Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 14 - Evidence - March 14, 2012
OTTAWA, Wednesday, March 14, 2012
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:20 p.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: Welcome to this meeting of the Standing Senate Committee on Banking, Trade and Commerce. This afternoon we will continue the five-year parliamentary review of the Proceeds of Crime and Terrorist Financing Act. This is our tenth 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. As committee members know, over the course of our hearings, a number of references have been made to a 10-year review of the act conducted for the Department of Finance by Capra International Inc. We are pleased to welcome the authors of that report. Representing Capra International Inc., we welcome Gunter Rochow, President; Michel Laurendeau, Senior Evaluator; Rick Reynolds, Evaluator; Eric Culley, Evaluator; Waldo Rochow, Evaluator; and by video conference from Orlando, Florida, Dr. Ralph Kellett, Chief, Evaluation Practice.
Colleagues, before we begin, the business of the Senate continues. We have permission to proceed with our meeting, but should the bells ring for a vote, we will suspend the meeting so we can return to the chamber to fulfill our duty and beg your indulgence.
Mr. G. Rochow, the floor is yours.
Gunter Rochow, President, Capra International Inc.: Mr. Chair, we thank you very much for having received us one week later than was originally planned so that our colleague, Dr. Ralph Kellett, could join us. He played a very important role as methodologist and chief writer of the report. We are very happy to see him in a warmer climate, although we are not complaining about what we have in Ottawa at the moment.
It is my great pleasure to summarize for you some of the key aspects of the 10-year review that we were privileged to undertake. I wish to assure you that everything that we say this afternoon, by the very nature of the beast, must be limited to our evaluation. There are many subjects of interest out there that belong to the departments; and we have no jurisdiction. All that we bring to you is the very best we can in the form of an overview of what actually happened in the evaluation. At the end, we welcome questions and, to the best of our ability, we will respond to whatever may be necessary for you to further this important cause.
As you are aware, the regime establishment, meaning the regime of the anti-money laundering and anti-terrorist financing activities, was a horizontal initiative involving both funded partners and non-funded partners. It is very important to recognize that difference. When you are a funded partner, you have a stronger commitment than when you are a non-funded partner. Nevertheless, to our great satisfaction, we found that both the funded partners and the non-funded partners have gone out of their way to contribute to the evaluation activity; and we are very grateful for and pleased about that.
The funded partners were the Department of Finance, the Department of Justice, the Public Prosecution Service of Canada, the Financial Transactions and Reports Analysis Centre, the Canada Border Services Agency, the Canada Revenue Agency, the Royal Canadian Mounted Police and the Canadian Security Intelligence Service. The non- funded partners were Public Safety Canada, the Office of the Superintendent of Financial Institutions and the Department of Foreign Affairs.
As you can imagine, working in an evaluation with such a large group requires a great deal of effort in terms of communication not only to draw out necessary information but also to verify the information with the partners. As I indicated before, we are absolutely delighted with the effort of both the funded and the non-funded partners in contributing to the information that we needed to carry out this work.
By implication, the AML/ATF Regime comprises the activities inherent in the mandates of the funded and non- funded partners; contributing provincial, regional and municipal bodies; regulatory bodies; law enforcement bodies; and entities obliged to report financial information under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations.
In addition, the review also involved other legislation: the Criminal Code, the Customs Act, the Charities Registration (Security Information) Act, the Income Tax Act and, for all I know, there may have been others. The list of legislated and related contacts did not end there.
The AML/ATF Regime has important international linkages, particularly under the Financial Action Task Force on money laundering and terrorist financing. The regime, while linking into all of these Canadian interests, also linked deeply into the international community where the same concerns are shared and where Canada is an important partner.
What does an evaluation do? What are its constraints? I must say that fortunately for us, Treasury Board of Canada issued in 2009 its new policy on evaluation, Standard on Evaluation for the Government of Canada. The directive on the evaluation function has provided us with the framework within which we had to undertake the evaluation. In other words, what we did was not a few shots into the dark. We followed the criteria and guidelines provided by Treasury Board in structuring the evaluation and going after data in an organized fashion. We ended up with in the final report was really a fuller image of that federal structure and framework.
What is that framework? In its evaluation policy the Treasury Board of Canada said that all evaluations that relate to federal government operations must address two core issues: relevance and performance, and within these two core issues other issues. What are they? Under the relevance component, the first issue is to address the need for the regime. Is that still needed? The government has an obvious interest in not financing anything that is no longer needed. It was our job in the evaluation to demonstrate that there is a continuing need for this activity.
Another issue that concerns the government when you address a program like that in an evaluation is whether it is aligned with government priorities. You bet it is. We found that as we proceeded through the evaluation. What could be more central to ensuring the financial security of the country than not letting others run wild with our financial system?
The third issue to be addressed under the Treasury Board guidelines in the category of relevance concerns its alignment with federal roles and responsibilities. Again, it was not difficult in the evaluation to demonstrate that this is indeed a federal responsibility in collaboration with provincial, municipal, private sector and international partners.
When it comes to the second core issue on evaluation, performance, it is characterized by two additional issues that account for performance. One is the question of effectiveness. Did the regime achieve expected outcomes? This included, among other things, the implementation and, to some extent, the design of the regime, followed by the last issue in the Treasury Board structure, which focused on questions of efficiency and economy. This was the structure in which we were asked to undertake the evaluation.
How did we go about it? When we were confronted with this major task, which we undertook very happily, we used a number of so-called lines of evidence or data collection methods. The first one referred to secondary research, which is referred to as a document and file review. In other words, we looked at everything that was relevant that we could get our hands on. Believe it or not, just to give you a sense of the dimension of the magnitude, this involved 166 documents.
In Senate operations I am sure you are familiar with numbers like that, and I often wonder how you cope with the documents that are put upon you. We had 166.
There was as well the database review and analysis. It involved the collection of performance data from the regime partners. As I indicated, there were a lot of them. There was the provision of budget information from the Department of Finance and the conduct of a financial expenditure survey among regime partners. There were interviews about regime operations. The interviews, as you can imagine, are directed to the key people who are responsible for particular aspects of the regime. We interviewed 34 of these. Then there were focus groups, which bring together still more witnesses, so to speak, as to what happened, and here we had six in the public sector and four in the private sector. There were case studies on regime operations, and we did 13 of them. There was an online survey in which we gathered 256 responses from a great variety of people who were not reached in the interviews, focus groups, case studies and so on.
In other words, we tried to achieve as good a penetration of the universe that should contribute to the evaluation as was possible in the context of time and the available budget. I must say as this point that all of these activities are not obligatory. We invite people to participate in interviews and focus groups and to respond to a survey. However, one of the cardinal rules, which appears on the first page, is that this is voluntary. We do not have forced responses, so the responses that we did get are ones that people happily contributed to the exercise.
When it was all said and done, what did we conclude in this exercise? First, with regard to the first issue of relevance, we concluded that such an initiative is indeed needed to combat the threat from money laundering and terrorist financing, which has not diminished since the regime was implemented in 2000. We also concluded, in terms of relevance, that the regime's operation supports the government priorities related to justice, to financial systems and to national security and privacy, and that the regime is an appropriate response to the global threat of money laundering and terrorist financing.
In particular, the legislative and regulatory framework was modified in accordance with evolving need. The regime is a horizontal initiative and it is needed for that reason, bringing federal, provincial, regional and municipal entities together to promote joint action.
The regime is also a government priority because its legislative, regulatory, structural, organizational and operational activities helped Canada to respond to 36 of the FATF 40+9 recommendations. That is a convoluted name, but we all know to what it refers. It is a government priority because the regime partners and stakeholders at all levels consider the regime to be relevant to counter the money laundering and terrorist financing threat.
What about the last aspect, being relevance? The regime objective is completely aligned with the mandates of the regime partners although the mandates of all partners, except for FINTRAC, are broader than the anti-money laundering and anti-terrorist financing aspects.
What about the conclusions that we found in regard to performance? Performance, as I indicated earlier, is the second core issue that all evaluations under the Treasury Board criteria must address. Here we found that the regime has made progress in achieving the expected outcomes. The word "progress" is a very important one in Treasury Board terminology. They do not expect that, just because a program has been launched and has been in operation, we have already reached the Promised Land, but we are making progress in getting there. That is what is expected of the regime partners. We have verified in the evaluation that progress is indeed being made.
Now Canada is compliant with 36 of the 40+9 FATF Recommendations on anti-money laundering and antiterrorist financing. There is progress in implementing the very act that is now under review, as well as its regulations. It meets anti-money laundering and antiterrorist financing responsibilities — and this is a very important detail — without violating privacy and rights and freedoms provisions. To Canada's honour, that must be one of the key features of an activity like that.
Continuing with our conclusions about performance, the regime is facilitating and monitoring compliance. There is intelligence-gathering and analysis. There is investigation, adjudication, and sanctioning. There is also regime implementation.
I think one of the conclusions that appeared to us in this is that the regime indeed created a hostile environment to anti-money laundering and terrorist financing. This is one of these things that cannot be quantified in ever-so-many terms. However, by creating a hostile environment, the regime has made it a lot tougher for criminals to peddle their wares or to bring in money. They have to fight a lot harder, being criminals.
Our conclusion about this activity is that we consider that a very major achievement. If we make it tough for them, then less money will be laundered and less terrorist financing will occur. If you ask us the question "By how much?", we cannot tell you. However, we know the environment is a lot rougher and I am glad I am not one of them. It would be a hard time to do the job.
What about conclusions about efficiency? While the efficiency has improved since 2008, additional gains in efficiency are unlikely without adjustments to regime funding.
As evaluators, we try to look at this as much as we can. It became apparent that when you have both funded entities and unfunded ones, they have to see how they can do what has been assigned to them and how they can best do their jobs. For us, we are outsiders peeking in.
We discovered that, in many cases, they said, "We have to do this on a risk-assessment basis — where is the greatest risk; where can we put most of our dollars and effort?" That is a reasonable approach, also recommended by the Treasury Board. They said, "You cannot do everything and count every last penny, or go after every last individual. However, if you can focus on what is obviously the greatest risk, that is where you should start. Then do as much more as you are able to do within the confines of your work."
This is behind this conclusion. We said that, in our opinion, the improvement of efficiency has been very significant since 2008. If we are still going after more, we felt that the people who have to deliver it will not be able to do it without more funding. You have already heard from them, and they will probably have told you that story — how much they were able to do, how much they might not be able to do and where some of the trade-offs are.
The last aspect concerning the fifth issue in the Treasury Board structure is the question of whether the regime is economical. Our conclusion is that, yes, it is, because the regime activities fit within the broader mandate of the regime partners. It is not free-standing. When you have something that is free-standing, it makes it expensive.
However, here you have something that fits into the broader structures. There are some trade-offs and some infrastructure that you can depend on and utilize in order to deliver this. The conclusion is that, yes, the regime activities fit within the broader mandate of the regime partners.
There is also the economic conclusion in the sense that other government programs are mandated to fund the AML and ATF activities in part. In other words, the government has said, "RCMP, you are getting this bag of gold to do your work. We want you to spend some of it in this area. DFAIT, you have that much money. There are certain things in the international scene that we want you to cover from within that bag of gold."
When it comes to the economy of this regime, our conclusion was that the combination of funding for funded partners and drawing on other unfunded partners was evidence that it is an economical way to deal with this issue.
In conclusion, I would like to spend a moment on what we had offered as recommendations. The first recommendation to us seemed entirely obvious, but we stated it because it needed to be said: The regime should continue. I would not want to live in a Canada without it.
We have another recommendation: The Department of Finance should lead an interdepartmental working group with the regime partners to determine future steps and examine key issues. We put down the issues, and I will spell them out in a moment. We put this in here because, in an evaluation, we see both the past and we are looking ahead. In an evaluation, we cannot spell out the details of what lies ahead. However, we found and believe this is the prerogative of the regime partners to discuss, and hence the suggestion that Finance should lead an interdepartmental working group.
What should they address? They should look at regime-related legislation and regulations to remove any barriers to effective and efficient regime operations. As you can imagine, there are certain barriers that are inherent in the legislation or regulations of some of the regime partners. They say, "You cannot release this bit of information. You are the custodian." If we want them to work together, there are some of these barriers and they may have to continue.
Then the question is: Can we optimize the way these various requirements fit together?
We then found that the interdepartmental working group should address concerns raised by reporting entities regarding compliance with the very act that is now under review.
Inconsistencies in the regime performance data and statistics: This is a difficult job because each department, agency and entity has set up its own reporting requirements and statistics to meet its own needs. Sometimes, when you are dealing with a horizontal initiative such as this, it is difficult to harmonize all of this, and yet the suggestion was that an interdepartmental working group look at this problem.
They should also look at whether updates are required to the regime's management and accountability framework and the logic model, which would be a result of their deliberations, both of the previous factors.
The final recommendation actually came out of one of the questions given to us but which obviously, in an evaluation of this type, was beyond our mandate. The question was, "What does the Canadian public think of this regime?" We do not know. The only way this can be done is, if you or Finance would want it done, if you consider conducting a public-opinion survey to determine the level of public awareness of the money laundering and terrorist financing threat and of the anti-money laundering and anti-terrorist financing actions of the regime.
Mr. Chair, my last two words are "thank you."
The Chair: I will start by saying thank you for your opening remarks. We are delighted to have you here. Before we move to questions on your evaluation, might I ask you — perhaps it would be of great help to the committee; it certainly would be to me — if you could give us some of the background and scope of Capra International Inc.
Mr. G. Rochow: Thank you, Mr. Chair. There is no subject on earth that I would rather address than this one.
Capra International Inc. is a small company, but it has a large network of very valued collaborators. Our reach is literally worldwide. We have worked in our largest evaluation — to give you a bit of a yardstick — with a horizontal initiative involving six large international agencies, one directly related to what you are doing, the International Monetary Fund, the World Bank, the World Trade Organization, UNDP, UNCTAD and the International Trade Centre. This also included 17 donor countries, of which Canada was one, represented by DFAIT, plus 19 least- developed countries, mostly in Africa, one in the Americas, which was Haiti, and four in Asia. That was our largest project and, needless to say, the one of which we are probably the most proud.
The second one that ranks not so much in the same spread is the very one that we are presenting here, of which we are extremely proud and we are thankful to the people with whom we have worked.
Currently, we are doing evaluation work in Nigeria for UNICEF. We are doing more evaluation work for the Inter- American Development Bank in Suriname. We have just launched a new project for CIDA, which involves Uganda, Nicaragua and Peru, and our associate arrived in Uganda on the weekend. We are also doing projects for the Ministry of Justice. We have just concluded one for Indian and Northern Affairs.
This gives you a little bit of a feel. It is a big spread for a small company, and that is what we are proud of.
The Chair: I thank you very much for that background.
Now we might move to some questions on the report. In your report you say the regime has made progress in achieving the outcomes and, if I quote from your report directly, you say:
Improving domestically the Regime's levels of liaison, cooperation and information sharing . . .
It is certainly encouraging for us to hear that the regime, as a horizontal initiative, is reflecting the increased cooperation between governments. On the other hand, I personally was surprised that your report makes no recommendations nor in fact any reference to the whole area of communication, cooperation and guidance between FINTRAC and the reporting entities. We had quotes directly from Ms. Susana Johnson, who talked about how difficult it was because the reporting entities found that they had very limited guidance. We had testimony from Mr. Bill Randle of the Canadian Bankers Association, who said it would be very helpful if there were some sharing of information between financial institutions and FINTRAC. That would be of great help to them.
It appears that there might be a major opportunity to improve the effectiveness of the regime by providing better guidance and increasing the sharing of information between FINTRAC and the reporting entities. I would be interested in your reaction to those comments.
Mr. G. Rochow: I will offer a brief comment, but then I would like to bring in my very valued associate, Dr. Ralph Kellett, who you are seeing here on the screen, to contribute a little more.
While this had not been singled out as such, it is the very part of the first recommendation that regime-related legislation and regulations be looked at to remove barriers to effective and efficient regime operations. We viewed this very point you raise as part of it, but our concern was that the complexities of legislative and regulatory barriers that may prevent better communication need to be looked at by the partners to see to what extent we can go beyond this.
At this point I would like to end my comment and ask my colleague Ralph Kellett to offer more information, if he wishes to do so.
Ralph Kellett, Chief, Evaluation Practice, Capra International Inc.: I think your question focuses largely on the communication between FINTRAC and the providers of the information, the various reporting entities. The intermediaries between them are the various regulators that FINTRAC works with first. OSFI is one of them, but there are 18 regulators they have established a memorandum of understanding, MOUs, with. Prior to the 2005-06 fiscal year, they did not have all those MOUs in place.
When we said progress, we are talking about the things they have done to improve the communication between FINTRAC and their clientele, both the organizational ones and then the reporting entities. We did hear, both in the focus groups with the four private sector focus groups, which involved the reporting entities, as well as from the surveys, that the picture is still not as good as they would like it. They did say, if you look at what is deficient in terms of the communication, it certainly is the lack of understanding, even with some of the large banks — for example CIBC, Bank of Montreal and the others — about the shifting in reporting requirements and what is really expected about risk analysis.
They felt it was a one-way communication. They were providing information and rarely getting much back. The constraint of course is FINTRAC's mandate and requirements under the privacy legislation not to communicate a great deal.
The example one of the larger financial organizations gave was that they provided information over a number of years and yet never really knew what happened when they flagged a particular suspicious transaction. They knew that something happened in the way of a prosecution or investigation but they were not privy, of course, to any of the outcomes, until perhaps if they saw it somewhere in the news that someone was convicted of a money-laundering offence.
I think that is where some of the concerns come from. They talked about a need for more education and information specific to their responsibilities and reporting. I think those are valid comments.
Not as much has been done by FINTRAC or the other partners in terms of educating and encouraging and providing information down the stream as has been in terms of providing information about how they need to report up the stream. Does that answer your question?
The Chair: Very much so. I thank you for that answer.
Senator Ringuette: Gentlemen, thank you for being here.
Before I lead on to my questions, I have a point of privilege that I want to raise with the chair, and that is the fact that the Senate is sitting in Committee of the Whole at the same time as a standing committee of the Senate, like ours, is entertaining witnesses with regard to the current study of FINTRAC. As much as I want to be a full participant in the different discussions that duties have been directed toward me, i.e., being a member of this committee, I also value my privilege as being a full participant in the Senate deliberations. Therefore, I certainly do not agree that the Committee of the Whole of the Senate and a standing committee of the Senate occur at the same time.
The Chair: Point noted.
Senator Ringuette: Point noted.
Gentlemen, when did you do this review that was requested by Treasury Board?
Mr. G. Rochow: We started on March 1, 2010, and concluded sometime in November, with minor tinkering a few days into December. I think it was largely completed in November 2010.
Senator Ringuette: For many committee meetings, we have been reviewing the current legislation and the proposal from the Department of Justice and FINTRAC. I was kind of worried that the taxpayers have been spending, over the last 10 years, almost $1 billion, and the only visible result was one case of money laundering in B.C. that resulted in a six-month prison sentence. With regard to efficiency, I certainly was questioning whether this is the best way that we can prevent, identify and prosecute money laundering and those entities that operate in Canada. I would like to have your comments on my comments.
Mr. G. Rochow: As I indicated at the outset, in an evaluation, we try to get at data that addresses the prescribed issues, of which efficiency is one. However, having said that, you are dealing with efficiencies involving many horizontal partners within their mandated roles. If the question is whether we could have had a bigger bang for the buck, which I think you are going to, I am not sure that is within the range of the mandate that we were given. However, having said that, I would again like to ask two of our associates to add to that, Dr. Kellett and also Eric Culley, perhaps in that order.
Mr. Kellett: There are two responses I could make to point to your question. First, there is a table early on in the report describing the financial allocation model of the program to the various funded partners since 2005-06. We have looked at the most recent five-year period during the evaluation. In the financial analysis, we found that the funding directly under PCMLTFA and for the regime, the federal direct funding, accounts for about 74 per cent of what is actually expended, so about a quarter of the expenditures needed to cover all of the activities. FINTRAC is fully funded, but the other departments are not, for example, the RCMP under Proceeds of Crime and within that the money laundering organization. You have about a quarter of the activities being undertaken within current mandate of the departments. In and of itself, that speaks to an economy, as was mentioned in the opening remarks by Mr. G. Rochow. I think that is important to note in terms of the buck and how much is being spent.
In terms of the bang, there is a real issue you have highlighted here, and that is how do you measure success? Of course, the ultimate outcome is shown in their logic model, and this the whole program or regime, not just the act, but the whole of the regime. There would be two things, but primarily deterrence of money laundering and terrorist financing activity. The ultimate goal was not to prosecute or lock people up but of course to deter. If you prevent money laundering from occurring, that is presumed to be a more desirable outcome, according to the logic model we work from, than actually apprehending people and convicting them and locking them up.
Part of that whole issue about conviction rate is something that the FATF has been very critical of Canada, particularly from the U.S., because each country measures its conviction rate in different ways. They have different data sets. As we mentioned in our recommendation, one of the recommendations is that something be looked at in terms of how the Statistics Canada crime data and so on is rolled up to look at money laundering and terrorist financing. We had little success in trying to bring together data that others had not been successful in bringing together to come up with even an idea of what is a conviction rate.
What the outcome is in terms of the bang is also in doubt, because we really do not know. For example, when people get apprehended under proceeds of crime, part of that is money laundering, and another part of it may be the selling of drugs, for example, or theft or the use of intimidation. People are prosecuted under a lot of other crimes. The predicate offences are not necessarily just for money laundering. We had real difficulty, we must acknowledge, in trying to measure that ultimate outcome. In fact, we say in the report that we can really only measure the immediate outcomes and have to interfere from that that deterrence is occurring. Mr. Culley would have more remarks about the data and the difficulty of verifying what that bang is.
Eric Culley, Evaluator, Capra International Inc.: Yes, we had a lot of difficulty with the statistics. There is one linkage between charges and charges being laid and the convictions obtained. First, the data with the RCMP was not matched with the data from the PPSC. Many of these cases, when they start from an initial investigation all the way through to a trial, take years. The data we saw coming out of PPSC was, in the main, related to charges and investigations that took place three or four years before. The common database for that relationship does not exist. That is one of the matters we brought forward in our recommendations.
The other key part of it is that we were not able, with the RCMP data, to tie together the impact of money laundering activities with the predicate offences themselves. We could not determine from the data whether the interceptions that were being made, the results of the investigations, what effect those incidents had on being able to catch the criminal, not for money laundering but for the crimes themselves, whether it was drug offences, tax evasion or terrorist activities. There is no linkage in the data. We are in a situation where we have to sort of guess, and we did not guess, because we were not able to follow that trail.
Getting back to the bigger bang for the buck, the bigger bang relates to what it is you are trying to do. Are you trying to create a hostile environment to protect our banking system? Are we trying to catch the terrorists? We are using the money laundering activity to try to track. It is not the money laundering so much that is the bang; it is whether, in fact, you can catch the criminals on the bigger matter and to create a hostile environment for money laundering so that we can maintain the integrity of our financial system.
In order to answer that bang for the buck, you have to figure out what it is you are trying to do.
Senator Ringuette: Dr. Kellett, I can understand that we need a system to act as, at least, a deterrent. Is this the system that seems to be doing the job? That is our mandate in reviewing the legislation and the regime. You indicated 74 per cent of the funds needed are with FINTRAC, and you hinted that maybe more attention and more funding should be given to a particular unit within the RCMP to look into money laundering, that that could provide more bang for the buck. Am I reading your comments correctly?
Mr. Kellett: Yes, you are. In fact, I would not say it that directly, but, in the report, we noted that FINTRAC is the only partner that is fully funded directly from the funds going through PCMLTFA. All of the others are providing, because it is part of their mandate, totally or in part, their own resources to make up the difference.
The RCMP is in a particularly difficult situation there because they have an Integrated Proceeds of Crime, IPOC, which looks more broadly. When they are doing an investigation, if valid disclosures come from FINTRAC, that say "this is something that needs to be investigated for money laundering," if they are already involved in an investigation to do with those particular individuals or organizations, this is that great information that helps them build into the investigation. It frequently, as you can see from the data we reported, leads to some kind of prosecution or freezing of funds or recovery of money.
When they receive the disclosures that are not related, they do not have the resources to launch something outside what they are already looking at. That is because they are not fully funded under money laundering or in the other organization under the terrorist financing activity. It is not that FINTRAC needs to be cut.
Senator Ringuette: The Department of Justice and FINTRAC are suggesting that the $10,000 standard to report be lowered to $1, therefore increasing exponentially the amount of data. Mind you, the $10,000 standard was put in place 10 years ago at the 10-year-ago value for $10,000. I would like to have your comments about that request to reduce to $1 all the transactions needed to be reported.
Mr. Kellett: The only way we can answer that from the evaluation perspective is based on the data we gathered for the evaluation. We were not specifically mandated to look at any of the particular changes that might be made to the act itself. We looked at those that were causing inefficiencies as opposed to those that were efficient. The threshold dollar figure was not one of the things causing an inefficiency. One of the inefficiencies, in fact, was the number of valid disclosures being made by FINTRAC for investigation that could not be followed up because of a lack of resources and, I might also add, the skilled staff to pursue that information.
With regard to the information, by the way, one progress is that the information from FINTRAC has become more fulsome since 2008, and we mention that as one of the improvements in efficiency. When they got the information, they could do more with it and follow the thread to, if you would, find the bad guys, follow the money and do something about it.
To say that you need more information coming up the pipe from the banks and so on, I think the entities that report would have to comment whether this would cause them more grief than currently. Their activities, of course, are not funded. They are doing this from their own operations. Whether that would cause them more grief or not with their customers is one issue. The other is whether more information and more tracking would provide more bang down the line with prosecutions.
As I said, one of the inefficiencies was not a lack in the number of proactive disclosures, so lowering the threshold gives more information and more analysis. That may be helpful. You would have to find out from FINTRAC how much that would contribute to their sharpening or making more fulsome their information because they do link individual cases. We did not speak to that, only that the threshold being too high was not an inefficiency at the moment we did this study.
[Translation]
Senator Maltais: My name is Ghislain Maltais, and I am a senator from Quebec. Money laundering is a huge concern for Canadians. It is also a concern for financial institutions, especially the government.
Many people are involved in the fight against money laundering, a phenomenon that is affecting not only Canada, but the whole world.
The committee has heard from many witnesses on this topic. I would like to focus on a specific part of your brief, the life insurance industry.
Insurance companies are inherently very restrictive. Before going into politics, I owned an insurance firm for 20 years, and I remember very well that insurance companies — be they Canadian, American or English — were very restrictive in terms of client quality.
How can Canadian insurance companies be infiltrated nowadays through money laundering?
That seems to me a bit paradoxical because, aside from monthly payments, insurance companies do not accept huge amounts of money for an annuity. They may accept a few thousand dollars a month for an annuity, but in the area of life insurance policy, there is still an important clause, the one on insurable interest.
I do not see insurable interest in terrorism. I do not know if anyone could provide me with information about that, as I find it to be unrealistic.
How has money laundering been used to infiltrate insurance companies?
Mr. G. Rochow: Unfortunately, I do not know to what extent that topic has been covered, but I would like to invite my colleague, Mr. Kellett, to tell us about experiences concerning life insurance and its involvement in the laundering you mentioned. I do not know whether Mr. Kellett has understood the question. If not, I can repeat it.
[English]
Mr. Kellett: Mr. Rick Reynolds was our anti-money laundering and anti-terrorist financing expert in the evaluation. As a methodologist, I would say that first we were looking at the larger issues, not drilling down. We received, as part of the program profile that we described in our report, the entities that are currently covered by the PCMLTFA. We just simply list them. We do not say why they are there, because that was not our mandate. There were some issues around should coverage — had been moved since 2008 to try to expand coverage in other areas, and there was some disagreement among the horizontal partners about whether or not that should be done.
In our conclusions, we did not ask about specific entities that would be covered or not covered, or how money laundering actually occurs within, for example, life insurance companies. We might look at casinos and see how it occurs there. It may be more obvious. Other organizations were also mentioned.
This was not an area that we delved into. You would need to address that to the experts from finance, or particularly FINTRAC, who have researched all of that data. Mr. Reynolds may have a comment. As I say, it was outside our methodological purview.
Rick Reynolds, Evaluator, Capra International Inc.: With respect to that, as Dr. Kellett said, that was not part of our mandate to look at. However, within the FATF recommendations, insurance companies are identified as one of the risk areas that need to be covered. From my past life in dealing with anti-money laundering and terrorist financing matters, I know that it is one of the mechanisms that can be used, the insurance companies, not so much annuities but, for example, large policies, and especially large down payments on policies.
Bear in mind that a similar situation exists for casinos. For example, doing minimal gambling, cashing out your chips, and then receiving a cheque back from the casino. What you are getting back is something that appears to be legitimate or could be presented as legitimate.
The same thing exists with the insurance companies. If I purchase a large policy and then cancel the policy, the money would be returned by cheque, with the insurance company's name on it, which would then lend an air of legitimacy to it. It is a number of mechanisms, not a single mechanism, that money laundering attempts to apply to disguise the source of the fund, but that would be one of them. As Dr. Kellett said, it would have to go back to FINTRAC, the RCMP or the other agencies to get the actual cases that they are seeing lately.
[Translation]
Senator Maltais: Mr. Reynolds, do you know that, in capitalist countries, there is an international association of insurance companies? One of that association's services is specifically focused on money laundering, an international phenomenon.
[English]
Mr. Reynolds: I am aware that there are associations with the insurance companies. I do not know whether, within that association, there are specific individuals — I believe there are — who, similar to within the Canadian Bankers Association, specialize in money laundering issues.
[Translation]
Senator Maltais: Has Capra International Inc. received any information on cases of money laundering in insurance companies?
Mr. Reynolds: No.
[English]
Senator Day: Gentlemen, thank you very much for being here and giving us the overview.
Mr. G. Rochow, I made a note when you gave your presentation, and Mr. Kellett has referred to the same issue with respect to funded and non-funded partners. I think it would be helpful to clarify the record as to why that has come up a couple of times. I made the note that the RCMP was funded, and then I heard that they are not funded.
Mr. G. Rochow: No, they are not funded.
Senator Day: I will put them down under "not funded."
Surely any of these organizations are funded by the public purse and by appropriations, and so whether you specifically have a line item that says "for the work under proceeds of crime, money laundering and terrorist financing" or whether it is just under the general operating revenue, does that make a big difference?
Mr. G. Rochow: I think I can clarify this. There is actually some funding to the RCMP for 43 positions, but the non- funded partners, just to reiterate this once more, are Public Safety Canada, Office of the Superintendent of Financial Institutions and the Department of Foreign Affairs.
The question then boils down to this: Within the extent of funding available, can they in fact do what is expected of them? This is where questions of risk are uppermost, to go after the highest risk. We cannot answer — at least I am not aware of it, unless one of my associates is — to what extent the 43 positions that have been mentioned are adequate to do what is expected of them. I do not know whether Dr. Kellett or anyone else has more detail on that.
Senator Day: Dr. Kellett, were do the funds come from? Are these all public appropriations funds, or where are the funds coming from that you are making this distinction?
Mr. Kellett: You cited the case of the RCMP and their 43 full-time equivalents in the proceeds of crime unit that are intended to be dedicated to money laundering. Most of those are throughout the country and the regions. In the evaluation, of course we interviewed, did surveys and had focus groups involving the RCMP as well as the other partners, mostly the funded partners. Being a funded partner means they get a specific block of money under the implementation of the PCMLTFA. It is a lump sum of money, an allocation within the budgetary system that goes to the Department of Finance. They, in turn, have allocated, based on their initial submission, to each of the funded partners.
As we mentioned, except for FINTRAC, where 100 per cent of their operation is funded from that money, the other departments, in order to achieve what they can under their mandate, have had to put in more in order to get to where they are now. That may not be where they would like to be, and the RCMP is one example of that. We observed it as an inefficiency in the system where they were receiving disclosures from FINTRAC which they could not do anything with. For the last three years, they were not able to carry on any investigations for those new disclosures because they did not have the resources. That is an inefficiency. FINTRAC is popping it out, but the investigative arm cannot do anything because their allocation under the act is not enough. They are totally publicly funded, and the rest is in what they call their A-base, the allocation for the other parts of their operation.
Senator Day: Thank you. I think that clarifies your concerns. I see what you are looking for.
My second question relates to your presentation again, Mr. Rochow, where you talked about the efficiency and the effectiveness, your evaluation of the regime and of the legislation. I made a note here of the hostile environment that has been created and you would not want to be trying to get around that hostile environment.
Then I read our briefing note that suggests that the RCMP in 2011 estimated that between $5 billion and $15 billion annually is laundered in Canada. Is that a hostile enough environment, or are we prepared to accept $15 billion being laundered each year as being the norm? It might be $50 billion if we did not have the regime.
Mr. G. Rochow: Again, I think I will personally have to defer to some of my associates who may have the actual numbers. My understanding is if this hostile environment that has been created had not been created, there would be a lot more, but I cannot tell you to what extent.
The other question is how much more could actually have been prevented if more resources had been pumped into it.
In part, as I indicated, we are approaching the evaluation from the perspective of progress. In having gone over the numbers over the years, it became apparent that indeed there has been progress. Has there been enough progress? Well, that is a judgment call. How much more we can do before diminishing returns set in is also a judgment call.
I would again like to invite either Dr. Kellett or Mr. Culley or others to answer and who could shed greater light on this question, which is important.
Mr. Kellett: In our background research for the study, we were asked to look at some of the FATF's mutual evaluation reports, the MERs, done on Canada and other countries and meticulously go through to find out where our deficiencies and strengths were.
One of the issues that have been with FATF, and Mr. Reynolds can comment on this as well, is the estimates of the actual depth of the crime: How much money is being laundered? How much money do terrorists obtain to finance their operations? This is really, as the RCMP mentioned, somewhere between $5 billion and $15 billion. That is quite a range in terms of percentages.
I think the answer is simply that no one really knows. When people have gotten away with it, no one really knows. You can only estimate based on the actual legitimate transactions and then the size of the economy and estimate there is a lot not being accounted for. That is the issue there.
In fact, as Mr. Rochow mentioned, we are not mandated to say. We are only to look at whether there has been progress in terms of some of the indicators in the shorter term of success; for example, the dollar value and the number of seizures made by the CBSA and whether that has improved. It had improved considerably for a few years and then around 2009-10 looked to be plateauing. Much can be said for the number of investigations and the amount of money frozen by the RCMP that they consider to be that which was resulting from money laundering.
We did see signs of increased seizures and freezing of funds and so on, and this is displayed in some of the graphs in the report. How much of a dent does that make? We really cannot say, but if you have made any dent, I presume that means there is an environment that is not welcoming or friendly to money launderers, that Canada is playing its part internationally and making it publicly known that they are trying to do something about e-transfers, cash cards, ATMs and so on.
Maybe Mr. Reynolds or Mr. Culley will have something further to add.
Mr. Reynolds: I will not comment much on it. I think Dr. Kellett has covered it well.
Basically, crime will continue because it pays so well. What will happen is the criminal organizations will spend great effort in laundering their money so they are able to utilize it, bring it back to themselves and benefit from their crimes.
The fact that the regime has been implemented, especially to the level of the FATF recommendations, has placed Canada in a position that it is a good international partner. It is part of the system that is making it more difficult for criminals to launder their money and move it around the world.
If Canada was not involved in the regime, there would be huge amounts of money residing in Canada that were criminal in origin and would be affecting both the financial and the internal structures of the country.
Senator Day: You are not prepared to make any comment as to whether $5 billion or $15 billion is a good estimate?
Mr. Reynolds: We have seen for years and years the desire to put a dollar figure on money laundering, and it is almost impossible to do. You know what you know, and you do not know what you do not know. By that I mean you just do not know how many criminal organizations are out there.
Senator Day: Do we know how much we are spending, roughly or totally, from the funded and unfunded government operations to chase after this money laundering that we are not aware of the amount of?
Mr. Reynolds: I am not quite sure I understand the question.
Senator Day: What is the total amount we are spending now?
Mr. Reynolds: That would cross all sorts of lines. Just dealing with organized crime in and of itself, I believe I saw a figure some time back that there were 600 organized crime groups that had been identified by the RCMP in Canada.
Senator Day: I am talking about this regime. What is the cost to the public purse of this regime, the way it currently exists, to chase after this money laundering and terrorist financing?
Mr. Reynolds: I will turn to my colleague Mr. Culley.
Mr. Culley: We made an estimate of that, and it is in the report. For 2009-10, it was just under $86 million per year. That does not include, of course, what the reporting entities are spending on their part. It is just the members of the regime, per se.
Senator Day: You were including the non-funded entities in that as well?
Mr. Culley: Yes.
Senator L. Smith: This is a fascinating discussion. It seems like it is a moving target. I do not obviously have the knowledge that you folks have. In listening to Mr. Rochow's remarks, the regime should continue; the Department of Finance should create a working group to develop future issues and regime-related legislation to remove barriers to education, optimize how partners work together, compliance with the act, inconsistencies of information, updates to accountability.
My question goes back to Senator Day's in that with everything you do, you want to have some form of a measurement system and you want to ensure you have some form of a cost return or some understanding of what it is giving back.
Could you talk a little bit about this creation of a working group? Is there a strategic plan? The 600 criminal elements identified by the RCMP are obviously pretty smart, and they probably have some good consultants that they hire to try to create plans for them. What about the concept? How much strategic planning actually goes on? If you look at the details of the players, there is a huge group of players in this portrait. The coordination of the players — and you have talked about that — is working and progressing, but, again, it is a moving target. Is there an opportunity to create a group? The drug trade is approximately $450 billion a year. Someone said that, and it blew me away. I hope it is accurate. We know that Mexico, as an example, is a major player. There are a lot of drugs in the U.S. Obviously, it is the big player, but we are becoming, probably, a larger player. Is there a way that we can, strategically, set up more of a form of identification of what crimes we should be following? Should we be putting more of that back into the RCMP's hands? FINTRAC monitors transactions, but who should be the ones in charge of implementing the strategy to ensure that the deterrent can be closer to being measured so that we can see some results?
You talked a lot about deterrence, which I understand, conceptually, but, at the same time, these people are awfully smart. Are we using our minds and abilities as best we can?
Mr. G. Rochow: I think you have a wonderful question. It is intriguing. The mandate that we were given goes somewhat beyond that. For that reason, the closest that we could come to deal with it was our second recommendation where we said that we are aware of some of these complexities looking into the future. However, we are the only outside observers. We are not the strategists. We have highlighted problems in, for example, the communication of information between different entities that are attributable to legislated or regulatory constraints under which they must operate. We appreciate that these partners, when they dealt with us, pointed to their own obligations as to what they could and could not give and divulge. In so doing, they were doing their job.
We, as outsiders, also felt that the best people to address these issues are the ones whose problem it is. The second recommendation said, in effect, "Now that the evaluation has been done and some of the difficulties have been identified, can you sit down together and see how some of these things can be fixed?"
We suggested that what should come out of that would be, among other things, any updates to the regime's management that might be required. There are many conceptual possibilities that I could have maybe thought of but that I did not consider it my role to suggest. This committee might very well come up with this.
I have presented workshops on horizontal initiatives, and I am currently the chair of the worldwide evaluation group in IDEAS, addressing issues of international horizontal initiatives.
One of the big problems is how you can provide data that is protected. Can you come up with a solution that would make certain data eligible for sharing, and, if so, under what conditions? This is something that, in this particular case, we could not have suggested. It is not our responsibility. However, a working group can weigh the pros and cons. They said, "Given these constraints, with these changes to existing regulations, and with these changes in the system, in future we should be able to work together more effectively." That is what we were essentially trying to communicate.
Senator L. Smith: There are four words that rang in my head as I was listening to everyone speak and taking notes. Get the brightest and best people from the regime and partners. To me, there is an opportunity to talk about role, mandate, scope, and measurement to fine-tune this, respecting the fact that this is a new animal created in the last decade, if I understand correctly, through FINTRAC's creation and then the partnership with the other players. It is an evolving body, if you like. It would appear that there is a great opportunity.
Mr. G. Rochow: I should also say that an internal, Canadian, interdepartmental working group is obviously the most important and the most appropriate. However, this whole regime also works in the context of the international commitments to the Financial Action Task Force. We are part of a larger, international picture. When we are looking for experts, I am sure that if we look around the membership of that international body and the discussions that have been happening and couple that with the experts that we have in Canada, that must be a very capable body of people to address the issues of effectiveness, efficiency, and economy that must be looked at.
Obviously, the complexities are such that there is no silver bullet.
Senator L. Smith: You do recognize the need to — and you have stated that — put the brightest brains together, not only internal people but international people, to create something and move forward?
Mr. G. Rochow: The fact is that the whole international community is aware of the issues and the threats that are associated with it. It is in everyone's interests to address them. Yet, Canada and other countries have their own requirements. It is not that we can come up with a one-size-fits all approach. For that reason, the interdepartmental working group that we suggested to address this is probably the best approach.
Senator Harb: Treasury Board asked you to look at a couple of things — the relevance of the regime and then the effectiveness of it. I am sure we all agree that the relevance of the regime is a given. If we do not have a FINTRAC, we have to set one up.
The question that I want to ask you is about the performance of the regime. In your consultations, which of the regime partners did you meet? Can you name the people or the departments that you have met with?
Mr. G. Rochow: I wish we could, but this is one of the cardinal rules that binds all evaluators. We are given a list of potentials, in terms, first of all, of the regime partners and then people out there in the provinces and elsewhere. We try to draw a sample and we collect —
Senator Harb: I am sorry, but I want to ask you the question differently so that you might be able to answer. There are 11 federal partners — different departments, the RCMP, OSFI and so on. I am interested in knowing whether you met with all of them.
Mr. G. Rochow: Yes.
Senator Harb: You met with each of those departments.
Mr. G. Rochow: Yes.
Senator Harb: You do not need to worry about the rest.
Mr. G. Rochow: I was not ready to betray confidentialities.
Senator Harb: You did a web survey as part of your work and 256 people responded. Did you provide the government with the results of the survey?
Mr. G. Rochow: Yes.
Senator Harb: Could you share the results of the surveys with us by any chance, or they are confidential?
Mr. G. Rochow: To some extent, they are already reflected in her, but I do not know whether Waldo would want to comment on that.
Waldo Rochow, Evaluator, Capra International Inc.: The Department of Finance would have to provide you with the specific results. Everything we have collected that can be shared has already been given to the Department of Finance.
Senator Harb: One would presume, if it is a web survey, as it is, that it would have been public and that the average Joe would have gone on and given his feedback.
Mr. W. Rochow: No, it was by invitation. The way it operates is we are given a list of people who may have something to contribute; and we also send a letter out to the various different associations, bankers associations and so on, to say, "We are running this survey. If you have an opinion, now is your chance to get your voice heard." Conceivably, we had 256 opinions.
Senator Harb: I presume that is why one of my colleagues asked you the question about the partners and whether you have met with the people who have to do the work in order to provide the information to FINTRAC. I take you to recommendation 2(b), where you have raised concern about reporting entities because they felt their issues were not being addressed. I believe that the government had been told that you need to consult with those partners before you move ahead with the next step. Would that be correct?
Mr. G. Rochow: Yes. We consulted with all of them. In the process of consultation, some of these concerns appeared, and they were basically inherent in the differing mandates of these partners. In some cases, they said we can go so far but no further. We operated within the constraints of the ability of the partners to tell their stories as fully as possible. Again, I am wondering whether Mr. Kellett might want to add a couple of thoughts on that point.
Senator Harb: Let me ask a couple more questions before you bring Mr. Kellett on. Recommendation 2(c) is in line with the same thing. You are quite critical of the regime. You talk about the inconsistencies identified in the regime performance data and statistics to facilitate the regime's ability to accurately report on its achievements.
Probably you are aware that the Auditor General has also made a similar comment on that and had some serious concerns in terms of the effectiveness of the regime. The government, I suppose, has issued this consultation paper. I presume they have looked at your recommendation before they issued it. Have you had a chance to look at this? Could you give us your comment about whether you feel this responds to what you are saying?
Mr. G. Rochow: This was subsequent to our evaluation. We have become aware of it, but we are not in a position to offer any comparison at this stage.
Senator Harb: You give the regime a credit in saying that when they share information with third parties, they ensure there is privacy and a balance between the rights of the individual in terms of Charter rights and so on. I want to ask you first what evidence you have. I say that because one of the proposals in the consultation paper wanted the financial institutions to pass on all information — not just $10,000 and up but from zero up — on electronic transfers to FINTRAC. FINTRAC has that information and all kinds of MOUs with other countries. Some of those countries may or may not have privacy laws. However, because they are partners, they have the legal right, or the moral right, to ask FINTRAC for information about any kind of transaction under $10,000. Therefore, given a situation in one of those countries, conceivably an agency could embark on a witch hunt.
I want to find out what sort of evidence you have or you looked at to ensure that before we supply information to a third party, we ensure that they have laws consistent with our Canadian Charter of Rights and Freedoms.
Mr. G. Rochow: On this important question, I must definitely refer to some of my associates who looked at the details. Perhaps Dr. Kellett recalls some of those aspects.
Senator Harb: Maybe he can comment on the other points.
Mr. Kellett: Certainly. One of the issues with FINTRAC is really not that they are too willing to give information away or to provide details even without the name of a suspected organization. Their problem has always been, for those receiving the information, such as the RCMP and CBSA and so on, that the information was never specific enough in detail for them to pursue an investigation. The act, as you have been looking at, provides fairly rigid constraints on FINTRAC in terms of how they protect the information they collect, even when they do a strategic analysis, and how much of that they can reveal without compromising the privacy of even an organization.
One of the complaints of the banks and so on — those providing the data up the line — is that they were not getting a lot of information back about how strategically to look for a suspicious transaction. For example, are there some individuals or regions where we need to pay more attention? FINTRAC is bound by the act not to divulge that kind of information within Canada and certainly without. Within the United States, Homeland Security, for example, can demand of FINTRAC particular information but FINTRAC is not obliged to give it to them under any of the agreements with the FATF.
You should really be asking FINTRAC about those restrictions because they are the ones that are holding all the data they get and protecting it against compromise. We had no need to look at any of that because, of course, we were not trying to say: "Are they doing a good job in terms of protecting information?" Their track record since 2001 says they have been doing a good job and nothing, as far as we were alerted to, has been compromised in any way or divulged that should not have been. It really seems to be the other way around.
The question of lowering the threshold as far as the reporting agency is concerned — we mentioned this an hour ago — is: Will that be a greater burden to them than it currently is? There are issues in recommendation (b) that they felt they were not being heard about. There were many of them. Our job was at the macro level, so we only rolled those up and provided them to the Department of Finance to be considered. The greater issue for them was getting information back down the system from FINTRAC in terms of strategic and tactical information. They felt they were giving information into a vacuum and getting nothing back. They were looking for more guidance on how to identify suspicious transactions to keep an audit trail and so on. That is the kind of thing that they were asking about. Remember: There were a lot of different views expressed through the focus groups in particular. Mr. Laurendeau was one of those focus group facilitators, and he may have a comment about some of the observations that came from that, that are generic and can be shared with you.
Michel Laurendeau, Senior Evaluator, Capra International Inc.: I can say that there were lots of different views expressed through the focus groups because there were very different players. Not everyone felt totally comfortable with the requirements of the act. At the same time as has been indicated, people feel they provide lots of information at some cost to them, and they would like to get a lot more feedback on the value of that information.
To answer your question, I do not think anyone has expressed at any time real concern about the protection of personal information and that the system was threatening that aspect of the procedures in any way, shape or form.
Senator Ringuette: Mr. Reynolds, I am a country girl from New Brunswick, and probably extremely naive with regard to money laundering and all kinds of schemes. When you gave us an example of how it can be done in a life insurance scheme, all of a sudden I said, "Whoa, okay." Then you added to that that in Canada there are banks or bankers that could be part of or could participate, I think, in different schemes.
To satisfy my curiosity — and maybe you cannot — could you give us an example, similar to the one you gave us in the life insurance industry, of how money laundering can occur in Canada with banks?
Mr. Reynolds: First, I would like to be clear. I did not say specifically a bank. Banks fit into money laundering because they are an integral part of our financial system. They are the ones that have the ability to move money internationally and across the country. If you want to move money throughout the world, you can have it in six countries in a few hours. You just have to work at it a little bit.
The big thing with money laundering is that it is a mechanism basically to move and disguise money. The more times that you can break the money trail, tracking back to actually the source of the criminality of where the funds came from, it is much better. If you only break the trail back once, it is fairly easy to find where it came from. However, if you break it 20 times, it is much better. By that I mean, "breaking it," for example, depositing it into a bank, taking it out and physically walking across the street, putting it into another bank, or transporting it across the border because jurisdictional issues cause problems for investigations, especially into areas that have weak money laundering laws.
The more you move the money around, the more you cut the trail, the more you use the money laundering mechanisms, the more difficult it is to follow that trail. Really, it is all about, for the criminal, the possession and use of those funds, because they work hard in their criminal life to be able to receive those.
As far as the banks are concerned, the banks are a conduit because they are a legitimate conduit for commerce, for money to move. They represent our financial system. They can be used in any number of ways in corresponding banking relationships.
Senator Ringuette: I am intrigued by this $10,000 threshold. If a serious criminal organization wants to break the trail, as you indicate, as many times as possible to remove the traceability, would they go lower than $10,000?
Mr. Reynolds: They do, on a regular basis, and it is called structuring. They can structure their transactions under the reportable limits. You would have $9,999.99, for example, or less, going in a transaction. My understanding is, on a brief read, that the proposal is only for international electronic fund transfers to reduce it to zero. It is significant from the terrorist financing side, because terrorist financing is smaller dollars and traditionally, or in the past, what has been found is the money that moves is much smaller than what moves for criminal activity.
Senator Day: The amount of $9,999.99 would be a suspicious transaction, I would think.
Mr. Reynolds: I would hope so, sir.
[Translation]
Senator Maltais: Mr. Reynolds, you said that someone may deposit a certain amount of money in a bank and then cross the street and put the same amount into another bank.
For average Canadians, opening an account in a bank does take a few minutes, with all the documents that need to be filled out. If a person opens two or three accounts in one day in different banks, will the banks notice it? I assume there are tricks money launderers use. Do the banks have a way to communicate in order to avoid this? That way of operating baffles me.
[English]
Mr. Reynolds: The best one to answer the question is the banking association itself. When I talk about going from one bank to another, I am talking about, for example, moving from the CIBC to the TD Bank. They do not generally share their customer list because they are competitors. They are not comparing and they do not have databases that come together to say that you possess an account with their particular branch. They are happy to have you there, as long as you are not conducting some questionable activity.
[Translation]
Senator Maltais: Small merchants may receive cash, but they do not have with them large sums of money on a daily basis. The bank will wonder where that money is coming from. It is normal for a merchant to come to a bank with a bag full of money. But that may appear stranger in the case of regular individuals. I do not know whether you can explain this to me. Are the banks not worried about that?
[English]
Mr. Reynolds: There is no question that people would become suspicious of this. In fact, there is a methodology known as "smurfing" where individuals are employed by criminals, usually individuals who do not have a criminal record, who are not directly associated to the criminal activity, who are involved in actually placing the money into the financial system. They will do exactly as you said — to show up with $1,500. They will have multiple accounts. It does actually happen.
The Chair: We have covered many interesting issues today. One issue that was raised last week by witnesses from the financial sector that I would like to have you touch on, if you might, is that they supported a risk-based approach rather than a rules-based approach to reporting of suspicious transactions. Do you have any observations on that?
Mr. G. Rochow: We do not have observations that relate directly to the banking sector. However, the concept of being selective in terms of risk is something that is very much part of government policy. The government realizes there are only so many things you can do before you reach the point of diminishing returns. In terms of evaluations, which is our area, Treasury Board advocates the formulation of evaluation plans. Do not evaluate everything; go after the most important risk-driven aspects and the department has to do that in fact.
My perception is that similar considerations would apply in the private sector and elsewhere. Again, I would like to ask my colleagues whether they are aware of anything more beyond this.
I see Mr. Kellett shaking his head.
The Chair: Thank you very much for that response.
Gentlemen, I know I speak on behalf of all of the members of the committee in expressing our appreciation to your appearing before us today. You have been an outstanding panel and we thank you.
(The committee adjourned.)