Suitcases full of cash muled to Vancouver by cash couriers
By Christine Duhaime, B.A., J.D., Financial Crime and Certified Anti-Money Laundering Specialist
According to this article in South China Morning Post, the Foreign Account Tax Compliance Act (“FATCA“), will result in the growth of Asia’s underground or shadow banking system, including an increase in the use of cash mules who transport suitcases full of US cash from Asia to Vancouver and New York to avoid the IRS.
Chinese mainlanders pay a 22% commission for cash exchange and mule services to Vancouver or New York.
Cash used to buy homes in Vancouver
To elaborate on the article, in Vancouver, real estate agents say that once a foreign national’s cash is safely smuggled into Vancouver, the foreign national from China or Hong Kong jet sets into Vancouver and buys numerous houses with cash, or deposits the funds into local bank accounts, apparently without any due diligence on the source of the funds; how more than $10,000 was transported into Canada without evidence of the filing of a cross border currency declaration form; or whether the foreign national is a foreign politically exposed person (“PEP“) from China (most foreign nationals with suitcases full of US cash newly arrived in Vancouver or New York are PEPs and many of them have US residency).
The smuggling of cash and other monetary instruments into Vancouver from Asia is not new (see here for that story) – in 2012, Canada’s CBSA seized $15 million in undeclared currency imports in Vancouver alone, an amount that is out-of-proportion to the rest of Canada and the US which seized $107 million for the entire country.
Compliance with anti-money laundering law
Depositing cash into a Vancouver bank account will not defeat FATCA but buying a house in Vancouver may if it exempts a financial institution from the transaction. The real estate industry is the least scrutinized reporting entity sector in Canada for compliance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, especially in Vancouver, and foreign PEPs from China are the least scrutinized group by financial institutions generally. The latter is not deliberate but rather is a reflection of the legal complexity of determining PEPs, beneficial ownership structures and other legal relationships required to properly identify them and then undertake the requisite monitoring of their accounts.
Due diligence on source of funds
If a person who recently immigrated to Canada or the US walks into a real estate office or a bank with a suitcase full of cash, a reasonable person trained in anti-money laundering compliance would ask to see the cross-border currency report issued pursuant to the PCMLTFA (or the BSA) in respect of the cash and would suspect they are dealing with a foreign PEP as a result of the fact that the person has a suitcase full of cash (sufficient to buy a multi-million dollar house in Vancouver or New York) and could afford the 22% commission paid to the money mule.
If the person or their money mule did not file a cross-border currency report for the currency importation, there is an immediate compliance problem. The prospective client has just demonstrated a propensity for crime. Their first official act in Canada (or the US if they arrived in New York) if they imported the currency or arranged for its undeclared importation, was the commission of a criminal offence, namely a failure to comply with the federal currency importation declaration requirements. The risks (business, regulatory and reputational) for a financial institution accepting such a client vastly increase and now the financial institution has a risk analysis issue to consider in addition to the issue of whether it is appropriate to consider filing a STR /SAR with respect to the lack of a cross-border currency report.
If an account is opened in circumstances above where a bank has not sought evidence of a cross-border currency declaration and other similar comfort documents that a reasonable person trained in anti-money laundering compliance would ask to see to paper the file and protect the institution and its executives, one can expect significant fines for a failure to meet the normal standard of care in anti-money laundering compliance. A due diligence defence is not available for institutions or their executives who fail to exercise the normal standard of care.
Criminal and administrative liability
Participating, facilitating or acquiescing in the use of a financial institution or the purchase of real estate to circumvent the law, in the manner described above, exposes directors and officers of reporting entities to criminal and administrative liability in Canada and the US and is not advisable.
It is also not advisable for non-reporting entities such as law firms, investment firms, immigration firms and other gatekeepers to participate or facilitate the investment of proceeds of crime to or in Canada, particularly when the purpose is to defeat FATCA and the IRS. The indictment and prosecution of a Canadian tax lawyer and Canadian former asset manager summarized here (“Canadian asset manager and Canadian tax lawyer whose firm gave anti-money laundering advice indicted in US for money laundering“) in an IRS sting for money laundering conspiracy is illustrative of the seriousness that US law enforcement treats facilitators of US tax evasion.
It is advisable for reporting entities to implement an anti-money laundering regime that has procedures to identify PEPs from Asia with suitcases full of cash who are deliberately abusing the financial system to launder funds and to ensure that Vancouver or New York do not become known as money-laundering safe havens.