Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 5 - Evidence - Meeting of June 22, 2006
OTTAWA, Thursday, June 22, 2006
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:45 a.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: Welcome to this hearing of the Standing Senate Committee on Banking, Trade and Commerce. This hearing will be televised across the country from coast to coast, but more importantly, it will be seen on the internet. Witnesses, whatever you say this morning will have a global echo.
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. Section 72 requires a parliamentary review of the administration and operation of this act five years after coming into force. The committee has a long history of supporting parliamentary reviews or oversight of legislation that we passed. It is vital that we ensure that the legislation passed by Parliament is operating in the way that Parliament envisioned. As Canada works as a global partner in making the world a safer and better place, it is important that we ensure that our anti-money laundering and anti-terrorist financing regimes meet the needs of Canadians and those of our international partners.
Today we are pleased to have before us as our witnesses as we continue these hearings Mr. Everett Colby, Chairman of the CGA-Canada Tax and Fiscal Policy Committee, Certified General Accountants Association of Canada, and Mr. Jean-Pierre Bernier, Vice-President and general counsel of the Canadian Life and Health Insurance Association.
Before you start, I must say that at one time I would have had a conflict of interest with Mr. Colby because I was a lecturer and teacher for many years with the Certified General Accountants of Canada. I thank them that association because it helped me pay my way through school. I no longer have a conflict of interest because I am no longer teaching for your association, but I thought I would put that on the record.
Everett Colby, Chair, CGA-Canada Tax and Fiscal Policy Committee, Certified General Accountants Association of Canada: On behalf of the Certified General Accountants Association of Canada and our 64,000 members, we wish to thank you for this opportunity to appear before you and give voice to our thoughts and concerns on the five year statutory review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. By way of background, I am an FCGA and chair of CGA-Canada's Tax and Fiscal Policy Committee.
I am also a public practitioner. I might also add that I was the expert for CGA-Canada who appeared before this committee and committees of the House of Commons on the initial legislation and the drafting of the regulations. It is actually what lead to my meeting my wife and caused me to move to Ottawa. Thank you very much for those opportunities.
I should like to start with some brief remarks about what we think about the current legislation, as well as the direction that the Department of Finance has taken with the June 2005 White Paper called Enhancing Canada's Anti- Money Laundering and Anti-Terrorist Financing Regime. I will then be happy to answer any questions that you or your esteemed colleagues may have.
As an association of professional accountants, CGA-Canada recognizes that we have a role to play in assisting Canada's law enforcement agencies in their efforts to combat illicit activities such as money laundering and terrorist financing.
CGAs, like other professionals, enjoy a privileged relationship with their clients. Although not formally recognized by the courts as an inherent right, clients expect their communications with their accountants, as well as their files, to remain within the boundaries of this professional relationship. Indeed, our own code of ethical principles and rules of conduct embody this principle. According to the professional code, CGAs are obliged to safeguard the interests of their clients and/or employers and to keep confidential all information obtained in the pursuit of their duties.
While we have amended our code of ethics to allow us to comply with the current legislation, it is CGA-Canada's contention that access to the professional files should be limited as much as possible and that any access granted should relate only to the respective file that triggered the search in the first place. All else must remain confidential and should not be subject to arbitrary examination by FINTRAC. This is even more apparent now, given the government's proposal to give FINTRAC more flexibility to turn over information from our clients to a government agency like the Canada Revenue Agency. Although this is not the intent of the white paper's proposal, FINTRAC employees trained to recognize and analyze the criminal offence of money laundering or terrorist financing might also be expected to identify tax-related offences and disclose this information to the Canada Revenue Agency. Moreover, the Canada Revenue Agency will be able to use this disclosure to seek a production order to obtain additional information from FINTRAC. We caution the committee to be sensitive in its deliberations to ensure that an appropriate balance is maintained between FINTRAC's mandate and privacy considerations.
Another significant change proposed by the government's white paper is to require our members to not only report suspicious transactions that have been completed, which is the current legislation, but to also report attempted suspicious transactions. Personally, this is what I find to be the most problematic of all of the proposals contained in that white paper.
Currently, professional accountants are called upon to exercise considerable judgement in recognizing whether a transaction is, in fact, a money laundering or terrorist financing activity. The addition of suspicious attempted transactions will require accountants to be even more vigilant. This is a significant change in policy. Accountants should not be expected to become detectives as they attempt to establish the rationalization or intentions of their clients' actions or questions.
By way of sidebar, I moved to this country in 1989 and became an accountant in 1990. In 1991, with the introduction of the GST, I became a quasi-tax collector for Canada Revenue Agency. In 1998, civil penalties were introduced and I became a quasi-auditor for Canada Revenue Agency as well. The PCMLTFA was introduced in 1999 and I became a quasi-RCMP officer. Quite frankly, the way this is going, I am anything but an accountant and losing focus on my true responsibilities to my clients.
The increased burden on accountants will have a significant impact on the client-accountant relationship and the transparency with which this information is shared and collected. We would ask the committee to be mindful of the professional relationship between practitioners and their clients and not introduce unnecessary scepticism or suspicion. After all, when clients come to my office, they expect professional services, not an inquisition.
In closing, without benefit of a review of the guidelines referred to in the white paper, it is difficult for us to comment further on the enhanced regime proposed by the Department of Finance. CGA-Canada strongly recommends that the guidelines provide specific criteria for determining those characteristics and circumstances that might lead a professional accountant to conclude that a client is attempting a money laundering offence. When the first legislation was introduced, it took months of consultation with various departments just to come up with guidelines on how to identify completed suspicious transactions.
In conclusion, we all want to do our part in helping government diminish funds going to terrorist groups and organized crime. We would nevertheless suggest that the committee and the government find a balanced approach to protect Canadians from terrorists without treating Canadians like terrorists.
Mr. Chairman and fellow members, I welcome your questions.
The Chairman: Thank you very much, Mr. Colby. We will hear from Mr. Bernier next and then we will ask the senators for questions. I already have a list, so if other senators have questions, please raise your hands.
Mr. Bernier, welcome.
[Translation]
Jean-Pierre Bernier, Vice-President and General Counsel, Canadian Life and Health Insurance Association: Mr. Chairman, senators, thank you very much for the invitation to appear before this distinguished committee and to comment on the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, an important piece of federal legislation that affects all life insurance companies doing business in Canada.
The Canadian Life and Health Insurance Association, CLHIA in short, was established in 1894 and is one of the oldest trade associations in financial services in North America today. CLHIA has been privileged to appear before this committee on numerous occasions, most recently in conjunction with your recently-released study of consumer issues in the financial services sector.
[English]
It is well recognized in the industry that dealing with money launderers or terrorist financing, whether in Canada or abroad, is bad business. Consequently, with or without prescriptive legislation, life insurers are doing everything they can under their individual risk-management programs and related internal controls to both detect and deter money laundering and terrorist financing. Failing to do so would adversely impact the most important strategic asset of any life insurer, namely, its reputation.
William Shakespeare once wrote, ``Defend your reputation or bid farewell to your good life forever.'' Those words illustrate the belief of life insurers that it is critical to utilize sound and effective practices to manage reputation risk on an ongoing basis. We understand that this perspective is shared by the industry's regulators and by the Office of the Superintendent of Financial Institutions.
The industry welcomes this committee's initiative to review the Proceeds of Crime (Money Laundering) and Terrorist Financing Act pursuant to section 72 of the said act. It is crucial for all interested parties that significant governing legislation be reviewed regularly to ensure that its provisions are well suited to a fast-changing environment and new realities. Consistent with this philosophy, life insurers review their compliance governance and risk management programs on a regular basis.
Under the act, life insurers are ``reporting entities,'' and as such, they must comply with a number of specific requirements, ranging from client identity verification and record-keeping to reporting suspicious transactions and terrorist property. It is worth noting that life insurance agents and brokers are also reporting entities having the same legal obligations.
In order to improve the efficiency of the regime without weakening risk-management effectiveness, and in order to streamline certain processes, where appropriate, several useful undertakings have been initiated by the industry over the last few years.
For example, because duplicate oversight and monitoring is less effective, the industry asked that company examination be performed by OSFI on behalf of FINTRAC for federally regulated insurance companies. A memorandum of understanding to that effect was executed between OSFI and FINTRAC. In turn, provincial insurers are examined by FINTRAC itself.
The applicable compliance elements of the anti-money laundering and anti-terrorist financing regime, the dos and don'ts, in business jargon, are spread over seven different documents, including the act under review, the Criminal Code of Canada, OSFI Guideline B-8, some FINTRAC guidelines and the United Nations suppression of terrorism regulations. These have been consolidated in the CLHIA compliance control database for quick reference. This database is a repository of federal, provincial and territorial compliance requirements applicable to life insurers in Canada.
The key to combating money laundering and terrorist financing activities begins with awareness. A knowledge- based training application in plain language has been developed by the industry following criteria set by FINTRAC, which provides background information, identifies potential red flags and outlines the principal obligations under the law. This has been, and continues to be, one of our most popular services. It is used by many of our members for their employee training programs across Canada. It can be downloaded from the CLHIA website and customized by our members for their individual use.
Although, to the best of our knowledge, the life insurance sector has not been used in a money-laundering scheme in Canada, our member companies welcome any opportunity to learn about insurance-specific typologies that they can incorporate into their anti-money laundering training programs. To that end, the life insurers continue to look to OSFI, FINTRAC and the RCMP for such typologies.
Risk assessment is the focus of the new supervisory framework governing life insurers and every product category has been carefully assessed and rated as low, medium or high on a consensus basis. A money-laundering risk matrix has been produced for use by industry players and communicated to the Canadian regulators. As required by the supervisory framework, the higher the risk, the greater the control.
The industry developed a model for self-assessment and certification, as a reference document to assist life insurers with their internal self-assessments. The need annual self-evaluation is not a legal obligation but rather OSFI guidance and a matter of good governance.
Senior management and boards of directors are making it clear that loss of reputation due to the company's products and services being used for money laundering and terrorist financing will not be tolerated — zero tolerance.
Life insurers, in detecting and deterring money laundering and terrorist financing, must comply with a supervisory process focussed on sound reputation risk management practices and prescriptive legislation-setting standards of general application. Whereas the former is risk-based and takes into account the nature, scope, complexity and risk profile of the regulated entity, the latter is rules-based and provides very little flexibility, if any, to accommodate unique circumstances.
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act applies equally to life insurers and deposit-taking institutions; yet, significant differences exist between the two types of reporting entities.
Life insurers are unique among the financial institutions covered by the act, in part because of the length of their client relationships and the in-depth personal and health information required to purchase their products and services. They are not transaction-oriented like banks and other deposit-takers, which must manage frequent deposits and withdrawals. Unlike a deposit account with checking privileges where money is payable on demand, a life insurance contract is intended to span over many years. Accordingly, any early withdrawals or loans against insurance policies are looked upon suspiciously. There are existing controls in place to monitor these infrequent transactions and report if there are reasonable grounds to suspect questionable activity. Life insurers are not usually involved in the initial placement of proceeds of crime; rather, their products might be used in the layering and integration stages of money laundering.
Most life insurance products do not lend themselves to money laundering, only those with investment features or features of stored value and transferability. Therefore, a product risk-based approach is needed. In the United States of America, group insurance is specifically exempted, amongst other insurance products where there is no risk; reinsurance is an example.
Deposit-takers tend to deal with their clients directly whereas life insurers have unique retail distribution networks consisting of life insurance agents and brokers, as well as wholesale distribution channels with banks, credit unions, Caisses Populaires, trust and loan companies and securities dealers. Each of these distribution channels, in turn, has its own legal obligations under the law, and these obligations work effectively to mitigate money laundering risk to life insurers. That is, the life insurance company does not see the client face-to-face. It is these intermediaries who distribute the products that see the clients face-to-face, verify identification and perform other mandated functions. Legislation should recognize this reality and reduce duplication of accountability.
Traditionally, life insurers consider themselves legally bound to provide insurance coverage the moment the application is signed and premium is paid — absent fraud, obviously. Moreover, provincial insurance laws and contractual agreements do not allow for unilateral termination of contracts by life insurers except for non-payment of premium. Federal legislation needs to recognize this particular state of affairs and not impose legal obligations or requirements that unduly interfere with this basic contractual relationship unless there is a legitimate reason or risk for doing so. The proposed prior approval and contract termination requirement for politically exposed persons goes against this industry-wide practice.
Anti-money laundering legislation should recognize the unique circumstances under which life insurers carry on business. The supervisory framework governing federally regulated financial institutions recognizes that institutions will adopt individual approaches to management of reputation risk, taking into account their circumstances. For example, it might be legitimate for deposit-takers to have their obligation at the front end of a transaction, whereas insurers would have their obligations focussed on the back end.
We look forward to continuing to work with the Department of Finance and regulators to ensure that the anti- money laundering framework contemplates the unique nature of the life and health insurance industry and the money laundering and terrorist financing risk susceptibility, which is consistent with the existing risk-based supervisory framework.
We thank the committee for the opportunity to comment on this important piece of legislation. The industry stands ready to provide any further input that the committee would find useful in the context of this review.
Senator Moore: Mr. Colby, as a lawyer I fully understand that the solicitor-client and the accountant-client relationship are based on confidentiality. What do you think you would be required to do under the white paper and its proposed legislation? How are you qualified to be a quasi-policeman?
Mr. Colby: Under the existing legislation when we talk about large cash transactions, it is a bright-line test. You can be in compliance with the legislation just by not accepting cash. It is very easy to comply. With the suspicious transaction reporting as it presently stands, where the transaction has to be completed, as professional accountants we are trained in analyzing financial transactions. For us to look at a transaction that has been completed, we can apply the guidelines and guidance that has been provided to try to make a subjective determination that this transaction could, in fact, be related to a money laundering or terrorist financing offence. It is a very subjective test. It is not very objective. It requires the exercise of judgment — judgment that, as accountants, is not a normal part or course of our professional training. After the initial legislation came out, our association spent a great deal of time and resources in providing training to try to impart some foundation of judgment for our practitioners to act and comply with the legislation.
The problem with the suspicious attempted transactions is that we are now talking about peoples' motives, thoughts and intentions. There is not necessarily any hard data or transactional information to look at or review. In theory, it would be nice to know what everyone is doing. However, in my opinion this proposed legislation will impose an aspect of the law at which people will fail because they will be fined if they do not exercise that judgment. All of the guideline papers and so on are wonderful and FINTRAC did a great job in developing some of them. Even though it was subjective, there were at least some criteria that could be used. We are talking about peoples' thoughts. When I sit across the table from a client, just as you as a lawyer would when interviewing or discussing your client's case or situation, is my mind focussed on the issue at hand? Is my mind focussed on their tax or accounting needs, or am I sitting there wondering if the client is trying to pull a fast one and commit a money laundering offence? If I so much as think that they might be ready to pull a fast one, I have to report it.
Senator Moore: Yesterday, FINTRAC representatives brought in a flow chart of a recent case. I see that Mr. Bernier has a copy.
The Chairman: For our audience that information is available at www. fintrac.gc.ca.
Senator Moore: The FINTRAC officials indicated that it took seven to eight years to set up that structure. How would you monitor that client? How are you supposed to judge that client, or what if you are wrong in your judgement? What if you are wrong and the client looses his or her reputation because of an erroneous investigation? What happens then? Have you thought about that possibility?
Mr. Colby: These were fears when the initial legislation was enacted. That is why they brought in the protection that as long as you filed a report in good faith you could not have such civil proceedings brought against you. That protection is there because they realized when we moved from a very bright-line test, where it used to be just the reporting of cash, to including a subjective reporting mechanism, such as the suspicious transactions, human mistakes could be made. There is protection for that type of mistake. Once a company has moved forward and conducted transactions, we are more likely to see that something is wrong and we can observe a transaction that does not fit the good business model. As accountants, we flow chart all the time and we would notice an improper transaction. We are trained to make that kind of observation. However, under this new model, even before the company gets started we are supposed to make a determination of whether the client will do something suspicious. We have to guess at what the client is thinking.
Senator Moore: What happens if you do not guess?
Mr. Colby: If I do not guess, I face the penalties. I believe this is a punitive measure because the judgment of an accountant, a life insurance agent or a life insurance agent is far different from the judgement of a FINTRAC employee.
Senator Moore: It is not your mission; it is your practice.
Mr. Colby: Correct. It is not that we do not want to comply. I believe the vast majority of Canadians believe that we would do anything to try to stop money laundering. However, if you place unrealistic burdens on us that in many cases we cannot meet, then send me my fine now.
Senator Moore: What if you are wrong and the company is quite innocent? What about that company's reputation? How does it get put back to where it was, that is, off the federal review list or whatever? Has that been considered?
Mr. Colby: In theory, it was discussed when the first legislation was introduced. It was one of the reasons for limiting the disclosure from FINTRAC to other agencies. My reporting as an accountant to FINTRAC was protected. I was not supposed to tell my client it was a legal obligation. We have modified our engagement letters and representation letters to point out to clients that this could put us in a position of conflict and my professional obligation is overridden by my lawful obligation. If I think something is happening, I must report it. We have made every attempt to make the client aware of the potential for reporting. However, if there is a leak of information and there is an investigation, then it has already gone through FINTRAC's hands and it is out of my control. If the reputation is damaged because the public finds out, I suggest that is not because of any actions the accountant may have taken but, perhaps, improper disclosure of some sort. That is why we expressed our disclosure concerns to Canada Revenue Agency. Let us face is: Information is power. The more information that is disclosed, the more it could potentially lend itself to misinterpretation or misuse. We believe that FINTRAC's powers of disclosure to organizations such as the Canada Revenue Agency should continue to be very limited.
Senator Moore: I have a question for Mr. Bernier. On the bottom of page 2, you mention, ``...life insurers review their compliance governance and risk management programs on a regular basis.'' When you state ``regular basis'' is the basis on page 5, where you state,
Under OSFI guideline B-8 on deterring and detecting money laundering, the effectiveness of risk management and internal controls pertaining to money laundering and terrorist financing risk must be subject to yearly self- assessment
Mr. Bernier: Yes, senator, that is the basis.
Senator Moore: You do a yearly self-assessment.
Mr. Bernier: Yes.
Senator Goldstein: I am intrigued by the likelihood or lack of likelihood that life insurance would be used as a vehicle for money laundering. It seems to me that if insurance products are by definition, products where a premium is paid on a periodic basis and cash surrender values build up with some not insignificant delays. It seems unusual to me that money launders would be willing to wait five, six, seven, eight years to get back money that they may have paid initially and they may have paid it by cheque and not by cash. They are more likely to have paid it by cheque. I cannot imagine how one pays an insurance premium in cash unless you pay by the month and walk into some office and pay $12 a month. I do not even know if those kinds of products are sold anymore. What kinds of incidents of suspicious transactions or reporting transactions are found in the life insurance industry?
Speaking of duplication, if indeed someone takes out cash surrender value of a policy which has accrued over some considerable period of time, what is that person to do with that money except launder it elsewhere and therefore have it captured by the financial institution or other institution which deals with this money? In other words, I cannot understand why the life insurance industry is subjected to this law.
Mr. Bernier: With respect to the first question, the absence of real life cases, your observation is corroborated by a comment made by a senior RCMP officer in November of last year at an OSFI information seminar on anti-money laundering and terrorist financing for the financial sector, which was very well attended at the Royal York Hotel. This gentleman, with many decades of experience in the RCMP fighting money laundering and terrorist financing, was asked how many cases of a life insurance company product being used for money laundering purposes he has come across. His answer was zero. He was not aware of any. However, we still have an obligation to protect our reputation. We do have some red flags in our training application program. For example, if you buy a life insurance product and you have a 10-day free look and within that 10-day free look you decided to have your insurance cancelled and your premium back then the life company will naturally give you a cheque, which you will take elsewhere.
Life companies are not involved at the placement stage of money laundering but they may be involved in the layering stage. This complicated chart from FINTRAC gives a good example of this involvement. It is extremely complicated and it is meant to be complicated. The money enters the financial system at a point of entry which is identified in the upper left corner by a purple arrow. That is where we are involved. We do not take cash generally. However, at the layering stage, a professional money launderer will simply layer transaction on top of transaction on top of transaction, with the goal of blurring the audit trail, and when you look at a chart like this for professional money laundering it is mission accomplished. It is very, very difficult. That is their purpose. We are very aware of this so we are constantly on the watch.
Senator Goldstein: I find it very difficult to understand that there would be money on the way out which would be identified as proceeds of criminal activity without that money being proceeds of criminal activity on the way in and, therefore, withdrawn from a bank or withdrawn from some element of the system which would create the red flag on the way in. Notwithstanding your excellent explanation, I cannot understand how money laundering would exist in the life insurance industry and, if it does, it would be minimal.
Mr. Bernier: In the last 12 months, life companies have reported almost 40 suspicious transactions.
Mr. Colby: If you go from a simplistic point of view, we assume that most banking institutions operate the same way Canadian or U.S. or European banks operate. For a launderer to utilize a bank in an offshore jurisdiction that does not have the same controls, he gets a Visa card from that bank and his premiums are paid by Visa. He can be anywhere in the world. That is how the launderer would filter it through to pay for automobiles, jewellery and life insurance policies. The launderer is no longer travelling with a duffle bag full of cash.
Senator Goldstein: Mr. Colby, we are not talking about laundering $700 worth of annual premium. We are talking about significant amounts of money. I cannot understand why anyone, even a money launderer, would be using significant amounts of money to buy life insurance, with all due respect. It does not make too much sense.
How do you square your reporting activities or your members' reporting activities with the voluntary obligation of confidentiality that life insurers assume vis-à-vis their clients?
Mr. Bernier: One of the exceptions under PIPEDA, the federal privacy legislation, to disclosing information is when it is required by law. When you file a suspicious transaction, obviously you have to identify certain personal information under requirement of law, so we do disclose that information.
Senator Goldstein: Do you disclose to your insured clients, or the applicants, on the way in that you may disclose?
Mr. Bernier: No, it is prohibited by the money laundering legislation.
Senator Goldstein: Does the legislation prohibit even the assertion that you may disclose? I know that the accountants in their engagement letters speak about the fact that information may be disclosed.
Mr. Bernier: There is a prohibition against disclosure.
Senator Goldstein: Mr. Colby, the accountants in Quebec, contrary to accountants in other parts of the country, have the same obligations of confidentiality as lawyers. They are subject to exactly the same prohibitions in the civil code or the same obligation of confidentiality as lawyers. I wonder why you have not made common cause with the Federation of Law Societies, at least in so far as the Quebec accountants are concerned, because they are in exactly the same position as lawyers in Quebec.
Mr. Colby: We have a duty of confidentiality, but we do not have a legal right of privilege. That seems to be the difference. When it has been challenged in court, our duty of confidentiality is not held in the same light as that legal duty of privilege. I am not a lawyer, so I cannot necessarily explain the legal foundation, but there is a difference between privilege and confidentiality. While we share confidentiality with lawyers, we are unable to assert privilege, unfortunately.
Senator Angus: Why are you, Senator Goldstein, restricting it to Quebec? I understood the difference the witness has just explained applies all over Canada.
Senator Goldstein: There is a privilege, Senator Angus, of a different nature but a privilege notwithstanding, that exists in Quebec and that has been recognized by the courts. It is not the same kind of privilege that lawyers have in Quebec, but a privilege notwithstanding in terms of precluding, for instance, the production of working papers and that kind of thing, not as a function of confidentiality but as a function of privilege.
The Chairman: As Mr. Colby has pointed out, when it comes to tax transactions of a questionable nature, there is not a question of privilege at all. There is a very positive responsibility to ensure that they do not comply or are not complicit in tax schemes that would fall in the face of the tax objective of the act, so there is no confidentiality there.
Senator Goldstein: That is a bit of a different issue, and there is confidentiality there.
The Chairman: With all due respect to the witness, is not there an overlapping responsibility? The witness, as I understood his evidence, said they have a lot of onuses to decide what they have to do as opposed to carrying out their work as accountants. They have tax responsibilities and now FINTRAC responsibilities. He is saying they are being overloaded with responsibilities. Having said that, the tax responsibility is clear under the law, and Parliament has passed that.
Senator Goldstein: As I understand it, the accountants are prohibited from participating in a tax evasion scheme, but if they are aware that their client has participated without their intervention, they incur no liability. They were not obliged to divulge. This is different.
The Chairman: Mr. Colby, we are trying to look at the various onuses.
Mr. Colby: I can appreciate your concern for the onus that is placed on all of us. Whether you are CGA, a CA or CMA, the accounting profession as a whole has embodied within that profession a duty of confidentiality to protect our clients and employers' affairs, business transactions, tax or otherwise. This Parliament introduced civil penalties legislation back in 1998 that places a liability on me if I knowingly or in circumstances amounting to gross negligence allow a client to carry out a transaction that would be clearly contrary to the law. However, that is separate and apart from the onus that we are talking about here.
When this initial legislation was passed, all three of the professional accounting bodies had to amend their code of ethical principles and rules of conduct to allow us to comply, because previously, with our duty of confidentiality, the only thing that allowed us to disclose client information was a process of law such as a subpoena. We have all since amended our codes to allow us to comply with a statute, but I must say I have a problem because we already have professional obligations to know our clients from a business perspective and to carry out the standards of our profession. We can be held accountable to that by our professional regulating body and, if we do something that is negligent and we are shown not to have gone far enough to know the business to make a judgment call, we can get sued for it, but that is a judgment call on business activities, not on criminal activities.
We are not trained as investigators. We are not trained in law enforcement. We are now going back to professionals who are already in some respects and in some opinions overregulated. Now we say we will start from ground zero and try to teach you how to exercise judgment, to recognize criminal activity, which we have done. All of the professional bodies have done it, but this is going even further. Now we will be required to be like psychologists to try to guess what our clients are thinking.
Overall, the white paper proposals are good. We were surprised that they did not require the increased client identification on suspicious transactions in the first place, and we actually advised our people to do that anyway. The only thing I have a problem with is this notion of attempted transactions, because that is placing an unrealistic onus on the profession. If you fine me for not exercising that judgment, you had better give me some pretty darn good tools to meet that obligation. I am not sure we can do that.
Senator Tkachuk: Yesterday, the Canadian Banking Association argued for a risk-based approach where banks would focus on certain kinds of transactions. Do you support the CBA approach or the current approach where FINTRAC receives and reports on transactions that meet the criteria, like the $10,000?
Mr. Colby: Cash transactions are an objective test, which is very easy to implement controls, systems, and so forth, as most major financial institutions, insurance companies and others have been able to do. That is one side of the equation. The other side of the equation is where you need to exercise judgment. I am a firm believer that ethical behaviour cannot be legislated. If someone does not want to comply, that person will not comply no matter what the legislation says. Moving to a risk-based approach going toward identifying the risks and putting your eggs in that basket to minimize those risks would be a wonderful addition. Does it make it easier to administer? No, it does not make it easier because it is subjective and left open to judgment. However, I think it will be more effective because it will allow for different sizes of accounting practices or, as was pointed out by my colleague, the varying aspects of different kinds of financial intermediaries. It allows them to use that judgment that you are expecting us to use to assess where we might be at risk, because you know what? We do want to protect our reputations. Allowing us a more risk- based approach would bring about more efficiency and effectiveness to the system.
Mr. Bernier: The life insurers take the same position. In fact, in the United Kingdom, the Financial Services Authority did a review of the U.K. money-laundering regime and made some proposals. They see the benefits of a less prescriptive approach as giving firms and senior managers the flexibility to implement systems and controls in the most appropriate way for their firms.
The Chairman: Mr. Bernier, would you table that with us, please? We are looking for comparative analyses as well. We have seen pieces of it from the United States, but it would be helpful if that could also form part of our record.
Senator Tkachuk: Just so I am clear, Mr. Colby, how do you perceive when a report should be made to FINTRAC from the paper presently put forward by the Department of Finance and FINTRAC? At what point would you report, and what would you report?
Mr. Colby: This proposal does not propose a new reporting regime. We have the existing reporting regime with which people have finally learned to deal.
In this paper, they are adding an extra moment in time when that needs to be done, which quite frankly is not clear. It says that reasonable measures to identify the client must be taken, which we can try to define later. However, it also says that a suspicious attempted transaction is to be reported. When is it an attempted transaction? Is it when the person thinks about it or when they speak about it or when they have told a colleague about it? There is no indication or guidance on that point. With the existing suspicious transaction reporting, it occurs when the transaction is complete, making a clear demarcation point so that one knows when to report. It would be rather difficult to try to establish a moment in time that could be consistently applied across the board for when an attempted transaction is suddenly reportable.
Senator Tkachuk: I asked what you perceive it to be but you do not know.
Mr. Colby: I could offer you a guess but I do not want to begin to speak for FINTRAC or for the Department of Finance. If you require the reporting of an attempted suspicious transaction, there needs to have been some kind of paperwork, contract, agreement or negotiation entered into that would lead to a transaction. No one would sit in my office and suddenly say they were about to commit a money laundering offence. Someone might say it but he or she could be just joking. Without a guideline, we have to wonder is that the moment in time when it would be considered a suspicious attempted transaction.
Senator Tkachuk: If you were to come across unusual lumpsum amounts in the books of a business, it might trigger your curiosity but it would not necessarily mean that money laundering was taking place.
Mr. Colby: That is very true. We spent a great deal of time negotiating these regulations and that would not be a situation when accountants would be liable to report. Under the current legislation, any activities conducted as an audit or review or compilation of financial statements, where you are working with the transactions and carrying out that activity as part of an engagement, you are exempt from reporting.
The reporting is a requirement only where you are acting as an intermediary for your client and this brings it back to my initial example. The client comes says he want to sell his business and wants me to be part of his team and act on his behalf to negotiate the sale, and we will explain the numbers. I would now be acting as an intermediary. If he completes the transaction and, based on the other parties involved, I think it looks a little suspicious, I would have to report it. I can deal with that. When he initially asked me to be a member of the team, was I then acting as an intermediary? Was I an intermediary before I conducted the transaction for him? So much of it is unclear as to where the obligation would arise that I am doomed to fail.
Senator Tkachuk: Let us say that you reported and jeopardized the sale and the sale fell through even though it was a legitimate sale. Are there civil remedies for such a case? The person who is selling cannot sue you and he cannot sue the government.
Mr. Colby: Under the existing legislation there is a protective clause, I believe it is 80 that says as long as I have made a report in good faith, I am precluded from any kind of civil liability.
Senator Tkachuk: I am wondering about the options for the client.
Mr. Colby: The client takes a loss.
Senator Tkachuk: The client loses the sale because you are scared all the time, right?
Mr. Colby: Quite potentially, you are right. Accountants have always been accused of being boring. We are not boring people, we just get excited about boring things and we like to do things in an orderly fashion. Under our code, we are allowed to comply with the legislation but only report what is required. We would be in breach of our code of ethics if we volunteered information not required. Based on the current requirements of what needs to be disclosed, if that client sustained a loss following my actions, it would not be as a result of anything that we might have disclosed because typically only tombstone information is reported. Rather, it would be because someone has drawn inferences from the transactions, which would be a law enforcement matter more than a matter of the accountant's actions.
Senator Moore: Mr. Colby, on page 3 of your presentation you say, ``without benefit of a review of the guidelines referred to in the white paper.'' At the bottom of page 23 of the white paper, dealing with reporting of suspicious attempted transactions, it says, at the second bullet, ``Guidance would be provided to reporting entities to assist them in determining when to report.'' That would seem to be the guideline that you do not have.
Mr. Colby: With all due respect, senator, yes, those are the guidelines we do not have. That happened in the first legislation. It equates with buy a car and I will tell you the interest rate later. It is not a fair way to do it.
Senator Tkachuk: Mr. Bernier, on page 7 of your presentation, you talk about life insurance companies and how ``their products might be used in the layering and integration stages of money laundering.'' Could you explain layering?
Mr. Bernier: Those are the three stages of money laundering. First, there is the placement, whereby the criminal will simply place the cash into the financial sector. It might be a hockey bag full of cash, for example. Life insurers generally do not take cash so the risk at the point of entry for life insurance companies is extremely low.
Senator Tkachuk: What about an insurance broker? Do clients always pay the life insurer?
Mr. Bernier: Do you mean the insurance broker as opposed to the securities broker?
Senator Angus: He means the insurance broker.
Mr. Bernier: That is payable by cheque only, payable to the life insurance company.
Senator Tkachuk: The cheque is from the client.
Mr. Bernier: That is correct. The first stage is placement of the cash. The second stage is what FINTRAC calls the ``layering stage,'' whereby the person piles financial transactions of all kinds, such as the purchase of mutual funds, one on top of the other to blur the trail of money. This is well illustrated in the FINTRAC chart, which is extremely complicated. We are at risk in this layering stage because someone might buy an investment product from a life insurance company and then simply ask for a refund. As long as the money is with the life insurance company, the risk is almost nil, but when the money goes out at a request — the back end of a transaction — then we become suspicious if certain red flags present themselves.
The third and last stage of money laundering is the integration. After many financial transactions have been executed by the criminals, they simply buy a company. For example, they might invest in Bell Canada. That is the integration because they integrate the ``clean money'' into the economy.
Senator Angus: It is a legitimate transaction.
Mr. Bernier: That is correct.
Senator Tkachuk: The clean money could be put into an RRSP or Mutual Fund.
Senator Massicotte: My cheque for personal insurance is payable to the insurance broker for the insurance company. I have never tried to pay in cash but I would not be surprised if I could do so and my policy is in excess of $5,000.
Mr. Bernier: We represent the life and health insurers. The property and casualty insurers are a complete and separate industry and I do not know their practices. However, generally, in the life insurance industry, you make your cheque payable to the life company.
Senator Massicotte: If I went to see my life insurance broker, he would not accept cash.
Mr. Bernier: No; that is a policy. You will have to write a cheque — that is the practice.
Senator Angus: Gentlemen, under the present law, as I understand it, the obligation is triggered once the transaction is completed. It might be too late by then, like closing the barn door after the horses have escaped. Mr. Colby is suggesting that the bill insists that you people have a supernatural ability to imagine what is in the minds of the client. You are saying that goes too far, which seems to be logical. However, somewhere between that point and the completion of the transaction you will get some inclining of a problem. You are not naive people. You people are all professionals; the other folks that are getting this obligation to report are the same. Could we not come up with a solution to this problem? If we do not come to a solution, it will be a sore point for all of you.
Mr. Colby: Forgive me if my comments regarding the difficulties with attempted suspicious transactions were only applicable to accountants. I do not think it should be part of the legislation, period. I think it places an undue burden on all reporting entities. You are implicitly putting a very subjective test in the legislation, where people will be fined quite heavily if they do not exercise the judgment that some agency thinks they should have exercised. I do not think that it is fair or equitable or just to place such an onerous burden on them.
Let us remember that money laundering and the proceeds of crime are criminal offences. While there may be a move to try to go that way, you still have to commit a crime before you can be guilty of it. There has to be some evidence to show that a crime would be committed or was committed. In such a situation, as has been pointed out by some of the esteemed senators here, what if I am wrong? What is the basis for me guessing that this could be the intent?
Senator Angus: I am not arguing with you, so do not get me wrong, but we have been hearing from FINTRAC, from the law enforcement officers — that knowledge is power. Even if the crime has not been committed, there is something that your nose is telling you — that this is not kosher — so you pass on the information. That might just be the piece of the puzzle that the law enforcement people need to close in on a whole gang and a network.
Mr. Colby: If there was something for me to give; but where there is no transaction as yet — someone has only contemplated this — what am I supposed to provide to FINTRAC, other than anecdotal, third party information that I think Joe Smith is going to do something.
Senator Angus: Mr. Colby, FINTRAC might know Joe Smith, and might have his name in the records. Mr. Smith might be under suspicion already. Your information might enable FINTRAC to set up a sting operation on Mr. Smith. I bring to your attention the operation in Montreal yesterday where there were three former Magog police officers involved. I do not know if the other senators saw it this morning, but it has great relevance to our hearings here today.
Mr. Bernier: There is a huge logistical problem attached to the reporting transactions under the current regime. I do not know the situation in Canada, but indications are that the United States has huge storage warehouses the size of football fields that contain reported suspicious transactions. It will take 300 years to go through all of them. If we were to add the attempted transaction to the existing storage, it will more than double, at least in my industry, because before a life insurance agent makes one sale, there are many attempted transactions before that — maybe 10 or 20. If it took seven years for FINTRAC to come up with that chart, it would probably take them 15 years to add all attempted transactions.
Senator Angus: We have heard that the amount of money out there in the Canadian system alone is anywhere from $11 billion to $40 billion. The chairman said it might be $150 billion. It is that serious. Is not the thin edge of the wedge at least better than nothing?
The nexus is either we will allow attempted transactions or some facsimile to be reported or not. If it is felt by the authorities that they need that information because patterns of behaviour take place; even if all of the stuff is in a warehouse, it does not mean it is not in their computer, in their intellectual property somewhere.
The Chairman: We are confronted with a huge public policy problem. It is very clear that there are billions of dollars of illegal transactions that course through our legitimate processes here in Canada. We have heard from FINTRAC that they have now been able to track $2 billion-plus of those billions. The total number is unknown to us but, as Senator Angus suggests, earlier testimony indicated it was $40 billion. They have just scratched the surface. That means that there are many participants to these transactions. If you look at the complexity of this chart, which took seven years, it indicates that all levels of governance — financial institutions, accountants, whatever — were involved, not as willing participants but as unknowing participants.
Our problem is how do we ensure that our economy is proper and appropriate and how do we fulfil our legal responsibilities in Parliament? How do we get at this issue in a way that helps FINTRAC yet does not unduly interfere with the appropriate rights of banks, accountants, lawyers and others? We have a huge problem here and we are going to grapple with it. We are interested in what you say but you have to give us some help.
We have heard from the banks that they want to have a narrower gauge by a risk assessment. Will a narrowed risk assessment unduly hinder the larger objective of trying to cleanse our system? We will never eradicate dishonesty, obviously, but how do we cleanse our system so that we are held up as a model economy?
There are huge policy issues involved. The question is how to eliminate these ill-gotten gains and put them into the general economy in an appropriate way. You have to give us more help than saying that you cannot get involved.
Mr. Bernier: Knowing the problem is half the solution. In the United Kingdom a respected consultant has looked into this issue. You heard from the Canadian Bankers Association and the credit card companies; both provide much information to FINTRAC. One of their criticisms was they were not getting enough valuable information from FINTRAC.
The U.K. recommendations include better feedback to financial services institutions regarding the quality and quantity of the reports; better feedback on successful prosecution and conviction to financial institutions; and better feedback on identifying money-laundering typologies. There is much that can be done without legislation.
Mr. Colby: I will offer two possible solutions. I have never been accused of not being blunt. I make my comments for the greater good of society with no personal disrespect intended, but the biggest mistake made with this legislation was when the lawyers won the right not to be included.
The Chairman: They are our next witnesses.
Mr. Colby: One of the key components, without question, of any money laundering process is the hiding of one's identity. That is why half the new proposals are to beef up client identification. If I have an opportunity to use an intermediary who can protect my identity, I will use that entity.
Senator Angus: You are referring to finding a way to overcome the court decision on privilege as an excuse?
Mr. Colby: That is correct. Second, we have made it very clear that we do not believe in the reporting of attempted transactions, if this committee and Parliament decide that needs to be in there, I think you should adjust the monetary penalties against someone's failure to exercise that judgment. It is so subjective. Maybe that is a compensating factor or a middle ground where people will not be afraid of that part of the legislation.
The Chairman: Obviously, Mr. Colby, we will want to encourage citizens and professionals to do their proper duty, without inhibiting their work, to help in the larger question of FINTRAC.
If there is anything more that either of you would like to give to us after reflection, please provide it to us in writing. We will look at all this information very carefully. You can see that this committee is wrestling with these conflicting policy goals.
We will hear from the Financial Transaction and Reports Analysis Centre of Canada and from lawyers about privileges and the question of how to balance these conflicting goals in society.
Kenneth G. Nielsen, Q.C., Chair, Committee on Anti-Money Laundering, Federation of Law Societies of Canada: Thank you, Mr. Chairman. We appreciate the opportunity to speak to the committee on this topic, and we appreciate the general accountants setting the stage for us with his last comment.
The Federation of Law Societies is the coordinating body for the 14 law societies in the country, including the Chambre des notaires du Quebec. The Federation of Law Societies regulates some 88,000 lawyers and 3,500 notaries in the country.
The federation, the law societies and all lawyers in Canada are fully cognizant of the issues of money laundering and terrorist financing. There has been a bit of a misconception that lawyers are somehow opposed to many of these regulations. We are not. Lawyers and law societies do not in any way condone terrorist financing or money laundering. However, it must be kept in mind that, to the extent that the government passes laws and regulations, and to the extent those laws and regulations are intended to comply with or be in conformity with international regulations, such legislation and regulations must be compatible with Canadian law and must be in accordance with our existing laws.
We have in our submissions a brief history of the role that the federation has played in the issues with respect to money laundering. When the law was enacted in 2001, concerns were immediately raised with respect to the obligations on all financial intermediaries, including lawyers at that time, to become agents of the state. We were obliged to report on the transactions of our clients, whether they be suspicious or in excess of $10,000, without ever letting them know what was going on.
The reason we raised those issues is that we saw this obligation as a threat to the fundamental Canadian constitutional protection of solicitor-client privilege and confidentiality. One thing to keep in mind, while it is referred to as ``solicitor-client privilege'' it is not the solicitor's privilege, it is the client's privilege. As much as for his own personal reasons a lawyer may wish to be tipping someone off, he cannot do that. I think I can say with some confidence that no client would want him to do that. No one in this room would want your own personal lawyer talking to —
Senator Angus: To anyone.
Mr. Nielsen: Thank you. That goes to the fundamental reason why the federation of law societies has challenged this legislation. Through litigation in British Columbia advanced by the Law Society of B.C. and the federation, an injunction was obtained. That injunction remains in place, although it has been extended. The litigation has been put on hold because we have, with some significant consultation with the Department of Finance and the Department of Justice, come to some resolution of the problems that we face.
To answer the chair's question with regard to ``help us,'' the law societies and the federation has some solutions that are referred to in our paper. They are ways in which the law societies can work with legislators to deal with terrorist financing and money laundering and at the same time protect our constitutional rights in this country.
One of the ways we have done that is what is referred to in our paper as the ``model no-cash rule.'' I will suggest to you that rule is better than the regulations. That rule provides that no lawyer handle cash except in some very limited circumstances. To pick up on a point from earlier this morning with respect to life insurers, generally law societies do not think lawyers need to be in the cash business. I have been in practice for almost 30 years, and I think I have handled cash once in that time. It was probably $750, and I think it was a small claims trial. There is no need for lawyers by and large to handle cash. The exceptions to the rule are for such things like fees for paying fines on behalf of a client. If you receive seized money from the RCMP and it comes back to you as the lawyer, you can handle that. Beyond that, there is no need for lawyers to handle cash. The limit in our rule is $7,500. It is even better than the transaction in the regulations of $10,000. That rule has been passed by all of the law societies in the country as of sometime last year. Quebec is a bit of a unique situation. The notaries and the bar I understand have passed the rule. It is now at a government level where it is being considered. As far as the regulators are concerned, that is the rule. It is in place across the country. The people from the Department of Finance and the Department of Justice folks that we have been dealing with were involved in negotiating that rule. It is there, and they are now analyzing the status of the rule.
Senator Angus: Does that apply across the board including all disciplines of law? I am like you; I have been practicing for many years and have never handled cash, but I am not a criminal lawyer. My friends that are defence lawyers say that many times their clients pay their retainers with cash.
Mr. Nielsen: I have been told that as well. If it is a retainer, that in itself is exempt. However, if a criminal client brings in a bag full of cash or a ``hockey bag,'' I think is the phrase used, to buy a house, that lawyer would be prohibited from taking it. The lawyer would have to advise the client to bring in a bank draft or a cheque and away we go. That forces the client to deal with the cash at some other location.
The exception in your example is with respect to retainers, but it applies across the bar. It does not matter in what area you practice.
The second area we can help is with respect to the client ID and verification issues that are now coming forward with respect to new regulations. Again, the federation has prepared a model rule with respect to client identification. The council and the federation have approved that model rule in January of this year. It has now gone back to the various law societies for consideration. I suspect I do not have to educate this crowd on the issues that arise when you are dealing with a federation.
The Chairman: Mr. Nielsen, we need a clarification. We noticed the reference to the Superior Court of Ontario's decision. Has this matter gone up to the Supreme Court of Canada? Where does it stand in the courts?
Senator Angus: How many challenges are there? I thought they rested in about five provinces.
Mr. Nielsen: Their law society and the federation with two separate actions, challenged the status initially in the province of British Columbia, but they were heard at the same time. This goes back to 2001-02. The Department of Justice was not prepared to have the B.C. litigation stand as a test case. There were actions in a number of provinces. There were actions taken in Alberta, Ontario and the Maritimes. The results were the same, but there were various orders across the country.
Senator Angus: There were actual hearings held, and they were deemed to be against the Charter?
Mr. Nielsen: Yes.
The Chairman: How high up in the court system did they go?
Mr. Nielsen: All went to the Superior Court level. In British Columbia, it was appealed to the B.C. Court of Appeal and it was upheld. The Department of Justice then sought leave to appeal to the Supreme Court of Canada. The federation and the Law Society of B.C. did not oppose. We thought it was something that should have been heard by the Supreme Court of Canada. That was a way to get it their initially.
At the same time, the Department of Justice sought a stay of the injunction. They wanted it lifted and the regulations to apply to lawyers. The Supreme Court of Canada granted leave and refused the stay application so that the injunction stayed in place. The litigation has been on hold since then. It was initially adjourned on an annual basis until about 2005. It has now been adjourned sine die because we have been working on, for example, the no-cash rule. Right now, the status of the injunction in British Columbia is standing. After the leave applications to the Supreme Court of Canada, the Department of Justice and the Department of Finance agreed that the British Columbia injunction would apply across the country, which essentially takes the lawyers out of the regime. There were some amendments to the legislation subsequent to that decision.
The Chairman: Mr. Nielsen, it would be helpful and would save our staff a lot of time if you could give us an aid memoir of the decisions with a copy of each of them so we can pore over them. If there are constitutional questions involved, obviously this is always of concern to the Senate. One of our mandates is to look at constitutional issues very carefully. Therefore, we would appreciate it if you would give us a full aid memoir.
Senator Angus: Including a summary of the litigation.
The Chairman: I would personally be interested in the final briefs made by your association or the lawyers representing you and the Government of Canada to the Supreme Court of Canada.
Senator Angus: I would like to make an observation. Senator Tkachuk and I were on the committee at the time Bill C-22 came before us. The bar association — I am not sure of the federation — made strong representations to us that this was unconstitutional. Two senators that I have mentioned, and other colleagues of ours, voted against the bill and it was clear to us that it would be struck down vis-à-vis the lawyers. That has caused a lot of delay in implementation and many problems. The gist of my observation is that we have to rise above the partisanship sometimes and ensure that we do not allow these laws that are on their face unconstitutional to get on the books.
The Chairman: We are here for our oversight and we are learning. We need to come up with a document and recommendations that are in the public interest so please proceed.
Mr. Nielsen: It may sound odd, but I am a litigator. It may sound odd to hear from a lawyer that we did not want to litigate this, but frankly we had no choice for the protection of the public. That is the fundamental position of the law societies: We are self-regulating bodies in each province. We have only one obligation. We are not there to protect the lawyers. The CBA has certain obligations and advocates on behalf of lawyers. Our obligation as law societies, and the federation as the umbrella, is to advocate and protect the public. When we took this challenge to court, we were protecting this fundamental right.
Senator Grafstein has raised the issue of how we balance these two things. There is no sentiment in law societies that money laundering is a good thing. We have to balance the protection of the public, the constitutional rights of the public, with what you folks are wrestling with on the issue money laundering. Our simple solution is we can do achieve that balance. We have worked with the Department of Finance and we have worked with the Department of Justice to draft the no-cash rule, for example, which achieves exactly that balance. We suggest that the model rule, which we have now worked on, with respect to client I.D., which is what the CGAs were saying, is a problem. We agree it is necessary to identify clients. In fact, client identification is something we should be doing as lawyers anyway. It does not matter if it has anything to do with money laundering.
Senator Massicotte: Basically, the problem — and I appreciate the constitutional independence of client privilege — is you are the only person in the whole of Canada that can be involved in illegal activity and not have to report it. The issue is how do we get there? In reading your brief you are basically saying, ``trust us.'' You say you have put in a system to report any cash in excess of $7,500 and that you are working on a system whereby your client process will occur. At the same time, there is nothing in saying that if a lawyer is not only suspicious of criminal activity, actually could be involved — and there have been many lawyers in the past who have been involved in criminal activity — nothing happens. You say client privilege is very important, but I am not sure it goes far enough. I am not sure the ``trust me'' approach is the right approach. In both instances, the $7,500 and you know your client, are responses to specific requests by the government to have you involved. Only when you are threatened to be involved do the bars react to say we should do something.
If we are to trust you, why did you not do it before? Even the first step of $7,500 as only an identification of cash transaction did not go very far where you know your client did not go far with knowledge of criminal activity. How do you get there and how do you get over the hump where Canadians should thrust you when in the past you were very delinquent in developing that trust?
Mr. Nielsen: First, it an interesting position. The one thing I have learned over the years is that clients actually trust their lawyer. That is the starting point. They have certain expectations of their lawyer.
We cannot pass rules and, with all due respect, Parliament cannot pass rules that will deal with the bad apples. In our own dealings with the Department of Finance and the Department of Justice, they have said that they are not trying to catch the lawyers who may be engaged in criminal activity, but trying to catch and deal with the lawyers who innocently get involved. That is why we came to the no-cash rule. I have not seen this chart that FINTRAC has presented, but I get the impression that it is a relatively complicated transaction. To think that there may have been a lawyer who innocently got duped in that would not surprise me.
The Chairman: It might not have been one; it might have been many.
Senator Dawson: They might not have been innocent.
Mr. Nielsen: That is right; if they are not innocent that is a different issue. Believe me; the law societies have no issue with the lawyers who are not innocent. However, those innocent lawyers who are caught in that transaction, if we take the cash out of the equation then there is no way they could innocently get involved in that. The problem of trust is a huge problem for lawyers. It is one I do not understand but we know it is out there. We rank somewhere above used car salesmen when they do these studies. I do not know how you try to get over that reputation. However, the fundamental point to start from is that clients actually trust their own lawyers and they have a high regard for their own lawyers.
I do not know about the question about why we were so late in dealing with cash. Lots of people dealt with cash. I was admitted to the bar in 1978. Terrorist financing and money laundering was not an issue when I started practicing. Life insurance companies presumably would have handled cash in the past. This is an evolving issue that has come to the forefront in the last few years. I do not think we were delinquent at all. We are out front. We are the only, as I understand, jurisdiction in the world that has prohibited lawyers from handling in cash. I do not know if that answers your question though.
Senator Massicotte: I am not sure it does. The largest transactions do not occur by cash but by money transfer. The initial problem is getting the cash in. Given that the rest of the world must comply with all these requirements, you are basically saying you want to be excluded. Therefore, it is dependent upon you as a profession and as a bar to say you will go beyond that. When you have reacted only twice to the issue I am not sure that is good enough. How do you deal with the money transfers? You said earlier you do not accept cash but you probably accept money transfers.
Mr. Nielsen: Electronic transfers are very common in the practice of law. We have talked to the Department of Finance about electronic transfers and ways we might deal with them. It is simply a situation where we have not finalized dealings. However, we have not said we are not prepared to consider what might be done on electronic transfers. To be totally frank, I think electronic transfers are a bigger issue with respect to lawyers than cash, because a lot of law firms will be involved in electronic transfers where they would never have any reason to deal with cash.
Senator Massicotte: You realize what happens in these instances. It is like choosing which country from which to work. These people are always looking for the easiest facility. I have heard many comments, even with tax advice, people say go see your lawyer, do not an accountant because a lawyer cannot disclose your suspicious transaction. These people see the lawyer as the easiest and the best way to focus and channel money. The lawyer will not tell on you. The lawyer will protect you.
I do want to go through your arguments again of why not the know-your-client basis because that does not infringe upon your client relationship. You just say no trusts again; we will do a good job there.
Mr. Nielsen: That is not right, with respect. There is a Supreme Court of Canada decision that says the identity of your client is a privileged item and cannot be breached. For example, clients come in to see lawyers and they do not want other people knowing they have to see a lawyer, for whatever reason. About 99.9 per cent of the time, or better, it is a legitimate reason for which they are there and not something criminal. The lawyer cannot disclose that meeting.
This is a fundamental foundational right to have the ability to go in and see your lawyer to be able to speak candidly and frankly to disclose your affairs to that lawyer and get that lawyer's advice on whatever those affairs are without the risk that the lawyer will go out immediately and take an ad out in The Globe and Mail disclosing that transaction. I cannot say it any more basically than that. I believe that is what clients want lawyers to do.
The Chairman: Mr. Nielsen, to be fair to you, we leaped ahead of your presentation. If there are other comments that you would like to make now, you can see that the senators are really trying to focus on what they consider to be the meat of some of these issues.
Please take another minute or two before we turn to Senators Goldstein and Massicotte, if you want to complete your presentation. We unfairly interrupted you. If you would like to sum up briefly, we will turn back to the senators.
Mr. Nielsen: The fundamentals from our perspective are that this is not the lawyer's privilege; it is the client's privilege. It is the fundamental constitutional right we have in this country. The FATAF regulations, with which we are trying to comply, as I understand them, say that compliance must be in accordance with the local laws of the country. All we are saying is that we appreciate the obligations that are there with respect to meeting those recommendations, but they have to be done lawfully. We are not there to protect the lawyers. We are there to protect the clients. To address Senator Grafstein's question of the last presenters, we think we can do that through the self-regulated bodies. We can give you what you need. When we did the no-cash rule, the Department of Finance wanted a commentary that we sent to our lawyers, either built into the rules, and if we did not do that when we passed the rules locally, that we would send a commentary out saying that the law societies would take a breach of the no cash rule seriously. I said to the finance people in one of our many meetings that we do not need to include that commentary. The law society takes a breach of any of its rules seriously. The law societies are policing the no-cash rules. We have the ability to reprimand, fine, suspend or disbar, and lawyers are disbarred regularly. Therefore, we will enforce those regulations. We can answer the problem, and we can do it constitutionally.
Senator Massicotte: I am concerned it is not enough. The cash rule deals with a very small part of electronic activity. The onus must be upon you to say, ``No, we can get around this system. Make sure it does not occur.'' I am concerned it is not enough.
Mr. Nielsen: Are you concerned about the no-cash rule not being enough?
Senator Massicotte: I am concerning about the voluntary basis that you have already and the proposed voluntary ``know your client'' basis. I am a little irritated that it is late and it is a response to proposed legislation. I am also concerned it is not enough to cover the risk to society of criminal activity, an implication of lawyers involved in the process.
Mr. Nielsen: If the lawyers will be involved in the process, it would not matter what the rules were that we passed. It would happen no matter what.
Senator Massicotte: It is a large, grey area.
Mr. Nielsen: It is not a large, grey area.
Senator Goldstein: I will ask you an initial question to which I know the answer, but I want it on the record from you, not from me. Does a lawyer who is not participating or has not participated in a fraud have any obligation to divulge to anyone that a client has come to him or her and said, ``I have committed a fraud,'' or ``I am going to commit a fraud''?
Mr. Nielsen: No, the only exception to solicitor-client privilege is in the furtherance of a criminal act, so if there is furtherance of a criminal act or in the situation of imminent danger to someone or to life, there can be disclosure in those situations.
Senator Moore: You are an officer of the court.
Mr. Nielsen: You are an officer of the court, exactly.
Senator Goldstein: Given that answer, namely, the obligation not to divulge, is there any distinction available between the commission of a fraud, which lawyers do not have to disclose, and money laundering? If the proposed regulations go into effect, or if the dictum of the Superior Court in Ontario is overturned by legislation, is there anything to distinguish the commission of a fraud from attempted money laundering?
I am asking the question because I want to understand why the equilibrium which exists and the obligation to not divulge which exists for a host of crimes should be abandoned with respect to money laundering. Is money laundering more important than the commission of other crimes?
Mr. Nielsen: No, there is no distinction. You are asking a societal question, I think.
Senator Goldstein: I was about to say that.
Mr. Nielsen: That is the issue. Is it more offensive to the public to launder money than it would be to rob a bank? I do not know if I can answer that question. That, to a certain extent, is a personal view. I can tell you that we have not distinguished between those crimes.
Senator Goldstein: Do you not suppose, therefore, that society as a whole has answered that question by saying we have to, in a free and democratic society, tolerate sometimes some very terrible things if the societal cost of avoiding these things is such that it will diminish freedom and the ability to live freely in this country?
In other words, where is the equilibrium? Where is the balance? Can you think of anything that justifies a disruption of that balance for lawyers and, indeed, for others, for example, priests? What in your mind would justify, other than danger to life, a disruption of that balance and a change of the societal value of minimal interference with the rights of citizens?
Mr. Nielsen: My answer was going to be, before you said ``other than danger to life,'' that is the one that I would focus on. That is so fundamental to me and every other lawyer that would give some thought to it. However, to me, you are on a spectrum, then, and someone is drawing a line. Probably what we are talking about is that people would draw the line differently, depending on the crime.
Senator Goldstein: That is certainly true. That is a judgment call. However, do the bars and the Federation of Law Societies of Canada draw or have they tried to draw that line any differently with respect to money laundering, on the one hand, and various other crimes, on the other?
Mr. Nielsen: No, we have not. We would treat it all the same. The solicitor-client privilege that might attach to an issue that could have a basis in money laundering would be the same for any other issue that might arise.
Senator Goldstein: You would, therefore, agree that the societal protection, which is the basis for solicitor-client privilege, should be applicable as much or as little to money laundering as to fraud, for instance?
Mr. Nielsen: Yes.
Senator Goldstein: Thank you.
Mr. Nielsen: Again, we say we have some mechanisms that can address the concerns you are facing.
Senator Goldstein: You are trying to comply and I am trying to comply — I am a lawyer as well — with the requirements of the laws of this country, so I commend you and we all commend you for trying to do so. I would like to see some more active assertion, aside from what you did in the courts, of fundamental rights in this country, which are absent from your submission. I understand why they are absent, but, nevertheless, as we spoke a few moments ago before you started testifying, I would like to see a lot more of that in your submissions.
There are other submissions that were made by the Federation of Law Societies of Canada which deal with fundamental rights. It would be nice if we could see those, Mr. Chairman, and have them produced on the record.
Mr. Nielsen: Those were passed about two years ago, I think.
The Chairman: You have time for several more questions, and Mr. Nielsen, we will hear from the distinguished deputy chair, who is most interested in this topic and has a history of this bill. Then I will conclude with some comments.
Senator Angus: Thank you. First of all, if I may, Mr. Nielsen, as I mentioned earlier, I still am a member of the Barreau du Québec. I have been on the bar council and I received your brief, but I had not heard of the Federation of Law Societies of Canada. Is it a fairly recent organization? How long has it been there?
Mr. Nielsen: It has been there for a long time.
Senator Angus: It is in Montreal, too.
Mr. Nielsen: Do you know Francis Gervais in Montreal?
Senator Angus: Yes.
Mr. Nielsen: Francis Gervais is the past president. It is an umbrella organization that has been in existence since the mid-1970s. It has coordinated a number of national items. It has become much more active in the last 10 years. There are many things that can be done nationally and money laundering is a good example.
Lawyers are now mobile in the country. We have something called the National Mobility Agreement, now signed by most of the jurisdictions, which permits — Quebec is a bit of an exception — lawyers from different provinces to practice in most jurisdictions in Canada for up to 100 days without becoming a member of the local bar.
Senator Angus: This will show in our record as being evidence relevant to our round table study on barriers to interprovincial trade.
Mr. Nielsen: It is an organization that coordinates issues nationally. It deals with such issues as money laundering and national mobility. We do not have the ability to regulate lawyers per se. That has to be done by my Law Society in Alberta, for example, or the Law Society of Upper Canada.
Senator Angus: Apart from learning about when it was formed, all lawyers in Canada are members of a bar association or law societies in their jurisdiction, but not all lawyers are members of the Canadian Bar Association. We have fallen into a habit, rightly or wrongly, in the Senate, of when we need to consult the profession as to their view on a piece of proposed legislation, which happens all the time, it always seems to be the Canadian Bar Association. I am delighted you people are here from the Federation of Law Societies of Canada. It seems to me the federation has a much broader brush than the CBA.
Mr. Nielsen: With all due respect, to the CBA, it has a very important role to play. To a certain extent, the CBA advocates on behalf of lawyers. In our discussions with the Department of Finance on money laundering, the CBA has played a significant role, but we have made it clear with the Department of Justice and the Department of Finance that when we say we can pass a rule, we can pass it and regulate lawyers.
The Federation of Law Societies of Canada is moving from Montreal to Ottawa over the summer. We now have space in Ottawa that we will be moving into. We have, in fact, our new CEO who will be starting with us on July 4. Jonathon Herman will be coming on as a full time CEO of the federation.
Senator Angus: Welcome, Mr. Herman. I am sure we will hear from you in the future.
Mr. Nielsen: If we are going to be a national federation or organization, we have to be in Ottawa, and we are here. We would invite this committee or any other Senate committee to contact us at any time. If you want input, that would be terrific.
Senator Angus: You are appearing here in your capacity as the chair of the money laundering committee of the Federation of Law Societies of Canada, which indicates to me there are a series of committees within the federation. Again, it underlines my point that we should be turning to the federation perhaps before the other place, in the future. I take it, as well, from your evidence that it was the Federation of Law Societies of Canada and not the CBA that went to court in the first instance in B.C. and elsewhere.
Mr. Nielsen: That is correct, the Law Society of B.C. and the federation took the two actions, but the CBA was intervener, so it played a role, but the applicants on those proceedings were the Law Society of B.C and the federation.
The Chairman: For the clarification of our listening public, the CBA is a national and provincial association of lawyers. I was chair of one of the committees as well. What we are talking about here is something different. You represent the law societies that include the self-regulating and publicly regulated lawyers across the country. You are closer to the rule making and enforcement of laws than the Canadian Bar Association.
Mr. Nielsen: We make the rules based upon which lawyers can practice in a jurisdiction.
Senator Angus: Lawyers cannot practice without being a member of one of your member associations whereas they do not have to be a member of the CBA. Obviously, the big issue is the privilege and the discussions that have been going on between you people and the authorities, to try to find a solution, failing which, I guess, the litigation will start up again.
The first two or three presenters from the department, several weeks ago, said these discussions were going very well and could be resolved soon. How soon is soon?
Mr. Nielsen: There has been a bit of a hiatus, to be honest in the last few months, but this is behind us. This is my second red-eye flight to Ottawa in a week. Diane Lafleur was present a meeting we had last Friday with the people from the Department of Finance. During that meeting, we dealt with where we were on the no cash rule and the client identification rule. We have given them our proposed model rule. They are now considering that model. They have made it clear they have to move on this quickly. They are looking at the fall, and so we are up for that and we want to work with them. Again, no one wants to litigate this. If we have to litigate we will, but it is on hold. The injunction in place provides that there will be no regulations applicable to lawyers until that litigation is resolved, unless we consent otherwise. We are anxious to work with them and they are anxious to work with us.
The Chairman: It would be helpful if you could tell us as soon as you have reached some accommodation. We would like you to refer that to our staff here because we are aiming to get this report out early in the fall and summertime is the time when you are going to proceed on this. We sense there is an urgency on the government side. We sense there is an urgency in this committee to finish our review and this is an important part of what we are looking at.
Senator Angus: Diane Lafleur was the first or second witness to appear before this committee. It was only after that first evening of hearings, I think, that we woke up to the fact that this is a much bigger issue. I do not mean the lawyer's privilege but this whole review is a bigger task than we had been led to believe it would be. Our plan is to revisit some of these witnesses and is she the main point person in your mind in Finance Canada?
Mr. Nielsen: We have had meeting with Mr. Frank Swedlove, who is about to move on to become the president of FATF for a year term. Last week, we met with the acting Assistant Deputy Minister, Serge Dupont. We have exchanged with Diane Lafleur.
The Chairman: I would like to return to the issue of the relationship of lawyers to criminal conduct. Senator Massicotte and Senator Goldstein and the deputy chair all alluded to this subject. As I understand the law, it is very clear, both as it applies to the law societies and to ethical conduct that while a lawyer can receive confidential information and sustain solicitor-client privilege, that is not an absolute privilege, it is subject to some variations on the theme. This is to help, I think, Senator Massicotte's question. It seemed to him to be black and white and I do not think it is.
Let me suggest if this is correct or not. Lawyers cannot knowingly participate in criminal actions. They cannot counsel criminal actions. They cannot, in effect, be complicit in criminal actions. That circumvents a great deal of what the lawyer can do. The lawyer has a duty when he hears this — and I will not go through the various rules — to disengage. There are strict rules about this duty. It might be useful for you to give us a brief itemized review of exactly what a lawyer must do when he is confronted with information he knows might make him complicit in criminal conduct. I know there are some rules; they vary from jurisdiction to jurisdiction. That might be helpful to us.
The second thing is a little more complex. It, again, deals with the question of solicitor-client privilege, which is, again, not absolute. All of us have practiced law and we heard this from our colleagues but one of the areas that caused great concern in every law firm I am familiar with was the insistence on the tax department to ensure that lawyers could not, in effect, advise on tax schemes that may be contrary to the anti-avoidance rules.
Again, there is not an absolute there, either. We both know that there were many representations made. There were some unhappy accommodations on behalf of the profession, and so on. Could you give us the parameters of that exercise? It indicates clearly to those of us who have looked at some of these questions that there are appropriate limits to the solicitor-client privilege. Having said that, all of us are concerned that we preserve the Constitution and ensure that when clients go to their lawyers that they can receive the best counsel and advice, but they are subject to these restrictions.
Mr. Nielsen: It would be best if I submitted that to you, and we will do our best. You have hit the nail on the head. Most of the Supreme Court of Canada decisions that deal with solicitor-client privilege say this is as absolute as possible. They do not say it is 100 per cent absolute. They say it is as absolute as possible, recognizing that there may be instances where you have to depart from that, for very good societal policy reasons. That is the protection we have to keep in place if we are to be a free and democratic society. It is as simple as that.
The Chairman: When I was at law school, the University of Toronto in 1955, the great John J. Robinette, a great colleague and mentor, taught us ethics. The first question he asked was to whom does a solicitor owe his first duty? Everyone stood up, and said, ``Client, client, client.'' He said, ``No, no, no.' ``The first duty a lawyer owes is to himself to be ethical.''
I want to end with that note. We are conscious of the ethical conduct in this issue. Senator Massicotte has final comment, and then we will adjourn.
Senator Massicotte: That information will be useful, but to help us, I assume that could you separate between when the bar recommends lawyers do not get involved and when the law recommends lawyers do not get involved? We are asking you to give us information about when the lawyer is suspicious or could be implicated in criminal activity, he must protract. When that occurs is it because of bar regulations, or is because the law requires the lawyer to do so?
Mr. Nielsen: The law does not regulate lawyers; the law societies regulate lawyers. To answer your question, the guidelines and criteria rules that bind lawyers come from the law society's code of conduct and rules.
Senator Massicotte: As an individual and a human being, there must be certain limitations. What is it that is law and what is it that is regulation?
Mr. Nielsen: As individuals, the same laws govern us as every other Canadian citizen.
Senator Massicotte: The same laws govern us with the exception of, as in this case, the Constitutional right of confidentiality.
Mr. Nielsen: That is what I am saying. You are asking for the source of the exceptions.
Senator Massicotte: It is all regulations. It is all administrative rules.
Mr. Nielsen: Yes, senator, the regulations and administrative rules come from the self-regulating bodies.
The Chairman: You have sparked interest from Senator Eyton, who is both a businessman and a lawyer. We are interested in his questions.
Senator Eyton: I will ask for a memorandum or an aide-mémoire in response to this question. I understand the model rule relative to the no-cash rule, and it sounds as though it is in place. It should work. I have less understanding about the model rule that applies to client identification and verification. All of this is the mechanics, how it works. In the memorandum, you talk about implementation. I would like an aide-mémoire to explain to me how you propose implementation. In the sense of a working scheme, what is the relationship with FINTRAC? To what extent will the law societies that have received reports, to what extent do they have access to law enforcement officials, or to more intelligence, that whole framework that allows you to be effective in fighting money laundering and terrorist activity?
It is the mechanics of how this will work. I understand the rule; I understand getting to the first stage, but what happens next?
Mr. Nielsen: How do law societies enforce it?
Senator Eyton: It should be an effective parallel system, and I am worried that it may not be a parallel system.
Mr. Nielsen: We can do that. To answer your question, there is no relationship with FINTRAC right now because we do not report anything to FINTRAC. However, we have considered and talked about the possibility that the information, when collected by the law societies, could be divulged by court order; in other words, if a court says this should be divulged. For example, search warrants are executed from time to time on law offices, but it is done through the courts. If the courts look at documents and say they are not privileged and they should be disclosed, then that is fine.
Senator Eyton: I am not looking for answers today. I suspect the answers will engender a long conversation about a parallel system we are trying to devise.
Mr. Nielsen: You have exhausted my answer.
Senator Eyton: I would like to see a memorandum.
Senator Goldstein: Could you, in your paper, distinguish between a lawyer being a participant in a crime and a lawyer having knowledge of a crime?
The Chairman: Mr. Nielsen, thank you so much. You will understand that we are trying to grapple with this issue. Again, as you properly put it, there is the public interest of pursuing money laundering, which is a huge problem, and on the other hand, to protect Constitutional rights and to strike a balance in the public interest.
If you have any further ideas or comments as you hear the testimony rolling out as the summer unfolds, please send it to us in writing. We will read everything carefully, and we hope to get our report out in the fall, so we do have some time over the summer to contemplate this. You have given the committee much to think about, and we will ponder this over very carefully over the summer months.
Thank you very much.
Mr. Nielsen: I thank you for the opportunity to be here and look forward to coming back.
The committee adjourned.