Navigating the Compliance Maze: Real Estate's FINTRAC Challenges

Hello and welcome to another episode of The know your

compliance podcast, the KYC podcast. My name is Greg Dent,

and I'm the host of the podcast. Today, we're going to do

something a little bit different. I'm going to spend a

little bit of time chatting with you about my observations of the

real estate sector as they relate to their anti money

laundering, counter terrorist financing obligations, or their

FINTRAC obligations. And I'm going to start with just kind of

explaining why I'm qualified to speak to this very topic. I've

been a real estate agent now for over 14 years, and I've been

studying FINTRAC and anti money laundering for about seven years

now, and so I think it is entirely possible also that I've

talked with more compliance officers or brokers of record or

managing brokers in this country, possibly than anyone

else about specifically

about their FINTRAC obligations. I'm not sure, but that's

probably true. And what's interesting to that about that

is that I've had so many different conversations that I

actually don't think there's any conversations left to have that

I haven't had with somebody at some point. And so I'm able to

kind of talk about some of the challenges that the sector has

in general and some of the specific challenges we've seen

as we at really trusted have unveiled our FINTRAC compliance

programs and our assistance with FINTRAC compliance programs. So

actually, one other thing that I think is important that makes me

somewhat qualified to speak about this is I've now delivered

training on fan track, on anti money laundering, on counter

terrorist financing, to hundreds and actually, definitely into

the 1000s, 1000s of real estate agents in Canada, and the

feedback and the questions that they've asked to help inform my

understanding. So I think I am somewhat qualified to talk about

this, and that's what I'm qualified to talk about. That's

what you're going to get to listen to today. So if you're

interested in about how the real estate industry has done with

their fin track obligations, or how it hasn't done and I mean,

some people would even ask, how the heck it's possible that they

still haven't figured it out is, is? And when I talk with folks

in the AML CTF space, that's certainly their feeling is, how

the heck is it that an industry is over 15 years into its

regulation and still doesn't understand and so I want to

start to try and address that question today as I kind of talk

about the challenges the industry has faced. So that's

that's what I'm going to do. Let's call let's launch right

into it. I don't have any other guests to introduce. It's just

me. So let's launch right into it today. I think there's kind

of four things that I think really make it difficult for the

real estate sector to adequately comply with FINTRAC. And look, I

think let's, let's lay the groundwork for this whole thing.

I'm recording this in mid 2024, over the last handful of years,

FINTRAC has regularly published fines somewhere between four to

six real estate brokerages most years get published. The average

fine has been $143,000 and fin track as recently as a couple

years ago, when they did the AML CTF virtual forum for the real

estate sector was abundantly clear that they believe quite

strongly that our reporting are the real estate sectors

reporting of suspicious transactions specifically is way

below what it should be by numbers. And I think they're

probably right. I think that's where the question starts to

form. Is it because the industry's in on it? Is it

because the industry's ignoring it? The is the industry just not

is the industry supporting money laundering? That's That's one of

the questions I've had some people, people ask, and I don't

think any of that's true. I think the the reality is,

here's, here's, here's my view on it. And I'm going to qualify

all of this by saying, Look, this is my take on all of this.

I think I'm qualified to speak on it, but, but others, my

others certainly can and do have other opinions. So I cluster all

of the problems into kind of three or four things. One is the

structure of the industry. Two is and this is somewhat related,

but there's kind of a misaligned incentives portion of this, and

that's true in other sectors. So that's not unique to real

estate, but there is a misaligned incentives problem.

There's a. Challenge that the tone from the top hasn't always

been as supportive of AML as it probably should, could have

been, and I'll unpack that in a second as well. And then there's

the regulatory squeeze, and I think that's something that

across the real estate sector, people are certainly feeling so

So let's delve into each of those a little bit, and I'll

kind of unpack what I mean when I say all those things. So let's

start with the structure, because I think the structure is

the one that I've had pushback on this from people within the

industry. And I guess the funny thing to me is the challenge

within our within this real estate sector, and why I talk

about the structure being a problem is a couple of different

things. First of all, the real estate sector is a ton of small

businesses, occasionally medium sized businesses, but mostly

small mom and pop operations. I hang my license at a brokerage

of 75 agents, which is kind of medium size, I suppose, for the

real estate sector. But if you go look at the financials of

that business, there's a total of, I don't know, three or four

full time staff. It's not a massive operation. There's not

huge profits. There's not huge revenues, in fact. So when you

realize that my medium sized brokerage is still very much a

small business, you realize that one of the challenges they're

going to have is compliance. Therefore is a large is going to

be a large cost, unless you find a way to deliver that within the

structures you already have. And that's the next part of things

is that most of these small businesses are owned and

operated by real estate agents who became owners, who became

brokerages, who became owners of brokerages, often become the

managing broker or broker of record of those brokerages,

because that's the next natural step in their progression, not

necessarily because they wanted to run a business, but because

they were running a business of sales and saw an opportunity to

run a bit more of a consistent business and or have a deep

desire to support and train others and form and have

leadership that way. But in all of those cases, I can almost

assure you that there is no broker in this country who got

into owning a brokerage because they wanted to make sure that

their fin track obligations were properly addressed. I kind of

smile when I say that, because it's so obvious, but I think my

point here is that compliance is, is one of the things they're

obligated to do, but it's not something that they're super

inspired by, and it's not something they particularly want

to do. And I don't mean just their AML, CTF compliance.

There's other compliance. We'll talk more about that in a

second, when I talk about the regulatory squeeze. And so I

think the very structure is, is problematic, Faith part two of

the structure still being problematic. There's, there's

actually three parts to the structure itself. Part two is

that the vast majority of brokerages have agents who hang

their license at a brokerage, but those agents are independent

contractors, and that creates a real problem for the broker

owners who have these responsibilities of fin track

compliance program in for the purposes of our conversation

today, but whose staff are constantly whose whose staff,

whose agents, and I shouldn't use the term, staff whose agents

are essentially customers. They're customers. If I'm an

agent hanging my license at XYZ brokerage, I can move my license

to some other brokerage like that, just a snap of a button, I

can move my license to somebody else. And so if I impose

significant burdens on an agent's doing their business,

whether that's a financial burden or a time burden, doing

some sort of additional form or paperwork, no matter how right

it must be. Might be sorry, it's competitive marketplace, and so

I risk losing agents when I do the right thing, from a

compliance point of view, because the brokerages across

the street might not be doing all the same things. And so

there's a there's an additional kind of structural problem

there. And I think the last part of the structural problems, this

is more about misaligned incentives, maybe, but it's

certainly part of the structure as well, is that, by definition,

the real estate sector is a sales organization, or is a

sales driven industry, and your the agent makes money every time

they do a sale, therefore they want to be doing sales. And so

there is an element. And of I mean, to use the really

aggressive term, there is an element of willful blindness

that might exist in some cases, at the very least, they agents

don't have incentives to stop doing deals for some sort of a

regulatory burden or for some sort of a hiccup on the

compliance front. And now look, I I've spent time on other

episodes of this show talking about why compliance is

important and compliance is the right business decision, and why

it saves businesses of all sorts money and time and all the rest.

So I'm not going to get into that here, but the nature of

real estate is such that the agent, the frontline person, the

person who's dealing with the consumer who's might be

laundering money, generally speaking, that agent has an

inverse incentive to make sure that they stop that transaction.

And so that becomes a, obviously a structural problem as well.

Now, I think the the next part about, if we now that we're kind

of on the topic of misaligned incentives, I think I should

kind of point out there is an additional challenge, which is

that many times agents are working with people who they

know, or they feel they know. When I think about my clients,

many of our many of my clients are, are people who are referred

to me by people I've previously done deals with. And so I kind

of feel like I've got this closeness with them on some

level. And sometimes they're, they're friends their family,

they're they're people at my church, they're people from my

kids soccer team, they're people from all of those kinds of

groups. And so you have these relationships. They're my

neighbors, and so you have this relationship, and you don't, you

don't want to believe that it's possible that those people are

laundering money. And there are many, many, many, many, many

times I've talked with real estate agents in this country

who have said to me, oh, it's not possible for my client, for

my clients, ever to be laundering money. I know them

all so very well. It's not possible. It's just not

something they would do, as though all of their all of their

clients, are from this perfectly close knit group that they know

extremely well. And I, again, I don't need to delve into on this

podcast. Certainly, I think listeners of this podcast are

going to understand that my neighbor is just as it's just as

possible for them to be laundering money as it is for

anybody else. But that is the challenge that the industry

faces, and part of the reason why reporting, I think, has been

so low, ultimately, I want to move to to the regulatory

squeeze. I've made reference to it a couple of times, and I

guess that's the other part of the that's another. There's kind

of two other things I'm going to talk about, the regulatory

squeeze is the next one. And when I think about the

regulatory squeeze, we were looking at an industry that's

been under the gun from governments across the country,

because in Canada, we have a housing crisis. I think that's I

don't even think that's controversial anymore as a

concept. I think everybody's kind of agreed that that that is

the truth. And what that's meant is that governments across the

country have done whatever they can to help regulate that,

speaking in BC, we've seen massive regulatory changes in

the last decade, easily from and I think that's that's most

evident in the amount of paperwork that is now being done

on every single deal, the various aspects that every

single deal must Now touch and to give you some specific

examples, in BC, we now have a rescission program. We have a

foreign buyer tax. We have differing levels of property

transfer tax. Every level of government, if you're working in

the city of Vancouver, every level of government, local,

provincial and federal, all have a vacancy tax. The and you as an

agent, you need to know all of these things. As a brokerage, as

a as a managing broker, you need to understand all of these

things to be able to inform your agents on them. And that's just

beginning to cut to open it up. I mean, in BC, dual agency is no

longer allowed. There's a disclosure requirement around

the expected remuneration. There's all of these additional

levels of new ish things, and that shifting framework means

that a for a for that owner of the mom and pop shop, there's

just a need to continue their education. And look, that's

wonderful. That's the point of being a professional. I think

that's terrific. But FINTRAC is just one more thing that they

need to be educating themselves about, and it's just it's so

tangential to what they're actually want to be doing in the

first place that most of them just don't most of them just

don't have the capacity either, either they don't want. To or

they just literally don't have the capacity, but, but my point

is that actually, let me even get a step further back, when

you own a real estate brokerage, your business is the business of

recruiting new agents, training and assisting your current

agents and making them successful. The compliance stuff

is stuff you do because that's the actual business. That's how

the business is expressed. That's where the money comes.

But your success truly is measured on your ability to keep

your current agents and recruit new ones. That's when you're

running a brokerage. The constant goal is to add new well

qualified in most brokerages. Cases, agents to the pilot and

look, that's going to change depending on your brokerage

model. Sometimes it's just a sheer number thing. Sometimes

it's quality as well. But the point is that your job as a

broker, owner of a real estate brokerage, is to make sure that

you have sales people doing the job, and to help those

salespeople do the job. All of the compliance stuff is one more

thing that's thrust upon you and and honestly, what ends up

happening for most broker owners is they just don't have the

capacity to learn about FINTRAC, to learn about their anti money

laundering obligations to the level of detail that it takes to

be successful at it. And so that's somewhat of a structural

problem that's so much of a regulatory squeeze problem, but

ultimately, it expresses itself as most brokerages in this

country and most broker owners in this country just not being

able to have the bandwidth to deliver, implement and maintain

and operate a fin track compliance program. And that's

that's the insight, I think, that my team and I came up with

about three or four years ago as we started to push towards the

delivery of what we now call fin track Express, where we take on

all of that responsibility. Well, not all, but where we take

on the the the creation of and the maintenance of the fin track

compliance program. And we put broker owners in a position

where they can just operate the program. That's the the insight.

The reason we went down that path was because we saw broker

owners everywhere drowning in their fin track obligations as

just being the the needle, the hay that broke the camel's back,

right? It's the one more thing that they had to do. There is

one other thing, and I haven't mentioned it yet, because I'm

always a little weary of this, because I don't want to offend

people in the industry, but I will say that the other

challenge from within the industry is that the tone of the

top hasn't always been great on this topic. And I think that

again, and this isn't there's no one organization or association

or anything that I think is particularly guilty of this.

Quite the contrary, I think every level of association are

the Canadian Real Estate Association, the BC Real Estate

Association, the Ontario Real Estate Association, the local

boards that support them, or that, sorry, that create the

local level of and and even the broker owners in the offices at

below that. I think everybody on some level in the back their

mind, and some say it quite vocally, think that FINTRAC is

going to go away. And want fin track to go away because we saw

the lawyers get out of their fin track obligations, or because

it's new for them, then, therefore it's probably not

going to make it, or something like that. And that, what that's

meant is that every time a leader within the industry

stands up and says, Well, FINTRAC, it's just one other

thing that we have to do. Or, you know, you just fill out

those forms and you're good, or whatever, some some version that

doesn't express the depth of what fin tracks really about,

and the and the importance of a business monitoring and managing

its risks specifically and obviously in our cases, around

AML, CTF, every time somebody does that, it's just a little

chip into the importance and the validity of the FINTRAC

compliance programs that the broker owner just might or might

not in many cases, implement. So I guess the tone from the top,

and again, I don't want to belabor the point, but

everybody's done what they can to help support the agent at the

end of the day, but it's so diluted by the time it gets to

the agent that many agents I and I would I know this is true

because Almost every week, I have a conversation with an

agent somewhere who says to me, well, as long as I'm filling out

the forms, I'll be fine, right?

And I think our listeners will probably understand that that's

obviously not the truth, and it's not coming from a place of

not wanting to go. Apply. It's coming from a place where our

industry has told them, here is the form that you need to fill

out, and as long as you fill that out, you'll have fulfilled

your fin track obligations, which obviously is wrong and

which obviously just doesn't work. Anybody who understands

fin track will understand that filling in a form is not what

you need to be doing, thinking it through and understanding

what you're looking at and making determinations based on

what you're seeing. That's what fin tracks about. The form is

the way of documenting that, and unfortunately, in the desire for

creating a simple way of of complying. Our bro, our

industry, has spent 15 years teaching agents that as long as

you fill in this one form, you'll have fulfilled your fin

track obligations. So I wanted to riff a little bit on this

topic, because I think that lot of people in the AML, CTF space,

anyway, don't understand why real estate agents, why real

estate brokerages, are so struggling so much with their

compliance. And I hope that by recording this and recording

this these thoughts, I'm able to kind of bridge that gap.

Certainly get really trusted. I we believe that there is a

future where real estate brokerages across the country

are well equipped to fulfill their FINTRAC obligations. And

when I think about the real estate brokerages that have

signed on to our FINRA Express program, I feel good about

knowing that their agents are getting a really high quality

AML, CTF training, their brokerages are getting high

quality policy and procedure manuals and their brokerages are

ready for an effectiveness review, or, more importantly,

for a fin track examination. But probably just as importantly,

I'm very proud to say that our brokerages are actually seeing

an increase in activities where they should be filing systems,

transaction reports, and they're they're noting that, and they're

wanting to file them, and they're understanding that

that's actually really an important part of their fin

track obligations is just paying attention and wanting to file

those. And we're seeing that expressed in the brokerages who

we're working with on a regular basis. So I believe that the

real estate sector one day will be in a better position. And I

think that certainly where I think really trusted is making a

dent. That's where it is right now is we're able to help those

brokerages better understand their fin track obligations and

better position them to be fulfilling their fin track

obligations. So I hope today's podcast as different as it's

been, just to listen to me for 25 minutes has been helpful, and

I do hope that you'll continue to join us on the KYC pod as we

have more guests and our talk about other topics related to

FINTRAC and anti money laundering and compliance

overall. Have a wonderful day. You.