Looking to launder some cash?
By Stephen Punwasi, Better Dwelling:
Looking to launder some cash? You might want to head over to Toronto, and use the real estate. A new Transparency International Canada (TI Canada) report studies the corporate ownership of Greater Toronto residential real estate. The organization took a dive through over 50,000 corporate purchases made from 2008 to 2018 (full report). Turns out at least $20 billion in buys were made with no checks and balances to determine the beneficial owners or source of funds.
Corporate and Beneficial Ownership
First you need to understand the issue with beneficial ownership in Canada. Beneficial ownership is the person/company that actually benefits from a company. Canada, much like any other tax haven, doesn’t keep track of beneficial owners. Instead, the government only collects a list of directors and a mailing address. Great from a privacy standpoint, but it can become problematic sometimes.
One of those times is when buying real estate. In Ontario, companies can register a title with only the name of the company, and a mailing address. There’s nothing else. We don’t note what country the company is registered, and the address can be a post office box. When combined with how they’re buying Toronto real estate, you can see how this is problematic.
Corporations Used $9.8 Billion In Cash To Buy Homes In Toronto
Using cash to buy Greater Toronto real estate is popular with companies. Looking at the 51,498 GTA homes companies bought from 2008 to 2018, $9.8 billion were all cash buys. That’s about 35% of the total dollar volume spent, with the volume accelerating right up to 2017. To contrast, just 11% of household volume made similar all-cash transactions.
The real estate industry would most likely tell you that’s a sign of market strength. After all, well capitalized companies are transferring money through banks with rigorous checks. What could go wrong?
Well, we don’t know who the beneficial owners of the companies bringing money into the banks are. Going out on a limb here, but I’m willing to guess the majority of them are regular companies that have extra cash. However, there’s no way to verify who has been actually buying these units. If a dodgy beneficial owner isn’t on the corporate registry, no government agency flags go off.
Unregulated Private Lenders Provided $10.4 Billion To Companies
Even more Toronto real estate was bought by companies using unregulated private lenders. Over $10.4 billion in mortgages were obtained by companies using private lenders, over the same period. This represents 49% of corporate mortgage dollar volume. To contrast, just 3% of GTA household borrowing originated from private lenders. Private lending is heavily overrepresented in the corporate world.
Unregulated private lenders are a bigger problem for transparency, since they are… uh, unregulated. TI Canada notes these lenders have no obligations under Canada’s current anti-money laundering regimes. This means they don’t just get to ignore beneficial ownership – they also get to ignore source of funds.
Corporate ownership isn’t the problem, as is the lack of information on buyers. The vast majority of companies may be totally legitimate businesses… or not. However, even a few billion in laundered cash can have a large destabilizing effect on prices. We’ll dive more into the pricing mechanics of money laundering next week though. By Stephen Punwasi, Better Dwelling
How do the most splendid housing bubbles in Canada stack up against the most splendid housing bubbles in America? Holy cow! Read… The Most Splendid Housing Bubbles in Canada Deflate
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