Thread by @amoralorealis

So, we're all going to start talking about the big money laundering problem with the US and Europe, right? And not a certain Asian country? Cause I'm sure you're not a racist.

https://twitter.com/amoralorealis/status/1126625267630235649

Like, I’d love to talk about this, it’s a fascinating topic. I really don’t know if I can trust many people to not be racist while doing so, though. And apparently no one is actually going to even skim the report.

The report: www2.gov.bc.ca/assets/gov/hou…
Its executive summary: BC cannot combat money laundering effectively on its own; it needs Canada's help, as coordination and cooperation are key. Anti-money laundering (AML) best practices are considered and gaps and opportunities identified.

Conclusion 1: Money laundering significantly damages our society and causes ongoing harm.
Conclusion 2: The amount of money laundering is significant, but it is difficult to measure.

Conclusion 3: Money laundering investment in BC real estate is sufficient to have raised housing prices and contributed to BC's housing affordability issue, by cautious estimate, 5%.

Conclusion 3 has been misunderstood so I'll explain quickly - this means, if we could remove all laundered money from RE tomorrow, real estate prices would drop by 5%. This is a cumulative 5%, not 5%/year.

Makes sense, right? If 5% of our GDP roughly is laundered, 5% goes to RE.

Conclusion 4: Red flag analysis demonstrates the need for data collection, combination and sharing improvements to distinguish between legitimate and money laundering real estate analysis.

Conclusion 5: Regulatory responses to money laundering are best-practice anti-money laundering measures.
Conclusion 6: BC's proposed beneficial ownership registry for land is a major step forward.

Conclusion 7: Closing regulatory gaps and improving regulatory effectiveness could significantly enhance anti-money laundering effectiveness.
Conclusion 8: Unexplained Wealth Orders could add a caluable new anti-money laundering tool. (i.e. civil forfeiture)

Conclusion 9: Core federal anti-money laundering legislation and practice are in urgent need of reform.
Conclusion 10: Data sharing needs to be enhanced.

Conclusion 11: Investigative capacity and cooperation also need to be enhanced.
Conclusion 12: Money laundering should be addressed across Canada.

Then the report makes a bunch of recommendations to BC and the feds - regulatory improvements, federal AML legislation and practice, data-sharing framework, investigation and collaboration, and involvement of other provinces.

Chapter 1 of the report describes the panel's mandate. The real estate part that everyone's concerned about is subsumed under "market abuse."

Chapter 2: Why does money laundering matter? Because of political and civil society impacts, social impacts, and economic impacts.

Real estate is attractive to money launderers largely for the same reasons why it's attractive to the average Joe: property makes money; it's a secure investment. But also, ownership can be easily disguised, & short-term speculation happens in normal operations, so easily hidden.

What does money laundering in real estate look like?
The report takes care to bust the myth of "bags of cash."

There are 3 phases to money laundering: Placement, Layering, and Integration/Extraction.

Very briefly, Placement is moving proceeds of crime into the legit financial system, Layering is further distancing the $ from any connection to underlying crime, and Integration/Extraction is using the laundered money to fund expenditures or activities w/o questions on source.

Note: sources of income for criminals include tax crimes, fraud, embezzlement, drugs, theft, bribery, and corruption. Fentanyl is only 1 (the most lethal one) of many drugs of the black market; cannabis, heroin, cocaine, amphetamines, are all very much a big part of this market.

Next, how money laundering phases works in real estate. This is complicated to tweet, so I'll point to the page numbers if you're further interested in specifics: 20~23.

Why is money laundering so difficult to prosecute in Canada?

Chapter 3: International Anti-Money Laundering Practices
Long and complicated chapter, so I'll share just the summary. If you're further interested, read the report: www2.gov.bc.ca/assets/gov/hou…

The best practices summary identified: Beneficial ownership of corporations, partnerships, trusts, and land (open, online registry), sharing information, specialized investigation, cooperation and coordination, & shared supervision of AML reporting responsibilities

Chapter 4: Estimated Effect of Money Laundering on BC Real Estate
This is what most people are looking for, probably, so I'll note that this chapter is pages 41-61 of the report www2.gov.bc.ca/assets/gov/hou…

They begin by talking about rising single detached house prices - the price of housing varies considerably in BC, but the most expensive markets are high by Canadian and int'l standards. Not entirely sure why we exclude multifamily dwelling ownership, but anyway.

Unsurprisingly, in Vancouver, where we have no more land on which to build new single detached houses (without demolishing an existing one), the prices are going up fastest.

Ok, back to money laundering. Estimates for Canada range from $5~50 billion. It's impossible to measure and hard to estimate. This report uses the "gravity model," a well-respected model that probably gives us the closest estimate (but there isn't a way to empirically test this.)

The panel members are careful next to illustrate the limitations of the gravity model and large margins of error.

With all that in mind, the academic meat of the report! The money laundering estimate in BC is $7.4 billion, in Canada is $46.7 billion. They estimate it's about 2.1% of our GDP, near the bottom of the IMF global estimate of 2 to 5% of GDP.

The gravity model also estimates money laundering inflows and outflows. Canada is both a receiver and a sender of criminal money for laundering. NOTE THE COUNTRIES, PEOPLE. The vast majority of money laundering inflow is from North America and Europe. NORTH AMERICA AND EUROPE.

Next section of this chapter is estimating money laundering in BC real estate. The panel members take care to note that any effort to predict the volume of ML in RE is compounding uncertainty with uncertainty. They consider different methodologies.

They estimate $5.3 billion of laundered money in BC real estate, or 4.6% of total volume transactions. However, they say that this does not necessarily translate into a price effect of the same magnitude. The effect on prices depends on elasticities of demand and supply.

A note - elasticity isn't the most intuitive economic concept, but it's definitely worth learning about. en.wikipedia.org/wiki/Elasticit…

Anyway, so the panel members considered best (not very good) available numbers for supply and demand elasticity, and estimated that a 4.6% shock to housing demand would have a 3.7% to 7.5% increase in house prices, compared a total absence of all money laundering in the market.

They again note the considerable uncertainty and margins of error, because they're lovable, respectable academics who are honest about this kind of thing. Next, the talk about "red flag analysis", which I honestly don't really get, but it shows why more info is needed (p. 58-60)

In conclusion to this chapter:
Estimate of $7.4 billion of laundered money in BC in 2018.
Estimate of $5.3 billion of ML in real estate in BC in 2018.
Estimate of 3.7%-7.5% house price increase due to money laundering. /1

Clear gains in housing affordability, even if they are not large in magnitude, to be had from a more effective, comprehensive AML regime in BC and Canada. They say it's important to note context: this explains only a relatively small part of the housing affordability problem /2

There are many other factors affecting housing affordability that are beyond the scope of the Panel's mandate. The housing affordability problem cannot be solved by reducing money laundering but reducing money laundering can certainly help. /3

Money laundering damages society in many different ways, so a strong government response is clearly required, regardless of the precise effect of money laundering investments on house prices. /endofchapter

I'm taking a coffee break at this halfway mark. BRB! Go watch those videos on elasticity of supply and demand, folks!

I’m ready

Chapter 5: The Regulatory/Anti-Money Laundering System in Canada
A complex set of (rather siloed) federal and provincial agencies and private sector actors makes up the broadly defined "regulatory/anti-money laundering system" in Canada.

7 types: law enforcement and security, tax administration, financial intelligence unit, financial sector regulators, professions regulators, data sources, data aggregators.

There are a lot of "players" in real estate and related regulators. There are significant regulator and FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) reporting gaps.

There's also a bunch of real estate industry actors, real estate financing actors, other lenders. The chapter is a description of the real estate regulatory/AML system in Canada, which is complex and has many different types of private and public sector actors. /1

There are complex, siloed responsibilities across two levels of government (provincial and federal). The result is gaps in both the AML system and the regulatory system, along with cases of regulatory overlap, causing confusion about each others' mandates, objectives, powers.

Chapter 6: Recent Developments
There are quite a few developments relating to federal and provincial anti-money laundering and real estate regulatory and taxation activities.

October 2017: higher eligibility rules for federal mortgage lending ("stress tests"), lowering housing demand. Also, since mid-2017, the Bank of Canada raised its benchmark interest rate 5 times from 0.5% to 1.75%, increased retail mortgage rates, also dampening demand.

Provincial Budget 2018: 2% higher property transfer taxes (PTT) for properties over $3 million, foreign buyer's tax raised from 15% to 20%, beneficial ownership info collected under PTT, new speculation tax for vacant properties, and higher school tax for properties over $3 mil.

Budget 2018 also announced the creation of a beneficial ownership registry for land. Draft legislation, Land Ownership Transparency Act (LOTA), released for consultation in fall 2018, scheduled for intro to legislature in spring 2019.

Condo and Strata Assignment Integrity Register (CSAIR) - effective January 1, 2019, developers must collect and submit to the Ministry of Finance data on all assignments of condo pre-sale purchase agreements, to reduce tax evasion and for regulatory purposes, including AML

FICOM restructuring - government announced in fall 2018 that it would introduce enabling legislation in spring 2019 to restructure the Financial Institutions Commission as an independent Crown agency responsible for regulation of mortgage brokers, insurance/trust, pensions etc

And in fall 2018, the MoF released the Real Estate Regulatory Structure Review report. So in summary, the province is doing a lot on this front.

Onto the feds! The feds have created an interagency group with agencies involved in AML efforts, a Canada-BC Ad HoC Working Group for real estate regulation and AML in Jan 2019, changes to PCMLTFA regulations, and a Standing Committee on Finance report.

So the panel recognizes that there's a lot going on already, that they know about. Onto chapter 7: What the Panel Heard, which summarizes the key messages they got in talks with a bunch of all these actors and agencies.

1)Importance of the money laundering issue
2)Importance of beneficial ownership disclosure
3)Importance of clarity in AML mandate, investigative resources &data sharing
4)Cash Transactions
5)Supervision of AML Compliance
6)Regulation of Mortgage Brokers
7)Regulation of developers

Chapter 8: Analysis and Recommendations
The panel's recommendations: provincial regulatory improvements, changes to federal AML legislation and practice, improvements to the data-sharing framework, more effective investigation and collaboration, and involvement of other provinces

There are a ton of details in this chapter, 29 recommendations. Pages 73 to 96. www2.gov.bc.ca/assets/gov/hou…

Money laundering will not be eliminated, and criminals will always exist. But some money laundering will be deterred and market abuse reduced.

The panel is careful to note that this might result in house prices reduced to some extent, but the effect will differ depending on the type and location of property, and no single measure will have a large, immediate impact on the market.

Now for some of the interesting data in the Appendices! Contrary to the perception of some, BC is not some money laundering central. There's more in Alberta, Ontario.

Another interesting table of house price-to-income ratios by area and - this is quite important - *property type.*

What median household income looks like (note how it's over 6 figures in Vancouver, yikes - I'm actually in a below-median household!)

Some global comparisons. Again, I wish this Demographia data didn't just focus on *house* prices, instead of *homes* (including multifamily). So much focus on the single detached house is unhealthy. We can't keep living in them and expect our emissions to go down.

Something I find interesting is that house price appreciation is concentrated in the major cities. However, the homelessness rate is actually quite a bit higher in non-major cities.

https://twitter.com/LausterNa/status/1124399757311352832

Look at how high the homelessness rate is in some cities where the price of homeownership is actually quite low. It's almost as if the *cost of single detached homeownership* isn't all that directly a cause of homelessness. Maybe we should look at other things, like rent price.

Oh I should note that the above graph is not part of the Appendix of the report, just to be absolutely clear.

And there's a more that I won't get into because I want to enjoy this gorgeous weather, but last tables I found interesting in the Appendix:

And that's a wrap, folks. Thanks for staying with me. That was this ML report, that I highly suggest at least a skim: www2.gov.bc.ca/assets/gov/hou…
I might go into the other report if I see yet more misinformation going around on that one, but I hope this thread was useful.

Did some patio and windowsill gardening after buying a strawberry, blueberry, and snowdrop plant today!