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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 3 - Evidence

OTTAWA, Thursday, March 15, 2001

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-16, to amend the Proceeds of Crime (Money Laundering) Act, met this day at 11:10 a.m. to give consideration to the bill.

Senator E. Leo Kolber (Chairman) in the Chair.


The Chairman: Honourable senators, we are hearing evidence today on Bill S-16. Our first witnesses are from the National Archives of Canada.

Mr. Ian E. Wilson, National Archivist, National Archives of Canada: Honourable senators, I appreciate this opportunity to speak to the committee. The issue to which I wish to speak is clause 54(e) of Bill S-16. The intent of this clause is to require the destruction of records prepared or gathered under the investigative powers of this bill. This runs directly against the Archives Act which requires, under section 5, my consent to the destruction of records.

Originally, the amendment in clause 54(e) was to read "despite the Archives Act." We have now had time to review the legislation and to try to come up with a legislative solution that meets the requirements of the committee and Canadians in terms of requiring the destruction of records that are gathered under investigation while at the same time respecting the requirements and the review processes established in the Archives Act to ensure that records to be destroyed do not have permanent historical significance to the country.

My staff and I have had an opportunity to review the records that have been created or will be created under these forms of investigation. We have determined that those records are not of permanent significance for the historical record of Canada. I have therefore, under section 5 of the Archives Act, issued records disposition authority 2001/003, which authorizes the destruction of those records pursuant to section 5 of the Archives Act after the applicable periods built into Bill S-16.

We are therefore proposing alternate wording, which I think, and our advisers suggest, meets the requirements that require the destruction of the record at the same time. Rather than overruling the Archives Act, as the original amendment would have, we are proposing the following alternate wording: "in accordance with the Archives Act under a records disposition authority that we have now issued."

That is our proposed amendment. I believe it has been distributed to you in both languages. It is a cleaner, simpler way of doing this, rather than saying "despite" or "not withstanding the requirements of the Archives Act."

Mr. Chairman, I will be pleased to respond to any questions.

Senator Furey: Mr. Wilson, is the directive you issued with respect to the destruction of records revocable?

Mr. Wilson: The wording in that last clause makes it clear that it is not revocable. The archives very seldom revokes; we do so only in certain specific instances, but it is discretionary. With that last phrase, discounting any subsequent amendments or repeal of that authority, we are trying to ensure that it is embedded in the legislation and cannot be revoked by my successors or me. That is the intent and our legal advisers say that that will cover it.

The Chairman: As we are seeing this proposed amendment for the first time, I do not know that anyone here can say whether it deals with our original objections. Perhaps it does; perhaps it does not.

However, this session of the committee is only to hear testimony and ask questions. We will conduct clause-by-clause study on Wednesday. I suggest that our legal advisers, under the guidance of Senator Furey who is sponsoring the bill, study this in order to satisfy us prior to clause-by-clause study that it deals with our objections. I do not know whether it does.

If that is agreeable to the committee, I suggest that Senator Furey advise us as to whether it deals with our objections, and that, if it does not, we authorize him to act on our behalf, subject to our final approval of course, to work with Mr. Wilson to produce wording that does deal with our objections.

Senator Meighen: What is the objection?

Senator Furey: It is simply that we wanted the records expunged and destroyed after a period of time. Mr. Wilson is saying this encroaches on his authority as the archivist.

The Chairman: Someone cited as an example this morning a person winning $10,001 at bingo and a file being established on that particular subject. Why should that file exist forever? Put in a purely simplistic form, that is the kind of thing we want to avoid. Some of us believe that the era of "big brotherism" in government may have gone a little too far. I think it is up to this committee to put some kind of a stopper on it.

Senator Meighen: I agree with what you have said, Mr. Chairman, and I think that is the consensus of the committee.

Mr. Wilson, you said that your blanket consent cannot be revoked. Did I understand you to say that that is premised on the supposition that the material collected pursuant to this legislation would not be of material importance to Canada?

Mr. Wilson: I said that it would not be of permanent historical value to Canada.

Senator Meighen: What if it were determined at one point that something was of permanent historical value?

Mr. Wilson: Our review would suggest that these investigations could affect many individual Canadians because the threshold is set very low. We suspect that, if things are important or if there is an issue, records will then appear in prosecution files or in court records that will become part of the permanent record. This would simply authorize the disposal of a file created on an individual who won at bingo, once privacy and other concerns are satisfied.

This is a routine action of the archives. Given the volume of modern government records, we only keep 1 to 2 per cent of the administrative record created by government day by day. Under the authority of section 5 of the Archives Act, we have the authority to review and identify which administrative records we want transferred to the archives for permanent retention and which will be disposed of routinely after the their legal, financial or audit purposes are fulfilled.

We are trying to find a way that meets the requirements and objectives of the committee while at the same time respecting the Archives Act and avoiding legislation that says "notwithstanding" or "despite the Archives Act." However, we do it in accordance with the Archives Act and to meet your intent, as I understand it, which is the disposal of the record.

The Chairman: You are worried that if you do this everyone else will do it, that it may be the thin edge of the wedge.

Mr. Wilson: We are worried about the precedent. Given the nature of the record, we concur with you that it should be disposed. It is a tidier approach to legislation to have it done, rather than suggesting that some other legislation may be in some way deficient, that we do it in conjunction with other legislation. We are trying to find the right wording. Whether we have it or not, we are open to discussion.

The Chairman: We appreciate your cooperation. We hope you will work with Senator Furey.

Mr. Wilson: Absolutely.

The Chairman: He will advise us whether he agrees, and then we will decide whether we agree.

Senator Finestone: I was listening with great interest to something I do not know anything about but I do know something about privacy and the National Archives of Canada Act. I do not know where this fits in.

Under the Privacy Act, no personal information can be collected by any institution, and you are a government institution, unless it relates directly to the operating program of the institution. I do not know where it fits into the right of your institution to have this information. If I win $10,000, it is bad enough that everybody who wants money, charitable or otherwise, will know that I have won. Why should you keep that information in your records?

Under the Privacy Act and the National Archives of Canada Act, why would you have that material in the first place, or want it?

Mr. Wilson: We are saying that we do not want it. It has no place in our records. We would not have enough room to preserve everything.

The Chairman: You will meet, or not meet, with Senator Furey, as he determines;, okay?

Mr. Wilson: Yes.

The Chairman: We will now hear from Mr. Cullen.

Mr. Roy Cullen, Parliamentary Secretary to the Minister of Finance: I am pleased to be here to speak to Bill S-16. Last June, I appeared before this committee to discuss Bill C-22, the bill that put in place the legislation that we are now proposing to amend.

I would like to take this opportunity to thank the committee for its very careful study of Bill C-22 back then. The enactment of Bill C-22 was an important milestone in Canada's legislative framework for fighting organized crime and money laundering.


Its timely passage also brought Canada's anti-money laundering regime into line with international standards and allows Canada to participate fully in the international efforts against money laundering.


As a member of the G-7 and the Financial Action Task Force, Canada had committed to improving our anti-money laundering regime. It was important that Canada be seen by our international partners to be making progress on this front, particularly in that the Financial Action Task Force was engaged in a process of publicly listing countries as having deficient anti-money laundering controls about the time the legislation was passed.

At meetings of the OECD and OSCE in Europe that I attended last summer, I was pleased and proud to report that Canada had passed this important piece of legislation and, again, I thank you.

Honourable senators, you will recall that the Proceeds of Crime (Money Laundering) Act provides for a system of mandatory reporting of certain financial transactions and cross-border movements of large amounts of currency and monetary instruments. The legislation also established the Financial Transactions and Reports Analysis Centre of Canada, FinTRAC, which will analyze these reports in a prescribed way and provide information to police for prescribed reasons and in a prescribed way to assist them in the prosecution of money laundering offences.

The establishment of FinTRAC as an independent agency at arm's length from law enforcement is one of the many privacy safeguards contained in the act. FinTRAC was formally established on July 5, 2000. It is now building the technical and analytical capacity needed to perform its mandate. It will begin to receive financial transaction reports after the necessary regulations have been implemented.

The proposed regulations for record keeping and financial transaction reporting requirements were published on February 17, 2001, in the Canada Gazette for a 90-day public comment period. Consultations are now underway to develop regulations to implement the reporting requirements for large cross-border movements of currency and monetary instruments. In addition, FinTRAC has developed draft guidelines to help financial institutions and intermediaries comply with the act and has initiated consultations with stakeholders.


Now, I would like to turn to the bill before us today -- Bill S-16. The four amendments that make up this bill respond directly to issues raised by honourable senators when they studied Bill C-22 in this committee last June.


The proposed amendments will be familiar to the senators on this committee as they were outlined in a letter dated June 14, 2000, from Secretary of State Jim Peterson to the committee chairman. That letter was included in the committee's report on Bill C-22.

Briefly, the proposed amendments relate to four specific issues. The first deals with the process for claiming solicitor-client privilege during an audit conducted by FinTRAC. As you know, FinTRAC is authorized to conduct audits to ensure compliance with the requirements under Part I of the act, namely the requirements to keep records and to report certain types of financial transactions.

The legislation currently contains provisions that apply when FinTRAC conducts a compliance audit of a law office. FinTRAC must provide legal counsel with a reasonable opportunity to make a claim of solicitor-client privilege with respect to any document in their possession at the time of the audit. The proposed amendment contained in Bill S-16 deals with situations where documents are in the possession of a person who is not a legal counsel. It would require that such a person be given a reasonable opportunity to contact legal counsel in order to make a claim of solicitor-client privilege.

Honourable senators will recall that this issue was raised by representatives of the accounting profession when they appeared before this committee last June 2000.

Another change ensures that nothing in the Proceeds of Crime (Money Laundering) Act prevents the Federal Court from exercising its authority under the Access to Information Act or the Privacy Act to order the director of FinTRAC to disclose certain information by either of those acts. This proposed amendment makes it clear that the recourse of individuals to the Federal Court is fully protected. This was the intent of the original bill and the proposed amendment will ensure that this will be the result.

The third proposed amendment more precisely defines the kind of information that may be disclosed to the police and other authorities.


The amendment clarifies that the regulations setting out this information may only cover similar identifying information regarding the client, the institution and the transactions involved. This deals with a concern of the committee that the existing wording may have provided for greater latitude for using regulations to add to the list of information set out in the act itself.


Bill S-16 would amend the act to ensure that all reports and information in FinTRAC's possession will be destroyed after specific periods: information that has not been disclosed to police or other authorities must be destroyed after five years; information that has been disclosed must be destroyed after eight years. The archivist presented a proposal that, on the face of it, seems to meet our requirements. However, if there are any difficulties, we will talk to you before the clause-by-clause occurs. We believe that it meets our requirements and we are happy, in that case.

The Chairman: Could you clarify that, please? My understanding, after meeting with the officials this morning, is that if we are satisfied then you are satisfied. Is that correct?

Mr. Cullen: The officials are satisfied, and I am satisfied on the face of it. However, I want to make sure that the government is satisfied, as I am sure they will be. We will contact you immediately if there is any problem.

I hope that honourable senators will find that these four provisions respond in a meaningful and concise way to the concerns raised by this committee.

Before I conclude, I will mention that the government considered very carefully this committee's report on Bill C-22, including the suggestions for three additional amendments to the act.

In response, the government has moved quickly to introduce the amendments that the Secretary of State committed to make, and that I have just described. However, the government has decided not to proceed with any further amendments to the act at this time, and if I you will allow me, I will briefly explain why.

First, the committee report recommended that FinTRAC be required to obtain either consent or a warrant before entering a law office to verify compliance with the act, similar to what is required before entering a private home.

Such an amendment, in our view, would treat a law office like a private home, rather than like other places of business. The government believes that it would be inappropriate to require a warrant to conduct a compliance audit -- I repeat, a compliance audit -- of any place of business, including the law office. The provisions in the act parallel those in the Income Tax Act, which do not require a warrant except for access to a private house.

Second, Parliament requested that a parliamentary committee review the act within three years and every five years after that. At present, the act requires a review after five years.

With respect, senators, I submit that a five-year review is more appropriate, for a number of reasons. More important, there will not be enough experience or data available within three years to provide an accurate assessment of the effectiveness of the legislation or the operations of FinTRAC. In any event, committees of Parliament can undertake to review any legislation at any time and could opt to do so in this case.


Finally, the committee report recommended that the act require regulations to be tabled before a committee in each House of Parliament.


The act currently stipulates a 90-day public consultation period, following prepublication of the regulations in the Canada Gazette, and an additional 30-day notice period if significant changes are made as a result of those consultations. We believe that this process provides ample opportunity for parliamentary committees, if they wish to do so, to review the regulations proposed by the government.

The Secretary of State has sent to the chair of this committee a copy of the proposed regulations, which were prepublished in the Canada Gazette on February 17, 2001, and they are also available on the Finance Canada Web site.


In closing, honourable senators, I would like to thank you once again for your close study of Bill C-22 and for raising the issues that the government has addressed through the bill before us today -- Bill S-16.


The government has devoted considerable time and energy to crafting its anti-money laundering legislation in such a way as to meet the needs of law enforcement while protecting individual privacy. The amendments contained in the bill considered today result from this committee's invaluable input to this matter. The officials that are here today and I are pleased to answer any questions.

The Chairman: Could you clarify the difference between a "compliance" and a "search"? That information is integral to the whole question of the warrant.

Mr. Cullen: In general terms, if there is a reporting requirement under the act we are talking about a compliance issue.

Mr. Yvon Carrière, Senior Counsel, Tax Counsel Division, Law Branch, Department of Finance: When FinTRAC conducts a compliance audit, they verify whether, in fact, the required reports were prepared. They are not investigating to know whether money laundering has occurred, or some other criminal activity. In fact, they would not be authorized to gather such evidence to prove that a crime had occurred. In the case of a criminal search, a warrant is obtained, and the people who perform the search in a criminal matter will look for specific evidence related to that criminal infraction.

A compliance audit is simply performed to verify whether the reports and records required to be kept under the Proceeds of Crime (Money Laundering) Act have been kept and that the reports have been made.

Mr. Cullen: Any information obtained by FinTRAC during the course of a compliance examination cannot be disclosed to law enforcement under section 55 of this act for the purposes of a proceeds of crime (money laundering) investigation. If it were disclosed, it would render the information inadmissible in a court of law.

Senator Tkachuk: I have a question about the "dwelling house." It bothers me as it bothered Mr. Kelleher. Mr. Cullen, you implied that it was different from a business, but that would be news to me.

I received an article by Mr. Peter Hogg, Dean of Osgoode Law School, that states that the common law rule is that a police officer or government official has no authority to enter private property for the purpose of searching for evidence and no authority to seize private property for use as evidence, unless authorized by law. However, we do that from time to time, in that common law continues to apply and that we can sometimes, by statute, make an exemption to that. However, it was just the way in which you were talking about "house " that bothered me. The home is special, and my interpretation of it would be that which we have to protect. It is my right, as a citizen, not to have law enforcement officials come to my home or my place of business without a warrant, or anywhere else that I consider my property -- those places should be protected. This is an exemption that only applies to the Income Tax Act. As far as we could find, there is no other exemption like this.

Why do you need this special power? Frankly, it scares the hell out of me. Once you make this exemption, there will be others. If there is no evidence, why is it necessary to search a dwelling?

Mr. Peter Sankoff, Counsel, Human Rights Law Section, Public Law and Central Agencies Portfolio, Legal Operations Section, Department of Justice: You have raised a complicated question. I will try my best to deal with that and all other aspects.

My understanding of the case law generally, and especially in respect of the Charter of Rights and Freedoms, is that there is a fair distinction made between the dwelling house as the place most deserving of protection. In particular with relation to this act, I would draw a number of distinctions. This act is not normally designed to cover a dwelling house. It is not a place that would generally have activities that would generate suspicious transaction reports.

As a precaution, a section has been included to deal with dwelling houses in case there is activity that would generate these kinds of reports. Because it is unlikely that this will occur, a special warrant provision has been put in to deal with that. It is not uncommon for that to be the case. A number of pieces of legislation have distinctions about what can be done in a dwelling house and what can be done in any other type of place.

I do not disagree with your proposition, that, as a rule, we wish to have preauthorized judicial authority to go into any place.

Nonetheless, the case law once again has made a rather serious distinction between what we would call regulated activity and what we would call a search for criminal purposes. In this case, it is very clear that the particular matter that we are discussing relates to regulated activity. The centre is only allowed to go into these types of premises where they are regulating compliance.

As Mr. Cullen pointed out earlier, none of the information can be used. It is clear from the way the act is currently worded that any information obtained in the course of a compliance audit cannot be used in a criminal investigation and cannot be used by the centre to determine whether money laundering has taken place. The sole purpose is for compliance. The manner in which this has been drafted goes a long way to ensuring that the distinction between regulatory compliance and a search for criminal purposes that has been made so clear in the case law is upheld. Therefore, I would see those two distinctions as making this situation special.

Senator Tkachuk: You mentioned the Charter of Rights and Freedoms. First, you are telling me that the Charter of Rights and Freedoms gives less rights than common law, which talks about property, not just dwelling place. Second, it is not the fact that you may find evidence of other wrongdoing that concerns me; it is the very act of government officials coming into my property. It is not the fact that you may find something but the fact that you have no right to be there in the first place, unless you have a reason to be there, and the reason should be supported by enough evidence to obtain a search warrant. I do not like you walking in. It is not because I am a criminal but because I do not like you walking in. You can have all these other exemptions, but as governments and legislators we have to prevent governments and police from walking in. We have a responsibility to do that, and that is what I am trying to do here.

Mr. Sankoff: I understand that. All I can say in response is that the number of situations where the government has the right to intrude on a business -- I hate to use the word "intrude," but let us say to assess a business or a property without a warrant for regulatory purposes -- are beyond my ability to number at this time. There are a number of areas where there is a purpose that is pressing. As I understand it, the justifications put forth for this initiative are pressing. I do not think this would be an everyday thing or that they would be going in at any time. It would be something undertaken from time to time for the purpose of ensuring compliance only. That, in my opinion, is not uncommon. In countless industries, government officials have the ability to go in solely to monitor compliance or to ensure that the very important process that is underway is actually taking place in the manner in which it was designed.

I understand the concerns about privacy here; nonetheless, the courts have generally accepted that for these purposes only. That is why the distinction about what is going on is so critical. They have generally accepted that the government needs to monitor compliance with various regimes, and the purpose that is being put forward for this one is seen as very important. That is where the distinction comes from.

Senator Meighen: Could someone refresh my memory as to what triggers the audit compliance initiative. What makes FinTRAC decide that they are going to undertake an audit compliance?

Ms Patricia M. Smith, Deputy Director, Policy, Liaison and Compliance, Financial Transactions and Reports Analysis Centre of Canada: Senator, a number of factors determine that we come in.

First off, we will have liaison officers in the field. They will be in contact with the reporting entities, finding out if they are comfortable with the legislation and with the regulations. I should point out that, as part of the regulations, there is a requirement to put in place an anti-money laundering compliance regime. The liaison officers will be going out and seeing if more information is needed to put such regimes in place.

Part of the job that we are doing now in terms of trying to become operational is to assess the training needs of the reporting entries. Hence, another factor that comes into place is this: What will be the training requirements of all these reporting entries?

Eventually, when we do become fully operational and start to receive transaction reports, we will have some statistics on the general nature of reporting and compliance. If 95 per cent of all entries from a particular sector are reporting, then we will know that there are some anomalies, and we will go back to the reporting entries and see if they understand the regulations and the law. Is there something they are not doing? Is the problem something to do with timeliness? Is the problem we are looking at something to do with their inability to connect with our reporting mechanism? They will be reporting largely through the Web or through a secure socket network.

There will be a number of methods by which we will be able to determine lapses in compliance. If, after looking at this and talking to the reporting entry, we determine there may be something more serious, then we would inform them that we are coming in to do a compliance examination, and we will give them feedback on the results of that compliance examination.

Senator Meighen: The reporting entity is any body that is required to report under the act?

Ms Smith: Yes.

Senator Meighen: It could be a law office.

Ms Smith: It could be.

Mr. Cullen: As I understand it, there could be situations where information would indicate that some intermediary, on the face of it, should be reporting, or there are sufficient grounds to believe that they should be reporting and the reports are not coming in. That would be cause for someone to ask the question.

Mr. Richard Lalonde, Chief, Financial Crimes, Financial Sector Division, Financial Sector Policy Branch, Department of Finance: I can give an example just to clarify that it is not just any business that will be reporting. The bill sets out very clearly that we are dealing largely with regulated financial institutions, and those are spelled out in clause 5 of the bill.

The bill also provides the ability to prescribe under regulation additional reporting entities, which we have done in the regulations that were prepublished in the Canada Gazette just recently.

As Mr. Cullen and Ms Smith have indicated, there may be instances where there may be gaps in reporting from certain sectors. I can give an example of the currency exchange business. There may be instances where, in one part of the country, FinTRAC may be receiving lots of reports from currency exchange businesses. Perhaps in another region of Canada there are very few. That may trigger a question as to why that is occurring and therefore prompt FinTRAC to inquire with those reporting entries in that region.

Senator Kroft: I am curious about this idea of reports that should be coming in. That suggests to me that you would take classes of institutions or offices or businesses and develop almost a statistical base saying that, given a certain volume in a certain industry, you should be getting a certain number of reports a month. Perhaps you are not meeting your quota. Is it that kind of analysis, or does there need to be some sort of a more specific fact-based trigger to prompt it?

The example you gave kind of fell in the middle. It was not exactly clear to me. Do you need a specific situation in order to trigger this, or will it be done on a statistical basis?

Mr. Lalonde: FinTRAC has the authority to do compliance audits on all reporting entries. As a matter of practice, it will not necessarily have the resources to visit all reporting entries on a routine basis and as such will have to decide and prioritize which entities will be conducting compliance audits. In the example I gave would be perhaps one criterion that they might use.

The legislation also provides, and I mention this in passing, the authority for FinTRAC to enter into collaborative arrangements with other regulators and other self-regulatory organizations for the purpose of carrying out this particular function of compliance audit as well.

Senator Meighen: Although you have answered the question, I am still not clear how you get this wonderful status of reporting entity. What do you have to do to get that? Do you have to be RBC Dominion Securities? Do you have to be Senator Kelleher's law office? How do you get this exalted status?

Mr. Lalonde: We use the term "reporting entity" to describe all those businesses covered under section 5 of the Act. Under this section, we talk about banks under the Bank Act.

Senator Meighen: There must be a catch-all clause.

Mr. Lalonde: There is an additional clause that allows us to respond to situations where, for example, internationally there may be new industries or new ways that money is being laundered. It allows us to add to the list of entities covered by the requirements by regulation.

As I indicated earlier, in the draft regulations that were prepublished on February 17, we have included, for example, the wire transfer business -- the Western Unions of this world -- as a business that ought to be covered by the requirements of the act. They may not be specified in the act, but they are prescribed in the regulations. We will be receiving views from that particular industry concerning that issue.

Senator Meighen: Let me turn, if I may, to the specific example of a law firm. How does a law firm fall into that status?

Mr. Lalonde: It would be in precisely the same manner as the Western Union or the wire transfer business would be included, by regulation.

The Chairman: That does not make sense.

Senator Meighen: Is my law firm obliged under this legislation now, or do I wait for a letter from you?

Mr. Lalonde: We have had extensive consultations over the last year or two with the Canadian Bar Association, the Barreau du Québec and others concerning the Proceeds of Crime Act, as well as the proposed regulations. At the association level, certainly, they are well aware of the government's intent.

The government has also prepublished these regulations and has announced this fact publicly.

Senator Meighen: With respect, I do not understand your answer to my question.

The Chairman: Is every Canadian presumed to read all regulations? Senator Meighen has an interesting tact here. Is a letter going to go out from FinTRAC to every conceivable suspect? Of course, I am using that word in quotation marks. Really, how does it start?

Ms Smith: There are a number of things. It is an iterative process on which we are just embarking. There have been consultations on the regulations that were prepublished; we are also commencing consultations on the guidelines that enumerate some of the requirements of the act.

As Mr. Lalonde has said, the regulation that pertains to lawyers is very specific. There are certain actions that a lawyer has to take before he or she becomes a reporting entity. He or she must be engaged in financial transactions. A lawyer giving out legal or criminal advice is not covered. It is only when he or she is engaged in very specific financial transactions. The regulation states that every legal counsel is subject to Part 1 of the act when he or she engages in any of the following activities on behalf of a third party, including the giving of instructions on behalf of a third party in respect to those activities. Then it lists the receipt or payment of funds other than those received or paid in respect of professional fees.

Senator Meighen: Let me pose a hypothetical situation. I am a client. I am interested in investing in a property in Ottawa. I send $500,000 cash to my lawyer in Ottawa, or $20,000.

Ms Smith: Are you the lawyer or the client?

Senator Meighen: I am the client. I am interested in buying properties in Ottawa. I have not sent the funds for the purpose of paying a fee.

Ms Smith: Your lawyer would probably then be a reporting entity.

Senator Meighen: That is my point. You will have many lawyers who are reporting entities because often, heretofore, at least, clients have given money to lawyers to hold for a future specific purpose.

The Chairman: Is that cash or cheque?

Ms Smith: It is only if it is cash for large cash transaction reporting requirments.

Senator Meighen: My colleague Senator Tkachuk just asked, if it is an electronic transfer, is it cash or cheque?

Ms Smith: If it is cash, your lawyer, as a reporting entity, must report the large cash transaction, which is any amount over $10,000. However, if you come in with a suitcase and you make a number of smaller transactions, it might be considered suspicious and would also be covered as a reporting requirment.

Senator Meighen: What is the situation if it is an electronic transfer?

Ms Smith: I am not aware that lawyers have that capacity. It is covered, yes.

Senator Meighen: That qualifies as cash?

Ms Smith: It is a transaction that needs to be reported.

Going back to how to inform everybody, we have been dealing with the Canadian Bar Association.

The Chairman: Excuse me, but there is something really wrong here. Are you telling me every electronic transfer is subject to some kind of something-or-other? There must be thousands of these transfers every day.

Ms Smith: It is international.

The Chairman: Yes, international.

Ms Smith: The amount must be over $10,000.

The Chairman: That is nuts. That is how business is transacted every day. As an example, I just transferred money electronically to one of my children. Is that a suspicious transfer?

Ms Smith: No, sir.

The Chairman: Why not? It comes under your definition.

Ms Smith: It is under the definition of a prescribed transaction.

The Chairman: Someone has to report that?

Ms Smith: That will be reported.

The Chairman: It is idiotic.

Senator Tkachuk: That is what we were trying to say the first time.

Senator Meighen: To go to the other tack, the thrust of all this seems to be an assurance that the proper reporting procedure is being followed. Once we know that it is being followed, then everybody is happy.

Ms Smith: Yes.

Senator Meighen: I do not know where that takes us. I will now come at it from the other side. Now you are saying that anything that is discovered by action in the course of investigation cannot be used as evidence in a criminal prosecution. Therefore, we are going through all this sound and fury merely to ensure that we have a nice, tidy, complete reporting function that goes nowhere except to allow someone to tick off and say, "Yes, the report was received in due and proper form."

Mr. Cullen: The first step is to get the reporting on track. Once the reporting is on track, the normal provisions would apply, I would suspect.

Senator Meighen: Let us say in the course of a totally normal compliance audit that you do come across something that is suspicious. I understood you to say that you can do absolutely nothing with it, under any circumstances. Is that correct?

Mr. Sankoff: The way it is drafted right now, that is the way it is.

Senator Meighen: What is the point of doing it?

Mr. Sankoff: The idea is that the persons who do not go further with these will be subject to prosecution for non-compliance. The idea, as we understand it, is not that persons captured by the act are going to regularly disobey the law. There are penalties for non-compliance. There are obligations in this act, and non-compliance is a problem, so the idea is that, over time, people will comply.

Senator Meighen: If I were a big, nasty money launderer, first, I would not be worried about an administrative slap on the wrist for not filling in some form; and, second, I would be sure to fill it out very accurately because I would be certain that you would be on my tail immediately if it were not filled out accurately, even though you might have told me that you would not do so. This is confusing.

Mr. Sankoff: It will not actually be the money launderer filling out the forms. It will be the other entities.

Senator Meighen: The money launderer's lawyer?

Mr. Sankoff: Theoretically, money launderers could engage in massive fraud, but in each case they will be subject to other penalties. There are other ways of deterring these sorts of activities.

Non-compliance is designed solely to deal with non-compliance. It is a regulatory function. Senators have expressed difficulty with the procedures that allow us to go in without a warrant to check for non-compliance. There is good reason why you are only allowed to go in for the purpose of non-compliance. It is quite reasonable that, in these circumstances, you cannot use that information for a prosecution.

The only reason that the centre is allowed in without the protection that has been expressed by senators is that it is strictly for non-compliance. If you were allowed to use that information, we might have a problem.

Senator Furey: Senator Meighen basically reiterated what has been said already in terms of any documentation that is found to be suspicious during a compliance. You are satisfied that section 55 prevents the use of that, is that correct?

Mr. Sankoff: The way it is worded, that is correct.

Senator Furey: Would you also say that you would be satisfied that it would include the use of it to ground an application for a warrant?

Mr. Sankoff: First, the centre is caught by various non-disclosure provisions. It is more than section 55. There is also the proposed amendment to section 54, which precludes the centre from using it in their analysis. The centre has very broad non-disclosure provisions. They cannot give it to anyone to get a warrant. The centre has no ability to get warrants on its own. Since they are precluded from disclosing it to the police -- or anyone else for that matter -- there is no way you could ground a warrant with that information. I would say you are correct.

Senator Furey: If that is case, you are back to the normal rules. If an investigating officer wanted to go into a business, he or she would have to satisfy a justice of the peace that there are reasonable grounds to believe, say, in this case, relevant records exist. That information would come outside of anything to do with a compliance audit. Is that correct?

Mr. Sankoff: That is correct, except what might be obtained during the prosecution for non-compliance, but it would not include the specifics of the records. Once there was a prosecution for non-compliance, it would be on public record.

Senator Furey: Presumably, that would follow an application for a warrant that was grounded in information not obtained through a compliance audit?

Mr. Sankoff: That is is not entirely correct. The person could be prosecuted for non-compliance. The centre has the ability to turn over material to the police strictly on non-compliance -- that is, where it is shown that there is non-compliance.

Senator Furey: A document that was found during compliance and could disclose criminal activity -- and I will not call non-compliance criminal activity; we will call it quasi criminal for now, just to differentiate -- could be used in a non-compliance prosecution. Is that what you are saying?

Mr. Sankoff: It would not be relevant to compliance, so it would not be used in that compliance prosecution.

Senator Furey: But it could be?

Mr. Sankoff: I have difficulty seeing how that could occur. If it did not relate to non-compliance, it could not be used in a non-compliance prosecution.

Senator Furey: But it could relate to non-compliance.

Mr. Sankoff: If it related strictly to non-compliance, it could be used in a non-compliance prosecution; that is correct.

The Chairman: Does anyone in your department have the vaguest idea how many wire transfers of over $10,000 are done in a year? It must be tens of thousands. Every time you buy stock in excess of $10,000, you wire the money to the stockbroker or to the person buying the stock for you. That must represent many tens of thousands of dollars.

Ms Smith: We are engaged in those discussions with the industry. We are in the consultation phase and are attempting to establish whether reporting entities will be able to use batch file transfers for reporting. That is one of the key elements we are working on, namely, estimating how many electronic transfers FinTRAC will receive.

The Chairman: You will need an credible army of people to police this.

Senator Meighen: That is another reason to review this after three years.

Mr. Cullen: This is new territory for Canada and for us. We want to make sure that the net is cast widely enough. Once you make exceptions, that is where the money launderers will go. We have also said at this committee that, given the regulatory regime we have, we can adapt and change and meet new requirements as they arise while being more flexible in terms of changing the guidelines regarding what comes into the net and what does not. At the first instance, we want to be sure that we do not create openings so that would be easy for people to come through.

We will grow and learn with our experience. I am not here to tell you that we have every single answer on every single type of transaction. We will be developing that through regulation and guidelines as this progresses.

Senator Setlakwe: In the case of compliance, you said there was a preclusion. If that occurs, what do you do? Do you not report it to the police? In the case of compliance, do you find something that is disturbing and that should be reported to the police but you are prohibited from doing so?

Mr. Sankoff: On material that is discovered, if you discover that the person has not complied, that means the regulator entity is subject to prosecution for non-compliance. The rest of the material -- that is, the material that may reveal other crime -- is not reported to the police unless it is for the purpose of the non-compliance prosecution solely.

Senator Tkachuk: If you find cocaine, there is no problem?

Mr. Sankoff: There is a general exception at common law, namely, the plain view exception. If, for example, you walked in on a murder, you are not precluded from calling the police and telling them that a murder is taking place.

Senator Tkachuk: If the cocaine is on top of a desk versus being locked up in a safe, is there a difference?

Mr. Sankoff: The limits of the doctrine have not been explored, so I cannot give a comprehensive answer. Generally, the courts hold that compliance inspections are designed to ensure compliance. If the centre went beyond its powers, I have no hesitation from saying the courts would stop them from doing so. While your situation may provide some border line examples of cocaine on a desk, the power here is toward compliance. If the centre abuses its powers, the court still retains control to censor that.

Senator Setlakwe: If you come upon an indictable offence, you would not report it?

Mr. Sankoff: If compliance is being done, it is not the centre's purpose to report on other activities. The centre is a non-investigative agency.

Senator Tkachuk: When we met last spring, we did not really get a good definition from you of "suspicious transaction." We had problems with that term, if you remember. Has there been anything further regarding that? What is a "suspicious transaction"?

Ms Smith: That is not an easy question to answer. We have written a draft guideline that is out for consultation now. A "suspicious transaction" will differ in the context in which it is found. There are few examples of an individual suspicious transaction but, rather, in a context where the transaction itself is suspicious. Let me try to simplify this.

If you are the Toronto-Dominion doing private banking, you will be looking for very different indicators of suspicion than if you are the credit union in Lower Stewiacke.

It will, in part, relate to how well you know your client and what is normal for that client's activity. If your client is a business and normally they have cash deposits of $10,000 four times a week, then that is normal. If a $10,000 deposit is made, there is no suspicion. If, on another day, $1 million is suddenly deposited, that may or may not be suspicious depending on what the bank or the entity knows about that client.

Senator Tkachuk: Last June we were under a tremendous rush to pass Bill C-22 because the government needed to get the centre up and running. How many employees do you have at the centre and what do you think its projected annual cost will be for the year?

Ms Smith: Right now, we have approximately 70 per cent of our total employment in the centre. We have approximately 70 employees. I believe our budget for this year is $20 million.

Senator Tkachuk: Last year, I believe you said it would be $15 million.

Ms Smith: I do not have the exact numbers.

Senator Tkachuk: Do you expect to have 100 employees?

Ms Smith: Right now we are resourced for around 100, yes, and we have approximately 70 in place.

Senator Tkachuk: Would you send me a letter with a more precise answer on that?

I am not sure if what I experienced was a mistake on the part of Nesbitt Burns, but I had what they call a locked-in retirement plan from a previous employment. At the age of 55, I wanted to convert that locked-in plan into what they call a RRIF. The broker requested that I produce a picture ID. I have known this broker for 15 years and therefore asked him why picture ID was necessary. He told me that it was to conform with either this act or the act passed previously, and that it had to do with money laundering. I refused to produce the ID and he informed me that I would then need to sign a waiver. I signed a waiver and sent it away. I do not recall what the waiver stated. It was small print.

I thought that odd, and that is why I worry about bills like this. Why would such a request be made? Would any of the department officials here today know the reason for that request? Why would a picture ID be required? What was the waiver all about?

Mr. Lalonde: The "know-your-customer" principle is one of the cornerstones of the international anti-money laundering standards. As well, being able to ascertain the identity of your client is key. In the current regulations, which have been in force since 1993, there is a requirement that those financial institutions covered by the previous act ascertain the identify of their clients by reference to a number of pieces of identity. For example, it could be a driver's licence or another similar document.

It is required of the security's broker or the financial institution, when opening up new business relations with a client, to ascertain the identity of the client by reference to a driver's licence, for example. There is also a requirement to record that fact and take note of the reference number. That is the current requirement.

Senator Tkachuk: In order to open an account an individual must basically put his or her whole life on paper, just to open the account, right? The paperwork to be filled out is quite thick. The situation I described referred to the RRIF account. I had already filled one in for the other account to get the locked-in plan.

What happens with the picture ID? Would it be put on a wall in the broker's office so that they can throw darts at it because I am a senator? If I had sent it in, what would have happened to my ID? Would it have been sent to the government or would it be kept in a file in the broker's office?

Mr. Lalonde: There are several ways in which securities brokers are allowed to ascertain the identity of their clients. If we are talking about picture ID, typically what must occur is that the institutions would need to ascertain your identity face to face. There is no requirement for them to maintain a photocopy of whatever picture ID you gave them' they simply must record the reference number. It is due diligence for them. It records the fact that they have actually done this.

Senator Tkachuk: I just thought it was odd.

Senator Furey: I should like to go back to this issue of documentation disclosed during a compliance audit.

It was my understanding that any information obtained during a compliance audit could not be disclosed, in accordance with section 55, among other sections, as you pointed out; that in fact if information were disclosed it would render the evidence inadmissible. I hear you saying today that if documentation were discovered it could be used in a non-compliance prosecution, which would put it in open court. Is that correct?

Mr. Sankoff: That is correct. It could be used solely for the purposes of non-compliance. It is highly arguable that material could not be subsequently used in a prosecution for a different purpose because of the manner by which it was obtained. The act makes clear, first, that the purpose in obtaining that information is for non-compliance. There are also constitutional guarantees that back up that basic premise.

Senator Meighen: I appreciate, understand and support the idea of the necessity of protecting privacy. On the other hand, Mr. Cullen, you have said that this put us right up there with our international allies in the fight against organized crime in money laundering, et cetera. If, as you say, the bill - which is entitled "An Act to Amend the Proceeds of Crime (Money Laundering) Act" -- is designed solely to ensure that people are complying with an administrative requirement and that any evidence gathered in that process can only be used for a non-compliance prosecution, how will we advance the war against money laundering?

Mr. Cullen: Senator, maybe we are not communicating well. First, if people are not complying with the act in terms of reporting then FinTRAC and the whole legislative package cannot click into operation, obviously. If people are not reporting when they should be, then how can we ever get at money laundering? Therefore, you must have a mechanism to get people who should be complying to comply with the reporting requirements of the act. Once people are reporting, then the normal provisions of the act and the legislative package click into place in FinTRAC.

The senator has raised an interesting point. If someone keeps non-complying, then that is probably a challenge and that is one of the balances that we needed to bring to the table -- balancing privacy with the need to deal with money laundering. If someone refuses to comply continually then that would be a challenge.

We are looking at a small percentage. Many organizations will want to comply, or they will comply. They may not know that they should be complying or they may not be complying in the appropriate way, and we want to ensure that they will be complying with the act and reporting.

For those players who do not comply because of the balance of privacy issue, we will be challenged. I am sure it will be challenging.

Senator Meighen: Presumably the proposed legislation applies only to people in Canada. I see a nod from behind. I would suspect that 99.99 per cent of those people are not money launderers. They may be used by money launderers unknowingly; is that correct?

Mr. Cullen: I think there may be more than you would think.

Senator Meighen: There might be. That is fine. I am still having trouble understanding how the reporting will do more than perhaps establish a pattern of carelessness or innocence, or a pattern of continuing non-compliance, which then leads you to say that there is something more here.

Mr. Cullen: Let me give you an example. If, under the Income Tax Act, someone is not filing an income tax return, in a sense they are participating in tax evasion. However, there are various forms of tax evasion. If they are not filling in a tax return, how will you ascertain whether they are evading tax? You must first of all have people reporting and complying with the reporting provisions of the legislation. Once they are doing that, then the provision kicks in. That means that transactions are analyzed. If there is other corroborating evidence that would suggest that the transactions are suspicious, that information would then be forwarded in a tombstone way to the RCMP, and so forth. Without any reports, there is nothing much that one can do with anything, I would suggest.

Senator Meighen: Fair enough.

Senator Furey: Let's go back to the question on the evidence. You are still satisfied, I presume, that there is the safeguard of the claim on solicitor-client privilege there, even during a compliance audit on any documentation.

Mr. Sankoff: Absolutely. No matter what, the solicitor-client privilege exists. To be honest, whether it in here or not, solicitor-client privilege is a claim at common law. The express protections are set out here. The solicitor-client privilege will always take precedence in this matter. If there is a valid claim of solicitor-client privilege, it will go before a judge to be tried.

Senator Furey: We all need diligent solicitors, Mr. Chairman.

Senator Wiebe: My question may be a little comical. I am not a lawyer, and I cannot always understand some of their concerns.

Let us assume that this proposed legislation is passed and that I am in the drug trade and have had a successful week. As such, I have a pile of money that I do not know what to do with it. I cannot process it through the regular system because it will be detected by your people, who are doing a great job. If I hire a backhoe operator and have him bury the money for me, will he be under the law of compliance?

The Chairman: The backhoe operator may not know what is in the container.

Mr. Lalonde: The short answer is "no."


Senator Poulin: I would like to thank Mr. Cullen and Mr. Peterson for their speedy reply to the questions we raised during our discussions on Bill C-22. The four changes that have been tabled deal directly with the centre framework legislation. I would like to ask a similar question to the one asked by Senator Tkachuk. If I understand correctly, the centre is developing. It has a staff of 70 and an annual budget of $20 million, approximately. Under Bill C-22, what is the status of the centre as a government agency?


Ms Smith: We are set up in the law as an independent agency at arm's length from law enforcement agencies.

Senator Poulin: What is your relationship with the RCMP?

Ms Smith: We are at arm's length. It is very clear in the legislation that we are at arm's length from all law enforcement agencies. I could give some specifics as to what that means.

Senator Poulin: No, I understand. What is the relationship, therefore, between the agency and the Department of Finance?

Ms Smith: That is a bit more complicated.

Mr. Lalonde: The agency reports to Parliament through the Minister of Finance. Hence, the Minister of Finance has oversight responsibilities. The legislation spells out the kind of oversight responsibilities the Minister of Finance has and the kinds of information the minister is entitled, to exercise that responsibility. It is very clear in the legislation that the minister does not have access to any personal identifying information.


Senator Poulin: Will the agency table an annual report to the House?

Mr. Lalonde: Yes.

Senator Poulin: On the issue of privacy, you said that any transaction of more than $10,000 must be reported, even if, for example, I am giving money to my daughter who lives abroad. Is that right?

Mr. Lalonde: The payment bill stipulates that all transactions must be reported. Any cash deposit of $10,000 or more must be automatically reported by the bank to the new agency.

Senator Poulin: If I ask my Canadian bank to transfer $15,000 to an American bank for my daughter who lives in a different city, is the Canadian bank required to report this transaction?

Mr. Lalonde: As things stand now, the payment bill requires any transfers of $10,000 to be reported.


Senator Tkachuk: To follow up on that, just so I understand this electronic transfer, because we are talking about cash here when talking about illegal transactions, right? You do not usually pay by credit card if you are doing something illegal; the transaction is usually done in cash. I could understand perhaps an international transfer of money, from here to Bermuda or the United States, or vice versa.

However, to clarify this, say that there is a transaction between two Canadian bank accounts. Let us say that Senator Kolber transfers $12,000 to my account in Saskatoon.

The Chairman: That is highly unlikely.

Senator Tkachuk: Would there be a requirement to report on that?

Ms Smith: No, there is no requirement in the regulations.

Senator Tkachuk: Therefore, domestically there is no requirement.

Ms Smith: No, internationally the requirement is over $10,000.

Senator Setlakwe: I wanted to ask if it were international or domestic.

The Chairman: My initial understanding was that it applied to any wire transfer, but Ms Smith has just said that it is only international.

Mr. Lalonde: The current draft regulations only concern international wire transfers.

The Chairman: That was not expressed clearly before.

The committee fully understands that we are out to get the "bad guys" and not out to abuse the "good guys" -- not to be simplistic about it. Almost all of the questions had to do with compliance. We have not heard much, if anything, about what should be done when we have those voluminous reports. We all appreciate that these are early times and that the waters are being tested as we proceed.

The challenge is huge and it is not patently clear how this is to be resolved. One of the suggestions that I would make to this committee is that we make a reference to the Senate to have a review one year from now. That way, the appropriate officials will be able to outline their experience on this issue to that date. I urge the committee to consider inviting the witnesses back in one year or so for an update. Perhaps by that time there will be some anecdotal evidence, if nothings else, about who has been abused in such cases and who has not. The witnesses could also tell us whether any "bad guys" have been caught and whether the system has worked.

With that in mind, I thank all the witnesses for their participation today. We, as a committee, will do our best to see this matter through.

The committee adjourned.