Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 13 - Evidence - March 8, 2012
OTTAWA, Thursday, March 8, 2012
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:32 a.m. for the review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (S.C. 2000, c. 17), pursuant to section 72 of the said Act.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good morning, ladies and gentlemen, and welcome to this meeting of the Standing Senate Committee on Banking, Trade and Commerce. This morning, we continue the five-year parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This is our ninth meeting on the subject.
Over the last month, the committee has focused its efforts on hearing from a number of so-called regime partners involved in the implementation and administration of this legislation. Having heard the internal perspective, we now continue our efforts to hear an external perspective. Over the next month, we will hear from those familiar with and impacted by the regime, including industry groups and associations as well as independent experts in the field. We are pleased today to welcome a panel representing financial institutions.
Representing the Canadian Bankers Association, we have Mr. Bill Randle, Assistant General Counsel; and Mr. Stephen Harvey, Vice President, Chief Anti-money Laundering Officer for CIBC. Representing Credit Union Central of Canada, we have Mr. Marc-André Pigeon, Director, Financial Services Sector; and Ms. Evelyne Olivier, Internal Audit and Administration Officer for the Winnipeg Police Credit Union. Finally, representing Mouvement Desjardins, we have Ms. Karine Bolduc, Certified Management Accountant and Director, Compliance and Anti-Money Laundering.
We will hear from each of the groups in turn, and then we will ask our questions.
Mr. Randle, the floor is yours.
Bill Randle, Assistant General Counsel, Canadian Bankers Association: Thank you, Mr. Chair. Before I begin, I would like to beg the indulgence of the committee about my voice and, I think, Mr. Harvey's, because we are both suffering from colds. I hope you will, as I say, bear indulgence.
Mr. Chair and members of the committee, thank you for inviting us here today to contribute to your review of the Proceeds of Crime, (Money Laundering) and Terrorist Financing Act. On behalf of our member banks, we welcome this opportunity to provide you with our comments on this important piece of legislation.
My name is Bill Randle, and I am the Assistant General Counsel of the Canadian Bankers Association. With me today is Stephen Harvey, Vice President and Chief Anti-money Laundering Officer with CIBC. Mr. Harvey is also a member of the Department of Finance's Public/Private Sector Advisory Finance Committee and has been actively involved in the development of the international anti-money laundering, anti-terrorist financing standards established by the Financial Action Task Force.
As you are aware, Canada's AML regime was established around 2000, with the anti-terrorist financing mandate being added in 2001. From the beginning, the financial industry has worked closely and cooperatively with the Department of Finance, law enforcement agencies and the Financial Transactions and Reports Analysis Centre, FINTRAC, on the development and implementation of the AML/ATF regime.
All of our member banks have enterprise-wide policies covering AML and ATF, including key elements such as client due diligence, also known as "know your customer''; the reporting of large cash transactions; electronic funds transfers; and suspicious transactions. These policies are designed to help protect the safety, soundness and reputation of the Canadian financial system and to ensure compliance with Canada's legislation and with the various anti-money laundering laws and regulations in any foreign jurisdiction in which they operate. We welcome, therefore, the comment by FINTRAC officials when they appeared recently before the committee that "the banks are actually doing a very good job and have a very good strong regime of compliance in place.''
As the committee is aware, the Department of Finance recently released for comment two consultation papers; the first was in November and the second was last December. Although the content of both papers is at a relatively high level, the CBA has provided detailed comments on both papers. We recognize that one of the primary goals of the proposed changes is to ensure that Canada is in compliance with the evolving international AML/ATF standards as established by the Financial Action Task Force.
We also accept and support the desire of the Canadian government to safeguard the international reputation of Canada's financial system and institutions and to promote their continued integrity and growth. We note, however, that to achieve this objective Canada's financial institutions need to be able to operate and compete on a level playing field in an increasingly global economy.
The second consultation paper of the Department of Finance states, and I quote:
The proposals in this paper seek to maintain the balance between the need to deter and detect money laundering and terrorist financing activities while protecting the privacy rights of Canadians. The Government also recognises the need to minimize the compliance burden on the private sector.
We are pleased that the government acknowledges that the existing AML/ATF regime imposes a regulatory burden on reporting entities and that there is a need to continue to protect the privacy rights of Canadians. A balance must be maintained between implementing further measures to deal with money laundering and terrorist financing and the incremental costs of complying with new requirements, given the significant costs and operational burdens caused by the existing requirements. Any new measures should not place undue or unnecessary incremental burdens on reporting entities and must not undermine the risk-based approach that is generally accepted to be the fundamental principle of the regime. In addition, it is important to allow flexibility in the requirements both today and in the future.
We also want to take this opportunity to raise one specific matter. In our view, consideration needs to be given to permitting FINTRAC to disclose information to reporting entities. The act and regulations currently provide provisions to address the exchange of information among Government of Canada departments and agencies, including FINTRAC and law enforcement, and there are proposals in the second consultation paper that are intended to expand upon those existing disclosure provisions. Neither the current legislative regime nor any of the new proposals in the consultation papers makes any specific provision for the sharing of information between financial institutions or between FINTRAC and reporting entities. We believe the government should consider allowing enhanced disclosure in these areas.
Current privacy legislation with limited exceptions restricts the disclosure of personal information without the knowledge or consent of the client. This situation makes it challenging for the financial system to effectively restrict the customer who is considered to present higher risks for money laundering or terrorist financing activity from an access to financial services. If one financial institution, for instance, believes that one of its customers may be involved in such activities and accordingly terminates its relationship with the client, there is virtually nothing that prevents that client from obtaining the exact same services from another financial institution.
By creating measures that would allow for the sharing of information between financial institutions, the AML/ATF regime as a whole would be strengthened. We recognize, however, that safeguards are required and, therefore, any measures taken to enhance information sharing clearly will need to be balanced with legitimate privacy concerns.
Finally, we wish to note that once the new amendments are finalized, reporting entities will need sufficient time to make the internal changes that will be necessary to ensure full compliance with the new and revised AML/ATF requirements. This will mean that operational processes, employee training and computer systems will have to be updated, and new policies and procedures will have to be developed. All stakeholders, therefore, will need a transition period to implement system changes before the new requirements should come into force.
In closing, we would like to reiterate the strong support of the banking industry for the AML/ATF regime. We are pleased to have an opportunity to work cooperatively with the government and parliamentarians to ensure that Canada's AML and ATF system is thorough and effective.
Thank you once again for providing the CBA with this opportunity to offer our views. We would be pleased to answer any questions.
The Chair: Thank you very much, Mr. Randle.
Mr. Harvey, did you wish to add anything at this point or will you only respond to questions?
Stephen Harvey, Vice President, Chief Anti-money Laundering Officer, CIBC, Canadian Bankers Association: I will just respond to questions.
The Chair: Thank you very much.
I will now turn to Mr. Pigeon.
Marc-André Pigeon, Director, Financial Services Sector, Credit Union Central of Canada: I understand from talking to the clerk that I have up to 10 minutes, and I will probably be using the full allotted time.
[Translation]
Thank you, Mr. Chair, for inviting us to share our thoughts on your review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
I am the Director of Financial Services Sector at Credit Union Central of Canada. With me today is Evelyne Olivier, the Internal Audit and Administration Officer with the Winnipeg Police Credit Union. The Winnipeg Police Credit Union has $150 million in assets, 20 employees and roughly 4,600 members.
As the person responsible for complying with the federal government's anti-money laundering and anti-terrorist financing regime, Ms. Olivier brings a lot of real-world experience to the table. She will be pleased to share her insights into some of the challenges posed by the legislative framework on small financial institutions.
[English]
Credit Union Central of Canada is the national trade association for its member organizations, the provincial centrals, and through them 368 Canadian credit unions that range in size from smaller organizations like the Winnipeg Police Credit Union to much larger organizations like Vancity, which has about $16 billion in assets, 420,000 members and 1,870 employees. Regardless of size, credit unions are full-service cooperative financial institutions that are owned by their members. Combined, Canadian credit unions hold more than $140 billion in assets and operate a branch network with more than 1,700 locations outside of Quebec. These branches serve more than 5 million members and employ almost 26,000 people.
While there may be a wide variation in the size of credit unions, most qualify as small businesses. In fact, two thirds of the country's credit unions have fewer than 50 employees. That is a widely used definition of small business. Moreover, credit unions are the only full-service bricks and mortar financial institution in some 380 communities outside of Quebec. These facts are important because many of my comments today will focus on the impact of the current AML/ATF framework and the proposed changes on smaller financial institutions like credit unions.
Before I get too far along in my remarks, I want to stress that the credit union system understands and appreciates the importance of the AML/ATF framework for protecting the safety of our country and the integrity of our financial system. As community-owned and -operated financial institutions, we care deeply about keeping our communities safe.
With that in mind, it is important to begin by recognizing that credit unions are separate, autonomous, individually incorporated financial institutions. Each credit union is considered a reporting entity for FINTRAC purposes and, as a result, is directly impacted by this legislation, despite the fact that credit unions tend to be mostly regulated provincially.
Unlike Desjardins and the chartered banks, these separate institutions do not have a single centralized reporting entity to manage their compliance and reporting. Each of the 368 credit unions, in other words, has to spend time and resources complying with these requirements.
The credit union system has been concerned for some time now that the AML/ATF framework fails to achieve the government's objectives and, moreover, harms the competitive interest of smaller financial institutions like ours.
As other witnesses have noted, there seems to be an imbalance between reporting requirements and legal convictions in the current framework. In 2009-10, we know that financial institutions provided roughly 16 million disclosures to FINTRAC, resulting in 509 disclosures to law enforcement entities, which in turn led to 29 convictions out of 138 completed cases. This is from Statistics Canada data. Cumulatively, FINTRAC has received 126 million transaction reports since inception. One would assume that, given this accumulated data and experience, the conviction rate would be a little higher than it is.
From a credit union perspective, it is clear that all of this implies a significant compliance burden, one that arguably disadvantages credit unions relative to their larger competitors who have the means to hire costly compliance officers, centralize these functions and achieve economies of scale.
To illustrate the kind of commitment that is involved, consider the commitment for a credit union with 13 branches that is involved with respecting the current $10,000 threshold for international transactions. One of our credit unions calculated that burden as follows: In 2011 it reviewed 843 international electronic fund transfers that exceeded the $10,000 threshold to determine whether or not reporting was required to FINTRAC. Of the 843, it reported 38 to FINTRAC, either because the credit union was the first Canadian financial institution to receive the funds or the last to send the funds, or because information was missing for funds received through another entity. It takes about five minutes to review each of these records, implying that this credit union devoted about 70 hours to this activity. It takes another 10 to 20 minutes to complete a report, depending on how much information is missing. This implies another 6 to 12 hours for the reports, for a total of up to 82 hours for this one aspect of the compliance regime.
Eighty-two hours may not sound like a lot of time, but keep in mind that this does not include time devoted to complying with other aspects of the framework, nor does it include training and upgrading costs, front-line staff time, the costs of implementing tracking systems, the risk of penalties and the opportunity costs of having employees devote at least two full weeks a year to this one aspect of the regime.
If we remove the $10,000 threshold, as proposed in the Department of Finance's December consultation paper, the reporting burden for this one aspect — and I stress the one aspect — of the framework would increase markedly.
When you pair the situation with the evidence of low conviction rates, you end up with a situation that seems to conflict the recommendations coming from the government's own Red Tape Reduction Commission report which in late January released its excellent report called Cutting Red Tape . . . freeing business to grow.
In that report, the commission, which was created by Prime Minister Harper, outlined several principles meant to guide regulatory policy. One of those principles is the notion of proportionality, an idea broached by the Privacy Commissioner when she appeared before the committee, which says simply that you should not use a policy hammer to swat a fly. We strongly support the use of this principle.
The commission also underlined the importance of understanding that one-size-fits-all regulations, which is the implicit framework in the current rules, tend to disproportionately harm smaller businesses like credit unions.
To avoid this outcome, the commission recommends the use of a small-business lens to filter regulatory requirements. It further discusses potential policy accommodations that flow from this lens including, for example, exemptions or delayed implementation time frames. With these considerations in mind, we would like to offer three recommendations for the committee to consider in its deliberations.
First, we believe the federal government ought to, at a minimum, question whether more is better with respect to volume of reporting, and whether that is the best way to mitigate the threat of money laundering and terrorist financing. It is for this reason that we, in our response to the Department of Finance's December consultation paper, oppose the elimination of the $10,000 reporting threshold.
Second, we believe the federal government should subject its proposed AML/ATF changes to the small-business lens recommended by the Red Tape Reduction Commission. The small-business lens would help ensure that rules are designed in a manner that meets the policy objectives of the government while not creating competitive disadvantages for smaller organizations.
Third, and finally, we believe that the public interest would be well served by having the federal government conduct a detailed cost-benefit analysis of the current framework before proceeding with the implementation of additional proposed regulations. Again, this cost exercise is entirely consistent with the recommendations from the Red Tape Reduction Commission report, which noted that regulators have not effectively or consistently applied this kind of analysis despite a requirement to do so in the regulatory impact analysis statements.
To conclude, Mr. Chair, we would like to thank the committee for the opportunity to contribute to its study. We would like to reiterate our support for the framework in principle, and we would be pleased to provide you with any additional information you would require and to answer your questions.
The Chair: Thank you very much, Mr. Pigeon.
Now, representing Mouvement Desjardins, Ms. Karine Bolduc.
[Translation]
Karine Bolduc, Certified Management Accountant and Director, Compliance and Anti-Money Laundering, Mouvement Desjardins: Mr. Chair, thank you for inviting Mouvement Desjardins to present its recommendations in the changes proposed to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
I am the director responsible for the surveillance department that deals with money laundering and terrorist financing for Mouvement Desjardins; I am also in charge of Mouvement Desjardins' compliance program.
Ranked 20th out of the 50 most secure financial institutions in the world in 2011 by Global Finance magazine, Mouvement Desjardins is the largest cooperative financial group in Canada. The movement inspires confidence around the world because of the commitment of its people, its solid financial base and its contribution to sustainable prosperity. Our mission is to work for the economic and social well-being of people and communities.
With assets of $190 billion, Mouvement Desjardins is the largest cooperative financial group in Canada. With the strength of our network of credit unions in Quebec and Ontario, and through the support of our branches, some active nationally, we offer our 5.8 million members a complete range of products and services.
Mouvement Desjardins also brings together expertise in wealth management, in personal and property insurance, and in services to individuals and to businesses. It is one of the country's largest employers, with about 45,000 capable employees and more than 5,400 elected directors.
I would first like to talk about the potential that cooperatives have in the fight against money laundering and terrorist financing. Mouvement Desjardins has different types of reporting entities, including a network of credit unions, life insurers, and stockbrokers. Our Fédération des caisses Desjardins du Québec issues credit cards and acts as a correspondent bank for international transactions.
From an overall perspective, being an integrated group allows us to have a complete view of our members' and clients' activities, which makes the detection of money laundering easier. The commitment to sustainable prosperity in the organization's mission refers to long-term economic development and wealth creation. This commitment reinforces Mouvement Desjardins' desire to fight against money laundering and terrorist financing.
In 2011, the "Coopmoi'' program was launched to provide financial education and cooperative activities. Mouvement Desjardins intends to continue its efforts at the 2012 International Summit of Cooperatives, in order to further celebrate cooperative activity and to highlight its relevance for and contribution to a plural economy.
We believe that cooperation is an element essential to the success of the fight against criminal financial activity and that the structure of Mouvement Desjardins can help to raise the industry's standards in this matter, so long as the legislation recognizes that uniqueness and provides the tools necessary for us to act as an integrated group.
Our testimony today will be divided into three sections: substantive issues with the proposed amendments, the items that we consider to be positive, and the proposals on strengthening that we consider to be too harsh.
In terms of the substantive issues with the proposed amendments, the first challenge is operational and technological. The quality of the member and client experience is at the heart of Desjardins' priorities, as it is for all other financial institutions. As a result, we look at all the legal requirements that have to be put into place in terms of executing them, first in an automated and centralized way and then, finally, in a decentralized way in the daily processes of service delivery directly to our clients and our members.
The work demanded by the act requires financial institutions to acquire sophisticated and expensive surveillance tools in order to examine a significant volume of transactions, to carry out burdensome administrative tasks in a centralized way and to implement effective methods of mitigation and oversight. These sophisticated tools can detect complex money laundering situations and scenarios. So it is essential that the act consider the growing ability that financial institutions have in detecting and declaring suspicious money laundering threats rather than to apply too- general rules designed to prevent information from slipping away. To operate effectively, FINTRAC must have strategic financial information.
The second challenge is structural. The complexity of the required amount of checking using the risk-based approach varies with the high reporting standards FINTRAC requires. This requires a centralized department to do the work for the financial institutions. This centralization is even more desirable since it allows a higher level of quality to be reached, work methods to be standardized, suspicious situations within a company to be detected against a global picture, all without conflict of interest because the work is being done by people who are not directly connected with service delivery.
At this point, it is vital to consider the particular structure of integrated groups such as Mouvement Desjardins. This will allow FINTRAC to conduct centralized compliance examinations, to communicate directly with the federation's central unit so that other institutions in the same group can be inspected or so that regular meetings with a central unit can be held in order to indicate situations that need to be corrected or simply to provide feedback.
Mention should be made in the act about the delegation of some activities between the various entities in the same group; this would ensure that Mouvement Desjardins, like other integrated financial groups, can use the full potential of its structure and thereby better spearhead the fight against money laundering and terrorist financing.
In terms of the financial challenges, I am sure that we all agree that the strengthening that requires transaction systems to be updated, surveillance tools to be acquired, and processes and training to be added, are expensive for financial institutions and should be chosen for the benefits they provide to the integrity of our financial systems. The time it takes to put them in place must also be considered.
As for the items considered to be positive, Mouvement Desjardins supports the principle of strengthening standards and the duty to be vigilant for our clients, since that is the basis of a good program of effective compliance. Of course, all the loosening of restrictions in the amendments is welcome because it allows efforts to be focused on the key areas.
So we look forward with interest to welcoming the loosening of restrictions in situations of introduced business, of clients not physically present, and of corporations listed on a Canadian or other foreign stock exchange designated by the minister.
The Internet is a major development in the business model of financial institutions, from sending money overseas to paying bills and opening accounts. We feel that the use of the Internet is an inevitable trend in the industry, but one that brings with it greater risks. The act must therefore provide for flexible tools allowing financial institutions to identify their clients online at little cost in both operation and expense.
The final item that we consider positive is that the department will have the ability to implement countermeasures quickly and to give instructions to financial institutions. It will of course be equally necessary to support financial institutions in putting these countermeasures into place.
In terms of the strengthening proposals that we consider too harsh, we feel that it would be inappropriate to remove the insurance declaration thresholds for politically exposed foreign persons or the thresholds for checking identities. Specifically with life insurance, we must avoid an extension into low-risk products and the elimination of the declaration threshold. Instead, the products that are at risk should be specified.
In the area of international electronic transfers, once more, it is necessary to avoid eliminating online transfer thresholds as a way to detect terrorist financing. We have mitigation measures in place and we propose that the act specify mandatory measures rather than create a system of sending electronic transfers to FINTRAC.
We also consider it too demanding to determine, for every account, whether clients are closely linked to politically exposed foreign persons when referring to close associates. Our proposal is to do so with high-risk clients. In general, therefore, Mouvement Desjardin's proposal is to rely on a risk-based approach by placing more markers for actions to be taken and products to be watched, rather than lowering or removing the declaration thresholds or, again, in requiring the identification of clients using low-risk products.
In closing, we would like to thank the Standing Senate Committee on Banking, Trade and Commerce for providing the Mouvement Desjardins with this opportunity to testify on the strengthening of the legislative framework that is proposed. We will be happy to answer your questions on the comments we have just provided.
[English]
The Chair: Thank you, Ms. Bolduc.
If I may start with a question to Mr. Pigeon, it is a pleasure to have you back. I think it was December 8 you appeared before our committee on another bill, Bill S-5, as I recall.
As I recall, at that time you made reference to the principle that you were concerned about one size fits all. Therefore it is with no surprise that I notice on page 8 of your presentation today you again make reference to that one size fits all.
You make specific reference to this issue of the $10,000 reporting threshold. Last night — you may have read the testimony — Susana Johnson, head of anti-money laundering services at KPMG Forensic, spoke to us about the maturity of the reporting regime and the possibility of lowering this threshold.
She said, and I quote directly:
. . . that lowering that threshold may not necessarily create additional problems because it is really an automated process. You just lower your threshold. I am not sure what the technological problems may be, but right now I am not sure there are necessarily a whole lot of issues. If it gives additional information to FINTRAC, it may be a useful thing to have.
I believe we have examples of other countries, like the U.S. and Australia, which have lower levels than the $10,000.
Now, you make reference to the concept of a small-business lens. I suspect that is what you are talking about with reference to this specific suggestion. Could you expand on it a little because we have this testimony from another witness that seems to be somewhat opposed to you? She may be speaking for larger institutions, but I will leave that up for you to amplify for us.
Mr. Pigeon: Thank you, Mr. Chair. I did review that testimony, and I picked up on that point as well. It does not align with our experience. It would not be a simple matter of pushing a button where that threshold would be eliminated. We have to review the transaction — and maybe I will get Ms. Olivier to talk a bit about this — so there is a time commitment involved there. It was our president, David Phillips, who was before the committee last time. While we have the same opinion, obviously, I just wanted to put that on the record.
I think the small-business lens is very helpful in this case, and I will turn it over to Ms. Olivier in a minute. Bear in mind that a lot of credit unions know their members exceptionally well. Ms. Olivier's credit union has 4,600 members. That is a lot of people, but not by the standards of a bigger institution. You can get to know those people fairly well and get a good sense of their character. Those kinds of considerations should be brought to bear in the regulatory policy framework. I would also add that I think that, when those are not brought to bear, there is a cost that the policy- makers are maybe not aware of. These credit unions do tremendous things in their communities. I can go on forever about the kinds of things they do for their communities on volunteer time and staff time. When you start eroding that, you erode their ability to provide those services and to meet the needs of small-business borrowers. The credit union sector is disproportionately involved in lending to small businesses. That is something we take a lot of pride in. Everything comes with a cost. If we increase the reporting requirements here, something has to give somewhere because we cannot increase our prices. We are in a competitive market. We are getting squeezed on margins like everyone else, so we have challenges there.
Evelyne Olivier, Internal Audit and Administration Officer, Winnipeg Police Credit Union, Credit Union Central of Canada: I can speak from the ground level, from the member coming in to do a money transfer. The teller has to gather all the information, and it is a lot of information. It is not only your name and your address but also where you work, your birth date, who you are sending the money to, their name, their birth date, and their occupation. This information is not necessarily in the system, so you have to ask them or research it. You have to have the bank information that the wire is going to as well.
After the teller or member service representative gathers the information, she has to put it through the money transfer system, and that is the automatic part. You still have to enter it manually. The automatic part is that you hit the send button, and it is gone. After that, their manager uses it and has to input it. We use the VeriSign software company, whom we report to FINTRAC. She has to enter the information manually plus check and ensure that all questions have been answered. After that is done, I review it on the VeriSign software to make sure that everything is filled out appropriately and then send it off as well. It gets the final okay, and then it is gone. With small credit unions, we just change banking systems. It does not have all the bells and whistles, but it does what we need it to do.
A lot of our members are long-time members. We are a semi-closed credit union. Mostly it is open to law enforcement. They do referrals to family and friends, so we know our membership really well. Chances of money laundering or terrorist financing happening are very slim, but we have to do all this extra work.
My job has changed dramatically because of this. Probably half of my job has been taken over by someone else so that I could focus on implementing the compliance regime, putting procedures and policies in place so that everyone is on the same page, dealing with the training issues, and doing the reviewing every two years. Your front line is your main focus because they are the ones who are dealing with the members. That is the line that tends to change more often because people want to move up the ladder. You get new people in, and the training starts all over again.
I will leave you with a story so that you remember what I am saying. A lot of our members are long-time members. I do not know if you remember your parents talking about this, but all you needed to open an account was your social insurance number. This is a piece of information you cannot provide to FINTRAC, so you have to have other identification. The identification we might have on file might be an expired credit card. It might be an expired driver's licence. You have to ask for all of this the first time the member is in front of you. That is constantly changing. Even though you might have it on the banking system, other software programs are used alongside the business, and all of that is continually being updated. If a member comes in one day to do an electronic fund transfer, the information might not be readily at hand. You have to get this all from them, and they might not have it on them either. There is ongoing change. Probably, most of us that have accounts have had them for a long time. We are not exposed to what it is like to own an account today, all of the questions you have to answer and the personal information you are giving up. To lower the threshold to $1,000 would mean a lot of Canadians' information being referred to FINTRAC for reporting purposes.
Just for our credit union, I did an audit, over a six-month period, for outgoing and incoming wires. Of the outgoing wires, I had 62 altogether. Ten were within Canada, and 52 were outside of Canada. Of the ones outside Canada, 13 were reportable, 28 were between $1,000 and under $10,000, and 11 were under $1,000. That would increase, over a six- month period, to 39 wires that would be reportable, as opposed to 13. For incoming wires, the numbers were smaller. Four were within Canada and 12 outside Canada. Of the ones outside Canada, one was reportable, seven were between $1,000 and $10,000, and four were under $1,000. That would be an additional 11 reportable. We are a small credit union, one branch.
The Chair: Thank you very much, Ms. Olivier. Ground floor testimony is of great help to our committee, and we greatly appreciate your comments this morning.
[Translation]
Senator Hervieux-Payette: I have a quick question for each one of you. So you can answer after I have asked the three questions.
My first question is for the bankers. Do you think that sectors other than those that are presently covered should be: banks, credit unions, insurance, brokers, and so on, I mean? Do you think that other sectors of the economy should be covered as well?
Second, and more directly related to you specifically, do you think the penalties for failing to report are sufficient? In the United States, we are told, they are much greater. So, when you do a transaction and get, say, $1 million illegally, if the penalty is $5,000, you might be tempted to keep the million and pay the $5,000. Just by way of example.
For the credit union central, I understand your problem, but given that the wrongdoers, the criminals, are very sharp, as we know they are, they will come over to you if the amount is reduced and you are not part of that policy. I was wondering if all your members issue prepaid cards, say, for example, debit cards that are given as gifts.
For Mouvement Desjardins, are your 45,000 employees all trained from the central office? Who checks the compliance internally? How do you know that your policies are being applied? Those are my questions.
[English]
Mr. Randle: I will try to answer your questions in order, senator. As for the first one, there is no obvious group of businesses that are not currently covered by the regime that you think would be covered. They have, over the years, gone from financial entities to casinos to jewellery stores and similar businesses. I think what you have been trying to do is deal with businesses that deal in cash, which is the obvious way, with the exception being financial institutions. Although they deal in cash, they also deal in other instruments, which historically have been used by money launderers.
On the second question, to some extent our response would be that the current administrative penalties are more than enough. They are not intended to be a criminal action. As far as I am aware, no one in FINTRAC, the Department of Finance, law enforcement or our regulator, OSFI, has ever said that any of the reporting entities have ever deliberately not reported. The administrative monetary penalties given over the last few years — and there have not been many — are, in many cases, due to institutions that have lesser resources or were just caught by the system. I am not aware of any examples, although FINTRAC might be able to provide you one, where such penalties were administered with any idea that there was an intentional attempt to avoid the system.
Increasing the penalties, especially given that the regime is incredibly complicated and sophisticated, would just simply mean that you would get more money, but that should not be the intention of administered monetary penalties. It should be to help people comply with the legislation. As far as I can see, every reported entity wants to comply with the legislation.
[Translation]
Mr. Pigeon: I thank the senator for her question, Mr. Chair. Prepaid cards are not part of our system to any extent at all, to my knowledge. Perhaps Vancity does a tiny bit, but apart from that, it is almost zero. That is a pretty easy question.
With respect to the other question, the credit union system, as Mr. Randle said, we are working very hard to ensure that the rules are respected. Ms. Olivier spends a lot of her time respecting the rules, and if the regulations change, we will put a great deal of emphasis on complying with the rules.
All we are asking is that the federal government take into account our differences, that we are a cooperative system, connected to our community. We often do not have as many members as the banks have clients. And they could perhaps develop policies that could help us better adapt to the regulations.
I will give you an idea. We have not thought a lot about it, but what we would like to do is have some good discussions with the Department of Finance. We have already started discussing it, thinking about ways to adjust, to change the way this applies to the credit unions. The Canadian Wireless Telecommunications Association recently proposed that, if the government wanted to impose regulations to monitor their client, that they should be compensated in some way. That is a lot of time, effort and money. This is not necessarily what we want to propose, but it is an idea. If we can start the discussion to get them to understand that the regulations have different consequences on the various institutions, we can start to think about similar solutions. We will do everything we can to comply with the rules, but we are looking for understanding from public servants.
Senator Hervieux-Payette: Just a quick comment, Mr. Chair. I do not know what criminal would deposit money in a credit union for the police, but just the fact that you have a connection with the police may help.
I want to remind you that, in Quebec, we had Earl Jones, who everyone liked and knew and who was in a small branch, and there were others who were very nice but, unfortunately, were not very honest.
Ms. Bolduc: Your questions were about training and monitoring. As I said, Mouvement Desjardins is an integrated group. So my service is responsible for deploying the compliance program for the entire network of credit unions, which extends to the subsidiaries.
Yes, training is centralized, done online, so using all the web technology, and in the classroom, for employees and managers. This ensures a certain standardization in the procedures. What is good about having a central unit is that it gives a little perspective, a little depth to the message. Today, the particular situation of Mouvement Desjardins is the same as that of Mr. Pigeon, in the sense that each of our credit unions is a reporting entity on its own. Each credit union has its own compliance officer. We cannot leave them with the burden of implementing the legislation on their own. We position ourselves as a global financial institution, and we deploy consistent programs across the company, rather than doing it bit by bit with blinders on. So that is what I have to say about training.
As for monitoring, good monitoring of the effectiveness of the program can ensure that undesirable situations are corrected quickly or that new procedures are put in place. Monitoring is done by Mouvement Desjardins monitoring office. We have an office in Mouvement Desjardins designated to carry out inspections of credit unions and subsidiaries. It applies the internal controls designed by my service and with the enhancements that come from that office.
[English]
Senator Oliver: I congratulate Mr. Pigeon for his presentation. I thought the three recommendations that he brought to the committee were clear and helpful for consideration when it comes time to do the report.
My main question is for the Canadian Bankers Association and Mr. Randle. The underlying theme in all of these discussions and negotiations we are having in relation to money laundering raises the question of how to find and strike the right balance between going after the money launderers and protecting Canadian individuals' rights to freedom and privacy. When I heard your presentation, it seemed that you were not as concerned with privacy as with the other. I would like to give you three quotations from your remarks and ask you to explain them, because it scares me a bit on behalf of Canadians. I realize that your banks are huge institutions with billions of dollars, but they are made up of individuals who have individual privacy rights. I do not think those rights can be forgotten.
You say that the first thing the CBA would like to have is consideration for FINTRAC to disclose more information to reporting entities. You also say that on the other hand, you know that under current privacy legislation, you cannot give out personal information without the consent of the client. You then say that this makes it very, very difficult to restrict a customer. "Restrict a customer'' — what about that customer's privacy rights? Do you have a money-laundering profile, or how do you actually define a "suspicious transaction''? Can you help us with what you do in those areas? If have some kind of money-laundering profile, how does it affect the privacy rights of ordinary Canadians who have to do financial transactions? That is my concern.
Mr. Randle: I will begin the answer, then Mr. Harvey could probably give you the details you want. I want to point out that we have 53 members, and of those 53 members, we have six major domestic banks. The vast majority of our members are much smaller than that. In fact, some of them, I would say the majority of them, are currently smaller than Vancity, which was named by the Credit Union Central of Canada. There is a tendency sometimes to see the banking industry as a monolithic group of the six big ones, and that is a fallacy that I would like to deal with here. That is not true. All of the banks, as with all reporting entities, have to comply with the same rules and the same regime.
A second general point I would make is that more than anyone else, financial institutions are clearly aware of the need to protect the privacy of their customers. They have done it diligently for many years, even before the privacy legislation was in place. As I am sure many of you know, since the 1920s when a famous court case was passed in the U.K., the duty of confidentiality has been applied consistently and diligently by the financial industry; and we continue to do so.
The things we were touching on were ways in which we can prevent people we do not want in the system, whether it is us, the government or I am sure anyone in the Senate committee, to be able to use the system to exploit it.
I mentioned in my remarks that we would obviously need some safeguards of privacy, because that is our major concern, but at the moment if an individual was asked to leave an institution because of suspicious activity and that service was ended, they could.
Senator Oliver: They could go to another institution, as you said before.
Mr. Randle: Yes. We need more time to go into the details, but like all legislation, this legislation is a balance between protection of privacy of individuals and preventing the misuse of the financial system, casinos and others to launder funds or do terrorist financing. By its definition it is a retreat from complete privacy, which is why I indicated that we need a balance. Possibly the balance is such that it would be more difficult to do any more, but in the United States they have legislation to deal with this as far as transfer of certain information between institutions when they have these types of suspicions, with protections, and I am sure that the level of protection for privacy is as high in the United States as it is in Canada. I think there are ways of doing it. We would obviously want to discuss it with the Department of Finance.
Our issue on FINTRAC is that it can disclose information, as you know, to certain law enforcement agencies and others. For example, they cannot go back to a financial institution that has filed a suspicious transaction report and ask for additional information. It may well be that their analysis, based on not only that report but other reports they receive, leads them to a certain tentative conclusion and they would like more information from the financial institution or the other reporting entity, and at the moment they could not do that. That seems to us to be a weakness in the system. It obviously would also allow a reporting entity that was dealing with someone who perhaps was not as suspicious as they could be because of the transactions that person has done, because FINTRAC would have information from elsewhere they could go back to that reporting entity — it could be our Winnipeg credit union — and say, "We have found out X, Y, Z,'' and that would allow that institution to look at their transactions more carefully.
I realize that on the surface it appears to be an erosion of individual privacy, but I would suggest, senator, that is not the intention. It is otherwise; it is to try to help the regime be more effective and efficient.
Senator Oliver: You did not deal with my question about the money-laundering profile for suspicious transactions.
Mr. Harvey: There are two principal ways in which we identify unusual activity, and I use the term "unusual'' on purpose. It is a much lower standard and it is much easier for us to explain to our staff what we are looking for.
The first, and perhaps the most important, is the eyes and ears of the employee in the branch dealing with the client. They know the client; they know what is normal activity versus what is not normal activity. We ask them to report to us centrally into my group.
In addition to that, we monitor, through automated systems, all activity in all accounts every single day looking for patterns of unusual activity. Once we have identified either a front-line report or a pattern of unusual activity originating from our system, that information is very carefully analyzed by an analyst in my group. We protect that information. We do not share that information with any other person in the bank outside of my group.
If an employee at the front line sends in an unusual report, no one else in the bank knows of the existence of that report. We do not under any circumstance release that to anyone. If after our investigation we still genuinely do not understand what the client's activity is — and we are really looking not just for the isolated transaction, because those are fairly easily eliminated — we orchestrate a conversation with the client to provide the client with an opportunity to give us a logical, reasonable explanation for the activity, because I have always believed that the best person to give the information is the client.
Assuming the client can provide that, that is the end of the case. If, on the other hand, as sometimes happens, the information provided by the client leads to further concern, then and only then would we contemplate filing a suspicious transaction report with FINTRAC. It is a very lengthy process. Even once we have reached the decision to file the suspicious transaction report we do not share that information with anyone in the bank. It goes from my group directly to FINTRAC. That is the privacy component.
Once we have reached the conclusion that an individual is conducting transactions that are suspicious by nature, we then have a decision to make. The decision effectively is this: We have a bad person. Are we comfortable keeping the bad person as a client? If the answer is that it looks bad but it was sort of explainable and we decide to give them a second shot, that is fine, but if the decision is that we think this is egregious activity such that we do not want that client, we will reach a conclusion to terminate the relationship. Again, it is done in such a way that the client is not aware that that report is what gave rise to it, so the termination component may take a bit of time.
That is where we feel that it would be beneficial if there was an ability to share information in a constrained manner with very rigid rules. As Mr. Randle said, under provisions 314(a) of the USA Patriot Act, their equivalent of FINTRAC can, upon receipt of a suspicious activity report, come to the bank and ask for additional information, which I think would enhance their ability to identify cases that should be referred to law enforcement. We can anticipate what we think might be of interest to FINTRAC, but we truthfully do not always know.
Provision 314(b) provides the ability for banks to share information between them, and I think it is used very guardedly. For many years I was opposed to having such a provision, and I did work in AML in the U.S. previously. However, I have come around to thinking that this is in the best interests of the Canadian financial system. It would enable us, with very limited disclosure information and very tightly controlled disclosure, to ensure that the real hard core criminal is kept out of the system.
Senator Tkachuk: Further to Senator Oliver's question, how many suspicious transactions do you generate per branch at CIBC per year?
Mr. Harvey: We do not track the actual suspicious transactions by branch but we do track the unusual transaction reports that originate. One reason that we disengage from the unusual transaction to the suspicious transaction report is that once a branch reports something we look at the client holistically. The client may have dealings with more than one branch or may deal with a broker-dealer, so if you attribute that suspicious transaction report back to the originating branch it may be a little distorted.
To give a simple answer, many branches do not submit any unusual transaction reports, and that is quite fine.
Senator Tkachuk: How many would you submit?
Mr. Harvey: From our branch networks we get around 7,000 to 8,000 a year.
Senator Tkachuk: Does law enforcement or FINTRAC follow up on those? Of those 7,000 or 8,000, how many would generate an investigation?
Mr. Harvey: I would estimate 1,000 suspicious transaction reports.
Senator Tkachuk: That is a lot.
Senator Harb: Thank you very much for your presentation. Are you aware of the report that was given to the Department of Finance by Capra International that was supposedly out there to do a 10-year evaluation of the system, and have they contacted any one of you for your comment?
Mr. Harvey: Yes, I was contacted and interviewed by the consultants as part of the drafting of the report.
Senator Harb: Anyone else?
Ms. Bolduc: Not Desjardins.
Mr. Pigeon: I do not believe we were either, but — this is an important point to keep in mind — we do not necessarily know what each of our affiliated credit unions is doing. There may have been some contact that we are not aware of.
Senator Harb: Have you had a chance to read the report? Did you get a copy of the final report?
Mr. Harvey: Yes, I did, and I confess that I have not read it to the level of detail that I would like.
Senator Harb: I want, with the permission of the chair, to give you a synopsis of it. In recommendation 2(b) they specifically deal with the notion that there are some concerns that were raised by reporting entities, and they have asked the department, as well as their partners, to go back and deal with those concerns. I hope you will pick up on that when they come back to you. I hope you will make your point very relevant and obvious to them.
In that report, and I do not know whether that is based on the consultation they had with you or otherwise, it seemed that throughout their recommendations they talk about the need to conduct a review, the need to improve the regime, the fact that the threats have not diminished since the year 2000 in terms of money laundering in terrorist activities. The regime likely contributed, which means unlikely contributed, to the reduction of dealing with it. The regime is considered to be economical to the extent that the economy can be determined and so on.
I guess this goes back to the point that Mr. Pigeon and others have raised, the proportion and the value-for-money element. Do you support the fact that perhaps the government, as well as the partners, should conduct value for money in terms of what we are spending versus what we are getting out of the system?
Mr. Harvey: I think at the end of the day one should worry about the effectiveness of the regime. I should add that I have been in the anti-money laundering business for 25 plus years — on the bank side, not on the laundering side.
I think the effectiveness of the regime can be measured by how hard a criminal has to work to get the money into the system, but you have to start with the premise that, short of axe murderers, criminals are in business to generate profits. Our job is to identify the profits or what we think are the profits of criminal activity and then report that to FINTRAC, who can then build a case disclosure to go to law enforcement and lead to a prosecution.
I think perhaps one of the questions we could ask ourselves, and it is a reasonable one — I think it has been discussed a little bit this morning — in terms of effectiveness, is the most effective way to move, for example, reporting of wire transfers from $10,000 to $1? I would submit probably not, because it clogs up the system then with a lot of information that probably does not serve any use. Does it serve any useful purpose to know that I sent a wire transfer to Reader's Digest for $50? I do not think so.
Similarly, I would think it might be appropriate for us to question the very $10,000 threshold even on large cash transaction reporting. There is no magic to $10,000. We arrived at that back in the mid-1980s and it has been perpetuated ever since in every regime, virtually in every country. If you look at it from an inflation perspective, $10,000 back in 1985 — my math is not the best — it is probably $150,000 today.
One could argue that a more effective regime would focus on the larger amounts, focus on the more egregious activity, and take us truly into a risk-based approach. I digress a little bit, I am sorry, but I get a little emotional on this topic.
Senator Harb: Have you monetized how much it will cost if you remove the threshold? You do not have to answer it now, but that would be something very useful for the committee so we have an idea of the implication of that change from $10,000 to $1 or whatever.
The committee, about six years ago, made a number of recommendations, one of which dealt with privacy. The committee made the recommendation that FINTRAC should provide information to foreign financial entities only if those countries have privacy laws that are consistent with Canadian laws.
In the end, your client, when he or she opens an account with you and you give information about your client to a Canadian agency, you do so with the understanding that he or she is protected by privacy laws.
When that agency moves on and takes the same information that you provided to them and gives it to somebody else outside the country, if those countries do not have privacy laws that are consistent with Canadian laws, then somebody is doing something wrong here, and ultimately it might be you.
Morally speaking, legally, it is FINTRAC's responsibility. Do you think FINTRAC should have provisions in the law that say so?
Mr. Harvey: Again, I think I will put my moral hat on and say — and I will separate out terrorist financing because that is quite distinct — that the AML regime focuses on criminal activity generating profits. Criminals do not operate within national boundaries. They operate transnationally, so I think an effective AML regime must operate transnationally.
However, I think some of the concerns you are raising are very valid ones, and we really need to be very comfortable that the disclosure of information by FINTRAC to another FIU in a foreign country is done in a balanced and meaningful way. I certainly am not privy to how they execute that except at a very high level, but I think that is being prudentially pursued by FINTRAC. I think the execution of the MOUs is up to 50 or 60, so it is not as indiscriminate. I think there is a balance there.
Senator Tkachuk: I have a lot of sympathy for the smaller institutions. I think some of us were on the committee when this bill was introduced a decade ago. A lot of us had reservations about this idea that everybody is guilty. We do it with security, and it seems that we are doing it everywhere. It seems an easy way to say everybody is under suspicion. Therefore, you go to an airport, fly in an airplane, we were going to search everybody.
It seems to me that there are more ways to generate profiles of people who are probably incapable of committing criminal acts than there are of generating profiles of people who are capable of committing criminal acts.
I will use my example. I cannot speak for everybody here, but I have been dealing with the Royal Bank since I was 18 years old. I have been dealing with Nesbitt Burns for a long time. They probably know more about me than I do.
Certainly banks and credit unions would know their customers. Is there a way that we can totally change the way we think about this and report transactions that are suspicious from suspicious clients, not transactions that are not even suspicious? We just have a number and we say everybody is in that number. I can get — and have gotten — secret security clearance, but I cannot get on an airplane without checking what little hairspray I use. Then they make me go through this x-ray machine now. It is not good enough now to identify metals; they have to see through your clothing. I mean, this is all nuts stuff, and we are not more secure. We get to thinking this way, and we do not think that there are other ways to do this. It is not in the interests of banks to have a bunch of criminals corrupting their system. It is not in their self-interest. It will destroy a bank, so there has to be other ways to do this besides this huge apparatus we have here in Ottawa gathering everybody's information, thanks to which, as far as we can tell, there have been barely any criminal convictions. We have this huge apparatus to catch two people or something, right, over a decade?
There has to be something better. That is why, Mr. Pigeon, I have a lot of sympathy for you. I think it is silly. Having small credit unions in Saskatchewan do this is ridiculous.
Mr. Pigeon: Thank you, senator. I will just make a couple comments, and I think my colleagues probably have something to say on this as well.
I would go back to the risk-based approach that was brought up by Mouvement Desjardins and the Canadian Bankers Association, as a kind of starting point for thinking about this. I did a fair bit of research before coming here. I looked at the Auditor General's report from 2004. She says — and I thought it was quite remarkable — that suspicious transaction reports received "directly from banks often contain more useful information than FINTRAC disclosures . . . . This is a serious criticism of a system set up expressly to add value to the raw information provided by reporting entities.'' She was kind of getting at what you are saying. There are very effective ways to do this, and then there is the blanket approach that seems a little overkill, frankly.
Mr. Harvey: I will add two comments. One is that the regime may have a deterrent effect. We may become a little misled by the small number of prosecutions. The reality is that if we make it very difficult for the criminal to launder the proceeds of their criminal activity, they may well be tempted to go somewhere else. If we can accomplish that, that is great. It is great if we can push them south of the border. There are no Americans here, so I am not going to offend anybody. I used to say, when I was down there, push it north, so it is okay. I think there is some deterrent effect to having a robust regime. However, let me assure you, senator, that I am old enough and have been around long enough to firmly believe in the presumption of innocence, and that is what drives the activities of my group.
We do not, despite how many reports we get on an individual, assume guilt. We assume innocence until we can prove to the contrary. I have — and you should probably come and ask some of my employees sometime — a very high standard. I have no difficulty in saying that I myself would live by it and be judged against it. Everyone has the odd transaction that looks kind of bizarre. I think that to build a system that identifies and reports those to FINTRAC just clogs up their system. I do not think that is meaningful. There are certain reports that we have to submit because we have to submit them. One thing that I have always thought a little unusual is that, when someone walks in to do a cash transaction of $12,000, for example, the requirement is that you file an LCTR. This means that you have to ask the client for certain pieces of information, as was commented upon. Many clients do not like that. They feel that that is an infringement on their rights, so they say, "What is the limit — $10,000? Well, give me $2,500 back. That makes it $9,500, and you do not have to report that.'' However, by law we have to report that as a suspicious attempted transaction, which we cannot tell the client about. I am not sure there is any real utility in that.
I used to say this more pointedly in the U.S. because the forms start out with the Internal Revenue Service. Who in the U.S. would report voluntarily on a form that is going to the IRS?
Senator Tkachuk: Exactly.
Mr. Harvey: Perhaps the real criminals are the ones who say, "Fine, go ahead and file it.''
Mr. Randle: If I may, senator, there is one particular proposal relating to this in the latest consultation paper. It says that FINTRAC will be given an "additional tool.'' There is no description of this, but it will "allow them to receive reports that are required to be submitted under the Act.'' We are not sure what that means. One of our concerns would be whether that is going to allow FINTRAC to go to a reporting entity that has not filed a suspicious transaction report and say that they should have, even though the reporting entity did what the law requires, which is that it took reasonable measures, decided it did not have reasonable grounds to suspect, and did not file an STR. It may not be that, but it is an example, in the consultation paper that was released in December, of a proposal that we were unsure of — because there is not much detail. We are concerned that — I am sure we will discuss it with Finance — that could potentially mean something that would be undermining the privacy and individual rights of Canadians, without really satisfying the purposes of the regime.
I am just using that as an example, but there are others as well.
Senator Tkachuk: I think we want banks to be good and honest citizens. I do not think banks are part of law enforcement. They are not police.
The Chair: Thank you, Senator Tkachuk.
[Translation]
Ms. Bolduc: From the point of view of Mouvement Desjardins, the answer to that is really suspicious transaction reports. Although the thresholds have really been lowered, FINTRAC does not necessarily obtain strategic financial information. If we look at what they did in 2011, with respect to FINTRAC, 777 reports were made to their partners; 80 per cent of those reports were initiated from information disclosed voluntarily by the police.
At any given moment, we can ask ourselves what kind of information is going to be added-value for FINTRAC to initiate these investigations. When 80 per cent of the flags are raised by the police, why ask for a heavier burden on the financial institutions? Is it really important for FINTRAC to know that a Moroccan student is receiving $100 a month or a week to buy groceries? That is not relevant information.
The legislation required that financial institutions acquire monitoring tools precisely for filtering this type of information that FINTRAC does not want to know in the end. I think the answer is really to go with the risk-based approach. The financial institutions are responsible and also manage these risks. It is our duty to send any relevant information to FINTRAC and to have an approach based on the effective risks.
[English]
Mr. Pigeon: Going back to the 2004 report from the Auditor General again, she raised the same point that Ms. Bolduc has just made about the filings from law enforcement officials and the value of those, relative to the $10,000 threshold. It is an excellent report, worth reviewing in your deliberations.
Senator Ringuette: I hope we will be hearing from this Red Tape Reduction Commission and Canadian Wireless Telecommunications Association because I think that they can contribute to our analysis and review of this legislation.
My second question is a follow-up to Senator Oliver's question and your answer. When you have a bad person and you are going to interview that client and get more details, is that not like removing the purpose of trying to identify if a person is doing something borderline needing investigation from the RCMP? Does it not send an alert to the client if you meet and question the transactions that they have done?
Mr. Harvey: There is that risk; and I accept that. That is why we script the conversations very, very carefully. Let me give you an example of where we may go down that path: We suddenly detect a pattern of wire transfers coming and going from the Cayman Islands. When we look historically, we see there have never been any wire transfers in the client's account but suddenly there are a lot of them in a very short period of time involving large amounts of money. We ask the client casually: "Are you moving to Cayman or have you bought an apartment there?'' We can generate and stimulate a conversation. If we come right out and ask: "Are you laundering money in Cayman,'' we probably will not get a right answer.
If you craft the conversation appropriately, you can elicit the information. In some cases, we are looking more for the way that the client reacts to the questioning rather than the specifics.
Senator Ringuette: Yes, but the purpose of this legislation for suspicious transactions is to send the information to FINTRAC, and FINTRAC sends it to policing authorities to investigate.
Mr. Harvey: Once we have reached a reasonable belief in our minds that there is suspicious activity, you are absolutely correct. Certainly, if we are going to interview the client, we are raising it up the bar of unusual, but we have not quite reached suspicion yet.
Senator Ringuette: I understand and I agree, Mr. Pigeon, with the three recommendations that you have put forth. I guess my question is with regard to effectiveness and whether the regime honestly provides the necessary tools under the legislation to attain the goal. I have to admit that I have serious doubts after 10 years, over $1 billion spent from public investment, never mind the private investment, and we have only one conviction of a guy for six months in B.C. I question all of this.
I look at the fact that the recommendations want to increase the quantity of information but not necessarily the quality of information in order to attain a higher degree of effectiveness in the purpose. I am looking at Internet banking. Does each of you have a private server? Does the reporting mechanism that will be required include electronic banking, never mind wire transfers — the entire e-banking and server system that you have and the capacity to analyze and kick out the suspicious data and transaction from the system?
What about your servers? What about the system that you have in order to comply with the new data that FINTRAC wants?
[Translation]
Ms. Bolduc: You raise an excellent point. Transactions via Internet services are the future and the present. We see people using the Internet more and more, even with cellphones now. It is a product and distribution method that is used very frequently.
For Mouvement Desjardins, we can create exception reports to detect money laundering in the case of Internet transactions. But the operational challenges remain. For Mouvement Desjardins, we are talking about 100 million transactions a month. Do you have any idea what that represents? If we apply an exception report with a very specific rule, do you know how many false positives that generates? If only one per cent is false positives, out of 100 million transactions, that might kill a financial institution. With the coming of the Internet, the legislation required financial institutions — CIBC, Scotia Bank, Mouvement Desjardins—to buy monitoring tools or to develop programs to monitor this because, humanly, the money laundering scenarios are too complex to create only one report. I understand the challenge facing my colleague in this respect.
So the question you asked was about whether the tools are sufficient: does FINTRAC or the government give financial institutions the tools required to perform their duties? There is still a lot of work to be done in this respect. When we check the lists of politically vulnerable foreign terrorists, the lists of known criminals on the market, these are astronomical costs. These lists are provided externally, and they need to be updated. There are costs to financial institutions. It is a tool. There are procedures we must put in place.
In terms of tools, obviously there are certain aspects missing to help financial institutions better manage their risks, a little guidance as well in terms of the risk-based approach. You are proposing in the legislation certain guidelines for prepaid credit cards. It is easy to say: we apply everything to all the products and to all the distribution methods; but why not specify our expectations with respect to situations that are truly risky?
[English]
Mr. Harvey: It speaks volumes to the real need for a risk-based approach, which would permit financial institutions individually to perhaps risk their own products and services and their delivery channels, and to put the resources where the greatest risk lies. I would emphasize that a risk-based approach to money laundering or terrorist financing should not be interpreted as an opportunity to cut costs. That is not the intent, but to generate better results is the intent, rather than looking at all accounts, and accounts originated via the Internet are a good example. Simply because you elect to use the Internet as a means to communicate as opposed to walking into a branch, does it really change the profile of you as a client or your account? Frankly, no, but perhaps used in context with other things, it may change the profile.
It is another piece of information. Quite frankly, rather than blowing our brains out looking at tens of millions of accounts every single day, it would be more meaningful, in my mind, to be able to take the resources and focus on those that pose the potentially highest risk. In case you had not already picked this up, I am really not in favour of lowering the reporting threshold for wire transfers because it will clog up the system with a lot of stuff that does not belong. It will not generate any results.
Senator Ringuette: Even at the $10,000 threshold that it is now.
Mr. Harvey: I think that is right and it is probably an opportune time. I have said it to FINTRAC so I am not saying anything I have not said before, but it is good to challenge where you are at as a status quo. Is $10,000 a reasonable limit? Well, historically, if you look at why we arrived at that amount, no, it is not reasonable in today's world; and it tends to clog up the system.
However, we certainly do not differentiate. We look at clients that originate via the Internet as we look at any other client, any other transaction and any other account. I am not sure they all pose a similar risk, and that is the real concern.
Senator Moore: Mr. Pigeon, you did an analysis that I thought was pretty useful with regard to the approximate two weeks a year it takes for one of your credit union branches to process the anti-money laundering documentation.
Mr. Randle, have any of your banks done a similar analysis as to the time it is taking them to comply with the paperwork that the credit unions have looked at? There is similar paperwork, I am sure.
Mr. Harvey: I think the simple answer is no, and perhaps there is a reason for that. I will speak for CIBC. I do not want to speak for other members.
To the extent possible we have automated all of the functions from the front line. For example, we spoke about wire transfers — in our environment, to generate a wire transfer. It is an online screen that is presented to the customer service representative. In our case, much of the client information is pre-populated. If you swipe your card, it pre- populates the information about the client so we do not have to ask repetitive questions. We have to ask the questions that would pertain to an outgoing wire transfer relating to where it is going.
We have minimized the potential impact. Similarly, with cash transactions, we have automated systems that generate the information from the front line and go into the back office.
Mr. Randle: I would highlight, if a major institution tried to do what was set out in the credit union brief, there are not enough hours in the day, or the year, or the world, because of the number of potential transactions. You have to automate it.
That leads me to a second point —
Senator Moore: I realize have you to automate it, but you have to automate because it would take time.
Mr. Randle: That is right.
Senator Moore: You must have taken a look somewhere along the line and said this will take us 80 to 100 hours, so we had better automate this somehow.
Mr. Randle: It was always decided it would be automated. Right from the beginning you realize the number of procedures and transactions, plus automation makes it more consistent because it is formulated.
The second point I would make is I do not know how your witness from — I think you said KPMG — could say this would be easy. I do not know what she was basing that on. You do not just flick a switch to go from $10,000 to $0. If they change the electronic funds transfer, the amount of time it would take in systems change, operational change, training of staff and implementation, I do not know how long that would take or how much money it would cost. It would not simply be a flick of a switch.
There are two things that match. You can only do this in a major institution by automating it, and I think many of the smaller ones have found they have to add the cost of doing it. Secondly, by their very nature, any changes which may stay minor will create a huge expense and additional regulatory burden. That then leads to the third part, which is the value.
If what you are saying is that we just like more reports, you have to have a balance between those.
Senator Moore: The same witness also said that — I think it was one of her clients — it cost $100 million to implement the AML regime. I can only think that must have been a major bank.
Mr. Randle: I could not comment on that.
Mr. Harvey: I would prefer not to comment on that.
Senator Moore: I am thinking about what you just said in terms of the balance, the expenditure versus what my colleague Senator Tkachuk says about FINTRAC being overly nosy in relation to private information. They do not have to know everything about every transaction every citizen in Canada is doing.
I am thinking about that balance. Then I am thinking about what you said, Mr. Randle, and I noted this the other day, FINTRAC wants to get additional tools. Has there been any discussion at all with your organization, with the credit union organization, as to what these additional tools are? It is a pretty catch-all phrase and I would think, given the implication of the cost increases, depending on what these tools are, you have to have some discussion going into this before we put it in our report or they make a recommendation to the Department of Finance or whomever.
Have you had any discussion at all? Have they asked to sit down with you and talk with your two leaderships about what this might mean for the Desjardins?
Mr. Harvey: We have just had the opportunity to respond to the consultation paper. We have extended an invitation, willingness, to meet to discuss in detail each of the components of the consultation paper, in part so we can get a better understanding of what is being proposed. In some areas the paper lacks detail and clarity. One example is it is simple to change $10,000 to $1,000. Theoretically it is. It is also easy to turn a battleship in a bathtub. It takes time. At the end of the day we have to have that dialogue, and we welcome it.
Senator Moore: Have you asked for it?
Mr. Harvey: Yes, we have.
Senator Moore: Has everyone asked for it?
Mr. Pigeon: I think Ms. Olivier wants to jump in here about the quantifying exercise we went through for that one credit union.
Ms. Olivier: What I want to share from the ground level is that even though your banking system would have the information on a window, doing due diligence for any reporting over $10,000, that customer service, member service person or teller would be required to ask again if it is all correct information. Is this current information? It includes occupation, your ID type, your same address. We cannot assume that it is correct. You have to do your due diligence and ask again.
It is not as quick as bringing a screen up, because adding the smaller transactions from $1,000 to $10,000 on all of them, this will be more time for the customer service, teller, member service person, to deal with that person in front of them again. It is confirming that information is correct.
Mr. Pigeon: There is an important point that needs to be emphasized. We all agree that a risk-based approach is important and should be the objective here.
However, another consideration from the Department of Finance and government perspective, getting back to the effectiveness issue, is we know from behavioural economics, which I am a student of, I follow closely, people do not manage excessive amounts of information very well. Even with the best systems there is a real challenge there. The more you give, you might reduce effectiveness. I think there is a real concern there that I would be worried about.
Ms. Bolduc: There is a cost to it also. It is expensive for us to maintain this data. I could not imagine how much it costs every year for FINTRAC to keep all the information they get from banks and credit unions.
Senator Moore: How long do you keep the information that you provide? Do you have to keep it for seven years, one year?
Mr. Harvey: It falls within our normal record retention requirements, which are effectively seven years.
The Chair: We have a supplementary from Senator Ringuette on Senator Moore's question.
Senator Ringuette: It just dawned on me, and probably you will not have at hand the answer to this question, but I think that it would be very important to this committee if each of your organizations could tell us, prior to this legislation, the number of suspicious transaction alerts you have provided to the different policing entities. I suspect that all of you, even prior to being mandated with this reporting regime, had your antennas up and running. It would be good for us to know how many you reported in X number of years prior to this legislation, and for us to follow up with the RCMP the results of that reporting. Then we could have kind of a before and after picture. I think it would help us in assessing the effectiveness of the regime. Is that possible?
Mr. Harvey: I certainly accept what you are saying, and I think it would be useful information. It may be a little difficult in that retrieving that kind of information is going back 10 or 11 years. It may be somewhat anecdotal, as opposed to absolutely 100 per cent factual, but I think that, with a little bit of creative thought, we could probably come up with it. I am thinking of one place where I report annually to the board, and I comment, year over year. If I went back 10 years and looked at what I said, I might be able to piece together the numbers. However, it would take work.
Senator Ringuette: Please do so, if at all possible, because it would give us another insight.
Mr. Pigeon: This could be especially challenging for Credit Union Central because we do not tell our affiliated members what to do, and we would have to get someone to volunteer to share that information. We could ask, and we will hopefully see if someone is willing to do that.
Senator Ringuette: Chair, I suspect that we will have the RCMP in front of us again. If they are asked to come before us again to give us further information, they could be asked to look into their records to provide us with information prior to the regime in regard to disclosure from financial entities.
The Chair: Thank you for raising that.
Senator Moore: I am thinking about these additional tools. We thought about this yesterday. I like Senator Smith's idea about having a committee — I am not sure what your wording was, senator — of stakeholders who could sit down and discuss these things with FINTRAC as to the practicality, the cost, and so on, of putting them in place. You may want to talk about that. Have any of you thought about doing something like that? Is that worth thinking of?
Senator L. Smith: It was based on the idea brought up by one of our witnesses. Where you have the automated capacity, you have a judgment. Who is making that judgment? Is it the teller? Then it goes up the food chain. When it is all washed out, how can you make sure that all of the players will have the type of tools? They have automated tools, but what about the people tools and the judgment tools. There seems to be a question and an opportunity.
Mr. Harvey: It changed a little bit, but we want to encourage people at the front line to put their hand up if something does not look normal. Then it is incumbent upon the recipients of that information to ensure that there is robust training of the people who are making the assessment. We do share best practices, thoughts, and comments, but, at the end of the day, as the chief AML officer for CIBC, I am accountable for the performance of my people. I am accountable for the reports that we submit. If it is a question of where the buck stops, it stops with me. I accept that; I have no difficulty with it. I trust my people who are authorized to release reports.
Because there is judgment involved, there has to be some discretion provided to the individual. I just do not think you can have a one-size-fits-all approach because, when you have that, you get away from the real, beneficial report going into law enforcement.
Perhaps, senator, as you mentioned earlier, you will be speaking to the RCMP again. They are perhaps in a better position than I am because they are the recipients, ultimately, of what we submit. If they are satisfied with what they are getting, then that tells me the system, in terms of the suspicious transaction reporting, is working. If they are not satisfied, I would like to know, rather than you knowing.
Senator Massicotte: Thank you for being with us. My first question will be to Mr. Harvey and Mr. Randle. We talked about risk-based analysis. We all know that is smart, nice words and so on, but do you have anything specific to recommend to Finance or FINTRAC? If so, has it been tried in the world? We are all reporting countries; most of us modern countries need to satisfy this demand. Do we have a specific model that works, or is this just nice wording that would require a lot of work?
Mr. Harvey: If you look at the legislative framework, it talks about a risk-based approach but then goes on to prescribe certain higher-risk clients and certain higher-risk activities. The more you prescribe, the less you are actually living up to a risk-based approach.
Senator Massicotte: Do you have anything specific to recommend, and is anyone in the world doing that?
Mr. Harvey: I think the U.K. is a good example of a regime that is truly committed to a risk-based approach.
Senator Massicotte: You do not need to report any cash transaction in excess of $10,000?
Mr. Harvey: They have reporting. The reporting element of cash transactions is not risk-based, it is factual. The risk-based approach pertains more to the requirement to monitor every single client's account, every single day, to see if, instead of two deposits a month, this month, for some reason, my employer felt magnanimous and gave me three. Then I have to go and figure out why I got a third one. That, to me, is useless information.
Senator Massicotte: To be helpful, it is always nice to be specific. You have no objection to the need to file a report in excess of $10,000 in cash. That does not bother you. It is the further analysis beyond that.
Mr. Harvey: Yes. It is the expectation that I take every account, look at it, and say, "This month you have three $10,000 cash reports. The month before, you had four, and, the month before that, you had two. What has changed?''
Senator Massicotte: The legislation says "anything suspicious.'' They leave a lot of discretion.
Mr. Harvey: There is other augmenting documentation. If we lived by the actual act, we would be in pretty good shape. The problem is as we keep adding pieces to it. A risk-based approach should enable me, as a chief AML officer, to assess what I perceive to be the risk with a client type and a product set. It should not tell me that private banking, because it is private banking, is a higher risk. I submit that that is absolutely a fallacy. I have said that for many years, so it is no big secret.
I do not think regulators or anyone outside of the bank should tell me, in a true risk-based regime, what poses a higher risk. I know my process and my clients.
Senator Massicotte: Are you proposing to say that legislation should simply say that financial institutions are responsible for reporting suspicious transactions without any guidelines, but that you know, from a reputation point of view, that if you blow it, you blow it big time?
Mr. Harvey: I could absolutely live with that.
Senator Massicotte: If they found something contrary and it got publicized, would you live with that result? The same for Mouvement Desjardins?
[Translation]
Ms. Bolduc: It is the same thing. The fact of reporting transactions with a certain threshold is something we do. Fundamentally, if we were not required to do it, the strength of the system, it is the training of the people, it is the eyes of the people. It is our monitoring system, but calibrated as a person, with the risks a person knows about the products, the distribution methods.
I fully agree with my colleague's point of view on this. We are capable, as a financial institution, of addressing the particularities of our products and services. We would remove the obligation of reporting $10,000 or more, yes, that would gain some weight, perhaps we would decide to do it anyway, to keep automatic reports to give us certain things to look at. But the fact of making it mandatory, it is secondary with the based approach.
Senator Massicotte: But your colleague recommends keeping the $10,000.
Ms. Bolduc: Yes, exactly.
Senator Massicotte: You are in agreement. It is mechanical, it is less burdensome.
Ms. Bolduc: A lot of the problem with the $10,000 is in the 24-hour rule. It is a little more troublesome for financial institutions. I would remove the 24-hour rule for the complexity. Mouvement Desjardins is extremely complex compared with a risk-based approach.
We could have mitigation measures if this aspect of the legislation were lightened. However, the problem with the $10,000 is with the international electronic funds transfers because we need to have the mandatory information and this provision of specific services for Mouvement Desjardins means that people who do the manual follow-up, for the information, it is the manual process.
Senator Massicotte: And that costs money.
Ms. Bolduc: And that costs a lot, yes.
[English]
Senator Massicotte: We have FINTRAC and all of you people working very hard to report any suspicious transactions over $10,000. I suspect that the level of criminal activity in Canada has not come down very much. We do not have official numbers on drug trafficking, but from what we see, it looks like they are as busy as they used to be, which means it is still very high. We have seen limited successful accusations emanating from all this reporting and work. The government spends $60 million, and significantly more is spent given all the work being done with few results. I think there is still the same level of criminal activity, and some say it could be as much as $20 million to $40 million in Canada. What are they doing? They have smartened up and do not deposit cash because they may get caught, but they are doing something right and outsmarting the rest of us because they are still transacting huge amounts of money. What is it that we have to change to catch them, because they are getting away with it?
Maybe the Canadian Bankers Association or Mouvement Desjardins could comment.
Mr. Harvey: As I said earlier, we need to recognize that apart from certain types of criminals, the majority of criminals are in business to generate profits. The best we can do is to struggle to keep up with them. I say "struggle'' because it does not matter what we do to close the door, they will find another one. They have the time and the resources to put in the effort and, more importantly, they have the money to do that.
If I sound negative, I do not mean it that way. I have been in this business so long; I think it is a realistic approach. We will not get ahead of the criminals. If they see us, they will just go around to the other side. The reality of life is that our job is to make it as physically difficult for them as possible and as expensive as possible. I read some estimates that 30 years ago you could launder for maybe 10 cents on the dollar and now it is 40 cents. That means we are eroding their profit margin by making them spend more money to launder the proceeds. I suspect that when they hit 100 cents on the dollar they will just double the price and start all over again.
When you are selling a product that people want, such as narcotics, it is not price-sensitive.
Senator Massicotte: We agree. You have taken significant measures, and it is working in the sense they are not doing it anymore, but where is that money going? What is our next step?
Mr. Harvey: There are a number of things you could look intelligently at, and one is opportunities. For example, you can buy a large grocery store and siphon a few bucks every day through the till.
Senator Massicotte: Let us go through the details. That example presumes the store is owner-operated, and that is tough. Once it becomes large, there is a problem.
Mr. Harvey: There are a lot of different cash-intensive businesses. Interestingly, Canada is still a fairly cash-intensive society, although we also use more debit cards than any other society in the world, which sounds like an oxymoron. Maybe we spend more than anyone else does, I guess. It is very cash-intensive, and I do not think there is any likelihood of losing the cash intensity.
As the economy grows and the number of businesses grows, the opportunities for the corrupt to open businesses grow accordingly.
Senator Massicotte: You are saying that they think the outlet for the cash today is retail-oriented cash businesses where they can inflate the revenues, pay tax on it and basically wash the money away.
Mr. Harvey: They have no problem paying income tax because it legitimizes the funds. I am confident that is at least some of it but not all of it. We also know that in today's world, whether we like the idea, there are certain businesses that will sell high-end automobiles for cash. You can buy a Maserati by dropping $150,000 cash and turn around and sell it for $140,000 legitimately; and you have just laundered the proceeds of crime.
Senator Massicotte: Where does that dealership deposit the cash?
Mr. Harvey: They will deposit it into their account, but they are probably not selling many of these cars every day. They might spread the deposit over a period of time.
Senator Massicotte: They are playing the game.
Mr. Harvey: I guess I have a narrow view, but it is this: You are either on our side or you are on the other side. They are on the other side. I do not think that I am quite a "George Bush-ist,'' but I would not disagree on that point. You are either with us or against us. People do not recognize the cost and the danger to society.
Senator Massicotte: The threat to the integrity of the system is phenomenal. Are we doing enough? You outlined a couple of cash businesses in a retail sense that can deposit cash, but remember: They deposit among your institutions.
Mr. Harvey: Give us better tools to share information and let us focus on higher-risk activities. I am confident that the results will flow. However, bear in mind that we will never get ahead of them.
[Translation]
Ms. Bolduc: Building on what he just said, the proposal that he made that the banks could exchange information or even with the cooperative sector, when we close the accounts, when we make life complicated, when we require accounts to be closed and with the constant reorganization, we make things difficult for them. That is one of the factors. The other factor, about companies that collect a lot of monetary funds, this is the problem with private automatic teller machines. I do not want to open Pandora's box, but you should look closely at this. There are businesses that are operating private automatic teller machines and that feed them. It is a tremendous money laundering tool.
Even the AMF in Quebec proposed a bill to better monitor this sector. It is something to look into, as well as the cash carriers that go and collect the receipts from certain businesses. These are financial intermediaries that mean that we do not have all the information that we would like to have.
[English]
The Chair: To our committee, excellent questions; and to our witnesses, excellent answers. On behalf of the committee, I thank you very much for appearing before us.
(The committee adjourned.)