Shawn O'Hara: Today we're going to be talking about two FINTRAC penalties: one imposed on the Canadian National Exhibition Association, and another imposed on the British Columbia Lottery Corporation. We're going to be talking about FINTRAC and gambling, plus two recent stories. These are high profile in the Canadian real estate industry, involving iPro Realty Limited in Ontario and RE/MAX Real Estate (Central) in Calgary.

FINTRAC, as you may recall, stands for the Financial Transactions and Reports Analysis Centre of Canada. It does financial intelligence and its main job is to detect, prevent, and deter money laundering and the financing of terrorist activities. It does things like monitoring transactions, collecting and analyzing data, supporting law enforcement and national security agencies, and enforcing compliance through the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which is the PCMLTFA if you want to look that up. Its headquarters is in Ottawa.

The first story, released on the 28th of August, is an administrative penalty imposed on the BC Lottery Corporation. They did a compliance examination, basically an audit of the casino sector, and imposed an administrative penalty of $1,075,000 in July for non-compliance with part one of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and associated regulations. Now, it does not at all mean that BCLC was involved in any actual criminal activity. What they were charged with was failure to report suspicious transactions, failure to develop and apply policies and procedures for high-risk clients, and failure to take special measures for high-risk clients.

FINTRAC says that BCLC failed to submit two suspicious transaction reports. If you're not quite familiar with this, when an entity, a business, or a person within that business has something that causes some degree of suspicion, then the person or the business is obligated to file a suspicious transaction report. If somebody shows up in your business with a hundred thousand dollars in cash and says, “I want to buy that vehicle,” most people don't carry around that much cash, so that could be enough to trigger a suspicious transaction report. In this case, they failed to submit two suspicious transaction reports, whereas FINTRAC says there were reasonable grounds to suspect one or more transactions or attempted transactions were related to the commission or attempted commission of a money laundering or terrorist activity financing offense.

The audit found that there were gaps in BCLC’s due diligence review process and that there were a few factors that BCLC did not take into account when they reviewed a particular high-risk patron who did certain activities that should have triggered the two suspicious transaction reports. The second violation is that they didn't develop and apply written compliance policies and procedures that were up to date. They failed to adapt the frequency and depth of monitoring measures, which FINTRAC says led to gaps in the timely review of transactions. The third violation was their failure to take the prescribed special measures that are required when a person or entity considers that the risk is high due to the patron's rate of play and the volume of funds, along with other factors. BCLC should have identified the patron as high risk and should have applied prescribed special measures, which would have assisted FINTRAC in analyzing, identifying, and reporting suspicious transaction reports in a timely manner.

But keep in mind, it is not the role of any entity, business, or person to investigate or to challenge. Like in that example I gave, if somebody shows up in your business with $100,000 in cash, you are not to say, “Hey, where did you get that money?” and call the RCMP right away. No, it is to still proceed with your business. You're not there to investigate or anything, but a business is obligated to file a suspicious transaction report to FINTRAC.

The BCLC has vehemently denied this or disputed this and has filed an appeal with the federal court. They issued an official statement: “BCLC takes its responsibilities under Canadian anti-money laundering legislation very seriously. It is confident in its position that it has fully complied with all its legal and regulatory obligations.” The findings do not include allegations of any criminal offense. BCLC is saying that they did their own investigation and found nothing unusual or suspicious with this particular patron other than the frequent use of $100 bills. They say that FINTRAC officials relied on what they refer to as an irrelevant factor by subjectively concluding that the patron was simply gambling too much. They claim that the amount gambled is not a relevant factor in what FINTRAC should be checking, and that it reflects a moral or value-based judgment rather than an objective application of the regulatory framework. They also claim that the regulator wrongly concluded that the suspicious transaction report should have been filed due to the patron's behavior and responses to interview questions. The BCLC says that FINTRAC didn't consider the patron's poor English language skills or the country from which they came, but there's no note here where they came from or what language they spoke. FINTRAC says the patron was uncooperative and provided false, misleading, or incorrect information about their occupation and their ownership of property.

It will be an interesting case. It looks like from my research that this patron received 541 casino disbursement reports over $10,000 between March 2017 and February 2018. So the minimum payouts might have been around over $5 million. This will be in federal court. We'll see how long that takes. My own take on this is that BCLC had somebody who could not provide enough information, and BCLC still went ahead with everything anyway and did not file a suspicious transaction report. Based on what I see here, I could see the federal court ruling in favor of FINTRAC, that it doesn't have to do with the money or gambling too much, it's that people need to be able to provide accurate information to FINTRAC or need to be able to provide accurate information when asked. We will see how that one carries out.

The next one is an administrative monetary penalty on the Canadian National Exhibition Association, CNE Casino. Their administrative monetary penalty was only $199,000 for noncompliance with part one of the Act. They failed to assess and document the risk of a money laundering or terrorist financing offense, taking into account prescribed factors, and they failed to institute and document the prescribed review. In the first violation, FINTRAC found that CNE Casino stated that their staff would report high-risk transactions to its compliance officer. But FINTRAC says this process did not meet the legislative requirement for a documented risk-based assessment. The second violation is that they failed to conduct a review of its compliance program to test the effectiveness of its policies and procedures. In this case, they're dealing with the process that CNE Casino went through or the process that they follow for staff to report any high-risk transactions, and then what the casino and the compliance officer were to do at that point.

There is no indication of criminal activity, and as Gary Bostock, the director of CNE Casino, stated: “We are in full compliance with all regulations and are committed to operating a safe, legal, and efficient business. There has never been any allegation of criminal activity at the CNE Casino in this process.” They also claim that FINTRAC failed to explain which procedures were inadequate and what regulatory requirements were missing, and that the casino provided documentation of its whole process to FINTRAC but didn't get any acknowledgement. Some comments from specialists in the field and other casinos have said that it doesn't point to failures or systemic failures, but to relatively minor gaps in the way this particular casino was carrying out their compliance obligations that could be easily remedied. A different case than the BCLC one. In this case, from what I've been reading, I could see that, through the appeal that CNE Casino has put in, they may win their appeal.

This next story relates to real estate. This was reported this week in the Real Estate Magazine. One is about iPro Realty. It's a Mississauga-based company and one of the largest brokerages in Ontario that permanently closed all 17 of its locations effective August 19th. This happened because it was discovered that there was a $10 million shortfall in their consumer deposit and commission trust accounts during a scheduled inspection. It's since been fine-tuned down to less than $8 million. This affects about 2,400 agents and iPro's co-founders, Rui Alves and Fedele Colucci, are now permanently barred from real estate in Ontario. It looks like the shortfall involved the agent commissions and the consumer deposits were illegally dispersed from the trust accounts, so they weren't managing the trust account properly. The Ontario Provincial Police are launching an investigation of alleged criminal activity, including potential fraud, to find out if a criminal offense has been committed. So that's an ongoing investigation.

The bigger story behind that is the problems with RECO, who is the regulator, the Real Estate Council of Ontario. It is the official regulator for real estate professionals in Ontario. Every province has some kind of a regulatory body. In British Columbia, there used to be the Real Estate Council that regulated the conduct of real estate agents and transactions, and now that is regulated by BCFSA, the British Columbia Financial Services Agency. The criticism here is the way RECO handled it as regulator, that they did not notify the public or the industry about this probe, this investigation, until months after they discovered it, and that meant that iPro agents conducted over 700 transactions and about $700 million in home sales after the shortfall was uncovered. Apparently, iPro was mishandling their trust funds. RECO found out about it, investigated, didn't say anything, allowed them to continue to conduct business, and $700 million in sales still went through this squeaky, leaking trust account. Then they struck a deal with the co-founders to avoid disciplinary action and allowed them to voluntarily terminate their resignation rather than face charges or fines.

This is an example where perhaps the regulator was a bit too close and not out there to do what the regulator should be doing, which is to protect the public, but instead to protect these two people involved in potential wrongdoing. Now, RECO's CEO did resign shortly after these events. Critics are saying that more needs to be done, that RECO's inspection system is too periodic and not robust enough. They allow some large brokerages to go years without a deep review, and the Auditor General in Ontario has said that there are gaps in RECO's oversight, including the long delays between inspections, their weak follow-up, and the heavy reliance on self-reporting. Similar to some of the criticisms that were raised in British Columbia, there are also criticisms about conflict of interest within RECO's board structure when active brokers are serving as board members.

The Ontario Ministry of Public and Business Service Delivery and Procurement, which is the one that oversees RECO, is investigating the way they handled it, and the government has said that it is prepared to assume control of the real estate watchdog if they're not satisfied with the audit and review of RECO's actions. This really undermines trust in the whole industry. As Janice Meyers, the CEO of CREA, the Canadian Real Estate Association, said, when the trust in the industry is broken, it doesn't just impact the individuals like the co-owners or co-founders of iPro and the agents who work there, but also the reputation of the entire profession, and that's across the country. Buying a house is often the biggest financial purchase that people make. It's a huge stressor, and then to discover potential wrongdoing going on very heavily damages the credibility of the industry.

The real estate industry is built on trust. People dealing with REALTORS have to have confidence that the REALTOR is acting with integrity. That's the huge key piece with REALTORS: their integrity, their reputation, and of course, REALTORS want their clients to be transparent and realistic. There's a degree of mutual trust, and that's why we have the REALTOR code that is for this professional conduct, and these are standards that everybody needs to uphold. So when they're violated, it's pretty bad. And it's scary, with the government of Ontario prepared to assume control of RECO.

This is a spokesperson for Ontario's Minister of Public and Business Service Delivery and Procurement, Stephen Crawford, who wrote in an email that the province's real estate regulator, RECO, has a duty to protect consumers and uphold professional standards in Ontario's real estate sector.

In its handling of the iPro Realty case, the largest case of fraud in Ontario's real estate history, RECO failed to deliver on its core mandate. As a result of this mishandling, the Minister will step in to oversee a third-party review of RECO to ensure the process meets professional standards, reflects industry expectations, and restores public trust in Ontario's real estate regulation. Moving west, there was an alleged Calgary Ponzi scheme with RE/MAX Real Estate Central in Calgary, with allegations surrounding a multimillion-dollar scheme run by a former agent, and RE/MAX Canada has dropped its affiliation to this RE/MAX real estate brokerage.

RECA, the Real Estate Council of Alberta, did an investigation, a disciplinary process for the real estate agent Eric Drinkwater, who was charged with $1.9 million in alleged fraud. He falsified bridge loans for non-existent real estate transactions that he claimed were taking place, and these transactions didn't exist, and he forged documents to proceed with the scheme, which occurred roughly between March 2020 and February 2024. He is the nephew of the owner of the brokerage. RECA says he admitted to a series of breaches and they found him guilty of conduct deserving of sanction, and he was permanently banned from conducting real estate. There's criticism that RECA did not act strongly enough or quickly enough. Similar criticism of RECO as with RECO, that they are failing to protect the public, and as a regulator, they've tended to focus on minor technicalities, like sign rules and measurements, but they have failed to act swiftly and decisively on serious misconduct. As a self-regulating industry, they are too close to the industry. Brad Mitchell, the CEO of the Alberta Real Estate Association, says that governments need to “strip regulatory bodies down to bare bones and rebuild.”

Talking with enough people in the real estate industry here in BC, they would say off the record that they blew it, and there's a bunch of different reasons and issues and so on that happened. They were self-regulating, and that was taken away from them for a variety of reasons. There's a feeling of regret here in BC, but what we could be seeing is the same thing happening in Ontario and in Alberta, where the provincial governments will start to regulate their real estate industries. I think a warning from some brokers, especially here in BC to their counterparts in Ontario and Alberta, would be: don't blow it. Don't get yourselves in that situation, and it might be too late.

And that's it for today. We've covered FINTRAC fining the British Columbia Lottery Corporation and the CNE Casino in Ontario, both of which are saying they did nothing wrong and they are disputing. We'll see how those turn out. Then two stories of scandal in Ontario and Alberta, where the regulators—the self-regulating regulators made up of people in the same profession as who they are investigating—are themselves, at least in Ontario, being investigated. In Alberta, not yet according to the story, but there are calls for that regulator to also be not just investigated, but changes to be made. And that's a wrap.

Links

• FINTRAC imposes an administrative monetary penalty on British Columbia Lottery Corporation
• Administrative monetary penalty on British Columbia Lottery Corporation
• FINTRAC imposes an administrative monetary penalty on Canadian National Exhibition Association (CNE Casino)
• Administrative monetary penalty on CNE Casino
• Real Estate Magazine: Two high-profile scandals spark reckoning for Canadian real estate industry