Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 12 - Evidence - Meeting of December 6, 2006
OTTAWA, Wednesday, December 6, 2006
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-25, to amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the Income Tax Act and to make a consequential amendment to another act, met this day at 4:03 p.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Ladies and gentlemen, this hearing will be televised on CPAC from coast to coast to coast and around the world by the Internet. Minister, we welcome you and your colleagues here today for this very important measure.
You will recall, minister and colleagues, that our committee was authorized on May 16, 2006, to undertake a review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which was the act preceding this particular act. We then tabled an interim report entitled Stemming the Flow of Illicit Money: A Priority for Canada. This measure, in our belief, goes to the heart of the integrity and transparency of the Canadian economy so that Canada can maintain its reputation around the world as an honest and forthright economy that stems, as best it can, the flow of illicit money through our economy.
Today we are delighted to proceed with the consideration of Bill C-25.
Ladies and gentlemen, we are delighted to welcome the Minister of Finance, the Honourable James Michael Flaherty, P.C., M.P., from my province. He is here with his assistants, Serge Dupont, the Assistant Deputy Minister; Diane Lafleur, Director; and Lynn Hemmings, Chief, Financial Sector Division.
Hon. James Michael Flaherty, P.C., M.P., Minister of Finance: It is a pleasure to be here with officials from the Department of Finance. I thank the honourable senators for their very good work that has helped in the formulation of this bill that I will speak about now.
[Translation]
Thank you for the opportunity to appear before this committee to discuss Bill C-25. This bill proposes important amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
[English]
These measures reflect the commitment of Canada's new government to ensure that Canada strengthens its ability to combat organized crime and terrorist financing and maintains Canada's international reputation as a leader in this area.
I want to make it clear that Canada is by no means a haven for money laundering and terrorist financing activities. Having said that, we will be relentless in our efforts to combat money laundering and terrorism financing. Since 2001, Canada has had an anti-money laundering and anti-terrorist financing regime that ranks near the top among our international partners.
Our financial intelligence unit, FINTRAC, has made significant progress in detecting suspected cases of money laundering and terrorist financing. In fact, Canada continues to work closely with its domestic and international partners to improve the regime.
One of the best ways of putting these criminals out of business is to starve them of the funds they must have to finance their distructive aims. In my budget this year, Budget 2006, there is an allocation of $64.4 million to FINTRAC, the Royal Canadian Mounted Police, the Canada Border Services Agency and the Department of Justice to implement new international standards and bolster analytic, investigative and prosecution capacities.
This funding will help to ensure Canada's regime remains effective and up to date. It will help the RCMP increase the number of officers working on the money laundering and anti-terrorist financing files. It will enhance the ability of the Canada Border Services Agency to detect unreported currency at airports and border crossings. It will assist FINTRAC in analyzing and monitoring financial transaction reports, as well as ensure the compliance of the unregulated financial businesses, such as money remitters.
Canada's new government is taking real action to combat terrorism financing and money laundering. The bill we are discussing today builds on and strengthens those initiatives. It also builds on expert advice received from across the country.
As a prelude to the bill, the Department of Finance issued a consultation paper entitled Enhancing Canada's Anti- Money Laundering and Anti-Terrorist Financing Regime. Over 50 submissions from stakeholders were received, followed by face-to-face consultations. As a result, Bill C-25 contains amendments that address industry concerns and minimize the compliance burden. The proposed measures in Bill C-25 respond to recommendations made in the 2004 Auditor General's report and in a 2004 Treasury Board evaluation of the terrorist financing regime.
[Translation]
In shaping the requirements for this bill, the government also looked to this very committee for guidance. Your thoughtful and insightful interim report, calling for tougher measures to deal with money laundering and terrorist financing, was indeed instrumental in drafting Bill C-25.
I want to thank you for that valuable advice and input.
[English]
May I say respectfully that it is important to keep in mind when considering this bill that the proposed amendments it contains will make Canada's anti-money laundering and anti-terrorism financing regime more effective than ever. The bill does this by making it consistent with new standards set out by the Financial Action Task Force on Money Laundering. As you know, the task force is the international standards setting body, whose purpose is the development and promotion of policies to combat money laundering and terrorist financing.
Canada assumed the presidency of the task force this year and I had the honour of meeting many of their members this past October during their plenary session in Vancouver. We also saw the funding provided for the establishment of the permanent secretariat for the Egmont group in Toronto.
Let me take a few minutes to talk about measures in Bill C-25. I will outline how the proposals in Bill C-25 meet international standards. In doing so, I will illustrate how this bill responds to the Auditor General's report and to the Treasury Board evaluation. In particular, you will see how the recommendations from this committee were pivotal in shaping this proposed legislation.
The first issue is protecting the privacy of Canadians. Of course, we all agree that this is critical. Bill C-25 has been amended to include a legislative requirement that the Privacy Commissioner conduct a review every two years of the measures taken by FINTRAC to protect information it receives or collects. The results of these reviews will be tabled in Parliament. I should emphasize that this review process will further strengthen existing safeguards already in place to protect the privacy rights of Canadians.
[Translation]
For an anti-money laundering and anti-terrorist financing regime to be effective, it is essential that financial intermediaries undertake enhanced client identification and record-keeping measures.
They must also maintain ongoing monitoring and identification of beneficial owners of assets with respect to high- risk clients.
[English]
Bill C-25 proposes to implement these requirements and more. For example, one of the recommendations made by this committee was to require the reporting of suspicious attempted transactions. Bill C-25 requires the reporting of these transactions and FINTRAC will be providing guidance to reporting entities on indicators of these kinds of transactions. As you know, in recent years there has been a substantial increase in money service businesses and foreign exchange dealers. These businesses are currently unregulated. To correct this, Bill C-25 proposes to establish a new registration regime administered by FINTRAC. Its purpose is to provide a tool to increase compliance with the requirements under the act. A new offence will also be created for operating an unregistered money services business. In addition, and also consistent with one of the recommendations of this committee, dealers in precious metals, stones and jewellery will be added to the list of businesses required to report to FINTRAC large cash transactions over $10,000. They will also be required to report any suspicious transactions.
Important changes to the money laundering and terrorist financing legislation relate to the sharing of information among enforcement agencies. These amendments will give Canada's regime more reach and effectiveness. Specifically, Bill C-25 proposes amendments to allow the exchange of information between FINTRAC, the Canada Revenue Agency and law enforcement agencies to prevent and detect the misuse of registered charities for the purposes of financing terrorism.
To increase the usefulness of FINTRAC's disclosures, the range of information disclosed will be expanded as well as the list of disclosure recipients. This includes the communications securities establishment and the Canada Border Services Agency. The Border Services Agency will be allowed to share cross-border currency reporting information internally for the administration of immigration legislation. To allay fears about privacy issues, it is important to re- emphasize that the proposed legislation in this bill continues to protect the privacy of individual Canadians by retaining the safeguards already built into the regime. In fact, the legislation backs up this protection with serious criminal penalties for unauthorized disclosure of information.
[Translation]
With respect to legal counsel, your interim report urged the government to complete its negotiations with the legal profession. I would note that Bill C-25 excludes the legal profession from reporting suspicious and prescribed transactions under the act, consistent with lawyers' obligations in respect to solicitor-client privilege.
[English]
As you may know, the provincial and territorial law societies have adopted a model rule that prohibits lawyers from receiving cash over $7,500 in respect of any file. This will address the placement of cash into the financial system and will replace the large cash reporting requirement. The bill, however, does not remove the provisions that require legal counsel to undertake client identification, record keeping and internal compliance measures when they act as financial intermediaries. The department is currently discussing the scope of these measures with the legal profession and how compliance enforcement will be supervised.
As a founding member of the Financial Action Task Force on Money Laundering, Canada has committed itself in Bill C-25, to implementing the 40 recommendations on money laundering as well as nine special recommendations on terrorist financing. Honourable senators, this is just one more example of how Canada's new government takes these issues seriously and will ensure that Canada plays an active role in the global fight against terrorism.
I am sure you can appreciate that in our ever-increasingly connected world, criminal activity in one country can have a ripple effect well beyond its borders. That is why it is essential that we and our G7 partners work closely on an ongoing basis. For our part, we must be diligent if we are to prevent criminals and terrorists from using our financial systems to fund criminal activities.
Honourable senators that is just what Bill C-25 is designed to do. It is why we must ensure swift passage of this proposed legislation. The measures in this bill will help to keep us one step ahead of criminals trying to misuse our banks and other financial institutions. This is a fight that we can win and must win. The proposals in Bill C-25 will help us to do that.
Concerning the effectiveness of the regime, I would like to give the committee an idea of just how effective Canada's money laundering and anti-terrorism regime has been thus far. Since April 1, 2002, there have been 567 money laundering charges prosecuted by the Attorney General. In addition, Canada's cross-border currency reporting regime has, since its inception, made over 5,000 seizures worth approximately $132 million, with over $34 million being forfeited to the government as proceeds of crime. As has been noted in the media in the most recent arrest of 73 alleged Montreal organized crime figures, information key to the investigation was financial intelligence from the Financial Transactions and Reports Analysis Centre of Canada, FINTRAC.
In conclusion, the proposed amendments in Bill C-25, together with the additional resources for the enforcement agencies committed in Budget 2006, will improve the ability of FINTRAC to produce relevant and timely intelligence.
[Translation]
These measures will also strengthen the tools for law enforcement to investigate money laundering and terrorist financing cases. This bill will help Canada maintain its solid leadership in the global fight against money laundering and terrorist financing.
[English]
We live in a world where the threats of terrorism and international criminal activity are ever-present and fighting back means being vigilant, relentless and more resourceful than our enemies. One of the best ways of putting these criminals out of business is to cut off the funds they must have to finance their acts of terrorism.
Once again, I thank the committee for its valuable contribution to this important proposed legislation. I welcome any questions that honourable senators might have.
The Chairman: I guess I neglected to mention that this is the first appearance by Minister Flaherty before the committee. We look forward to working with you, minister, in the common interests of Canada.
We are also pleased with the quick review of the committee's recommendations and that a number of them have been included in the proposed legislation in respect of such things as ATMs, unregistered money services businesses, jewellery, charities and increasing prosecution budgets, all of which we think is excellent. I will not pre-judge the bill until we hear from other senators. I turn to the Deputy Chairman of the Banking Committee, Senator Angus, from Montreal, to begin the questioning.
Senator Angus: Minister Flaherty, I join the chair in welcoming you warmly to this Banking Committee. You are likely aware that most, if not all, legislation emanating from your department comes before this committee at one stage. We hope that this will be but the first of many appearances. I would hope that you will agree that we give your bills serious scrutiny. In that respect, I would like to emphasize that we also welcome Ms. Lafleur, Ms. Hemmings and Mr. Dupont, whom we have worked with in trying to understand what lies behind this proposed legislation.
Minister, you indicated a need to have speedy passage of this bill, and this committee has been advised that it is a matter of urgency that this bill be passed before the end of 2006. I would appreciate it, minister, if you could elaborate on that so my colleagues and I will have a true sense of the urgency. Assuming we do not find something in these hearings that we are not expecting, you will find that we will be sympathetic to a reasonable request in this regard.
Mr. Flaherty: I have no doubt that you will be sympathetic to reasonable requests, and I will try to be reasonable. The primary concern is the leadership role that Canada has as President of the Financial Action Task Force on Money Laundering this year. We held a large congress in Vancouver in October, and Canada is playing a leadership role in the international community on this subject. We will be evaluated next year on the 40 recommendations and on the other issues that the financial action task force imposes on member countries. We want to be evaluated as the best. In order to do that, we need some of the tools that are in Bill C-25, now before this committee. We would like to move forward, once the bill passes the legislative process, with enactment so that when we are evaluated next year, we will do well.
Senator Angus: Thank you for that, minister. As you and your officials are aware, the antecedent legislation as well as this bill contains the mandatory statutory review. It was in connection with the review of the previous bill that this committee became seized with the issues raised by international terrorism financing and money laundering and the obvious magnitude, previously unknown to us, of the problem of illicit funds in circulation, not only in the global economy but also in Canada, specifically.
It was only as we were getting to the tip of the iceberg in our review that we became aware that it was important that this bill be introduced in the other place. All of that is to say that we had not finished our review process. I want to make it clear to you and your officials that it is ongoing. Our report, to which you kindly made nice comments, was an interim report, so stated. I hope that you will understand and help us. We can only help Canada to be number one if we can get to the bottom of some of the abiding questions. These questions deal with the magnitude of the problem, whether it is $30 billion or $10 billion, with the law enforcement agencies seized with the information that is eventually reported to FINTRAC and what they are doing. We have a number of outstanding queries in that regard. We hope that you will lend your support to our study, and we will file our final report in due course.
I have a specific question. We have been told by some folks who seem to be in the know that other countries in this task force to which you referred have been tougher on the lawyers. It is almost suggested to us that Canada is copping out a bit in that area. I must share with you that we recently visited New York where we met with the district attorney of Manhattan and noted that their provisions concerning their lawyers are tougher than ours. We know that in the antecedent legislation ours were tougher but the Charter was invoked resulting in an injunction and you were not able to enforce those provisions in respect of lawyers, rightly or wrongly.
You have described to us a process that has been put in place. After reading that, as well as the brief we received yesterday from the Federation of Law Societies, other recent court decisions about solicitor-client privilege in Canada and the weakening of that so-called privilege, I ask you how Canadians can be comfortable with what you refer to as "compliance enforcement under the model understanding that has been worked out?" We are quite concerned about that.
Mr. Flaherty: I guess we are both lawyers and we can talk about this.
Senator Angus: There are quite a few around the table.
Mr. Flaherty: Yes, quite a few. You are right; there were legal proceedings in Canada. As you know, there were injunctions relating to reporting issues and solicitor-client privilege issues.
I met with representatives from the legal community for a vigorous discussion on this several months ago. I welcome the help of this committee and your ongoing work on this issue, among others, but particularly on this issue, because it is not without difficulty, given the established right of solicitor-client privilege. I am confident the law societies will enforce the rule about $7,500 cash transactions. I suppose it may become less important over time as we move towards a society in which cash is not used very much and everything is done by debit cards and credit cards. For the time being, this rule is one we ought to watch and hope for stringent enforcement by the law societies in Canada. As I say, I welcome your further advice on this subject.
Senator Angus: Are you comfortable that your officials or the enforcement agencies will have sufficient investigative authority under this compromise to make it work? It seems on its face to be a glaring loophole.
Mr. Flaherty: I suppose we have to trust lawyers to obey the rules. They are lawyers, and they are supposed to understand the law and know and obey the law. Their own societies are saying to them, as conditions of membership, that they obey this rule. If they do not obey the law, they risk disbarment and losing their ability to make a living from practicing law. That is a fairly serious consequence to not complying with the $7,500 rule.
Senator Angus: Thank you.
The Chairman: Thank you, Mr. Minister, for coming to speak with us. We all understand how busy you are, and we are flattered that you are able to spend time with us. We are also grateful for the previous intervention and advice provided to us by Ms. Hemmings, Mr. Dupont and Ms. Lafleur. A number of my colleagues had the advantage of attending an excellent briefing session by Ms. Lafleur when the bill was first introduced, for which we thank her and your officials.
We had a number of questions when we initially considered the issues. Many of those questions revolved around the privacy and the balance that one seeks to find between the needs of society to minimize the transactions that are envisaged by this legislation, on the one hand, and the rights of individual Canadians to have their privacy rights respected, on the other hand.
The Office of the Privacy Commissioner emailed a brief submission to the committee dealing with the issue some time back and it contained the following interesting issue. In the letter, the Commissioner says that the committee's views on C-25 are captured well. She agrees with our comment that "the greater the information that is disclosed by the FINTRAC, the more likely it becomes that privacy rights of Canadians may be violated."
The Privacy Commissioner goes on to say:
Having said this, it is difficult for us to point to any specific provisions in Bill C-25 that concerns us more than the other provisions that will expand the scope and coverage of the act. Rather, it is the incremental expansion of the anti-money laundering anti-terrorist financing regime that causes us concerns, particularly given this it is difficult for us to assess the scope of the problems that the new provisions are intended to address.
Does the department have any statistics or reasonable predictions as to the extent to which these enhanced provisions, which, by definition, challenge the privacy rights of Canadians, will be useful in tracking down and avoiding or eliminating the activities or some of the activities we seek to eliminate?
Diane Lafleur, Director, Department of Finance Canada: As I think, I have said before this committee in the past, money laundering and terrorist financing are by their very nature illicit activities, so it is very difficult to come to a specific number on the scope of the problem.
What I think is most important is that this legislation has an additional amendment that was added during the process of going through the House that will essentially mandate that the Privacy Commissioner will go to FINTRAC once every two years. The Privacy Commissioner will have the opportunity to review the procedures that FINTRAC puts in place to protect the privacy of the information that is it given so that the public and Parliament will have the opportunity to see whether there is a problem that needs to be addressed. At this point, none have been identified. As the minister has stated, we think that privacy rights are very important and need to be protected, so we felt it was very important to add this additional belt and suspender, if you will, going forward to ensure that a problem does not develop.
Senator Goldstein: Do you have statistics or specific knowledge about whether these enhanced provisions will enhance enforcement? There is no apparent correlation that you have and none that we are able to see?
Ms. Lafleur: We know that in assessing the effectiveness of the regime in the past, whether it was the Auditor General or the independent Treasury Board mandated evaluation, there were deficiencies identified in the regime. Specifically, enhanced disclosures from FINTRAC were identified as one way that we could make the regime more effective. These provisions are, in part, an attempt to address those recommendations.
The objective overall is to create as hostile an environment as we possibly can for terrorist financing and money laundering. We are confident this will help shape that environment and continue to make it more hostile.
Senator Goldstein: Minister, you spoke about increasing the number of people subjected to the reporting mechanisms. You spoke of precious metals and gemstones. The statute itself, although it speaks of precious metals, does not speak of gemstones. I am wondering where we can find that reference.
Ms. Lafleur: That will be in the regulations that will come after this legislation is passed, if it is passed. It is being done in regulations because there are many steps in the process of going from the raw material to a piece of jewellery, whether it is the extraction process, the polishing process, retail, wholesale, et cetera, and each one of those steps has their own different risks and vulnerabilities. We want to ensure that we are able to pinpoint the riskiest points in the production chain so that we can ensure that nobody who is at high risk escapes reporting requirements. We want to ensure we get at the precise activities that are the riskiest. That is why we are doing it that way.
Senator Goldstein: I have a technical question.
The Chairman: Senator Goldstein, are you moving to another topic? Senator Fitzpatrick had a supplementary.
Senator Fitzpatrick: Welcome to the committee, minister. This is your first time. We hope we will see you back here on numerous occasions, over a short period of time, mind you.
Mr. Flaherty: We do not use that word "short" around the Department of Finance these days.
Senator Fitzpatrick: Getting back to the privacy issue and the privacy review every two years, I question in my mind if that is often enough. A lot of damage can be done during a two-year period. I do not know what recourse there is for those persons who have been harmed. I would like you to venture an opinion if you believe that review of two years is often enough. Should it be done on a yearly basis, or perhaps even as a continuing audit of the activities?
Mr. Flaherty: The Privacy Commissioner has the right to go in any time that she so chooses. The new provision that came out of the House Finance Committee amendment is powerful because it mandates that the Privacy Commissioner shall conduct a review every two years. If there are problems or issues in the interim, the Privacy Commissioner can become involved. I have spoken to the Privacy Commissioner about an issue earlier this year. She looked at her mandate and she has the power to do it; and that is good.
In terms of FINTRAC sharing information with other countries, which comes up from time to time, that only happens pursuant to a memorandum of understanding, which has to be negotiated between FINTRAC and its brother or sister agency in the other country. Such MOUs have to come to the Minister of Finance, ultimately, for approval. I have reviewed some of those.
Senator Goldstein: I want to go back for a moment to the issue of precious metals and gemstones. The proposed legislation speaks to "prescribed precious metals." It does not speak to gemstones and I would suggest to you that you might want to consider that wording because prescribed precious metals, by their very nature, would exclude gemstones because they are not precious metals. Am I reading this correctly?
Lynn Hemmings, Chief, Financial Sector Division, Department of Finance Canada: That amendment to the existing statute is to address those that deal in precious metals, specifically the Royal Canadian Mint when it sells precious metals directly to the public. Section 5 will allow us to specify various segments of the market, including cut and polish, or wholesale/retail, depending on the risk. We would do that in the regulations.
Senator Goldstein: Where would you find the enabling language that would permit you to do so by regulation?
Ms. Hemmings: I believe it is section 5(i) or (j) of the existing statute.
Senator Goldstein: There are an unusual number of references to regulations in this bill. How advanced is the drafting of the regulations so that we can have an idea of the extent of the regulations. Can you tell us where you are on that issue?
Ms. Lafleur: We need the regulation-making authority before we are able to proceed to finalizing any regulations. We are working on the policy that would be implemented through regulations but we do not anticipate anything being pre-published before the new year.
Senator Goldstein: On the oversight issue, the original amendment in committee called for a review every year. That was changed, as I understand by consent, to every two years. However, the language used is considerably different, whereas the committee language called for a review of all facets of all operations, the language that you now have limits the review to data protection measures only. Have you considered in the course of making that change, which is abrupt and significant, the limiting effect of the review process making it very limited. Have you taken into account the fact that other elements of the operation should be looked at as well?
Ms. Lafleur: The original amendment introduced in respect of the review of FINTRAC was a fundamentally different amendment. That amendment would have imposed a review by SIRC and not the Privacy Commissioner. I believe that after discussions between members, a consensus was reached that because FINTRAC is not an investigative body, it does not have the same kind of power as law enforcement agencies or CSIS. There were not the same kinds of concerns. The concerns raised in the discussion around committee were in respect of the specific privacy issues and how FINTRAC handles the information in its control. In trying to find the root of the concern, they voted in favour of it. We have to set aside the original amendment because its intent was fundamentally different from what we ultimately ended up with.
Senator Goldstein: I want to talk about politically exposed people. The bill specifically excludes domestic politically exposed people. However, there is similar legislation in other countries that would appear to cover Canadians, because we do not have the same limitation in other countries.
Have you considered the appropriateness of politically exposed persons who are, notwithstanding the language used, quite neutral and not suspected of anything on the face, as well as that these Canadians would be the object of investigations in countries where the privacy legislation might not be as rigorous as that of Canada?
Ms. Lafleur: The politically exposed person provisions are consistent with the Financial Action Task Force, which requires that each country impose measures to have enhanced due diligence of foreign politically exposed persons. As well, a UN resolution would extend that to both foreign and domestic politically exposed persons.
In the consultation paper released in June 2005, the original proposal was to have measures in Canada to cover both domestic and international. In fact, this kind of measure is difficult for countries to implement and difficult for the reporting entities to administer. In our discussion with the reporting entities, we came to the conclusion that, as a first step, we should limit the enhanced scrutiny to foreign politically exposed persons, which is a smaller set of individuals. There are companies that create databases of names of individuals who are considered foreign politically exposed persons. Reporting entities can make use of those lists, and it makes it easier for them to administer the provisions. That is why we have focused on foreign politically exposed persons. We will continue to monitor the situation. Over time, perhaps when we do the next five-year review, we will extend it to domestic exposed persons, consistent with the UN requirements. Because of the compliance burden and the feedback that we got from reporting entities, we opted to take a more gradual approach, which keeps us in line with the financial action task force standards.
Senator Goldstein: I would assume that you are familiar with the report prepared by Sir Lander for the Serious Organized Crime Agency, SOCA, in the U.K. He suggested only a few months ago that his investigation had revealed in a sister democracy and one that is equally concerned about privacy rights that there had been "some serious examples" of inappropriate disclosure. We had occasion to discuss that with you when you were kind enough to appear before the committee during the preparation of our interim report.
Have you considered the concerns we expressed that not all of the people, with whom we have 36 memorandums of understanding, or more, have the same privacy protections that we have? Have you considered the extent to which our statute should say that we could exchange information only with those countries that have laws substantially similar in nature to our privacy legislation?
The Chairman: Before the witnesses answer, I am mindful of the clock. I have given Senator Goldstein much more leeway than I should have. The question is on the table if the minister could respond briefly.
Mr. Flaherty: The point probably needs to be made that FINTRAC as senators are aware, discloses only what it chooses to disclose to agencies in other countries. FINTRAC is under no obligation to disclose. There are serious criminal penalties for misbehaviour or violation of the rules respecting privacy by anyone at FINTRAC.
Ms. Lafleur: I will add that the act as it stands has a specific requirement that FINTRAC, in its memorandum of understanding to share information, must ensure that privacy provisions are in place and that its memorandum of understanding partners treats the information adequately. That is already in the act.
Senator Tkachuk: Welcome, minister. How did you arrive at the specific amount of $7,500?
Mr. Flaherty: I did not do the number negotiation.
Ms. Lafleur: The large cash transaction reporting threshold imposed on all other reporting sectors is $10,000. On principle, since this was a voluntary agreement on their part, we wanted a number that was lower than $10,000 to make it that much tougher, because it is not a legislated provision.
Senator Tkachuk: It was not a thin briefcase/fat briefcase then.
Considering the age we live in, for what purpose would lawyers receive cash anyway? That is a lot of money to be carrying around Bay Street.
The Chairman: There are many law firms across the country and not on Bay Street.
Minister, you can speak in your capacity as a lawyer or as a minister.
Mr. Flaherty: The senator raises a good question. In fact, it was a question I raised with the representatives of the law societies when I met with them. In today's society, where cash is decreasingly used in commerce, I would think over time one would expect that sort of rule to get lower and lower until it was no longer necessary and that the reporting could take place through the use of credit or debit cards.
Senator Tkachuk: Is it one person per transaction?
Ms. Lafleur: Per single file in respect of any one case.
Senator Tkachuk: What if that one client had three or four cases going on? Could he or she deposit $7,500 in each of those cases?
Ms. Lafleur: They would have to be unrelated. If you had one large real estate transaction, the client could not come with $7,500 every day to complete that transaction, because that is all one case.
The Chairman: When I was a criminal lawyer over three decades ago, I insisted on cash because I was not prepared to take cheques or anything else from a criminal. I can understand someone demanding cash payment from criminals. I do not think that is untoward.
Senator Tkachuk: Our banking system is one of the most efficient in the world. When you deposit that cheque, it is good right away or it is not good right away.
The Chairman: The alleged criminals I know do not have bank accounts.
Senator Tkachuk: That should be your first clue. I find this whole thing about lawyers quite astounding. It seems ridiculous to me. I know we went through this the first time this came up, and I am glad there is something in there, even though the amount is $7,500.
The Chairman: The minister has invited us to look at this question. Senator Angus has a particular interest in this question to protect the public interest, and I am sure we will return to it.
Senator Meighen: I know it is a tall order, minister, but I will keep my questions short.
The Auditor General, in paragraph 2.40 said:
Law enforcement officers told us that suspicious transaction reports they received directly from banks often contain more useful information than FINTRAC disclosures — they are more current and provide the reasons for suspicion.
From what you have, I gather you feel you have addressed the question of the extent of the information provided; you have expanded the range of that information and the list of disclosure recipients, but is there anything in Bill C-25 that addresses the criticism of currency or timeliness?
Mr. Flaherty: Do you mean the timeliness of reporting by financial institutions to FINTRAC?
Senator Meighen: I mean comparing information from banks, for example, to FINTRAC; the information provided is more current or more timely.
Mr. Flaherty: FINTRAC is unusual in the sense that it gathers information over time and then decides to whom it will disseminate the information. In the bill, I do not think we have addressed the issue of timeliness. I know there are concerns about the timeliness of reporting of some of these transactions. There was something in the press recently about delay in information coming forward.
Ms. Lafleur: It is comparing apples and oranges, because the report that goes straight from the financial institution to the law enforcement institution is one single transaction at a point in time that may have looked suspicious. A FINTRAC disclosure is usually a result of number of different transactions between which they have drawn linkages and painted a more sophisticated and precise picture of illicit activity that might be going on. They are different kinds of products. FINTRAC can speak to that in more detail, but FINTRAC adds analysis and value in the work that it does before it discloses to law enforcement.
Senator Meighen: The Auditor General mentioned the currency issue, and I wonder if that is a serious problem. The bill now requires specified entities and individuals to report attempted suspicious transactions. Will the regulations outline the process? What happens if someone analyses incorrectly and does not think that the client is endeavouring to attempt to pass off a suspicious transaction and does not report it? What sanctions do you have in mind?
Mr. Flaherty: I noted in reviewing the material that the inclusion of the word "attempted" and those types of transactions, attempted transactions, came from this committee, and I thank the committee for that suggestion. It is important that even if a transaction may not go through, it may be equally suspicious and worthy of reporting to FINTRAC. I am advised that FINTRAC itself will issue guidelines to financial institutions about what constitutes an attempt.
Senator Meighen: We obviously had not thought it through as far as you had.
[Translation]
Senator Massicotte: Welcome, Mr. Minister. I am glad to have you with us. I would like to talk about this enormous challenge; this subject is of great concern and interest to us all. This subject should be of interest to all Canadians because if the problem is not properly handled, it could jeopardize our monetary system and public confidence in our basic economy. I strongly encourage you to take the necessary measures.
However, I wonder whether these measures are adequate. I noted that $132 million have been seized over a period of time, but experts say that the real problem is somewhere between $3 billion and $20 billion.
Can we feel confident in these measures when we have the impression that we are just dealing with a small part of the problem? What do you have to say about this?
[English]
Mr. Flaherty: That is a very good question. We are expanding the scope of the work by including some of the precious metals and different rules with respect to lawyers. It does not mean that we are getting to the end. The subject matter is criminal and terrorist behaviour of people who seek to launder money in different ways to finance their activities. As loopholes are closed by successful investigations, prosecutions and reporting, they will seek other ways to launder money. That is to be expected so we have to be as diligent as possible.
The statistics show us that there have been more than 500 money laundering charges since April 2003. I see a large number of voluntary information reports. The RCMP submitted 573 reports related to money laundering and 61 reports related to terrorist financing as at May 2006. We have had more than 5,000 seizures worth approximately $132 million; the Canada Revenue Agency has completed 35 special enforcement audits on individuals known or suspected of deriving income from the criminal economy, which resulted in federal tax assessments of over $4.2 million; and, as I mentioned, there were the recent arrests of alleged organized crime figures in Montreal.
It is difficult to gauge what degree of success that represents because one must first know the size of the iceberg. We can look at what has been done in other countries, and we know that we can do more. As well, we have challenges in Canada with counterfeiting. We must expand the scope so that new ways of money laundering are not successful.
[Translation]
Senator Massicotte: I share your concern because I am far from convinced that enough is being done.
I saw that an extra amount of $62 million was invested in the RCMP. But even the RCMP said, a few weeks ago, that they are lagging behind in all the necessary measures. They explained that they are just starting, but they are getting organized and that they will eventually get there, but the problem is very serious and I hope that we will succeed.
As we compare our statistics with those of other countries, I really feel that we are lagging far behind the United States. Of course, their economy is 12 times the size of ours, but it worries me anyway.
With regard to legal counsel, we hope that the arrangement will be satisfactory. You said that we must expect lawyers to act within the law. Let me add that I hope that all Canadian citizens are law-abiding.
When a disciplinary committee has to act against a member of the Bar who has not behaved correctly, the punishment is not very severe. I am afraid that the consequences are not very grave for those who commit offences. We should do something to make the consequences more serious for those who infringe upon our regulations and our legislation. Is there some way to educate the judges regarding this? We want to show them that an offence against the monetary system is very serious.
[English]
Mr. Flaherty: I am hesitating in my response because I am thinking about ongoing initiatives. The Bank of Canada is working with people in public office to try to educate them about the seriousness of white collar crime, money laundering, counterfeiting and the scope of those challenges in Canada. I take your suggestion seriously that education is an important function. Certainly, I would not presume to educate judges on the subject but I am sure if we make information available, they would welcome it.
Senator Fitzpatrick: On the number of charges, can you tell us how many convictions have resulted? Do you have an estimate of how many money laundering crimes might have taken place. It is a great big world full of this kind of activity. Have you any idea how large it truly is in terms of the number of money laundering crimes taking place on a daily or yearly basis?
Mr. Flaherty: I would be speculating if I did not speak to the statistics that we have. I am told that the Department of Justice Canada keeps statistics on the number of prosecutions but not on the results, which is rather remarkable.
Senator Fitzpatrick: It might be a good idea to find out the results.
Mr. Flaherty: I agree, and I will look into that.
Senator Moore: I want to go back to the response of Ms. Lafleur with regard to the regulations from the Department of Finance. Ms. Lafleur, you said that no regulations for the changes proposed by Bill C-25 have been prepared. Is that correct?
Ms. Lafleur: I said that none are ready to be or have been pre-published.
Senator Moore: Have they been prepared?
Ms. Lafleur: Some of the drafting work is ongoing.
Senator Moore: Are you halfway or nearly ready? If this bill were passed today, would you be ready to go with the regulations within one week?
Ms. Lafleur: No, we would like it to be as early as possible in the new year for pre-publication. In some cases we need the authority provided in the bill to do that. The regulations will go forward in batches of two or three sets. We need to sequence the work. They will not happen all at once.
Senator Moore: Do you consult with interested stakeholders with respect to each "batch," as you put it?
Ms. Lafleur: Yes.
Senator Moore: What categories are you talking about?
Ms. Lafleur: A number of regulations will relate to the provisions for enhanced due diligence and record keeping and will likely be in the first batch of regulations. There will be regulations related to the new money service business registration system and the relevant details. There will be regulations to bring in new reporting sectors, such as dealers in precious metals and gemstones.
Ms. Hemmings: There will also be regulations on the administrative money penalty scheme.
Senator Moore: Minister, at page 4 of your remarks, you talk about "suspicious attempted transactions" and that "FINTRAC will be providing guidance to reporting entities on indicators of these types transactions." Do we know if FINTRAC has prepared its guidelines? When will FINTRAC publish those guidelines?
Mr. Flaherty: I cannot give you the answer to that question right now, but I understand FINTRAC is testifying next.
Senator Moore: Have you had any discussions with them about their guidelines?
Mr. Flaherty: No.
Senator Moore: Senator Tkachuk asked about $7,500 threshold. Is $10,000 the right level? Was that number arrived at in discussion with the other 30-some members of the task force? How did you arrive at that number? Has it been reviewed? Is it appropriate? Should it be lower?
Mr. Flaherty: The $10,000 figure is consistent with international partners taking cash between countries. I sincerely invite honourable senators to look into this whole issue with respect to the lawyers as thoroughly as you are able and to give advice on the subject, because it concerns me as well as it obviously concerns a number of honourable senators here today.
Senator Moore: I do not raise that number as a matter of concern with members of the bar. They are officers of the court, and they take an oath. There are huge penalties, as you say. A lawyer could be denied the opportunity to practice and earn a living, which is the ultimate sanction. I am wondering about this $10,000 figure. You indicate that $7,500 was used in establishing the model with the bar societies, the lower the better. Do we go back at any time to our other 32 members of the task force and say we think $7,500 would be a better number? How do we do that, or do we do that?
Ms. Lafleur: The Financial Action Task Force on Money Laundering has not dictated what it considers large cash transactions. Different countries have gone with different thresholds. The Americans use $10,000 as their threshold. The Canadian standard is about as low as it goes with the Americans and the lower the better, as you say. You are right that maybe at some point the financial action task force may need to look at the different thresholds used by different countries to ensure that there is more consistency. It might be wise to lower that threshold. At this time, given the exchange rates, everybody is more or less in the same ballpark.
Senator Moore: Maybe I will have a more detailed discussion with FINTRAC on that subject.
The Chairman: I have a few questions, minister, and then we will allow you to go.
We agree with you, minister, that this is a grave situation worldwide. My own experience with talking to parliamentarians in Europe has been that this is a serious problem. All Parliaments are taking it seriously, in the Western world, at least. I discovered, to my amazement that they consider it and we consider it, having difficulty outlining the scope of the problem but being described as one of the second or third largest businesses in the world — illicit transactions and money laundering. It is a huge problem worldwide, and we are delighted that Canada will now take the lead on this important issue. I think it is important we do so. We commend you and the department for that work.
We made our interim report and anecdotally, after its completion, we discovered a number of other scams. As you said, the criminal mind is very nimble. As we close a loophole, another one opens up. The ministry and this committee must be ever diligent. We must ensure that Canada is not a haven for criminal activity.
Let me ask you two brief questions based on the anecdotal information we received after our interim report. Is the legislation sufficient to deal with the automobile scam or, in its regulatory power that will come under the committee after the act is proclaimed, will it be able to capture automobile scams? I will not get into the details of it. The department probably knows the details because this information is publicly available.
Mr. Flaherty: Yes, it is a matter for future review.
The Chairman: Are the powers under the proposed legislation sufficient to allow you to move quickly under regulation if you see this is a problem?
Mr. Flaherty: I am advised that we could do it through regulation if the bill is passed.
The Chairman: I raise this because these are issues that unfortunately we did not get to as a result of our study.
Another anecdotal problem is insurance. I know you have regulatory power because insurance companies are, in effect, financial institutions, and there is some regulatory power in the bill to deal with that. Have you looked at this question? Has the department looked at this question? Will the regulations, if not covered specifically in the bill, be able to deal with insurance scams?
Ms. Lafleur: Does your question concern the life sector or the property and casualty sector?
The Chairman: My question concerns the life sector.
Ms. Lafleur: The life sector is already covered by the regime. The property and casualty sector is not, because the risk assessments indicated a very limited scope for risk in that sector. As the legislation provides for regular reviews, we continue to update those risk assessments. We have not identified any significant risks in that sector at this time.
The Chairman: I assume that because of the regulatory power of the ministry, you will have an opportunity to discuss this with the corporations that deal with this activity. We hope you do that. We understand that we cannot be pluperfect here, but we can certainly have an oversight and put those companies on notice that this is a problem. Once we do that, minister, I think that may help you and your ministry and the prosecutorial arm to deal with this problem.
Mr. Flaherty: We deal with them regularly in any event, as you know, so that will be something we can discuss with them.
The Chairman: Let me ask a question that I think was asked but not clearly responded to. This is regarding the disclosure of information by FINTRAC to the Communications Security Establishment.
The Privacy Commissioner has questioned the need for this provision. Sharing information with the Communications Security Establishment would cast, he feels, suspicion on individuals, with the result individuals would be subject to enhanced surveillance, which would feedback to the RCMP, CSIS and perhaps FINTRAC. The Privacy Commissioner believes, and I hope this is not out of context, that if the RCMP or CSIS wants to provide this information to CSE regarding possible surveillance, it should do so directly. Would you care to comment on this for the purpose of the record? We are hearing the Privacy Commissioner next week, and it will be very important for us to have your take on that.
Ms. Lafleur: Are you saying a concern has been raised with FINTRAC being able to disclose certain information to CSE where there are matters of potential national security?
The Chairman: No. It is with respect to casting suspicion on individuals that would be subject to enhanced security. The question is can that be fed directly to CSE as opposed to doing it through FINTRAC?
Ms. Lafleur: Whether individuals can provide information directly to the CSE?
The Chairman: Yes.
Ms. Lafleur: I do not think there is anything that prevents it. We do not need legislation to enable that.
The Chairman: We are looking at clause 26 of the bill. To be clear, I am trying to answer my own question. We received this comment from the Privacy Commissioner, and I will give it directly to you.
The Privacy Commissioner commented:
The bill proposes to allow FINTRAC to share information with the Communications Securities Establishment if it determines that the information is relevant to the mandate of CSE in paragraph 273.64(1)(a) of the National Defence Act.
The paragraph the commissioner refers to states:
to acquire and use information for global information infrastructure for the purpose of providing foreign intelligence in accordance with the government's intelligence priorities.
The commissioner continues:
The act allows FINTRAC to share the information with the RCMP, CSIS and the Canadian Revenue Agency, the Canada Border Services Agency, Citizenship and Immigration to investigate and, presumably prosecute, money laundering, terrorist financing, tax evasion, fraud and other offences. However, CSE is not an investigation or enforcement agency and any information shared with CSE cannot be used for enforcement purposes. CSE can, however, conduct surveillance and sharing information with CSE may simply cast suspicion on individuals with the likely result that they will be subject to increased surveillance or above the surveillance, or and above the surveillance inherent in the scheme as a whole. Any information obtained by CSE as a result of its intelligence gathering activities could then be disclosed to the RCMP or CSIS and potentially fed back to FINTRAC via the RCMP's ability to voluntarily provide information to FINTRAC. We question the need for this provision. If the RCMP or CSIS wants to provide information to CSE re: possible surveillance targets it should do so directly.
That is in the written request that you received from the Privacy Commissioner. Frankly, I think the commissioner is saying that we should not allow the information to be fed back to the RCMP that would not come through the front door.
Mr. Flaherty: There is a standard whereby FINTRAC must act reasonably and must act on the reasonable belief that the information they have relates to terrorism and money laundering before they pass it on to anyone else. FINTRAC does not have to pass it on to anyone else. The other large point is that FINTRAC is independent and arm's length from law enforcement in Canada.
The Chairman: Having heard your answer, I take it that the Privacy Commission can, at any time, make a spot check and investigation on any matter that the commissioner deems important. There is that interim check at any time before its two-year review. We certainly welcome that.
Mr. Flaherty: I think that is an important safeguard for Canadians, yes.
The Chairman: If I can sum up the safeguards, as I understand them — because I think it is important for the Privacy Commissioner to respond, as he will be here — we have these safeguards for the rights of the individual Canadian.
First, we have the ministry itself. You have told us that FINTRAC reports to you and, therefore, this is a concern for you and your ministry. Second, we have the safeguard with respect to FINTRAC itself acting reasonably within the confines of the law. We then have the ability of the Privacy Commissioner to respond to spot checks at any time on anything the commission feels is inappropriate. Finally, we have the two-year review that will allow this committee to deal with it in a formal way because that would be a report to Parliament. The ultimate test would be the five-year review, when we can examine any inappropriate conduct on behalf of any agency that is the subject matter of this bill.
Is that a fair summary of the protection the public would have to protect its privacy?
Mr. Flaherty: Yes, and in addition, there are the criminal penalties for any unauthorized use or disclosure of the personal information under FINTRACs control and the reality that FINTRAC and its employees are immune to subpoenas or other forms of compulsory process, except in respect of money laundering in terrorist financing investigations and prosecutions.
The Chairman: The final question for you, minister, is a concern this committee has with respect to prosecutions. Senator Angus referred to our meetings in New York with the Manhattan district attorney, a very iconic figure in the United States, Mr. Morgenthau, who spent time with the committee because he was interested in our work. This committee is concerned with the question that Senator Massicotte raised, namely, the question of white collar crime. This fits into that category in an overlapping way.
Minister, are you satisfied that the prosecutorial arm to surveil this legislation is sufficient in terms of funding as well as expertise?
Mr. Flaherty: You can probably guess what I will say about funding. I will say yes, because of the allocation in the budget this year of $64 million. That allocation was made as a result of the very serious concern that the Government of Canada has with respect to money laundering and anti-terrorist financing. It is a substantial contribution.
Can we do better on the prosecution side? I will not speak for the Minister of Justice, but I know he feels strongly that we must be diligent on the prosecutorial side. When I look at the numbers, I think perhaps more could be done on the prosecution side. I welcome your advice about your meetings with the district attorney in New York.
The Chairman: Let me provide a quick rebuttal. We asked Mr. Morgenthau what the budget was for his white-collar crime unit. I think it was $60-$70 million for New York for the Manhattan district attorney on this aspect alone. If you did a rough comparison in terms of the size of our economy to their economy, I would think this is something that you may give continuing consideration to. This committee will be looking at this question through every measure we deal with. We are not happy with the prosecutorial arm, as Senator Massicotte has said. We will allow the RCMP and FINTRAC to respond, but this is something we are interested in and, hopefully, you will be as well.
Mr. Flaherty: Yes.
Senator Goldstein: I have an observation. In the course of your remarks a few moments ago, you spoke about one of the safeguards the fact that there must be reasonable grounds to believe that money laundering has occurred or may occur. I think the criterion in the act is reasonable suspicion that it is occurring. That is quite a different threshold than reasonable grounds to believe.
Mr. Flaherty: I am advised that it is reasonable grounds to suspect.
Senator Goldstein: Yes. Some of us have expressed some concern about that. I guess we will have occasion to deal with it when we speak to representatives of FINTRAC.
The Chairman: Minister, thank you very much. I know you have stayed well over your allotted time. I appreciate that and appreciate the information we have received from you and your department. As I say, we welcome your invitation for us to have an ongoing role in this matter. We are concerned about Canada and we want to ensure there is no sign outside that says Canada is a safe haven for money laundering and elicit conduct. We will do our best to help you and the public interest to maintain a safe and secure economy that has integrity and honesty.
Mr. Flaherty: Thank you.
The Chairman: We have taken extra time with the minister, and that was important, but we only have half an hour remaining before we must leave this room for another committee. I apologize to our witnesses.
I would ask the witnesses to limit their opening comments to allow time for the senators to ask some questions.
We are here to continue our review of an act to amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the Income Tax Act and make amendments to Bill C-25.
Please limit your opening remarks and then we will get into questions.
Glynnis French, Deputy Director, Strategies and Partnerships, Financial Transactions and Reports Analysis Centre of Canada (FINTRAC): Before I begin, I will introduce my colleagues.
With me is Yvon Carrière, Mr. Mark Potter, and Jim Butcher.
[Translation]
We are glad to be back before the committee members today to discuss the importance of the provisions of Bill C-25 for FINTRAC and for the entire Canadian plan designed to fight money laundering and the funding of terrorist activities.
[English]
We appreciate the committee's study of the legislation. The support you lend in an effort to improve Canada's capacity to combat money laundering and terrorist activity is encouraging and helpful. Your constructive report raised the profile of money laundering and terrorist financing on the national scene and has drawn attention to some of the challenges we face.
We are here to discuss amendments to the current regime. It is important to recognize that the existing regime is working. We have had success in the short period of time it has been in place. The regime is well-regarded by international counterparts.
FINTRAC makes an important contribution to that success. In our annual report tabled two months ago, in 2005- 06 we produced 168 case disclosures of suspect financial activity involving more than $5 billion in transactions. Since FINTRAC began five years ago, we have made 610 case disclosures involving transactions valued at over $8 billion. We are gratified that financial intelligence contributed by FINTRAC is reflected in investigations, charges, and prosecutions.
As noted in your report, methods used to launder money and finance terrorism are changing, international standards are rising, and all countries are expected to meet them. It is necessary to make amendments to the legislative framework. FINTRAC believes the bill is consistent with the committee's recommendations.
From an operational perspective, there are three elements to the proposed legislative package that are important to FINTRAC. These are: Expanding coverage of the act to new entities and professions, strengthening the deterrence provisions of the act, and expanding the range of information that FINTRAC may disclose.
Bill C-25 will expand the coverage of the anti-terrorist financing regime by bringing additional business sectors within the ambit of the legislation and regulations; for example, the legal profession and dealers in precious metals and stones. These sectors are vulnerable to money laundering. Their inclusion will strengthen Canada's efforts to combat money laundering and terrorist activity financing.
The bill will strengthen the deterrence component of the regime by creating a registry for money services businesses and establishing a system of administrative monetary penalties. These proposed measures will improve compliance with essential reporting, record-keeping, and client identification provisions of the law. This will contribute to FINTRAC's analysis and strengthen the deterrence of money laundering in Canada.
[Translation]
Third, Bill C-25 will enhance the information that FINTRAC can disclose to law enforcement and national security organizations, by broadening the nature of the information it can disclose while carefully protecting the privacy rights of Canadians. This will meet the needs of law enforcement organizations and they will be able to make better use of FINTRAC's main product.
[English]
I draw your attention to one aspect of the amendments. A bedrock issue to both Houses is the protection of privacy. As acknowledged in your report, the act was crafted to ensure the highest protection for personal information. It made it possible for some information to be disclosed to law enforcement to facilitate detection and deterrence of serious criminal activity. The protections begin with the nature of the institutional arrangements that establish FINTRAC as an independent and arm's length entity that receives and analyzes reported financial transaction information. It can only pass on information if particular tests are done. The information we hold cannot be accessed by outside bodies except by court-granted production order. The act provides for criminal penalties to be applied to the unauthorized disclosure.
[Translation]
We take our responsibility for protecting this information very seriously. As an institution, we firmly believe that protecting private information is and must be the cornerstone of an efficient system.
[English]
FINTRAC has and will be willing to cooperate with the Privacy Commissioner in conducting reviews of the measures taken to protect information we receive or collect. We support the amendment to the bill that mandates a biennial review.
FINTRAC is supportive of the amendments proposed in Bill C-25. The amendments will help ensure Canada's anti- money laundering and antiterrorist financing regime stays strong and effective into the future.
Nicolas Burbidge, Senior Director, Office of the Superintendent of Financial Institutions Canada: Chairman and honourable senators, I thank you for the opportunity to appear before you as part of your consideration of Bill C-25.
I am the head of the group at OSFI responsible for the anti-money laundering and anti-terrorist financing program, AML/ATF program. Appearing with me is my colleague, Keith Martin, who heads our AML/ATF assessment team.
We are here to say that OSFI supports the passage of Bill C-25. Early next year, Canada's adherence to international AML standards will be reviewed by the financial action task force, FATF.
The FATF is a multinational body that sets international standards. It uses a peer review system to evaluate its implementation in member countries. OSFI has participated in the FATF review process. We know the importance that will be attached to the contents of Bill C-25 in Canada's evaluation. A good review will reinforce the perception that Canada is a safe place for financial transactions and investments. Strong AML programs are important for a safe and sound financial system.
Bill C-25 makes important changes required by the standards and includes the requirement to report suspicious attempted transactions and identify beneficial owners of clients that are corporations of other entities. Other changes include the prohibition of account opening, if the identity of the client cannot be established and the requirement to determine whether a client is a politically exposed person. Bill C-25 includes the requirement to apply customer due diligence to higher-risk accounts and transactions and enhanced identification requirements around correspondent banking. The last change is the requirement for Canadian financial institutions to conform to Canadian regulations and standards.
[Translation]
These measures are not new to the federal financial sector. The large Canadian banks already follow such measures in those countries that apply these standards. Moreover, more than three years ago, FATF adopted these standards.
Consequently, the financial sector has had plenty of time to prepare for adopting such measures in Canada.
[English]
For the reasons provided, Bill C-25 raises the bar considerably on AML standards in Canada, and it will require increased effort and resources by the financial sector to implement. While the higher standards set out in this bill come at a cost, we believe that the alternative would cost Canadians much more in the long run. When we last appeared before this committee in May, I reviewed our adherence to world banking and insurance standards, which require the office to be able to determine whether banks and federally regulated life insurers have adequate know-your-customer policies and procedures in place. We at OSFI will continue to work with our regulated entities to ensure that these policies and procedures are robust enough to prevent financial institutions being used by criminal elements and terrorists.
We believe the enactment of Bill C-25 will result in Canada being viewed internationally as having a strong anti- money laundering regime.
The Chairman: Thank you for your cogency and conciseness.
Senator Angus: I will address both FINTRAC and OSFI. I believe that all of you were in the room when the minister testified this afternoon. You would have heard him say that his goal would be to have Canada be best in as much as we have a high profile position on the task force. In your opinion, will Bill C-25 get us there, if enacted as drafted?
Ms. French: Thank you for the question. I would say, yes, this legislation does take us up a notch. We have a very robust regime but, as the minister mentioned, criminals are continually finding new ways to take advantage of the system. Both international standards and the bodies set in place to deal with the issue need to be advancing continually to ensure that they keep up with changes taking place in the marketplace. This takes us up a notch and gets us closer. It is a very robust regime.
Mr. Burbidge: I concur with Ms. French.
Senator Angus: When you say it takes us up a notch and gets us closer suggests to me that we are not there yet. The task force has its 40 basic recommendations and the nine special recommendations. To what extent will we comply in that regard?
Ms. French: Finance officials would agree that perfection is difficult in this area because the issues are constantly evolving. Certainly, this does meet the basic requirements established by the FATF through the 40 basic recommendations and the nine special recommendations. It does bring us into compliance. Canada will be subject to a review by the FATF. We do not anticipate that we will come out of that review with a perfect record because no country has done so. However, we believe this will take us a lot closer.
Senator Angus: Mr. Burbidge, in your opening statement, you said:
For the reasons provided, Bill C-25 raises the bar considerably on AML standards in Canada, and it will require increased effort and resources by the financial sector to implement.
Can you enlarge on that statement please?
Mr. Burbidge: Yes, Canada's banks and other financial institutions that we regulate or supervise are spending a considerable amount of resources in terms of dollars and in terms of people to implement the existing regime. There is no question that some of these new requirements will require additional effort.
I single them out because they are very important to bring us up to the kind of standards and measures that the FATF is expecting. I have been trained in how to evaluate compliance with FATF standards of other countries and it is an extremely complex system. There are 49 recommendations and each is broken down into numerous subtopics that cross-weave one another. It is extremely complex. As my colleague from FINTRAC has said, no country has achieved a perfect score on these requirements. The banks have invested many resources into the existing regime and are now well placed to leverage off the systems. They have their training in place in their institutions to implement these new requirements. It is not as if they are starting from scratch. Like any other regime that involves compliance, it comes at a cost. Those costs are being borne by the financial community willingly because the financial community shares the view that these measures are important and that they are required to keep up the fight against the bad guys.
Senator Angus: As you know, Canada has enjoyed an envious reputation in world financial circles for its banking system and services to Canadian citizens at all levels and with all means.
Do you see some negative elements in these rules and regulations that would impact negatively on banking services?
We have heard testimony in committee hearings that there has been an incredible and sudden growth in money service businesses. We have been told that there are different kinds of them across the country, such as exchange offices. They grew up as they did because the banks were vacating this service. There was too much red tape and it became too cumbersome, onerous and expensive for banks to provide bank accounts for people with low-level accounting — people who would have $1,000 here and $400 there that they would want to transfer to other countries. Banks have vacated the area for apparently reasonable reasons so these other businesses have grown to fill the void, apparently legitimately on the face of it. However, they became a potential source of abuse by the criminal element because they are unregulated. We have heard of all the potentially bad things about this new industry in terms of the bill regulating them and requiring registration. Could the banks be criticized for vacating the field?
Mr. Burbidge: We have always taken the position that banks have to make the ultimate decision as to whom they will or not provide banking services. It is quite true that over the past several years, since Canada brought in this legislation, there has been an increase in the money service business, but I think that is why the government is now bringing these measures forward in order to extend coverage to money services businesses. We do not regulate the money service business, nor will we under this bill. That will be someone else's job. However, banks are free to provide banking services to whomever they choose. No one is requiring banks to provide banking services to one particular customer or another. There is always a concern that the more regulation you bring in, the more the illicit transaction trade might move to unregulated areas and that is another reason for extending the regime to money service businesses.
Ms. French: Under the current law, money services bureaus and foreign exchange are subject to the PCMLTFA. They are required to have a compliance regime, they are required to keep records, they must do client ID, and they must report suspicious transactions or transactions above the established thresholds to FINTRAC.
It has been noted that the money services bureau sector, given that it is unregulated, is more vulnerable to money laundering and to abuses of one kind or another. This will ensure that we know who they are, that they are identifiable and that the directors and people who run these businesses are known and are part of that registration system.
Senator Angus: We are in a time bind, but I have to tell you that this is an area in which we have concern. You have the five or six main chartered banks and while it is a free economy and they are free to choose their customers and so on, there is an element of give and take in our system here. This committee takes a great interest, and has done for 139 years, in what our banks do and do not do. If there is a problem as a result of this situation of money laundering and terrorist financing that is hurting our bank services, we will be interested in it.
How can you regulate it? Will this bill be sufficient when you have hundreds and hundreds and literally thousands of these money service businesses that will suddenly be subject to regulation? Is the infrastructure in place? Are the resources available?
Ms. French: The onus will be on money services bureaus to submit themselves to the registration process. It is our intent to make that registration as simple and straightforward as it can possibly be. Accordingly, we do believe that legitimate money services bureaus will come forward and will have themselves registered by the system that FINTRAC is putting in place. If they are not, they are acting contrary to the law.
Senator Angus: The question is who will enforce it?
Senator Moore: I think you were here during the minister's presentation and remarks. I asked him with respect to the reporting of suspicious attempted transactions. He said that FINTRAC will be providing guidance to reporting entities on indicators of these types of transactions. Have you prepared those guidelines?
Ms. French: We are certainly working on the guidelines, but of course, the law has not been passed. We are working toward the system that would provide guidelines to reporting entities. It is actually pretty simple, because it would be an instance where a reporting entity believes that a client coming into the bank is trying to do something that is suspicious and then decides not to go forward with the transaction. That would be a case of an attempted suspicious transaction. It would be an instance where the client decides not to proceed with the transaction.
Senator Moore: How do you disseminate? Do you put together a memo and ship it out to the banks and financial services businesses?
Ms. French: We do a tremendous amount of work with reporting entities to ensure that they understand their responsibilities. We have a comprehensive program of outreach training, information systems, pamphlets and briefings, and, in addition, guidelines on our website.
Senator Moore: Turning now to the Financial Action Task Force, you may have heard me ask questions with regard to the $10,000 threshold. Which countries do we do most transactions with? I would like to know what the numbers are and what the corresponding threshold is in each of the countries with whom we are doing the balance of our transactions. Do you have that information or could you give that to us later?
Ms. French: I will ask my colleague from the compliance sector if he has that information at hand. Given the fact that our largest trading partner is the United States, it is very likely that the greatest number of international wire transfers is in fact with the United States. I would like to have that confirmed by my colleague. As was mentioned earlier, they do have a $10,000 reporting threshold as well.
The Chairman: I would hope that you could give that information as soon as possible. If you cannot give it now, tomorrow or the next day.
James Butcher, Assistant Director, Regional Operations and Compliance, Financial Transactions and Reports Analysis Centre of Canada (FINTRAC): I cannot give you those numbers off the top of my head. We capture electronic funds transfers and instructions to transfer funds, which may be different from the question you are asking in regard to where the business goes, mostly north-south to the U.S. or mostly overseas. It depends on the question. What we do capture is the instructions to transfer funds in or out of Canada. That is reported to us either by the banks or the money services business, which may not correspond exactly to your question of where the commerce is going. We are capturing the funds. I do not have here the numbers that say X percentage goes north-south or Y percentage goes here or there.
Senator Moore: We know we are doing business with 32 other countries.
The Chairman: If you can give us whatever you have in writing, we would appreciate that.
Senator Moore: Is that $10,000 threshold looked at when you have meetings of the membership of the task force? Do you think you could catch more if it were lower, or are we fine where we are? Was it ever higher and it came down to $10,000? What is that number?
Ms. French: In our regime, it has always been $10,000.
Senator Moore: How long has that been?
Ms. French: Since the year 2000, when the legislation was brought forward. It is a practical matter. For one thing, the $10,000 threshold is well understood by reporting entities. It is easy for them, and it is easy for the sector in general. There are many other reasons why we think the threshold is a good one. Other jurisdictions have similar thresholds, and that makes it easy. We believe it is consistent with criminal activity, and the funds are of sufficient size that it is worth collecting that information. It is worth noting that already we receive about six million large cash transactions reported per year and an additional nine million electronic funds transfers.
Senator Moore: I have one other question. We heard numbers about the prosecution, and so on. A case was reported in the Montreal Gazette on December 2 which stated that, "Vast sums of money being transferred to such institutions as offshore accounts. Just two weeks ago, a Quebec man accused of laundering $1 billion in drug money through a Bahamas-based investment firm was convicted in New York. Martin Tremblay of Chicoutimi pleaded guilty November 20 to using Dominion Investments Limited to hide the proceeds of narcotics trafficking."
Are you aware of that case?
Ms. French: The provisions within the PCMLTFA prohibit me from speaking about any individual case. I can neither confirm nor deny.
Senator Moore: You cannot say you are aware of it? You are aware of it now.
Ms. French: We do read the paper, yes.
Senator Moore: In that case, $1 billion, would you go speak to the authorities in New York or someone in the Bahamas or elsewhere and try to find out how to prevent that in the future? That is a huge sum.
Ms. French: As a generic review, we do that on an ongoing basis to determine that we are implementing systems and processes and analytical approaches that are state of the art and ahead of the game to try to ensure these kinds of things. I need to underline that we are not an investigative body. Our job is to look at transactions and to report suspicious transactions.
Senator Moore: A case of that size probably does not happen every day. You probably have cause to speak to your American counterparts who are members of the task force and say, "We have to talk about that." I would do that if I were in your shoes, but would you not do that?
Yvon Carrière, Senior Counsel, Financial Transactions and Reports Analysis Centre of Canada (FINTRAC): FINTRAC is a member of the Egmont group that has a biyearly exercise of typologies where all the financial intelligence units get together and discuss the latest money laundering trends and the most important cases. I expect the case you refer to would be discussed in that forum.
Senator Moore: That is just yearly?
Mr. Carrière: There are more than just yearly meetings of the group; that is for sure.
Senator Meighen: I am not sure if I understood or if the minister was able to provide an answer for this question.
What sort of penalties are contemplated in the regulations for someone found to have failed to have correctly identified an attempted transaction? It seems to me that identifying attempted transactions is not all that easy. It might slip through with all the good faith in the world. Is it contemplated that the regulations would impose a serious penalty?
Ms. French: My understanding is that we are introducing an administrative monitoring penalties regime to augment what is currently available to us through the criminal penalty system. Those penalties will range from minor serious to very serious. Failure to report is a very serious offence under the act. We will have to work with that to determine how to implement the kind of penalties that we want to put in place.
Senator Meighen: Is it your instinct that an attempted transaction is considerably different from a completed transaction in terms of reporting?
Mr. Carrière: Right now, the act provides a penalty for failing to report a suspicious transaction.
Senator Meighen: What about an attempted suspicious transaction?
Mr. Carrière: I think the intent is that the same penalty that now applies to failure to report a suspicious transaction would apply to the failure to report an attempted suspicious transaction. Those penalties apply only when the failure is knowingly done. It is knowingly contravening the duty to report an attempted suspicious transaction or a suspicious transaction.
Senator Meighen: Are we measured by both the FATF and the United Nations Convention for the Suppression of the Financing of Terrorism?
Mr. Carrière: The evaluation to which Canada will be subject is only with respect to anti-money laundering measures. I do not think there is a yearly evaluation with respect to how well we respect the UN convention against terrorism.
Senator Meighen: Is there any evaluation?
Mr. Burbidge: The FATF evaluation covers compliance both with anti-money laundering legislation and also anti- terrorist financing legislation.
If you are asking specifically about United Nations conventions, the FATF looks at how a country implements the United Nations resolutions relating to counter terrorism matters and is that regime compatible and does it do the job? The anti-terrorist part of the regime is evaluated. There are nine recommendations that the FATF specifically directs at counterterrorism measures.
Senator Goldstein: The statute proposes to increase retention time from five years to 10 years, and in the case of an ongoing investigation, 15 years.
What motivated you to double this? Have you been experiencing difficulties about the relatively short retention time? I think five years is long, but you apparently think it is short and you are doubling it. Can you tell us quickly why and what your specific experience has been with respect to retention for only five years?
Ms. French: The provision that changes the retention of reports will allow FINTRAC to do much better trend analysis over time. We do need to have reports in hand for at least a 10-year period in order to do appropriate strategic analysis of what we are seeing in terms of different trends happening in money laundering and terrorist financing. It allows us to do that.
The Chairman: We are over our time. Senator Massicotte, the final question. If you have the question, please provide it in writing and please respond as quickly as possible. We are over our time with another committee.
[Translation]
Senator Massicotte: Let me come back to a big challenge facing this bill. Money laundering can be very harmful to the economy, to our confidence and to ourselves. I would like to hear your comments, if possible, to reassure us that the measures are adequate and that we are in control of the situation. I am sure that we all have the same experience: when we travel to various Canadian cities, we see restaurants, hotels and all kinds of business enterprises that we know are not viable and we know that they are simply there as fronts for money laundering.
Give us a few words to reassure us that we are really in control of the problem.
[English]
Ms. French: I can confirm that these measures improve the regime and will certainly help FINTRAC do its job more effectively. We believe it will help all members of the regime do their jobs more effectively.
[Translation]
Senator Massicotte: That was not my question. I know that it will help, I have no doubt, but is it adequate? This is a major problem and I feel that we are talking about it without really coming to grips with it. Are you really positive that the problem will be solved with these measures?
Ms. French: I think that the same problem exists in every country. It is a big problem and we can seek out the solutions step-by-step. We have taken a few measures that have gotten us closer to a more efficient system.
Senator Massicotte: I know that we are in a race, but I feel that the bad guys are winning and that we are losing.
[English]
Mr. Burbidge: You must realize that the regulated sector, the sector I know the most about, processes millions of transactions a day. There is an obligation to look at suspicious activity and now attempted suspicious activity.
That translates into a tremendous amount of surveillance. When you couple that with the requirement to identify and apply enhanced monitoring to higher-risk situations, we are moving forward. That generates a huge amount of activity on the part of the regulated sector for sure. You can have confidence that activity is going on bringing greater surveillance and greater monitoring to try and catch the bad guys.
The Chairman: Our time has been shortened because of the minister's time. We want to thank both your agencies for the work you are doing on our behalf.
The committee adjourned.