Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 5 - Evidence - Meeting of June 21, 2006
OTTAWA, Wednesday, June 21, 2006
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4 p.m. to review the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (S.C. 2000, c. 17) pursuant to section 72 of the said act.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Ladies and gentlemen, welcome to our hearings. They are being televised from coast-to-coast-to- coast. More than that, they are also distributed to the Internet worldwide. What you say reaches not only the financial capitals of North America but also the financial capitals around the world. Welcome to what the Senate considers to be a very important oversight of your work.
The Standing Senate Committee on Banking, Trade and Commerce has been mandated by the Senate to undertake a review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, (S.C. 2000, c. 17) pursuant to section 72 of the said act. That section requires a parliamentary review of the administration and operation of the act five years after coming into force of this section.
The committee has had a long history of supporting parliamentary review of legislation. As legislators, it is vitally important that we ensure that legislation is operating in the way that Parliament had envisaged. As Canada works as a global partner to make the world a safer place, it is important that Parliament ensures that our anti-money laundering and anti-terrorism financing regime is meeting Canadian needs and the needs of our international partners.
Today, we are pleased to have before us officials from the Financial Transactions and Reports Analysis Centre of Canada, more commonly known as FINTRAC, to discuss the centre's analytical process.
Please proceed.
Horst Intscher, Director, Financial Transactions and Reports Analysis Centre of Canada: Thank you for this opportunity to come back to provide more information on our business process and our analytical process. I will keep my remarks brief. I will be turning to Ms. Wing to give a brief overview of the business process as a prelude to a more lengthy presentation by Mr. Bulatovic on a sanitized money laundering case that illustrates what we do, how we do it and what the results are.
The legislation was created to set out a careful balance between the needs of investigators and the privacy rights of Canadians. This notion of the balance is at the centre of our legislation and is a defining feature of our operations. It is something we are intensely focused on at all times.
By law, we must have reasonable grounds to suspect that information we disclose will be relevant to the investigation or prosecution of a money laundering or terrorist activity financing offence or other threat to the security of Canada. To protect the financial transaction information in our possession, FINTRAC's internal process sets out clear rules to ensure that no information leaves the agency without meeting this threshold test. Furthermore, no outside agency has access to our databases, and inside our agency, access is further restricted to only those employees who do the financial analysis.
I am encouraged that in a relatively short period of time our contributions to law enforcement and to CSIS are being reflected more and more in investigations, charges and prosecutions. It took some time to produce these results, given that money laundering and terrorist activity financing are often complex and can take years to come to fruition.
FINTRAC's contribution to financial intelligence can sometimes be central to an investigation or it can identify suspects previously unknown. Our disclosures can also provide linkages that may not have been known to investigators without our intelligence.
Ms. Wing will now give a brief overview of our business process and Mr. Bulatovic will take us through the sanitized case.
Sandra Wing, Senior Deputy Director, Financial Transactions and Reports Analysis Centre of Canada: There are two handouts. I will refer you to the handout entitled ``FINTRAC's Business Process.''
The Chairman: For our television audience, I am sorry that we cannot get that up on the screen, but we will try to make that available on our website.
Ms. Wing: I will run through this graphic that will serve to recap FINTRAC's information flow. I will start on the left-hand side and move through to the right.
The category of ``Receiving Information'' starts with financial transactions that take place out in the economy; this could be a currency exchange, a money transfer or a deposit. If these transactions are undertaken by any one of the groups listed in the next column, such as accountants, banks, casinos, they could, in certain circumstances, be required to report to FINTRAC.
The types of reports that they are required to file with us are: electronic funds transfer reports of $10,000 or more; large cash transaction reports of $10,000 or more; suspicious transaction reports regardless of value; as well as terrorist property reports. We also receive cross-border currency seizure reports and cross-border currency reports of $10,000 or more from the Canada Border Services Agency.
I move to the column in the red boxes entitled ``Conducting Analysis.'' What do we do with all this information? We rely heavily on our people and technology. With respect to technology, the electronic receipt of financial information allows us to use IT systems to sift through the reports and link the financial transactions. In the initial review of these transactions, we identify patterns of suspicious financial activity and assign them to our analysts for a closer look.
As the analysts develop their cases, they focus first on the relevant transactions from our database; then they verify identities and associations among people and businesses involved in the transactions and they group the related transactions.
When do we disclose? Where the analysis gives rise to reasonable grounds to suspect that the financial activity will be relevant to an investigation or prosecution of a money laundering or terrorist activity financing offence, a report is prepared detailing the rationale for disclosure. They also prepare a disclosure statement that contains details on the financial transactions, when and where they took place, the individuals conducting them, and any accounts, businesses or other entities involved.
The report and the disclosure statement go through a series of vetting and management approvals before it is submitted to the Director of FINTRAC for final approval. This review and approval process ensures that we meet two fundamental criteria: first, that we have met our legislative threshold to disclose; and, second, that the information provided is what is allowed under our legislation.
Peter Bulatovic, Assistant Director, Tactical Financial Intelligence, Financial Transactions and Reports Analysis Centre of Canada: Honourable senators, I would like to draw your attention to the second chart you have in front of you. It is a link chart that depicts a recent money laundering case involving a number of financial reports received by FINTRAC and consisting of electronic funds transfer reports, large cash transaction reports and suspicious transaction reports concerning the financial activity of various foreign and domestic companies and individuals. This chart demonstrates that through our analysis of the transactions found in our data holdings and analysis of other sources of information, we were able to link the three separate clusters of financial transactions into a larger financial network identifying new linkages, new parties to the transactions and new accounts, thereby providing a more comprehensive financial tactical product to the recipients of our disclosure.
The separate financial clusters can be found on the chart and identified as box A in the top right-hand side, box B top left-hand side and box C bottom right.
Let me begin by describing the activity in box A. A foreign financial intelligence unit advised FINTRAC of a money laundering investigation of four individuals and a business involved in the wiring of funds between accounts with the same reporting entity in that foreign country. These individuals provided Canadian addresses and identification and were described as Canadian by the foreign financial intelligence unit.
The financial intelligence unit reported that the business referred to in the chart as company 1 in box A in the top right-hand side of the chart would wire funds through several foreign reporting entities to an account at a reporting entity in their own country. Two of the Canadians held power of attorney over this account. The funds would then be further transferred to another account at the same reporting entity. This account was also held by the Canadians.
The financial intelligence unit deemed this whole activity suspicious. No other information could be found by this financial intelligence unit regarding company 1 in box A.
Upon receipt of this query from the financial intelligence unit, our database was searched for financial transactions to determine the extent of any involvement of the individuals and business identified. We found financial activity for two of the four individuals identified in the query. In addition, we also found transactions involving company 1, the company identified by the financial intelligence unit.
According to the transactions in our database, company 1 wired several millions of dollars to multiple companies in Canada. Between box A and B, company 1 wired funds to companies 2 and 3 and 4, and to multiple other companies all located in Canada. One of the principal recipients of these electronic funds transfers was an import/export auto business located in Canada, noted in the chart as company 4 in box B.
A search of open sources yielded little information on company 1 and nothing on company 4. These searches were conducted to obtain contextual information and the nature of these businesses and determine, importantly, what is the underlying business relationship or rationale for these transactions.
We found no open source information available on company 4 in the way of advertising, telephone directory information or company website. However, through sources we were able to confirm that this company was incorporated in Canada.
We found that company 1 was not in the business of purchasing or selling vehicles or anything remotely associated to that industry. Therefore, the level of financial activity conducted between company 1 and company 4 was suspect and required further attention.
As a result of our analysis of the financial transactions involving company 4, found in box B, we found a suspicious transaction report filed by a Canadian reporting entity. The reporting entity reported to FINTRAC activity deemed suspicious with regard to the business account held by company 4. The reporting entity stated, amongst other things, that the accounts were opened several years ago and were relatively dormant; the dollar value of the wire transfers received in the two business accounts was steadily increasing; over a short period of time, millions of dollars were wired to the accounts held by this business with no rationale as to why the increase occurred; and the number of wires received from various foreign companies originated from a country with weak anti-money laundering controls. In addition, the reporting entity indicated it was suspicious that cheques were being issued from a foreign currency exchange and subsequently deposited into the reporting entity accounts of company 4. Again, there was financial activity that was inconsistent with the nature of the company's stated business.
We also found two other companies operating at the same address as company 4. They are company 5 and 6, and they form part of the second cluster of financial transactions found in box B. In fact, when an address for one business changed, so had the addresses for the other businesses for the same period. Over a period of about four years the addresses had changed three times.
Wire transfers received by company 5 were also received from the same foreign country that possessed weak anti- money laundering controls. Open source information provided a full listing for company 5 and a business description of the company as an auto import/export business. Company 5 and company 5 also share the same director.
I would like to draw your attention to company 7, which you will find in neither box A, B or C but in the centre of the chart. Company 7 is the financial link to company 4 and company 1 and to the personal accounts belonging to the two individuals which you can find in box C, the third cluster of the financial transactions.
Company 7 sent wire transfers to company 4. Company 7 also sent wire transfers to an account held by two individuals in Canada. In addition, it wired transfers to a Canadian company, company 2, which was also a recipient of wire transfers from other companies. Company 7 is, in fact, a link that links the three clusters on the financial transactions identified in the chart.
Following a search of our financial transactional database on company 7, we found a suspicious transaction report filed by another Canadian reporting entity on the two individuals in Canada identified in the lower right-hand corner of the chart in box C. The suspicious transaction report was submitted as a result of the suspicions raised regarding the activity of the accounts held by the two Canadians. The reporting entity stated that over a period of five months, two individuals received 14 wire transfers from four different companies, company 7 being one of them. Efforts were made by the reporting entity to contact the individuals, but the mail was returned and the phone number provided was incorrect. The reporting entity wanted to question the couple regarding the recent financial activity involving their accounts.
The reporting entity refused the receipt of several other wire transfers for this couple. As a result, the male appeared at the reporting entity and claimed that the funds were owed to him from his business overseas. When asked about the wires received from various foreign companies, he did not know the companies or why they were sending the payments. It is rather unusual that a customer would receive funds from multiple businesses and not know who these businesses were or why the funds were being sent. It was also unusual that a new customer would not come to the financial institution where the accounts were held over a seven-month period.
We also received voluntary information from a Canadian law enforcement agency on these two individuals. It was suspected that they were using their personal accounts to launder the proceeds of crime.
As a result of our analysis of all the information available to us, we suspected that the financial transactions identified in the chart would be relevant to the investigation or prosecution of a money laundering offence or a substantially similar offence.
The following internationally recognized indicators of money laundering were identified as applicable in this case. We had large and rapid movement of funds. We had large incoming wire transfers on behalf of a foreign customer with little or no explanation. We had unexplained dispersal of funds to multiple beneficiaries. There was use of multiple accounts at a single financial institution for no apparent legitimate purpose. There were two investigations ongoing; one by law enforcement and the other by the financial intelligence unit. There were multiple amounts paid into personal accounts without explanation. There was a reactivation of a dormant account. There was atypical business behaviour and account behaviour.
The total value of this disclosure was in excess of $21 million U.S. and in excess of $2 million Canadian. We received reports from eight different reporting entities receiving in excess of 400 electronic fund transfers, several large cash transaction reports and some suspicious transaction reports.
The Chairman: I want to advise our audience that these charts will be available on the website, www.fintrac.gc.ca, and we will provide a link from your website to our website so people who come to our website will be able to link into yours.
We have about 15 minutes for questions for this panel. I hope the questions will be short. I admonish the witnesses for their responses to be short. If there is a larger question, they are prepared to give us that information in writing.
Senator Meighen: Obviously these are not simplistic matters. FINTRAC's 2005 annual report indicates that the percentage of case disclosures involving transactions from six or more different reporting entities increased to 39 per cent in 2005 from about 18 per cent in 2004, and that the average number of transactions per disclosure increased from 62 in 2004 to 136 in 2005. What are the implications of these figures for the complexity of money laundering and terrorist financing activities, as well as for national security, which is a subject that interests me, sitting as I do on the Standing Senate Committee on National Security and Defence?
Mr. Intscher: There are several factors at play. First and foremost, we have deliberately pursued a strategy of trying to identify larger cases, larger networks because we think that would be much more meaningful and more valuable to law enforcement agencies.
Second, as our database is maturing, there is also more information in it, and so as the years have gone by, we have been able to accumulate a larger collection of transaction information. That partly accounts for the increase in the number of reported transactions.
It is difficult to extrapolate from the information that we disclose to any estimate of what money laundering or terrorist financing amounts to in Canada. The disclosures that we have made in a sense speak for themselves in that they are increasing in number. They are increasing in complexity and volume. That is true for cases related to money laundering, terrorist financing and threats. The dollar values of the transactions involved are significant and I would say in the case of terrorist financing they are worrisome.
We will see in the coming year, in our next annual report, that this pattern continues. We have not fully finished verifying all of the data that goes into it, but there will be a significant increase in both of those categories.
Senator Meighen: I appreciate that it may be caused simply by greater efficiency on your part in casting a wider and perhaps a finer-meshed net.
Do you think if you had substantially more resources that you would catch a lot of fish out there that are slipping through the net? In your view, do you have resources at least to cause some disruption in this flow of illegal transactions?
Mr. Intscher: It is always tempting to say yes, we should have more resources. Certainly we would not refuse them, but we are not particularly asking for them.
The improvement in our performance is due, as I said, to a larger database, to a particular strategy, and to our growing experience. We are now five years old. We are able to see things and do things that we were not able to do at the outset.
Senator Meighen: Have your resources increased or stayed the same?
Mr. Intscher: Our resources were increased when terrorist financing was added to our mandate. Other than that resources have stayed constant. If some of the mandate enhancements that are discussed in the Department of Finance's consultation paper come to pass, then we will require additional resources to undertake such things as registration of money services business or the implementation of an administrative monitoring penalty scheme for non- compliance, et cetera.
The key to the growth in the complexity has been the growth in our database, our strategy and our growing experience.
Senator Meighen: What steps have you taken to protect the privacy rights of Canadians as you cooperate with worldwide financial organizations and intelligence units?
Mr. Intscher: Disclosures we make to domestic law enforcement agencies and to CSIS, and disclosures we may make, because it is a discretionary power in relation to foreign entities are governed by the disclosure threshold provisions. These provisions state that the information must be suspected of being relevant to an investigation or a prosecution of money laundering or terrorist financing.
We can only disclose to foreign entities with which we have a memorandum of understanding governing the exchange of this kind of information. Information can be disclosed only to a like organization; in other words, another organization like ours. The other organization must consult us before making any onward disclosure of our information. As in the case of domestic disclosures, what we disclose to foreign entities relates to the transactions, who made the transactions, where they were made, the amounts and so on. We would not disclose information that does not meet the threshold for disclosure or that relates to our in-depth analysis. We would provide only the same kind of information that we provide domestically.
Senator Meighen: How many memorandums of understanding do you have?
Mr. Intscher: We recently signed more so there are 39 in place. In practice, we exchange information with some regularity with 9 or 10 of them. The others were put in place because from time to time we see cases that involve transactions to those jurisdictions and we may want to query them. Some MOUs involve initiatives from the other party because they want to exchange information with us.
Senator Goldstein: We heard last time, and we hear and read again today that FINTRAC is perceived internationally to be a leader in its field. We certainly comply with international standards. Last time I understood that you had 30 MOUs in place. You are growing exponentially. You now have 39 in place. If you come here at the end of June, you will have 56 in place and that would suit all of us fine.
The drive for disclosure and the need for privacy conflict in a zero-sum game. The more information you have available to do your job, the less privacy for the people about whom that information has been gathered. Disclosure and the right to privacy is a concern to all Canadians.
No one disputes that activities such as yours, which are successfully put together, with respect to money laundering and to terrorist financing, are appropriate and necessary. The question is: How much of that activity is necessary? How much of those powers do you need to do your job effectively and efficiently, while having regard for the fact that Canadians also have a right to privacy?
Put another way: In a free society, some risks have to be taken and accepted. There has to be a tolerance for some bleeding of information, and carrying on some activity that society would rather not have carried on. The price to be paid for stopping that activity to its maximum amount is also a price that is deducted, so to speak, from privacy rights.
First, where is the balance? Second, does anyone at your agency try to deal with that balance? Third, to what extent, if any, is the Privacy Commissioner, from whom we will hear later, able to interact with you to deal with privacy issues?
Mr. Intscher: First, the legislation endeavours to strike a balance between the needs of the investigative agencies and the rights of citizens to privacy. That balance was examined carefully and debated extensively when the legislation was passed.
We have also undertaken to operationalize that balance and that need to protect privacy through a number of measures. We protect the information. We screen the employees who have access to it. There is no outside access to the information. We are required by law to destroy the information after a period of time. When our analysis turns up information that might be relevant to an investigation of money laundering or terrorist financing, the information is put through a challenge process within our organization. I personally chair the disclosure committee of the agency. I am not involved in preparing the cases. My role and the role of a number of the members of that committee is to challenge the information to satisfy ourselves first, that it meets the threshold for disclosure; second, that it warrants being disclosed and is not a frivolous case; and third, that all information we propose to disclose in that case is warranted for disclosure. However, the information we disclose is only a small portion of the information we have in relation to those transactions. It relates to the identity of the person who conducted the transaction, where the transaction took place, the time, the amount and the kind of transaction, et cetera. It is known in the industry as ``tombstone information.'' Any additional information that might be desired by the investigative agencies can only be obtained through a court-issued production order.
I am strongly committed to the protection of privacy and always have been throughout my career. I place a great deal of emphasis on this protection within the agency. It is a value that is clearly understood by everyone in the agency. I do not think a day goes by that we are not reminded of it and the need to adhere to it.
Our data holdings are subject to the Privacy Act. We have provided information extensively to the Privacy Commissioner over the full life of the agency. To my knowledge, we have not had any unauthorized disclosure of information. There are no casual disclosures. Everything must be done formally and in writing. I am confident that we have not had an unauthorized disclosure.
Senator Campbell: After the last meeting, I arrived home to headlines in The Vancouver Sun of a $200-million-plus money laundering case, as a result of your activities. I want to congratulate you on that.
It was an amazing case that was well covered by the media. You were noted as being involved. Congratulations on that. Is there any oversight committee that looks at what information is released? If I take it correctly, an oversight committee is equal to a disclosure committee. Is that fair?
Mr. Intscher: The disclosure committee is an internal oversight committee. The disclosure committee is comprised of me, the chair, the deputy directors and the assistant directors of the agency. A couple of committee members are involved in the process of generating the cases. The rest of us are not involved, and we provide that challenge.
Senator Campbell: Would you ever see the need for an outside oversight to deal with the information aspect. I also realize you said that this oversight has not been a problem, which I accept.
I hate to wait until something happens to put a safeguard in place. Perhaps that might be an answer to some of our questions.
Mr. Intscher: We are already subject to that kind of oversight through the application of the Privacy Act. Any citizen who believes, or suspects, that we may have information or may be disclosing information about them may make a Privacy Act request to us. If they are not satisfied with the response from us, they can ask the Privacy Commissioner to conduct an investigation.
That has not happened. We have had a number of access requests under the privacy legislation, and I think the applicants have been satisfied with the response they received from us.
The Chairman: I think Senator Campbell alludes to the concern of this committee. We just published our consumer report. We believe in self-regulation, but we also believe in independent analysis of consumer complaints within a particular pillar of activity. If you look at our report, I think you will understand the philosophy of the committee. We are keen to solve problems, be they privacy- or consumer-related, and to come up with a mechanism within the ambit of your responsibilities that does not interfere with your responsibilities but proffers immediate and quick responses. This is something we will look at when we conclude our report.
Senator Moore: You said you have 39 MOUs. Is that for sharing information only to a certain level, or is $10,000 a threshold between those countries and your centre?
Mr. Intscher: The $10,000 threshold applies to reporting large cash transactions for international wire transfers. Suspicious transactions have no monetary threshold. They could be as low as $1.
Senator Moore: Is there a requirement to report to you, at a minimum, on $10,000 transactions?
Mr. Intscher: The regime varies from financial intelligence unit to financial intelligence unit. In some cases, the objective reporting threshold is $25,000 or $30,000. In some countries, the threshold is $2,000 or $3,000. Each financial intelligence unit, FIU, shares information according to the laws of its own country. If we had information that we could disclose that involved the kinds of transactions that can be reported to us, they would share with us the kinds of transactions they are able to receive.
Senator Moore: On the second page is the rendering of a money-laundering case. How long did it take the perpetrators to set that up, and when did you first discover it? This case is very intricate.
Mr. Intscher: We have seen a number of cases where elaborate arrangements were put in place over a number of years. The activity sometimes continued for several years before anyone was able to put together the information and identify it.
I cannot go into specifics, but we disclosed a case some months ago that involved an elaborate network of companies set up in the mid-1990s. The transaction activity was carried out at a high volume for seven or eight years. As a result of some analytical work, we were able to lift one little corner of that, which excited our curiosity, and it then became a case.
We think any number of networks like that have been operating for some time.
Senator Moore: In this case, Mr. Bulatovic, did you find the source of that money in a foreign country?
Mr. Bulatovic: When we receive electronic funds transfers from international destinations, we do not always —
Senator Moore: Where did it originate? Was it illicit crime funds?
Mr. Bulatovic: It was listed by the FIU as being suspected of money laundering in that country.
Senator Moore: Where did the money come from? Where did the launderers get it?
Mr. Bulatovic: The money came from another international destination to the country where the FIU —
Mr. Intscher: I believe you mean what activity generated the money. In this case, we were not able to learn that. In some cases, indicators make it obvious what the source is. However, because this money originated from a foreign FIU, we accept their assertion that this activity is money laundering. In some countries, the predicate offences for money laundering are restricted; in others they are wide open.
As a general observation, probably 60 to 65 per cent of the disclosures we have made relate to proceeds from drug traffic of some kind.
Senator Moore: How long did it take for these transactions to complete? How long were you watching this? Was this a matter of a month or years?
Mr. Bulatovic: It took approximately five months to put the case together, but the data of the financial transaction ranged over a two- to three-year period.
Senator Moore: Your centre has about 180 employees with an annual budget of approximately $132 million. This transaction alone was in excess of $2.1 million U.S., $2.2 million Canadian. What volume does your centre do annually? It must be hundreds of millions of dollars.
I think you are doing well and I want the public to know what you are doing.
Mr. Intscher: In our annual report one year ago, we noted that we had disclosed 142 cases, I believe, with a total value of transactions in those cases of $2.1 billion, which was more than double what we had done the year previous, which was double what we had done the year before that.
I strongly suspect that this year's annual report will report another doubling of that volume, or more.
Senator Moore: What happens to the funds you seize?
Mr. Intscher: We do not actually seize them. We provide intelligence for law enforcement agencies in the form of these disclosures, and they carry out their investigations. It took us five months just to put together this information. It would take a law enforcement team some time to conduct this investigation.
Senator Moore: Do proceeds of crime funds go into the Consolidated Revenue Fund?
Mr. Intscher: They go into general revenue.
The Chairman: I want to thank the witnesses. We will hear from two other sets of witnesses on questions relating to your activities. I would appreciate it if you could stay to hear their evidence. If you have any response to their evidence, please provide it to us in writing. We want to ensure that our hearings are balanced.
Mr. Intscher, we commend you and your staff. You have done a superb job. This work is of great importance and great interest. I think there is a sense that the committee should recommend more resources, because your job is vital to the fight against crime and terrorism. This work sends a strong message that Canada is standing on guard.
We are pleased to have before us next officials from the Office of the Privacy Commissioner and the Office of the Information Commissioner. We have Raymond D'Aoust, Kris Klein, Carman Baggaley, Alan Leadbeater, and Daniel Brunet.
We are under time constraints, so could you limit your presentation to the time period indicated on the agenda? We will put all your written materials before the committee and examine them carefully. We are here to probe and get to the heart of your concerns. Please proceed.
[Translation]
Raymond D'Aoust, Assistant Privacy Commissioner, Office of the Privacy Commissioner: Mr. Chairman, I would like to thank you for having invited us to appear before your committee regarding the review of the Proceeds of Crime and Terrorist Financing Act (S.C. 2000, c. 17), pursuant to section 72 of the said act. With me today are some of my colleagues Mr. Carman Baggaley and Mr. Kris Klein. My statement today is an abbreviated report of our submission.
I should like to mention that to review this piece of legislation is quite a challenge for an organization such as ours, even after having met with the representatives of the Department of Finance and of the Financial Transactions and Reports Analysis Centre of Canada, and after having analyzed the testimony of other witnesses that you have heard. We still do not have a sense of the scope of the problem nor do we know if the current regime is effective. Therefore, it is difficult to properly determine whether legislative changes are really required.
[English]
We know that the regime created by this legislation is novel and remarkable. The regime is novel because of the degree to which it requires the private sector organization to act as agents of the state. There are other government initiatives in which private sector entities, for example airlines, are required to provide personal information to government agencies for investigatory purposes but they are not expected to collect personal information over and above what they need for business purposes, solely for the purpose of providing it to the state. In addition, the airlines are not expected to make a judgment about what constitutes suspicious behaviour. The regime is precedent setting because it creates a mandatory reporting scheme allowing government officials to obtain access to personal information for investigative purposes without judicial authorization and without satisfying the standard requirement of reasonable and probable grounds.
As Stanley Cohen, who appeared before this committee last month, noted, Canada's money laundering agency, FINTRAC, and the entire mandatory suspicious transaction reporting, is of ground-breaking and precedent-setting character. It tests the limits of existing constitutional authority. This statute is inherently intrusive and at odds with the protection of privacy. It treats everyone as a potential suspect. It weakens existing privacy protects, for example, by effectively denying the ability of individuals to obtain access to their personal information under either the Privacy Act or the Personal Information Protection and Electronic Documents Act.
In view of the intrusiveness of the proposed Proceeds of Crime (Money Laundering) and Terrorist Financing Act, we urge the committee to consider carefully the proposals that have been made to amend it. If these proposals are implemented, the number of organizations required to monitor and to collect information about their clients and customers will increase. The amount of personal information collected will expand and more transactions will be subject to scrutiny and reporting. The number of people whose financial transactions will be scrutinized will be greater than ever and the safeguards governing the regimes will be weakened.
We understand that money laundering both rewards and supports criminal activities and we are aware that the financing of terrorist groups threatens our security and the security of the rest of the world. We are not here today to deny or to question the need to combat money laundering or terrorist financing. We are here to ask whether this legislation is the best way to identify money launderers and people who fund terrorist groups and to subject them to the rule of law.
[Translation]
As representative of the Office of the Privacy Commissioner, it is our duty to insist that the committee undertake an in-depth review to see how proportionate the proposed measures are in relation to the very problems they aim at resolving. Without concrete empirical evidence, it is very difficult to establish with certainty whether changes to the present legislation are required.
I thank you again for having invited us and we will be pleased to answer your questions.
[English]
J. Alan Leadbeater, Deputy Information Commissioner of Canada, Office of the Information Commissioner of Canada: The Information Commissioner has a concern relating not to too much secrecy authorized by the statute but the way in which secrecy is authorized. To help you follow my argument, I have handed out sections of the law to which I will draw your attention.
The first is section 24 of the Access to Information Act. This section causes a problem for us. Section 4 of the Access to Information Act makes it mandatory for government institutions to refuse to disclose any record requested under the Access to Information Act that is listed in schedule 2 the act. In section 85, immediately below that, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, adds certain provisions of the statute to schedule 2 of the Access to Information Act. That means that information provided to FINTRAC and information prepared by FINTRAC pursuant to those reports must be kept secret forever, on a mandatory basis, under the Access to Information Act.
The Information Commissioner is of the view that, while a certain amount of secrecy is necessary for an organization such as this, secrecy forever in all circumstances, with no public interest considerations, is not consistent with the accountability of this organization. There are adequate exemptions in the Access to Information Act to protect the information, but not for all time and not without meeting certain injury tests.
As this body is reviewing the body of the statute, a similar body reviewed the operations of the Access to Information Act some years ago and recommended that section 24 of the act that I just read to you should be abolished. We should not have these provisions put into statutes creating mandatory secrecy forever without regard to the careful balance between secrecy and openness contained in the Access to Information Act.
We made that esoteric point before. We lost the battle but we hope you will take this viewpoint into consideration and accept our proposal to drop section 85 from the statute. There is adequate protection for all this information in the exemptions to the Access to Information Act.
Senator Meighen: Has the Office of the Privacy Commissioner received any complaints about improper disclosure of personal information in the context of the acts we are talking about?
Mr. D'Aoust: We have received one but it is not related to money laundering.
Senator Meighen: My other question is with respect to the five- and eight-year time periods for the retention of information and reports by FINTRAC. Are those time periods consistent with other countries' practices, and are they too long or too short in your opinion?
Mr. D'Aoust: I will defer to Mr. Baggaley who has studied this extensively.
Carman Baggaley, Senior Policy Analyst, Office of the Privacy Commissioner: We have not looked at the legislation for other countries. The five- to eight-year period does not necessarily cause us any great certain. We recognize that it may take a certain period of time for FINTRAC to conduct the analysis. Our concerns relate more to the inherent nature of the program.
We are glad to see specified retention schedules, which are not always in acts. There are other programs in which there are no definite retention periods after which the information is destroyed. In that sense specified retention schedules are a positive aspect of the act.
Senator Meighen: You may have said it and I missed it. What are comparable periods in other jurisdictions?
Mr. Baggaley: I cannot answer that question. We do not have the experience.
[Translation]
Senator Meighen: Mr. D'Aoust, should we take for granted that in relation to the Review of the Proceeds of Crime and Terrorist Financing Act, the balance is upset and should be corrected?
Mr. D'Aoust: Yes, that is what we think. Commissioner Bruce Phillips stated his position in that regard the minute the legislation was passed. We think that with the proposed amendment, the balance is really threatened because privacy is much more than personal information protection.
Obviously, the officers take their responsibilities very seriously in terms of the protection of personal information. However, with the proposed amendments, we are going to widen the field in order to get information on a lot of people. This is a great source of concern to us.
Senator Goldstein: The answer to the question you were just asked made me feel a bit better, but I have another one. Your presentation is excellent, on page 3, you say:
[English]
Let me do it in English. On page 3 you state:
We appreciate the difficulty in estimating the amount of money being laundered or the overall extent of the problem, but without this information we are unable to make a reasoned assessment of whether the privacy implications of the regime are proportionate to the problems being addressed.
You were here earlier when I asked the question of your predecessors. That issue preoccupies me and some of my colleagues. What do you need or how do you determine the extent to which the amendments that are now proposed and that would cast the net wider are necessary for the efficient and effective performance by FINTRAC of its statutory responsibilities? What do you need to help us judge whether they are appropriate or not? We have no criteria and FINTRAC has not, until now, given to us any indication that those additional powers are necessary to properly execute its functions.
Mr. D'Aoust: That is a good question that warrants more thought. However, I will attempt to respond.
The Department of Finance and FINTRAC clearly need to demonstrate what has been achieved over the years, and, provide empirical evidence as to why those amendments are necessary. How would those amendments increase the effectiveness of their regime? If we had that evidence we could say it seems reasonable or not. We are not able to make that determination.
Second, perhaps an audit of FINTRAC would also shed some light as to the rationale for further expanding the surveillance network. We have not audited FINTRAC although they are subjected to the Privacy Act.
Senator Goldstein: Why do you not?
Mr. D'Aoust: It is a question of resources.
I can say, however, that FINTRAC is one entity we are considering as part of our long-term audit plan. Certainly, we can look at that more closely. We have limited resources for audit. Our audit team is roughly about six or seven people. We have recently reported, in our annual report, on a major audit that took us 18 months to complete, the audit of the Canada Border Services Agency. We would have to make that determination.
Senator Goldstein: The Canada Border Services Agency is not tracking the data it gives to the United States.
Mr. D'Aoust: That is correct.
Senator Goldstein: Did you discover that in your audit?
Mr. D'Aoust: Yes, we did.
Senator Goldstein: What would you need to incite you to put FINTRAC high on your audit list?
Mr. D'Aoust: FINTRAC it is one entity that our director general of audit and review has identified for, I believe, 2008-09. We could consider that in two fiscal years.
Senator Goldstein: I do not want my questions to be interpreted in any way as a criticism of FINTRAC. I think it is doing a particularly fine job with the resources it has at its disposal. I am worried, as we all are around this table, about the balance and the equilibrium that we have to find in our free society in connection with activities of this nature.
Senator Campbell: I will go back to the question I had with the previous witnesses regarding oversight. I am trying to match up what was said to what I read here under the various sections of the statutes. Effectively, what I thought I heard was that if I want to know if FINTRAC has information on me, I simply make an application and it is answered. If I look at section 85 of the act, nothing is answered; is that correct.
Mr. Leadbeater: Section 85 deals with information other than personal information. Personal information requests are pursuant to the Privacy Act. The Privacy Act has no similar provision or schedule. You can access your personal information without this draconian type of secrecy. If you want access to information that is more evaluative and broad-based, then there is black-out secrecy.
Senator Campbell: They would say, yes we know you but we cannot tell you how.
It seemed like a sliding scale. Is a loss of privacy attached to a dollar figure? We know that $2 billion is involved. If the problem reaches $4 billion does that mean the problem is greater so we should loosen up a bit? I believe you said in the report on page 3, Senator Goldstein. I have not found it.
Senator Goldstein: It did not say that, senator. As I understood it, it said that to properly assess the extent to which additional powers are required, the Office of the Privacy Commissioner needs to know to what extent money laundering is a problem in Canada. That is the way I understood it. It is a problem.
Senator Campbell: We know that it is doubling every year up to $2 billion.
Senator Goldstein: The question is whether doubling the resources or enhancing the resources will give the agency an opportunity to obtain yet more information with respect to money laundering or is there a diminishing return. We do not know that and only an audit, I suppose, can tell us that.
Senator Campbell: Do you have concerns — or does this fit into the area of not knowing — about where the information goes within the whole system? FINTRAC has information. Let us say they give it to the RCMP. The RCMP is tied into U.S. customs and it goes on like that. Are you concerned that there is no way of tracking where that information goes or who has access to it?
Mr. Leadbeater: I have a quick comment. I know that the broad exemption of blanket of secrecy here was included to encourage people to voluntarily report, so there is a promise that it will be confidential. However, that promise is undermined by other sections of the act that allow release and disclosure to many sources, such as law enforcement, other countries and other jurisdictions, et cetera. The promise is even misleading to Canadians to tell them there is a blanket of secrecy here when yes, there is secrecy from the Canadian population but not from a whole lot of other jurisdictions and agencies.
Mr. D'Aoust: There are ways of tracking where information goes. In fact we have done a data mapping as part of our CBSA audit. We have the methodology and the tools to do this. We have not done this data mapping with FINTRAC. Obviously, by the chart you were presented with, FINTRAC does some of its own monitoring and so on. I believe they probably do it with a great deal of rigour.
Again, I would ask whether those 34 or so MOUs have been audited by FINTRAC themselves to ensure that the recipient adheres to the principles of protecting personal information. That is what we have referred to for the last couple years as a robust privacy management framework, ergo using the internal control mechanisms, if you will, to ensure that privacy is respected.
Senator Campbell: You indicated that you have had one complaint and it was not related to money laundering. Are we trying to prevent something that may happen, or are we trying to set up a system that follows the best practices?
Mr. D'Aoust: I think the latter; following the best practices. Right now leading-edge practices in privacy protection are in those organizations that have the proper internal controls to ensure that privacy is protected. You cannot wait until you have external auditors like us, or wait until you get a complaint. We are not surprised that we have had so few complaints because citizens do not know about FINTRAC and the information that is collected on them. Therefore, it is not surprising that we do not receive complaints.
The Chairman: I have a couple of questions because you have opened up large policy issues. You can sense in senators' questions that they are all wrapping their minds around the conflicting policy goals. On the one hand, we have a growing problem of money laundering in the country, which is evident — criminal conduct and criminal activity. On the other hand, we have a policy objective of preserving the privacy of Canadian citizens. In a way, these two issues are not conflicting but at least clashing important public policy issues.
Have you looked at other jurisdictions, say the United States, to see whether they have addressed this issue within their agencies, or externally? I am interested as to whether internal reforms within agencies provide a safeguard to ensure that the objectives of privacy as best we can follow it are within the boundaries of the agency. Anyone who has made a study of secret organizations will see in a lot of intelligence agencies there are internal audits to ensure that one side of the agency does not exceed its jurisdiction. Have you thought about some types of internal checks and balances that might be adopted within the agency, within FINTRAC, that would at least give some balance at source?
If you have not thought that through, perhaps you might look at other jurisdictions and let us have it in writing.
The other thing is, there seems to be a bit of a conflict with the roles of Privacy Commissioner and the Information Commissioner. On the one hand, we want more information; on the other hand, we want greater privacy. There appear to be two important policy goals but they have an internal conflict that obviously has to be resolved in a way that both can proceed in a normative fashion.
Can you give us some advice with respect to how you could spot-check or spot-audit some of this material to assure yourself, without doing a whole audit, in the same way the Auditor General does? She does not audit the books of Canada, but she spot-checks to ensure that agencies reflect their policy objectives and at the same time meet the goals of the Information Commissioner and the Privacy Commissioner.
We have three different goals, all positive, all important, yet somehow we have to come up with the Canadian model of making them all work to the satisfaction of our Canadian citizenry.
Can you bend your mind to this? You have given us a grandiose approach and say it is a big problem. We understand it is a problem. We would like the benefit of your views as experts in your narrow activities, to see if we can come up with a formula that is acceptable. You can see all senators are focussed on these issues. We are concerned with proceeding with FINTRAC's excellent work. We know it is a deep problem. Some senators have suggested FINTRAC should get more resources to do this. You have suggested you do not have enough resources to do even a minor audit on an important agency.
We need your help on this and we also have to respect the taxpayers' dollars. Perhaps you might think about that and give it to us in writing. We will not finish our report until the fall. We may come back for other hearings as well. We may have you back as well. However, this issue is important and we are trying to proceed in a way that fulfils the public interest.
I want to thank the witnesses for coming. This next section of the Standing Senate Committee on Banking, Trade and Commerce hearings on the proceeds of crime will be taped for television, so your words will be heard from coast to coast to coast, and you will also be seen and heard via the World Wide Web.
We are pleased to have our third set of witnesses with us. Please give us your comments briefly and you will see that the senators will quickly hone in on the important issues. Welcome to you all. We will start with Mr. Law.
Warren Law, Senior Vice-President, Corporate Operations and General Counsel, Canadian Bankers Association: Honourable senators, thank you for the opportunity to appear today to provide the views of the banking industry during your review of Canada's anti-money laundering and anti-terrorist financing regime, specifically the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, and its related regulations.
I am Senior Vice-President and General Counsel of the Canadian Bankers Association. With me today are experts from banks on money laundering to assist me. We have Stephen Harvey, Global Head for Anti-Money Laundering Programs at CIBC; and Bill Dennison, Director and Anti-Money Laundering Compliance Officer for the Bank of Montreal. I would make some brief introductory remarks and then entertain your questions.
[Translation]
The Canadian banking industry recognizes its key role in combating money laundering and terrorist financing and has consistently supported the efforts of the Government of Canada to develop an effective regime in this area.
We believe that the enactment of the proceeds of crime and terrorist financing activities and its related regulations have provided, over the years, a solid platform for constructing an effective system. Banks have invested tens of millions of dollars in the development and implementation of automated systems to combat money laundering and terrorist activities financing in order to meet the regulatory standards placed upon them.
The banking industry has been proactive in meeting its obligations and we will continue to take these obligations seriously. But there is always room for improvement and we believe the current review provides an excellent opportunity to address the flaws that have appeared in the current system by making changes to the existing provisions or by enacting new measures.
[English]
Clearly, one of the most fundamental and vital objectives of the anti-money laundering and anti-terrorist financing, AML/ATF, measures must be to protect the financial system from criminal activity. However, this protection must be done in a balanced way. An AML/ATF regime is unique in that to function well, it must interact with a wide range of stakeholders, such as law enforcement agencies, government departments and financial institutions. We believe that no useful purpose is served and, in fact, the effectiveness of the regime itself is diminished by overburdening any of these entities with too many restrictions, too many rules and too many requirements. We trust that the parliamentary review will ensure that any changes to Canada's anti-money laundering measures are practical and allow legitimate business activity to flourish.
Finally, three matters should guide the AML/ATF framework. First, we strongly believe that any AML/ATF measures should be implemented with a risk-based approach. For example, with respect to appropriate non-face-to- face client identification requirements, the consultation paper states that the appropriate measure or combination thereof should be based on the money-laundering or terrorist-financing risks associated with different kinds of financial services. We endorse that approach. Second, once amendments are enacted, FINTRAC needs enough lead time to implement the necessary changes to their systems and employee training programs. Third, efforts to combat money laundering and terrorist financing would be significantly assisted if the legislation made it easier for reporting entities to receive more feedback from FINTRAC about their reports. In addition, we support measures that lead to enhanced disclosure.
Once the other panellists have made their statements, we would be pleased to take your questions.
Debra Armstrong, Chief Counsel and Corporate Secretary, MBNA Canada Bank, The Ad Hoc Industry Group: Thank you, honourable senators, for the opportunity to speak to you today. I act as the Chief Anti-Money Laundering Officer for our institution. I am joined by my colleague, Ted Wilby, from Capital One Bank. We are here today to speak to you on behalf of three other institutions, City Cards Canada, Amex Bank of Canada and J.P. Morgan Chase Bank. You will have heard the words ``bank'' in all of our names so I want to reassure you that we are certainly members of the CBA and endorse all of the views with respect to the committee's study. However, we have a particular interest to set out for you today to seek your assistance in furthering this cause.
We are credit-card-issuing banks. We have other ancillary products but we are largely credit card issuers. We have issued 14 million credit cards to Canadians in our time in the market and over the 18 months since 2005, we have processed $30 billion in transactions for the Canadian consumer base.
The credit card industry has evolved tremendously over the last 15 years as a result of several things. First, regulatory changes made in the 1990s, in response to what consumers told the government they needed: more choice, cheaper products and different ways of receiving that product. The members of the group that Mr. Wilby and I represent today believe we were the innovators in changing the market to bring to Canadian consumers exactly what they needed in terms of access to credit through a credit card product. This kind of product, as senators are aware, has become an increasingly important tool for Canadian consumers. You cannot do anything as simple as make a hotel reservation or rent a car without this kind of product available to you.
The biggest change that Canadian consumers drove was the way in which they embraced technological change. People do things differently than they did before. Twenty-five years ago, you obtained a credit card by going to your local bank to talk to your account manager over the counter. Today, things are drastically different. Consumers want alternative ways of accessing credit. They no longer go into their branches and, in fact, a number of the larger banks also adopted distribution channels similar to our own. These channels are non-face-to-face, which will become more important as I go forward. Effectively, we distribute our products through the Internet, over the telephone and by direct mail.
In the last two years, 40 per cent of Canadians who have received credit cards have acquired them through those channels, either through one of the banks that do their business the way we do or through a traditional banking channel. This number is one and a half times more people than showed up at a bank branch to apply for and receive a credit card. That is who we are. Why are we speaking to you today?
The Department of Finance is currently considering changes to the anti-money laundering and terrorist financing regulations. We have not seen the proposal. We expect to see regulations later in the fall. We have been involved in a series of discussions with the Department of Finance over a long period of time. Thus, we have a sense of where these proposals might go. Candidly, we are concerned with what we see. The concern comes with what is known generally as the know-your-customer-regulations. These regulations help to identify a customer, in particular, when you open a credit account. Today I will speak only about credit card accounts.
We are concerned that the approach the Department of Finance will take on this issue will effectively deny honest Canadians access to credit card products through these non-traditional or non-face-to-face channels. I must make this clear. We are absolutely behind all attempts and approaches to foster a robust money laundering and terrorist financing regime that counters that activity. There is no upside to our business to have our products used as vehicles to finance terrorism or to foster money laundering.
It does nothing for us, but it is absolutely critical to our business model. This business model was sought out by our regulatory regime and approved when they looked at our business plans to ensure that we are able to deliver the product to the consumer the way they asked us to.
This concern is again around the non-face-to-face channels. All financial institutions in this country are regulated through a risk-based regulatory approach. That approach effectively means that certain products bear more risk than others, certain distribution channels bear more risk, and we are regulated in accordance with that risk. It is surprising that the Department of Finance does not appear to be taking a risk-based approach to their regulation. It seems to be a one-size-fits-all approach that is not working. For example, if you enter into a private banking relationship with a wealth management organization, you have the same type of identity requirements as you would see in the non-face-to- face channels, which does not make sense.
We believe that the Department of Finance will require a secondary step at the application stage. We do not believe that is effective in any way, shape or form at detecting or deterring money laundering. This change will cause consumers to be completely inconvenienced, and may cause the consumer to abandon the option entirely. In our view, the proposal is ineffective to do what we want it to do.
We are convinced that our proposal directly and effectively facilitates the goal of the Department of Finance to establish a robust and effective compliance program around money laundering and terrorist financing. We believe that the proposal we bring to the table is more effective and does not adversely affect the channels of distribution that we have established with the encouragement of our regulator.
We ask that the Department of Finance consider a best practice that we would like to see adopted internationally. The United Kingdom and the U.S. have established a process and systems that allow for effective money-laundering regimes in the non-face-to-face environment.
We use an electronic database to match information to which a person perpetrating fraud or money laundering would not have access. These databases are sophisticated. We have good evidence from a credit reporting agency that in 8 million transactions tested, identity was confirmed in 99.994 per cent of the cases. We will never get to 100 per cent, but we believe that means is effective in detecting and deterring money laundering.
We do not understand why the Department of Finance would not look to the best practices that have been adopted internationally. Our system of regulation is similar to that in the U.K. or the U.S. We believe those countries have robust programs to counter terrorism and money laundering in their jurisdictions.
In summary, we are not here asking for leniency in the way the regulations come down. In fact, the proposal we offer enhances what we currently have. The proposal will require us to make changes that we are prepared to make because fraud does not work well with our business. We want the loans we make to be repaid and we have no interest in having our products used for criminal activity.
We share the same goal. We are struggling to understand why the Department of Finance would adopt a program that seriously undermines channels of distribution that Canadian consumers have clearly indicated they want access to, without effectively deterring and detecting money laundering, which is the ultimate goal.
The Chairman: If they are not confidential, can you give the committee your proposed guidelines that you think the Department of Finance is not following?
Ms. Armstrong: We will be happy to share that document.
Jennifer Reed, Vice-President, Public Affairs, MasterCard Canada: Good afternoon, and thank you very much for the invitation to appear before you today.
MasterCard has never tolerated the use of our systems and services for any illegal activities, including money laundering or terrorist financing, and we fully support your efforts to reduce them. MasterCard has worked diligently with our customer financial institutions around the world to comply with heightened AML procedures and measures to combat terrorist financing. It is our hope that this global experience will help you in your current deliberations.
Our goal in appearing before the committee today is to suggest alternative means to prevent money laundering and terrorist financing. Based on our experience, potential changes would be less effective in curtailing such activities than the recommendations presented by issuers here today.
In addition, changes being discussed would have a negative impact on Canadian consumers and competition in the credit-card marketplace. We want to ensure that you are aware of these unintended consequences.
The major theme we want to leave with you today is that there are ways to combat money laundering and terrorist financing without having this unfortunate impact on consumers and competition. Allow me to provide MasterCard's perspective.
MasterCard has been at the forefront of increasing consumer choice and convenience in the credit card marketplace. Eleven new card issuers that have recently entered the Canadian market have chosen to issue MasterCard branded cards. These new issuers change the marketplace in two fundamental ways. First, competition was enhanced considerably to the point where today there are over 600 credit card options available to Canadian consumers. Second, most issuers have used non-traditional means to acquire cardholders, such as direct mail, telephone solicitation and Internet. Many of those innovations in Canada originated with MasterCard issuers, including Canadian Tire Bank, MBNA, Citibank, President's Choice and Capital One. These innovations offer consumers faster and more convenient methods of acquiring a credit card, something consumers were and still are demanding. Consumers have more choice and there is more competition than ever before. Unfortunately, potential changes to Canada's money laundering and terrorist financing rules threaten to stifle those successes.
As the issuers here have outlined, those possible changes would severely curtail the ability of credit card issuers to distribute their products outside of traditional brick-and-mortar, branch-based networks. Given that many MasterCard issuers do not have such a network, consumer choice in credit cards would be weakened significantly.
Members of the ad hoc group have provided you with a more detailed assessment of what these possible changes mean to the viability of their business model. I will keep my comments at a higher level. First, and perhaps most important, the possible changes would be less effective at combating money laundering and terrorist financing than those proposed by the industry. For example, the Department of Finance has been reluctant in the past to accept electronic means of verifying identity despite the fact that a product such as Equifax eID Verifier has a 99.994 per cent accuracy rate.
The Department of Finance approach would have a serious impact on existing business models and ultimately, on Canadian consumers. Based on that, I ask committee members what kind of regulation makes more sense: effective and with minimal impact, or less effective and impractical for both consumers and industry?
Second, several years ago the federal government took concrete steps to enhance competition in the financial sector. The choice and convenience consumers enjoy today are direct successes of that effort. Indeed, your own study into consumer issues in the financial sector recommended further efforts to allow new domestic and foreign players to enter into the Canadian payment system.
The changes being discussed will have the opposite effect, shutting out new competitors and making it significantly more difficult for existing issuers without a branch network to attract new customers. Likewise, consumers will have reduced ability to switch issuers, essentially trapping them in their existing relationships.
As I mentioned earlier, MasterCard has experience with anti-money laundering and terrorist financing globally. To that end, I strongly encourage you to examine our written submission in which we discuss the U.S. and U.K. models for fighting money laundering and terrorist financing. These countries have effective measures in place that do not compromise consumer choice and convenience.
For example, the USA Patriot Act specifically recognizes that credit cards are not at high risk for money laundering or terrorist financing. The act allows for identity verification measures such as those our issuers here in Canada suggest.
The changes being discussed by Department of Finance will severely impact the credit card marketplace in Canada. MasterCard strongly urges the committee to ask the Minister of Finance to consider the alternative means to protect against money laundering and terrorist financing in non-face-to-face transactions that have been presented to the department by the issuers here today.
There is no need to choose between consumer choice and convenience, and the prevention of money laundering and terrorist financing. Both can be achieved simultaneously.
The Chairman: Thank you for your cogent evidence. It is provocative.
Senator Moore: Mr. Law, can you explain exactly what you mean by a risk-based approach? I think both you and the other witnesses are in step in saying that approach is best to reviewing this act.
Mr. Law: The circumstances that present themselves should determine the steps to take. At the end of the day, a financial institution must identify the customer with whom it deals. The circumstances of the transaction will determine what risk is involved. The steps taken to identify the customer should depend upon the risk involved.
Senator Moore: You must issue the card first, though.
Mr. Law: In the case of my fellow panellists, you have to issue the card. Remember that money laundering can occur in many other situations.
Let us take extreme examples. A mother walks into a bank branch with her 10-year-old son and wants to open up his first account. Should the same anti-money laundering requirements and identification requirements apply to that situation as opening a wealth management account, where hundreds of thousands of dollars may go through the account? You must take the circumstances into account to determine the possible risks involved in money-laundering situations. These risks are what should determine what steps to take to identify your customer.
I think the Department of Finance has recognized this. If you look at the department's consultation paper, if you look at the work that has been done by the Financial Action Task Force, and if you look at the recommendations made by this organization, which is a super-national oversight body in the area of anti-money laundering and anti- terrorist financing, the whole trend is towards using a more risk-based approach. We fully support that approach.
Senator Moore: You are not getting that response from the Department of Finance?
Mr. Law: I do not say that. In the discussions that the industry has had so far, finance has been open to what has been raised as suggestions and what position they are to take in terms of updating the laws and regulations. In my view, it is a bit premature because these discussions are ongoing.
Senator Moore: That is from the banker's point of view, but that is not what I heard from the credit card issuers.
Mr. Law: They may have their concerns, but my view is these discussions are ongoing. So far in our view, finance has been fairly open to concerns of the industry or parts of the industry. We shall see. These discussions will continue.
Senator Massicotte: Right now, all transactions at $10,000 must be reported to FINTRAC. FINTRAC does the risk assessment analysis. That is their approach.
What you are saying is, let banks do the risk assessment approach and not have the raw data that is required, as opposed to FINTRAC doing it. Is that correct?
Mr. Law: I would not go that far but I think that banks must have flexibility to understand the risk that is presented and act accordingly.
Senator Massicotte: Are you recommending that change in the existing information requirement?
Mr. Law: No: This is a common thread throughout the whole legislation. It is not related to any specific provision in the act. Throughout Part 1 of the act, it is important whatever the situation, whatever the circumstance, that you take the risk.
The Chairman: We are trying to get at some of the hard issues, so I will allow more flexibility for supplementary questions.
Senator Moore: I want to hear from the credit card issuers.
Mr. Law thinks that discussions are ongoing and that there is an opportunity, and perhaps the view, that his association may prevail. From hearing you and reading your briefs, I do not get that feeling from the credit card issuers. Do you think the issue is over or do you think there is still room for discussion and persuasion in view of the proven systems in place in the United States and the United Kingdom?
Ms. Armstrong: I agree with Mr. Law's comments that the proposals are not on the table. We have not seen draft legislation, so to that effect discussions are ongoing. Our committee and our group have actively discussed this matter with finance for two years. We thought we had resolution of this issue last year. A year later we had other feedback from finance to suggest that the matters we put forward were either rejected or clearly not heard. We are here today because those proposals will come down. We are here to reach out and seek assistance from this committee in ensuring a balanced and risk-based view is taken in light of the fact there are different ways to distribute products. Largely, there are the branch banking environments which have different ability and risks they face. Our environment is the non- branch environment. We are not as confident as Mr. Law that there is much room left for discussion.
Senator Goldstein: I have an initial question to you, Mr. Law. Did I understand you correctly to say that the CBA would prefer that information be provided back to you from FINTRAC? I am sure I did not understand what you meant by that.
Mr. Law: I think you understood me, because I will answer yes to your question.
We want to be an effective player in the anti-money laundering, anti-terrorist financing regime. We are an important stakeholder. If we received more information back from FINTRAC as to the kinds of information that is useful in an investigation, it would help from our standpoint to develop our own practices and procedures.
This issue was looked at in the 2005 consultation paper, namely the issue of the constraints on FINTRAC right now with respect to sharing information. In our view, if the laws could be changed so that FINTRAC could provide us with more information about the effectiveness and quality of the information we provide to them — that is, has the information been useful in an investigation; and has it been useful in providing more leads to law enforcement agencies — that would help the banks.
Senator Goldstein: How does that square with the obligations of FINTRAC to keep this information secret except with respect to certain disclosures it must make according to the statute?
Mr. Law: You hit the nail on the head because there must be some legislative changes made before FINTRAC can do this. This issue gets back to the balancing act that FINTRAC faces. You have the good fight against the AML and ATF on the one hand and the privacy issues on the other. From our standpoint, we could be a more effective player and stakeholder in the fight against money laundering and terrorist financing.
Senator Goldstein: ``Effective'' may be correct in the context, but that word does not deal with the more fundamental issue as to whether financial institutions would have the appropriate controls in place to ensure that people who receive this information keep it confidential.
Last time, Senator Campbell implied that he is concerned about where the information goes and the extent to which the people who receive that information are constrained. I clipped the article, which you may have seen this morning from the Ottawa Citizen, which indicates that the border agency that is giving certain information to the U.S., does not track what happens to that information.
With respect to financial institutions, some of whom are my clients so I am respectful of them, how would financial institutions be in any better position to protect the privacy of that information than others?
Mr. Law: You are presuming that this information provided by FINTRAC back to the financial institutions contains personal information. All we want — and I am looking at my experts to tell me if I am wrong — is not necessarily information dealing with the specific individual, but the kind of information that is effective in a particular situation to help fight money laundering.
Senator Goldstein: Are you talking about categories and principles of disclosure?
Mr. Law: I think at that level there is no privacy issue at all.
The Chairman: I asked if Ms. Armstrong has recommendations for the Department of Finance, and if she is prepared to share them, we would like to see them. We can make an analysis, and then get back to finance to see why they disagree.
Mr. Law: We have no problem with the position that the credit card issuers are taking.
The Chairman: I am talking about your own issues. Do you have things that are overlapping and separate in terms of your recommendations to finance? We would like to hear and then we will talk to finance to see what their answers are.
Mr. Law: It is useful to point out that we have no problems with the position that the credit card issuers have taken. We recognize that they have a specific delivery channel and they have specific requirements. The CBA, and our banks generally, have a diversity of product channels and products.
The Chairman: Do you have specific recommendations to finance with respect to your concerns. You talked about a risk-based approach? We would like to have that approach, and we will analyze it.
Senator Goldstein: I assume that by reason of the mere volume of transactions that financial institutions in Canada are engaged in, they are the most fecund source of information for FINTRAC.
To what extent do you think that criteria could be established to monitor the progress in laundering money and terrorist financing? What kind of tests or assessments could be made to determine how effective the volume of information that is now given is, as opposed to the volume of information that finance is seeking — which is more than is now available?
Mr. Law: If you allow me, I will turn the question over to the experts to deal with that issue.
Senator Goldstein: Would you allow the experts to deal with that?
The Chairman: Of course. This is an open forum.
Mr. Law: This is Mr. Dennison; he is from the Bank of Montreal.
Bill Dennison, Chief Anti-Money Laundering Compliance Officer, BMO Corporate Compliance: If I understand the question correctly, it is the ability of the banks to report large cash transactions and international electronic funds transfers, and our suspicious transactions reports to FINTRAC. It is also the ability to form any kind of analysis on the extent that those activities or the transactions are related to money laundering or terrorist financing activity offences.
Senator Goldstein: It is the extent to which the provision of that information enhances the ability of FINTRAC to do its job and the extent to which the additional information that finance is now looking at and suggesting would enhance its ability to do that.
In other words, do we need that additional element that finance is suggesting to render FINTRAC efficient or sufficiently efficient?
Mr. Dennison: Finance is not suggesting an increase in the types of prescribed transactions. It is strengthening the know-your-customer provisions within financial institutions so they know who they are dealing with. While conducting transactions for the public for our customer, we are satisfied that the transactions are for a legitimate purpose.
To the extent that we report all the transactions that we are obligated to report under the regulations, and to the extent that we have established robust compliance regimes to ensure our staff are aware of trends and situations that require the reporting of suspicious transactions, we believe we have a robust system. Reporting more prescribed transactions is not really at issue here. It is know-your-customer and the strength of the know-your-customer provisions. I do not know if Mr. Harvey has anything to add to that.
Senator Massicotte: We were limited to your summary letter only, Mr. Law. I did not read your full submission; neither did I read Finance's submission.
I want to understand. I read your letter proposing to make a risk-based system. Who can disagree with that?
What is the consequence of that approach on the banks? Are you suggesting if we do that, the regulations should allow us to report fewer transactions? What is the objective of the approach?
Mr. Law: It would be more effective.
Stephen Harvey, Senior Director, Global Head, Anti-Money Laundering Programs and Group Money Laundering Reporting Officer, CIBC: It is not really related to the amount of transactions that we would report. Rather, a risk- based approach would enable us to allocate our resources more effectively so we would devote greater investigative time and effort to accounts and transactions we deem to pose a higher risk.
Correspondingly, we would pay probably less attention to what I would refer to as a plain vanilla type of account.
Senator Massicotte: Your objective is not to reduce the cost of reporting but to do a better job.
Mr. Harvey: It is not a cost issue; it is an issue of allocating resources.
Senator Massicotte: Do you think you need to do a better job?.
Mr. Harvey: We can always do a better job. I have been in the field of anti-money laundering for close to 20 years and I do not expect to have another 20 years but there will always be enough business to keep me employed.
Senator Massicotte: Is it a major issue to our economy?
The Chairman: Are you saying it is a growth industry?
Mr. Harvey: Axe murderers excepted, criminals are in criminal activity to generate profits. Profits of crime are what we are all about.
Senator Massicotte: If you compare 10 years ago to today, is there any measure to say this problem is growing, or is a threat to our economy?
Mr. Dennison: We get our information from the same sources you do. We read the newspaper. We listen to the reports, both internationally and locally from law enforcement that indicates crime is increasing. We have heard various figures. I know the committee has heard various figures on how big the problem is — whether it is $17 billion or $25 billion — and we have to depend on the entities that have that information and can provide it.
Senator Massicotte: You people are personally involved. Do you see an increased volume?
Mr. Dennison: We report suspicious transactions based on a reasonable suspicion that the transactions relate to a money-laundering or terrorist-financing activity offence to the extent that we may not have the ability or knowledge of what the predicate offences involve. We may have a suspicion as to what is involved but we are reporting suspicious transactions.
Senator Massicotte: Has that volume gone up.
Mr. Dennison: It has gone up significantly. We have implemented detection systems.
Mr. Harvey: In five years it has doubled.
Senator Massicotte: It is a serious issue.
The beginning premise of this whole system is know your client. However, in many theories, the basis is sometimes wrong and we spend a lot of money trying to get there. Is know your client a good starting point.
Mr. Harvey: It is a good starting point but it is not a stand-alone process.
By that I mean knowing our customer adequately and properly can enable us to identify the patterns of activity that we would expect for that customer. Then it moves to monitoring. If monitoring that customer's activity identifies patterns that are outside our expectations, then we can look at it more closely. Knowing your customer, KYC, is a key fundamental at the beginning of the process, but then becomes more of a transactional or activity-monitoring process as we move down the line.
Frequently, it is necessary to revalidate the KYC information subsequently because we look at the pattern of activity that is inconsistent with what we expected. The question always is: Have the customer's patterns changed? Is the customer different now than when the customer opened the relationship? Did we get it wrong in the first place?
Senator Massicotte: ``Know your client'' seems to suggest you have met your client. The restaurant owner who has been laundering money for the last ten years — or car dealerships launder a lot of and the volume is constant — then you probably met the customer on a corner of the street and the customer came to your bank every time but it did not stop this customer from laundering money. The subsequent stuff you talked about is not ``know your client' physically: it is an analysis of the accounts to note anything unusual about the flow of money, et cetera.
Mr. Harvey: I do not want to take too much time to go down the path of analysis. However, the example you raise of a car dealership: we know fairly accurately how many vehicles a car dealer has to move to generate X number of dollars in revenue. If we see a car dealership in an unusual area that has a particularly high cash activity, then we look to see how many vehicles were moved through the facility. We use a lot of information in terms of our analysis.
Senator Massicotte: That approach is a risk analysis.
We dealt with an issue earlier of issuing fraudulent credit cards to the wrong person. The argument being made is that there is no need for face-to-face meeting. I am not sure what that fact-to-face meeting gives you. Many dishonest people look honest, but the argument being made is that the credit reference service or somebody providing a credit reference service is 99.984 per cent accurate. Do you buy that?
Mr. Harvey: I have no reason to challenge the purported accuracy.
Senator Massicotte: If you assume that is accurate, why do the banking systems use the other argument that you require a 7 face-to-face meeting? When the person wants to deposit $1 million in a wealth management account, why not simply refer to the same service they refer to in order to identify that person? It may actually be more reliable.
Mr. Law: We obey the laws as they are.
Senator Massicotte: Forget the laws; we are here to discuss amendments to the laws. How good is that argument? If it is so reliable, why do you not do it for the person depositing $1 million?
Mr. Dennison: It goes back to the risk-based approach and the diversity in the types of products and the types of risks that come along with the products. When dealing with correspondent banking relationships, when dealing with private relationships, when dealing with the account for the paper carrier who is 17 years old and making a nominal amount of money, there are different risks associated with products, accounts, types of customers, geographic allocations and what we would commonly expect to know about those customers.
We are talking about enhanced due diligence and when should you do enhanced due diligence for the individual who conducts the $1-million transaction, versus the paper carrier who deposits $25 from the proceeds of their weekly activities?
We offer a varied spectrum of products and different types of accounts to different customers from different backgrounds as far as their wealth and their ability to make different types of transactions are concerned. Customers have different requirements in the financial services industry.
I want to emphasize, and it has been stated, that the Department of Finance has consulted consistently in good faith throughout the process. To the extent that recommendations are made and the consultation process is continuing, we have to recognize that the Canadian Bankers Association does not take any issue with that process to that point, if that is a fair statement.
Senator Massicotte: A recommendation was made, including the credit card, about the American reference to how you do the check; words such as ``reasonable, prudent care,'' or some loose words regarding that issue. Is there a concern by the banks or credit card companies? The legislation gives you a sense of responsibility, saying you must be prudent and cautious and use this kind of approach to get there. Is there any concern by your members of someone suing you or someone claiming damages, saying your care was not adequate? Is that a concern for the member banks, being accused of not doing their job, given those words are somewhat loose?
Mr. Law: Banks are always concerned about the proper due diligence. That concern is important.
Senator Massicotte: Has the government ever come back and said that you were not prudent or that you did not do your job?
Mr. Law: No, never.
Senator Massicotte: If that is the case, how do we know you are doing your job if your relationships are not policed?
Mr. Law: Senator, I stand by the opinions that have been expressed by key stakeholders within the AML/ATF community. I refer, for example, to a speech given last month by the director of FINTRAC where I believe the words were that he referred to the ``sterling contribution'' that has been made by the banking community to the deterrence and detection of money laundering activities and terrorist financing activities.
Senator Gustafson: Only today, a young man in the next office, who is a secretary, walked into my office and said he had been robbed. He had $600 in a bank account and the banker phoned him saying that the money is gone. What percentage of money is small theft, in other words? In this case it was $600. He is not clear yet on whether the banker will guarantee his money. However, he got a call this morning. There are many small thefts like that.
I had the experience of having my briefcase stolen. I went through all the hoops to cancel credit cards, et cetera, because who knows. Someone obviously got hold of this young man's account number in some way and took the money out of the bank. The bank was good enough to phone him and advise him of it only today.
Mr. Law: I cannot really address the unfortunate circumstances of this case, but in my mind — and I do not know how the money was stolen — it raises the need in Canada for legislation dealing with identity theft. This issue of course is way beyond the purview of this committee at this time. This legislation is something we have been pressing for, for a number of years. I am happy to report that steps seem to have been taken by the Department of Justice recently in that regard. However, identity theft is a serious problem in this country. You may not appreciate that. It leads to a whole range of crimes, such as impersonation, forgery and fraud. It is something we must deal with in this country.
Senator Gustafson: You must have an idea of the amounts of smaller thefts and large amounts of laundering?
Mr. Law: The only thing I can refer you to is the website of Public Safety and Emergency Preparedness Canada. They make reference to the fact that identity theft in this country costs the economy $2.5 billion a year. It is a huge amount.
The Chairman: I appreciate that information.
I have a couple of questions. If you cannot answer them briefly, again, written responses would suffice.
You talked a lot about FINTRAC but we have not talked much about security within the banks. We have had two examples recently of private information that has fallen into public hands. I will not go through those particular cases. This information is highly sensitive. The question is: You are looking for a greater surveillance and an earlier surveillance of information gathered by FINTRAC or in conjunction with them; can you satisfy us briefly that your internal controls with respect to your own officials are satisfactory? I ask that because in the United States much of the money laundering happened with compliant bank officials.
Mr. Harvey: We are subject to annual audit by our internal audit departments. We are also visited on an annual basis by a regulator, the Office of the Superintendent of Financial Institutions, OFSI. I can assure senators that our controls over the information that we have plays prominently in both of those reviews. I am not aware of any problems being highlighted. If there had been any, I likely would not be here.
The Chairman: I refer you to private data that appeared in the United States in bins. That problem was a serious breach of privacy. When dealing with sensitive information in this category, we have to be satisfied that officials from FINTRAC and from the banks have the appropriate internal security. We are not quarrelling with your thesis at this moment, we are trying to understand it. We have to be satisfied that you have internal security as well.
Mr. Law: Senator, as you well know we treat our privacy obligations seriously.
The Chairman: This is just a friendly reminder.
Mr. Law: Yes.
The Chairman: Turning to the credit agencies, you have drawn our attention to the Department of Finance. Again, there are serious problems with respect to theft of credit cards. All of us at one time or another have been subject to that. Can we be satisfied that your internal controls with respect to credit card thefts are satisfactory and protect the public interest?
Ms. Armstrong: As Mr. Harvey has said, we have robust internal and external audit systems. We have regulators in often and we demonstrate our fraud practices and we are also members of industry groups. With regard to anti-money laundering terrorist financing activity, fraud is an issue that all institutions combat every day. We desperately would like to see it disappear because it costs us. That kind of fraud is different. We can find no links to anti-money laundering and terrorist financing. I agree and wholeheartedly support your statement but the two do not seem to be linked.
The Chairman: The title of this bill is Proceeds of Crime (Money Laundering) and Terrorist Financing Act. It is all part and parcel of the pith and substance of the bill. Obviously, we will look at that.
Thank you, Ms. Reed, for your brief about American practices. Persons under the USA Patriot Act deal with their risk analysis in a precise way. I thank you for bringing that to our attention. I will quote from your brief, which states: ``
...banks identify their customers ``to the extent reasonable and practicable'' and encourage the use of ``risk-based procedures'' to form ``a reasonable belief''...
All of you saw chart 2. You are asking FINTRAC to somehow make a closer and faster risk-based procedure that would allow you to have a greater access or interface with this material to strengthen your internal controls.
I cannot imagine how anyone could examine this from the risk-based analysis point of view when it starts with this flow through of $21 million that goes to a single female address to a car company to another address. How is FINTRAC, which starts in a spiral fashion, able to determine at an early stage of their analysis — a risk-based procedure based on a reasonable belief — that each bank knows the true identity of its customers? How does FINTRAC do that? How does the government do that?
Mr. Law: Senator, I cannot speak for FINTRAC. When I first looked at this chart, I saw that the scenarios are complicated. I think the chart underscores the fact that you are dealing with a complicated area of the law and a number of stakeholders that have to work together for one common goal to reduce and deter money laundering activity and terrorist financing activity.
From the banking standpoint, if this chart says anything to us it is that we need the flexibility to target the areas where we think the risk is the greatest.
Bart Rubin, Counsel, MasterCard Canada: Allow me to bring us back to the reason we came to present before the committee today. It was around the ``know your customer'' legislation under review.
The Chairman: Do you truly know your customer?
Mr. Rubin: The issue that you raised with this complicated scheme in the chart is more about monitoring transactions after we have attracted or acquired a customer. That point was in the material that we submitted to the committee. It is likely good practice for us to consider ongoing monitoring to detect these kinds of transactions but it is beyond the scope of what we submitted in our brief today.
The Chairman: First, I thank all of the witnesses for coming today. If you have second thoughts about this, please present them in writing. This issue is evolving, the scope of which is new to this committee, and we are concerned about the parameters. You have given us a greater insight into the issues.
The committee adjourned.