Money laundering | Vancouver’s dirty figures: the smoking gun that wasn’t

When British Columbia released its bombshell findings last week that more than CAD7 billion (MOP42 billion) was laundered in a single year through the Canadian province – mostly through real estate – it trumpeted that “thousands” of properties might be involved.

It appeared to be conclusive evidence of what many in the city suspected: the 60% surge in Vancouver housing prices in the five years through 2017 was fueled in part by dirty cash, a big chunk flowing from Asia.

But the government’s case may be less conclusive than it appeared. A closer reading of the studies underlying the announcement shows there’s little hard evidence of actual money laundering, and even then, the amounts could be much smaller. And while one report said much of the suspect money is coming from China, the other pointed to the U.S.

“It’s very difficult for us to really accurately estimate the volume of flows of money laundering,” said Vanessa Iafolla, who researches money laundering at the University of Waterloo in Ontario. “It’s hard to measure something that you can’t see.”

Canada’s third-largest city and its most expensive housing market is increasingly divided over what caused the cost of a typical home to surpass a million dollars in mid-2017. Premier John Horgan’s government, which has pledged to make housing more affordable, is under pressure to deliver answers. He announced Wednesday a formal inquiry into money laundering.

The province is planning to set up a public registry of beneficial property owners by next year – the single most important step in peeling back the anonymity that enables dirty money, many experts agree. In the meantime, it’s working with educated guesstimates.

The study gauged that CAD7.4 billion was laundered through B.C. last year. By far the biggest source of dirty cash into Canada was the U.S. at CAD4.9 billion, six times more than from East Asia, including China. The second study, led by a former police chief, said it identified thousands of suspect properties – none of which were used to arrive at the CAD7 billion figure – and declared that “China figures prominently” in the flow of suspicious money.

GRAVITY MODEL

The methodology in the first study, known as the gravity model, seeks to determine how much dirty money is floating around the world, what portion needs to be laundered, and how much each region is likely to attract. Launderers are expected to gravitate to safe havens and rich economies where it’s easier to hide ill-gotten gains. It assumes that criminals, like most people, channel most of their financial assets into real estate. Geographical and cultural proximity, including a history of migration, are thrown into the mix.

“There’s no way of proving it,” but it beats the impossible task of trying to tally up transactions you don’t know about, says John Walker, a former researcher with the Australian Institute of Criminology who first developed the model, said by phone.

The government trumpeted that CAD5 billion of the CAD7 billion washed in the province last year went into real estate – the study’s highest possible estimate. It may be as low as CAD800 million depending on how criminals save versus invest, according to the report. The study also indicates billions more are being laundered in oil-rich Alberta and Ontario, home to the financial capital Toronto.

‘TREMENDOUS

OVERSIMPLIFICATION’

Finance Minister Carole James says dirty money was responsible for raising housing prices about 5% in the province last year. The report said its best estimate was a range of 3.7% to 7.5% but noted “considerable uncertainty” about the figures.

“It’s a tremendous oversimplification,” says Matthew McGuire, a forensic accountant who previously worked for Canada’s financial intelligence unit. “There is money being laundered through real estate, yes, but the factors that influence the change in prices of real estate are far more complex and far greater than just criminality.”

On Wednesday, a government news release said the impact on Metro Vancouver prices may have been “upwards of 20%” – the kind of geographic granularity that’s impossible to calculate with current data, the report’s chair Maureen Maloney had said earlier this week. The offices of Horgan, James and Attorney General David Eby didn’t immediately respond to a request for comment.

Vancouver has for years been riveted by stories of rich Asians moving cash into the region: students and homemakers declaring no income but owning multi-million-dollar homes, Chinese high rollers showing up at casinos with hockey bags brimming with cash, and most recently, a thriving grey market in Vancouver-to-China luxury car exports that sent millions of dollars in sales-tax refunds to overseas buyers.

ELECTRONIC LAUNDERING

That’s fed the perception that Vancouver’s money-laundering problem is in large part an Asian one.

But rich economies generate the most dirty money and from crimes related to the financial sector that can move billions at the push of a button, according to Brigitte Unger, a professor at Utrecht University who modeled the Canadian study. She says the Netherlands, considered to be at the forefront in tackling dirty money, had earlier made the same mistake that “money laundering only took place in Chinese restaurants and casinos.”

“The big money, I’m still convinced, doesn’t come from China,” said Unger by phone from Vienna. “The big money comes from the U.S. and from Europe because these are the rich countries, which use Canada as a wide-open door because it has much lower restrictions on where to place your money and how to stay anonymous.”

CASH GIFTS

The second report had featured a luxury car dealer describing how foreign students come in 10 times a month with no credit and no income and get auto financing based on wire transfers as “unequivocally money laundering.”

Flamboyant displays of wealth by students may be unpalatable but not necessarily criminal. An international student who returns home periodically typically isn’t required to report or pay taxes on income from abroad, while cash gifts from family members aren’t taxable under Canadian rules.

The second study sifted through more than a million land titles looking for red flags such as overseas buyers, properties bought without financing, opaque addresses and unusual mortgage terms. More than 2,000 properties were classified high risk for simply having mailing addresses in China or Hong Kong.

Ultimately, it concluded the approach had limitations.

“The ‘suspicious properties’ analysis suggests that a scoring system may not be an effective way to detect properties linked to money laundering,” the study said. Natalie Obiko Pearson & Natalie Wong, Bloomberg