The Objective Of Money Laundering
When you buy an asset, whether a home or an investment property, you try to get the best value for your time and money. You want a deal. The seller is trying to extract the maximum price they can get from you, without driving you away. They don’t want you to get a great deal. The balance of interests go back and forth, and is a fundamental part of a functioning market. Opposing interests help balance things, plus or minus a dash of exuberance.
If you are money laundering, that’s not the case. The objective is to move as much cash, as fast as possible. This often involves large assets, and the bigger the price – the better. Especially if there’s a recurring payment component. Both the seller and the money laundering buyer want the highest acceptable price.
Sellers often feel somewhere between a genius and a lottery winner when they find this buyer. Competition between interests align, and there’s minimal friction preventing prices from going higher. The seller assumes their master negotiation skills prevailed. The money laundering buyer gets to move more money than they were asking for. The buyer seems “irrational,” but that’s just the market.
This alignment of interests is how home prices rise much faster than normal. Typically a buyer wants the best deal, and the seller wants the most money. Opposing interests help to balance demand. If both the buyer and the seller want the price of a home to rise as much as possible, prices jump very quickly.
The laundered home doesn’t happen in a vacuum though — it’s in the middle of a public market. This impacts people in two ways, comparables and competition. Once a home is sold, it’s used as a comparable or “comp” for figuring out the prices in a neighborhood. Now the home used to launder influences how much every home in a neighborhood costs.
Even if your home has nothing to do with money laundering, it’s nearly impossible to tell which comps do. Maybe it was a first-time buyer that was tired of bidding wars? Maybe it was a real estate developer looking to create a land assembly? Maybe it was a corrupt foreign official or fentanyl dealer, looking to clean a few hockey bags of cash? It’s near impossible for regular buyers, or agents, to tell.
Competition also plays an interesting part, since legitimate buyers run into these buyers. This allegedly leads to interesting situations, but more importantly it’s hard to tell. How can you tell if you’re in a bidding war with a legitimate buyer, or one with incentive to drive prices higher? You can’t, but these are the “Red Flags” REALTORS® look for.
It may be money laundering if …
- Client arrives at a real estate closing with a significant amount of cash
- Client purchases property in the name of a nominee such as an associate or a relative
- Client does not want to put his/her name on any documents that would connect him/ her with the property or uses different names on offers, closing documents and deposit receipts
- Client inadequately explains the last minute substitution of the purchasing party’s name
- Client negotiates a purchase for market value or above asking price, but records a lower value on documents, paying the difference “under the table”
- Client sells property below market value with an additional “under the table” payment
- Client pays initial deposit with a cheque from a third party, other than a spouse or a parent
- Client pays substantial down payment in cash and balance is financed by an unusual source or offshore bank
- Client purchases personal use property under corporate veil when this type of transaction is inconsistent with the ordinary business of the client
- Client purchases property without inspecting it
- Client purchases multiple properties in a short time period, and seems to have few concerns about the location, condition, and anticipated repair costs, etc of each property
- Client pays rent or the amount of a lease in advance using a large amount of cash
- Client is known to have paid large remodeling or home improvement invoices with cash, on a property for which property management services are provided
- Client does not want correspondence sent to home address
- Client over-justifies or over-explains the transaction
- Client’s home or business telephone number has been disconnected or there is no such number
- Client uses a post office box or general delivery address
Money laundering is not the sole reason for much higher prices, but it fans the flames. Low interest rates and easy lending allow regular families to provide liquidity. If a launderer can’t get clean cash, they don’t transact. There’s no appeal without house buyers overbidding comps, or rapidly flipping.
Money laundering investors however, can influence the direction of the market. A real estate market is only as good as its last comp, set by the marginal buyer. If that marginal buyer was laundering money, they have motivation to overpay. Regular households buying into this, provide comp validation, and liquidity. Most households never consider where their liquidity is going to come from.
Contacts for More Information:
Financial Transactions and Reports Analysis Centre of Canada: 1-866-346-8722 or www.fintrac.gc.ca
(Source: Compiled with information from the Canadian Real Estate Association