Skyrocketing housing prices and an increasingly prohibitive cost of living have culminated in Vancouver being named the second least affordable place to live in the world, trailing only behind Hong Kong. Unfortunately, the affluence driving these trends didn’t originate from long-time residents of the Canadian city — nor are these residents reaping the benefits. On the contrary, they may eventually be pushed out of the city altogether.

Instead, this influx of money is coming from external sources — specifically, wealthy individuals and criminal organizations from China. These individuals have found Canada’s casinos and real estate sector to be an appealing option for skirting China’s strict currency controls. Exacerbating the issue are opportunistic criminal organizations that are flooding the market with fentanyl, a prime driver of a deadly, nationwide opioid crisis that has taken the lives of nearly 14,000 Canadians from January 2016 through March 2019.

This isn’t strictly an issue isolated to Vancouver. But the city (and, more generally, British Columbia) has the unfortunate distinction of being the current epicenter of the illicit activity. Authorities have, therefore, taken to calling this phenomenon the “Vancouver model.”

How It Works

The Chinese government forbids nationals from taking large sums of cash outside of the country, which is a problem for wealthy Chinese traveling abroad to gamble. To get around this, these wealthy gamblers deposit funds into the local bank accounts of Chinese criminal organizations before leaving for Canada. In return, those organizations then present the Chinese travelers with suitcases or duffel bags filled with Canadian bills to gamble with upon their arrival — these funds are the illicit funds obtained in Canada and which are to be laundered.

The gamblers then purchase chips in Vancouver casinos, and, later, cash those chips in for “clean” money, provided in the form of a check from the casino. They deposit the check in “underground” banks in Canada controlled by the criminal organization. The funds are then wired to China through a series of shell corporations, and then back to the underground banks in and around Vancouver. As the last step, the funds are typically used to buy local real estate.

There has been considerable public outcry in the past two years regarding this type of money laundering, particularly since it involves two hot-button issues: the flood of fentanyl into North America and rising housing costs. This public attention has been one of the factors making casinos and the real estate sector areas of focus for FinTRAC and Canadian authorities. Recent measures have been implemented to crack down on this practice (and to great effect, as the number of suspicious transactions has decreased significantly since 2015). Yet distinguishing otherwise legitimate large money transactions, or transactions that fall outside their jurisdiction, from the clearly illegal ones remains a challenge for Canadian law enforcement.

Detection Strategies

The avoidance of legitimate, regulated financial institutions is a characteristic of the Vancouver model, so direct evidence of funds wired into and out of accounts is elusive. Monitoring transactions completed in the real estate sector (and tracking the purchase of other high-value goods, like precious metals and stones as well as luxury cars) may prove effective. For example, transactions that are fully paid for and not financed should be tagged, as well as funds coming via suspect banks.

Yet, although financial institutions aren’t likely to be the primary conduit through which the money is laundered, there are ways in which they could be involved and which they may be unaware of. Though the initial real estate purchases are generally fully paid and do not involve a mortgage, the subsequent sale to a legitimate buyer may involve bank financing. Thus, a red flag would be the fact that the selling party purchased the property recently and does not have a mortgage to pay off.

Additionally, the criminal organizations may wish to avoid making the final purchases with funds from suspicious-appearing underground banks, and so they may route funds via accounts at legitimate banks to make the purchases. A sudden flow of funds into a recently-opened account, for instance, or into a usually dormant account may warrant additional attention.

A Multi-Industry Responsibility

Detection, therefore, is difficult but not impossible. It’s important to note, too, that the burden doesn’t rest solely on financial institutions or law enforcement. Casinos and real estate businesses have their own compliance obligations to meet in the fight against money laundering. The public’s growing awareness of the Vancouver model will only serve to increase focus on these obligations and pressure to tighten controls.
Understanding who you’re doing business with and how they may impact your business is a universal concern. Fortunately, tools to screen individuals and monitor the flow of money can be configured to help manage risk in a number of industries. Combining the right technology with increased diligence across the board is the single best way to mitigate this threat.

Learn more about how AML screening solutions can help here.

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