LESSON 3

Question 1

CHAPTER 5

Answer 1

SEE THE FOLLOWING NOTES…

Question 2

COMMON GROUNDS OF LIABILITY AGAINST LICENSEES

Answer 2

The Real Estate Errors and Omissions Insurance Corporation reports that the majority of claims that they investigate deal with trading services licensees. The most common grounds on which liability has been found against trading services licensees are:
-negligence
-misrepresentation
-errors in drafting agreements; and
-breach of fiduciary duties

Question 3

NEGLIGENCE

Answer 3

Negligence is a tort that involves a failure by a person to exercise care in circumstances which require that person to take care.

The potential scope of negligence is very great because the number of situations in which they law may determine that a duty to take care exists is unlimited; however, not every accident will support a claim of negligence.

Question 4

BEFORE A PERSON WILL BE HELD TO BE NEGLIGENT, CERTAIN CRITERIA MUST BE MET. THE PLAINTIFF MUST PROVE THREE THINGS:

Answer 4

1. THAT THE DEFENDANT OWED THE PLAINTIFF A DUTY TO TAKE CARE
   A person will be held to owe a duty to take care to all persons whom they can or should reasonable foresee as being affected by their actions. In addition to situations where foreseeability of harm exists, the courts in CA are willing to find a duty of care in situations where, as a matter of policy, it is felt the public has a right to expect persons involved in particular activity to take care in the way they conduct themselves in that activity.

2.THAT THE DEFENDANT BREACHED THE STANDARD OF CARE OWED
The relevant standard of care in any situation of duty will be to take the same care that a reasonable person would take in all circumstances of the case. Generally, the greater the risk involved in a particular activity, the higher the standard of care that will be imposed on person engaging in that activity.

3.THAT THE DAMAGE SUFFERED BY THE PLAINTIFF AS A RESULT OF THE DEFENDANT’S BREACH WERE NOT TOO REMOTE IN LAW
The type of damage caused must have been reasonably within the contemplation of the defendant as possible consequence of their acts or omissions. Types of damage not reasonably foreseeable are considered too “remote” in law, and a plaintiff will not be able to get compensation for them.

*Where a plaintiff is able to prove that the defendant owed them a duty of care which the defendant failed to fulfill, and that the failure of duty resulted in reasonably foreseeable damages, the plaintiff will succeed with a claim in negligence. If any one of the required elements is not proven by the plaintiff, the action is negligence will fail.

Question 5

HOW DOES NEGLIGENCE AFFECT LICENSEES?

Answer 5

A licensee can be liable to one of the parties to a transaction for failing to use reasonable care in dealing with that party. The law imposes a duty of care on the part of a licensee to maintain a reasonable standard of conduct in the performance of their professional tasks. When a licensee fails to perform to the required standard of care and damage or loss results to the part, the licensee can be found liable.

Question 6

VICARIOUS LIABILITY

Answer 6

Vicarious liability is a legal principle that holds that when an employee commits a wrongful act in the ordinary course of employment, the injured party can sue both the employee and the employer for damages caused by the employee’s act.

A real estate brokerage will be held liable for the negligent or other wrongful acts of its licensees when those acts are committed in the ordinary course of employment. This common law principle is known as vicarious liability.

Employers may even be vicariously liable for wrongs such as fraud or assault, if such acts are committed in the course of an employee’s employment.

Question 7

MISREPERSENTATION AND DECEIT

Answer 7

Generally speaking, real estate licensees can face liability for two types of misrepresentation:
1. negligent misrepresentation; and
2.deceit and fraudulent misrepresentation.

Question 8

MISREPRESENTATION

Answer 8

Misrepresentation is a false assertion of facts which, if accepted, leads one to an incorrect belief about a given situation.

Question 9

NEGLIGENT MISREPRESENTATION

Answer 9

Negligent misrepresentation is a legal principle which provides that is the ordinary course of business, a person seeks info or advice from another who possesses special skills in circumstances in which a reasonable man would know that their special skills were being relied upon, and the person asked chooses to give the advice without clearly qualifying their answer so as to show that they do not accept responsibility if it is incorrect then they accept a legal duty to exercise such care as the circumstances require. If they are incorrect they may be liable for their negligent misrepresentation.

Question 10

THE SUPREME COURT OF CA HAS STATED THE PARTICULAR REQUIREMENTS FOR LIABILITY FOR NEGLIGENT MISREPRESENTATION AS FOLLOWS:

Answer 10

1. There must be an untrue statement
2. It must have been made negligently
3. There must be a special relationship between plaintiff and defendant giving rise to a duty of care; and
4. There must be reliance by the plaintiff on the negligent statement which is reasonable.

*Where the reliance results in foreseeable loss, the person who relied upon the statement may recover damages from the person who made the negligent misrepresentation.

Question 11

THE SPECIAL RELATIONSHIP GIVING RISE TO A DUTY TO TAKE CARE WILL BE CREATED WHERE A SKILLED PERSON, OR EXPERT, GIVES ADVISE IN THE COURSE OF THEIR BUSINESS TO A PERSON WHO IS REASONABLY GOING TO RELY ON THAT ADVICE. IN SUCH SITUATION, THERE ARE THREE COURSES OF ACTION OPEN TO THE SKILLED PERSON:

Answer 11

1. The skilled person can refuse to give the advice or opinion sought
   2.The skilled person can give the advice or opinion with a clear qualification that they accept no responsibility for the accuracy or reliability of the advice; or
2. The skilled person may give the advice with no qualification or disclaimer of liability.

Question 12

DECEIT AND FRAUDULENT MISREPRESENTATION

Answer 12

Deceit is a fraudulent or deceptive misrepresentation used by one person to deceive or trick another person ignorant of the true facts.

The tort of deceit is similar to the concept of fraudulent misrepresentation which applies to the law of contract.. Deceit and fraudulent misrepresentation are diff. from negligent misrepresentation in two aspects.

First, they involve a sense of moral fraud as opposed to carelessness. Second, a person does not need to be an expert to be liable.

Question 13

HOW DO MISREPRESENTATIONS AND DECEIT AFFECT LICENSEES?

Answer 13

The service performed by a real estate licensee includes providing info about a number of matter relating directly or indirectly to a particular property. Before providing info about a property, licensees should consider the following.

A licensee who provides incorrect, inaccurate or misleading info to one of the parties to a transaction might be found liable. Conversely, a real estate licensee can be found liable to a vendor for a non-disclosure of info about the property known to the licensee which, if not adequately disclosed, gives the purchaser a cause of action against the vendor. If the info which you are giving to a party is in the form of an opinion, you should assume that it will be relied upon.

Question 14

SECTION 49 AND 50 OF THE RULES - REPRESENTATIONS AS TO SERVICE AGREEMENTS, SALES, RESALES, PURCHASES ETC

Answer 14

These sections address situations where licensees make representation and promises for the purposes of including another person to enter into a service agreement with the licensee or to buy or sell real estate in which the licensee is involved. These sections of the Rules state that such a representation or promise must not be made unless the licensee delivers to the person to whom the representation is made signed statement by the licensee (and if applicable, anyone else involved in the representation) that clearly sets out all of the details of the representation.

Any intentional misrepresentation or intentional omission of such a fact would be misconduct, negligence or impotence, and could result in professional discipline against the licensee.

Question 15

ERRORS IN DRAFTING AGREEMENTS

Answer 15

A real estate license must understand the basics of contract law, including the principles relating to offer and acceptance, counter-offers and revocation offers. Liability can often arise if these basic principles are not observed. The message from the courts is clear: know basic contract law if you have any doubts, seek legal advice.

Real estate licensees must be able to draft legally enforceable documents such as contracts of purchase and sale which reflect the intent of the parties. These document should be drafted in simple, accurate and understandable terms. Jargon, abbreviations, colloquialisms and any terms or phrases which give rise to uncertainty should be avoided. When in doubt, a licensee may with to err on the side of providing more detail and specificity.

Question 16

BREACH OF FIDUCIARY DUTY

Answer 16

Fiduciary is a person who holds a position of trust with respect to someone else and is obliged, by virtue of the relationship of trust, to act solely for the other person’s benefit.

In most cases, real estate licensees act for their clients within an agency relationship, whereby the licensee is the agent and the client is the principal. The agency relationship between a licensee and a client is also a fiduciary relationship. The most important duties that an agent owes to the principal are known as “fiduciary duties”.

Question 17

STATURORY AND INDUSTRY LIABILITY

Answer 17

A real estate licensee can be disciplined by BCFSA. BCFSCA may discipline a licensee who has committed professional misconduct, which includes committing a breach of the Act, Regulation or Rules, or who demonstrates conduct unbecoming a licensee. A real estate licensee may also face disciplinary proceedings by a real estate board of which they are a member. The penalties that are available to boards range from a reprimand to suspension or expulsion from the board.

Question 18

WHAT IS THE BOTTOM LINE?

Answer 18

The law is imposing increasingly strict standards on all professionals, including real estate licensees. Because the law is constantly changing and developing, accepted practices of the real estate industry will also change. It is imperative that licensees keep abreast of these changes. Avoiding liability as a real estate licensee is not easy, but all licensees must take the time to learn how to recognize situations which put them at risk of liability and how to avoid these situations.

Question 19

PROCEEDS OF CRIME (MONEY LAUNDERING) AND TERRORIST FINANCIAL OBLIGATIONS

Answer 19

Money laundering is an issue that affect all of British Columbians. It harms economies, makes communities less safe and negatively impacts society.

Money laundering is the process used to disguise the source of money earned from criminal activities. Essentially, money laundering is designed to convert “dirty” money into “clean” money.

Money laundering is about more than “bags of cash”. A preconceived notion is that money laundered through real estate must involve a large payment of cash.

Question 20

THE SCOPE AND IMPACTS OF MONEY LAUNDERING

Answer 20

There are many negative impacts of money laundering, including that money laundering:

-may lead to increased corruption of public officials, and threatens the “rule of law”: the accountability of all persons, institutions and entities under the law
0can erode the public trust of professionals who assist money launderers
-facilitates and encourages criminal activity
-is linked to tax evasion, which deprives governments of funds to provide essential public services
-causes distortions in the market, particularly by inflating the prices of assets that are attractive to money launderers.

Question 21

REAL ESTATE AND MONEY LAUNDERING

Answer 21

Real estate is attractive for money launderers for a variety of reasons:
1. HIGH VALUE
Real estate is a big-ticket, high value asset, meaning that large amounts can be laundered in a single transaction.
2.SECURITY
Real estate is a fairly secure and stable asset that cannot be stolen and is less susceptible to dramatic decreases in value in the long term.
3.SIMPLICITY
There is a large market for real estate and entry into the market does not require a high degree of sophistication.
4.POTENTIAL FOR PROFIT
Real estate typically increases in value in the long term, and renovations and physical improvements can add to the profit potential of a property.
5.VARIOUS METHODS OF LAUNDER MONEY
Money can be laundered through real estate in multiple ways, including the use of separate legal entities in real estate purchases/sales, and unregulated lenders in financing real estate.
6.SUBJECTIVE VALUE
Since no two properties are exactly alike, prices can be manipulated to control the amount of money laundered in a transaction.
7.OVERSIGHT
Some participants in the real estate industry are unregulated, or under-regulated, meaning that there are “weak spots” in the industry that criminals can exploit.
8.ANONYMITY
The identity of beneficial ownership of real estate can be hidden through the use of corporations, trusts and nominees.
9.SPECULATIVE COMPONENT
Because short-term ownership of real estate is not unusual, criminals can flip properties as part of their money laundering activities without necessarily raising suspicion.

Question 22

BENEFICIAN OWNERS AND NOMINEE

Answer 22

Beneficial owners are individuals who enjoy the benefits of ownership of property even though the property is registered in the name of another person or entity.

Nominee is an individual or entity that is legally registered as the owner of the property, with true control and ownership belonging to one or more other, unregistered persons or entities (also known as a “bare trust” arrangement)

Question 23

MONEY LAUNDERING PROCESS

Answer 23

STAGE 1
PLACEMENT
Is the process of placing the proceeds of crime into the financial system.

STAGE 2
LAYERING
Is the process of converting the criminal funds into another form in order to conceal the criminal origins of the proceeds.

STAGE 3
INTEGRATION
Involves reintroducing and reintegrating the laundered funds into the legitimate economy to create the perception of legitimacy and having the funds appear to have been legally earned.

Question 24

METHODS USED TO LAUNDER MONEY THROUGH REAL ESTATE TRANSACTIONS

Answer 24

There are two key misconceptions about money laundering in real estate
MISCONCEPTION #1 THE ONLY WAY TO A LAUNDER MONEY IS THROUGH BUYING PROPERTY WITH PHYSICAL CASH
In many cases, real estate is part of a more complex money laundering process, and the involvement of real estate only occurs after the dirty money has entered into the financial system.

MISCONCEPTION 2 MONEY LAUNDERING IS BEST DEALT WITH THE BANKS AND OTHER FINANCIAAL INSITUTIONS
While financial institutions have a large role in combatting money laundering, they are not the only ones with a role to play. The licensee may get into much deeper conversations with these individuals and learn a lot more about them through other cues.

Question 25

BY USING THE THREE METHODS IDENTIFIED ABOVE, THE FOLLOWING ARE SOME EXAMPLES OF MONEY LAUNDERING SCHEMES THAT CRIMINALS HAVE USED TO LAUNDER THEIR MONEY THROUGH REAL ESTATE:

Answer 25

1.MORTGAGES
a) MORTGAGE PAYMENTS WITH DIRTY MONEY
Criminals may obtain a mortgage loan from a private lender, and while the down payment may be made with legitimate funds, the mortgage payments are made with dirty money. Even if the lender is regulated, the mortgage payments are subject to less scrutiny than bank deposits, because they are in smaller amounts and do not qualify as deposits.
b) QUICKLY DISCHARGING MORTAGES
A related technique is to repeat the mortgage repayment process multiple times with a series of quickly discharged mortgages. In this method, the criminal is granted a mortgage loan, quickly pays it off with dirty money and then applies for, and receives, another mortgage loan. This process allows the criminal to launder more money.
c)LOAN BACK SCHEMES
A criminal can lend themselves money from their own illicit funds to finance a real estate purchase. They would use companies or nominees as the lender to create the appearance that this money is coming from someone else, in order to make it look like a legitimate mortgage transaction.
d)ACTING AS UNREGULATED LENDERS
Criminals can launder money by operating as unregulated lenders. The loan repayments would be clean money, particularly if the borrower was not involved in the criminal’s illegal activities.
2. RENTAL AND LEASING
There are a number of ways by which money can be laundered through a rental property. Properties owned by criminals can be rented to individuals, and the rental amounts claimed to be received can be inflated. The legitimate rental income can then be mixed with the criminal’s dirty money. Another method is for criminals to purchase property (through a third party) and then pay rent using dirty money. Alternatively, criminals can provide dirty money to co-operating tenants, who make their rent payments with the dirty money and repay the criminal with clean money.

3.CONSTRUCTION AND RENOVATION
Criminals can use dirty money to buy supplies and pay laborers and tradespeople for construction or renovation work. The result of this activity is an increase in the value of their properties, so when they sell them, it appears that they have earned legitimate income through a capital gain.

4.CRIMINAL OPERATIONS
Criminals often purchase real estate because they need it in order to conduct their criminal operations and generate illicit profits (e.g. facilities to produce or grow drugs, provide prostitution services etc.)

5.VALUATION
Criminals may overpay for real estate, allowing them to wash larger sums of money. In other cases, they may underpay for real estate on paper to a seller, paying the balance of the true purchase price in cash with their dirty money. Sellers may be motivated to agree to such transaction because this will enable them to evade some of the capital gains tax on sale.

6.UNFINANCED TRANSACTIONS
Purchasing real estate without financing (i.e. without a mortgage loan) is rarely done with physical cash, but rather the wire, bank draft, or cheque. These transactions draw less attention because a lender, who typically collects a lot of info as part of their underwriting process, is not involved.

7.ABORTED PURCHASES
Sometimes, the seller is an unsuspecting person, and other times, the seller is aware of the intent of the criminal buyer, who provides a deposits (paid with dirty money) to their lawyer or real estate agent. The deposit is placed in a lawyer or agent’s trust account. The buyer then claims that the transaction will not be closing (e,g, subject clauses could not be fulfilled, the parties agreed to terminate the contract) and asks for their deposit back. The return of their money from a lawyer’s or agent’s trust account helps the criminal create distance with the dirty money used to pay for the initial deposit.

Question 26

COMBATTING MONEY LAUNDERING
THE HISTORY OF THE ANTI-MONEY LAUNDERING REGIME

Answer 26

Financial Action Task Force (FATF) was initially tasked with examining money laundering techniques and trends, reviewing current international and national measures, and setting out measures to combat money laundering.

Question 27

THE PROCEEDS OF CRIME (MONEY LAUNDERING) AND TERRORIST FINANCING ACT

Answer 27

The PCMLTFA has four objectives:
1.To implement specific measures to detect and deter money laundering and the financing of terrorist activities, and to facilitate the investigation and prosecution of money laundering and terrorist activity financing offences.

2. To respond to threat posed by organized crime by providing law enforcement officials with the info they need to deprive criminals of the proceeds of their criminal activities while protecting individual privacy.

3.To assist in fulfilling Canada’s international commitments to participate in efforts to combat transnational crime.

4. To enhance Canada’s capacity to take targeted measures to protect its financial system and mitigate the risk of it being used for money laundering.

To fulfill its first objective, the PCMLTFA places a variety of obligations on those who may be able to identify money laundering activities. Those who have such obligations are known as “reporting entities”.

Question 28

FINANCIAL TRANSACTIONS AND REPORTS ANALYSIS CENTRE OF CANADA

Answer 28

The PCMLTFA also establishes the Financial Transactions and Reports Analysis Centre of Canada PINTRACT one of several government bodies involved in Canada’s regime to combat money laundering.

FINTRAC’s key tasks include:
-requiring certain individuals and entities to submit various reports to FINTRACT
-using these reports to assess and analyze financial transactions to uncover relationships and networks that will assist in criminal investigations and prosecution of offences related to money laundering/terrorist financing and threats to the security of CA
-ensuring compliance of reporting entities with the PCMLTFA and
-promoting public awareness and understanding of money laundering and terrorist financial threats.

Question 29

KEY COMPLIANCE OBLIGATIONS UNDER THE PCMLTFA

Answer 29

1.COMPLIANCE PROGRAM
A compliance program must include the following five elements:
1. COMPLIANCE OFFICER
A compliance officer must be appointed, who is responsible for the implementation and oversight of the brokerage’s compliance program. They must have the necessary authority and knowledge to carry out the requirements of the program, meaning that they must have knowledge of the business, knowledge of the money laundering and terrorist financing risks in the sector, and knowledge of the brokerage’s legal obligations under the PCMLTFA.

2.POLICIES AND PROCEDURES
The brokerage must develop written policies and procedures that are applied to all the activities of and persons within the brokerage. The policies must be kept up-to-date. These policies and procedures must be approved by a senior officer of the brokerage. In most cases, this will be the managing broker.

3.RISK ASSESSMENT
A risk assessment is an analysis of the potential risks that could expose a business to money laundering. It must be documented and include mitigation measures and strategies. In completing a risk assessment, one must consider the brokerage’s relationship with its clients; the products, services and channels offered by the brokerage; the geographical location where the brokerage operates; new technologies and their impacts; and other relevant factors affecting the brokerage.

4.TRAINING PROGRAM
Brokerages must develop, implement and maintain a written training program for PCMLTFA compliance for employees, agents and other authorized to act on behalf of the brokerage.

5.REVIEW OF COMPLIANCE PROGRAM
A compliance program must be reviewed every two years to ensure that, despite any changes in the operating environment and conditions, the program continues to be effective. Specific follow-ups based on a review must be actioned by a senior officer of the brokerage.

Question 30

KNOW YOUR CLIENT (CONTINUATION OF… KEY COMPLIANCE OBLIGATIONS UNDER THE PCMLTFA)

Answer 30

The Know Your Client obligations or KYC obligations under the PCMLFTA relate to identifying clients. If the client is an individual, this means that a licensee must identify them. If the client is an entity (e.g. corporations, trust, partnership, fund, unincorporated association/organization), this means that the licensee must confirm the entity’s existence.

Question 31

THERE ARE FOUR MAIN TRIGGERS FOR THE KYC OBLIGATION TO IDENTIFY A PARTY IN REAL ESTATE TRANSACTION. A RECORD OF THE IDENTIFICATION MUST ALSO BE KEPT. WHAT INFO MUST BE CONTAINED IN THE RECORD DEPENDS UPON THE TYPE OF PARTY:

Answer 31

-FOR INDIVIDUALS
name, address, date of birth, and nature of their principal business or occupation
-FOR NON CORPORATE ENTITIES
Name, address, and nature of principal business for both the entity and the individual conducting the transaction on behalf of the entity
-FOR CORPORATE ENTITIES
A copy of the provisions in the official corporate records relating to the power to bind the corporation with respect to the transaction (e.g. certificate of incumbency, articles of incorporation, bylaws that set out the officers who are authorized to sign on the corporation’s behalf).

Question 32

THERE ARE VAROUS EXCEPTIONS FOR EACH SUCH AS WHEN THE ENTITY INVOLVED IS A FINANCIAL ENTITY OR A PUBLIC BODY. FURTHERMORE, LICENSEES ARE NOT REQUIRED TO RE-IDENTIFY AN INDIVIDUAL OR ENTITY IF THEY HAVE ALREADY DONE SO DURING A PAST TRANSACTION IN ACCORDANCE WITH THEIR PCMLTFA OBLIGATIONS, HAVE KEPT THE REQUIRED RECORDS, AND HAVE NO DOUBTS ABOUT THE INFO USED FOR THAT PURPOSE

Answer 32

TRIGGER #1 RECEIPT OF FUNDS
Licensees who receive funds from a person in any form (e.g. cash, back draft, cheque) must identify the individual or entity. An exception exists when funds are received from a financial entity (e.g. bank) or a public body. If a licensee receives funds directly from another party in the transaction, and that party is represented by another licensee, that other licensee has to identify that party (i.e. each licensee identifies their own client only0.

TRIGGER #2 PURCHASE OR SALE TRANSACTION
Licensees must identify the individual or entity when a purchase and sale of real estate occurs. Licensees must identify their own clients and any unrepresented parties. Further, if their client or unrepresented party is acting on behalf of a third party, that third party must also be identified.

TRIGGER #3 LARGE CASH TRANSACTION
A large cash transaction is defined as a transaction in which a licensee receive $10,000 or more in cash in a single transaction, or multiple payments of cash that add up to $10,000 or more in a 24-hour period (if the transactions were conducted by or on behalf of the same individual or entity, or if the amounts were for the same beneficiary).

TRIGGER #4 SUSPICIOUS TRANSACTIONS
A suspicious transaction occurs when the licensee has reasonable grounds to suspect that the financial transaction is related to the commission or attempted commission of a money laundering or terrorist financing offence. Suspicious transactions will be explored in greater detail later in this chapter.

Question 33

HOW TO IDENTIFY AN INDIVIDUAL
THERE ARE THREE MAIN METHODS THAT LICENSEES CAN USE TO IDENTIFY AN INDIVIDUAL

Answer 33

1.GOVERNMENT ISSUED PHOTO IDENTIFICATION METHOD
Licensees must review a piece of government issued photo identification that is “authentic, valid and current”, and compare it to the person providing it to ensure that they match. The PCMLTFA now allows for this to be done virtually, if sophisticated software that is able to assess a particular identification document’s authenticity is used. As such, reviewing identification through video conferencing and reviewing photocopied identification is not permitted.

2.CREDIT FILE METHOD
Licensees must refer to the individual’s credit file, which must be located in Canada and have been in existence for at least three years. The name, address and date of birth on the credit file must match the info that the individual provided to the licensee.

3. DUAL PROCESS METHOD
   Licensees must do the two of the following:
   a. refer to info from a reliable source that includes the individual’s name and address.
   b. refer to info from a reliable source that includes the individual’s name and date of birth.
   c. refer to info that includes the individual’s name and confirm that they hold a deposit account, a prepaid payment product account, or a credit card or loan account with a financial entity.

Question 34

HOW TO CONFIRM THE EXISTENCE OF A CORPORATE ENTITY

Answer 34

Entities include corporations, trust, partnerships, funds and unincorporated associations and organizations. To confirm the existence of a corporation, licensees can refer to a paper record, or an electronic record that was obtained from a source that is accessible to the public, such as its certificate of incorporation; a certificate of active corporate status; a record that has to be filed annually under provincial securities legislation; or any other record that confirms the corporation’s existence, such as the corporation’s published annual report signed by an audit firm, or a letter of assessment for the corporation from a municipal, provincial, territorial or federal government. Licensees must also verify the corporation’s name, address, and the names of its directors.

To confirm the existence of an entity other than a corporation, licensees can refer to a paper record, or an electronic record that was obtained from a source that is accessible to the public, such as a partnership agreement; the articles of association; or any other record that confirms its existence as a legal entity (e.g. trust agreement).

Question 35

THIRD PARTY DETERMINATION

Answer 35

In certain cases, when performing one’s KYC duties, a licensee must also take reasonable measures to determine if a client is acting on behalf of someone else (i.e. a third party). A third party is defined by FINTRACT to be a person or entity who instructs another person or entity to conduct an activity or financial transaction on their behalf. Third party determination is required in purchase and sales transactions and large cash transactions.

Question 36

BENEFICIAL OWNERSHIP REQUIREMENTS

Answer 36

Beneficial owner: for the purposes of the Proceeds of Crime (money laundering) and Terrorist Financing Act, any individual who directly or indirectly owns or controls 25% or more of a corporation or other entity.

This is because money launderers may use one or more “lawyers” of corporations or other entities in order to distance themselves from a money laundering transaction.

Question 37

LICENSEES HAVE TWO OBLIGATIONS WITH RESPECT TO BENEFICIAL OWNERSHIP INFO. THESE OBLIGATION ARE TRIGERRED ANY TIME A LICNESEE IS REQUIRED TO VERIFY THE IDENTITY OF AN ENTITY

Answer 37

1. THE FIRST OBLIGATION IS TO OBTAIN OWNERSHIP INFO
   The specific info that must be obtained depends upon the type of entity. For corporations, licensee must obtain the names of all directors of the corporation and the names and addresses of all persons who directly or indirectly own or control 25% or more of the share of the corporation. FINTRAC indicates that beneficial ownership info could be obtained in various ways, including verbally from an authorized representative of the entity, or in writing (e.g. by having the entity’s authorized representative fill out a from that includes questions about beneficial ownership).
2. THE SECOND OBLIGATION IS TO TAKE REASONABL EMEASURES TO CONFIRM THAT THE BENEFICIAL OWNERSHIP INFO THEY HAVE OBTAINED IS ACCURATE
   FINTRAC has provided various examples of how licensees may discharge this obligation. Perhaps the simplest method is to ask the authorized representative to sign a document confirming the accuracy of the info. More investigative methods may involve searching the Land Owner Transparency Registry or the BC Company Registry, or reviewing the official documents of the entity, to independently confirm the accuracy of the info. The degree of investigation that will be considered reasonable will depend upon the risk assessment of the entity, with high risk entities meriting more scrutiny than low risk entities. Risk assessments are discussed further later. Licensees must keep a record of the measures taken to confirm the accuracy of the info they obtain.

Question 38

LAND OWNER TRANSPARENCY ACT (“LOTA”)

Answer 38

LOTA came into effect in BC, other than the sections dealing with info being available for searches. LOTA was created by the BC government as part of its broader efforts to combat tax evasion, fraud, and money laundering in this province.

LOTA requires that a transparency declaration be filed when applying to register certain interests in land at the land title office. These interests are fee simple estates, life estates, rights to occupy under a lease exceeding 10 years, and certain rights under an agreement for sale.

The transparency declaration state whether or not the person receiving the interest is a “reporting body” which includes “relevant corporations”, “trustee of relevant trusts”, and “partners of relevant partnerships”.

The transparency report must include certain info, including info about any “interest holder” of the reporting body. Under LOTA, the legal definition of “interest holder” includes individuals who may not have direct ownership of land but are considered to have an indirect interest in it. Interest holders include:
1.For land registered in the name of a trustee of a relevant trust, individuals who have a beneficial interest in the land as well as individuals who have the power to revoke the relevant trust and receive the interest in land.
2.For land registered in the name of a relevant corporation, individuals who (a) own 10 percent or more of the issued shares, or 10 per cent or more of shares that carry the voting rights of the relevant corporation; or (b) have rights or abilities to elect, appoint or remove the majority of the directors of the relevant corporation.
3.For land that is the property of a relevant partnership and is registered in the name of a partner of the relevant partnership, individuals who are the partners in the relevant partnership.

Question 39

TRANSPARENCY REPORTS REQUIRE VARIOUS TYPES OF INFO TO BE PROVIDED BY REPORTING BODIES SUCH AS:

Answer 39

*“Primary identification info” about the reporting body such as:
-in the case of an individual, the person’s full name, citizenship and certain info about their principal residence and
-in the case of corporation, the name, address and jurisdiction of the corporation

*“Primary identificatio info” plus certain other info about each “interest holder” such as
-birthdate
-social insurance number
-description of how the individual is an interest holder

*Parcel Identifies (PID) of the land to which the transparency report relates and
*The name and contact info of the person certifying the report.

LOTR is one of the tools that licensees can use to assist them in fulfilling their anti-money laundering obligations.

Question 40

POLITICALLY EXPOSED PERSONS AND HEADS OF INTERNATIONAL ORGANIZATIONS

Answer 40

Given the threat foreign and domestic political corruption poses, the PCMLTFA and its regulations require the licensees to take reasonable measures to determine whether the person with whom they are in a business relationship is a politically exposed persons (PEP), a head of an international organization (HIO), or a family member or close associate of a PEP or HIO, at the outset of a business relationship and at certain other points during the business relationship.

Question 41

BUSINESS RELATIONSHIPS ON ONGOIND MONITORING

Answer 41

A licensee is considered to be in a business relationship with an individual or entity the first time that they are required to verify their identity.

Question 42

THERE ARE TWO KEY REQUIREMENTS PLACED UPON LICENSEES WHEN THEY ARE IN A BUSINESS RELATIONSHIP WITH A PERSON:

Answer 42

1.KEEP A RECORD OF THE INTENDED OF THE BUSINESS RELATIONSHIP
This requirement is fairly simple. For example, it could be as simple as: “The purpose of this relationship is to act as an agent for someone looking to identify residential properties for investment”.

2. PERFORM ONGOING MONITORING BASED ON RISK ASSESSMENT
   At the outset of the business relationship, one of the first duties of brokerages and licenses is to assess the risk of the client participating in money laundering or terrorist financing activities. This risk assessment should follow the procedure contained in a brokerage’s written compliance program, and may be based upon various factors, such as the geographic location of the client, the country where funds originated, the client’s identity, and the client’s business activities. Upon completion of the risk assessment, the client may be categorized into a certain risk profile, with some clients being higher risk than others. The purpose of ongoing monitoring is to detect any suspicious transactions; to keep client info up-to-date; to reassess the client’s risk profile; and to determine whether transactions are consistent with what is known about the client. High-risk client’s info must be updated more often. Ongoing monitoring is also about reassessing the client’s risk profile, which may change if the type of transactions the client engages in changes, or the licensee learns new info about prior transactions. A business relationship will end five years after the last transaction that required the licensee to verify the identity of the client. Each brokerage will have policies for how ongoing monitoring should be done. For certain types of clients, ongoing monitoring may be as simple as annual or other periodic follow-up with the client by email to ensure accuracy of client info. Ongoing monitoring may also involve periodic searches of LOTR to assess whether the client has acquired any other property interests in BC.

Question 43

REPORTING

Answer 43

The third key obligation upon licensees under the PCMLTFA related to reporting. Licensees are required to provide certain reports to FINTRAC.

Question 44

TERRORIST PROPERTY

Answer 44

A Terrorist Property Report must be filed without delay by a licensee when they know or have reason to believe that property in their possession or under their control is either owned by a terrorist or a terrorist group, or controlled by or on behalf of a terrorist or terrorist group.

Question 45

LARGE CASH TRANSACTIONS

Answer 45

A large cash transaction was defined earlier as a transaction in which a licensee received $10,000 or more in cash in a single transaction, or multiple payments of cash that add up to $10,000 or more in a 24 hour period.

Question 46

SUSPICIOUS TRANSACTIONS

Answer 46

The reporting of suspicious transactions is a key obligation upon licensees, and the industry has been criticized for not reporting suspicious transactions as often as it should. The real estate sector is highly vulnerable to money laundering, and there are numerous methods and schemes used by criminals to launder money through real estate. Licensees are on the front line for detecting and deterring money laundering. Suspicious Transaction Reports (“STRs”) are the most valuable types of reports to identify money laundering, so they must be detailed and of high quality.

Unlike large transaction reports, there is no monetary threshold for reporting on a suspicious transaction.

Question 47

REASONABLE GROUNDS TO SUSPECT

Answer 47

Reasonable grounds to suspect is:
-a step above simple suspicion (i.e. a”hunch” without much more)
-a step below reasonable grounds to believe (i.e. probability supported by verified facts).

Question 48

FIGURE 5.5 DIFFERENT STANDARDS OF SUSPICION

Answer 48

SIMPLE SUSPICIOUN
-Hunch or intuition leads you to think the ML or FT may be occurring
-Cannot articulate reasons for suspicion
REASONABLE GROUNDS TO SUSPECT
-Based on an assessment of facts, context and indicators, there is a possibility that ML or TF is occurring.
-Able to present reasons why it is suspicious but they do not need to be proven or verified.
REASONABLE GROUNDS TO BEILEVE
-There is a probability that ML or TF is occurring
-Able to present a set of verified facts that can be proven and support this suspicion.

In most cases, the determination that there are reasonable grounds to suspect is based on a mix of facts, context and money laundering/terrorist financing (“ML/TF”) indicators.

Question 49

FACTS

Answer 49

A fact is an actual event, action, occurrence or element that exists is known to have happened or existed. It cannot be an opinion. For example, the facts surrounding a financial transaction could include the date, time, location, amount or type of transaction, or could include account details of the party’s financial history.

Question 50

CONTEXT

Answer 50

A financial transaction may not appear suspicious in and of itself. However, when examined in the appropriate context, suspicion may be raised. Understanding the context of a financial transaction involves something that may be observed or acquired through:
-knowledge of the typical financial activities found within the real estate business industry;
-a general awareness of the events occurring in the real estate market;
-regular “know your client” activities; and
-the background and/or behavior of a client.

Question 51

ML/TF INDICATORS

Answer 51

ML/TF indicators are potential red flags that could initiate suspicion or indicate that something may be unusual without reasonable explanation.

Question 52

MONEY LAUNDERING/TERRORIST FINANCING INDICATORS

Answer 52

GENERAL
-The use of corporate entities, trusts and nominees
-Cash purchases
-The use of unregulated lenders
-Ownership by foreign persons

CLIENT BEHAVIOR
-Client arrives at a real estate closing with a significant amount of cash
-Client over-justifies or over-explains the purchase
-Client exhibits unusual concerns regarding the brokerage’s compliance with government reporting requirements and the brokerage’s anti-money laundering or anti-terrorist financing policies
-Client exhibits a lack of concern regarding risks, commissions or other transaction costs
-Client is known to have paid large remodeling or home improvement invoices with cash

ATYPICAL TRANSACTIONS
-Client sells or buys property significantly below or above market value
-Client purchases property without inspecting it
-Frequent change of ownership of same property, particularly between related or acquainted parties
-Property is re-sold shortly after purchase at a significantly different purchase price, without corresponding changes in market values in the same area
-Client buys back a property that they recently sold
-Client negotiates a purchase for market value or above the asking price, but requests that a lower value be recorded on documents, paying the difference “under the table”
-Client purchases multiple properties in a short time period, and seems to have few concerns about the location, condition and anticipated repair costs of each property
-Client wants to build a luxury house in a non-prime location
-Payment is made in cash, bank notes, bearer cheques or other anonymous instruments
-Parties show strong interest in completing the transaction quickly, without there being a good cause

PERSON/ENTITY FINANCIAL PROFILE
-Client persists in representing the financial situation in a way that is unrealistic or that cannot be supported by documents
-Transactions being carried out on behalf of minors, incapacitated persons, or other persons who appear to lack the economic capacity to make such purchase

USE OF OTHER PARTIES
-Client does not want to put their name on any document that would connect them with the property, or uses different names on contracts, closing docs and deposit returns
-Client inadequately explains a last-minute substitution of the purchasing party’s name
-Client purchases property in someone else’s name such as an associate or a relative
-Client pays initial deposit with a cheque from a third party
-Client pays a substantial down payment in cash and the balance is financed by an unusual source or offshore bank
-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 entity, or when the entity has no business activity
-A transaction is completely anonymous

Question 53

ANSWER QUESTIONS

Answer 53

The answers given to initial questions may uncover additional issues and inconsistencies that warrant further questioning. This info gathering process is valuable to licensees because it:
-assists in fulfilling your obligation to report suspicious transactions
-conveys to your clients that you are a critically thinking professional, rather than a simple “order taker” and
-discourages clients who may be engaged in money laundering activities from working with you, as they may fear being identified as suspicious.

Question 54

WHEN TO SUBMIT AN STR

Answer 54

STR must be submitted as soon as practicable after having reasonable grounds to suspect that a transaction is related to the commission or attempted commission of a ML/TF offence.

Question 55

HOW TO SUBMIT AN STR

Answer 55

Except in very rare circumstances, licensees must submit STRs to FINTRAC electronically through one of two encrypted submission methods. A brokerage compliance program will set our how this should be done by the brokerage’s licensees.

Question 56

RECORD KEEPING

Answer 56

The final key obligation on licensees under the PCMLTFA is to keep certain records.

There are six record keeping obligations that licensees, on behalf of their brokerage, must observe, some of which have already been touched upon in this chapter.

1.SUSPICIOUS TRANSACTION AND OTHER FINTRAC REPORTS
Must be kept for at least five years from the date it was submitted to FINTRACT
2. LARGE CASH TRANSACTION RECORDS
Must include specifically enumerated info about the transaction and must be kept for at least five years from the date of creation
3. CLIENT INFORMATION RECORDS (TO FULFIL KYC OBLIGATIONS)
Must be kept for five years from the date of completion of the last business transaction. These include beneficial ownership info records when dealing with entities and PEP of HIO records where dealing with those persons, their family members or their close associates.
4. RECEIPT OF FUNDS RECORD
A record must be kept for at least five years when a licensee receives any type of funds, with the record including info such as name, address, date of birth, principal business or occupation, amount and currency of funds, date the funds were received, date of the transaction, and account info. If the client is a corporation, a licensee also need to keep a copy of the provisions in the official corporate records relating the power to bind the corporation with respect to the transaction.
5. UNREPERSENTED PARTY RECORD
Licensees must take reasonable measures to identify unrepresented parties in a real estate transaction. Such records must be kept for at least five years.
6.REASONABLE MEASURES RECORD
Where a licensee has attempted to identify an unrepresented party using reasonable efforts but is unsuccessful, licensee must record the measures taken, the date they were taken, and the reason why the measures were unsuccessful.

Question 57

AMPS

Answer 57

FINTRAC focuses its efforts on promoting awareness, providing assistance, and conducting compliance assessments. However, non-compliance can result in administrative monetary penalties (AMPS) and/or criminal proceedings.

AMPS are designed to provide a measured and proportionate response to particular instances of non-compliance. The purpose of the AMP program is to encourage future compliance with the PCMLTFA and to promote a change in bahavior from the reporting entity.