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episode # 171

Is Your Home Equity Illicit? With Tsur Somerville

Dirty money has been flowing into BC, but what does that actually mean for BC’s economy, its real estate market, and – better yet – your home equity? Professor Tsur Somerville co-authored the 184-page report that has sparked a public inquiry and he now sits down with Adam and Matt to detail his findings. Did money laundering lead to inflated prices? Is BC’s relationship between real estate and crime unique? And where does the market go from here? Get out your crime maps and let’s connect some dots!

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Episode Summary


About Tsur:

Tsur is an associate professor at the Sauder School of Business at the University of British Columbia. He is an economist by training and his research focuses on housing markets and real estate, mainly housing supply. He has been teaching at the University of British Columbia for the past 26 years.

What is money laundering?

Money Laundering can be defined as any aspect of the process that creates the appearance of clean and legitimate income or capital out of funds that emerged from the commission of a crime. The predicate is that there must have been an original crime. Money Laundering involves getting this ‘dirty money’ into the financial system. It is the attempt to hide the source of the funds and create legitimacy through various processes, including layering a complicated trail of transactions to disguise the origin of the funds.

Money laundering doesn’t always have to involve cash. Money laundering is also involved in electronic money transfers and transactions, even if cash was not involved.

If you are going to prosecute money laundering, you would need to show that there was a crime and the trail of the funds from that crime. It is difficult to prosecute because not only do you have to follow the trail, you also have to prove the crime. If the crime originated in a country other than Canada, you also have to get international cooperation – this can be difficult.

Tsur was part of an expert panel that drafted the recently published report “Combatting Money Laundering in BC Real Estate”.

On how they determined what was money laundering in their report:

If you know all the crimes that have happened in the world and all the funds that have come out of that crime, that’s your money laundering number. This was the direction they took. They looked at criminal activity and the estimated funds generated from criminal activity and tried to model how this money was moved around the world. It was a top down approach.

There was an internal report issued by FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) that discussed the challenges of estimating money laundering. It is difficult because money laundering is hidden by the perpetrators of it. There is a large standard of error and you are always dealing with estimates.

FINTRAC has mandated reporting in Canada for banks and other institutions regarding large financial transactions. Some criticism has been lobbied to suggest the required reporting for money laundering is not very helpful, but they do align a system to make sure that everyone is playing by the same rules. It also allows that if a party is not playing by the same rules, they will suffer consequences. The reporting requirements are designed to educate and reflect the nature of the industry and how it works. If people are not following the rules, they can be held accountable.

On the estimates of how much ‘dirty money’ has entered the BC Economy and how much has flowed to real estate:

Statistics of crime reporting from across the world are available from the United Nations. This information was used to estimate money laundering in Canada – the provinces in Canada were divided up as if they were different countries. Crime statistics from other countries and other estimates regarding crime and funds from crime were examined, adjusted by inflation and GDP and other things. Flows of illegal funds from one country to another were examined – looking at financial flows and where the money was likely to end up. Tsur and the team examined things like source country GDP, end country GDP and the attractiveness of each country for illicit funds. For example, money is more likely to flow from the Republic of Cameroon to France than it would be to flow from the Republic of Cameroon to Australia because of cultural links and these types of factors. Or for example, Australia would be a likely end place for illicit funds generally because it has a well developed, stable, financial system and it an attractive place to be. Criminals want to have their funds in places where it is most safe and most hidden. This would tend to be countries with well developed financial systems with less regulation on funds, for example: Australia, Canada, the USA. Although these countries have regulations, they may be more forgiving than other industrialized countries – like the Netherlands. You could find other countries that have less regulation than Canada (like Panama), but their economies may not be as stable or safe. The trade off for criminals is to find a safe place with minimal regulation on funds for the money to eventually find a home.

Money launderers have lots of money in diversified portfolios. They have money in real estate, the stock market, venture capital funds, etc. From a criminal’s perspective, you don’t want this money in China with strict regulations. You want it in an open liberal society where there are legal protections for you and even if you are caught, you have a chance to fight to keep the money.

On Vancouver being an attractive city for real estate investment due to social and political stability and also being attractive to money launderers for the same reasons:

Criminals are like anyone else. You want your money and investments to be in places that you want to be. All the things that make an area attractive are also going to make it attractive to money that has been ‘dirty’ sourced.

The report issued received some push back from other provinces in Canada suggesting the estimates of money laundering were too high. Tsur notes that part of what drives everything is how much drug crime, fraud and tax crime you have in a particular area. Places that have more of these activities are starting with a larger base of dirty money. This would include BC and Alberta. It is not surprising there would be a bunch of money floating around because of this. There are various indicators or activities that people associate with money laundering, but these activities don’t necessarily always mean money laundering is happening. These activities can also be legitimate business activities. This is what makes money laundering difficult to discover.

Tsur’s team recommended ways for investigators in Canada to connect the dots for things that are suspicious and ways to get more dots or more situations where people have an obligation to report suspicious transactions. These steps will make money laundering more challenging for criminals. Nobody is thinking that money laundering will go away all together, but this is a better deterrent than doing nothing.

On which provinces are having the largest problem with money laundering:

The way money laundering is measured is that the estimate gives a lot of weight to the generation of the money and the money is much more likely to stay in a stable place. For this reason, it is probably more likely to be a larger problem in Alberta than the prairie provinces. Alberta and the Prairie provinces both have high instances of drug crime and they both have very high levels of GDP per capita. BC has a lower GDP per capita than both of these provinces. The way the money laundering model was setup is that it gives a certain amount of weight to different factors. They might be overestimating the money laundering in these provinces. Don’t take the numbers as exact amounts. Take the numbers reported as showing that money laundering is a problem in BC and other provinces in Canada and this is our best estimate. There are strengths and weaknesses with the estimate that the framework produced, but what it should be indicating is that steps need to be taken to curb this practice all across Canada.

On why is money laundering a big issue in BC right now:

It is true that money laundering has always been a problem. The attention being paid to the issues right now is due to several factors. We have fentanyl and the opioid crises in BC where people are dying on the streets. This makes people stop and ask what is happening with this money. Also, we know the housing market is being heated by legitimate and illegitimate funds and prices are getting out of control. This also makes people take notice of this issue on the housing affordability side. People are looking for something to blame. Money laundering is part of the problem when it comes to housing affordability, but not the only problem. It might be a convenient issue to look at politically and point the finger to say – this is the problem.

The problem with solving the housing crises in Vancouver to make things more affordable is that everyone’s house price will fall as a result. People are very happy to fix the crises as long as it doesn’t affect them personally. I want house prices to be lower for my children so they can buy, but I don’t want to lose the equity in my own home.

On trying to fix the housing affordability question in BC and how that would affect the overall economy:

BC has a problem because the economy has become addicted to real estate. This shouldn’t be the case because real estate is not an end in itself. If we build a whole bunch of new buildings and then tear them down again to rebuild them, this would employ a whole bunch of people – but fundamentally this is wasted money. This is not what a healthy economy is built on. To move our economy away from real estate will be a painful adjustment. If you want to get to the healthy place, this is necessary. A real estate economy is not really in anyone’s long term interest.


5 Wire (five quick questions about Vancouver)

Favourite neighbourhood: Main Street Corridor

Favourite bar or restaurant: Sushi by Yuji (Kingsway at Nanaimo)

First place you would bring someone from out of town: Endowment lands – nice forest in the middle of the city; take a trip on the Sea Bus

A piece of advice you would tell your 18 self today: Don’t think of your home as an investment, think of it as a consumption good, something you are living in that you want to enjoy. If you make money off it, you did well but don’t get caught up in the investment part of it.

Something you have purchased for under $500 that has positively changed your life: Reading glasses – otherwise I can’t read anything.

Find out more about Tsur Somerville

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