Episode 4

Navigating the Compliance Maze: Real Estate's FINTRAC Challenges

In this episode, Greg delves into the real estate industry's ongoing struggles with FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) compliance. Drawing from his extensive experience training thousands of real estate agents, Greg unpacks the unique challenges the sector faces in adhering to anti-money laundering and counter-terrorist financing regulations. He explores the industry's structural issues, misaligned incentives, regulatory pressures, and the need for a shift in the "tone from the top" to drive meaningful compliance.

Key Takeaways:

  • The real estate industry's fragmented, small-business structure poses inherent challenges in implementing robust FINTRAC compliance programs.
  • Misaligned incentives, where agents' sales-driven focus can conflict with compliance obligations, contribute to the industry's struggles.
  • Regulatory changes and the "compliance squeeze" have overwhelmed many real estate brokerages, leaving them with limited bandwidth to prioritize FINTRAC requirements.
  • Industry leaders' perceived indifference towards FINTRAC compliance has trickled down, leading some agents to believe that form-filling alone is sufficient.
  • Targeted FINTRAC training and compliance support programs can help real estate brokerages better understand and fulfill their obligations, driving improved reporting and risk management.

Connect with Greg and ReallyTrusted at:

https://reallytrusted.com/

https://www.facebook.com/ReallyTrusted/


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Transcript
Greg Dent:

Hello and welcome to another episode of The know your

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

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

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

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

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real estate sector as they relate to their anti money

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laundering, counter terrorist financing obligations, or their

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

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

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

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studying FINTRAC and anti money laundering for about seven years

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

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talked with more compliance officers or brokers of record or

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managing brokers in this country, possibly than anyone

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else about specifically

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

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

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

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

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

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

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

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as we at really trusted have unveiled our FINTRAC compliance

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programs and our assistance with FINTRAC compliance programs. So

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

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

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

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terrorist financing, to hundreds and actually, definitely into

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

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

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

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

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

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interested in about how the real estate industry has done with

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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FINTRAC has regularly published fines somewhere between four to

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six real estate brokerages most years get published. The average

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

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

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estate sector was abundantly clear that they believe quite

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strongly that our reporting are the real estate sectors

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reporting of suspicious transactions specifically is way

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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estate, but there is a misaligned incentives problem.

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

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

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

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

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across the real estate sector, people are certainly feeling so

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

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

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start with the structure, because I think the structure is

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

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

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

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about the structure being a problem is a couple of different

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

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businesses, occasionally medium sized businesses, but mostly

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

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

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

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

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

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

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realize that my medium sized brokerage is still very much a

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

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

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

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

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is that most of these small businesses are owned and

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operated by real estate agents who became owners, who became

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brokerages, who became owners of brokerages, often become the

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managing broker or broker of record of those brokerages,

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

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necessarily because they wanted to run a business, but because

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

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

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desire to support and train others and form and have

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

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

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into owning a brokerage because they wanted to make sure that

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their fin track obligations were properly addressed. I kind of

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

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

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

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

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

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

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

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

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

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actually three parts to the structure itself. Part two is

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that the vast majority of brokerages have agents who hang

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their license at a brokerage, but those agents are independent

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contractors, and that creates a real problem for the broker

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owners who have these responsibilities of fin track

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compliance program in for the purposes of our conversation

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today, but whose staff are constantly whose whose staff,

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

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

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

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

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

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significant burdens on an agent's doing their business,

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

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

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

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

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compliance point of view, because the brokerages across

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

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

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

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

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

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

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

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

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

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aggressive term, there is an element of willful blindness

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

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

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regulatory burden or for some sort of a hiccup on the

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

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episodes of this show talking about why compliance is

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important and compliance is the right business decision, and why

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

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

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

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

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laundering money, generally speaking, that agent has an

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inverse incentive to make sure that they stop that transaction.

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

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

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

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

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that many times agents are working with people who they

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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podcast. Certainly, I think listeners of this podcast are

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

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possible for them to be laundering money as it is for

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anybody else. But that is the challenge that the industry

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

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

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

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

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

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

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

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been under the gun from governments across the country,

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

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

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

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

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country have done whatever they can to help regulate that,

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

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

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evident in the amount of paperwork that is now being done

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on every single deal, the various aspects that every

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single deal must Now touch and to give you some specific

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

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foreign buyer tax. We have differing levels of property

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

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

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

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

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

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

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

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longer allowed. There's a disclosure requirement around

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the expected remuneration. There's all of these additional

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levels of new ish things, and that shifting framework means

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

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

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

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

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

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

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

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

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

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

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

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recruiting new agents, training and assisting your current

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agents and making them successful. The compliance stuff

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

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

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But your success truly is measured on your ability to keep

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

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

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

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

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

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

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

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

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

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

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

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

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laundering obligations to the level of detail that it takes to

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

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

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ultimately, it expresses itself as most brokerages in this

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country and most broker owners in this country just not being

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able to have the bandwidth to deliver, implement and maintain

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

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

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

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

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

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

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compliance program. And we put broker owners in a position

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

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

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owners everywhere drowning in their fin track obligations as

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

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

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

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

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

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challenge from within the industry is that the tone of the

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

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

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or anything that I think is particularly guilty of this.

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Quite the contrary, I think every level of association are

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the Canadian Real Estate Association, the BC Real Estate

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Association, the Ontario Real Estate Association, the local

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

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

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

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

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

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

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

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

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meant is that every time a leader within the industry

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

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

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

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

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and the and the importance of a business monitoring and managing

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its risks specifically and obviously in our cases, around

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

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chip into the importance and the validity of the FINTRAC

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compliance programs that the broker owner just might or might

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

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

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

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

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

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because Almost every week, I have a conversation with an

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

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the forms, I'll be fine, right?

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

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

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

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

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

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your fin track obligations, which obviously is wrong and

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which obviously just doesn't work. Anybody who understands

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

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you need to be doing, thinking it through and understanding

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what you're looking at and making determinations based on

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

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

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

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

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

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

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

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

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estate brokerages, are so struggling so much with their

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compliance. And I hope that by recording this and recording

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

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

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future where real estate brokerages across the country

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are well equipped to fulfill their FINTRAC obligations. And

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when I think about the real estate brokerages that have

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

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knowing that their agents are getting a really high quality

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AML, CTF training, their brokerages are getting high

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quality policy and procedure manuals and their brokerages are

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ready for an effectiveness review, or, more importantly,

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

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

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an increase in activities where they should be filing systems,

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

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wanting to file them, and they're understanding that

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that's actually really an important part of their fin

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track obligations is just paying attention and wanting to file

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

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

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

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think that certainly where I think really trusted is making a

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

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brokerages better understand their fin track obligations and

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better position them to be fulfilling their fin track

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

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

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

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have more guests and our talk about other topics related to

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FINTRAC and anti money laundering and compliance

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overall. Have a wonderful day. You.

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