Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 16 - Evidence - April 26, 2012
OTTAWA, Thursday, April 26, 2012
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 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: I call this meeting of the Standing Senate Committee on Banking, Trade and Commerce to order. This morning we continue the five-year parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This is our fifteenth meeting on the subject. In conducting this review, the committee has heard from a number of so-called regime partners involved in the implementation and administration of this legislation. In recent weeks we have been hearing from those familiar with and impacted by the regime, including industry groups and associations as well as independent experts in the field.
As you know, honourable senators, much of the regime revolves around the work of FINTRAC, our financial intelligence unit. Over the course of the hearings there has also been reference to practices of some of our other international partners. This morning we will hear from one of those partners. We are very pleased to welcome Mr. Alan Hislop, who is head the United Kingdom Financial Intelligence Unit, which is part of the Serious Organised Crime Agency or SOCA.
On a personal note, I would like to extend, on behalf of the committee, to Mr. Hislop our great appreciation. He has altered his travel plans dramatically. He would not tolerate doing this from the U.K. by teleconference.
We wish to extend a particular welcome to you and particular appreciation, Mr. Hislop, for attending today. We would be pleased to hear your opening remarks, after which I am sure we will have questions for you.
Alan Hislop, Head, United Kingdom Financial Intelligence Unit, Serious Organised Crime Agency: Thank you, Mr. Chair. Good morning senators. As the chair has mentioned, and as I think you are aware, my position is the head of the United Kingdom Financial Intelligence Unit, or the UKFIU, as it is know. As FIUs across the world are different in structure, remit and powers, I think it would be useful to present a picture of where the UKFIU sits within the U.K. anti-money laundering structure and within the Serious Organised Crime Agency, or SOCA.
SOCA is an executive non-departmental public body, something that is probably unique to the U.K., within the Home Office. We are led by a board with a majority of non-executive members, and the board is responsible for ensuring that we discharge our statutory responsibilities and meet the strategic priorities set under statute by the Home Secretary.
SOCA is a U.K.-wide organization with international reach. It is an intelligence-led agency with law enforcement powers and harm reduction responsibilities. Harm in this context is damage to people and communities. Its main functions are set out in the Serious Organised Crime and Police Act 2005. Put simply, these are to prevent, detect and contribute to the reduction of serious organized crime and to the mitigation of its consequences, and to deliver statutory requirements set out in legislation, including those in respect of information related to crime and international treaties.
There are two key points from that legislation to highlight. First, the UKFIU is one of those statutory obligations which I have just mentioned. Second, wide ranging information sharing provisions are pivotal to SOCA's role. Perhaps at this point it is also worthy to point out that the government has announced its intention to create a national crime agency, an NCA, that will harness and build on the intelligence, analytical and enforcement capabilities of SOCA. It is intended that the new agency should be fully operational by December next year.
In terms of the environmental context, the UKFIU is a member of FATF and also a member of the Egmont Group. The structure is therefore aligned with the FATF recommendations and financial information sharing is facilitated through the Egmont facilities.
Within Europe there are some additional but complementary provisions through European Union directives. These set the requirements of member states with regard to various business areas, and we are currently operating to the Third EU Money Laundering Directive, although a fourth one is currently being drafted following the recent review of the FATA recommendations.
Within the U.K., Her Majesty's treasury department is the national lead on anti-money laundering and represents U.K. interests at FATA. They are also responsible for secondary legislation relating to the implementation of measures in support of the recommendations, for example, with regard to customer due diligence, know your customer, et cetera. These are encapsulated in money laundering regulations of 2007, which are also currently under review and the subject of consultation. These regulations effectively implement the Third EU Money Laundering Directive and set out the scope of the regulated sector and the preventive measures they must take.
The U.K. Home Office is responsible for primary legislation with regard to domestic implementation of the law through the Proceeds of Crime Act 2002. This sets out the principal money laundering offences and the requirements around reporting. Supporting the overall effort are a number of regulators responsible for various sectors.
With regard to governance arrangements, SOCA, through the UKFIU, is responsible for managing the suspicious activity reporting, commonly known as the SARs regime, but it does this in partnership with stakeholders.
Overseeing SOCA's discharge of this responsibility sits a SARs regime committee. This was established following the last major review of the regime by Sir Stephen Lander in 2006. It ensures that the regime is delivering as desired and that developments are effectively represented to the government's Money Laundering Advisory Committee. More particularly, the committee oversees the effective functioning of the regime including a wider visibility and oversight of the regime outcomes. Their responsibility also extends to encouraging, exhorting, influencing, advising and supporting the reporting sectors and regime end users as well as monitoring and addressing difficulties they may have. The committee also supports publication of the SARs annual report which is the assessment of the operation of the SARs regime over the previous year. The annual report helps ensure effective governance and transparency of the regime and is publicly available. Membership of the committee currently consists of a SOCA executive directive, who is the chair, and representatives of the UKFIU, end users, regulators, professional bodies, the Home Office and Her Majesty's treasury.
In respect of the U.K.'s legal framework, I have mentioned the Proceeds of Crime Act. The key reporting obligations are applicable to anyone in the U.K. in the reporting sector. In essence, there is a legal obligation to submit a SAR to SOCA if they know or suspect or have reasonable grounds to know or suspect that another is engaged in money laundering and the information came to them in the course of their business. In most organizations this is reported through the nominated officer, known as the money laundering reporting officer. Reporting is also governed by tipping off provisions, which make it an offence, having submitted a SAR, to reveal information which is likely to prejudice any resulting law enforcement investigation.
The Terrorism Act is also in play. It is a criminal offence in the U.K. to finance or facilitate the financing of terrorism, and this act stipulates a further legal obligation on the regulated sector to submit SARs to SOCA. There is no minimum limit for the value of activity being reported, nor is there a requirement for the report to contain only transaction data, thus enabling the widest possible scope for reporting. Although there are differences, the regime operates in parallel to that of the Proceeds of Crime Act, including consent and tipping off provisions.
It is perhaps worth pointing out also that while SOCA does not have a remit to address terrorism, the UKFIU has established close links with relevant counterterrorism units in order to support their objectives and discharge SOCA's statutory obligations.
On money laundering regulations, which I mentioned earlier, both the Proceeds of Crime Act and the Terrorism Act are supplemented by secondary legislation in the form of the money laundering regulations, which implement aspects of the EU money laundering directives into U.K. law.
The five key obligations on the regulated sector include staff training; customer due diligence, which includes knowing the customer/business, including client identification; record keeping; having systems and controls in place to prevent money laundering or terrorist financing, which include internal reporting of suspicions or knowledge of money laundering; and finally, identifying a nominated officer to oversee submitting SARs to SOCA and the implementation of the regulations and appropriate guidance.
With regard to guidance, approved guidance issued by regulators and trade bodies assist the reporting sector to deliver its responsibilities under the legislation. When deciding whether an offence has been committed, the court must consider whether the defendant followed any relevant guidance issued by an appropriate body and approved by Her Majesty's treasury. The most significant contribution to guidance is the Joint Money Laundering Steering Group Guidance Notes for the U.K. financial sector which have been approved by Her Majesty's treasury and the money laundering advisory committee for the regulated sector.
I have mentioned the U.K. SARs regime. A suspicious activity report is a piece of information alerting law enforcement that certain client or customer activity is in some way suspicious and might indicate money laundering or terrorist financing. The SARs regime is the end-to-end system which enables reporters who spot suspicious financial transactions, or any other suspicious activity that might suggest money laundering or terrorist financing, to report this to the UKFIU in a SAR; the UKFIU to process a SAR and store on it the SARs database, which is given the name ELMER; and end users in law enforcement to subsequently make use of the data held on the SARs database viewed through an online portal called money.web or a system known as ARENA.
The Proceeds of Crime Act established two distinct provisions for the handling of suspicions about criminal funds. The first requires institutions in the reporting sectors to disclose as SARs to the UKFIU any situations that arise concerning criminal property or money laundering. The second allows persons and businesses generally, and not just those in the reporting sectors, to avail themselves of a defence against money laundering charges by seeking the consent of the UKFIU to undertake an activity including completing a transaction, which would otherwise be a prohibited act, about which they have concerns. Similar provisions relating to terrorist financing are contained within the Terrorism Act.
Perhaps worthy to point out, there is no automatic de minimis limit, nor is there a requirement for the report to contain only transaction data. Rather, SARs should contain details of suspicious activity, thus ensuring the widest possible scope for reporting.
With regard to stakeholder engagement, starting from the top with the SARs regime committee, the UKFIU works collaboratively with the reporting and end user communities to support the regime's overall objectives. A team of staff are dedicated to outreach and dialogue working with partners to meet respective needs. A dedicated communications role is intrinsic to this. In support we also have staff from other end user agencies embedded within the UKFIU.
Related to data handing and sharing, the ELMER database stores all SARs submitted by the reporting sector and is owned and managed by the UKFIU, supported by its IT supplier. The majority of reports are submitted electronically. The security internal database is then managed so as to provide complete and, where appropriate, accessible information for use by identified stakeholders. There are approximately 1.38 million SARs on ELMER and current submissions of SARs are just short of 250,000 a year. UKFIU interests are identified through daily automated searches.
As previously stated, SOCA was empowered with powerful legal gateways to allow it to share information and collaborate with partners. There was a need to maximize the value both of SARs and other sources of financial and criminal intelligence. The value of financial intelligence is often not fully realized until it is combined with other sources of information.
Consistent with this approach, most of the ELMER database is made available to in excess of 70 different U.K. agencies through a secure web-based portal, which as I mentioned is money.web, or ARENA, which provides advanced analytical functionality. These are available to investigators from every police force in England, Wales, Scotland and Northern Ireland, along with the national agencies that have prosecution powers, for example, Her Majesty's Revenue and Customs, the Department for Work and Pensions, and the Serious Fraud Office.
ARENA software provides a data mining solution and searches against structured and unstructured SARs data offering users the ability to visualize the information obtained, including network charts and mapping.
Access to the data is tightly controlled through a governance regime which includes an end user criteria, end user agency agreements and individual user agreements. Agencies must meet the criteria and individuals are restricted to those who are largely accredited financial investigators or trained financial intelligence offices or analysts. Training, including confidentiality training, ensures that those who have access to the data understand handling conditions and respect the confidentiality and sensitive nature of the information.
SARs are retained on ELMER for a period of six years or until proven not to be linked to crime. They are then deleted automatically. A single SAR is often used several times by several different users for different purposes. For example, the information within a SAR may inform HMRC around taxation; it may inform local police about fraud or theft; or it may inform a government department about another issue or weakness in a financial product.
If the SAR is requesting consent, the UKFIU consent team, in close consultation with appropriate end users and others, have seven working days to make an initial consent decision. If consent is refused, then law enforcement has 31 calendar days, the moratorium period, to take further action. By that we mean restrain or seize funds. Where consent is granted, the reporter may go ahead with the specified transaction or activity and will have a defence to any potential money laundering offences relating to that activity.
Law enforcement agencies prioritize and make recommendations on consent requests referred to them by the UKFIU. They can check SAR subject details against local intelligence data bases for relevant additional information. Depending on the outcome, SARs can lead to the instigation of new investigations or enhance existing ones or knowledge of a subject.
In the last year, management of the consent provisions alone, covering over 13,000 consent requests, resulted in over £35 million being restrained or seized.
Recognizing the international dimension to money laundering and terrorism financing data sharing also extends to the international arena where the UKFIU has actively engaged with a number of partners around information exchange.
In summary, over all the UKFIU takes the view that the SARs regime is one of the most important public-private sector partnerships we have in the U.K. and that it exerts a powerful deterrent effect on criminals.
The Chair: Thank you, Mr. Hislop for those opening comments.
My first question for you has to do with the organizational structure that you operate. In Canada, as you know, FINTRAC operates under the direction of the Department of Finance. As I understand from your remarks, your organization operates as a division of the Serious Organised Crime Agency, which is part of the Home Office.
Could you comment on how it was decided that the UKFIU went to the public safety portfolio as distinct from being in some other area? Perhaps you could give us some background on how it evolved and when it started.
Mr. Hislop: It started in the late 1980s. At that stage we had what was referred to as the National Criminal Intelligence Service, and the UKFIU was a department within that, so even at that early stage it was within the law enforcement intelligence arena.
SOCA was created in 2006 and, as a consequence, the National Criminal Intelligence Service was integrated, along with a number of other agencies, including the National Crime Squad, aspects of the U.K. border services and some of Her Majesty's Revenue and Customs that were involved in investigations, into the new Serious Organised Crime Agency. That is the background. It started at the start of, if you like, the global phenomenon of money laundering and SARs reporting and it has stayed there ever since.
The Chair: If I may ask, is your background law enforcement?
Mr. Hislop: Yes, my background was with a police force, and since 1998 I have been managing on a national basis through the national crime squad and then into the Serious Organised Crime Agency.
The Chair: Thank you. I will turn to senators for questions.
[Translation]
Senator Maltais: I do not know whether it happens in your country, but the Canadian Bar Association said, when its representatives appeared before this committee, that multiple real estate transactions are often made with only one client to end up with one invisible client.
Therefore, it is almost impossible to track the origin of the funds that could be used for criminal activities. Do you have similar cases in your country, with the monitoring agency you have set up?
[English]
Mr. Hislop: I cannot comment on securities per se, but our operating model means that we identify entities. Therefore, if there is an account or an individual or an address, anything like that, that is common across a number of SAR reports, our technology enables us to make the links around all of that and therefore identify what may be investigative opportunities.
[Translation]
Senator Maltais: Is there a very good working relationship between your organization and the various financial institutions?
[English]
Mr. Hislop: We have excellent relationships. It really is a partnership arrangement right from the top with the SARs committee where banking is represented through the British Bankers' Association, who support us in a number of ways. It really is seen as a joint effort toward the outcomes that everyone is trying to achieve through the SARs regime.
[Translation]
Senator Maltais: Unlike Canadian law, your legislation does not prescribe a minimum value to report a transaction. In your opinion, is that an advantage or a disadvantage?
[English]
Mr. Hislop: We do not have that provision. Our whole regime is based on a risk-based approach. The thinking behind any institution around the law means that they have to examine each transaction, each activity, on a risk-based approach. On the one hand we have ELMER and all of our suspicious activity reports, which are suspicion-based as opposed to something which is not risk-based at all. Therefore, I suppose there would be a danger that if everyone said that all transactions are automatically reported, you could lose focus on the risk based approach to each one.
Senator Harb: In your 2010-11 report, you stated that approximately 250,000 SARs were submitted. It seemed that they were submitted mainly by four institutions in the United Kingdom, at least according to the document that I have. What happened with the other institutions. Why do all of these reports seem to be coming only from four?
Mr. Hislop: I do not recognize the four. Banking represents something like 77 per cent of SARs. The second largest would be money service bureaus, which represent 9 per cent. Between them they represent something like 87 per cent of the total number of SARs submitted. Of course, there are much larger than that. If you look at in terms of banks, we do a piece of work around the top 10 which goes to each individual organization and looks at their submissions as an example of. So rather than top four it is top ten for us.
Senator Harb: Interestingly, you mentioned that much of the data coming into your system does not necessarily result in more convictions but that your system is based on risk. You mentioned something along the line of automated searches. Does that mean you go into the data base and with a certain criteria you electronically try to extract the information that you need and then delve into it?
Mr. Hislop: That is right.
Senator Harb: My last question deals with the fact that last year, as a result of those searches and investigations, you were able to seize or confiscate £35 million.
Mr. Hislop: Through the consent regime.
Senator Harb: Through the consent regime.
Mr. Hislop: That is right, yes.
Senator Harb: Could you elaborate on the consent regime?
Mr. Hislop: As I mentioned, within the U.K. legislation there is provision for reporters to seek consent from the UKFIU. Only the UKFIU or a police constable can give consent for this to happen where they are conducting a transaction or an activity which they believe could be money laundering or a criminal offence, and they can afford themselves of the opportunity of a defence in law against them on the money laundering charges if they get consent from the UKFIU.
If my memory serves, there were 13,662 that year, each of which came to us. We then have a requirement within seven days to review that request, and the way we do that is we do our own internal searches to see if there is any internal interest. We will then refer to a relevant law enforcement body where there is one identified to see whether there are opportunities or other interests, and it could be both ways. Consent could either be denied or granted, but there is the opportunity for law enforcement to intervene, which could be around stopping dissipation of criminal funds out of the country or putting freezing mechanisms in place; or it could be that there is an edification that a transaction will be taking place in which somebody may be coming with a bag full of money, which means that law enforcement may give consent. Actually, law enforcement then has an opportunity to be there to meet and greet the said people.
Senator Stewart Olsen: I have two issues, if I might touch on them. You mentioned that your database is very secure, but there are a tremendous number of users of the database. How do you ensure those users are safe? I know that you say training. Who trains them and how are you ensuring an ongoing security with the amount of users?
Mr. Hislop: This is an ongoing challenge that we have, but one that is entirely manageable and managed, and evidence of management, if you like, is through the number of breaches that we do not get. Effectively, as I mentioned, there is a whole structure of governance in place whereby there is an end user criteria which has been agreed to at the highest level with the SARs committee. Organizations looking to get access to that data firstly have to be on the agreed legislative list of agencies that have powers around all of that. They then have to meet the criteria that is published, which is around securing of data, access to it and the whole environment around where this data is going to be viewed, so the organization has to sign up to that. It also signs up to various conditions around provision of feedback to us and obligations around if there are any breaches or breakdown of that security. They have to report to us.
That then is translated into individual user agreements, so every single one of approximately 2,100 users across the country has to actually sign up, recognizing their responsibilities and their obligations around the handling and security of the data that they are accessing.
How does that training take place? As I say, most of them are either accredited financial investigators or financial intelligence officers. We have in the U.K. an organization currently known as the National Policing Improvement Agency. It is, in law, responsible for accreditation and training of those individuals, and there is an agreed format for all of that. They keep the list of who, and we obviously link in with those with around who is proposing to get access and everything else.
In terms of ongoing scrutiny, and it is really scrutiny that we do to ensure that people are still accredited, making sure they are still using it, and we have the full background. In terms of breaches, they are rare.
Senator Stewart Olsen: The other issue I would like to touch on is the matter of reports, prosecutions and consents. You have a large number of reported on your SARs. How many actual prosecutions or consents have resulted from those? I am not sure if you have the figures.
Mr. Hislop: No.
Senator Stewart Olsen: It is interesting. We have a large number of reports here as well, and we have been looking at how many prosecutions have resulted now. I am interested in your consent procedure because that seems to eliminate the need for prosecution. Am I gathering that? Is that correct?
Mr. Hislop: No, in fact, it is the contrary. It presents opportunities for prosecution because we only refuse consent where there is going to be an investigation that will go to a court and seek the assets being restrained.
Senator Stewart Olsen: I see.
Mr. Hislop: Actually it is more of an opportunity that it presents more than anything else.
In terms of your first question around number of prosecutions, that is very difficult because of our operating model whereby SARs are made available to end users, to investigators, as a matter of course. The life of a SAR could be six years, so it is difficult to say when there will be a prosecution and how material that SAR is to it. It may be just a bit part; it may kick off a whole investigation. Equally it is important to recognize that we have an all-pronged approach, so it is not just investigations. It can be preventative measures; it can be interventions to disrupt, as well as protection of the elderly, vulnerable, et cetera.
Senator Stewart Olsen: Would you measure your success then by the amount of money that you have recovered? How do you measure your success in the organization?
Mr. Hislop: It is very difficult because of the way that we deal with SARs. As I say, one piece of information, one SAR may not provoke an investigation. However, having said that, collectively, together with the rest of criminal information that we have or the rest of the information that law enforcement across the whole of the U.K. has, that could be the bit that tips it into an investigation, an ancillary enforcement action, as opposed to not. How do you actually measure that? That is very difficult.
The Chair: Picking up on Senator Stewart Olsen's point, how do you approach the whole issue of evaluating performance? How do you take a look at your department and say the taxpayers of the U.K. are getting good value for their money?
Mr. Hislop: Well, of course the size of our department is quite small because of the role that we have, but of course what we do have is a devolved model whereby actually, instead of the 70 or 80 people that we have within the UKFIU, there is actually 2,100 plus out there who are effectively doing the role that other FIUs across the world do. We have gotten much larger, but it is determining how you break down the role of a financial investigator in a police force as opposed to the prosecutor of that offence. It is very difficult.
One thing that might be worth mentioning is that in the U.K. part of the performance regime is an "incentivization" angle whereby if law enforcement, and clearly law enforcement things like the Crown prosecution service, are involved in getting confiscations back, then actually part of that confiscation fund gets fed back to law enforcement, so there is an encouragement and "incentivization" to actually invest in this sort of work.
Senator Ringuette: I gather that from at least three different angles there is a major difference from your responsibility in the U.K. and what we have here in Canada.
Mr. Hislop: Yes.
Senator Ringuette: The first one being structure.
Mr. Hislop: Very, yes.
Senator Ringuette: Your structure is under the guidance of law enforcement.
Mr. Hislop: I would not necessarily say "under the guidance of." We come under the Home Office for policy.
Senator Ringuette: Exactly, yes.
Mr. Hislop: However, in terms of the UKFIU, it is an independent element. You know, we deal with our business independently of the Home Office, apart from policy directions. Of course, the SARs committee offers a top sort of cover in terms of support to the objectives that are set to us, and that of course is more to the agencies. Home Office is just one party to that.
Senator Ringuette: I detect, first of all, that your data gathering is completely risk based, whereas ours is a set amount, a currency amount, which is completely different from the start. Our system, FINTRAC, inputs some data to get an output, and if they identify there is something suspicious happening, then they will refer it to the law enforcement agency. I do not detect that is the way you operate at all.
Mr. Hislop: Not at all. We make the SARs available. It is then for individual law enforcement, and that includes all the police forces of England and Wales who see all of those that are within their force area, to then compare that with information that is available to them locally from which then they can take whatever action is appropriate and prioritize accordingly.
Senator Ringuette: Exactly. Now in that process, do these local law enforcement agencies also have the opportunity to input into the system?
Mr. Hislop: No, not at all.
Senator Ringuette: It is only a research database?
Mr. Hislop: Correct. The only thing that they can do in terms of input is, if we refer a consent to a police force, they respond back to us on the nature of that, but that is the extent of it. As well, they are obligated to give us feedback so that we can try and give feedback then to reporters around it. However, in terms of input into ELMER, no.
Senator Ringuette: Now the other issue is our $10,000 Canadian currency threshold. You do not have a threshold.
Mr. Hislop: No.
Senator Ringuette: I would like you to talk to us about your experience in regard to having or not having a threshold and how it can impact on the detection of a criminal activity.
Mr. Hislop: It is difficult to hypothesize on something we have never had, if I am honest. From a UKFIU perspective, our role is only mandated on the suspicious activity reports, not on any transaction data at all.
Senator Ringuette: Okay, I will rephrase my question.
In your experience over the last 20 years, what would be the average number of pounds or euros that have triggered an investigation, successful or not?
Mr. Hislop: It is very difficult to say because they can be very small to very large, and inevitably, because of our remit around harm reduction, some of that is not necessarily going to mean an investigation. It could be an intervention to stop something happening or to disrupt something happening rather than a criminal justice outcome.
Senator Ringuette: Do you gather statistics about the result of the data that you gather and activities from law enforcement agencies that happen as a result of your data bank?
Mr. Hislop: I think there are two things. First, all the records relating to confiscations and seizures are actually collated by the Home Office. In terms of feedback, we have a process whereby we have a twice yearly questionnaire whereby we, the UKFIU, send out to all end user organizations a questionnaire where we ask them to give us examples of how SARs have been used positively with a view to assessing the worth of the regime, really, and that gets published then as a means back to end users to encourage this to continue.
Senator Ringuette: What kind of results are you getting?
Mr. Hislop: What I recall, these are always a minimum because it is the minimum we reported. In terms of a year, certainly in excess of 100 million restraints, for example, and there is some other figures in there which I cannot recall at the moment but am quite happy to provide, and I think they are included in the SAR annual report there.
Senator L. Smith: Good morning. I have more of a macro question. With your experience, could you give us some of the pitfalls or maybe some advice? It seems that you have had a much longer track record and period of experience, even though your system is different than ours. Could you allude to some of the pitfalls that you have faced and how you have overcome them? That could be helpful to us because we are reviewing legislation, supposed to be making recommendations to enhance what we are doing.
One example is the incentive program that you have, but if you could give us some background as to some of the things you have seen and faced and overcome that may be some parallels we could take for our own evolution.
Mr. Hislop: There are two aspects. The biggest challenges for us, quite frankly, with our model is, one, there is an insatiable appetite for feedback, and that is always a difficult challenge to try and manage, from both sides, trying to get feedback from law enforcement and then without obviously any conflicts on the investigations and how do you actually feed that back to reporters. When you are dealing with 250,000 reports, you cannot deal with that on an individual basis. It is just a constant uphill struggle.
We are currently looking at a different engagement model with our partners with a view to how they can support us, recognizing that this is always going to be an issue, as to what information we can provide to either the trade bodies, the trade associations, the affinity groups, that they can then push down to their membership with a view to, again, supporting the objectives of the regime.
That is one major issue that we will continue to deal with because the demand for feedback is never going to go away, and I get why as well. Part of that is to do with a desire, a real ambition to make sure that they are submitting SARs on the appropriate subjects. To do that, obviously they want to know. "What happened with the previous report? Was it right or not?" I understand all of that.
The second biggest issue I guess with our model is around the technology that supports it. Because we are engaging with so many different partners from both the reporting sector and also with a push now to end users, the users of connectivity, of software support on different platforms is another issue that with the pace of technological change is and continues to be a real challenge for us.
Senator L. Smith: Could you explain how your incentive system works? You mentioned incentive systems to partners on successful completion. Does money physically go back to a unit?
Mr. Hislop: Yes. It is not a UKFIU initiative. It is run by the Home Office.
A bit of the background to this is that we have in the U.K. a real desire to see mainstreaming of financial investigations. Literally, every criminal investigation will normally have a financial angle to it, certainly it seems from the Serious Crime Organisation Agency and that sort of level increasingly now down to a police force level.
Criminals often undertake their activity for financial gain. This comes back to harm reduction, to remove those negative role models from communities where you have somebody who is engaged in criminality living a lavish lifestyle, which then presents a role model for others to follow and to get involved in criminality.
Part of this is a mainstream financial investigation to take away the incentive for people to go into criminality, take away the assets they got from their criminal business positively. When that gets turned into cash, it goes into the Home Office, who then, appropriately by ratio, returns that to the law enforcement that may be involved in it.
Senator L. Smith: What would the split be between money laundering and terrorism of the 250,000 clicks that you get?
Mr. Hislop: It is obviously much smaller with terrorist financing. I cannot give you the exact figure.
Senator L. Smith: If you had to guess or estimate?
Mr. Hislop: I am tempted to say something like 13,000, but that could be way off. One of the advantages that we have from being all together is it is one reporting regime, so the terrorism desk deals with the totality of SARs as opposed to just those that are reported from the terrorism perspective.
Senator Massicotte: Thank you, Mr. Hislop, for being with us. It is very valuable for our review because it gives us a comparison to a very sophisticated body.
There are no minimums for known transactions. What about the foreign transactions? Is there a minimum there or the same, risk-based?
Mr. Hislop: It is the same, risk-based. From a UKFIU perspective, we do not have access or process any of that data.
Senator Massicotte: What about those that are required? The financial institutions are eligible under the act. As for real estate brokers — you may call them something else.
Mr. Hislop: Estate agents.
Senator Massicotte: Do they have the same obligation?
Mr. Hislop: Yes.
Senator Massicotte: What about jewellery stores?
Mr. Hislop: Yes.
Senator Massicotte: Including the retail stores?
Mr. Hislop: High value goods, yes.
Mr. Hislop: Yes.
Senator Massicotte: Life insurance companies?
Mr. Hislop: Yes.
Senator Massicotte: It is all risk-based, so if a jewellery store or a real estate broker has no such transactions, they do not have to worry about it; or must they also take all the training to make sure they can identify it? Most residential real estate workers are never subject to that risk. Must they also take all the training to make sure they can identify it and report it?
Mr. Hislop: Their obligation is there for them. I am not sure about their training regime.
Senator Massicotte: If they can answer that they are not exposed and there is no risk, that is adequate in your system.
Senator Stewart Olsen raised the issue that there are significant differences. Obviously, we are asking ourselves why there are. We referred to structure, and we referred to, in your case, no minimum, totally risked based. In our case, there is sort of a lack of clarity when the records are destroyed. In your case, they are automatically destroyed after six years, unless there is an ongoing file of sorts.
Mr. Hislop: That is right.
Senator Massicotte: The other thing that is interesting is our users here recommend strongly they should have an ability to share the information, and the counter argument is there is a risk to that, but you are sharing it with the financial institutions. I gather you have 1,200 people able to share. Therefore, do large financial institutions have somebody in their organization that could share information about other people's reporting of odd transactions? Am I correct in saying that?
Mr. Hislop: I am not quite sure.
Senator Massicotte: You are sharing the reports, I gather. You have the 1,200 potential users who are qualified to see some of that information; is that accurate?
Mr. Hislop: The financial investigators.
Senator Massicotte: Would a bank have a financial investigator? Who is that?
Mr. Hislop: The financial investigators are normally — I say "normally" — probably the greatest majority will be police officers. It could be within Her Majesty's Revenue & Customs.
Senator Massicotte: It is government.
Mr. Hislop: They are law enforcement, nothing else.
Senator Massicotte: A bank could not be eligible to share that information.
Mr. Hislop: No.
Senator Massicotte: That is interesting.
On the risk-based stuff, the theory would suggest it is very easy to say, "Of course, it should be risk-based." I mean, why cause that burden upon these reporters if there is no risk? The argument we hear, and it is quite substantial, says, "Yes, but everybody thinks they are not eligible, and everybody thinks the risk lies elsewhere." Unless you force them to report at a certain level, a minimum, it may not be adequate. As you notice, the United States follows that principle. Many of the countries have done this, but on a theoretical basis, yours is superior. Why cause all this hassle? How strongly do you feel your system is adequate, even without that minimum?
Mr. Hislop: I think the fact we are getting almost 250,000 reports a year indicates that there is some real buy-in here from the people who are identifying suspicious activity, and this is from a wide spectrum. Again, if you look at the annual report and the categories that are reporting, they are wide and varied, which seems to indicate that there is some knowledge around all of this, and it is not just a "you must do it because I am telling you to." There is a real buy-in. That is the only thing I can say.
Senator Massicotte: Would not one believe those who would buy in so easily are those beyond suspicion, and maybe the people who are a little bit less honest are obviously going to find all the excuses in the world not to report?
Mr. Hislop: There is always a danger of that, and that is one of our challenges whereby we will be looking at cross sectors because, in many transactions, a number of participants across the regulated sectors should be involved.
If, for example, we have a mortgage fraud trend in one area, well, inevitably there are another few sections that will be involved in all of that. The question will then be why we are not receiving reports from that, which could be an indication that actually there could be somebody corrupt or somebody who is criminal involved and complicit in that, which could be a law enforcement opportunity identified that needs to be taken forward.
Senator Massicotte: Another complaint we receive from users is the whole basis of "know your client." That is critical to financial institutions.
Mr. Hislop: Yes.
Senator Massicotte: In our system, we do not have a national identity process. We do not have a citizenship card, but they would recommend that they should have access to government records because we have a lot of government records, either Revenue Canada or other processes. In your country, do the users have access to some form of national reference or citizenship list?
Mr. Hislop: No. There were plans for a national identity scheme, but they have not been taken forward, so, no there is not.
Senator Massicotte: Senator Stewart Olsen, the whole debate, all this is good, everybody is working hard, creating a lot of activity. I know it is very difficult, but somehow we have to measure success or measure impact compared to cost.
In your presentation, you said you seized or restrained £35 million pounds in the last reporting year.
Mr. Hislop: Through just the consent part.
Senator Massicotte: It is all good to restrain, but how much of that is eventually released after an investigation? What is the net amount of money that was permanently restrained?
Mr. Hislop: Again, it is very difficult, because, as you know, financial investigations take years to go through the whole process, to identify what realizable assets people have and the criminal benefits of the crime. That sometimes means that if someone has just lived a lavish lifestyle on the basis of criminality, there could be very little in terms of assets that you can actually realize.
In terms of measuring all of this, one of the things has to do with taking away these role models. It is creating a culture whereby it influences criminal behaviour.
As an example, at a recent SARs committee where the law enforcement lead from the policing world cited how, because of the environment that we have now created, those top criminals are taking their children away from private schools. They are not driving the big flashy cars anymore. They are not living in the big mansions because it attracts too much interest from law enforcement. In terms of taking away that negative role model, I think it is a positive impact of the SARs regime.
Senator Massicotte: I appreciate that that is very good. They are living more modestly, so congratulations. When we look in our country at the amount of drug money and underground economy going on, it is in the billions of dollars. We have spent lots of money with this system. I have not heard reports, and other senators would be more knowledgeable than I, but I have not heard of a diminishment in volume of drug money or whitewashing money. Is all this good? Have you seen a drop off in drug trade in your country? Does this help? It would appear they have just gotten smarter. They know you exist, and they are going to behave differently. You have pushed the problem aside but not resolved it.
Mr. Hislop: Trying to calculate the value of organized crime particularly is notoriously difficult. Certainly in terms of our best estimates or guesstimates, they do talk about between 20 and 40 billion. That is quite a big range, frankly. It is a case of not having just one approach to this. It has to be multi-dimensional. I say that in terms of we also, within SOCA, have what we have in terms of civil recovery. If there are people who have a lifestyle that is not supported by visible means of income, then there are opportunities that can be pursued through the civil route rather than the criminal route.
Senator Massicotte: Have you? Has that resulted?
Mr. Hislop: Yes. They try and then get the assets that way. Again, it is another means, if other means have failed or not been successful.
Senator Massicotte: It is just nudging. It is like jello. It is tough.
One last question: We are very proud of our constitution, and our constitution gives the legal profession certain rights on behalf of their clients and behalf of all Canadians citizens, but the fundamental basis is that anyone charged must have independent advice. They have used that argument to exclude lawyers having to report. They must report suspicious transactions but do not have to do the automatic, formal reporting. How do you deal with solicitors and barristers in your country? Are they required to report, as anyone else is?
Mr. Hislop: Yes, they are.
Senator Massicotte: How do you deal with the fact that they should not have disclosed confidential information of their clients?
Mr. Hislop: It is managed, and managed very well. The law society is a member of the SARs committee and is very supportive of where we are going with this. They do, and you can imagine how difficult this could be, participate in the consent regime as well. If they have got a client and they think there is a criminal transaction about to take place, they do afford themselves sometimes of the consent provisions.
Senator Massicotte: They are obviously more creative than ours.
Senator Moore: Thank you, Mr. Hislop, for coming to Canada and being here this morning. What is the annual budget of your unit?
Mr. Hislop: Since we are part of SOCA, we do not actually get a defined amount to do that. Again, we probably will not now, being as we will be going into the national crime agency.
Senator Moore: You do not know how much you have to operate with?
Mr. Hislop: We are part of an information department, which also covers other statutory responsibilities which includes things like Interpol and Europol, which are very similar in nature in terms of getting requests to get information from other partners. We also have, for example, the U.K. NCO, which is the counterfeit currency unit. Again, it is all part of a departmental resource, depending on what the priorities are.
Senator Moore: I thought you might know what you need to operate year in year out, but maybe you do not want to tell us. You do not want to tell the other guys how much resources you are putting into this. That is fair.
Mr. Hislop: I honestly do not know.
Senator Moore: I want to ask you a few things, first, with regard to the Egmont group, and second, with regard to ELMER. With respect to the Egmont group, like FINTRAC, your unit is a member of the Egmont group, and I did not know until recently, preparing for your visit, that Egmont has a secretariat established in Toronto in 2007. I did not know that.
Mr. Hislop: Yes.
Senator Moore: Do you know the annual cost of the budget of that unit and who pays for it and how?
Mr. Hislop: I do not. My understanding was that, at the start of Egmont, the secretariat function was part financed by the Canadian government, but that has now finished, so there is annual subscriptions by members.
Senator Moore: Is it a flat rate or a base of population? Do you know how that is determined?
Mr. Hislop: I cannot remember. I know I have signed up to say paid, and we do pay every year.
Senator Moore: It is just a membership fee.
Mr. Hislop: Yes.
Senator Moore: With regard to your relationship with FINTRAC, how many references would you make to FINTRAC and how many would they make to you of SARs?
Mr. Hislop: I cannot give you the specifics, but there are two ways. One, obviously, is where we are looking, on behalf of sometimes U.K. law enforcement, sometimes on behalf of SOCA, and sometimes where we think there may be an interest for Canada, in which case we will make just a straightforward information sharing with you. Likewise, Canada can make the same request of us.
Senator Moore: How often does that happen? Do you do 10 or 20 or 1,000 a year? What is the volume?
Mr. Hislop: It is certainly not the last figure. If I recall, I think the total inbound was in the order of 700 or 800 or something like that.
Senator Moore: Coming in to you?
Mr. Hislop: Yes, and a similar number going outbound, of which Canada will be an inbound?
Senator Ringuette: That is not solely to Canada.
Mr. Hislop: No.
Senator Ringuette: It is to all the membership.
Senator Moore: That is not just FINTRAC but the Egmont for distribution to all members?
Mr. Hislop: Yes.
Senator Moore: There are how many members?
Mr. Hislop: I think it is 127.
Senator Moore: You do not know what portion of those numbers go specifically to FINTRAC?
Mr. Hislop: Not specifically, no.
Senator Moore: When you do that and make a reference to FINTRAC involving Canadians, I expect that information is sitting in the ELMER database. You mentioned it stays there for six years. Does a Canadian citizen know that you have this information in your database? Do you give them notice? If they have done a crime and are going to be prosecuted, they will find out soon enough, but otherwise, do they know that this information is sitting in your database?
Mr. Hislop: I cannot say specifically. I can say that when FINTRAC would send a request to us, we would obviously record that, but that is only available to UKFIU, not anyone else, unless FINTRAC —
Senator Moore: I am thinking about the privacy issue and notice to a Canadian citizen that there is information held pertaining to him or her in a database outside of Canada. Would they know that? Would you tell them?
Mr. Hislop: We certainly would not, no. It would be on the basis that obviously, for FINTRAC to send information to us, an understanding of how we actually manage that data.
[Translation]
Senator Hervieux-Payette: We heard from the two organizations that govern lawyers in Canada. I understand, from a question asked by my colleague a little earlier, that lawyers in your country are fully involved in the regime. I would like you to elaborate on this, because it is an issue we will have to address.
In Canada, we have tens of thousands of lawyers who process thousands of transactions. There is also the fact that the honoraria issue is entirely excluded. I guess our drug dealers do not necessarily have a bank account with the Royal Bank. Therefore, I presume they show up with a lot of cash.
I do not know what the situation is in Great Britain, but it seems that criminals frequently launder money through lawyers' honoraria.
In your country, do lawyers process legal cases differently, when they go to court, when they write documents, and so forth? Do they ask for their fee upfront, do they buy a building, or do they invest their client's money in a financial institution?
What is your opinion on money-laundering transactions? Do your lawyers distinguish between financial transactions, whether they involve real estate or something else, and the honoraria they are paid? In both cases, do they report suspicious activities to your organization?
[English]
Mr. Hislop: I am not quite sure I understand the honoraria issue that you are alluding to.
Senator Hervieux-Payette: In Canada, if you show up at a prestigious law firm, you will be asked to make a deposit. They may not be as well paid as in England on the hourly fee. Let us say that for a normal, regular case it can range in thousands and thousands of dollars, let us say $10,000, $20,000, upfront, even before the lawyer goes to court. This is a practice. Maybe I will have to put £50,000 if I was in your country. Is it a practice in your country that this amount of money that would be given upfront would be given to the lawyer cash and that this would not be reported?
Senator Moore: You mean a retainer.
Senator Hervieux-Payette: A retainer, yes.
Mr. Hislop: I have to say it is not something I am aware of in terms of people putting big sums of money upfront like that. It is not something I have come across.
Senator Hervieux-Payette: I am sorry. I worked for 10 years in one of the largest firms. We were dealing with people in London. I think you better ask your colleague lawyers who are sitting with you, because I can tell you there is a practice there also that a retainer is paid at the beginning.
What is worrying me is that those who are committing these crimes, when they are caught, need someone to defend them. I am quite sure that they do not write a cheque. They just pay cash when they arrive, because otherwise the lawyer would not take their case because once they are in jail, normally they do not have access to their bank accounts and they may not have a bank account.
Mr. Hislop: My view on that is that if they are coming in with big quantities of cash and they are appearing before a court relating to criminality, it strikes me that the common man would say there is something suspicious there and it should be subject of suspicious activity reporting.
Senator Hervieux-Payette: Yes, but according to our own legislation, they do not even have to report anything, either in cash or with a cheque. It is totally excluded. If there is no such practice in your country, of course, I understand that, but what I understood from the question of Senator Massicotte was that when it comes to transactions when you have to retain a lawyer to buy a building, to buy a company, in our case, if the transaction is more than $10,000, they would refuse cash, and under $10,000, if it were $9,999.99, they would not declare that amount of money. Our view is that maybe in this case we should cover it from the first cent, which it seems that you are doing. As far as I am concerned, we need to clarify that in our law.
Mr. Hislop: As I said, there is no de minimis limit with us. If there is suspicion, it should be reported.
Senator Hervieux-Payette: I think I have covered that, and I think we will have enough for our report.
The Chair: That concludes the questions in round one. I will now move to round two.
[Translation]
Senator Maltais: We know that the U.K. is the motherland of international insurance companies. Some witnesses told us that insurance companies were a good place for money laundering, but the Association of Canadian Insurers said it was not true.
In your country, do you have a working relationship with insurance companies? Are there any attempts to use them for money-laundering purposes?
[English]
Mr. Hislop: We certainly receive SARs from insurance companies. They are not part of our formal SARs committee because it is quite a small niche business area, but yes, we do get reports from them.
[Translation]
Senator Maltais: In Europe, especially since Eastern European countries became EU members, there has been significant weapons trafficking. Do you have this problem in your country?
These transactions are not made through financial institutions but through multiple small deals. In your country, do you have to monitor money-laundering activities linked to weapons trafficking?
[English]
Mr. Hislop: It is not something I am aware of from the SAR reporting angle. Obviously from a Serious Organised Crime Agency, there are instances where we have been involved from the firearms importation side, but in relation to SAR reporting, I cannot say I have had any visibility with that.
[Translation]
Senator Maltais: Drug trafficking is a major source of money laundering in the world. Who are the customers in your country? Which countries do you focus on in this respect? In Canada, we know who they are, but does your organization keep a list of countries most likely to launder drug money?
[English]
Mr. Hislop: One of the advantages of the UKFIU being in SOCA is that SOCA does have, as I mentioned in my opening speech, international reach. We have a network of overseas SOCA liaison officers, some of whom represent SOCA's interest on a financial basis. They are focused in regions, prioritized to those regions where we have more interest. It would be no surprise where some of those would be across the world. Therefore, whilst I talked about the small number within the UKFIU, actually the reach of the UKFIU is much wider than that. In terms of outreach to those places, yes, we have outreach through what you could call our agency in the field, if you like.
Senator Ringuette: Mr. Hislop, I have here with me the United States —
Mr. Hislop: Information Commissioner's review?
Senator Hervieux-Payette: The United States Department of State Bureau of Internal Narcotics and Law Enforcement Affairs, and it is a report entitled Volume II: Money Laundering and Financial Crimes, dated March 2012. They do a review of different countries and make different assessments. I have to say that, overall, there is an excellent assessment of your organization.
It states here that in regard to money laundering criminal prosecution/convictions, in 2009, there were 2,439 prosecutions, and in 2009 there were 1,411 convictions. That is quite a lot in comparison to Canada, because we have learned through our process here that there was one prosecution and one conviction with a sentence of nine months in prison, after 10 years.
Would this be your average activity in regard to the database that you gather for your law enforcement entities?
Mr. Hislop: I have no reason to believe otherwise. In terms of a structure for dealing with money laundering type matters, obviously each police force has its own team that will be dealing with these matters. Additional to that, we have a structure of I think 11 regional asset recovery teams, which again are multi-agency, so there will be police staff and customs staff who are looking at the higher level than force prosecutions, again with a view to taking out that middle layer that is cross border but perhaps not at the national or international level.
Senator Ringuette: There is an observation in this report in regards to the U.K., and it says:
Also, the Serious Organized Crime Agency, which includes the UK financial intelligence unit, will transition to the National Crime Agency by 2013.
Mr. Hislop: That is right, yes.
Senator Ringuette: Basically, probably your legislature, or you identified a "Sir" earlier who made a review of your unit, and maybe it is a consequence of the review and a recommendation within the review.
Mr. Hislop: No. That review was back in 2006 and it was published in March 2006. SOCA came into being on April 1, 2006. That was with a view to looking at improving the regime. Again, the document is widely available, published, looking at an organization in anticipation of SOCA being established and SOCA being the owner of the SARs regime. The change to the national crime agency has come about since the new government came into power, and it is looking at bringing in together a much wider remit, but building it on the existing SOCA. Effectively, it will be a national crime organization with a number of commands: serious organized crime, economic crime, border command, and also a child exploitation and online pedophilia command. It is bringing together a number of —
Senator Ringuette: It will create a mega law enforcement crime investigation agency?
Mr. Hislop: I am not sure I would use the word "mega," but it is certainly a combined national crime agency.
Senator Ringuette: I see the purpose of the move.
Senator Moore: With regard to the ELMER database and access, Mr. Hislop, can FINTRAC and other members of Egmont have direct access to that, or must they go through your unit?
Mr. Hislop: They absolutely must go through the UKFIU, and we would consider every case on a case-by-case basis.
Senator Moore: Finally, I was trying to find out something about you this morning, and there is not a mention on the Internet.
Mr. Hislop: Of?
Senator Moore: Of you. I do not know how you achieve that, but good on you.
Mr. Hislop: Yes. At the start of SOCA, we very much were discreet, shall we say, and certainly because of the nature of some of our other business, we have maintained a semi-covert status.
Senator Moore: Thank you very much.
The Chair: Thank you for that response, Mr. Hislop. You obviously have good connections.
You have added greatly to our review. On behalf of all of my colleagues on the committee, I would express our great appreciation for your taking the time to personally appear before us.
Mr. Hislop: It has been a pleasure.
(The commmittee adjourned.)