Lawyers would benefit from stronger procedures for verifying the identity of beneficial owners
The legal profession would greatly benefit from more proactive verification of beneficial ownership of real estate through a public registry, says the author of a C.D. Howe Institute report that outlines deficiencies in B.C.’s new hidden land ownership registry, intended to fight money laundering.
“Lawyers would gain on a number of fronts,” says Kevin Comeau, a lawyer and money laundering expert who wrote B.C.’s Public Registry to Combat Money Laundering: Broken on Arrival, released earlier this week. “First, it allows them to meet their ‘know-your-client’ obligations, which is really important, not only for their personal liability exposure, but to prevent not being sanctioned by their law society.”
“But, secondly, it would massively improve the reputation and perceived integrity of the legal profession. Right now, it’s being attacked over and over and over again, in the press and in social media, for allowing money laundering to happen.”
Comeau adds a properly designed registry for disclosing real estate ownership would reduce criminals’ ability to use lawyers, accountants, and other professionals as ownership frontmen.
However, Comeau, who works with Transparency International Canada's Working Group on Beneficial Ownership Transparency, says the version of B.C.’s database set to go live on Nov. 30 contains “too many flaws” to deter those who want to launder dirty money and evade taxes through real estate transactions.
In his report, Comeau says there were “high hopes” that the B.C. government would build a world-class registry, first proposed in 2018 and passed in 2019, or at a minimum, adopt the basic lessons learned from existing public registries.
It came after a provincial report on money laundering said $5 billion was laundered through real estate transactions and likely increased housing prices by at least five per cent in 2018 alone.
Transparency International Canada, an anti-money laundering organization, also concluded in a 2016 report that shell companies owned nearly one-third of the 100 most valuable residential properties in Greater Vancouver.
However, Comeau's report outlines how the B.C. government has since stripped the registry of “all its potential power and functionality,” so much so that the final product set to launch “will likely do little to stop money laundering in B.C. real estate.”
As to why the province removed the teeth from the registry, Comeau says that is “something you’d have to ask the province,” but if he were to speculate, it was likely an attempt to reduce set up and operating costs.
Among its flaws, Comeau says, is that there is no system for the “proactive” verification of the identity of the true beneficial owner of the real estate – that is, the ultimate owner, not the name listed on the land title. The system offers little value to law enforcement agencies and others who search the registry.
Other problems with the registry include restrictions on keyword search tools, limiting the ability to connect beneficial owners with money laundering criminals.
Comeau points out there is no confidential tip line associated with the new registry, which would enable registry searchers from around the world to provide key information and evidence to Canadian law enforcement agencies and the Canada Revenue Agency. Comeau also notes that the sanctions for false filings don’t include prison sentences, and the fines are simply “the cost of doing business.”
As Comeau’s report summarizes, the information on the registry will be “unreliable, difficult to access, difficult to process.” And “even if it helps a searcher spot a falsely declared beneficial owner, the ability to communicate that discovery to law-enforcement officials and their ability to leverage it to catch criminals will be curtailed.”
While there are several issues with the new registry, the biggest flaw, Comeau says, is that there is no requirement for registry officials to independently verify all identification information filed on the registry.
There is not even a requirement for government-issued photo identification, such as passports or driver’s licences. Money launderers can avoid detection by simply making up a name and creating a non-existent beneficial owner with no connecting factors to the true beneficial owner or criminal organization.
While there are two verification safeguards in the registry, they are of limited value, Comeau says. One is a transparency declaration that is required, but there is no third-party verification, “which means criminals organizations and their frontmen can certify the declarations themselves.” The other is the province’s right to demand verification to determine compliance with the act, but that would only be done on a random spot-check basis or if there are grounds to believe there has been non-compliance.
For lawyers, the lack of a identify verification system means they will not be able to use the registry as a way to meet “know your client” obligations. Lawyers are not experts in identity verification, Comeau says, particularly when dealing with foreign passports and other identity documents written in non-Latin script such as Russian, Chinese and Arabic alphabets.
As well, Comeau’s report notes that for any legal professionals who do work on the outer limits of the law, a registry that verifies beneficial ownership would make too easy ‘to spot a tax-haven lawyer with 17 homes in West Vancouver.” Providing the registry with a proper identity verification system would force criminals to use individuals they know and trust, not professionals, making detection easier.
As for searching the registry, Comeau says there are at least two major deficiencies. The first is a $5 fee for each search, which applies to law enforcement agencies, government regulators and the general public. Not only are the fees a deterrent, he says, but they could also actually undermine the potential to generate greater revenues through fines and forfeiture of properties. “If done properly, this registry could actually be a significant money maker for government,” he says.
The second flaw with the search system is that the registry does not allow for keyword searches. The public can only search for the name of a specific name or land parcel identifier number. For example, Comeau says, there is no ability to enter a country name to get a list of anyone connected to that country.
While there are “significant” flaws with the registry, Comeau says the “good news” is that these are fixable. His recommendations include:
• Implementing a proactive verification system using government-issued photo identification. While it would be expensive to set up and operate, such improvements would generate revenues that would exceed those costs.
• Imposing prison sentences and fines for offences, reflecting the property’s value in question, up to $5 million.
• Creating a unique-Identifier system for each beneficial owner to determine “whether John Smith from London, England owns 12 houses in West Vancouver, or 12 John Smiths from London each own one house in West Vancouver.”
• Disclosing names in their original alphabet script, not just Latin script, to help enhance searchers worldwide to identify falsely declared beneficial owners. Also, include both a person’s legal name and all other commonly-used names for that individual.
• Removing the $5 user fee
• Requiring universal registration of beneficial ownership upon the registry’s launch, as money launderers who already own houses can avoid registration and detection.
Ron Usher, a lawyer for the Society of Notaries Public of B.C., which represents notaries public who handle routine sale contracts, says the new database will be a useful tool for agencies and regulators looking into suspicious transactions. But there is a “delicate balance” to be negotiated in making this information more public, as it may reveal the private information of “tens of thousands of people doing completely normal transactions.”
Making such details public “could be God’s gift to every con artist from one end of the planet to the other,” he says.
Usher, who was part of a panel that led to the overhaul of B.C.'s real estate regulations, adds notaries and lawyers handling real estate transactions are already qualified to verify the identity of their clients and their partners and only accept valid ID.