Effective February 20, 2009, Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act), will apply to real estate developers. The amendments to the Act and its accompanying Regulations create new requirements for reporting, record-keeping, and client identification, introduce a mandatory compliance regime for real estate developers, and broaden these obligations for brokers and sales agents. Before selling a new property - a house, condominium unit, commercial or industrial building, or multi-unit residential building - you will need to determine how the new requirements affect you and your business.
Do the New Requirements Apply to You?
The Act defines a "real estate developer" as an individual or entity, other than a real estate broker or sales representative, who, in any calendar year after 2007, has sold to the public the following:
- at least five new houses or condominium units,
- at least one new commercial or industrial building,
- at least one new multi-unit residential building containing five or more residential units, or
- at least two new multi-unit residential buildings that together contain five or more residential units.
Sales to the public include those to an individual, a corporation, or any other entity, but exclude those between affiliates or between a subsidiary and its owner.
According to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the agency responsible for collecting information and ensuring compliance with the Act, a "new" house or building is one that was constructed (or possibly one that was substantially renovated) within the past two years and was not occupied for its intended purpose before being sold. This means that a model home or sales office qualifies as a new home if sold within two years of being built.
Know your Ongoing Obligations: Reporting, Record-Keeping, and Compliance
If you fit within the definition of a real estate developer under the Act in relation to your activities in any calendar year after 2007, you will have anti-money laundering reporting, record-keeping, and compliance obligations unless the nature of your business substantially and permanently changes.
If you engage the services of real estate brokers or sales representatives to act as your agents for sales to the public, the record keeping and client identification obligations will not apply to you but will be the responsibility of those brokers and/or sales representatives, so long as they are agents or independent contractors rather than your employees.
Money laundering is the act or attempted act of disguising the source of money or assets derived from criminal activity. Terrorist financing includes providing money to individuals or groups to facilitate terrorist activities. In order to combat these activities, under the Act, real estate developers will be required to report certain events to FINTRAC:
- suspicious transactions (including attempted suspicious transactions) where you have reasonable grounds to suspect that the transactions are related to a money laundering offence or the financing of terrorist activity (e.g. unusual mortgage agreements; different names on offers to purchase, closing documents and deposit receipts without explanation; multiple transactions by the same individual or by related individuals)
- possession or control of terrorist property that is owned or controlled by or on behalf of a terrorist group
- cash transactions of $10,000 or more, including two or more cash transactions of less than $10,000 made within a 24-hour period by or on behalf of the same client (reports are not required where you receive the cash from a financial entity or a public body)
The Act requires that you record detailed information about the people or companies involved in a transaction:
- Identify your client(s)
- Maintain client information records
- Determine any third parties, such as the buyer’s real estate agent, representative, or lawyer, and keep a record about that determination
The above records will require you to verify the identification and occupation of each buyer (e.g. copy an individual buyer’s driver’s licence; obtain official records of existence and signing authority for companies such as copies of the articles of incorporation, articles of amendment and an excerpt of the appropriate by-law identifying who has signing authority). Where it is not possible for you to view the original piece of identification, you may use an agent to verify the original identification document on your behalf. Even if you use an agent, you are responsible for making sure the identification requirements are met.
Additional steps are required in sales situations where the real estate developer does not meet face-to-face with the buyer. In these cases, you are required to use two of the following methods:
- refer to an independent and reliable identification product or, with the client’s permission, obtain a credit bureau file that must have been in existence for at least the last six months;
- obtain an attestation from a commissioner of oaths or a guarantor that he or she has seen an original identification document for the individual;
- confirm that a cheque drawn on a deposit account that the individual has with a financial entity has cleared, or confirm that the individual has a deposit account with a financial entity. (Financial entity means a bank listed in Schedule I or II of the Bank Act (Canada), an authorized foreign bank with respect to its operations in Canada, a credit union, a caisse populaire, a trust and loan company, or an agent of the Crown that accepts deposit liabilities. In the case of a foreign bank, the deposit account must be in Canada).
You may not always be able to identify a client outside Canada by these methods because there may be no available Canadian credit history, no access to a Canadian guarantor, and no deposit account with a financial entity. In this case, you may need to use an agent to identify the client.
In addition to reporting all cash receipts of $10,000 or more to FINTRAC, you must also take specific measures to keep a receipt of funds record for all amounts received (including deposits) setting out the amounts received, currency, and accounts affected.
By February 20, 2009, real estate developers must have a compliance regime in place to comply with the Act. This includes appointing a compliance officer, conducting a risk assessment of potential threats and vulnerabilities to money laundering and terrorist financing to which your business is exposed, developing a procedures manual, training staff on compliance procedures, and providing for ongoing compliance review. Failure to comply with the requirements of the Act can lead to administrative monetary penalties and/or criminal charges. Penalties include up to five years’ imprisonment and possible fines of up to $2,000,000.