REPORT OF THE COMMITTEE

Thursday, June 4, 2015

The Standing Senate Committee on Banking, Trade and Commerce has the honour to table its

ELEVENTH REPORT

Your committee which was authorized to examine the subject matter of those elements contained in Divisions 14 and 19 of Part 3 of Bill C-59, An Act to implement certain provisions of the budget tabled in Parliament on April 21, 2015 and other measures, has, in obedience to the order of reference of May 14, 2015, examined the said subject matter and now reports as follows.

DIVISION 14 – Amendment to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act

Clause 167 of Division 14 of Bill C-59 would amend subsection 55(3) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to allow the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to disclose designated information to provincial and territorial securities regulators if it has reasonable grounds to suspect that the information would be relevant to investigating or prosecuting money laundering or terrorist financing activities, as well as offences set out in securities legislation.

FINTRAC told the Committee that, in a number of cases in which provincial securities regulators and law enforcement agencies conducted joint investigations, the regulators had access to information that FINTRAC had disclosed to law enforcement agencies. It said that, in these cases, this access was very helpful when the regulators prosecuted offences under provincial securities legislation. The Canadian Securities Administrators highlighted one such a joint investigation, which involved a “pump and dump” scheme; in this case, the information provided by FINTRAC allowed bank accounts linked to the scheme to be identified, which would not have otherwise been possible.

According to the Department of Finance, FINTRAC’s inability to disclose information directly to provincial securities regulators is a shortcoming of Canada’s anti–money laundering and anti–terrorist financing regime; Division 14 would address this shortcoming. FINTRAC explained that a number of financial intelligence units (FIUs) in other jurisdictions have the ability to disclose information to their jurisdiction’s securities authorities. According to the Canadian Securities Administrators, which was represented by Quebec’s Autorité des marchés financiers, these jurisdictions include the United States and Australia. In FINTRAC’s view, the amendment proposed in Division 14 would bring Canada in line with those jurisdictions where FIUs share information with securities authorities.

As well, FINTRAC noted that disclosures to provincial securities regulators would be made in accordance with a two-stage test that is similar to that which it applies in disclosing information to the Canada Revenue Agency. It said that, before disclosing any information to these regulators, it would first need to have reasonable grounds to suspect that the information would be relevant in investigating or prosecuting a money laundering or terrorist financing offence. According to FINTRAC, if that first test is met, it would need to have reasonable grounds to suspect that the information would be relevant in investigating or prosecuting an offence under provincial securities legislation.

The Canadian Securities Administrators said that the proposed amendment would allow provincial securities regulators to ask FINTRAC to provide information in relation to specific cases, and would give FINTRAC the ability to disclose information to a provincial securities regulator voluntarily. It suggested that allowing FINTRAC to disclose information to these regulators could improve investigations of violations of provincial securities legislation in a number of ways. For example, it could enable:

• the tracing of flows of illegally obtained funds;
• the identification of bank accounts linked to securities-related offences, such as Ponzi schemes;
• more timely implementation of freeze orders on bank accounts containing illegally obtained funds, which could prevent the transfer of these funds elsewhere, such as to a foreign jurisdiction;
• the identification of individuals involved in securities-related offences and potential witnesses; and
• more accurate calculation of the potential losses incurred by victims of securities-related offences, which could affect the penalty imposed on offenders.

As well, the Canadian Securities Administrators noted that the amendment proposed in Division 14 could prompt securities dealers to report more suspicious transactions to FINTRAC instead of reporting such transactions directly to provincial securities regulators, as securities dealers may see the former approach as a more efficient way to report securities-related suspicious transactions.

The Department of Finance stated that the amendment proposed in Division 14 would strengthen Canada's anti–money laundering and anti–terrorist finance regime, and would help provincial securities regulators to combat offences under provincial securities legislation, thereby increasing the safety and security of Canadians and the financial sector.

DIVISION 19: Privilege for Supervisory Information related to Federally Regulated Financial Institutions

Clauses 232 to 238 of Division 19 of Bill C-59 would add section 504 to the Trust and Loans Companies Act, sections 608, 638 and 956.1 to the Bank Act, sections 672.2 and 999.1 to the Insurance Companies Act, and section 435.2 to the Cooperative Credit Associations Act to provide that prescribed supervisory information is considered privileged for the purposes of a civil proceeding. During a civil proceeding, this information would not be used as evidence and no person would be allowed to give oral testimony or produce documents in relation to it.

However, the Minister of Finance, the Superintendent of Financial Institutions, the Attorney General of Canada and federally regulated financial institutions would have exemptions from this privilege for certain civil proceedings; as a consequence, they could use that information as evidence in these proceedings. Furthermore, a court, tribunal or other body could order the Minister, the Superintendent or a federally regulated financial institution to provide oral testimony or documents relating to prescribed supervisory information for certain civil proceedings.

According to clauses 239 to 245, clauses 232 to 238 would be effective retroactively, and would apply in any civil proceedings in which a final decision has not been made before the day on which these clauses come into force. Clauses 246 to 252 would provide that certain regulations of the Trust and Loans Companies Act, the Bank Act, the Insurance Companies Act, and the Cooperative Credit Associations Act would apply to clauses 232 to 238 until new regulations for those clauses are in force.

In its appearance before the Committee, the Department of Finance said that the proposed amendments would modernize, clarify and enhance the protection of prescribed supervisory information that is prepared by the Office of the Superintendent of Finance Institutions (OSFI).  It explained that the phrase “prescribed supervisory information” refers to the opinions of OSFI that are provided to financial institutions regarding any actions that they need to take; currently, financial institutions treat this information as confidential. In the Department’s view, the purpose of the proposed privilege is to ensure both an open and frank exchange of information between financial institutions and OSFI, and a consistent approach regarding the use of this information in courts across Canada. It mentioned that these proposed amendments were in response to a Quebec Court of Appeal case involving a class action lawsuit between Manulife and Mouvement d’éducation et de défense des actionnaires. It asserted that, although OSFI’s opinions would be privileged, the information on which the opinions are based would still be available for use in a civil proceeding.

As well, according to the Department of Finance, the proposed amendments would enhance both confidence in the supervisory process and the stability of the financial system, while respecting the need for transparent and fair judicial processes. It indicated that exemptions to the proposed privilege would be available in four situations: criminal proceedings; civil proceedings where a financial institution is winding-up; civil proceedings where a financial institution has launched a case against the government or OSFI for a review of their activities as regulators; and proceedings commenced by the Minister of Finance, the Superintendent of Financial Institutions or the Attorney General of Canada. In the Department’s view, allowing supervisory information to become public could have negative consequences for consumers and the financial sector. It highlighted that supervisory information was always intended to be privileged, and was not meant to be used for civil proceedings initiated by shareholders of financial institutions. It also commented that other types of information are privileged under the Statistics Act.

The Canadian Life and Health Insurance Association expressed its support for the proposed amendments, and indicated that the provisions in the Insurance Companies Act that deal with prescribed supervisory information facilitate the efficient and timely exchange of information between an insurance company and OSFI. It explained that OSFI uses the information provided by financial institutions for a variety of purposes: to determine whether the institutions are in sound financial condition and are complying with Canadian laws and supervisory requirements; to advise the institutions promptly of any deficiencies and required corrective actions; and to advance a regulatory framework that promotes the adoption of policies and procedures designed to control risk.

In the view of the Canadian Life and Health Insurance Association, the disclosure of prescribed supervisory information in civil proceedings would likely negatively affect communications between OSFI and financial institutions, which could affect OSFI's ability to identify deficiencies in the marketplace and, in turn, have a detrimental effect on the safety and soundness of Canada’s financial system. It noted that one reason for the international perception that Canada’s financial system is one of the soundest in the world is the country’s robust supervisory regime for financial institutions. It clarified that the amendments proposed in Division 19 would apply to certain – but not all – of the information that is exchanged between OSFI and a financial institution, and emphasized that the confidentiality of medical information held by insurance companies would not be affected by the proposed amendments.

Like the Canadian Life and Health Insurance Association, the Canadian Bankers Association supported the amendments proposed in Division 19, and stated that ongoing communications between OSFI and financial institutions is an essential part of their supervisory framework. It explained that these communications include forms and reports, OSFI’s ratings system for financial institutions, and information prepared exclusively for OSFI that may be commercially or competitively sensitive. It cautioned that a failure to treat this information as confidential could jeopardize the efficiency and transparency of the information exchange between OSFI and the financial institution.

According to the Canadian Bankers Association, the proposed privilege would help to ensure the stability of Canada’s financial system, as it would prevent the misinterpretation of information provided to OSFI by financial institutions. It said that the proposed amendments would confirm the original intent, as described in the regulatory impact statement for the regulations in question, of keeping communications between OSFI and financial institutions confidential in order to ensure a productive, collaborative and co-operative relationship between them. It suggested that OSFI would be the main beneficiary of the proposed amendments, and mentioned that it, the Canadian Life and Health Insurance Association, the Insurance Bureau of Canada and the Attorney General of Canada were interveners in the Quebec Court of Appeal case between Manulife and Mouvement d’éducation et de défense des actionnaires. It also highlighted that Canadian banks’ strong performance during the financial crisis was due to the prudential management of banks and a strong regulatory framework.

In the view of one of the Committee’s senators, the proposed privilege should not include OSFI communications that indicate that a financial institution has not acted efficiently or properly and needs to take corrective measures.

After considering the witnesses’ testimony, the Committee has no objections to the proposed amendments in Divisions 14 and 19 of Part 3 of Bill C-59 becoming law.

Respectfully submitted,

IRVING GERSTEIN

Chair

Appendix – List of Witnesses

Wednesday, May 26, 2015

Canadian Securities Administrators:

Marianna Ferraro, Lawyer, Legal Branch - Montreal, Autorités des marchés financiers;

Jean-François Fortin, Executive Director, Enforcement Branch, Autorités des marchés financiers.

Department of Finance Canada:

Heather Kay, Senior Economist, Financial Systems Division, Financial Sector Policy Branch;

Lisa Pezzack, Director, Financial Systems Division, Financial Sector Policy Branch.

Financial Transactions and Reports Analysis Centre of Canada (FINTRAC):

Dan Lambert, Manager, Financial Analysis and Disclosures.

Thursday, May 27, 2015

Canadian Bankers Association:

Darren Hannah, Acting Vice President, Finance, Risk, and Prudential Policy;

Bill Randle, Deputy General Counsel.

Canadian Life and Health Insurance Association:

Frank Zinatelli, Vice President and General Counsel.