As I look out onto downtown Vancouver from the 16th floor of one of the many skyscrapers onto at least a dozen others, I see why it is sometimes called the city of glass. Here I am supposed to say something clever about windows, blinds and the lack of transparency being in sync with the state of anti-financial crime oversight and reporting. I couldn’t think of anything witty, give me a break, I’m new though this situation is not.
| Wherever there are yachts in the shadow of a skyscraper there is a potential connection to illicit funds.
Littered across the skyline lie a number of building projects in process, some yet underground, many low, some high, aesthetically pleasing and not, others over-towering the blocks laid before them. Amongst this economic bloom and bustle that has been on the up for a while, framed by the mountains and sun glistening off the sea there is a dark and ever present undertone, the one we get out of bed in the morning for, the one that I am reminded about every time a McLaren or Lamborghini roars down the road - that dirty money, that money-washing machine. Wherever there are yachts in the shadow of a skyscraper there is a potential connection to illicit funds, underground dark money or Moneyland to use the term coined by the author and journalist Oliver Bullough, and also the title of his superb book. Mr Bullough did not venture to Vancouver in his varied and wonderfully disturbing travels but as I am here and have been drawn in by the media coverage, which is good to see (and obviously not), I wanted to have a proper look so I got involved in a little know your city action.
The money laundering shenanigans in Metro Vancouver, British Columbia, Canada have caused a stir over the last few years. It’s been one thing after the other in an expansive ongoing and public deliberation, there are hundreds of comments posted after news articles, one of them brought to light that Vancouver, B.C. is known as Vancouver, Bring Cash. There are big stories relating to shiny and terrible things like luxury real estate, exotic automobiles, drug trafficking, organised crime and casino resorts. It’s evident for many that things aren’t quite right, and rarely is financial crime in the spotlight so markedly when not related to a specific scandal. In the case of Vancouver, it’s the whole economic landscape in question - the scandal is money laundering. This exposure is vast and involves a lack of enforcement of regulation, it encompasses the conversation around the housing market and how the influx of foreign funds over the last decade or two has caused prices to skyrocket - the big question being about the legitimacy of much of that money with source of funds due diligence not being part of the discussion for a significant time.
| Is Vancouver, like London, a dodgy real estate hotspot, a drug and dirty money transit point, a long time gamblers town with a diverse population?
Vancouver has long been known for having problems with money laundering and financial crime. It is a port city, though not large it’s metro/greater and lowland areas cover a considerable area, 2,700km2, and houses around 2.5 million people, in comparison Greater London is 1569km2 with around 9 million inhabitants (Source: Google/Wikipedia). Being a massive port city, we won’t go into the subtleties of using shipping for illicit transfer of value, trade based money laundering and all that (cue Lionel Richie). The authorities haven’t even got into that yet as far as I can tell but I haven’t started digging yet. There was mention of export of luxury cars being used to claim massive tax rebates, and the potential for the actual purchases being made with dirty money - nice work if you can get it. These reports are a good (though awfully late) start, they have to realise that this problem is bigger than the casinos and real estate, it’s the whole bento box that is rotten not just the sushi. Great sushi in Vancouver by the way.
Is Vancouver, like London, a dodgy real estate hotspot, a drug and dirty money transit point, a long time gambling loving town with a diverse population? Well, yes it is. On the brighter side, Metro Vancouver is spacious and airy and beautiful, framed by the sea and mountains, and London is not. It has a serious problem with fentanyl, the synthetic opioid, and scourge of many of an addict, but dealers/gangs are making a lot of money from that and the usual suspects meth, cocaine and heroin - the problem is evident in the streets of downtown Vancouver - those proceeds of crime then need to be cleaned. Casinos have always been a cash heavy potential entry point for dirty money, and this seems to have been the case in Vancouver for some time. Once cleaned it allegedly goes into real estate projects, luxury cars and goods. It’s a neat little method, that placement, layering and integration model perfected. And alongside that there is that overseas capital from unknown sources, maybe transnational crime groups send money to Vancouver on ships to clean it, who knows? One guy knows some stuff, Peter German.
The thing about Casinos.
In June 2018 a damning report of BC casinos in relation to financial crime controls and compliance was unleashed;- DIRTY MONEY, An Independent Review of Money Laundering in Lower Mainland Casinos conducted for the Attorney General of British Columbia - https://news.gov.bc.ca/files/Gaming_Final_Report.pdf. Ordered by the government and compiled by Peter German & Associates, Mr German is a ex-RCMP (Royal Canadian Mounted Police) deputy commissioner and now lawyer. The report is comprehensive, detailed and brutally scathing in a polite Canadian kind of way, and has a lot to say about the British Columbia Lottery Commission (BCLC from hereon). Part two of that report was released last week, DIRTY MONEY - PART 2; Turning the Tide - An Independent Review of Money Laundering in B.C. Real Estate, Luxury Vehicle Sales & Horse Racing - I’ll deal with that later.
The Dirty Money (Part 1) report goes deep into the dealings of a number of local casinos, their daily operating procedures, the policies in place, the regulators and authorities and a number of examples that sound like they are straight of the days of old, when gangsters had tommy guns and wads of cash to clean. Unfortunately some of these laundering events are less than 5 years old and it’s shocking from my perspective (I know I’m late to the BC party) that a reasonably established gaming industry in a post-industrialised economy can so blatantly be used for money laundering in a country with considerable controls and legislation in place. It seems that though the skyscrapers are going up, there hasn’t been much other progress, the only thing progressive, as is so often the case, has been the ingenuity of the launderers, usually though they have to adjust or change their methodology, in the case of Vancouver, they didn’t need to once they’d got a solid system in place. Now I’ve got that out of my system, I’ll go over some points that were of interest to me.
Check this one out, “In a 2000 report to the Province, J. Peter Meekison referred to the mandate of BCLC being “to maximize revenues for the province” and referred to “its obvious role in promoting its activities”. In fiscal year 2016-17, over $907 million from $1.339 billion net income generated by gambling went into health care, education and community initiatives. By comparison, the much larger gaming industry in Nevada produced $900 million in revenue for the State in 2015, based on an 8 to 15% fee which it collects from casino operators. BCLC’s average share of casino revenue is 65%.” Anyone see an issue here? I guess the question is, how much would a real push on reducing laundering effect revenues? Only one way to find out enforce your regulations, which they have done to some extent and unsurprisingly casinos have reported a hit on takings - well fancy that. I will speculate and say that there may be people at the top who don’t appreciate it when revenue is reduced just because of some harmless money laundering and capital flight!
There was an article (3) recently stating revenue in BC casinos is down due to the AML controls put in place since last year. It’s obvious that the casinos have become bloated and greedy. They are probably being quite unrealistic about the legit revenue they might expect to have in the absence of the dirty cash flowing through their drop boxes. Some casinos and their backers are losing money, struggling with financing etc, do they want people to feel sorry for them? They made enough dirty money, time to pay the piper. Of course the main issue here is that hundreds of regular people are employed by these companies and it’s terrible situation but that will, or likely has been leveraged by a politician or lobbyist to try and reduce collateral damage from AML reform in the form job losses. It’s not easy situation to deal with, but they have to cut the head off the snake now they’ve got it it their sights. If it gets loose post this round of media attention, there will be no end to this saga.
Time for some speculation, if government taxes on casino revenues are heavy, they make a lot of money, right? Controls in casinos have been strict on paper but lax on enforcement, they may be a connection there, maybe not. The BCLCs mandate to quote the report is, "BCLC’s primary goal is to maximize the revenue which government obtains from gaming”, and wait for it, to quote the report again, "FinTRAC requires that entities responsible for the conduct and management of gaming submit transactional reports to it. The curious result in British Columbia is that BCLC, and not the casino operators, is tasked by the federal government with reporting under the money laundering legislation. BCLC has embraced this role and views itself as the gold standard for Anti-Money Laundering (AML) compliance in Canada’s casino industry.”
So there you have it, the perfect nonsense, and despite BCLC clashing with FinTRAC who levied a heavy fine on them in 2010 (settled in 2016) the arrangement and performance remains the same. Can the entity in charge of maximising revenue, effectively enforce a precedent which by its nature, in this context, is likely to be revenue-limiting? This is the kind of system that can work in theory but in reality there are too many variables, conflicts of interest and delicate balances that have to be met, compromises that can’t be made when it comes to making money. In the casino environment, the compliance vs gaming battle will rage on, but with this type of arrangement maybe it can be more easily resolved or reconciled, if all the control is in one place maybe it can be managed more efficiently, if the will is there, maybe. There is always someone at the top of the chain whose sole priority is making money, they have the control and power to make changes but their job is to make as much money as possible (generally speaking, for the shareholders etc, huzzah!). Of course this is all just my opinion, no accusations, just observation of true facts.
In addition, for a developed gaming industry there are some curious oversights in operational diligence (that may have been sorted now) which seem strange. One that stood out was the tracking of high value chips, it is one of the most basic things to track high value chips in play, counting the chips at the start of a shift and at the end to ascertain if any were missing. It wasn’t unusual for clients to walk out with chips, but it was usually regulars, they’d play them the next time they were in. If big players were in, and extra high denomination chips were issues to the tables, they would be tracked. If there were any big deviations, numbers would be double checked and player tracking would pick up who has the chips. This could also be checked via CCTV to confirm, player X had these chips at this time, didn’t cash them out when she left etc. From what I gather, and I find it hard to believe, this wasn’t being done properly in BC casinos leading to a large deficit and the potential for chips being used as currency in drug deals became a concern/possibility. This is a good idea from a criminal point of view but is outrageous from a casino compliance perspective. To allow a variance of millions of dollars before taking action is even more bonkers - maybe I’m mistaken there but that’s how I read it. I worked in a few casinos, one at the time being the largest in the UK, it was very busy and did good business - this could never have happened without a conspiracy involving 50%+ of the staff, I guess sometimes the conspiracy just has to be that nobody says anything - just saying.
What about the Chinese connection?
From my experience and understanding, in relation to casinos back home in the UK and in Canada there is often a Chinese client base, which is quite usual. In Chinese culture and life, at home and for diaspora around the world, gambling is a leisure pastime, they enjoy it, spend a lot of time and money doing it. Usually they are fun, in control, legit and without cause for concern, however many of them own cash businesses so you have to consider that side of it. If there are a lot of Chinese people living in an area, then the casino may well have a lot of Chinese clientele, the casinos will often cater to them and everyone is happy.
Unfortunately there are always party-poopers spoiling the fun, seeing opportunity to launder, and back in the days there was probably (definitely) not much enforcement going on to discourage criminality, hell they probably encouraged the business. If we are kind we can say the management didn’t make the crime connection, but what is more likely is that there was some wilful blindness in play, it happens when seeing the cash come over in wheelbarrows. The Vancouver model of money laundering took advantage of this stereotype and bias by using seemingly regular casino goers to launder cash in the form of loans issued to them in dirty money. On the surface it’s kind of like smurfing, where the money is split and enters the financial system in manageable chunks via different individuals.
There has been some controversy over the pointing of the pointy stick of blame towards immigrants (so what’s new), specifically Chinese in relation to capital flight (illegal and not), gang related illicit funds or laundering schemes. The fact is that metro Vancouver has had a high immigration rate, with 40.8% of the population being immigrants (2016 figures - 2). Another fact is the investor visa/residency cost is relatively low in relation to other western powers. The origins of casino gaming in the province and the participation of the Chinese diaspora is a hot topic that I won’t go into, suffice to say, the negative links are probably warranted to an extent given the information in the report (results of investigation examples and criminals caught). In addition, as the 1st Dirty Money report states, much of the laundered funds will be generated in Canada, by services and goods provided by organised crime, i.e. illegal drugs, counterfeit products and stolen property.
Of course, if criminals from anywhere are using a particular sector or industry to launder money it’s the responsibility of the authorities and regulators to deal with it, and if it’s a casino to literally not deal to them. It is easy to lay the blame, but if the controls aren’t in place then criminals will take advantage, the origin of the money is a separate battle to be fought. If the facilitators are ready and able to move the money, they will move it, but there has to be a reason to move it to a particular place, and that reason is always going to be easy access to the global financial system. If that variable is removed, then the dirty money is harder to clean and that is the whole point of AML legislation and the fine work of the Financial Action Task Force (FATF) in this day and age.
In a way Vancouver has had the opportunity to beat the market to the punch when dealing with Chinese money. They have been aware of the issues for a long time, have had an influx for years of people and money, encouraging the investment but failing to create a precedent and apply appropriate due diligence. Now and recently the rest of the world sees increasing investment from China, the government (Belt and Road initiative etc) and huge private companies making an impact on global finance are being scrutinised just like everyone else, and there is a somewhat strained but now common acceptance of AML/KYC requirements the world over. Sure there may always be friction from some, it can be inconvenient, but on the whole it is understood and accepted. Unless you have something to hide. There can be no excuses when it comes to the state of AML affairs in BC, it’s been what one might call an omnishambles, one of my favourite new words.
With a purge of corruption in China, and the embrace of technology without the concerns for privacy seen in the west (whether that’s good or bad or a choice or not I can’t comment) we are and will continue to see a shift in availability of personal information. Despite the method and regime, there is a win for transparency from certain angles. Having dealt with Chinese companies over the past few years both state owned and otherwise, there is healthy compliance with due diligence requests, which adds to the idea that those who don’t want to share have a good (bad) reason not to. It is fair to say, if the government lead the way then the private sector will fall in line. In terms of new economic powerhouses, there is a hell of a lot of money in China, India and elsewhere looking for investment and opportunity across the world, only a fraction of it is dirty, that fraction is still a huge amount. Controls on funds coming out of China are focused on cash withdrawals and transfers, there seems to be little limit or control in the use of credit cards. I have digressed a bit, but the point is the KYC side of this won’t be the problem it would have been 5 years ago - so that isn’t an acceptable excuse. The lack of compliance with law can be blamed on the lack of effort to enforce compliance.
How to get ahead of the criminals?
How about this for starters, don’t tighten the reins too much for now and keep that dirty money coming in. With that dirty money you create an AML budget to recruit, train and strengthen AML compliance staff. Once the new controls and team are ready to go, you deploy simultaneous national countermeasures, a strategic attack on the bad guys. At the same time, the government who rely on the dirty money at the top of the chain need to adjust their budget and find a new legal source of income. I don’t know maybe increase the investor residency visa thresholds, and apply a heavier tax on sales where funds are generated abroad. Just an idea.
More seriously, in terms of a deterrents and ways forward, the first is to create policies and controls in line with threat vectors and real requirements, and then make sure they are implemented. KYC on clients should take a risk-based approach as banks do. There should be a risk strategy in place, and clients should be designated risk ratings as per a set of determinative parameters within a fixed risk assessment framework as they are in banks and financial institutions. They may have this already, but if they don’t, there you go. That one’s a freebie.
A more drastic approach is that of cashless casinos. In New Zealand (1) they have been a success with other places taking the same approach. All transactions being carried out on membership cards that are pre-loaded under a strict policy and monitored appropriately - no cash on site at all. That’s quite a monumental change to make. The downsides are that for regular gamblers there is a tangible satisfaction in receiving your winnings in cash, it is part of the fun and in some ways allows a kind of self-regulation, seeing the cash lost can be an important buffer to going over-board. Also that older gamers may be put off by the technology aspect and go elsewhere. There are a number of key customer retention points here relating to the experience of gambling in casinos, or playing. Saying that, there are more machines in casinos these days and many of those do not take cash. When/if the cash drop disappears and revenues fall, the difference in figures may tell us a lot about what was happening.
Then there will be the inevitable creative criminals who will find ways to get the money into the casinos, but I can’t see how they would easily or as effectively circumvent a cashless system to operate at the same level as a cash drop system. Sure they could fund the loans into bank accounts directly rather than cash, but the whole point of this system was the issue of getting cash into the system in the first place, they would need a lot of smurfs, and some serious convolution to avoid transaction monitoring thresholds and triggers - if that is a thing in Canada, I haven’t checked. Jokes aside, I haven’t seen any reports into the efficacy of banking due diligence and transaction monitoring but in terms of the reporting to FINTRAC the numbers are high, not sure what they’re doing from there though. If casinos lock the door, the onus is with the banks and they should already have robust suitable framework and controls in place. At this point I wonder if they have - all things considered? I feel Dirty Money - Part 3 coming to a website near you.
There is a gap in relation to the facilitators of ML, a huge spanner in the works is the fact that lawyers are not covered under ML reporting requirements, meaning that client/trust accounts are probably used like a junkies needle injecting that dirty money into the Canadian economy. While this is a jumbo elephant sized oversight, its easy to point fingers, it is notaries in BC that are the real estate facilitators of choice and they are covered by AML regs - not that they are reporting. The UK requires lawyers to report, SAR and the rest of it, the fact is (4) that this isn’t actually happening as it should. It’s true some is better than none, but there are no real excuses when it’s the law - these lawyers often just take the law into their own hands, outrageous behaviour.
When there is money to be made, concessions, creativity and greed compromise the rule of law, loopholes are found and exploited. But sometimes loopholes aren’t required. In this case the origins of the booming real estate market are a little more complex. The money involved is seen to come from legal and illegal sources from overseas and not. A key point here is that wealth generated outside of Canada is being used to fund extravagant lifestyles in Canada - it’s not all dirty money but it’s a perfect home for it.
Another key point which has enhanced the profile of money laundering and allowed the public to relate and take action is that houses are snapped up but the income hasn’t been taxed in Canada, that creates an imbalance in the economy, prices have gone up due to demand but wages haven’t, as the demand is not funded by the domestic economy. It really is a broken system, I’ll get into the real estate side of things in another post in line with report 2.
Now is the time for Vancouver to get with the program, if it misses the window and doesn’t clamp down with authority, it will become an even greater mountain to climb - they have enough mountains (real ones), they don’t need another. Their AML system has been described as stuck, and it is. In line with the next German report and the global move to embrace and improve AML standards - it’s a tough gig, but they have to make changes as now we are seeing through the cracks in the reflective facade of the city of glass, they need to make sure those windows are two way or shatter them before they are shuttered further.
Al.
Reference, Links and Related Articles.
2. https://newtobc.ca/wp-content/uploads/2013/07/Vancouver-Immigrant-Demographic-Profile-2018.pdf
2019 Vancouver Population stats -http://www.demographia.com/dhi.pdf
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