I won't read it because it is a long motion, but this would have been the motion I placed on notice with the committee on finance to research a report on the impact of changes to mortgage rules. These are B-20 mortgage rule changes that were introduced January 1 by the OFSI. It has multiple parts to it.
One of the key ones I want to mention.... I was looking at the calendar the committee had and I noticed there will be openings in June, but also, obviously there's a calendar for the fall. This motion is worded carefully to say that this study would begin after the statutory review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act is completed and tabled in the House. I'm very conscious that we first need to finish the study we're currently on. I know there will be pre-budget round tables afterward. I don't want to upstage that. I don't want to replace it.
I'm simply saying for planning purposes at the finance committee, I believe this should be the next one that we undertake. I'm simply moving it so we can start a conversation about it and then see where the conversation goes at the table.
I believe that the B-20 rule changes are having a pretty heavy impact on mortgages and the ability of Canadians to renew their mortgages. There has been talk already. I have a couple of news articles I'm going to refer to on this new stress test, the 2% increase that homeowners, when they're renewing their mortgage, have to comply with.
There are many individuals. There are as many as 50,000 Canadians who may be prevented from buying a house, who before would have been able to do so, according to the CBC. This was an article not too long ago. There are 100,000 Canadians who will fail the stress test who already have a mortgage with their lender. They will not be able to get a renewal of their mortgage with any other lender. They will basically be trapped with the lender they're with currently. I think that's an issue the committee should be seized with and look at whether these rule changes and the way the stress test is working are actually to the benefit of the public and the benefit of Canadians.
A stat I got from the CIBC capital market report is that 47% of all existing mortgages will need to be refinanced in 2018, which is actually up from the 25% to 35% range in a normal year. It has already had an impact, people are seeking shorter mortgages and having to renew them more often or they're not being able to qualify here.
Again, I think this is an issue we should look at. I think it's an important one. I think a lot of Canadians are being cut off now. I get these a lot. I have received a lot of emails and phone calls from constituents in my riding. Probably there are about half a dozen serious cases and in maybe two dozen I'd say they're looking out in the next year ahead and seeing that they may have difficulty. For a lot of them, it's spousal situations or spousal breakdowns actually, where they had the income necessary to renew their mortgage and would be able to under normal circumstances, but the condition in Calgary is 8% unemployment and a great deal of underemployment, so people are having a difficult time proving income at renewal time in order to get the renewal.
A 2% stress test just adds on to that burden. We've seen the central bank increase the prime lending rate, which obviously has an impact because then you're getting to an even higher rate that you're trying to renew for. The mortgage carrying costs, which I want to mention, have risen substantially in almost all Canadian cities, according to a 2017 RBC report. I'm sure for 2018, that's just going to get worse.
Despite that OFSI made this rule change on January 1, which I'm sure was coming down the pipe from before, I'm sure it was something they were going to do anyway, a lot of people knew it was coming down, so the volume of mortgages being renewed was moved. You can see the volume was actually quite high in December 2017, and then goes down substantially afterwards. It hasn't picked up in May. I was waiting to see in May if there would be pickup. Typically May and June are really good months for mortgages in general. People go out, they see homes, it's springtime. They're either looking to upgrade, downsize, or they're looking to get a different type of property or just entry into the market. This is the time of year when you do it. This is the time of year when I did it when I purchased my house many years ago.
I think these B-20 rule changes are affecting new entrants into the property markets. Getting onto that property ladder, investing in your house is the best investment you will make, probably the best financial investment you will make if you manage it very wisely.
The second part of it is that it makes you invest in the community you're in. For a lot of the communities, where there is a high proportion of property ownership, typically, the community associations and resident associations in my riding do much better than in those areas where there is a high proportion of short-term renters, not long-term renters. Long-term renters take care of their homes and they really do care about the areas they live in and invest themselves in their communities.
According to the Financial Post, first-time buyers seem to be one of the groups most impacted by the B-20. Early results are saying that the stress test—as proposed—has squeezed millennials' home-buying budgets by about $40,000. That's about 16%. I asked Mr. Poloz, the Governor of the Bank of Canada, when they would have the data necessary to do an assessment, and he said maybe in a year. I think we could start in the fall, after we've completed the statutory study that we're undertaking right now, in order to be able to have this on the docket and to be able to basically ask the Bank of Canada and others to produce data. There are many associations that have already started to do so.
I also want to give the context, though, for this study on B-20. This isn't the only rule change affecting mortgages. I'm just going to count them through, starting on December 2015, I see one, two, three, four, five, six, seven, eight, nine, 10, 11, 12, 13—that's quite a few—14, 15, 16, 17, 18, 19 rule changes affecting mortgages leading up to this point. So the thing with B-20 is its cascade effect.
You have a series of rule changes and you now have interest rates that have gone up and they've made it more difficult for people to renew their mortgages or get into the property market, so I think this is worthy of study because we can look at B-20 by itself but we also have the benefit of two years of data impact on each rule change as it has come through.
I think that's beneficial. I think it's timely as well to do it in the fall. We'll see what the summer gives us in terms of volume sales, in terms of changes in pricing. I think B-20 was intended to target the Vancouver and Toronto markets specifically but the impact has been huge in small communities and in smaller cities, and I think when we look at the Canadian market, there's no such thing as one Canadian real estate market. There are a whole bunch of different markets. You compare homes in a locality, close to work, close to a good school—typically that's what our parents looked for. For those who don't have any kids, you're looking for easier transportation. Getting to and from work and going to the grocery store, those are the things they're looking at. Those people, new entrants, are being priced out of the market with these B-20 rule changes.
I have a list of the groups that I think we should specifically look at. If we pass it now, especially, we'll give the summer to all these different mortgage brokers and different associations, different business groups, to do some data work in anticipation of the committee undertaking a mortgage study.
Lastly, because I want to cede the ground and hear from the other side about what we could agree to on a study here, the Financial Post is reporting that mortgage growth in Canada hasn't been this weak since 2001. According to RBC, as of March, home sales in Calgary have plunged 18% year over year. Victoria's are down 19% year over year. The head of the Ontario Real Estate Association, Mr. Tim Hudak, said the cumulative effect of the new mortgage changes amounts to what he called “a war on homebuyers”. That was reported in the Huffington Post, and I think one of the most serious ones here is—and this is the one I'll finish on—the warning from Mortgage Professionals Canada that this new stress test would reduce housing demand by as much as 15%, in their view, resulting in 100,000 to 150,000 fewer jobs in the economy. That's 15% on demand. It's pretty big for one singular rule change.
I think it's worth studying just because it will have such a big impact on Canada's GDP growth at the end of the term, and we know what the numbers are like in budget 2018. I know that the fall is when we usually do our pre-budget round tables, so I think this study goes along very nicely with being able to inform the government on what it could do better, whether the rule change by OSFI was the wrong one, whether there are amendments to it, whether going back.... A lot of the proposals I've heard from industry are not saying to get rid of B-20 completely. They're just saying we should change the way it is being implemented, modify the stress test to something else, and make certain other changes to the rules as well.
I'm going to finish there. I'm willing to have a conversation about whether we could find unanimity here and find approval for this study, again, to start after the current one. That's the way the motion is worded—that after the current study is completed, this would be the next one to come up.
With that I'm going to cede the time. I'm sure members know I'm more than happy to talk it out, but I know we have guests here who are going to inform us on the review we're undertaking right now, so I'm looking forward to the conversation.
Thank you to the committee, and thank you, Mr. Chair. I appreciate the invitation to be here, and hopefully we can provide some opinions that will be of assistance to you in your work.
I have to say, at the outset, that the opinions I express are mine alone, not those of the international centre, nor of the Province of British Columbia. I suspect the reason I'm here is the result of the attorney general's visit. My briefing note actually was provided to the committee by the attorney general.
Just to give you a little bit of a background, I'm a lawyer, former deputy commissioner of the RCMP, and former deputy commissioner of federal corrections. My doctoral work was in asset recovery of money stolen by kleptocrats in the developing world, getting that money back to the developed world. I'm the author of a text on money laundering, Proceeds of Crime and Money Laundering, which has been in publication for about 20 years and remains current. I was most recently commissioned by the Attorney General of British Columbia to inquire into allegations of money laundering in our casinos. I come to you today with that as a background, with that as a perspective. If I may, I'll take five or so minutes to give you a few thoughts.
The task you have in front of you, committee, is actually a very important one. I'm sure you're aware of that. This proceeds of crime legislation is important on any number of fronts. I don't wish to start on a negative note, but I will. There are some fundamental problems with our enforcement regime. Canada itself really has not too much to be proud of when it comes to dealing with money laundering. Canada has been a follower rather than a leader internationally. This is nothing new. This has been going on for some 20 years, since 1989 when proceeds of crime legislation first came in.
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act is good legislation as far as it goes, but again Canada tends to always be following the lead of other countries—the United Kingdom, the United States—always getting pushed by the FATF, always getting pushed by the OECD—
I'll outline a couple of problems. Number one, there is a lack of urgency in terms of how Canada deals with this problem. This is nothing new. It's not something that happened this year or last year. It has been ongoing. I'll give you a very brief example: cryptocurrency. We all know about cryptocurrency. In 2014 there were statutory changes and four years later we're still waiting for the regulations. That is typical of what we see. I realize things don't happen instantly.
Number two is the balancing that takes place. If one looks at the paper prepared by Finance, one sees that it's well written, but it constantly talks about balancing crime control with, first, privacy, which we realize is important; second, undue burden on entities that are regulated; and third, public resources.
I would say that one has to realize that money laundering is all about organized crime. Organized crime is all about drugs, fentanyl, any number of commodities. It's about people dying on the streets. Just as you would not want your police to say, “Well, it's a domestic assault. We have a little balancing to do. We might not be able to come over to the house for a little while”, it's no different when you talk about money laundering. This is the way to deal with organized crime.
We have to be very careful when we balance. What we really have to do is apportion resources and do the best that we can with those resources, which leads me into the issue of enforcement. It is great to have a Proceeds of Crime (Money Laundering) and Terrorist Financing Act. It's great to create this framework and all the regulations, and FINTRAC and requiring entities to report, and accumulating lots of information and intelligence, but if there's no one doing anything with it, you're wasting a whole lot of government money and you're wasting a whole lot of the money of the entities that are being asked to report.
Although there are a number of agencies that receive intelligence from FINTRAC, there's really only one agency that is tasked with conducting complex money-laundering investigations, and that's the RCMP. Quite frankly, the RCMP left this field in 2012 and is just now getting back into it. We're seeing the implications of that in British Columbia. The RCMP, admittedly, is doing their best to recreate the units that were abolished, such as proceeds of crime sections, commercial crime sections, and so forth.
You have this framework and you're building on that framework and you're trying to cover off the loopholes. As I believe the attorney general mentioned, it's a bit of a whack-a-mole. You cover off one area and then you have to look at other weaknesses in the economy, but none of that will really get you anywhere unless there's someone dealing with enforcement.
In the money laundering strategy that the Department of Finance has it refers to the third pillar being disruption. I gather disruption includes various things, but part of it is enforcement and right now you're just not seeing enforcement.
I can go on at great length, but I'll stop there. That's about five or so minutes and I'll turn it over to my friend. Thank you.
Thank you, Mr. Chairman.
I'm Milos Barutciski, as the chair said, a partner at Bennett Jones, a national law firm. I'm in the Toronto office. It's originally a Calgary firm.
That said, as I am a Quebecker, I will start my presentation in French. Why not? It is worthwhile.
Like Mr. German, I am a lawyer. We know each other well and go way back, but we did not know that we would both be here today. You won't be too surprised to learn that my point of view is somewhat similar, I think, to Mr. German's point of view. It is not identical, and that is because our roots are different. Mr. German was a police officer for a number of decades. I myself am a lawyer and, as such, I have mainly represented businesses for just over 30 years. I began my career in Montreal, and then I continued it in Ottawa. I am now in Toronto, and I have been there for 25 years.
I advise people, I defend companies, mainly, and rarely individuals, in matters related to international economic regulations.
I was chief of staff for the competition bureau for my brief two years in government, but I used to do a lot of cartel work. I don't do much of that anymore because I have other partners who have been doing it as long as I have, and frankly, I focus my attention on other things.
What do I do? For the past 10 to 15 years I've been focusing on corruption work, sanctions—essentially that kind of economic regulatory work. My clients, as I said, are primarily corporate. It's a very different perspective from where Peter comes from, but my views are not entirely different from Peter's.
Let's start with money laundering, which is obviously a real problem. The impact runs through every sector of the economy. We tend to think of it as being the criminal world, and of course it is, but sadly, the billions of dollars that are laundered in this country alone don't only go from one crook's pocket to another crook's pocket. They go through a chain of professionals, legitimate businesses, and thousands of other enablers who are not so much unsuspecting, but rather wilfully blind or willing to look the other way. That is a problem.
I remember back probably 15 to 20 years ago—Peter will remember this—when Norm Inkster retired as commissioner of the RCMP. He used to give this speech that started with about 15 minutes of “Let me tell you about your day”. Nobody smokes anymore, because people walked away from them, but back then, in the early 1990s, when you were waiting at the bus stop, you were smoking a cigarette that was smuggled through customs on a reserve, perhaps, or somewhere else. It was proceeds of crime, and you were doing this, and you were doing that. I won't repeat the story, but basically, what Norm told was a story of how you can't go through the day without being impacted and affected by money laundering.
The answer was the regime we have today, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, albeit that the “TF” was clipped on a little later, after 9/11. It came out of the FATF, the Financial Action Task Force process in Paris, of which Canada has been a member for a long time. The whole idea was to raise the cost of laundering crooked money. As I recall, back in the 1990s, it was six to eight cents. Has anybody ever actually looked at how much it costs today to launder money? It's probably not much more than six to eight cents. In certain segments, it's probably gone up to 15¢, but you know, the crooks don't sleep at night either. They go to a party and then they work all night, too, and they find other workarounds. We'll hear Peter's report in due course, but in his province of B.C., it seems they're taking it at both ends.
The regime was intended to raise the cost of laundering money, and the way it was done was by creating gatekeepers—primarily financial institutions. The idea was that we might make a dent in the problem by making the essential gatekeepers the FIs, accountants, and lawyers, although there's a whole story about lawyers that we don't need to get caught up in. By making the people who facilitate and enable and move the money accountable up to a point at which they at least have to do basic due diligence and then report or keep records, as the case may be, we can actually make a dent in it.
If we're not making a dent, then what on earth are we doing? I can tell you, back in the early 2000s, I was a private practitioner. There were a handful of us advising the FIs on implementation of the regulations, and it was a fairly active business. In the early days of the regulations coming into force—somewhere around 2004-06—I worked on possibly the first AML audit that OSFI did, and on the back of the envelope, based on the work we did to remediate, I calculated that the five schedule I banks and the insurance companies had, between them, spent somewhere around $5 billion just implementing the system.
Since then we have accumulated massive costs. We've downloaded those costs, as Peter said, on the FIs primarily, but also on other sectors of the economy. That would be fine if we were actually getting something—if we were actually fighting and enforcing crime—but we're not. Some of the questions you should be asking yourselves in the course of your study of this bill are about exactly that: implementation.
The FIs, my clients, are diligently trying to follow the law by reporting or recording, and sometimes they slip up, but the default position is that they would rather not take a risk by exercising judgment; rather, they will just cover the floor. It becomes checklist compliance. It's not actually compliance with the law, because the people who are not complying—who are overtly stealing, cheating, and so on—just keep doing it. All we've done is impose costs on the private sector that are ultimately passed on to consumers, yet in the absence of any enforcement, what is it? It's a mountain of paper, or bits and bytes.
I come back to the same conclusion as Peter did. The balancing makes sense, but it needs to be balanced for a purpose, not just putting all the costs on the economy. When I say the banks, sure, they're big players out there, but those costs get passed on to consumers. The question is, you're balancing against what? That's what you need to spend some time on.
Thank you. That's a great question.
I don't speak for the RCMP, but what happened in or about 2012 or 2013 is that, with the rise of terrorist incidents in Canada and an awareness that we could be subject to terrorism at home, the RCMP moved a lot of resources in that direction. It also restructured its organized crime resources. It collapsed units that had existed for a long time, such as the commercial crime section and proceeds of crime. These units had been around commercial crime since the seventies—a lot of expertise and so forth. They essentially created organized crime teams, and they would attach a couple of specialists to each team, like a specialist in money laundering and fraud.
The problem with that is that you don't have that nucleus of people who can drive a file, so they end up being add-ons to, let's say, a drug investigation. Over time you lose that expertise. My understanding is that now, about five years down the road, white collar crime is starting to rise in terms of profile in the country, or at least in certain parts of the country. Again, I don't speak for the RCMP. Just by reading news reports, it's obvious that they are trying to recreate their expertise in that area. That is so critical, in terms of the work of dealing with proceeds of crime legislation.
I would just add—and this was a concern of mine right from the beginning in 1993, when you had the first proceeds of crime legislation—that it's the Department of Finance that is responsible for this legislation. There's nothing wrong with the Department of Finance. It's just that the Department of Finance does not deal with enforcement. That's the solicitor general. You have two ministries. It's great for finance to be dealing with the framework, but they have to be talking, and you have to make sure the solicitor general is engaged in the game as well. Both departments have to be talking for you to have a holistic approach to this problem.
On the legal thing, I think it's mostly much ado about very little.
Lawyers generally.... Remember the original regulation that was struck down. It was about lawyers moving money, where lawyers are actually intermediaries, taking funds in trust, and moving it out. Lawyers that take crooked funds in trust and move them around are really at the margins already. They've broken 101 other rules before they did that. To get into a massive fight over that and devote the resources of a lot of well-meaning, well-intentioned advocates for AML regulation to it is actually letting the elephant just march through the door, barrel around, stomp on the flowers, and go back out while we're focusing on a technical issue. It's a pointy-headed technical issue.
I'm not saying that it's not a real issue. I'm not saying that there aren't lawyers who do bad things. All I'm saying is that it's like a drop in the bucket. Remember what it is: it's just lawyers actually handling money. Most of us don't handle the money. The money rarely.... In certain instances, it does, but it's not how most laundered money goes through. What we're doing is allowing a whole bunch of other stuff to go through, and not even unacknowledged but unenforced.
When Peter says there's no enforcement, we have this massive infrastructure that is extremely expensive to maintain and to keep working on and, yes, maintaining.... When I say “extremely”, we're talking about billions a year with the reporting entities, but we spend a fraction of that. I said this once to.... I won't mention his name, but he was one of the superintendents of the commercial crime unit a number of years ago. I said, “If you had a choice between having the AML legislation and the information that FINTRAC has and that occasionally you can have access to under certain circumstances, etc., which costs x billion dollars, or just getting another $500 million so that you can hire forensic accountants, investigators, and a bunch of people, what would you take?” Hands down, it was, “I'll take the money.”
So I ask you guys.... That's why I said to do some studying. Get the data. How many forfeitures have there been? How much money was seized? How many prosecutions have there been for money laundering, etc.? Because right now we have a highly expensive regime that in my view hasn't actually accomplished very much. Why?
The issue of checklist compliance isn't limited to this area. We see it in all fields. You have to take it from the standpoint of why a company wants to comply.
We have the fundamental reason and the tone from the top: you don't want your people being crooked because that jeopardizes the business. But human nature being what it is, with people having personal incentives to juice the revenue for this quarter so that they can get the bonus for it or whatever, stuff happens, so the tone from the top is important.
The other thing that motivates companies is exposure to liability. When you have a complex regulatory scheme, like the one we have under the PCMLTFA...and I can point to other schemes that are similar. We've had the same thing happen with the securities law, by the way. The Securities Act, which was supposed to be blue sky legislation to allow investors to understand what there is, is now a quagmire of lack of transparency. But that's the whole point.
Companies invest enormously in mitigating liability. If you're an FI, a bank, a trust company, or an insurance company, and you can get amped because you didn't follow the right process, didn't report the right thing in a timely manner, this, that, and the other, you sit there and you establish systems that mitigate that risk. But that essentially means spending scarce compliance resources on the checklist to comply with the massive regime rather than preventing the harm that the regime is intended to mitigate. You're actually diverting resources away from true compliance.
Get me right. I am not against what FINTRAC does, and I am supportive of what the legislation does. FINTRAC does a certain job. The problem is the disconnect Peter was talking about between the regulatory regime and the enforcement—
Thank you, gentlemen. It's been a circus here, and I appreciate your patience.
I've had a high degree of interest in this, having come through a bill I championed, which was recently defeated, on single-event sports wagering. The United States has moved ahead with this in a 6-2 decision and will now, basically, be a bastion for organized crime related to sports betting and also a flag-bearer for nefarious offshore operations that will receive Canadians participating in their operations.
One of the things that is clear about some of the work we did on Bill , with regard to beneficial ownership, is that Canada is considered a laggard in terms of its international reputation for dealing with beneficial ownership. I do want to say, though, for the record, that in terms of public and private disclosure, it's interesting that you can, with that corporate number, ask for the public to subsidize you for everything from your entertainment business expenses to writeoffs, a series of different things, but you don't actually have to disclose ownership of it. You get all the benefits of the public subsidy, being tax deductions, but you don't have to actually disclose what it is that you are....
I would like your comments. What would be the criminal reasons for not wanting to actually provide that public identity?
First of all, I completely agree with what Peter just said. Quebec is at the forefront of that aspect of it—enforcing white collar crime and creating resources.
On the issues involving blockchain or..., the cryptocurrency is the most potentially dangerous from that perspective—I agree with Peter—but it's just one of several things we focus on and are studying and looking at. This is one we need to pay attention to.
I become very frustrated when we spend so much time talking about beneficial ownership or lawyers: “Why shouldn't lawyers be reporting?” I see where Peter is coming from. Lawyers do play a role. They don't, however, generally handle the money. To focus attention on those kinds of things, public versus private registry, while the big issues are unaddressed....
Let's talk about beneficial ownership. That's fine. How are you going to deal with trusts? In a common law regime, trusts are created almost by just a handshake. I may hold the legal title. I'll declare that. There is, however, a trust relationship established by a course of dealing, implied by law. Trust is a unique.... Corporate lawyers, tax lawyers, and estate lawyers use trusts to structure certain kinds of things in very creative ways. That's not going to be caught by the traditional beneficial ownership.
The U.K.'s beneficial ownership is moving in that direction, but much of the leading work on beneficial ownership and much of the stuff that goes on at the Financial Action Task Force is actually driven by civil law jurisdictions that have no concept of trust. There are many issues out there that you guys should be dealing with that are far bigger in terms of their dollar impact on crime and on the economy.