The Real Estate Council of Ontario (RECO) has fallen short in protecting consumers, a report from the Auditor General of Ontario found, citing a surprisingly low number of brokerage audits, continuing issues with realtor exam misconduct, and no system to analyze complaints against realtors and brokers.

What may be of the biggest concern to the general public, however, is the fact that the RECO was found to have no consistent process for assessing an applicant's criminal history. Although RECO requires applicants to undergo a criminal background check, whether or not they are considered fit to conduct business is up to the individual judgement of RECO's seven registration officers.

READ: RECO "Not Always Effective and Timely" Finds New Report From Auditor General

The Auditor General found that more than 1,700 of the 98,304 salespersons and brokers in Ontario -- roughly 2% -- disclosed on their application that they have one or more criminal charges or convictions. This number doesn't include applicants who did not disclose a charge or conviction on their application but were found to have a criminal record during a background check. This is because RECO does not have a dedicated field to record the results of their checks.

In preparation of the report, the Auditor General's office reviewed a sample of 25 brokers and salespersons who self-disclosed a criminal conviction or charge and found that 20 of the applications, which were approved by RECO, reported crimes such as fraud and physical violence, including assault and assault with a weapon. One registrant was even convicted of "acquiring and using credit card and debit information for the purpose of defrauding a large number of victims, through theft of financial data from cardholders to extract funds from their accounts." Another was convicted of using fraudulent cheques.

Once approved by RECO, salespeople and brokers have to renew their registration every two years. As part of that process, they're asked to disclose any new criminal charges or convictions, but for the most part, RECO doesn't carry out a new criminal background check.

"Although RECO told us that it can impose a condition for registrants with a criminal history at the time of their initial registration to provide an updated criminal record check when renewing their registration, we found that as of September 2022, RECO did not have any conditions in place to maintain registration for 72% or 1,232 out of 1,700 registrants with a self-disclosed criminal history," the report reads.

In response to these findings, RECO said it will "enhance its registration policy to include guidelines and processes for those assessing applications to include rationale for approval and refusal of applications, including for applicants who have a history of criminal offences, by the end of 2023." They also pledged to publish their guidelines so that the public can understand what's considered when assessing an application, and said they will "re-evaluate" the practice of not requiring criminal record checks for renewals.

More than a year ago, 34 Toronto-area realtors were sanctioned by Humber College for "deliberate and organized misconduct" related to their online licensing exams. But according to the Auditor General report, breaches in integrity of the Humber realtor exams took place three times: April 2021, September 2021, and March 2022, and RECO "has not taken steps to independently verify whether the issues that led to the breaches have been satisfactorily addressed." And the misconduct in Ontario goes well beyond 34 realtors. To date, Humber has reported to RECO 356 cases of large-scale, deliberate, and organized misconduct involving 315 students.

The conduct breaches were largely related to Humber shifting its exams to an online format and using a proctoring software that didn't have proper controls in place. The report notes that it allowed exam writers to share their screens with each other undetected, and let students continue writing exams even when the proctor was having technical difficulties and couldn't actually observe the test takers.

At no point after any of the three times they were made aware of breaches did RECO initiate an independent review of the examination process or suspend the virtual exam option. Compare this to the Law Society of Ontario, who suspended all online exams for lawyers and paralegals and hired third-party investigators after it was made aware of exam integrity breaches, and RECO's response seems even more puzzling.

RECO has now committed to an independent review of exam protocols and proctoring software, and to establish a formal protocol for identifying and analyzing future exam breaches.

"The protocols will include identifying and analyzing any future exam breaches, specifying that immediate corrective actions are to be taken to address those identified issues, and maintaining the ability to move exams to in-person administration should software integrity issues arise," RECO's response, included in the report, reads.

For agents and brokers who do pass their exams and are registered with RECO, the report found that RECO has no system in place to analyze and identify systemic issues or trends in complaints filed against them. While RECO does record complaints, it "does not meaningfully categorize" them.

"We found that in 55% of the 11,700 complaints handled by RECO, RECO did not categorize or record any description of the complaint in its system. In the remaining 45%, RECO identified that the complaints involved alleged violations of the Code of Ethics," the report reads.

"However, RECO categorized these violations in broad categories such as fairness and honesty, competent service, and unprofessional conduct, limiting its ability to identify and address systemic issues. For example, RECO could not identify how many complaints related to allegations that a registrant representing a seller did not disclose to the seller all offers they had received."

When it comes to inspecting brokerages, RECO also fell short, with 27% of registered brokerages never having had a full on-site inspection and 35% not having one within the last five years. RECO suggested that this is due to having suspended on-site inspections during the pandemic, however the report notes that more than half of the brokerages that never had an in-person inspection were registered before March 2020 and have been registered for an average of 14 years.

RECO currently has no policy requiring the inspection of brokerages within a certain time frame, the report says, and has no system to assign risk levels to inspected brokerages so that high-risk operations can be inspected more frequently. It also does not carry out inspections of brokerages that claim to have fewer than five real estate transactions, and does not verify the accuracy of those claims. In fact, 20% of RECO's scheduled inspections were cancelled because of such claims.

"RECO’s policy requires its inspectors to conduct an online search of the brokerage name before exempting it from an inspection, and review any complaints against it to assess the accuracy of the declared trading volume," the report says. "However, RECO’s inspectors told us that that they do not carry out such procedures."

When agents, brokers, and brokerages are investigated by RECO, there are no set procedures or timelines to be followed. On average, investigations take about six months to complete, but vary widely depending on which investigator is working on it. One investigator's cases averaged 26 days while another's averaged 331 days.

The report also took aim at the fines RECO doles out for conduct violations, saying they're not high enough to be preventative. Between 2017 and 2021, the average fine given out was $8,273, with 78% of all fines being $10,000 or less. When the Auditor General's office reviewed a sample of 15 cases, they found the fines given out were less than the commission earned from the related sale.

The report also warned of likely money laundering in the real estate industry. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) requires realtors and brokers to report both cash transactions exceeding $10,000 and suspicious transactions. But in a review of reports made to FINTRAC over the past five years, the Auditor General's office found that the number of these reports was "extremely low." In fact, between the 2017/18 and 2020/21 fiscal years, not a single cash transaction was reported. And over the past five fiscal years, just 82 reports of suspicious transactions were filed.

Although RECO is not explicitly required to ensure compliance with money laundering laws, they do require registrants to conduct themselves with integrity and should updated their inspection procedures to include a review of reports to FINTRAC, the report argues.

"RECO has already begun to explore opportunities to collaborate with FINTRAC on sharing information and collaborating on inspections, investigations, and prosecutions within the scope of its authority, as it does with law enforcement agencies," RECO's response reads. "RECO will consider to what extent it could review registrants' FINTRAC reporting obligations during inspections within RECO's legislative authority and in consultation with FINTRAC."

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