Why do we allow money laundering in the auto industry?

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If you head into your bank with $10,000 in cash and ask to deposit it, the bank must report that transaction to the Financial Transactions and Reports Analysis Centre of Canada – FINTRAC. If you buy precious metals or stones with that much cash, the store must also report it to FINTRAC. Same goes for accountants, real estate brokers/agents/developers, casinos, securities dealers, life insurance companies, and money services businesses. If you plunk down a bag of cash to do business at any of these entities, it starts a paper trail to determine if said cash was legitimately come by. 

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But not car dealerships.

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Why do we allow money laundering in the auto industry? Back to video

Canada has a money laundering problem, and nowhere is it more apparent than in British Columbia. Though there are multiple scams being run to clean cash obtained through illegal activity, the world of high-end cars is a favourite. 

In May, 2019, the Government of British Columbia published the findings of a report conducted by former senior RCMP member Peter German , who is also a lawyer and President of the International Centre for Criminal Law Reform. His report broke down the five categories through which organized crime uses the automobile market to launder money:

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Domestic and international laundering through vehicles:  “ Vehicles are used both domestically and internationally as conduits for money laundering.” Many stolen cars are never recovered, and there isn’t enough scrutiny of those exported.

Crime vehicles: h igh-end criminals like high-end cars. Luxury vehicles are purchased with dirty cash or leased or rented which means law enforcement has a harder time seizing them.

Money laundering: m any dealers are happy to conclude a cash purchase – even hundreds of thousands of dollars – which then get deposited into proper financial channels, camouflaging where the money originated. The industry has little appetite to regulate these sales, says German.

Grey-market export vehicles: l uxury vehicles fetch even higher prices in overseas markets, and there is little regulation surrounding reselling. The really dirty part here? When you purchase for resale, you can apply for a refund on the provincial sales tax. B.C. had to hire additional staff to handle these fraudulent rebates, which at the time of this report in 2019 had cost the province $55 million in rebates to criminal exporters.

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Independent luxury car resellers:  “ Select resellers of luxury vehicles are often noted for their willingness to deal with individuals involved in organized crime, many of whom are known to the police for serious criminal histories, typically for drug trafficking.”

Nothing in the report was news to Carey Smith, a Retired Detective sergeant with Halton Regional Police and later the Director of Investigations with OMVIC, Ontario’s sales regulator. He headed up a joint forces GST fraud investigation called Project Phantom – one of the largest in Canadian history. They found over $50 million of fraud over three sectors, $20 million alone in Ontario .    

That was back in 2004, and Smith says little has changed when it comes to ways the auto industry is involved in questionable practices, whether through breaking laws, interpreting them or finding the loopholes. He also notes the only reason things don’t change is that it’s an area dealers are comfortable with, governments can’t or won’t address, and consumers rarely see. 

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Organized crime funnels millions of dollars through car purchases. Some are the flashy headlines you read where someone tosses a duffel with $400,000 in it on a sales desk and walks out with a supercar. But Smith says more likely, it’s transactions involving multiple vehicles. 

If an industry is listed on FINTRAC, any cash amount over $10,000 must be reported at the point of sale and its source traced. Vehicle sales are not on that list. The duffel bag money is deposited by the dealership at the bank; as long as bills of sale appear in order, the transaction moves along. “They’re often on cars that don’t exist,” explains Smith. “They don’t look at metal. If a dealer says, ‘oh, a wholesaler just cleared out all the junk on my lot’ and produces accompanying bills of sale, it looks legit enough. Often, they’re phantom cars.”

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George Iny, president of the APA notes that dealerships see the scenario through a different lens. “Dealers want to sell cars. A cash buyer is welcome.” Iny goes on to address a stickier issue. “If it’s a franchised dealer, their concern is a cash customer not export new vehicles to China, the Middle East, the U.S. or another market where the value is higher. That would be a risk to their franchise if the automaker has restrictions on sales for export.” Remember: when these cars bought with laundered money are exported, the criminals are claiming back their PST rebates and taking millions of taxpayer’s dollars, legitimately. Brazen, that. 

That cash customer reselling is where the true danger in all of this lies. “Cars represent a lot of things,” says Smith. “They are used for the moving of contraband, but they are also used to pay for contraband. This is about drug trafficking and terrorism. Criminals can’t send a money transfer to pay for something, but they can move around a lot of expensive cars. They can even use those cars to transport contraband. This is drug money being moved to the cartels.”

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Casinos, another popular cash wash station, didn’t do FINTRAC reporting until December of 2017. 

From this NP article : “On average, roughly $5 million a month in suspicious cash was being flagged at B.C. casinos. “The money was walking in the front door,” [B.C. Attorney General David] Eby said. “People with shopping bags full of $20 bills would walk it up to the cage.” In February, following the new measures, suspicious cash transactions dropped to $200,000, Eby said.”

Why aren’t car dealerships just added to FINTRAC’s list? Smith is succinct: the automotive industry in Canada is a tentpole industry. Those numbers reflect a huge part of our economy. There is little appetite to dampen those numbers, so the industry won’t police itself from…making sales. Cash is legal. The banks are receiving the cash from their customer – the dealership. Consumers aren’t seeing something in their backyard, so there is little cry to stop something they don’t know is happening. It appears like a victimless crime – if drug cartels are victimless.

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When asked, OMVIC, Ontario’s vehicles sales regulator defers to the Feds: “ This decision would be made by the Federal Government. Dealerships are not currently designated as reporting entities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), for this reason, they are not required to report suspicious transactions”.

Maybe the baseline fact is the most depressing: no matter what restraints and reporting the law puts in place, the money will pop up somewhere else. Organized crime is miles ahead of government regulations. 

Governments have been aware of what is going on for years. Carey Smith has spoken on the Senate floor about it, begging for more oversight. Nada.