B.C.’s money-laundering disaster goes nationwide

On paper, Peter Zhang and his spouse, Judy Wang, have been fashions for the kind of newcomers Canada wished to draw with its immigrant investor program. Earlier than it was scrapped in 2014, this system’s purpose was easy: lure the world’s rich to Canada’s shores with the promise of a passport. In return they might carry their enterprise savvy, spend money on the financial system and create jobs.

Zhang and Wang have been undeniably wealthy. They arrived from China on the finish of 2010 with a minimum of $6 million, settling within the suburbs north of Toronto. However virtually instantly after, a twisting story was set in movement that may finally see Wang accuse a realtor, a lawyer and others of fraud and negligence, and immediate an Ontario choose to boost questions on each the supply of Zhang and Wang’s wealth and a string of actual property and mortgage transactions tied to the case.

Initially of 2011, the couple purchased their first house, a six-bed, five-bath pile in Richmond Hill, Ont., for $1.25 million—and paid for it totally in money. By February, nevertheless, Zhang and Wang had separated, claiming in court docket that they divorced in 2013, although Ontario Superior Courtroom Justice Paul Perell, in a November 2017 decision on a procedural matter within the lawsuit, described the divorce decree as “suspicious.” (In an electronic mail by way of her lawyer, Wang now says they divorced in June 2018.) Regardless, the pair continued to purchase and develop three extra Richmond Hill and close by Thornhill properties collectively, largely in money, by way of their joint firm Yi Hao Investments. Wang purchased a fourth property on her personal in Vaughan with a 100 per cent loan-to-value mortgage from RBC in 2017. All advised, she and Zhang purchased five properties, value $9.three million on the time of buy.

Other than actual property, a substantial chunk of Zhang and Wang’s wealth was going to cowl Zhang’s playing actions. Over the subsequent a number of years, Wang testified, she transferred as much as $6 million to him from the sale of properties. (Justice Perell famous in his choice that neither Wang nor Zhang had any employment or enterprise pursuits in Canada past actual property investing.) In the meantime, the couple entered right into a sequence of byzantine mortgage transactions with actual property agent Yan-Ling Ding and lawyer Rahul Kesarwani to generate money for Zhang’s playing. As an example, at one level, based on Justice Perell’s findings, Zhang’s possession of Yi Hao was transferred to Ding to hide Zhang’s identification so he may receive a $900,000 mortgage from CIBC, whereas Kesarwani organized a high-interest $150,000 non-public mortgage from his personal firm for Zhang. (Ding and Kesarwani have been provided the chance to remark by way of their legal professionals however didn’t reply, whereas makes an attempt to succeed in Zhang have been unsuccessful. By means of her lawyer, Wang mentioned she was unable to offer contact info for Zhang “presently.”)

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In 2017, Wang sued a number of folks, together with Ding for mortgage fraud and Kesarwani for negligence and breach of fiduciary responsibility. Not one of the allegations have been confirmed in court docket. Justice Perell did, nevertheless, provide his findings on the assorted transactions and testimony in a call about procedural issues later that yr. He didn’t maintain again. Ding engaged in a “very suspicious” mortgage transaction, the choose wrote, whereas Kesarwani’s behaviour was “problematic.” Perell saved his harshest language for Wang and, specifically, Zhang, writing that he discovered their testimony to be “self-serving, implausible, inconsistent, illogical, unbelievable, unreliable, evasive and inconsistent with the documentation.”

However Justice Perell additionally raised questions which can be more and more being requested throughout the nation in different circumstances: The place did the cash come from, and the way was it moved to Canada? Wang, on the recommendation of her lawyer, declined to reply these questions throughout her testimony. However in his choice, Perell highlighted the sworn testimony of a number of of the defendants. “[The defendants] consider that Mr. Zhang was a felony who managed to get his wealth out of China to develop into a cash launderer in Canada,” he wrote. “I make no finding apart from saying that it’s unknown how Ms. Wang and Mr. Zhang acquired their appreciable wealth or how they obtained it out of China for investments in Canada.”

In her electronic mail to Maclean’s, Wang now says she was a component proprietor of an organization concerned in reselling metal merchandise, that their cash was transferred to a “Schedule I Canadian financial institution,” although she didn’t say which one. She additionally mentioned she had “no information of cash laundering by Peter Zhang.”

The irony, in fact, is that have been it not for Wang’s choice to launch the lawsuit, it’s unlikely any of the main points contained on this weird case—which was referenced in a current report by Transparency Worldwide concerning the opacity of Toronto’s actual property market—would have ever come to gentle.

Canadians have realized so much previously few months about a few of the forces that contributed to the astonishing run-up in actual property costs during the last decade and a half. Many of those revelations have emerged from British Columbia in current weeks with the discharge of two landmark experiences on cash laundering that sought to estimate the size of the province’s soiled cash downside, and element the way it tightened its grip on the housing market and different industries.

The gush of ill-gotten good points into the financial system is deeply troubling. An expert panel set as much as look at cash laundering’s affect on B.C.’s actual property sector “conservatively” estimated in its report that $46.7 billion was laundered in Canada final yr. Of that, the panel estimated that transactions in B.C. accounted for $7.four billion. All that shady cash pushed up house costs, too. The panel “cautiously” estimated that property costs are three.7 to 7.5 per cent larger than they might have been with out the impact of cash laundering. That’s for the province as a complete. The figure can be larger in markets like Larger Vancouver, the place cash laundering exercise is concentrated.

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However the panel additionally contained disagreeable surprises for different elements of Canada. Utilizing what’s referred to as the Gravity Mannequin for its estimates—which elements in worldwide commerce flows, per capita GDP and crime statistics—it discovered that Alberta and Ontario have even larger ranges of cash laundering exercise. Maureen Maloney, a Simon Fraser College professor and chair of the panel, acknowledges the constraints of any mannequin to place a greenback figure on against the law that by its nature lurks within the shadows. However this, she says, needs to be a wake-up name for different provinces. “Individuals wish to say that is solely a B.C. downside,” says Maloney, “however it’s clear that this can be a downside dealing with all of Canada.”

The B.C. NDP authorities isn’t sitting again. The panel made 120 suggestions for tactics it and the federal authorities can crack down on cash laundering, and B.C. Legal professional Basic David Eby has already taken motion on a number of of them, together with a pledge to determine a public registry of the beneficial owners of all residential property within the province. (Beneficial homeowners are these people who finally personal the property, even when the title could also be in one other particular person’s or company’s identify.) B.C. Premier John Horgan has launched a public inquiry into cash laundering within the province.

The response from provinces like Alberta and Ontario has been much less impressed. Alberta Justice Minister Doug Schweitzer largely dismissed the panel’s findings concerning the scale of cash laundering within the province. “We use intelligence from front-line regulation enforcement companies, not information we are able to’t confirm,” he advised reporters dryly. “We’ll proceed to work with our regulation enforcement companions to guard law-abiding Albertans.”

The Ontario authorities insists it already has the difficulty effectively in hand. Finance Minister Vic Fedeli’s office mentioned he wouldn’t be out there for an interview, however launched a press release. “We take this subject significantly, and felony exercise is not going to be tolerated in Ontario,” it learn. “Ontario’s police providers are well-equipped to research and take acceptable steps when criminality is identified.”

The undercurrent of denial and complacency in these responses worries specialists, who warn the inevitable impact can be a shift in illicit exercise away from B.C. to provinces the place launderers are much less more likely to get caught. “As a cash launderer, you’re going to go to these jurisdictions the place you’ll have much less probability of being investigated and fewer probability of being underneath scrutiny,” says Maloney.

Kevin Comeau, a retired lawyer and advocate for better transparency in property possession, is much more blunt: “Whereas cash launderers in B.C. may depart Canada altogether, they’re extra more likely to head to Ontario, as a result of it has among the many weakest anti-money laundering legal guidelines of all of the Western liberal democracies.”

Luxurious houses in Richmond Hill, Ont.: The actual property business has a ‘deplorable’ monitor report with regards to flagging doubtful transactions ( by Giovanni Capriotti)

The indicators of suspicious transactions are in every single place in B.C. However Belmont Avenue—west of downtown Vancouver within the upper-class neighbourhood of Level Gray—is pretty much as good a spot as any to begin. The road boasts five of Vancouver’s 10 most costly properties, and on a sunny day it’s not arduous to see why: the homes are positioned above the Spanish Banks seashores and have unfettered views of the North Shore Mountains.

Save for the clatter of hammers at close by building websites, the avenue is eerily quiet and empty for a cloudless afternoon. Lots of the houses have curtains drawn throughout each window. It might be that the inhabitants need to defend their privateness; it’s additionally potential the houses are vacant. Many on Belmont have been named in a 2016 Transparency Worldwide report as properties owned by way of shell corporations, or suspect nominees, flagging them as potential cash laundering websites. Tian Yu Zhou, listed on land data as a “scholar,” purchased one of many properties, a sprawling cedar-panelled home, for $31.1 million in 2016. Zhou has a 99 per cent possession stake; his mom, Cuie Feng, listed as a “businesswoman,” owns the opposite one per cent.

It’s no secret that a lot of the cash flowing into B.C.’s actual property market is coming from China. In a single now-famous examine, Andy Yan, director of the Metropolis Program at Simon Fraser College, examined 174 property transactions over a six-month interval in Vancouver’s prosperous west facet and located that two-thirds of all gross sales have been to patrons with non-anglicized Chinese language names, an indicator they have been current immigrants from mainland China.

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“Everyone seems to be now in how a lot of that cash coming from China is authentic,” says Christine Duhaime, a financial crime lawyer who has assisted Chinese language corporations in recovering cash stolen from the nation that discovered its approach into Vancouver’s actual property market. China has lengthy maintained capital controls that permit its residents to trade and withdraw solely US$50,000 a yr. Apart from that, residents want express approval to maneuver their cash in a foreign country.

To point out how artistic some are getting to bypass these limits, which have grown extra restrictive in recent times, Duhaime factors to 1 case she’s conscious of, during which a businessman in China loaded 180 staff onto buses, every carrying a duffle bag full of US$50,000 in money, and shuttled them to the financial institution. The workers deposited the cash into their accounts after which wired the funds to their boss in Vancouver. The flurry of wire transfers didn’t set off any pink flags on the Canadian financial institution, she says: “For too a few years, the banking business in Canada has taken a place that we don’t ask questions concerning the windfall of cash from China.”

Even when cash laundering circumstances do emerge, police in B.C. are woefully in need of assets to pursue them. Because it stands, there are not any federally funded RCMP officers devoted to investigating cash laundering crimes within the province, and prosecutors have a poor monitor report of bringing such circumstances to an in depth. Since 2002, solely 10 folks have been convicted of cash laundering in B.C., based on Henry Tso, a retired RCMP superintendent who now works in fraud mitigation at accounting firm MNP. Typically prosecutors decide to drop cash laundering fees in circumstances to concentrate on fees like drug trafficking which can be extra more likely to lead to convictions.

“These circumstances are extra advanced to research and more durable to prosecute than murder,” says Tso. “At a murder crime scene you get your DNA and also you get your witnesses, however with regards to cash laundering and financial crimes, they cross by way of worldwide borders, you’ve obtained advanced company constructions and also you want forensic auditing expertise to comply with very refined paper trails.”

The fight in opposition to cash laundering in B.C. suffered a significant setback late final yr when federal prosecutors stayed felony fees associated to the RCMP’s “E-Pirate” investigation. The trial in opposition to Silver Worldwide Investments, Caixuan Qin and Jian Jun Zhu, which included allegations that $220 million in suspected drug money was laundered by way of an underground financial institution and on line casino in a single yr, was to have begun in April. Media later reported the costs have been stayed after prosecutors mistakenly uncovered a police informant. “That was to be Canada’s largest cash laundering case in historical past,” Eby mentioned not too long ago at a conference focused on Vancouver’s housing market. “To have that collapse on the eve of trial was a really significant situation when it comes to public confidence within the justice system.”

Provincial prosecutors instantly launched civil forfeiture lawsuits in opposition to Qin, Zhu and Silver, alleging cash laundering and in search of to get well tens of millions of value of actual property, on line casino chips and money. All three have denied the allegations. A second forfeiture case stemming from the E-Pirate investigation additionally accuses Stephen Hai Peng Chen of cash laundering. He denies the allegations. B.C.’s civil forfeiture office is suing him to grab two houses value a mixed $2.7 million, in addition to $60,100 in money, which, mockingly sufficient, police discovered stuffed in a garments dryer.

B.C.’s Eby has vowed to create a registry of useful homeowners (Darryl Dyck/CP)

The identical day the cash laundering panel launched its report in Might, one other report initiated by the B.C. authorities was made public. Written by lawyer and former RCMP deputy commissioner Peter German, “Dirty Money — Part 2 was a follow-up to his 2018 report detailing how Vancouver-area casinos “turned a blind eye” for years as criminals handled them as “laundromats” to clean illicit cash. His newest report delved deeper into the on line casino business, but additionally detailed how soiled cash winds its approach by way of B.C.’s luxurious automobile market and actual property business.

On the car entrance, German’s group heard from luxurious automotive sellers who mentioned they have been “proper within the thick of cash laundering right here,” with giant cash-only gross sales occurring on a month-to-month foundation. In a single case, a younger automotive purchaser dropped $200,000 money on a brand new automotive and the dealership dispatched a squad of staff to haul the cash to the financial institution, which, after studying that it got here from a luxurious automotive sale, gladly accepted the money.

German says there’s a key distinction between cash laundering by way of casinos or luxurious automobiles and thru actual property. “You don’t see folks carrying baggage of money with actual property,” he says in an interview, noting that with casinos and automotive sellers the aim is to get soiled cash into the authentic financial system. “With actual property, you’re coping with cash that has already been cleaned.”

The German report identifies a number of indicators of threat for the true property sector, resembling the expansion in non-public mortgage lending, which has thrived in recent times as regulators tightened mortgage guidelines. In B.C., he discovered that 90,000 residential mortgages, equal to 9 per cent of the market, are held by a mishmash of 18,570 non-public lenders.

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Personal lending has additionally been on the rise in Toronto. A report final yr from the Financial institution of Canada decided that personal lenders now account for 9 per cent of recent mortgages within the metropolis, whereas the Toronto brokerage Realosophy discovered 20 per cent of refinancings concerned non-public lenders in 2018, up 67 per cent in two years.

That fits with a fast survey Maclean’s carried out with Ben Rabidoux of North Cove Advisors of high-end properties listed on the market in Toronto, Richmond Hill and Markham, Ont. Within the case of 90 of the most costly homes in these three cities, totally one-third have been carrying non-public mortgages, and of these houses, 20 per cent concerned a number of non-public mortgages. Within the case of 1 Richmond Hill house at the moment listed for greater than $7 million, there have been eight non-public mortgages.

It’s not simply that personal lenders should not regulated like conventional banks. They don’t should report suspicious transactions to the Monetary Transaction and Studies Evaluation Centre of Canada (Fintrac), the watchdog tasked with detecting and stopping cash laundering and terrorist financing. “We now have a hopscotch system of financial reporting on this nation,” says German. Some industries like banking are required to report all transactions over $10,000, whereas others, like non-public lenders and legal professionals, are exempt.

German says the true property business specifically has a deplorable monitor report with regards to flagging doubtful transactions. From 2014 to 2018, all the actual property sector in B.C. flagged simply 62 suspicious transactions, based on the German report. The numbers in Ontario are hardly higher. Over the identical interval, that province’s actual property business reported simply 112 suspicious transactions, based on figures offered to Maclean’s, although Ontario has a inhabitants 3 times bigger than that of B.C. Fintrac says it has ramped up actual property investigations previously two years, conducting 362 examinations nationwide, 37 per cent of which befell in Ontario.

Issues could quickly get higher. The final federal price range included extra funding to enhance Fintrac’s examinations within the on line casino and actual property sectors. A Fintrac spokesperson says the company may even play a task in a brand new job pressure that was proposed within the 2019 federal price range; it’s meant to enhance coordination between regulation enforcement and intelligence companies to fight cash laundering.

However for now, says German, police and Fintrac stay aside. “Fintrac has to guess at what the police need, and police should guess what’s within the databases,” he says. 

Fedeli (left) says Ontario police are ‘well-equipped’ to deal with the difficulty (Frank Gunn/CP)

How unhealthy is Canada at stopping cash launderers? “We now have a 99.9 per cent failure fee,” says Comeau, the lawyer and activist. He sits on Transparency Worldwide’s Canada working group on anti-money laundering and beneficial possession transparency, and says crucial factor Canada can do to enhance its efficiency is to undertake a nationwide registry of who owns what residential property.

Because it stands, Canada makes it extremely simple for homebuyers, home or international, to obscure their identities through the use of numbered corporations, offshore trusts and nominee homeowners to hide who finally owns a home or condominium. That anonymity and opaqueness create a breeding floor for felony organizations to hide the movement of proceeds from crime into the housing market. Actually, Comeau believes the B.C. knowledgeable panel on cash laundering far underestimated the size of cash laundering in Canada at an annual $46.7 billion. He believes the worth of the crime is probably going nearer to $100 billion to $130 billion a yr.

B.C. has begun to deal with the issue. In April, Premier Horgan introduced the creation of Canada’s first public registry of property homeowners. All companies, trusts and nominees should disclose their beneficial homeowners. Those who fail to conform will face fines of as much as $100,000 or 15 per cent of the assessed property worth, whichever quantity is larger. The transfer will carry the province in step with nations like the UK, Germany and France which have already established property registries. 

In Ontario, realtors are lobbying the province to comply with swimsuit. Final month, Tim Hudak, CEO of the Ontario Actual Property Affiliation, mentioned a beneficial possession registry in Ontario was “effectively late,” including, “Ontario realtors don’t need to see a single greenback of soiled cash coming into the housing market. When criminals conceal their cash right here, it drives the value of actual property out of attain for normal Ontarians.”

A current Transparency Worldwide report that examined a decade value of Toronto actual property transactions discovered that since 2008, corporations acquired $28.four billion in Toronto-area housing, with most of these being non-public companies whose homeowners have been nameless.

However the B.C. authorities’s efforts to clamp down on cash laundering, to not point out its different measures geared toward cooling the housing market, aren’t going over effectively with everybody. Chatting with Enterprise in Vancouver, Fraser Institute senior coverage analyst Josef Filipowicz warned the strikes may harm the B.C. financial system by harming luxurious retailers. Fewer big-ticket luxurious objects offered for money may result in slower gross sales, his argument went, forcing retailers to chop again on employees.

Eby, B.C.’s legal professional basic, took to Twitter to skewer the concept that cash launderers want defending as a way to save jobs. “How about ‘Bullet gross sales decline may impression gun retailer jobs if authorities efficiently cracks down on gangs,’ adopted by ‘Most cancers docs concern for careers with crackdown on tobacco.’ ”

Joking apart, the animosity towards the federal government’s current measures is turning into palpable—a minimum of amongst sure demographic teams with a historical past of excessive voter turnout. Lawyer Jonathan Rubenstein, 70, is director of StepUP, a corporation of two,000 principally silver-haired members that shaped to oppose the NDP’s housing measures. He says the group is for “individuals who understood that in a society the creation of wealth is essential and that defending the minorities in that society is essential and never being unduly unfair to those sections of society is essential.” He insists that cracking down on cash laundering, which may probably take away Chinese language patrons from the market, is unwarranted, for the reason that numbers being bandied about are theoretical: “We don’t know the way a lot soiled cash is within the homes.”

On the opposite facet of the demographic spectrum are younger Vancouverites shut out of home-buying by hovering costs, who welcome any measures that take away froth from the market. “For lots of people my age within the metropolis, proudly owning a house is simply not a possible factor,” says Trevor Clarke, a 28-year-old public relations skilled. Through the run-up in costs, it was clear to everybody that there was some huge cash coming into town, he says, “however the justification was all the time—effectively, Vancouver is a extremely fascinating place, so who’re we to say that the cash coming in is soiled?

“But it surely will get to a degree the place individuals are simply sitting on their houses and utilizing them as investments,” he provides. “My opinion of that has actually modified; housing is much less of a commodity and extra of a fundamental want metropolis ought to govern and legislate for residents.”

As B.C. tackles its cash laundering disaster, and different provinces look on, these concerned within the fight don’t count on any simple victories. “It’s like Medusa’s head,” says Duhaime. “You narrow off one and all of the sudden understand there are 10 different snake heads it is advisable cope with.”

—with files from Rachel Jansen

This text seems in print within the July 2019 situation of Maclean’s journal with the headline, “A great deal of soiled cash.” Subscribe to the month-to-month print journal here.