Anti-Money Laundering Legislation And Its Impact On Real Estate Developers

Since 2009, real estate developers (“Developers”) have been subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “Act”).  Under this Act, Developers are required to comply with the following record keeping and reporting obligations:

1. keeping a “client identification record” each time they sell a new property;
2. keeping a “receipt of funds record” each time they receive funds from a purchaser (some exceptions apply);
3. reporting the receipt of cash in excess of $10,000; and
4. reporting suspicious transactions where they have reason to suspect that the transaction is related to the commission of money laundering or terrorist financing.

Developers are also required to implement a compliance regime.

A Developer is defined in the Act to include a person or entity who, in that calendar year, has sold to the public, other than in the capacity of a real estate broker or sales representative:

• five or more new houses or condominium units;
• one or more new commercial or industrial buildings; or
• one or more new multi-unit residential buildings each of which contains five or more residential units, or two or more new multi-unit residential buildings that together contain five or more residential units.

Therefore, a person or entity selling bare lots is not subject to the Act.

Applicability to Developers using Outside Realtors

Developers who rely on outside licensed real estate agents or brokers for sales are not subject to the Act.  In such cases, the outside licensed agents/brokers are the ones with responsibilities under the Act.

Developers only have record keeping and reporting obligations if they sell directly to the public, through inside sales staff or through an outside new home sales company with non-licensed agents.

When some sales are handled in-house while others are handled by outside licensed real estate agents/brokers, the number of in-house sales is used to determine whether the person or entity falls under the definition of a Developer under the Act.

Record Keeping and Reporting Obligations

1. Client Identification Records

Each time a Developer sells a new house, new condominium unit, new commercial or industrial building or new multi-unit residential building (a “Transaction”) directly to a buyer instead of through an agent, the Developer is required to ascertain the identity of the purchaser in the Transaction and keep a “client information record”.  A “client information record” must set out the client’s name and address, and the nature of the client’s principal business or occupation. Therefore, Developers need to ask each client to provide a brief description of their principal business or occupation.

If the client is an individual, the “client information record” also has to include the individual’s date of birth.  If the “client information record” is for a corporation, the Developer must keep a copy of the part of the corporate records showing the power of the corporation to enter into the Transaction.
   
Where the purchaser is an individual, ascertaining their identity requires a Developer to check the individual’s:

• birth certificate;
• driver’s licence;
• provincial health insurance card;
• passport; or
• other similar document.

Where the purchaser is a corporation, the Developer must confirm the corporation’s name and address and the names of its directors.  In British Columbia, the most common way to confirm this information would be to conduct a corporate search on BC Online at https://www.bconline.gov.bc.ca/.

Where the purchaser is another form of entity (e.g. a partnership or trust), the Developer must ascertain its existence by examining appropriate records (e.g. a partnership agreement or declaration of trust).

If the client is an individual, the “client information record” must be completed at the time of the transaction.  Where the “client information record” is for a corporation or other entity, the Developer has 30 days from the date of the transaction to complete the record.

2. Receipt of Funds Records

Developers are required to keep a “receipt of funds record” for every amount received in the course of a Transaction, unless the amount is received from a financial entity (i.e. a bank or credit union) or a public body.  An amount is “received from a financial entity” only if it is a payment made by the financial entity itself (e.g. a payment by the Royal Bank).  An amount is not “received from a financial entity” if it is a payment from an individual drawn from an account at a financial entity (e.g. a cheque from an individual drawn on their Royal Bank account).

The information required in a “receipt of funds record” includes:

1. the amount and currency of the funds received;
2.  the date of the transaction;
3.  the purpose, details and type of transaction (for example, the funds were for a deposit on the purchase of a house, etc.), including whether any other individuals or entities were involved in the transaction;
4. if the funds received were cash, how the cash was received (for example, in person, by mail or any other way); and
5. if an account was affected by the transaction, include the following:

• the number and type of any such account;
• the full name of the client that holds the account, and
• the currency in which the transaction was conducted.

3. Large Cash Transactions

If a Developer receives an amount in cash of $10,000 or more, it must keep a “large cash transaction record” unless the cash is received from a financial entity or a public body.  Cash includes only coins and bills, and does not include cheques or bank drafts.

A “large cash transaction record” includes the same details noted above for a “receipt of funds record”.  However, “large cash transaction records” must be reported to FINTRAC (the Financial Transactions and Reports Analysis Centre of Canada).  Details regarding submitting “large cash transaction records” to FINTRAC can be found online at http://www.fintrac-canafe.gc.ca/publications/guide/guide-eng.asp.

4. Suspicious Transactions

In addition to reporting large cash transactions, Developers are required to report suspicious transactions and attempted suspicious transactions to FINTRAC where there are reasonable grounds to suspect that the transaction is related to the commission of money laundering or terrorist financing.  Details regarding reporting suspicious transactions can be found online at http://www.fintrac-canafe.gc.ca/publications/brochure/05-2003/2-eng.asp.

Record Retention

Developers must retain “client information records”, “receipt of funds records” and “large cash transaction records” in paper or electronic form for at least five years from the date they were created.

Compliance Policy / Appointments

Developers must develop a compliance regime consisting of the following five elements:

1. the appointment of a compliance officer;
2. the development and application of written compliance policies and procedures;
3. the assessment and documentation of risks of money laundering and terrorist financing and measures to mitigate high risks;
4. the implementation and documentation of an ongoing compliance training program; and
5. a documented review of the effectiveness of policies and procedures, training programs and risk assessment, which must be completed every two years.

1. Appointment of a Compliance Officer

Developers must appoint one individual within their organization as their Compliance Officer.  The Compliance Officer should report, on a regular basis, to the board of directors, senior management or owner of the developer.

2. Written Compliance Policy 

A developer’s compliance regime must include a written compliance policy.  The level of detail to be included in such a compliance policy will differ based on the developer’s risk of exposure to money laundering or terrorist financing.  Please see section 3 below for more information on risk assessment.  At a minimum, a compliance policy must contain a summary of reporting, record keeping, client identification, risk assessment and risk mitigation requirements.

If a developer is a corporation, its compliance policy must be approved by a senior officer of the corporation.

3. Risk Assessment 

Developers are required to complete an assessment and documentation of the risks they face related to money laundering and terrorist financing.  Regardless of the result of a developer’s risk assessment, developers are required to meet the reporting and record keeping obligations set out above.  However, if a risk assessment reveals a high-risk situation, enhanced due diligence is appropriate.

A risk assessment considers factors such as the nature of the product or service being provided, the geographical region where business is conducted, the relationships the developer has with its clients and any other relevant factors.  FINTRAC has produced a checklist and risk matrix which can be found online at http://www.fintrac-canafe.gc.ca/publications/guide/Guide4/4-eng.asp.

In addition to a risk assessment, developers must mitigate risk where a high risk transaction is identified, keep client identification information up to date, and conduct ongoing monitoring of transactions that pose high risks.

4. Training Program 

All employees of a Developer who have contact with customers, who handle customer transactions, who handle funds in any way or who are responsible for implementing of overseeing the compliance regime must be trained with respect to reporting, client identification and record keeping requirements.  The training program must be documented in writing and must be kept up to date.

5. Review of Compliance Policy

Developers must complete and document a review of the effectiveness of policies and procedures, training programs and risk assessment every two years.  The review must include a new risk assessment.

If a developer is a corporation, it must report the findings of the review, any policy and procedure updates to be made because of the review and the status of implementation of the updates to one of the corporation’s senior officers.

For more information or questions please contact:

Pushor Mitchell Partner Brad Cronquist at [email protected] or (250) 869-1150, or

Pushor Mitchell Associate Andrew Brunton at: [email protected] or (250) 869-1135.