reasonable measures to establish the source of funds.
- Two responses for two situations:
CHBA's response to these proposals addresses the different actions required for two distinct situations. The first situation is sales to individual purchasers. The second situation is sales to third parties and beneficial owners.
- Manageability of obtaining identity information on individual purchasers:
- In the first situation, the requirement is to record the information on documents such as a driver's license, a passport or a health card (where permitted by the province). It should probably not include a SIN number since that may violate the legitimate purpose of the SIN card. Since new home builders and developers have records on all sales, recording this additional information would not be onerous.
- Unacceptability of obtaining information on third parties and beneficial owners:
- The second part of the proposal is very different. It requires obtaining information on third parties and beneficial owners (Proposal 1.10) and customers dealt with non-face-to-face (Proposal 1.9). (Proposal 1.11 deals with monitoring their relationships with customers and is dealt with later.) CHBA regards this proposal as unacceptable and non-viable for two reasons: the volume of work required and the questionable accuracy/veracity of the information gathered. While dealing with third parties, beneficial owners and customers on a non-face-to-face basis may not be very frequent, obtaining the proposed information would be onerous. In some cases, it could require searching numerous documents (e.g., minute books of corporations). Secondly, new home builders and developers could not attest to the veracity of the information collected. A customer acting on behalf of others or the third parities and beneficial owners could provide false information. New home builders and developers are not the police. They are not expert in tactics to determine the accuracy of information provided. Yet, according to other proposals (1.8, 3.2, 6.12, 6.13 and 6.14), they would be liable for obtaining the information and for its accuracy. This is a wholly unreasonable proposition. The proposal is unworkable and excessive, especially in view of the structure of the housing industry which, as noted earlier, is comprised mainly of very small companies with a small staff complement.
CHBA's recommendation on a workable response in the case of third parties, beneficial owners and non-face-to-face clients is to report any transactions of this type to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) for follow-up by this organization.
The government proposes to require reporting entities to take certain measures in the following situations:
- When there is a suspicion of money laundering or terrorist financing and the identity of the client has not previously been ascertained, the reporting entity should identify and verify the customer's information. In this situation, verification should be undertaken only to the extent that it can be accomplished without "tipping off" the customer about the suspicion.
- When there is a suspicion of money laundering or terrorist financing, and there are doubts about the veracity or adequacy of previously obtained customer information, the reporting entity should repeat the process of identifying and verifying the customer's information. In this situation, verification should be undertaken only to the extent that it can be accomplished without "tipping off" the customer about the suspicion.
Records of the sources of information and the methods of identification should be kept in both cases.
- Need to clarify requirements:
A key to responding to this proposed requirement is understanding "suspicion of money laundering or terrorist financing". The FINTRAC web site provides the following guidelines on suspicious transactions in real estate:
- Client arrives at a real estate closing with a significant amount of cash.
- Client purchases property in the name of a nominee such as an associate or a relative (other than a spouse).
- Client does not want to put his or her name on any document that would connect him or her with the property or uses different names on Offers to Purchase, closing documents and deposit receipts.
- Client inadequately explains the last minute substitution of the purchasing party's name.
- Client negotiates a purchase for market value or above asking price, but records a lower value on documents, paying the difference under the table.
- Client sells property below market value with an additional under the table payment.
- Client pays initial deposit with a cheque from a third party, other than a spouse or a parent.
- Client pays substantial down payment in cash and balance is financed by an unusual source or offshore bank.
- Client purchases personal use property under corporate veil when this type of transaction is inconsistent with the ordinary business practice of the client.
- Client purchases property without inspecting it.
- Client purchases multiple properties in a short time period, and seems to have few concerns about the location, condition, and anticipated repair costs, etc. of each property.
- Client pays rent or the amount of a lease in advance using a large amount of cash.
- Client is known to have paid large remodelling or home improvement invoices with cash, on a property for which property management services are provided.
- Concerns about work requirements, cost of compliance and liability of reporting entities:
- These criteria require the application of judgement, and this is expensive because it requires the attention of senior staff or principals of a company. The cost of compliance will be high. The proposed requirement for verification of client information imposes a significant workload on new home builders and developers. It again raises the question of reliability of the information gathered, as noted above in discussing Proposals 1.3 and 1.10. CHBA's recommendation is that if a suspicious situation arises, a new home builder/developer should report this to FINTRAC and not be obligated to obtain and/or verify information about the customer.
Proposal 1.5: The government proposes to require that for transactions above a certain threshold, when there are reasonable grounds to suspect that a new or existing customer is a foreign or domestic politically exposed person (PEP), as defined, reporting entities would have additional responsibilities. These entities would need to do the following:
- Have appropriate risk management systems in place to determine whether a customer is a politically exposed person.
- Take reasonable measures to establish the source of funds.
- Conduct enhanced ongoing monitoring of the business relationship.
- Obtain senior management approval to enact the transaction, open the account or continue the business relationship.
- Clarification of PEPs:
- The Department of Finance defines PEPs as people who have been entrusted with prominent public function. They include heads of state, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations and important party officials. The Consultation Paper expresses concern that these people constitute higher risk for financial institutions and intermediaries since they have greater opportunities to engage in corrupt activities.
- Unworkable proposal:
- This proposal is unworkable because of the wording and concepts contained in it:
- The phrase "above a certain threshold" is not a defined term and does not permit implementation.
- The meaning of the first three of the actions proposed, i.e., have appropriate risk management systems in place to determine whether a customer is a politically exposed person, take reasonable measures to establish the source of funds and conduct enhanced ongoing monitoring of the business relationship, are not clear in terms of knowing what is required.
- The definition of PEPs is very broad. They include regular customers of many new home builders and developers, e.g., senior government officials (deputy ministers, assistance deputy ministers, Presidents of Crown Corporations, judges, etc.). The basis for such a broad definition is not apparent.
- The proposed requirement for "additional responsibilities" raises again the issues of workload in order to comply, and the unreasonableness of expecting new home builders and developers to obtain credible information that requires expertise in criminal investigations that new home builders and developers do not possess.
The government proposes to allow any reporting entity to rely on another person or entity to ascertain the identity of their customer provided that the reporting entity has a contractual arrangement with the person or entity for the purpose of ascertaining customer identity. The agent would be required to ascertain customer identity in person by referring to a government-issued identity document as required under the regulations. Under this provision, the reporting entity would have to obtain customer information from the person or entity ascertaining customer identity on its behalf and would be required to keep the records specified under the regulations. However, the ultimate responsibility for complying with the requirements would remain with the reporting entity.
- Clarification of requirement:
This proposal is contained within a section of the Consultation Paper that discusses non-face-to-face transactions. The Paper takes the position that, to the extent possible, reporting entities should meet their customers in person and ascertain their identity by referring to a government-issued identity document. However, when this is not possible, customer identification measures should ensure that non-face-to-face transactions can be conducted with the same confidence and surety as when a customer is physically present. When customer identity cannot be ascertained in person by the reporting entity, the Government proposes two options: 1) relying on an agent or introducer; or 2) using specific non-face-to-face customer identification measures.
- Concerns about workload, cost and relevant expertise:
- The requirement refers to the use of non-face-to-face customer identification measures. While the frequency of such transactions may be low for most builders, where they do arise, the same issues as mentioned previously arise: extra work and cost to new home builders and developers, the unreasonableness of expecting new home builders and developers to know and apply these measures, and the liability of non-compliance in light of the lack of expertise to meet requirements. New home builders and developers are not able, and should not have to, carry out these types of measures. CHBA's recommendation is to report non face-to-face business transactions to FINTRAC and let it examine them.
Proposal 1.11: The government proposes to require that reporting entities monitor their business relationships with their customers, including transactions, on an ongoing basis; and ï€ implement procedures to ensure that customer information remains up-to-date.
Lack of relevance to new home builders and developers:
This proposal does not seem very applicable to real estate developers, i.e., most situations involve one sale. Any further contact with that customer would be rare, and it would show up as a new sale. CHBA suggests that instead of the proposed requirement, a more relevant one would be report repeat sales to specific customers in a short time or on an ongoing basis.
The government proposes to explicitly include the reporting of suspicious attempted transactions.
- All reporting entities that are currently obligated to report suspicious transactions would be required to report suspicious attempted transactions.
- Guidance would be provided to reporting entities to assist them in determining when to report.
- The current form and manner of suspicious transaction reporting would remain unchanged except for the addition of information indicating that the transaction was not completed.
- At a minimum, reasonable efforts should be made to obtain the name and address of the individual undertaking the transaction and the amount of the transaction.
- The same record-keeping requirements in place for suspicious transactions would also apply to attempted suspicious transactions.
This proposal should be understood in the context of existing reporting requirements. These are understood to be as follows: reporting entities are required to send to FINTRAC suspicious transaction reports, which contain designated information, when they have suspicions that a financial transaction relates to money laundering or terrorist financing. Based on information on FINTRAC's website, the following reporting guidelines apply:
- Electronic reporting is mandatory if the reporting entity has the capacity.
- Options exist for reporting, depending on the volume and frequency of reporting: 1) low volume/low frequency, 2) low volume/high frequency and 3) high volume/high frequency. Option 1 is likely the most appropriate for new home builders and developers.
- The reporting time requirement is 30 days from the date when a suspicious transaction is noted/detected.
- The reporting requirements has five general parts: 1) information about the reporting entity, 2) details about the transactions, 3) more details about the disposition of the transactions, 4) details about the transaction disposition (this refers to the way in which the transaction was implemented, focusing of whether the person conducted it on his/her own behalf or on behalf of another person/business or entity and 5) reason for the suspicion.
- Lack of clarity about the meaning and identification of "attempted" transactions:
- CHBA is not clear on what attempted transactions means in the context of selling dwellings, and therefore is unclear about the application of this proposal to new home builders and developers.
- Concerns about the challenge of initial set-up of the reporting system, work, cost and other implications:
- Becoming familiar with the reporting system will be difficult for many small new home building companies because of their work load and the unfamiliarity with the current reporting system. As with other proposals, CHBA has a concern about the workload and cost of these reporting requirements. Also, some new home builders and developers may be afraid to report any transactions for fear of retaliation from those reported.
The government proposes to create an administrative and monetary penalty regime to deal with individuals and entities that do not comply with the adopted requirements. The key features of this regime would include the following:
- A clear description of the violations to be dealt with through the use of penalties. These violations would include failure to identify clients and keep appropriate records, report suspicious transactions, large cash transactions, electronic funds transfers and terrorist property, implement an appropriate compliance regime, including the appointment of a designated compliance officer and the establishment of appropriate policies, procedures and training programs for employees, provide accurate, timely and complete reports and information to FINTRAC and cooperate with a FINTRAC compliance officer.
- A clear schedule of graduated penalty amounts would be established following appropriate consultations with reporting entity stakeholders.
- Penalties would be established in regulations and would be assessed by FINTRAC in accordance with clearly established criteria.
- Notice would be issued to entities that do not comply, which identifies the nature of the violation and the amount of the penalty.
- The notice would review the range of options available to the offender, including the right to appeal and the recourse to a defense of due diligence
- The name of the offender and details of the violation would be made available on FINTRAC's website.
- Penalties would be used as a complementary compliance tool to criminal sanctions, which will continue to be available to deal with the most severe violations (e.g. willful non-compliance). The capacity to impose an array of penalties when persons or entities demonstrate non-compliance with requirements laws will enhance FINTRAC's overall compliance program.
- Value of a graduated penalty regime:
CHBA acknowledges that penalties should depend on the seriousness of transgressions.
- Unreasonableness of introducing a penalty regime at this stage of the proposals:
- As noted previously, the proposals have been introduced without any evidence of their prospect of success in combating money laundering, of real estate developers' capacity to implement relevant proposals, or of other implications on the industry. It is therefore unreasonable and premature to propose a penalty regime at this time.
To support management of the proposed anti-money laundering and anti-terrorist financing regime, the government proposes that an advisory committee be established. The committee would have the following key characteristics:
- The committee's mandate would be to advise the government on issues of common interest and develop approaches for dealing with emerging issues.
- The committee would serve as a discussion forum among various public sector and private sector stakeholders in Canada.
- The committee would comprise about 20-25 senior representatives from the public and private sectors.
- Private sector representatives would include the Canadian banks and other deposit-taking institutions, insurance companies, securities dealers, money service businesses, and other affected sectors.
- The committee would meet twice a year (or more frequently if necessary), with the option of using a working group structure to examine selected issues in greater detail.
- The committee would be chaired by the Department of Finance.
- Agreement with establishing an advisory committee:
In view of the significant increase in the proposed number of reporting entities, the wide-ranging resulting implications and the onerous impact of the proposals on new home builders and developers, CHBA supports the proposed advisory committee.
- Need for representation from distinct reporting entities:
- The housing industry has distinct characteristics. It is a large sector in terms of overall impact on the economy, but, as noted previously, it is comprised of many small companies. These companies have limited capacity to respond to many of the proposals and no capacity to respond to others. Further, they are not based on evidence that the proposals will be successful or feasible. CHBA therefore recommends the inclusion of a CHBA representative on the Committee to discuss these fundamental issues.
- Need for sensitivity to the cost of compliance:
- CHBA notes the proposal for a mix of representatives from the public and private sector. CHBA further recommends that the committee be co-chaired by a representative from the Department of Finance and a member of the private sector. One reason for this recommendation is that the proposals appear not to be sufficiently sensitive to the difficulty and cost of complying with them. Strong representation from and designation of a senior role for the private sector representative will increase scrutiny of the proposals with respect to their reasonableness and feasibility.
Proposal 6.5 Canada Revenue Agency Business Numbers
Proposed amendment: Require reporting entities to obtain and report business numbers.
Departmental explanation: When ascertaining the identity of a customer that is a business, the proposed amendment would require reporting entities to obtain its CRA-issued Business Number. It would also require the business number to be reported to FINTRAC on a suspicious or prescribed transaction report.
Comments:This does not appear to be an onerous requirement. Further, CHBA recommends that that CRA require all businesses regardless of size to have Business Numbers, i.e., to broaden the current requirements, since this would help combat various criminal activities in the underground economy (CHBA has recommended this action for years).
Proposal 6.8 Terrorist Property Reports
Proposed amendment: Require reporting entities to report to FINTRAC terrorist assets frozen under the United Nations Suppression of Terrorism Regulations and other related statutes.
Departmental explanation: Currently, reporting entities are required, in addition to reporting to the RCMP and CSIS, to report to FINTRAC when they are in the possession of assets of a terrorist entity listed under the Criminal Code. The proposed amendment would require them to report to FINTRAC in respect of the assets of terrorists listed under the United Nations Suppression of Terrorism Regulations and other related statutes.
Comments:This proposal does not appear to be relevant to real estate developers, i.e., it is unlikely that they would incur this situation. Further, real estate developers would not typically have the knowledge required to comply with this requirement, or how to obtain the information. This is another case where members of the housing industry would be held accountable for something (in this case something unlikely to occur in their business) that they would generally not be able to comply with but still held liable.
Proposal 6.9 Property Managers
Proposed amendment: Exempt the activities of property managers from the obligations of real estate agents (and other reporting entities under the new proposal).
Departmental explanation: Currently, some property managers have obligations under current requirements, as they are required to hold a real estate license to conduct property management activities in their province of operation. The proposed amendment would exempt transactions conducted in the course of property management activities from the proposed requirements.
Comments:This is a minor "housekeeping" issue and not contentious.
Proposal 6.12 Compliance Regime
Proposed amendment: Include an explicit requirement for reporting entities to implement a compliance regime.
Explanation: The requirement for reporting entities to establish a compliance regime is linked to their obligations under pertinent legislation. The proposed amendment would add clarity and certainty by adding an explicit corresponding requirement under the Act.
This proposed requirement flows from Proposal 3.2 which proposes a graduated penalty regime. A compliance regime is obviously required to inform and guide reporting entities on what they are required to do. However, as noted in CHBA's comment on that proposal, CHBA does not support the introduction of a penalty regime at this stage of the proposals because of the lack of evidence that they will address the problem of money laundering effectively or that they are feasible or cost-effective.
Proposal 6.13 Providing Documents to Compliance Officers
Proposed amendment: Require that documents requested by a FINTRAC compliance officer be produced at a site determined by FINTRAC.
Departmental explanation: The amendment would allow FINTRAC to conduct examinations in its own offices and avoid having to request a search warrant for reporting entities that operate in dwelling houses that deny FINTRAC access to their premises.
This proposal also flows from Proposal 3.2 (penalty regime), in that it reflects requirements that would facilitate FINTRAC's efforts to audit compliance by reporting entities. CHBA does not support the introduction of penalties and related actions at this stage of reviewing proposals for the reasons stated.
Proposal 6.14 Compliance Questionnaires
Proposed amendment: Require that reporting entities complete and return compliance questionnaires sent by FINTRAC.
Departmental explanation: Currently, reporting entities are not compelled to complete compliance questionnaires. The amendment would allow FINTRAC to require that these questionnaires be completed and returned for risk-assessment purposes.
This proposed requirement also flows from Proposal 3.2 (penalty regime), and is part of a compliance system. CHBA offers the same comments as for Proposal 6.13.
Proposal 6.15 Statute of Limitations for Non-Compliance Infractions
Proposed amendment: Extend to five years the one-year limit in respect of non-compliance infractions proceeding by summary conviction.
Departmental explanation: Currently, the statute of limitations for non-compliance infractions is one year in the event that the Crown elects to proceed by summary conviction. Extending to five years the statute of limitations for non-compliance infractions proceeding by summary conviction would provide the Crown greater flexibility to determine if it wishes to prosecute a non-compliance infraction.
This proposal also flows from Proposal 3.2 (penalty regime) and is part of a compliance regime. CHBA offers the same comments as for Proposal 6.13.
Proposal 6.16 Reporting Entities Going Out of Business
Proposed amendment: Transfer the obligations under the Act of a company that is no longer in business to its directors.
Departmental explanation: Currently, it is difficult to hold companies that no longer exist accountable for non-compliance violations that the company may have engaged in while in business. The proposed amendment would be to transfer continued responsibility for those violations to the director(s) of the corporation in the event that it ceases to be a legal entity.
This is applicable to the real estate development industry where a common practice among larger new home builders and developers is to establish a separate company to build each project.
Conclusions and Recommendations
Need for a Considerations of Prospects of Success, Feasibility and Cost-Effectiveness of the Proposals
- The decision to expand the number of reporting entities to include real estate developers as defined should be based on evidence that money laundering and anti-terrorist financing occurs in this sector. It should also be based on analysis that indicates the prospect of the success of the proposed measures, the capacity of real estate developers to implement the proposals and their cost-effectiveness.
- More specifically, the Department of Finance should consider the relative value of requiring thousands of businesses to gather information and keep records (a requirement that would apply to each of the hundreds of thousands of dwelling sales per year) and to report suspicious transactions from the legitimate housing industry where the prospects of uncovering criminal activity is likely low, versus a focused investigation of new home builders, renovators and trades who participate in the underground economy where the amount and cost of work would be far less and the prospect of uncovering criminal activity is likely much higher. Further, this focus could be carried out in a coordinated manner by FINTRAC and CRA, since CRA has some information and skills required to carry out this type of work.
Unreasonableness of Requiring Compliance with Some Proposals
- As noted, a number of the proposals require a significant amount of work and expertise that the housing industry does not have, e.g., identifying information on third parties and beneficial owners, applying non-face-to-face customer identification measures and reporting on terrorist assets. At the same time, the proposals would make real estate developers responsible for the veracity of the information. This is wholly unreasonable.
- If these proposals are adopted, CHBA's recommendation for dealing with them is that real estate developers report to FINTRAC cases where third parties, beneficial owners and non face-to-face communications are involved in a sale, and let FINTRAC investigate these situations.
In the interests of adopting and developing feasible and balanced initiatives to combat money laundering and anti-terrorist financing regimes, CHBA will volunteer to provide representatives to participate in the proposed advisory committee.