Money Laundering
As of late there has been much media attention focused on the role of foreign buyers, and increasingly on ‘money laundering’. No doubt both foreign buyers and money laundering play a role in our markets but not necessarily a linked role. To ignore the Billions of dollars laundered domestically and lay 100% responsibility for such behaviour and our markets sharp price increase at the feet of one group of people paints a biased and potentially unfair picture.
Short Version
While it may be true that Canada has within wanted fugitives from other countries, we are talking dozens of individuals – not tens of thousands. And do we really believe these specific people drove up the entire lower mainland housing market?
What about the Billions of dollars in laundered criminal proceeds from domestic crimes committed by long standing Canadian citizens? For instance the BC bud industry, which was estimated back in 2004 to be worth $4Billion – $7Billion annually. This is an industry dependant upon having the right real estate to work from, ideally owned and not rented – for maximum privacy.
Yet we put intense focus (and blame) on 234 buyers from the last 5,118 transactions in Metro Vancouver.
So why the intense focus on a group of people that was just 234 strong in June?
Because it is easy.
Take a step back, there is a far bigger and more complex picture around Vancouver real estate than many people seem to want to see. The first step is perhaps in understanding the difference between a foreign buyer and a new or pending Canadian citizen. The next is understanding that however much money may be flowing into Canada that should not be, we also have domestic money laundering issues of our own to address.
Actions should be driven by facts and fundamentals, not rhetoric.
Long Version
Money Laundering
In a recent Globe & Mail on Money Laundering and Real Estate it was pointed out that Federal examiners from FinTRAC visited 80 real estate offices that were targeted (not selected at random) based on previous complaints or concerns. One would expect 80 offices selected at random to be a representative sample of the overall market. However, in this case it was a specific targeting of 80 suspected ‘problem’ offices that were audited and therefore, any results should yield higher than average transgressions.
The results? ‘In 55 instances – most involving brokerage firms and some focusing just on individual agents – they (FinTRAC) found practices significantly lacking.’
55 instances, of which most involved the firm, not an individual, suggests administrative and managerial weakness around internal procedures. To be fair to real estate office management and admin staff these people are tasked with keeping dozens and dozens of agents on track and in line – a task not unlike herding 100 cats. As for the small amount of files which involved individuals and the nature of their transgressions? ‘FinTRAC found that some real estate agents were neglecting to get proper ID from clients, such as drivers’ licenses or passports.’
Keep in mind that Realtors go through a licensing program that consists of little more than a 10 week correspondence course and final exam, and of the current ~12,500 agents in BC one in four have been in the business less than five years. This is a group of people with initially limited training in an industry that lacks any formal apprenticeship program. Agents statistically gain very little experience over their first two to three years due to the limited amount of business most do.
With 25% of the workforce essentially rookies, having two dozen or so individuals fail to collect proper ID is not too surprising. If anything it is surprisingly good. In some of those cases the clients will almost certainly have been family or friends and getting the ID just seemed silly to the Realtor at the time, the compliance department rightly looks at it differently. Rookies tend to deal almost always with close friends and family in the first few years, and so such an oversight is easy to imagine.
~35,000 annual transactions (Greater Vancouver).
~12,500 agents.
55 instance of ‘practices significantly lacking’.
It would not seem Realtors play a pivotal role in any sort of money laundering as Realtors do not handle the cash, the cash flow through the banks. One would be hard pressed to find a law firm that would process a cash payment for real estate these days either. So while Realtors make an easy target, are they really the correct target?
Follow the money (but only to one country please)
In years gone by we have just been, as a populace, quite happy to have outside investment dollars flowing into our economy. As of late with a spike in house prices steep enough to convert simple frustration into outright anger and thus an acute desire for a single target to channel that anger towards, the latest target is now ‘foreign money’ and increasingly foreign money from one outside country in particular. Basically giving all other nationalities a free pass.
Foreign money is consistently be referred to as ‘dirty’ or ‘laundered’. It earns these unsavoury designations by virtue of the country of origin’s government exerting capital controls in an effort to stem the flow of money exiting said country.
And so while the money may well have been earned quite legitimately and the people that earned it otherwise law-abiding citizens who simply want to preserve their capital and possibly pave the way for a better life for their children, the laws (of their country) are being broken when these residents move their own money outside their own borders.
Disdain for government regulation (especially over our own stuff) is universal, and to most understandably frustrating, and in this context is hardly criminal sounding. In fact, it is the legitimate business owners that have far greater access to the tools required to game the system and move their legitimate earnings out of their home country. Those deriving profits from criminal enterprises have a much tougher time of it.
So are these funds ‘dirty’? I suppose it depends how you view things. What would you yourself be doing under similar circumstances. If you were in one of many countries around the world with a collapsing political structure, social unrest, tremendous air and water pollution, a flawed education system, a radical regime jockeying for power and or any one of these things, let alone a toxic mix of a few, I suspect such conditions would have many of us looking to get our money, and our family, out and over to a safe haven of some sort.
One with stability on all fronts.
Canada perhaps?
Vancouver perhaps?
And how much of our city are these foreign buyers purchasing? 5% of metro vancouver, and 3% of Province-wide transactions according to data based on an exceedingly large. This is based on ~10% of total transactions for the year. Not opinions, actual transactions.
Of course the sample size is already being challenged by those whose beliefs it challenges. Instead far weaker studies are being cited that support beliefs based on a minute, biased, and anecdotal sample size. As if somehow a study involving the surnames of 172 property sales offers superior data to a sample size of ~10,000 transactions.
No doubt this recent headline ‘Nearly two of three families say they can’t see themselves living in Vancouver three years from now‘ will also get repeated as if it carries great weight. This is a study based on 2,313 responses. This is ~0.004% of the population.
Again 3% of B.C. properties total with foreign buyers funds.
Is there another group that may also represent 3% of the market? A local group of longtime residents that we should be as concerned about?
What about our homegrown criminals breaking the laws of our country?
Compare today’s focus on money from that one country in particular to the absence of attention to local BC story so old and familiar that we tend to just ignore it. It’s like an ugly mole, we know its there, we know we should do something about it, but we are busy with other things in our lives – easier targets to spot driving down the road in a Maserati with an ‘L’ on the back of it for instance.
But this other group, and their story, have no doubt had an impact on real estate that few of us seem to connect with price pressures, specifically the laundering of local criminal proceeds. According to a 2004 study, B.C.’s marijuana industry was worth $4 billion to $7 billion annually and might we ask where are those billions of ill-gotten gains being washed and/or invested? In BC real estate perhaps? And make no mistake that this creates demand from yet another group of cash buyers which in turn pushes up prices. Yet we seem to get far more worked up about legitimate business people using legally earned dollars from another country (albeit perhaps illegally removed from said country) who come and buy our real estate than we do our own tax evading, law breaking, and society eroding fellow citizens.
Likely because they mostly cruise around in mini-vans and pickup trucks, laying low, and they look, talk, and act like us…except for the criminal behavior part.
With an estimated 50,000 indoor grow-ops (and that’s just one drug) how many of those 50,000 properties would you guess are rented, as opposed to purchased with untaxed criminal proceeds?
The drug dealers must love the shift in focus and the demonising of money flowing from one specific country as it conveniently shifts all attention away from them.
Meanwhile a wedge is quietly being driven in the name of ‘cracking down on money laundering’.
Well what a load of crop fertilizer.
I like to think that we as Canadians, in particular as British Columbians, would have a bit more respect for our already painfully embarrassing past when it comes to singling out people of a specific ethnic descent. It has not played out well for us in the past.
We can do better.
Let’s drive positive change, let’s not drive wedges.
Positive change will flow from detailed data, rational and extended conversations, and prudent steps. (A retroactive 15% tax is not a prudent step)
The root of why prices have spiked cannot be found in a single cause. It cannot be distilled into a ten second soundbite. It is a far more complex beast with dozens of heads and most of us don’t want complex. We want simple. And most of us are angry. We are mostly angry at ourselves (I know I regret selling what I sold, and not buying what I should have bought), and we want to vent that anger towards something other than ourselves.
Just give me a group of people to be angry at, pretty please…
This seems to be the current sentiment, and we need to get over it.
It is not productive.
Thank you