Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 12 - Evidence - Meeting of December 7, 2006
OTTAWA, Thursday, December 7, 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 10:50 a.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Good morning, ladies and gentlemen. We are here to continue our examination of Bill C-25, Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the Income Tax Act and to make a consequential amendment to another act. You will recall that this committee prepared an interim report that raised a series of questions affecting this bill. We were delighted yesterday by the minister's testimony that a number of our recommendations were incorporated in the bill in order to give Parliament better oversight when dealing with questions of privacy.
We are delighted to have before us representatives from the Royal Canadian Mounted Police, Raf Souccar, Denis Constant and Richard Reynolds. Gentlemen, welcome. We know this is a difficult time for the force, but this committee respects the force and its integrity, honesty and decency. The force represents, for us, the best in Canada. We are delighted that you are able to appear before the committee this morning to provide testimony in respect of Bill C-25. You have heard that we are interested in what the RCMP has been doing with regard to enforcement of this measure. We look forward with cogent and careful interest to everything you have to say. Please proceed.
Raf Souccar, Assistant Commissioner, Federal and International Operations, Royal Canadian Mounted Police: Thank you, senator, for your kind words of support. It is much appreciated.
Honourable members of the committee, I would like to thank you for the opportunity to address your committee on the important issue of money laundering and terrorist financing in Canada.
With me are Chief Superintendent Denis Constant, Director General for Financial Crime in Federal and International Operations; and Superintendent Rick Reynolds, Director of National Security Operations Branch under our National Security Investigations Directorate. Both of these gentlemen have extensive experience in their respective areas and, between the three of us, I hope we will be able to address and answer your questions.
Canada's anti-money laundering and anti-terrorist financing regime impacts two separate branches of the RCMP: The Proceeds of Crime Branch, which is the authority overseeing the anti-money laundering regime; and the National Security Operations Branch, which oversees the anti-terrorist financing regime. The RCMP continues to work closely with Finance Canada; the Financial Transactions and Reports Analysis Centre of Canada, FINTRAC; and other interdepartmental partners to enhance Canada's efforts in these areas.
The initiative was evaluated twice in 2004, once by a private firm named EKOS and again by the Office of the Auditor General of Canada. Both reports commented on the lack of information contained in FINTRAC disclosure reports as well as a need to increase resource legislatives for the RCMP. As you know, in addition to the legislative review of Canada's Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which led to the tabling of Bill C-25 in the House of Commons on October 5, 2006, Canada's regime will undergo mutual evaluation in March 2007 by the Financial Action Task Force. In light of the Financial Action Task Force's mutual evaluation of Canada's regime, legislative and regulatory amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and increases in funding were announced in Budget 2006 to enhance Canada's framework. The Treasury Board's submission to provide funding to enhance federal capacity in combating money laundering and terrorist financing was approved on October 5, 2006.
The RCMP's Proceeds of Crime Branch will receive funding for 12 additional investigators to help build capacity in the three major financial centres of Montreal, Toronto and Vancouver, while the RCMP's National Security Operations Branch will receive funding for 33 investigators, allowing the RCMP to form dedicated terrorism financing units within each of the RCMP's Integrated National Security Enforcement Teams, INSET.
[Translation]
The RCMP values the contribution of FINTRAC in its fight against money laundering and terrorist financing. FINTRAC is one of the many sources of intelligence to support the various cases we pursue.
As stated in the 2004 report of the Auditor General of Canada and the five-year evaluation of the national initiative to combat money laundering, the effectiveness of FINTRAC disclosures is limited by legislative restrictions that constrain the information that can be disclosed.
Due to these restrictions on the amount of information FINTRAC can share with law enforcement, their leads often cannot compete successfully with other sources of information for scarce resources, especially when the information is not provided in a timely manner.
[English]
The RCMP is of the view that FINTRAC should provide the reasoning underlying the determination that a transaction is deemed suspicious when disclosing information to law enforcement agencies. The RCMP is also of the view that the threshold for obtaining a production order should be lowered from "reasonable grounds to believe" to "reasonable grounds to suspect." It should be stressed that law enforcement is not seeking direct access to FINTRAC's information. The RCMP continues to respect its arm's-length relationship with FINTRAC and the need to ensure that personal information under its control is protected.
However, once this independent agency has reasonable grounds to suspect that their information would be relevant to investigating or prosecuting a money-laundering offence, this information should be made more readily available to Canadian law enforcement agencies at the front end of the investigative process. Under current reality, law enforcement must conduct almost a full investigation before gaining access to the analysis reports produced by FINTRAC.
In the proposed legislation, FINTRAC becomes the registrar of money service businesses. The RCMP believes that FINTRAC should make the registry available to law enforcement agencies, which would be a positive enhancement to the existing regime. The RCMP provides FINTRAC with voluntary information reports that state that a proceeds of crime (money laundering) investigation is being conducted. They provide a full summary of the criminal investigation as well as pertinent details on the subjects being investigated.
The RCMP supports inclusion of the law profession in Bill C-25. This inclusion fills a significant gap to the existing regime. Lawyers are highly vulnerable to the use of their services knowingly or unknowingly by major national or international crime groups operating in Canada and abroad. These are my comments. Thank you for the opportunity to provide the information.
The Chairman: I have to say to honourable senators that I was a little unfair to some of them yesterday because of our mistress, the clock. Today, I will change the order for questioning and begin with Senator Massicotte.
[Translation]
Senator Massicotte: I would like to start by welcoming our witnesses. In the past 12 months, $132 million in assets have been seized. Some experts say that money laundering amounts to a figure between $3 and $20 billion every year. Canadians may think that the changes are very good, but that we are not really succeed in controlling money laundering. As we have seen in the case of some countries, when people lose confidence in the economy, there's a very significant impact on the quality of life.
Can you assure us that the amendments are adequate and that the RCMP has the resources it needs to manage this very significant threat to our economy and to our quality of life?
[English]
Mr. Souccar: You are absolutely right. Economic integrity in the economy of Canada depends very much on the extent to which financial crime is allowed to continue. The RCMP recognizes that, and we have made economic integrity one of our five strategic priorities.
How much of the information that comes to our attention are we able to investigate? We are aware that there are 800 criminal organizations in Canada, and we have a capacity to investigate perhaps 150 of them. To each investigation that we conduct, we have a proceeds of crime component and a money-laundering component. That is with respect to organized crime.
With respect to national security, the same type of initiative is in place whereby we try to conduct the terrorism financing investigation along with the terrorist national security investigation itself. Resources are an issue. It would be great to have a complete team totally dedicated to money laundering or terrorist financing with every investigation. The only commonality of organized groups is money; they want to make money any way they can. The activity does not matter. In terms of national security investigations, it is a means to an end. They require the financing in order to be able to carry out their activities. It is a little different, but the commonality is there.
[Translation]
Senator Massicotte: If I understand correctly, the $3 million you are being given for 12 additional employees is not adequate?
[English]
Mr. Souccar: You are absolutely right. It is an improvement, but we need capacity in all our investigations to be able to go after the money. In an organized crime investigation, where we seize a shipment of 500 kilos of cocaine, an organization will consider that the cost of doing business. They expect to lose a shipment every now and then. We make the proper steps if we follow the money, get to the root of it and destabilize the organization by attacking their finances. It also helps protect the economy of Canada in that it takes away the unfair competition that may be derived from utilization of dirty money to compete with legitimate business.
[Translation]
Senator Massicotte: Could that explain the lack of resources? The comment is made by ordinary Canadian citizens. During our recent trip to the United States we noticed a number of things. We could mention the example of Mr. Eagleson, Conrad Black or Mr. Tremblay, who recently faced charges in the United States. It actually appears that Canadians are monitored more closely by Americans than by our own people. Sometimes it seems that we are not doing our job. An RCMP report published about five weeks ago said that the main reason for this was that they were getting organized and things would eventually improve. Is that really the case? And will we still be saying the same thing five years from now?
Denis Constant, Chief Superintendent, Director General, Financial Crime, Royal Canadian Mounted Police: You have raised a very important question. To all intents and purposes, we have to assume that the problem involving the proceeds of crime in Canada is an international problem. It is international in scope, and we need an international response to deal with it. I think that to some extent, Canada is doing its share. In this area, the agencies that have a role to play are doing a good job with the instruments and tools available to them at the moment. I think that trying to make comparisons with other countries will not help define the entire problem. The American system has some mechanisms in place that we do not have in Canada. They have a civil process regarding the proceeds of crime.
The Americans use this tool a great deal. That tool does not exist here. We have a civil process, which has started being approved in some Canadian provinces, but it is strictly within some provinces. The process does not apply at the federal level.
Senator Massicotte: Some will say that my favourite subject is lawyers. The bill puts forward some amendments to give lawyers the responsibility of managing their own profession. Are the proposed changes adequate? Will we trust the profession, the Bar to provide its own management and to require regulations? Are you satisfied with the regulations proposed by the Bar? And will we be able to rely on the profession to discipline itself?
[English]
Mr. Souccar: My thoughts on this are that it is better than what we have right now, but I feel we need to go further.
This is not a disparaging remark toward lawyers. I am a lawyer myself and a member of the Ontario Bar Association, so I can maybe take more liberties because of that. This is also to protect lawyers who are duped and who unwittingly take part in a money-laundering scheme without their knowledge. Forcing lawyers to report any transactions over a certain threshold will give more integrity to the profession. Those who are duped would allow someone else to make the determination as to whether or not that transaction could be a money-laundering transaction or a legitimate transaction. It gives that second sober look at the transaction.
Senator Massicotte: Is it adequate?
Mr. Souccar: My proposal would make it adequate. However, at this point, the proposal in place does not go that far. Rather than having the law society oversee the lawyers within the law society itself, we would take it a step further to see that it gets reported outside, in the same manner as a bank.
[Translation]
Senator Biron: The President of the Canadian Bar Association said that any additional information arising out of Bill C-25 will be used in a lawful, responsible, transparent manner in keeping with the public interest and our constitutional values.
The association is opposed to a more extensive exchange of intelligence until there is a guarantee of some oversight and independent, effective responsibilities. How will you go about ensuring that intelligence will not be passed on outside the country or shared with others?
[English]
Mr. Souccar: I believe it would be in the same way that we would guarantee all other information that was received. For example, if information is received from FINTRAC, we look at it and make a determination as to whether or not the transaction is in fact a money-laundering transaction involved with substantive criminal offences. If it is not, then it goes no further. I believe we would use the same methods that we do with our regular investigations.
Mr. Constant: I would just like to add that the money-laundering regime in Canada will be as strong as our weakest link, and if we choose to exclude the lawyers' profession outside the legislation, we provide an opportunity for organized crime, for terrorist groups to focus their energy in directing their efforts to utilize, wittingly or unwittingly, the profession to launder their proceeds.
I want to draw your attention to something that is quite important: Dr. Stephen Schneider, Professor of Sociology and Criminology at Saint Mary's University in Halifax, has done a great deal of research on money laundering in Canada over the last 15 years. He had the opportunity to research all money-laundering files of the RCMP and found that 49.7 per cent of all money-laundering investigations undertaken by the RCMP involved lawyers who had came in contact with proceeds of crime money, either wittingly or unwittingly. Therefore, not only are we focused to ensure the integrity of the Canadian economy, but also to ensure that the Canadian legal profession is not being abused by the criminal element.
The Chairman: I have a number of supplementary questions on the topic. Would you make Dr. Schneider's document available to the committee? It is important for the committee to have the text of a document to which a witness makes reference.
I see that we have it available; thank you.
Senator Angus: My question is a supplement to Senator Massicotte's question on the adequacy of the provisions for lawyers in Bill C-25. I too am a member of the Canadian Bar Association and the Barreau du Québec, and I am very troubled by this proposed legislation. My view is that the provisions in the original bill in respect of lawyers were found to be adequate. Am I right in saying that? Even though the lawyers attacked them and you were not able to use them in this bill, would they have been sufficient, had they been upheld by the court? Do you know what I am referring to? In the original bill, not only were banks and various people required to report suspicious transactions and money caps and so on, but also the legal profession was included. During the hearings on the previous bill, we heard testimony from law societies that it would interfere with solicitor-client privilege and that it might be ultra vires. They certainly attacked those provisions of that bill. The committee did some research and found that the U.K., France and the U.S. have strong provisions against lawyers, and they do not get attacked on solicitor-client privilege. Here in Canada, for some reason, the opinion has been different. Could you clarify that for the committee? I believe that Senator Massicotte's question was clear:
[Translation]
Are the provisions contained in Bill C-25 adequate with respect to lawyers?
[English]
Your answer was no, was it not?
Mr. Souccar: In respect of what you just said, the answer is, no; it needs to be much stronger. If Canada is to be criticized about anything when it comes to the Financial Action Task Force's, FATF, review, certainly that will be it, because Canada is seen as a weak link in that area.
Senator Angus: Yesterday, Minister Flaherty explained to the committee that the government wants to receive a high mark in the FATF review. The legal systems in the U.S. and in England are basically the same as they are in Canada. We lawyers understand solicitor-client privilege, but it seems to be narrowing, as a recent decision of the Supreme Court would suggest. We are concerned about your views on the subject, because we were aware that 49.7 per cent of the cases investigated involved lawyers. It is key to this proposed legislation.
Richard Reynolds, Director, National Security Operations Branch, Royal Canadian Mounted Police: I will comment further on that. Captured in the current legislation is another example: real estate agents. Lawyers are financial intermediaries of most real estate transactions, and the majority of the money moves through the lawyers, so there seems to be a significant imbalance.
Senator Massicotte: My interest was clarification.
[Translation]
Senator Massicotte: I would just like to clarify Mr. Constant's comments. If I understand correctly, the weak point seems to be the system involving lawyers?
Mr. Constant: That is correct.
[English]
Senator Goldstein: On the same topic, Mr. Constant, you have given us a statistic of which we were aware — that roughly 50 per cent of the transactions investigated by the RCMP involved lawyers at some level. Under the current legislation, lawyers are exempt, and yet you are able to investigate situations where lawyers are involved. On that basis, would you not be prepared to say that Dr. Schneider's statistics justify the proposition that it is not essential that lawyers be covered in full by this proposed legislation and that what is actually required for your purposes is already available under existing legislation?
Mr. Constant: I believe that the study by Dr. Schneider shows what the senator has mentioned. It is a testament of how much money is being circulated through the hands of lawyers and that, because of their profession, they are being exposed. Wittingly or unwittingly, this is a course of action that has taken place. At the same time, the current legislation is not sufficient to protect the legal profession, because by excluding lawyers, the reporting mechanism is also excluded. As long as lawyers are excluded, meaning they will not have to report, an opportunity is provided for the criminal element to focus their attention on the legal profession.
The Chairman: Your issue is not the process, in that you are not against self-regulation by lawyers. Rather, the question is whether the self-regulation is adequate in these circumstances. Is that what you are saying?
Mr. Souccar: We are going beyond that by saying that self-regulation would be inadequate.
The Chairman: Our next witnesses are from the Canadian Bar Association and we will await their response.
Senator Goldstein: I want to add my voice to that of the chairman and say that we respect and admire the work of the RCMP. We consider you to be the finest of the finest and congratulate you for that. We are also with you during this moment that has become rather upsetting for your force. We want you to know that we stand with you.
The inquiry that we undertook last time and the inquiry that we are now involved with, deal with a common problem — the necessity and appropriateness of law enforcement on the one hand and the desire on the part of all of us on the other hand to protect the privacy rights of Canadians. That desire is not only ours; it is shared by you and by every Canadian.
We are trying to find a balance with the understanding that law enforcement officers, especially people in leadership positions like yourself, would tend to want to have as much ability to pursue law enforcement as is reasonably possible and some civil rights people, like me, would want to limit that in, perhaps, the broader interests of society. Therefore, there is that kind of interplay that goes on. Neither position is right or wrong. They are healthy positions in a free economy and especially in a free society.
Having said that, we asked the last time for information on the practice, position and policy of the RCMP with respect to record retention, as it involves the proceeds of money laundering and as it involves the financing of terrorist activity in Canada. We thank you for giving us an answer, but that answer was, in the view of some of us, insufficient. Are you now in a position to give us a complete answer with respect to the policy? If it is written we would like to see a copy of it, and if it is not we would like to know that. We would also like a copy of the policy that is followed by the RCMP with respect to record retention in this area of activity.
Mr. Souccar: My first comment is in response to the first statement you made about the interplay between both views: It is essential, absolutely essential. That is what maintains the balance, and this is exactly what makes Canada the country it is. I appreciate your comment and that is certainly something very important.
In terms of retention of files, I can give you my answer, and I also have three binders sitting on the table that contain all our policies. These are available if you wish to have them. That is why we brought them.
As an example, if we receive information from FINTRAC relevant to a suspicious transaction, that information is maintained by the RCMP for eight years, after which it is purged. If the information is deemed to be unsubstantiated after eight years, it is gone. If it is determined to be substantiated, an investigation ensues. If the investigation takes four years, including court appearances and results, eight more years are added at the end of the four years — a total 12 years — after which the information is destroyed.
If information is given and determined to be unsubstantiated then two years later more information is given about the same subjects and the information is found again to be unsubstantiated, the eight year clock does not start over but continues.
Senator Goldstein: Is that policy in writing?
Mr. Souccar: Yes.
Senator Goldstein: Is there any audit done with respect to the way it is polled?
Mr. Souccar: Yes, and all the information is in the binders. I can make it available to you.
Senator Goldstein: I am willing to look at it. Bill C-25 provides that FINTRAC gets to keep information if there is no investigation or remittance to a law enforcement agency for 10 years. Assuming you are given that information in nine years and 11 months, you then keep it for another eight years. That means that you have potentially unsubstantiated information that is kicking around in someone's records for 18 years. Do you not find that excessive?
Mr. Souccar: You are correct in the calculations you have made. FINTRAC may be able to answer the question. I believe if information is not transmitted to us within the first year or two, they do not go back. So much information comes into FINTRAC that I do not believe they go through old information, filter it and pass it on again. I believe they deal with new information when it arrives. Potentially, if they go over new information and cross-reference it to old information, they may then provide the package.
Senator Goldstein: The new information would start the 10-year clock running over again?
Mr. Souccar: For FINTRAC?
Senator Goldstein: Yes.
Mr. Souccar: I cannot answer for them.
Senator Goldstein: Speaking only for myself, potentially information about Canadians is sitting around in records for decades — available in a limited way, but records still. I find that difficult to understand or accept unless there is a very real probability that the person about whom those records exist is a person involved in money laundering or terrorist activity. Personally, I find that excessive.
I will now move on to another topic.
The statute will be adding to the load of suspicious attempted transactions. I do not know what kind of additional load that will be. You have indicated today, and we have had indications in the past, that resources are limited. Therefore, you are unable to deal with any more than a maximum of 20 per cent of the information furnished to you, bearing in mind that information does not get furnished to you unless there are some grounds for concern on the part of FINTRAC. If, added to that, you will to have to investigate suspicious attempted transactions, should you not be asking for additional resources in a more aggressive way than you have until now?
Mr. Souccar: You are right, to the extent, that the resources, the amount of information and the increase of information will add a heavier burden. We sift, however, through the information that comes in regardless of whether it is information from FINTRAC or information from other sources regarding criminal organizations. We do not have resources and we will never have resources, nor can we begin to think we ever will have enough resources to attack every criminal organization in Canada. We have to look at all the information we get, sift through it, create intelligence and from there assess the threat and impact of each piece of information. We then do a triage to determine which ones we will put a significant amount of resources toward.
We are faced with that challenge with everything we do. Do we need more resources? Yes. When does it stop? We have to achieve a balance, and I feel we have been receiving some resources throughout the RCMP over the last year, significant resources. This area is one that I believe is not staffed anywhere near what it should be, because, as I highlighted earlier, the commonality between all these criminal organizations is to make money. Unless we follow the money, we will not have the impact we should. In the case of national security, again money is a means to an end and we have to be able to follow it in order to have any impact.
Senator Tkachuk: You talked about wittingly and unwittingly, as far as lawyers were concerned. How unwitting does a lawyer have to be? It is very difficult for me to believe that a briefcase full of cash would not stir some suspicion that there is something not right, especially if it is substantial. Could you give me an example of an unwitting transaction?
Mr. Reynolds: It may not be a case of a suitcase full of cash. Hopefully they would tweak to that. For example, an offshore transfer of funds through a lawyer's trust account would basically create or break a paper trail, as it currently stands, because there is no recording on such a transaction. That would invite the influx of money from offshore into Canada, which would then be invested. Lawyers are an integral part of investment and of the creation of corporations through that. There are means other than just the receiving of cash that would then be recorded and captured as well.
Senator Tkachuk: The Canadian Bar Association would be aware of situations like this, would they not?
Mr. Reynolds: I believe the Canadian Bar Association has produced a publication for lawyers on signs to watch for within money laundering.
Senator Tkachuk: That would take care of the unwitting lawyers, but it would obviously not address the ones who are cooperating in this whole money-laundering operation. Hopefully, the public policy is read and perhaps someone is paying attention to this, but if a lawyer is willingly part of this operation, it would be very difficult to stop.
Mr. Souccar: You are right. However, it is no different than any law that we have out there; we have those who will break the law intentionally. Despite the fact that we have a law against theft, for example, we still have thieves out there. In terms of a lawyer, who is involved in money laundering knowingly, at least it puts him or her on notice that there are rules, regulations and laws in place, which will hopefully discourage them.
Senator Tkachuk: If there is a transfer of cash from another country to a lawyer's trust account, that is reported anyway, is it not, if it is over $10,000?
Mr. Reynolds: It is captured in the international transfer, yes.
Senator Tkachuk: How do we compare with other countries? Senator Angus touched on this earlier with the comparison on the laws concerning transactions through a lawyer's office, but how do we compare on other aspects of the law with other countries? What is our success rate, not just in prosecutions, but in actual cash in comparison with the population?
Mr. Souccar: I believe we compare well, and I believe the FATF review will demonstrate that there are some criticisms, some of which will be with respect to legislation.
Senator Tkachuk: This legislation or other legislation?
Mr. Souccar: This legislation. However, I believe we will be praised for much of the work that is being done. The integrated model that we have adopted in Canada is, I believe, the envy of many parts of the world. That is the integrated model that we use with law enforcement, forensic accountants, Canada Border Services Agency, tax people, and Justice Canada. We work in an integrated way, along with other police departments. We work toward a common goal, with all pieces of the puzzle at the table, working together to achieve our end. The same is true with respect to our terrorist financing groups. They also work in an integrated way.
We have provided training worldwide on money-laundering investigations to bring other countries up to a standard that will allow them to cooperate with us at the same level, recognizing that many of our investigations do not start and end within our borders.
Senator Meighen: On the subject of the weak link and cash and lawyers, a presentation — which I imagine we will hear later — from the Federation of Law Societies of Canada, FLSC, speaks of a no-cash rule for lawyers. If FLSC adopted the rule that lawyers could not receive cash, to what extent would that alleviate your concerns?
Mr. Souccar: As Superintendent Reynolds explained, it may help somewhat, but I do not believe that is the bulk of our concern, because of the cashless transactions, if you will.
Mr. Reynolds: It comes down to the distribution of the funds and the exit of the funds to whatever investment is going through the accounts. As it currently stands, there is no reporting on that.
Senator Tkachuk: There is one area that perhaps you could clarify for us. On page 5, the third paragraph of your presentation, when you are talking about FINTRAC, the last sentence says:
Under current reality, law enforcement must conduct what amounts to almost a full investigation before gaining access to the analysis reports produced by FINTRAC.
I am not sure exactly how this works. For example, there is a suspicious transaction at the FINTRAC office. How much information do they have to get for it to then come to your office to be investigated? Then you decide that you will investigate. What is the reasoning for not providing the background to why they forwarded that information to you until the end of the investigation?
Mr. Souccar: This is exactly what they are restricted from doing. At this point, they provide us with a name, address, that type of information, and the amount of money involved in the suspicious transaction. In order for us to get more information, we need a production order at this point.
Senator Tkachuk: What do you mean by a "production order"?
Mr. Souccar: A production order is an order from the courts for them to produce more information to us. To obtain that production order there has to be reasonable grounds to believe that a money-laundering offence has taken place, at which point they provide us with the extra information.
The "reasonable grounds to believe," we feel, is a fairly high threshold. In order for us to reach that threshold of reasonable grounds, we have to conduct what is tantamount to a full investigation.
We are suggesting that if the threshold is lowered to "reasonable grounds to suspect," as opposed to " believe," less investigative work would have to be done on our part in order to obtain a production order so that FINTRAC can provide us with the reason why they suspect that transaction is suspicious. That is what we are looking for: Why do they believe it is suspicious?
Senator Tkachuk: Perhaps to others it does not, but to me it seems even more dangerous that they would supply information to you to conduct an investigation when they themselves have not provided sufficient reason to do the investigation. They could be supplying any kind of a name. In other words, you are investigating somebody just because FINTRAC says you should, and this does not seem to be a good enough reason, unless you have information that says maybe you should follow this up.
Mr. Souccar: They do their homework at their end.
Senator Tkachuk: You told me you do not know their homework.
Mr. Souccar: We do not. What I am saying is that they do their homework at their end to determine if it is suspicious, but they keep that from us unless we are able to get a production order to get that type of information. You are right. When we do it, we do without understanding why they consider it to be suspicious.
Senator Tkachuk: FINTRAC are not police; they are bureaucrats.
Mr. Souccar: They are an intelligence agency, analysts.
Senator Tkachuk: I find this a bit troubling, but perhaps others, who have more knowledge of the law, might want to follow this up.
Senator Goldstein: The threshold for getting a production order at the moment is "reasonable grounds to believe," which is a high threshold. "Reasonable grounds to suspect," which you prefer, is a lower threshold. Are you aware that there is no provision in Canadian law, other than what you are asking for in this bill, that permits the production of documents or search warrants or arrest unless there are reasonable grounds to believe? Your request is a radical departure from Canadian legal tradition.
Mr. Souccar: It would improve the system to know why we need to conduct the investigation. It might very well be that, given that reason, we may choose not to conduct an investigation. Whereas now, if there is a $1million- transaction that appears to be suspicious and we have been given only the names, addresses and so on, we move forward with an investigation without sound reasoning as to the suspicious nature of the transaction.
Senator Goldstein: If you were investigating a murder and needed a search warrant, you would have to go to court and assert reasonable grounds to believe, not reasonable grounds to suspect. Why should a search or production order with respect to proceeds of crime have a lower threshold than murder, treason, rape or any other offence that exists under Canadian law?
Mr. Reynolds: FINTRAC discloses on their suspicion that money laundering is involved, yet withholds their reasons for that suspicion. The RCMP is being held to a test of reasonable grounds to believe to obtain FINTRAC's reasonable grounds for suspicion, which is an inequity. By the time we go for a production order, in many cases we have surpassed that, and we would be better off — and in some instances this is an issue — to begin to execute search warrants against financial institutions. Therefore, we have moved ahead of the value of whatever limited investigation FINTRAC could do to reach their threshold of suspicion themselves.
The Chairman: What is the American experience and practice on that point? They have the same FINTRAC overview. What is their practice compared to ours?
Mr. Reynolds: Their organization is called Financial Crimes Enforcement Network, FinCEN, which is more a law enforcement financial intelligence unit that has greater access by law enforcement. In fact, law enforcement has access to the majority of the information supplied, as well as the authority to query FinCEN. FINTRAC is a more administrative financial intelligence unit.
There is a greater flow of information without any court order between FinCEN and law enforcement agencies in the U.S.
Senator Moore: It is interesting that you mention Dr. Steven Schneider. He was at my alma mater, Saint Mary's University. I tried to contact him yesterday, but he did not get back to me. I thought it might be useful to the committee to hear his evidence on the issues.
You mentioned the result of his study: 49.7 per cent of all investigations involved law firms. What constitutes the other 50 per cent? Are realtors involved? Do you have the answer or should we ask Dr. Schneider?
Mr. Constant: It could be any number of elements, such as a money transfer originating from a bank. The 49.7 per cent comprises financial transactions facilitated by a lawyer.
Senator Moore: Yes, and those were brought to the attention of the RCMP.
Mr. Constant: That is correct, during the course of our investigation.
Senator Moore: What makes up the other 50 per cent? Are banks and realtors involved? What is the percentage?
Mr. Constant: I do not have information on the percentages of the balance.
Senator Moore: It is interesting that you know about the legal part, but I wonder what other elements were investigated.
Yesterday, representatives from FINTRAC appeared before the committee. I mentioned a case that was in The Gazette of Montreal, which reported that vast sums of money are being transferred to such institutions; that just two weeks ago, a Quebec man accused of laundering $1 billion in drug money through an investment firm was convicted in New York; and that Martin Tremblay of Chicoutimi, Quebec, pleaded guilty to using Dominion Investments Limited to hide the proceeds of narcotics trafficking.
Would the RCMP have known about that and were you part of that investigation?
Mr. Constant: Are you referring to the news item on Mr. Tremblay and Dominion Investments?
Senator Moore: Yes.
Mr. Constant: We had some dealings with Mr. Tremblay before the U.S. undertook an investigation. However, that investigation was purely American and was not the result of a joint Canada/U.S. investigation.
Senator Moore: If such a large sum of money was sliding through the system, it makes one wonder how much else we might be missing.
Mr. Constant: I agree with you, senator; this was quite a substantial amount of money. Without going into the details of the investigation, this individual was operating in the Caribbean for some time.
Senator Moore: Were any of those funds being laundered through Canadian accounts? Do we know that? Did you ask that of your American counterpart? Perhaps the answer would help to prevent similar activities in the future. Do you consult in that way?
Mr. Constant: There was a request from the U.S. agencies, as part of their investigation, for us to pursue some of their interests in Canada; and we are doing that. Although I do not have the details of the transactions and the information with me, we are assisting U.S. authorities in their investigation.
The Chairman: It would be useful for this committee, because there is concern that we have not applied appropriate resources and energy to white-collar crime. It is important for committee members to understand whether this illicit transaction passed through Canadian channels in any way to determine whether the Canadian system is appropriate to safeguard against such illicit transactions.
I understand that you need to bear some restraint when an investigation is ongoing, but it would be helpful if we could have the information to determine whether a transaction on such a humongous scale touched Canadian accounts. If that is the case, why was action not taken in Canada?
Mr. Constant: Mr. Chairman, we are pursuing the interests of the U.S. in Canada. The transactions that we are pursuing in Canada are not of the magnitude referred to by the senator. These transactions are significantly less, but they are still a significant amount of money; in the range of hundreds of thousands of dollars.
Senator Moore: The fact that he pleaded guilty does not mean that, in cooperation with American authorities, you will not follow the money. Is that right?
Mr. Constant: Absolutely, we continue to track these transactions. We continue to work, because we feel that the only way we can succeed in tackling organized crime, as Mr. Souccar said earlier, is to take away their money. In order to do this, it has to be a sustained collective global effort.
Senator Fitzpatrick: I would invite you to comment on the extent to which money laundering takes place through investors investing in offshore brokerage accounts and brokerage operations. The Canadian depository system is a complicated process now with the involvement of brokerage firms, offshore banks and nominee accounts. We have just heard reference to $1 billion that was somehow laundered through a brokerage firm. How frequently do you believe this kind of activity takes place?
Mr. Constant: This is a great question. To give a precise answer is difficult because, as you mentioned, when we deal with proceeds of crime worldwide, it is about making a profit. Consider the magnitude of drug trafficking, in which organized crime is excessively involved; those profits have to circulate somewhere. That becomes the Achilles heel for all criminal organizations around the world: how to move their cash. The international community has undertaken the responsibility to try to address the issue collectively. Recognizing this, there is still a great deal of money for organized crime to launder. In order to liquidate the money collected in these transactions, they have to run it through financial institutions, investment brokers, et cetera.
That is why I go back to my initial point: It needs to be a collective effort. When the FATF talks about standardizing the methods to deal with proceeds of crime in Canada and the U.S., as well as how we should deal with it collectively, if we truly want to tackle the issue, it is critical that we achieve a collective response.
Senator Fitzpatrick: What kind of specific programs are in place to track such activities? Do you examine brokerage transactions? Are there specific indicators of suspicious transactions? Do you have any way to monitor these activities?
Mr. Constant: This is another great question. Much education and awareness needs to happen. The organization has invested a great deal of effort in that process over many years. We have a new money-laundering regime that began in 1994. Before that, it was non-existent in Canada. The banking institution, like the public sector, has embraced the need to tackle this issue. We are getting a lot of support from them. To know the precise magnitude of this, we rely frequently on studies from the United Nations that reflect the level of the phenomenon worldwide. This concerns not only Canada but also countries worldwide. We rely on studies that are published annually by the UN, which contain information on the level of proceeds of crime around the world.
Mr. Reynolds: We participate with the FATF through finance both on the terrorist financing and on money laundering. We also participate in the G8 Roma-Lyons Group on Security and Intergraf under the law enforcement sub-group and the practitioners group dealing with counterterrorism, money laundering and terrorist financing. There is an international working group on terrorist financing, which has a limited number of participants to deal with methodologies. We try to share information on those types of methodologies that are moving and the significance of those particular money-laundering mechanisms.
Senator Meighen: Senator Angus mentioned that, rightly or wrongly, there is a perception in this country that we do not deal as severely with white-collar crime as they do in other jurisdictions. One reason might be a lack of tools to do the job. One of you referred to the American example, where they have at their disposal a civil remedy. On the other side of the coin, the Ontario Securities Commission does not have a criminal remedy directly available to it like the U.S. Securities and Exchange Commission, SEC. Could you comment on that and explain more fully what you meant by the civil remedy not being available to us as it is in the U.S.?
Mr. Constant: The civil remedy is part of a two-pronged approach available in the U.S. When suspicious transactions surface, U.S. law enforcement authorities have the opportunity to base the investigation on the evidence they have collected and proceed either criminally or civilly. If they believe they can demonstrate a criminal involvement in the process, they can use either a criminal or civil process. In a civil process, the threshold is far less significant in the U.S., because the individual is being asked to explain the sudden wealth of money at a given time. The onus is on the individual to demonstrate the source of the money. Often in U.S. civil processes — particularly when it is done in a criminal environment — an individual might find it simpler to just walk away from the money rather than bear the onus of an explanation. We have seen this happen in U.S. courts. Rather than go before a judge to explain where the money originated, people basically walk away from it. At that point, the money is forfeited to the government.
We do not have such a process in Canada. We are starting to see it in each province, because the civil process revolves around a provincial authority. I will try to explain the capital market in Canada.
It is difficult when we begin to draw comparisons between the U.S. and Canada, because the processes are different. In Canada, we are governed by provincial securities commissions, whereas the U.S. is regulated nationally by the U.S. Securities and Exchange Commission. Some might say that presents a much weaker system in Canada, because, as much as the provinces are instrumental in ensuring that their laws are similar from one province to the other, the simple fact is that they are not exactly the same. This provides opportunities for people in the capital market to begin to play with the rules from one province to the next.
It makes our market vulnerable to some degree. I have to admit that in some cases, it paints a little bit of our own market in Canada from an international perspective, because they feel that, unlike a lot of industrialized countries, we do not have a one-stop shop with all the securities commissions under one roof.
As far as the criminal process is concerned, the RCMP is responsible for the criminal aspect of the capital market under the Integrated Market Enforcement Team, which was established three years ago.
Senator Meighen: Can you tell us the extent to which criminal or terrorist organizations are using charities to finance their activities, and whether the permission to the Canada Revenue Agency to disclose now under the proposed legislation will be of significant assistance?
Mr. Reynolds: That is a very good question. Charities are a very significant area of use by terrorist organizations — not only for the raising and movement of cash, but also, to a great extent, for logistics; for example, being in certain parts of the world where they otherwise would not have a reason to be or the ability to invite parties into Canada through letters of invitation.
We work closely with Canada Revenue Agency in the charity registration area. The ability for them to share the information with us and for us then to utilize the information in further investigations will be of great importance. As it stands now, for them to share it with us is in support purely of the Charities Registration (Security Information) Act, which limits our ability to carry forward a peripheral investigation. That will be a significant and very beneficial change.
Senator Angus: You may be aware that, although today we are examining Bill C-25 as drafted and trying to get it back through the system so it will be passed in time for the review by the international task force, we do plan to continue our review of the legislation.
You saw our interim report, and, hopefully, you folks will be able to come back and help us as we probe deeper into some of the issues. The chairman and I were just discussing that you mentioned that there are 800 criminal organizations in Canada and you only have the resources to investigate 150 of those, which certainly got our attention.
Perhaps you could help me on this: Are these 800 organizations of organized crime, which you have identified? If you were asked privately in the secrecy of your office to name these 800, do you know who they all are?
Mr. Souccar: Yes, absolutely, and that is the point. The numbers are going up every year, not necessarily because the situation is getting worse; but as we get better at digging up information and intelligence and as we work together in a very seamless way across the country, we are getting better at identifying these criminal organizations.
If we had 600 criminal organizations last year and 800 this year, it is not that there are 200 new ones that have cropped up, rather 200 more that have come to our attention. Every province has its own provincial intelligence section or unit that does their threat assessment as part of Criminal Intelligence Service Canada. They identify the criminal organizations within their province.
Everything is collated into one at the end of the year to identify the number of criminal organizations across Canada. There are just under 800 — I gave you a ballpark figure — the figure is in the high-700s. We do a threat analysis of each one of them to rank them in order and then we go after them one at a time. The operation you heard about recently in Montreal was one organization that ranked at the top of the list. We go after them based on the impact and threat that they pose to our homes and communities.
Senator Angus: I am placing importance on the word "organization." We hear of random bank robbers, who rob a bank, do a lot of damage and get a big heist, but that is not organized crime, I take it. We are talking about the Hell's Angels and different biker gangs and such that are identified as doing illegal activities, is that right?
Mr. Souccar: That is correct.
Senator Angus: We hear about these high profile organizations such as the biker gangs. Can you just give us an outline, without divulging any secrets or impairing your investigative work? Are we talking about apparently legitimate businesses that are, in fact, criminal organizations?
Mr. Souccar: As a criminal organization gets more and more sophisticated, the whole idea is to take their dirty money to make it legitimate at one point in time; for example, investing it in a legitimate business. In the process, of course, there is the unfair competition, and the economy is harmed in a big way.
These are criminal organizations. Of course, I am not at liberty to give you details as to who they are, but it is no secret the Hell's Angels is one of them.
Senator Angus: For example, the XYZ restaurant, gossip goes around that this is really the Hell's Angels money that started this business. Does the restaurant become a criminal organization? I am just trying to get a sense of these 800 organizations. Obviously, they are not all biker gangs; they are not all the Hell's Angels or the Rizzuto family.
Mr. Souccar: The restaurants, the businesses themselves, are the methods by which some of the criminal organizations launder their money. The restaurant itself is not the criminal organization, nor are the people working in the restaurant necessarily part of the criminal organization. It could be a restaurant with waiters, waitresses and managers, who have no idea that they are working for a company or a restaurant that is being financed by a criminal organization. It is the criminal organization itself that we target, not the restaurant.
In the process of our investigation, we try and identify all the assets that have been obtained and follow the trail of the money. That is why it is important to do that, to identify all the assets obtained — be it vehicles, homes, businesses — and go after the whole thing in order to have the greatest impact on that criminal organization.
Senator Angus: The point I was getting at was these 800 organizations are not apparent to the public; they are covert, they are behind the scenes. It could be a family, a corporation, but we do not meet them day-to-day on Bay Street or St. James Street, is that correct? These are secret organizations that are crooks.
Mr. Souccar: For the most part, yes.
Senator Angus: When we do our continuing study, if you do not have enough resources to investigate one third or one quarter of the criminal organizations that are out there, you need our help — and we want to help.
Mr. Souccar: That is concerning criminal organization. We can talk about national security and the number of ongoing investigations we have at this point. Are we at 1,200?
Mr. Reynolds: We are running just over 1,500 files on terrorist investigations, of which approximately 150 are terrorist financing investigations in this country.
The Chairman: We have to conclude this, but you can see that the appetite of senators for more information is intense.
I want to go back to your funding issue. As a percentage of the scope of the problem, money laundering, we know, is in the many billions of dollars — we have not been able to quantify exactly how high.
On the other hand, we know that white-collar crime is also reaching gigantic proportions in terms of monetary amounts. Your agency is responsible for essentially dealing with primary prosecutions for both, and sometimes they obviously overlap.
In the United States we attended the Manhattan district attorney's office and discovered his budget for the district was the same as yours, nationally. It was roughly U.S. $65 million and yours is $63 million.
Senator Angus: Was that the additional money?
The Chairman: What is your budget overall for surveillance or prosecutions for FINTRAC, et cetera, and white- collar crime; what is your total budget in dollars?
Mr. Constant: From a proceeds of crime perspective, including justice, the initial investment done by the Government of Canada — and it goes back to 1994 — was in the vicinity of $41 million for the 260 resources that we have involved in money laundering.
The Chairman: Is that an annual budget?
Mr. Constant: Yes, but that cost also includes justice, prosecutors and forensic accountants.
The Chairman: We are trying to grapple with a breakout number to determine some comparative analysis with the United States. If their situation is similar to ours, are we doing an appropriate appropriation for this surveillance?
The senators are astounded that there are 1,500 terrorist organizations in effect and 800 criminal organizations, and only 20 per cent have been dealt with in some fashion. This is an astounding piece of information, which confirms what we learned in the United States about their ability to direct funds toward this. They not only had the Manhattan district attorney's office, but also the attorney general's office in New York State.
We need a total budget of how much money is being spent by the federal government to investigate and prosecute those areas that come under this particular provision, this act, and white-collar crimes in general. We would like to have that number. We would then like a breakout of the workforce, how it is utilized and the difference between forensic investigation and prosecutions. We know that this is costly. We also know from Dr. Schneider's study that there is a way of coordinating this, so we can do it in a cost-effective way.
It is important, however, for us to get this number because we do not feel enough money is being directed in terms of investigation, prosecution and the skills you need to do this. These are very sophisticated criminals and criminal transactions. We are sensitive to that. Give us as much information as you can, please. This report for this bill will be another interim report; we will come back again and consider all this. We are not comfortable at all that we do not have enough resources to ensure that Canada is not a haven for criminal activity.
Mr. Constant: Thank you, Mr. Chairman, I can provide you with all that information in writing, if you do not mind.
The Chairman: We would appreciate that. That will allow us to make our analysis. We have a high respect for your organization. To our minds it indicates the best of Canada and we want to thank you very much for your efforts and hard work. We hope that you will work through the troubled waters and emerge as an icon of Canadian identity.
We will continue now with our witnesses and are delighted to welcome from the Canadian Bar Association, Mr. Simon Potter, past president, and Tamra Thomson. We also have the Federation of Law Societies of Canada, Kenneth Nielsen, Q.C., and Jim Varro, Policy Counsel.
Also with us is Mr. Jean-Pierre Bernier, Vice President and General Counsel of Canadian Life and Health Insurance Association.
We will hear from the Federation of Law Societies first.
Kenneth G. Nielsen, Q.C., Chair, Committee on Anti-Money Laundering, Federation of Law Societies of Canada: With me is Jim Varro, Policy Counsel with the Law Society of Upper Canada. We thank you for the invitation to appear before you again. I would particularly like to thank the committee for having a warm-up act for us both times that we have been here. When we were here in June, it was the Certified General Accountants, who finished off their presentation by saying the biggest problem is leaving the lawyers out of the legislation; and then this morning we heard from the RCMP, who I believe have the same view. It is always nice to be the follow-up to those kinds of warm-ups, although I can tell from the questions of senators that lawyers are front and centre on some of these issues.
As we have mentioned in the past and as documented in some of the materials we have presented, the Federation of Law Societies of Canada is the umbrella organization for the statutorily constituted law societies across the country. The law societies in each province and territory are the bodies that regulate the lawyers, and you must keep in mind that the regulation of the lawyers is in the public interest. That is the mandate of the law society. Some people believe that law societies are there to protect the lawyers. That is not the case at all. Our mandate is to protect the public. My friend, Mr. Potter, will advise as to the role of the Canadian Bar Association in the dealings on behalf of lawyers. That is the distinction between these two organizations.
The law societies across the country and the federation support Canada's efforts to deal with money laundering. We are not in any way condoning money laundering, obviously, or terrorist financing. It is something with which we must deal. Nor do we condone those lawyers who get involved in those kinds of activities, the lawyers referred to as wittingly becoming involved.
My understanding, from all our dealings over the years with both the Department of Finance Canada and the Department of Justice Canada, is that everyone recognizes that many laws and rules can be passed; but if any individual — including lawyers — intends to become involved in criminal activity, it does not matter what the rules and the laws say; they will do what they will do. We are trying to address, in this legislation and in the rules that the law societies have passed, those lawyers who become unwittingly involved.
Our approach has always been to the extent that we have to deal with these issues, we must deal with them within the constitutional framework in Canada. It is fundamental to our whole system that we be governed by the rule of law, which includes not only an independent judiciary, but also an independent counsel.
As far as Bill C-25 is concerned, we are delighted, from the legal profession point of view, to see that proposed new section 10.1 is included. As you are all aware, that proposed new section removes the suspicious transaction reporting requirements on lawyers, which is consistent with the constitutional challenges we have had over the last five years or so.
The framework now is that, if this bill passes, lawyers will not be governed by those provisions. We say that is not necessary; it is constitutional that the lawyers be removed. We have dealt with these issues concerning the money- laundering matters with the passage of the no-cash rules, which were referred to earlier this morning and which we have talked about.
To reiterate, lawyers in Canada are now prohibited from holding cash in excess of $7,500 except in limited circumstances, such as bail, if they get it back from the police, or if it is to deal with a retainer. That initiative was undertaken by the law societies on its own part, but eventually in conjunction with the Department of Finance Canada. Indeed, the terms of the rules were arrived at as a result of numerous meetings with members of the Department of Finance Canada. Those rules are now in place in all jurisdictions, with the exception of Quebec. The law society and the Chambre des notaires du Québec have passed the rules, but it is now with the Quebec governmental agencies.
Bill C-25 deals with client identification and verification. As we understand it, the proposal now is that lawyers would be governed by regulations, on which the Department of Finance Canada is working. We have had numerous meetings with the Department of Finance Canada over the last eight to 12 months. Indeed, the recommendation in the interim report is that the Department of Finance Canada should continue those negotiations, and we are doing that. We are awaiting receipt of a prepublication form of those regulations. The real issue being wrestled with is whether those regulations will be constitutional. In other words, will those regulations face the same challenge that the legislation itself did or is there some way we can work with the government where those regulations will be applicable?
We have crafted what we refer to as a model rule on client identification and verification. It has been approved in principle by the federation, and all of the law societies are now considering that model rule. Essentially, the model rule, as we understand it, would cover all of the requirements in the FATF recommendations and, indeed, would cover those issues with which the Department of Finance Canada is concerned. It is not a question of whether or not lawyers should know for whom they are acting. That is a given and goes without saying. The reality is that most lawyers already know that.
We are continuing with those negotiations. I believe you heard from the Department of Finance Canada yesterday that those regulations are being drafted as we speak, and we anticipate receipt of a prepublication form of those regulations in the near future, at which time we will be meeting again with the Department of Finance Canada.
In summary, we believe that the self-regulation of lawyers by the law societies can deal with these issues. We believe that, by working in conjunction with the Department of Finance Canada, we can address the issues. Indeed, that was the conclusion that this body came to in publishing its interim report.
Simon Potter, Past President, Canadian Bar Association: I am here in a representative capacity, very proud to represent our current president, Mr. Parker MacCarthy, who is in British Columbia, I believe, today. I am accompanied by Tamra Thomson, Director of Legislation and Law Reform at the Canadian Bar Association, who is here not only to keep me on the straight and narrow, but also to ensure that any factual inquiries that you may have get answered as quickly as possible.
The Canadian Bar Association does speak for the legal profession, unlike the federation and the law societies which it represents. However, we also see ourselves as having a mission of protecting the rule of law in Canada and the rights of Canadians and of ensuring that we have a system of administration of justice that remains as respectable and as respected as it is today.
We agree with the bill's recognition of the fundamental importance of solicitor-client privilege. We are very pleased, as is the federation, to see the explicit removal of a requirement that lawyers rat on their clients. That is a sensible decision. It is not only the government that has agreed to do that, but also the courts. It is a court judgment that took the word "lawyer" out of that bill.
We also agree with your committee's recommendation that the proper course is to allow the path of discussion between the federation and the government to continue, in order to find the proper balance in the enlisting of the legal profession to help in money laundering, but also protecting solicitor-client privilege. We believe that that balance is there. We believe that the very elegant solution of simply prohibiting lawyers from accepting large amounts of cash means they have nothing to report anyway; it will all be in cheques and, therefore, reported by the banks if that is necessary.
On two items, we want to simply draw attention. First, we are not asking that the bill be rejected, but on the question of solicitor-client privilege, if there is a search and seizure, there is a part of the bill that says that the search and seizure will stop if the lawyer asserts privilege. It is a very clear point of law in Canada now that privilege does not arise with the assertion by the lawyer; the privilege is there. It seems obvious to us that the bill ought to require that a notice be given before the search continues; a notice given to the holder of that privilege, that is to say, the client.
Secondly, on the question of information sharing, we believe we live in a world today in which sending large amounts of private information across the border to other agencies and having no means of checking as to what is being done with it, how much has gone or what has come back the other way is simply not prudent enough. We do not believe that blind trust and blind confidence is a way to protect the privacy concerns there. Our recommendation is that the provisions on information sharing should come into force only when you senators are satisfied that there are adequate means of oversight and accountability.
In short, we agree with the federation that the proper course is the bill as it exists in terms of lawyers' involvement in the fight against money laundering and an encouragement to the federation to go down the path of negotiating a properly balanced approach, which would rely on self-regulation.
Senator Angus: Did you want to hear from the gentlemen from the life insurance association?
The Chairman: It is a separate issue. We will focus on the lawyers and then we will come to the insurance.
Senator Angus: I welcome all of you here, some of you not for the first time. It is helpful to us when you come. I will try to follow Mr. Potter's style. I have three messages to deliver to you legal people, particularly Mr. Potter. First, we salute the good work you are doing on behalf of the profession across Canada, in the case of the Federation of Law Societies of Canada; the work you do to protect the public interest insofar as the law societies and the bar associations are concerned; and the good work the Canadian Bar Association does for the profession.
The second message would be that although you might have a contrary impression, having listened to some members of this committee who are lawyers, we do respect the principles that govern our profession and the principle of solicitor-client privilege. If you believe that that may not be the case, I can assure you that you would be wrong.
Third, we do get the feeling that you do not quite get it. This is about the most serious problem facing our economy. We are told that the illicit funds that circulate are in the range of $10 billion to over $30 billion. As Dr. Stephen Schneider from Saint Mary's University has said — according to his research — the stark reality is that about half of the transactions somehow pass through our law firms, our law offices, and our profession. A number of us are lawyers. We ask why we have this problem in Canada and not in the U.S., the U.K. or France and so on. We are aware we have the Charter here in Canada. However, we have a problem not only of money laundering and the drug elements related to it, but also the financing of terrorists. We are involved in the war on terrorism, and these issues are on the front pages every day.
We are starting to get the impression that the lawyers are losing sight of the forest for the trees. I say this in the best of faith. We want to work with you, but, as we said to the minister: "It appears you have copped out; you have been conned in by the lawyers." The law enforcement agencies told us again this morning that it is a huge hole in this legislation, and all of this legislation becomes nugatory if we cannot enforce it properly. The last part of message three would be: As helpful as the agreement is, which you have all worked out with the finance department, in terms of accommodating the Charter and the injunction in Saskatchewan and B.C., it is unenforceable when the rubber really hits the road. It is all well and good; we are all involved in self-regulatory organizations. However, in something like this where enforcement will be required, we are not too clear on how this nice-looking agreement will be enforced.
Those are my observations. I hope you will understand the inquisitive nature of number 3.
Mr. Nielsen: I believe there were some questions in there as well. Let me assure you that we get it. We are not here supporting laundering or terrorist financing in any way money. However, the other issue we get is the rule of law and the importance of solicitor-client privilege. There is no person in this room who would want to come to me and confess their particular position and have me run to the RCMP or FINTRAC. Clients come to me on the basis of being absolutely confident that what they say to me is privileged and the advice I give to them is privileged; so we get it.
I did not understand the RCMP's suggestion that there is a hole here. Lawyers cannot accept cash. The suitcase full of money that was referred to does not happen in a lawyer's office any more. The transaction they talked about was the offshore transaction of money being wired to my trust account. That would be caught in the system somewhere else and there is nothing for me to report.
What is the hole there? What is suspicious about me receiving money on behalf of a client to finance the purchase of an apartment building in Edmonton, for example? If there is nothing to trigger my suspicion, what would I report in that situation? I miss what hole or gap to which they refer.
If the concern is whether or not law societies enforce their rules, let me put that to rest. Law societies do enforce every rule, and the money laundering, no-cash rule will be enforced like every other rule. If someone breaches that rule, they face the risk of reprimands, suspension or disbarment. The law societies will enforce those rules.
The Chairman: Let me share the deputy chairman's concern. This committee has been trying to grapple with this. In our last report, we hoped that self-regulation would do the trick.
We are now told by the prosecutorial arm of the government — the RCMP — that that is not the case. We heard the example from Senator Moore this morning of a $1billion-dollar transaction that was caught in the United States. It went from one source to the other and into some sort of legal transaction. We do not have the fundamentals of that, but surely when we have evidence by Dr. Stephen Schneider that 49.7 per cent — almost 50 per cent — of all legal transactions touched or went through a lawyer's purview or prism, this has to be of concern. We have to be able to formulate a tighter test or mechanism to provide a blockage of this type of activity.
The deputy chairman and I are both Q.C.s. We are both lawyers; we respect the legal profession. We understand the public interest. You do not have to lecture us on the public interest of lawyers. We know that. We are here to try to solve a particular glaring problem.
Senator Angus has pointed out that the U.K. has gone farther than we have in Canada. How far have they gone to protect the public interest? The United States has gone farther than we have to protect the public interest. Tell us how far they have gone and what the difference is between us and them. They have their system of the Anglo jurisprudence. Canada, the United States and the U.K. have the same system. Why do those entities also protecting the public interest have a different take on this? Give us the differences, why there are differences, and why you object to these differences.
I want to say as well, and Senator Angus reminded me, that this committee is upset and embarrassed by the fact that major prosecutions of Canadians take place in the United States. That is not acceptable to us. That means that we are not in effect a sovereign nation where there is criminal activity in Canada and it is captured by our southern neighbour. That is a sidebar, but it creates a tremendous amount of concern in this committee, of which we intend to do something about. Help us to solve this problem.
Frankly, both the senator and I — and other senators, who are lawyers — are concerned about this as lawyers.
We are senators, and you are there; we are here. We have our responsibility. Please help us. Give us the comparison; tell us precisely why the U.K. and the Americans have gone farther and we have not gone as far.
Mr. Nielsen: You have to take those separately. The U.K. is in the situation they are in because the lawyers did not challenge it, as I understand, and the legislation is there.
The Chairman: I am trying to make sure that senators do not react to your comments. What precisely happened in the U.K. that the barristers, who wear the silk, decided not to challenge?
Mr. Nielsen: I cannot speak to why they did not challenge. All I can say is they did not challenge.
The Chairman: What happened? What is the difference between their acceptance of a process as opposed to yours? What is the mechanical difference?
Mr. Nielsen: It would be wrong to suggest that the lawyers in the U.K. have accepted the process. I was just at a meeting in Amsterdam that was attended by 80 different individuals, mostly lawyers from around the world. The U.K. legislation is essentially the same as the original legislation here, but it was not challenged, and so the U.K. lawyers are now bound by that, and I do not know whether they have any ability to challenge.
Australia is now in the process of introducing legislation, which the bar council down there has rejected and, as I understand it, will challenge.
The Japanese government is doing the same, which the bar association there may challenge.
Mr. Varro can speak to this better than I, but in the United States the legislation is not there, and if legislation similar to what was initially in our act in Canada is introduced, I understand the American Bar Association will challenge it also. There is no distinction between privilege in the U.K., the United States, Australia or Canada. The rules that govern privilege are essentially the same.
Senator Angus, in introducing this bill, talked about these issues, particularly in the United States, and you did highlight that perhaps one of the differences is the constitutional abilities to challenge, and you are absolutely right. Our challenge with respect to the original legislation was under the Charter. I cannot speak to whether similar charter constitutional challenges are available in some of these jurisdictions.
The Chairman: With all due respect, we understand that. We are knowledgeable about that and understand the differences between the two systems, namely, the difference between the U.K., which does not have a written constitution, and the U.S. and Canada that do. We understand those distinctions.
I am asking you to tell us what they have allowed so far in the United States and what they have allowed in the U.K. that are different from your position — just the mechanical aspects. We can get this information.
Let me put it this way, as my great professor at law used to say, "Grafstein, this is a comparative law question." Give us a comparative law lecture.
Mr. Potter: We will make sure you have a table setting out the differences, as there are differences.
In brief, though, I can tell you that one of the differences is that the U.K. is in Europe, and the U.K. was responding to a European directive, which is indeed challenged by the Belgian bars in Luxembourg.
The Chairman: We understand that. I am in Europe four or five times a year. I am the leader of a party in Europe. I understand the differences of the two systems. Tell us what about the mechanical differences.
Mr. Potter: Mechanically, lawyers in the U.K. have to file reports on receipts of money, their clients and suspicious transactions.
As Mr. Nielsen just said, in brief, in the U.K., it is more or less the way the legislation was originally in this country. It is not that way in the United States.
The Chairman: Pause there for a moment. Let us see if we can get at this in a more precise way.
We understand the difference between reasonable doubt, reasonable things and suspicious. We know that the suspicious test is much more difficult, much harder on the lawyer and so on.
Tell me how you define "suspicious." How would the legal profession define "suspicious"?
Mr. Potter: That is the major problem with this bill and the major problem with the one in the United Kingdom. My definition of "suspicious" might be different from someone else's. It is a highly subjective test, and it is one of the reasons that our courts in Canada have said it does not wash. You cannot ask lawyers to determine when their clients are doing something suspicious or not.
The Chairman: Excuse me.
Mr. Potter: I do not have a definition of "suspicious."
The Chairman: Bear with me, respectfully. A number of us have been practising lawyers. We have had a lot of commercial and criminal experience. What about the smell test? I remember Mr. Justice Estey told me about a simple test. He said the test was if I something one day, would I want that to be published in the papers the following day, and if I did not, that did not pass smell test.
We understand the complexity of suspicious versus reasonable doubt and belief. Surely, lawyers are acute enough to be able to come up with a definition that would be appropriate in order to limit the extraordinary application of a large and capacious test that would be difficult to define. That is what we are all about as lawyers. That is what we do here in Ottawa: We come up with words to define content. Help us with this.
There must be a way of dealing with this in a reasonable and rational fashion that deals with the public interest. With respect to the banks, Senator Angus points out that the banks say they have to comply with suspicious transactions. I know the test is different. The banks do not have the same solicitor-client privilege. We understand that. However, there has to be a middle ground here, and we need your skill and expertise, which is so great, to help us with this.
We have the U.K. experience. What is the American experience?
Mr. Potter: That is a point I wanted to make a few minutes ago, but if it is true that Canadians are being prosecuted in America, it is not because American lawyers are reporting and Canadian lawyers are not. There is a proposal to require lawyers to report, and the American Bar Association has said it will challenge that.
The Chairman: I agree that that was a little foul ball.
Mr. Potter: I would like to talk about another foul ball, namely, the 49.7 per cent. That number is not 49.7 percent of all illicit transactions involve lawyers. Dr. Schneider reported that in his review of investigations, he found 49.7 per cent of investigations involved law firms. It is hardly a surprise that a transaction involves a law firm. On that basis, one cannot jump to the conclusion that if the lawyers were in a reporting mode, those transactions would not have happened.
The Chairman: I agree. Let us get back to the test in the United States. Let us see if we can deal with the precision. What test in the United States goes farther than the test in Canada?
Mr. Potter: I believe it does not go farther than here, and that will be in the table, which we will deliver to you.
Jim Varro, Policy Counsel, Federation of Law Societies of Canada: I can address that. It is summarized in the report of the FATF when it completed its mutual evaluation of the U.S. last year. I will read this paragraph for you, and it should summarize the situation in the United States. For clarity, "BSA" refers to the Bank Secrecy Act, which governs the money-laundering regime, "AML" is anti-money laundering and "Form 8300s" refers to the $10,000 and up threshold for reporting:
Lawyers and other legal professionals in the U.S. are not defined as "financial institutions" under the BSA and are not currently subject to most of the AML requirements under the BSA (other than the obligation to file Form 8300s). Representatives of the American Bar Association (ABA) Task Force on Gatekeeper Regulation and the Profession (ABA Gatekeeper Task Force) stated that the ABA has no objection in principle to the application of certain AML requirements on lawyers, as long as they do not conflict with established ethics requirements and the attorney-client privilege. The ABA represents more than 400,000 lawyers in the United States. FinCEN is reviewing the status of attorneys under the BSA, particularly with respect to their involvement in certain real estate transactions and corporate formation capacities.
In effect, the lawyers are not governed by any anti-money laundering regime to date.
Senator Fitzpatrick: Welcome gentlemen. I am not a lawyer so forgive my non-legal questions.
What is wrong with investigating suspicion? I can understand one should not be charged with suspicion, but what is wrong with investigating a suspicious situation and what is wrong with the legal profession providing that information, so that suspicious situation can be investigated?
It is not a charge, just an investigation. The tax department does audits all the time. It is not a charge unless something is wrong, but they may be suspicious that the income tax has not been filed properly.
Mr. Nielsen: There is nothing wrong with that, senator, and indeed it happens. The income tax is a good example. The question here is who gets the information, and the concern that was raised with respect to the original act, of course, was that frankly lawyers were, as my friend says, becoming rats, becoming agents of the state and reporting on their clients. If the tax department has a concern about tax evasion and that suspicion happens to be about a client of a lawyer, if they can convince a court, convince a judge that there are reasonable and probable grounds to believe, then there is a mechanism established after the Lavallée decision of the Supreme Court where they can get that information. It is not that lawyers are not participating, it is how the information is brought forward that is the issue.
Mr. Potter: There is nothing wrong with an investigation of a suspicious circumstance. What is wrong though is if you go with your tax problem to your tax lawyer and your tax lawyer judges it to be a bit suspicious and, without talking to you, is required to report to the state. That is wrong, because if that happens you will not consult a lawyer. It is in the interests of Canada and of the administration of justice that all citizens should be able to talk to their lawyers to bring themselves into legality. That is why it is wrong to ask lawyers to rat on their clients.
The Chairman: We agree with you on that.
Senator Goldstein: I have some technical concerns about the section that is intended to apply to lawyers. Proposed new section 10.1 of the bill tells us that certain sections do not apply to legal counsel when they are providing legal services; in other words, when the counsel, to put it bluntly, is doing something other than supplying legal services then that person — as a person not as a lawyer — has to abide by the reporting mechanism.
My question in terms of that drafting is the following: If the lawyer, not as a lawyer but as something else, is participating in a suspicious transaction, he or she is not about to divulge to anybody that he or she is participating in that transaction, therefore, of what utility, when all is said and done, is proposed new section 10.1?
I want to add to this to display my colours, because you will have noticed that within the committee, if you read our past discussions and studied our interim report, there is not unanimity with respect to the role of the lawyers. I would rather err on the side of preserving the constitutional guarantees of which this country can be so justly proud, even at the risk of losing investigatory capabilities with respect to suspicious or improper transactions.
That is a personal view. I grew up as a lawyer and still have that approach.
I first ask you to tell us about proposed new section 10.1 of the bill.
Mr. Nielsen: If I could address your last comment, I believe the view that you have expressed is the view that has been expressed by our courts, so you are on good ground there.
With respect to proposed new section 10.1, if a lawyer or any other person is involved knowingly in a suspicious transaction, they will not report, so that does not help.
In some provinces, lawyers are permitted to be real estate agents, for example, or insurance agents. It is tough, perhaps, in some situations to take off one hat and put on the other. If you assume I am one of those people who can sell real estate and practice law, if I am practicing law then proposed new section 10.1 would exempt the suspicious transaction reporting.
If, on the other hand, I do nothing more than facilitate a real estate transaction, I am then not subject to the no-cash rule to which I have referred. I may get a huge bag of money to purchase the real estate, and if I feel it is a bit offside, then I would be obliged to report that.
It is not to deal in any way with the individual that is complicit; it is to try to segregate, so that it is only in these limited circumstances where the individuals are providing legal service that the exemption would apply or the act would not apply. In any other circumstance where I do anything as an individual citizen, I am in the same position as everyone else.
The Chairman: As I recall, in Ontario, that was exactly the same situation when lawyers became mortgage brokers, and the Law Society of Upper Canada worked hard to start to really focus on those lawyers who decided that they would bear the two responsibilities. Frankly, the results on lawyers were much tougher than mortgage brokers per se, because they wanted to segregate and keep careful rules about that.
We are at the end of our time on this. We really would welcome your help on trying to deal with this problem. You will hear the public concern. You have heard it from the RCMP; we have heard it from other sources. Our last report put full faith and confidence in the self-regulation mechanism to help us solve this problem. There is a problem, and we have not come to grips with it as best we can.
We look forward to your talents, intelligence and duties as officers of the court and public officers essentially to help us with this. We will revisit with you again. If you need our assistance on this, we are interested.
Senator Massicotte: I want to make sure I understand. I am a bit suspicious of self-regulation of professions. A bridge fell down three or four years ago in Montreal. It appears the engineer was at fault, and he was unable to practice for a whole month and only what, three people died. Having said that, how severe are the consequences to lawyers caught in money laundering, and how many lawyers in the last 12 months have been disbarred for money-laundering reasons?
Mr. Nielsen: I do not have those statistics. I can tell you that we take every breach seriously. Criminal activity is the most serious, and lawyers are disbarred on a regular basis.
Senator Massicotte: Is that for life, for a month or years?
Mr. Nielsen: There are rules in every jurisdiction for lawyers to be able to apply for reinstatement. However, disbarment is a disbarment.
Senator Massicotte: Can we get some numbers on how many people were disbarred in the last 12 months for criminal reasons or white-collar crime purposes?
Mr. Nielsen: I believe we could put those statistics together. We could do it on a national basis.
Senator Massicotte: Thank you.
The Chairman: I believe you share our concern about how we solve a particular problem in the public interest. If you have any new information to tell us, please feel free to contact the clerk. This report will be an interim report, again, and then we will come back at this problem in the future.
Mr. Nielsen: Thank you. We are delighted to be asked to come back and we will help you wherever we can.
Mr. Potter: Thank you, senators.
Jean-Pierre Bernier, Vice President and General Counsel, Canadian Life and Health Insurance Association: Mr. Chairman, I will be guided by your preference. For my appearance, I prepared a presentation highlighting the key points of our written submission.
The industry I represent is generally supportive of Bill C-25. There are a few areas where particular attention should be paid to ensuring that implementation of the legislation and accompanying regulations is consistent with the risk- based approach.
It is fundamentally important that a risk-based approach to the bill be implemented, not only with high-risk situations, but also with low-risk situations.
The rationale for every one of our recommendations is in our written submission.
It is important that a reasonable period of time be provided for adjustment. We are dealing with a complex piece of legislation. Our member companies do business in 20 countries around the world. In Canada, we have almost 75,000 insurance agents and brokers, who are also reporting entities under this legislation. Time is essential for implementation.
We have to make sure that the regulations do not hamper the global competitiveness of the Canadian life and health insurance industry, because of the extra territoriality of some provisions of Bill C-25.
Our concerns can be answered appropriately by the regulations to come. One of the recommendations in our written submission is that the Senate Banking Committee undertakes a review of the regulations to ensure they are in keeping with the intent of the legislation and the recommendations of this committee. In the Senate Banking Committee's October 2006 report, under the chapter heading, "The Desire Regime," a risk-based approach was recommended for this legislation and its regulations.
The Chairman: I can tell you that, under the parliamentary review, we have a Scrutiny of Regulations Committee, which meets on a regular basis and is a joint committee of the House and the Senate. When the regulations are adopted, they are adopted on the basis that they are congruent with the jurisdiction of the act.
If you have concerns about the regulation, keep that in mind. You can go there when the regulations are published. They go through all the regulations on a regular basis.
Senator Goldstein: I am not convinced that that committee will have the appropriate background for dealing with these particular regulations.
The Chairman: We are not going to give up our jurisdiction to look at the purview of the act. I am just making the witness aware there is another focus, and that their jurisdiction is tightly controlled, so that the regulations do not exceed the purview of the act. It is a parliamentary oversight.
Senator Meighen: You must realize, Mr. Bernier, that we got this a few minutes ago; I have not had an opportunity to read the whole thing.
Your last bullet says you are concerned that the implementation of the legislation and accompanying regulations be consistent with the risk-based approach, whether it is a high-risk or low-risk situation. I, frankly, do not understand what you mean. Could you explain that?
Mr. Bernier: By way of example, if it cost $20 to monitor a $5,000 cancer insurance where a materiality and risk assessment determines that only $5 could apply to this particular product, it would be nice to use the $15 for high-risk situations to enhance training or to buy more sophisticated software.
Proposed new subsection 9.6(2) of Bill C-25 deals with the risk-based approach. There was a school of thought expressed by the Investment Dealers Association of Canada, when they appeared before the House of Commons Finance Committee, that the risk-based approach only applies to high-risk situations and not low-risk situations.
Senator Goldstein: I should have asked this question yesterday of the Office of the Superintendent of Financial Institutions Canada, OSFI, but there is a dictum in their report, which covers life insurers. I am curious about it.
It states, "Although money laundering and terrorist financing activities are frequently associated with deposit accounts, other financial products, such as loans, mortgages and other credit products, may also be used to hide the proceeds of crime or terrorist funds."
I do not understand how a mortgage loan by an insurance company to anyone for purposes of purchasing a home can possibly be something that should be considered as a function of proceeds of crime. Can you help me understand?
Mr. Bernier: If the insurer-lending institution becomes suspicious of a transaction.
Senator Goldstein: I am trying to understand how that suspicion would arise. Buying a home and borrowing money, every Canadian does that.
Senator Angus: Then he pays off the loan; hence, it is laundered.
The Chairman: We are going to give evidence ourselves here. I am interested in your answer.
Senator Goldstein: We are trying to understand the OSFI recommendation.
The Chairman: We would appreciate your view. This is a problem. We understand that life insurance and other insurance is a problem. How is this a way of laundering the money?
Mr. Bernier: Generally speaking, life insurers are not lending institutions. Under the Insurance Companies Act, we have the power to engage in lending activities. Generally, we do not. Once a life insurance policy has been sold with surrender values, and an individual policy holder comes to a life company to get a policy loan, which is more of an advance on the cash value of the policy, then we have a list of red flags from the RCMP, FINTRAC, OSFI, and the International Association of Insurance Supervisors. If we are suspicious of a money-laundering or terrorist-financing transaction, we will investigate and report in accordance with the law.
The Chairman: Have you ever had that happen?
Mr. Bernier: No.
The Chairman: You said that they have a high-risk series of flags. Give us some examples?
Mr. Bernier: A high risk will be a single premium annuity contract, particularly if the amount is large.
Senator Goldstein: We understand that. I do not understand how a Canadian borrowing money against his policy can be a suspicious transaction.
Mr. Bernier: We are not aware of any cases in relation to money laundering with respect to these particular residential mortgage loans.
Senator Goldstein: Why are you monitoring them?
Mr. Bernier: We have an obligation to monitor any transactions.
Senator Goldstein: Do you consider it appropriate to be called upon to monitor such transactions, given your experience?
Mr. Bernier: The answer is, yes, if there is a suspicion.
The Chairman: Would the lawyers like to opine on this particular question?
Mr. Potter: What do you mean by "suspicious," senator?
Senator Moore: The suspicion is driven by the dollar amount is what you are saying.
Mr. Bernier: We have a list of red flags: The money could come from another country; the claims could be quick coming; it could be a change of beneficiaries. There is a whole list of after-the-purchase transactions that will indicate a red flag of this particular money-laundering transaction.
Senator Moore: Should we have a copy of the guidelines?
The Chairman: Could you provide us with your red flag guidelines?
Mr. Bernier: Absolutely. We have developed our own, but FINTRAC also has a list of red flags for insurers on their website.
The Chairman: If you could give us yours, we will look at it.
Senator Eyton: I have not read your remarks, although I have read the conclusion. I was intrigued by your conclusion, because you say that your industry is supportive of the bill, and of course it is against the proceeds of crime and terrorist funding, but then you had a few reservations or conditions. There are three bullets, and the third one says, "as long as it does not unduly hamper our global competitiveness," which is another way of saying, "Well, if we have to compete —" There is a twist to your third point. I cannot see how it would ever affect your "global competitiveness" when we are talking about the bill and the activities it governs.
Mr. Bernier: I will give you the example that is in our written submission. One of the provisions of Bill C-25 that has an extra-territoriality effect is the client identification requirements for which there is a whole list of prescribed procedures and processes. In Canada, the requirement is two photo identifications. For a life company doing business in a country where the requirement is only one, it would be difficult for the life agents to ask for the additional photo identification. That is one example.
The Chairman: If there are no further questions, we will adjourn this hearing. I thank the distinguished representatives of the legal profession and also Mr. Bernier. It has been useful and very helpful. This is an experience in progress. We are trying to solve a problem in the best interests of Canada.
The committee adjourned.