On Tuesday May 7, 2019, the Government of British Columbia published its second report (the “Report”) on money laundering in the province of British Columbia (“BC”), this time focused on the luxury car sector and its role in laundering of proceeds of crime. The Report, authored by former senior RCMP officer Peter German, is the first detailed examination of money laundering in luxury car sales in Canada.
How it Works
The mechanics of the money laundering activities are described generally as the purchase of vehicles in cash with the proceeds of crime, thereby converting the illicit cash into an asset, which will serve to disguise the origin of the money, following which the asset can be sold.
Criminal and terrorist organizations frequently exploit global trade systems to move value around the world by employing complex and sometimes confusing schemes associated with legitimate trade transactions.
The report is organized into five chapters. Each chapter relates to a specific category of how organized crime is promoted in the luxury vehicle sector in BC, and Canada broadly:
- Domestic and International Laundering Through Vehicles. Vehicles are used both domestically and internationally as conduits for money laundering. The Report makes a connection between the disproportionate number of luxury vehicles not recovered by law enforcement, and organized vehicle theft rings who steal the vehicles for export. The pathways of theft and laundering often overlap, taking advantage of legislative regimes or lax enforcement that allow vehicles to be exported from ports with little scrutiny.
- Crime Vehicles. Luxury cars are a prime target for laundering due to the proclivity of criminals to be attracted to a lifestyle of consumptive wealth, provide a tool with which to invest their profits, and a means to perpetrate crime. These individuals often have no legitimate source of income and wish to avoid the oversight regime which regulates most financial institutions. They will either purchase vehicles using cash with the intention of laundering criminal proceeds, or rent vehicles in order to make it more difficult for the vehicles to be seized by law enforcement.
- Money Laundering. Some dealers have historically accepted large sums of cash from suspicious individuals to pay for the vehicles. This allows buyers to clean their money since the dealers deposit the cash proceeds into mainstream financial institutions removing any footprint of the transaction at point of sale and removes the ability to determine the source of wealth at purchase. The Report notes several contributing factors including; (a) provincial regulators who are focused on consumer protection and not money laundering, (b) the increased use of foreign financing means instead of cash and of intermediary leasing companies acting as agents for buyers, (c) dealers not wanting to be put in a dangerous position by not accepting the forms of payment, and (d) vehicle industry associations who do not view cash-based sales as a significant concern.
- Grey Market of Export Vehicles. They grey market is unregulated from a financial crime perspective, making it difficult to track the source of purchasers, companies involved, and methods of payment. Dealerships can engage in arbitrage by charging much higher prices in global marketplaces. Due to select tax provisions, an estimated $55 million in provincial sales tax (“PST”) was refunded to criminal exporters.The dealers also co-opt civil servants to assist ‘straw buyers’ and exporters.
- Independent Luxury Car Resellers. Select resellers of luxury vehicles are often noted for their willingness to deal with individuals involved in organized crime, many of whom are known to the police for serious criminal histories, typically for drug trafficking.
In response to many of these concerns, the BC Ministry of Finance raised several red flags that may indicate money laundering, including:
- Seemingly altered vehicle registration documents;
- The types of cars being high-value, high-end luxury cars;
- Generic-looking export documents with suspicious inconsistencies;
- Straw buyers struggling to explain anomalies in document;
- Same straw buyers showing up for multiple transactions;
- PST refunds that are going directly to vehicle exporters; or
- Straw buyers who often do not speak English and act simply as signatories.
The Report makes several recommendations that could assist in reducing criminal activity at several points of the supply chain, including manufacturers, dealers, regulatory bodies and government:
- Designate car dealerships as reporting entities to the Financial Transactions and Reports Analysis Centre (“FINTRAC”) under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”). Should they be so designated, car dealerships would be required to have in place an anti-money laundering compliance program, including appointing a compliance officer, having in place policies and procedures, training their staff and engaging in effectiveness reviews. In addition, they would become subject to certain identification, record-keeping and reporting requirements.
- Universal cash reporting of all sales over a certain threshold including;
- Prohibiting cash leases of vehicles where the yearly accumulated lease payments equal or exceed $10,000.
- Amending the Motor Vehicle Act to prevent the acceptance of over $10,000 as a deposit on, or payment for a vehicle.
- Institute Geographic Tracking Orders as a supplement to cash reporting.
- Provide more permanent enforcement and legislative solutions targeting the specific commodity related to exporting and port activity.
- Empower the Vehicle Sales Authority of BC to superintend luxury car resellers and require principals to obtain criminal record and background checks.
- Include “not for export” clauses in purchase agreement from manufacturers.
- Require ‘straw buyers’ to show, proof of payment via their bank account, proof of ownership for one year prior to refunding PST, have the refund cheque be mailed to their address as opposed to the exporter or third party agent, and provide evidence that taxes were paid on the vehicle in the jurisdiction to which it was exported.
- Provide Ministry of Finance staff with the ability to track vehicles within Canada via VIN search.
- Require all vehicles exported to be subject to cursory review by the Canada Border Services Agency (“CBSA”) to confirm ownership.
- Imposed transaction fees including export fees for grey market vehicles equivalent to a percentage of the PST refund and administrative fees for PST refunds.
The Bigger Picture
Money laundering in the luxury car market is one of several components of German’s full report that also includes his recent findings on B.C.’s real estate sector. The report is intended to provide a window into money laundering in the province and inform the public of its dominance and economic impact. While the Report was focused on BC, there is a risk that similar issues could be at play in other Canadian provinces. Accordingly, auto dealers operating in Canada should be mindful of the risk of money laundering in this sector and of the fact that there may be future regulation addressing money laundering in this sector going forward.