Beneficial ownership registers – the wrong solution?

You would have to be living under a rock all of this time if you have not yet heard that Canada is apparently the money laundering capital of the universe and that Canadian real estate is the asset class of choice for these currency criminals. Moreover, this alleged massive influx of real estate capital can be curbed and eliminated if the government would just build a “beneficial ownership register” to record the names of all of these evil cash crooks.

This would be a more amusing storyline except that the storyline seems to be genuinely gaining traction with politicians of all stripes across the country. The problem is that the world is much more complex than such transparency conspiracy theorists would have us believe and building a beneficial ownership register will not address money laundering and will, instead, cause problems for the real estate development industry.

First of all, it is unlikely that anybody is really alleging that the real estate industry is a hotbed of “money laundering.” As anyone who has ever watched the Netflix series, Ozark, would recognize, true “money laundering” is the process of mixing illicit proceeds of crime with legitimate business revenues in cash businesses. Anyone in the real estate industry knows that the business, end-to-end from land assembly to unit sales, is anything but a cash business, with ever dollar meticulously documented. No, there is no “money laundering” in the real estate business.

What would not surprise anyone, however, is that there may be some proceeds of crime invested in Canadian real estate. Why wouldn’t there be? Crooks are likely to redeploy capital in asset classes that make sense and real estate holdings have always made sense as a part of any rational portfolio. This is not surprising. Of course, the exact dollar amount of the proceeds of crime invested in the Canadian economy is impossible to determine with any precision. Experts guesstimate the amount at upwards of five per cent of GDP, but how much of this is invested in real estate is all but impossible to determine. After all, it’s not like the criminals (and their front men) will openly declare their criminal status when acquiring real estate.

Therein lies the rub. Nobody can estimate the amount of criminal proceeds invested in Canadian real estate because it is impossible to know if any given real estate owners are criminals (or fronting for criminals). The transparency conspiracy theorists would have us believe that, if we only built a beneficial ownership registry (and passed laws to require all real estate owners to register the names of the “true ultimate owners”), then anyone (including shell companies) that “front” real estate for criminals in Canada will now suddenly disclose which criminals they work for, and we could then quickly clamp-down on such criminal. It is almost like suggesting that we should build a public drug dealer register so that the drug dealers will rush forth and register their true names so we can finally win the war on drugs.

One would think that the absurdity of the proposition would be self-evident, except for the fact that this is already actually happening. British Columbia has already passed legislation implementing a beneficial ownership register for real estate. Furthermore, politicians in other provinces (most notably, Ontario) are now considering doing likewise.

Now, real estate development stakeholders might feel that this is nothing more than yet another layer of bureaucratic oversight (and an ineffective one at that), but that would be naïve. While the additional bureaucratic burden on the industry is a given, the worst case scenario for the real estate development industry is far more than just additional regulatory burden. Instead, it might fundamentally alter how the industry acquires land in the province.

One of the things that developers in British Columbia will find out soon is that land assembly is going to become far more difficult (if not impossible) in the face of a public register of beneficial owners. Typically, one assembles a greenfield project by acquiring adjoining lands through various numbered companies or lawyers. Imagine trying to assemble various adjacent properties when you are obliged to disclose, on a public register searchable by anyone, who the true ultimate beneficial owner of each parcel is. The first buy will be easy, but once the neighbours realize (by searching the public register) who is buying up lands in the area, well, the gig is probably up for almost all subsequent purchases. After all, the beneficial ownership register doesn’t just require criminals to declare beneficial ownership; it requires every registered owner to disclose whom he/she/it might be ultimately holding in trust for.

The irony is that the government already collects much of this information. Currently in Ontario, transfers of beneficial interests already attract land transfer tax and the corresponding obligation to disclose true beneficial ownership to the Ministry of Finance, and Ontario now imposes a Non-Resident Speculation Tax which requires similar beneficial ownership disclosures as well for certain types of real estate. It is very unlikely that the criminals who own real estate in Ontario have disclosed their real names under these existing reporting regimes, and it is unlikely that making the same information searchable in a public register would in any way enhance disclosure and compliance. Furthermore, for the non-criminals who will in fact honestly comply with such legislation, having true beneficial ownership available through a public register will cripple the development industry’s ability to assemble greenfield projects in the usual manner.

It is probably too late for British Columbia, which has already passed the enabling legislation and is busy building a beneficial ownership register. Let’s just hope that Ontario sees the light before it too goes down a rabbit hole that has no apparent exit.

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Megan J. Lem is a corporate lawyer in the New York office of Kirkland & Ellis LLP. This article reflects the personal view of the author alone.