Money laundering and terrorist financing indicators - Real estate
This guidance on suspicious transactions is applicable to real estate developers, brokers and sales representatives that are subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and associated Regulations. It is recommended that this guidance be read in conjunction with other suspicious transaction report (STR) guidance, including:
This guidance provides money laundering (ML) and terrorist financing (TF) indicators (ML/TF indicators) organized by topic:
- ML/TF indicators related to identifying the person or entity
- ML/TF indicators related to client behaviour
- ML/TF indicators related to the person/entity financial profile
- ML/TF indicators based on atypical transactional activity
- ML/TF indicators related to transactions structured below the reporting or identification requirements
- ML/TF indicators related to transactions that involve non-Canadian jurisdictions
- ML/TF indicators related to use of other parties
- Indicators specifically related to terrorist financing
- ML/TF indicators real estate agents and developers
- ML/TF indicators real estate brokers and sales representatives
ML/TF indicators are potential red flags that could initiate suspicion or indicate that something may be unusual in the absence of a reasonable explanation. Red flags typically stem from one or more factual characteristics, behaviours, patterns or other contextual factors that identify irregularities related to financial transactions. These often present inconsistencies with what is expected of your client based on what you know about them.
The ML/TF indicators in this guidance were developed by FINTRAC through a three-year review of ML/TF cases, a review of high quality STRs, published literature by international organizations such as the Financial Action Task Force (FATF) and the Egmont Group, and consultation with reporting entity sectors. These ML/TF indicators do not cover every possible situation but were developed to provide you with a general understanding of what is or could be unusual or suspicious. On its own, a single ML/TF indicator may not appear suspicious. However, observing an ML/TF indicator(s) could lead you to conduct an assessment of the transaction(s) to determine whether there are further facts, contextual elements or additional ML/TF indicators that require the submission of an STR.
Criminal organizations often combine various methods in different ways in order to avoid the detection of ML/TF. If you detect unusual or suspicious behaviour or a transaction that prompts the need for an assessment, ML/TF indicators combined with facts and context can help you determine if there are reasonable grounds to suspect that the transaction is related to the commission or attempted commission of an ML/TF offence. These ML/TF indicators may also be used to explain or articulate the rationale for your reasonable grounds to suspect in the narrative portion of an STR, as they provide valuable information from a financial intelligence perspective.
One piece of the puzzle
The ML/TF indicators in this guidance are not an exhaustive list of ML/TF indicators to support all suspicious scenarios. These ML/TF indicators should be considered as examples to guide the development of your own process to determine when you have reasonable grounds to suspect that the transaction is related to the commission or attempted commission of an ML/TF offence. These ML/TF indicators are one piece of the puzzle and are designed to complement your own STR program and can be used in conjunction with other publicly-available ML/TF indicators.
During an assessment, FINTRAC will review your policies and procedures to see how you use ML/TF indicators within your STR program. Part of the assessment will include evaluating how the actual policies follow your documented approach and determining its effectiveness with respect to the use of ML/TF indicators. This can include a review of transactions to determine how your STR program identifies potential STRs and assesses them using facts, context and ML/TF indicators. For example, you can receive questions if you have not reported an STR for a client you have assessed as high risk and that client activity also matches against multiple ML/TF indicators.
Combination of facts, context and ML/TF indicators
If the context surrounding a transaction is suspicious, it could lead you to assess a client's financial transactions. Facts, context and ML/TF indicators need to be assessed to determine whether there are reasonable grounds to suspect that the transaction is related to the commission or attempted commission of an ML/TF offence. On its own, a single financial transaction or ML/TF indicator may not appear suspicious. However, this does not mean you should stop your assessment. Additional facts or context about the associated individual or their actions may help you reach the reasonable grounds to suspect threshold.
Alert or triggering system
FINTRAC acknowledges that a reporting entity may have developed a system that relies on specific alerts or triggering events to signal when to assess a transaction to determine if an STR should be submitted to FINTRAC. If you rely on such a system, FINTRAC expects that you review the alerts in a timely manner in order to determine if an STR should be submitted. Regardless of how you choose to operationalize these ML/TF indicators, FINTRAC expects that you will be able to demonstrate that you have an effective process to identify, assess and submit STRs to FINTRAC.
General ML/TF indicators
The ML/TF indicators in the following section are applicable to both suspected money laundering and/or terrorist financing. The ability to detect, prevent and deter money laundering and/or terrorist financing begins with properly identifying the person or entity in order to review and report suspicious financial activity.
As a real estate developer, broker or sales representative, you may observe these ML/TF indicators over the course of your business activities with a client. It is important to note that depending on your business activities, some of these ML/TF indicators may not apply.
ML/TF indicators related to identifying the person or entity
The following are examples of ML/TF indicators that you may observe when identifying persons or entities.
- There is an inability to properly identify the client or there are questions surrounding the client's identity.
- The client refuses or tries to avoid providing information required or provides information that is misleading, vague, or difficult to verify.
- The client refuses to provide information or provides information that is false, conflicting, misleading or substantially incorrect.
- The identification presented by the client cannot be verified (e.g. it is a copy).
- There are inconsistencies in the identification documents or different identifiers provided by the client, such as address, date of birth or phone number.
- Client produces seemingly false information or identification that appears to be counterfeited, altered or inaccurate.
- Client displays a pattern of name variations from one transaction to another or uses aliases.
- Client alters the transaction after being asked for identity documents.
- The client provides only a non-civic address such as a post office box or disguises a post office box as a civic address for the purpose of concealing their physical residence.
- Common identifiers (e.g. addresses, phone numbers, etc.) used by multiple clients purchasing properties that do not appear to be related.
- Transactions involve individual(s) or entity(ies) identified by media, law enforcement and/or intelligence agencies as being linked to criminal activities.
- Attempts to verify the information provided by a new or prospective client are difficult.
ML/TF indicators related to client behaviour
The contextual information acquired through the know your client (KYC) requirements or the behaviour of a client, particularly surrounding a transaction or a pattern of transactions, may lead you to conduct an assessment in order to determine if you are required to submit an STR to FINTRAC. The following are some examples of ML/TF indicators that are linked to contextual behavior and may be used in conjunction with your assessment and your risk based approach.
- Client makes statements about involvement in criminal activities.
- Evidence of untruthfulness on behalf of the client (e.g. providing false or misleading information).
- Client exhibits nervous behaviour.
- The client refuses to provide information when required, or is reluctant to provide information.
- Client has a defensive stance to questioning.
- Client presents confusing details about the transaction or knows few details about its purpose.
- Client avoids contact with reporting entity employees.
- The client refuses to identify a source for funds or provides information that is false, misleading, or substantially incorrect.
- The client exhibits a lack of concern about higher than normal transaction costs or fees.
- Client makes inquiries/statements indicating a desire to avoid reporting or tries to persuade the reporting entity not to file/maintain required reports.
- Insufficient explanation for source of funds.
ML/TF indicators related to the person/entity financial profile
Clearly understanding the expected activity of a person or entity will allow you to assess their financial activity with the proper lens. For example, a person who is unemployed but has a very large budget to purchase a home may be conducting a financial transaction atypical of what is expected. The following are some examples of ML/TF indicators linked to person/entity profile.
- The transactional activity (level or volume) suddenly changes and/or is inconsistent with the client's apparent financial standing, their usual pattern of activities or occupational information (e.g. student, unemployed, social assistance, etc.).
- Client appears to be living beyond their means.
- Rounded sum transactions atypical of what would be expected from the client.
- Size or type of transactions atypical of what is expected from the client.
- There is a sudden change in client's financial profile, pattern of activity or transactions.
- Client uses notes, monetary instruments, or products and/or services that are unusual for such a client.
- Client uses multiple accounts at several financial institutions for no apparent reason.
- Suspected use of personal funds for business purposes, or vice-versa.
- Use of multiple foreign bank accounts for no apparent reason.
ML/TF indicators based on atypical transactional activity
There are certain transactions that are outside the normal conduct of your everyday business. The following transactions are examples that may be indicative of a suspicious transaction, and would require additional assessment.
- A series of complicated transfers of funds for a deposit that seems to be an attempt to hide the source of the funds.
- Transaction is unnecessarily complex for its stated purpose.
- Client presents notes or financial instruments that are packed, transported or wrapped in an uncommon way.
- Transaction consistent with publicly known trend in criminal activity.
- Client transacts using musty, odd smelling or extremely dirty bills.
- Transaction involves a suspected shell entity (an entity that does not have an economical or logical reason to exist).
ML/TF indicators related to transactions structured below the reporting or identification requirements
Structuring of transactions to avoid reporting or identification requirements is a common method for committing or attempting to commit an ML/TF offence. There are multiple thresholds which trigger reporting/identification requirements by a reporting entity. Some examples of ML/TF indicators which may be indicative of a person or entity attempting to evade identification and/or reporting thresholds are listed below.
- Client appears to be structuring amounts to avoid client identification or reporting thresholds.
- Client appears to be collaborating with others to avoid client identification or reporting thresholds.
- Multiple transactions conducted below the reporting threshold within a short time period.
- Client makes inquiries that would indicate a desire to avoid reporting.
- Client exhibits knowledge of reporting thresholds.
ML/TF indicators related to transactions that involve non-Canadian jurisdictions
There are certain types of transactions that may involve jurisdictions outside of Canada where there is higher ML/TF risk due to more permissible laws or the local ML/TF threat environment. The following are examples to consider when making an assessment of the real estate transaction conducted by a person/entity through your business.
- Transactions with a person who lives in or an entity that operates out of a jurisdiction that is known to be at a higher risk to facilitate ML/TF.
- Transactions involving a person who lives in or an entity that operates out of a location of concern, which can include jurisdictions where there are ongoing conflicts (and periphery areas), countries with weak money laundering/terrorist financing controls, or countries with highly secretive banking or other transactional laws such as transfer limits set by a government.
- Transactions involving any countries deemed high risk or non-cooperative by the Financial Action Task Force.
Due to the ever-evolving nature of the ML/TF environment, high risk jurisdictions and trends are often subject to change. To ensure that you are referencing accurate information, FINTRAC encourages you to research publicly-available sources on a regular basis to support these ML/TF indicators as part of your STR program. There are multiple sources that identify jurisdictions of concern, including the FATF which publishes contextual information on high-risk jurisdictions in relation to their risk of money laundering and terrorist financing. You may also observe funds coming from or going to jurisdictions that are reported in the media as locations where terrorists operate/carry out attacks and/or where terrorists have a large support base (state sponsors or private citizens). Identifying high-risk jurisdictions or known trends can also be included as part of your risk based approach and internal STR program.
ML/TF indicators related to use of other parties
In the course of a ‘normal' real estate purchase or sale, there are a ‘normal' number of parties who are engaging in the transaction, depending on the nature of the transaction at hand. For example, in the instance of a real estate purchase, there are generally two parties to the transaction: the individual(s) selling a property and the individual(s) purchasing the property.
Transactions that involve parties not typically associated with a transaction can present an elevated risk of money laundering and/or terrorist financing. These additional parties can be used to allow a criminal to avoid being identified or being linked to an asset. This section includes examples of how the involvement of other parties may be indicative of the structure of a criminal enterprise. Some examples of such other parties include the use of a third party, nominee or gatekeeper.
Use of third party
A third party is any individual or entity that instructs someone to act on their behalf for a financial activity or transaction. There are some situations where there is an apparent and discernable rationale for the inclusion of the third party in a transaction and this may not be suspicious. However, you may become suspicious in a situation where the reason for a third party acting on behalf of another person or entity does not make sense based on what you know about the client or the third party. Use of third parties is one method that money launderers and terrorist financiers use to distance themselves from the proceeds of crime or source of criminally obtained funds. By relying on other parties to conduct transactions they can distance themselves from the transactions that can be directly linked to the suspected ML/TF offence. Some examples of ML/TF indicators related to the use of a third party indicators can be found below.
- Unrelated parties with no apparent relation to the person/entity provide a deposit for the transaction.
- A client conducts transaction while accompanied, overseen or directed by another party.
- Client appears or states to be acting on behalf of another party.
Use of nominee
A nominee is a particular type of other party that is authorized to conduct transactions on behalf of a person of entity. There are legitimate reasons for relying on a nominee to conduct financial activity of behalf of someone else. However, this type of activity is particularly vulnerable to ML/TF as it is a common method used by criminals to distance themselves from the transactions that could be linked to suspected ML/TF offences. Below are some examples of ML/TF indicators relating to the misuse of nominees.
- An individual or entity other than the person or entity purchasing or selling property conducts the majority of the transaction activity which seems unnecessary or excessive.
- Client is involved in a transaction that is suspicious but refuses or is unable to answer questions related to the transaction.
Use of gatekeeper
A gatekeeper is an individual who controls access to the financial system and can act on behalf of a client. Such services can be abused so that criminals have access to the financial system without being identified. Gatekeepers may include lawyers, accountants and other professions which can access the financial system on behalf of a client. While there are many transactions where it is ‘normal' to have a gatekeeper represent the interests of a client, such an appearance of normalcy can also be utilized to the advantage of criminals to provide the veneer of legitimacy to their transactions. The use of gatekeepers themselves is not an indicator of an ML/TF offence. However, entities should consider the following examples which can indicate misuse of the financial system access provided to gatekeepers.
- Gatekeeper avoids identifying their client or disclosing their client's identity when such identification would be normal during the course of a transaction.
- Gatekeeper is willing to pay higher fees and seeks to conduct the transaction quickly when there is no apparent need for such expediency.
Indicators related to terrorism financing
In Canada, terrorist financing offences make it a crime to knowingly collect or provide property, which can include financial or other related services, for terrorist purposes. This section is focused on examples that are specific to the possible commission of a terrorist financing offence. However, please note that the other ML/TF indicators in this guidance may also prove relevant in determining when you have reasonable grounds to suspect the commission of terrorist financing as the methods used by criminals to evade detection of money laundering are similar.
Indicators specifically related to terrorist financing:
These are some examples of indicators relating to terrorist financing.
- Transactions with a person who lives in or an entity that operates out of certain high-risk jurisdictions such as locations in the midst of or in proximity to, armed conflict where terrorist groups operate or locations which are subject to weaker ML/TF controls.
- Client identified by media or law enforcement as having travelled, attempted or intended to travel to high-risk jurisdictions (including cities or districts of concern), specifically countries (and adjacent countries) under conflict and/or political instability or known to support terrorist activities and organizations.
- Transactions involve individual(s) or entity(ies) identified by media and/or sanctions lists as being linked to a terrorist organization or terrorist activities.
- Law enforcement information provided which indicates individual(s) or entity(ies) may be linked to a terrorist organization or terrorist activities.
- Individual or entity states or eludes that they support violent extremism or radicalization.
- Client provides multiple variations of name, address, phone number or additional identifiers.
Indicators specific to real estate agents and developers
In addition to the general ML/TF indicators that have been highlighted in this guidance, there may be more specific ML/TF indicators related to your business, when you act as an agent in the purchase or sale of real estate or as a real estate developer, when you sell a new house, a new condominium unit, a new commercial or industrial building or a new multi-unit residential building to the public. Below are some examples of sector specific ML/TF indicators that you should consider as part of your STR program.
- Client arrives at a real estate closing with a significant amount of cash.
- Client purchases property in someone else's name such as an associate or a relative (other than a spouse).
- Client does not want to put his or her name on any document that would connect him or her with the property or uses different names on Offers to Purchase, closing documents and deposit receipts.
- Client inadequately explains the last minute substitution of the purchasing party's name.
- Client negotiates a purchase for the market value or above the asked price, but requests that a lower value be recorded on documents, paying the difference “under the table”.
- 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 (for example a third party or private lender) or offshore bank.
- Client purchases personal use property through his or her company when this type of transaction is inconsistent with the ordinary business practice of the client.
- 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 insists on providing signature on documents by fax only.
- Client over justifies or over explains the purchase.
- 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 where other options are available.
- Client wants to build a luxury house in non-prime locations.
- Client exhibits unusual concerns regarding the firm's compliance with government reporting requirements and the firm's anti-money laundering or anti-terrorist financing policies.
- Client exhibits a lack of concern regarding risks, commissions, or other transaction costs.
- Client persists in representing his financial situation in a way that is unrealistic or that could not be supported by documents.
- Transactions carried out on behalf of minors, incapacitated persons or other persons who, although not included in these categories, appear to lack the economic capacity to make such purchases.
- A transaction involving legal entities, when there does not seem to be any relationship between the transaction and the activity carried out by the buying company, or when the company has no business activity.
- Transactions in which the parties show a strong interest in completing the transaction quickly, without there being good cause.
- Transactions in which the parties are foreign or non-resident for tax purposes and their only purpose is a capital investment (that is, they do not show any interest in living at the property they are buying).
- Transactions involving payments in cash or in negotiable instruments which do not state the true payer (for example, bank drafts), where the accumulated amount is considered to be significant in relation to the total amount of the transaction.
- Transactions in which the party asks for the payment to be divided in to smaller parts with a short interval between them.
- Transactions in which payment is made in cash, bank notes, bearer cheques or other anonymous instruments.
- Transactions which are completed in seeming disregard of a contract clause penalizing the buyer with loss of the deposit if the sale does not go ahead.
- Recording of the sale of a building plot followed by the recording of the declaration of a completely finished new building at the location at an interval less than the minimum time needed to complete the construction, bearing in mind its characteristics.
- Transaction is completely anonymous–transaction conducted by lawyer–all deposit cheques drawn on lawyer's trust account.
Indicators specific to real estate brokers and sales representatives
In addition to the general ML/TF indicators that have been highlighted in this guidance, there may be more specific ML/TF indicators related to your business as a real estate broker or sales representative. Below are some examples of sector specific ML/TF indicators that you should consider as part of your STR program.
- Client sells property below market value with an additional “under the table” payment.
- Client purchases property without inspecting it.
- Client is known to have paid large remodelling or home improvement invoices with cash, on a property for which property management services are provided.
- Client buys back a property that he or she recently sold.
- Frequent change of ownership of same property, particularly between related or acquainted parties.
- If a property is re-sold shortly after purchase at a significantly different purchase price, without corresponding changes in market values in the same area.
Please refer to the FINTRAC Operational Brief which provides ML/TF indicators that are intended to assist reporting entities involved in real estate transactions to meet their obligations to report suspicious transactions or attempted suspicious transactions that are related to the commission or attempted commission of a money laundering or terrorist financing offence.
- Date Modified: