‘Organized crime knows fraud is the way to go’: former RCMP financial crime expert

A former RCMP organized crime and money laundering investigator says that fraud is a fast-growing business for gangsters that have realized Canada’s justice system is vulnerable to scams that net criminal proceeds estimated at up to $6 billion annually.

And, like drug-trafficking proceeds, these funds are laundered into real estate, driving prices higher. But fraud proceeds are even easier to hide and clean than drug cash, according to Henry Tso, the former superintendent in charge of RCMP’s federal serious organized crime and financial integrity team in B.C.

In an interview with Global News, Tso said that ten years ago he noticed crime cartels increasingly moving into fraud and exploiting the same systemic weaknesses — such as lack of police resources and weak prosecution and sentencing — that currently exist in Canada’s anti-money laundering regime.

“Fraud is very similar to money laundering, but with fraud they are also generating large amounts of criminal money,” Tso said.

“Organized crime knows fraud is the way to go. Because if you get caught it is not like getting caught for drug-trafficking.”

Tso is now a senior manager for major fraud probes with auditing firm MNP’s forensic and investigative services team. He says his work with MNP shows Canadian businesses suffer an estimated $3 billion in fraud losses annually, and organized crime is responsible for much of the damage.

And average Canadian citizens are targets too. Tso says formal records show that individuals lost $405 million to fraudsters from January 2014 to December 2017. But some estimates put losses to individual Canadians as high as $3 billion per year, Tso said. A recent MNP study found that B.C., Alberta, and Ontario have the most incidents of financial fraud.

However, because it is estimated over 90 per cent of fraud cases are not reported, it is difficult to determine exactly how much money is being lost to fraudsters. Many cases are not reported because fraud is so difficult to investigate and prosecute, Tso said.

And sentences for financial crime convictions are very light in comparison to violent or drug-dealing crimes.

For example, a man who was busted in B.C. for trafficking cocaine worth $10 million, got a 10-year jail sentence, according to statistics gathered by Tso. And one of the largest fraud cases in B.C. history, for $182 million, earned the perpetrator just a six-year jail sentence.

And in similar ways that drug kingpins rely on professional money laundering networks to move and stash cash, crime cartels are hiring the services of apparently legitimate facilitators to generate and launder fraud proceeds, including lawyers, accountants, and computer experts.

“Organized crime is not blue-collar now,” Tso said. “They are very sophisticated.”

Another reason organized crime is increasingly moving into fraud, is that by comparison, cash earned from drug trafficking is more difficult to launder, Tso said. But funds defrauded from businesses often come through bank transfers and electronic funds, and can more easily be deposited into and flowed through banks.

Mortgage fraud drives home prices higher

Tso said while the scale of real estate money laundering in Canada is starting to be understood, few people realize that organized crime is behind about 90 per cent of mortgage frauds. These schemes can manipulate the prices of homes higher, and often involve identity theft and loan documentation fraud techniques that gangsters have mastered.

“Organized crime gets so much money with I.D. theft — you put some bills in your garbage, they intercept it and sell it on the dark web,” Tso said.

In Tso’s experience, sophisticated mortgage fraud schemes that focus on illegal property flipping have been seen most prominently in cities such as Vancouver and Toronto. But these schemes are operated across Canada, he said.

These real estate scams rely on circles of colluding buyers and sellers, and are used to launder fraud and drug-trafficking proceeds, and also to fraudulently obtain property to use in drug-trafficking schemes.

“Illegal property flipping involves repeatedly and fraudulently selling a property between colluding individuals,” Tso said. “The price is artificially driven up through false appraisals or subsequent sales between colluding individuals.”

Tso said these schemes see homes repurchased several times over a short period for a higher price each time, “by criminal associates of the ‘flipper.’”

Finally, the flipped property is purchased at an inflated value by a “straw buyer” using stolen identity or false mortgage borrowing information.

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For the banks that are duped into providing loans in these complex transactions, loan losses can be big.

“The ‘straw buyer’ intends to let the property default and be untraceable to the financial institution,” Tso said. “As the price is artificially inflated, the loss to financial institutions can be significant.”

This type of scheme could help to explain some of the wild price surges in some areas of Vancouver’s real estate market. A review by Global News of a number of cases involving B.C. Lottery casino money laundering suspects, shows incredibly complex mortgage foreclosure cases involving Canadian banks, mortgage investment corporations, and private lenders that have criminal records and associations. In many of these cases, the assessed value of mortgaged homes is dwarfed by the value of multiple loans taken out against the properties.

Under-reported and under-prosecuted

Organized crime is also heavily involved in stock market manipulation and mass market and corporate theft fraud schemes, Tso said.

It is the sophistication of “organized fraud” as Tso calls it — with cases that require forensic auditing of complex corporate structures — that makes it just as difficult to investigate and prosecute as money laundering.

Corporations that suffer big losses know that with low chances of gaining convictions and having defrauded funds returned, it could be better to keep cases quiet rather than suffer the embarrassment and reputation risk of having a big fraud disclosed in court.

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But Tso said that Canada’s government needs to look at justice system weaknesses — including the consequences of a ruling that puts strict time limits on criminal trials — or organized crime will increasingly target Canada, putting the nation’s financial integrity at risk.

A Global News investigation recently revealed the 2016  “Jordan” ruling — which sets 18-month trial limits for provincial cases and 30 months for superior courts — has resulted in nearly 800 criminal cases getting thrown out.

“A lot of these fraud cases have been dismissed on the Jordan rule,” Tso said.

Failed cases include Canada’s largest ever alleged fraud, according to Tso, a complex scheme in which investors lost $100 million and the Canada Revenue Agency was duped into paying out $200-million in improper tax refunds.

In the case, Tso said 5,000 investors from across Canada lost money in fraudulent investments that were sold by professional brokers and crafted by experienced lawyers and accountants.

“Basically, there was Jordan issues (and the case was dismissed) because the judge was sick,” Tso said. “It’s the largest fraud case in Canada, and they are laughing because the justice system, not the police officers, screwed up.”

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