Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 1 - Evidence - November 21, 2013
OTTAWA, Thursday, November 21, 2013
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.m. to examine the subject matter of those elements contained in Divisions 2, 3, 9, and 13 of Part 3 of Bill C-4, A second Act to implement certain provisions of the budget tabled in the House of Commons on March 21, 2013, and other measures.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good morning, colleagues. I call this meeting of the Standing Senate Committee on Banking, Trade and Commerce to order. Today, the committee is holding its first meeting as part of its study on the subject matter of Divisions 2, 3, 9 and 13 of Part 3 of Bill C-4, A second Act to implement certain provisions of the budget tabled in Parliament on March 21, 2013, and other measures, otherwise known as BIA.
I would like to introduce Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance, who will lead us through today's presentations.
For the benefit of the committee, we will have a short presentation followed by questions on each of the four divisions individually, starting with Division 2.
I will be asking Mr. Rudin to introduce the other officials accompanying him as we study each of the divisions, but before that, I would like to also introduce Ms. Mary Dawson, Conflict of Interest and Ethics Commissioner, who is here with our study on Part 2. She is accompanied by Lyne Robinson-Dalpé, Assistant Commissioner, Advisory and Compliance.
Mr. Rudin, the floor is yours.
Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada: Thank you very much, Mr. Chair. Before I present a brief summary of the items in Division 2 with respect to streamlining conflict of interest requirements, I will mention that I have two colleagues with me, both executives of my branch who are here to help inform the committee and answer your questions: Mr. James Wu and Ms. Alexandra Dostal.
I will start, as requested, with a brief overview of the purpose and content this division.
The government is committed to strong governance and oversight of federally regulated financial institutions and to manage conflicts of interest appropriately. A number of the provisions that are relevant in this regard are of long standing, and a number of them were enacted before the government enacted the Conflict of Interest Act and before other measures were taken, for example, strengthening the code of ethics for the public service. So this is part of what may turn out to be a larger project to review these provisions in the various institutions and related statutes to ensure they are consistent with overall government policy and to see whether or not they can be updated, modernized, streamlined or otherwise improved.
Basically, there are two types of measures included in this proposed budget implementation act. The first would amend the statutes that govern the federally regulated financial institutions to allow agents of the Crown and federal and provincial government employees to sit as directors on the boards of federally regulated financial institutions.
The purpose of this change is to allow federally regulated financial institutions access to a greater pool of potential candidates for boards of directors. One of the consequences of the prohibition against agents of the Crown sitting on boards of federally regulated institutions means that a person cannot at the same time be on the board of a Crown corporation and on a federally regulated financial institution. This, in the government's view, is an unfortunate consequence. As I said, it restricts the ability of federally regulated institutions to find board members, or it may, conversely, make it more difficult for the government to find appropriately skilled board members for the Crown corporations. Indeed, it penalizes those people who are willing to serve on Crown corporation boards by taking away the opportunity to also pursue a position in a federally regulated institution. It's the government's view that the Conflict of Interest Act, which governs the Crown corporation appointees, and the conflict of interest policies of these Crowns are more than sufficient to manage any conflicts of interest that might arise in this area.
The other provision we are here to discuss and answer your questions about would remove one of the obligations that falls on some members of the Financial Institutions Supervisory Committee. This is the committee that consists of the most senior members of the Bank of Canada, the Office of the Superintendent of Financial Institutions, the Canada Deposit Insurance Corporation, the Financial Consumer Agency of Canada and the Department of Finance. They have an obligation to notify the minister in writing if they have an intent to borrow money from any financial institution. This also applies to two other officials who are not, strictly speaking, members of the Financial Institution Supervisory Committee, and it's the view of the government that this is an outmoded requirement which no longer serves a useful purpose and can be dispensed with.
With that, we are very happy to get your questions.
The Chair: Thank you, Mr. Rudin.
Ms. Dawson, do you have an opening statement, or do you prefer to answer questions?
Mary Dawson, Conflict of Interest and Ethics Commissioner, Office of the Conflict of Interest and Ethics Commissioner: No. I was very recently invited to come, and I have no opening statement. Thank you.
The Chair: If I may direct our colleagues, we are dealing with page 172 of Bill C-4, where you will find Division 2. Will you walk us through clause by clause, starting with 159? Is that the approach? Perhaps I will just start with some questions, starting with the deputy chair of the committee, Senator Hervieux-Payette.
[Translation]
Senator Hervieux-Payette: For the purposes of our work, it would be hard for us to arrive in committee carrying the Trust and Loan Companies Act, the Office of the Superintendent of Financial Institutions Act, the Bank Act and so on.
You gave an introduction, but I do not have the provision that is being repealed in front of me and I do not know the scope of the change. An analysis has been conducted; I do not know whether it was by the department. I have read the five lines, four lines or three lines of clauses 159, 160, 161, 162 and 163, but what is being repealed and for what purpose?
To all intents and purposes, what will the final result be once they have been repealed? I am talking about clauses 161, 162 and 163. Does that mean that public servants will be able to sit on the boards of all the banks, all the trust and loan companies, all the organizations and all the local credit cooperatives and so on?
The scope of what is being repealed is hard to understand because we cannot go and look at all the bills to prepare for the committee's meetings. Explain to us how big a change this repeal will make.
Mr. Rudin: It is not always easy to understand the scope and importance of the repeal because we are proposing to change aspects of several acts. In Canada, we have one act respecting the banks, another respecting trust companies, another on insurance companies and so on. So we are making similar changes to each of those acts.
So this concerns the possibility of sitting on boards of directors. Changes must therefore be made to several acts in order to be coherent, consistent.
But the impact on all those acts is the same: it will enable people to sit simultaneously on the board of a Crown corporation and on that of a federally regulated financial institution — that is a bank, a trust company, an insurance company or a credit cooperative — and also allow public servants to sit on the boards of those institutions. That is the first component.
The second component is to remove the requirement to inform the Minister of Finance before taking out a loan with a federally regulated financial institution for any person who is currently subject to that requirement, and that requirement is set out in two sections, in the Office of the Superintendent of Financial Institutions Act and in the Financial Consumer Agency of Canada Act.
Ms. Dostal: I would like to add that two sections will be amended: section 20 of the Office of the Superintendent of Financial Institutions Act and section 15 of the Financial Consumer Agency of Canada Act will be repealed.
Senator Hervieux-Payette: Let me see how this applies. You have a deputy minister, an assistant deputy minister and probably down to the director level. The Royal Bank, the Toronto-Dominion Bank and the National Bank can have a deputy minister on their boards tomorrow. We know that the fees paid by those financial institutions exceed $100,000. That means that those people will be able to keep their government jobs, never be in conflict of interest under our rules, policies or regulations, and receive the fees that are paid to every member of a board in addition to their salaries as deputy ministers, assistant deputy ministers or directors. This is completely above board; they have the same mandate as all other members sitting on the board? There is no restriction?
Mr. Rudin: Public servants are always subject to the either the Conflict of Interest Act or to the Values and Ethics Code for the Public Service; they may not hold an outside position if their responsibilities as public servants would put them in conflict of interest.
In my case, for example, it is obviously impossible for me to be involved in any way in the management of a financial institution.
It is not that there will be other restrictions; there will be a fair number of them. It is just that it is unnecessary for the act itself to provide for a 100-per cent restriction, and we propose to rely on the other aspects of the act, particularly the Conflict of Interest Act and the Values and Ethics Code for the Public Service.
Senator Hervieux-Payette: For example, if Loblaw's asks you to sit on its board, you may accept since you are not involved in food. However, what do we do about all the regulations the government has in that field, in food safety? Are you not automatically in conflict of interest since you know the Deputy Minister of Agriculture and Agri-Food, since they are your colleagues in Ottawa and you can influence government policies that apply to another field?
Mr. Rudin: Absolutely, but I could not accept that responsibility if it put me in conflict of interest. Furthermore, in this case, Loblaw's owns a bank. So it is even clearer in that instance.
Senator Hervieux-Payette: Then let us consider Costco.
Mr. Rudin: Absolutely. The point is that we have the Conflict of Interest Act and the Values and Ethics Code for the Public Service, and the government is proposing to rely on this existing framework in managing and eliminating these conflicts.
Senator Hervieux-Payette: What is the ultimate objective of the decision to allow you to sit on boards in every financial field? Because, apart from managers responsible for regulating and administering all the acts that apply to those businesses, none of the other 36 million Canadians can sit on those boards. What is the objective? Why are we doing this?
Mr. Rudin: Are you talking specifically about public servants or also about people from outside the public service who sit on the boards of Crown corporations, for example?
Senator Hervieux-Payette: The people who sit on the boards of Crown corporations generally come from the private sector. They do not make regulations for the government. They are appointed precisely because they are all people who come from different sectors, and I suppose, in this instance, that there might be a member of the board of the Royal Bank, for example, who would not sit on the board of BDC. That would make no sense.
[English]
The Chair: Would you like to be put down for the next round?
[Translation]
Senator Hervieux-Payette: Yes, but I would like to get an answer because that was the point of my question.
Mr. Rudin: Let me repeat myself, but if sitting on the board of a financial institution might put a public servant in conflict of interest, that would not be permitted. It would not be permitted even if these changes were made because the matter would be handled under either the Conflict of Interest Act or the Values and Ethics Code.
I have no other answers to your question.
[English]
Senator Nancy Ruth: I want to follow on the same line of questions on the same division. Problems have often occurred when a change like this is made. Could you give us examples of where it would have been useful to have had a public servant, either federally or provincially, sit on one of these boards?
Mr. Rudin: I don't have a hypothetical example available in that regard.
I understand that we have sometimes been approached by federally regulated financial institutions who are interested in engaging a public servant. Obviously, as I said, this would not be permitted if it would put the public servant in a conflict of interest as defined either in the code of ethics for the public service or under the law governing conflict of interest.
Senator Nancy Ruth: How is that process going to work? Does the corporation need to go to the Privacy Commissioner or whoever it is and say, ``Is this a conflict of interest?'' The way I look at it, who knows who you met somewhere, whether they were a registered lobbyist or not? You might know a considerable amount about competitors in an industry and so on. You would be useful to sit on my board, I would think; highly useful. However, I would think that would be almost unfair trading with other people in the industry. My tendency is to want to keep you out.
I'm looking for some good reasons.
Mr. Rudin: Sorry, are you referring to me specifically, senator?
Senator Nancy Ruth: No, generally. ``You'' is generic, just like ``sons.''
Mr. Rudin: Clearly, given my responsibilities, I would be in a conflict and it would be unthinkable.
I don't have a specific example. I know I am repeating myself, but all I am saying is that in the case where there would be a conflict of interest, and it is not clear that that would be true for every public servant in every federal department or every provincial administration but all for which there would be a conflict of interest, they would be governed by both the conflict of interest policy — law and policy of the federal or the provincial government. Of course, federally regulated financial institutions need to have a conflict of interest policy for their own board members as well.
Senator Nancy Ruth: You are saying that this is being driven by industry and not by the public service; is that correct?
Mr. Rudin: Well, it's our understanding that there has been some interest on the part of the institutions. There also may have been some interest on the part of bureaucrats, but that would not be the motivation. It is to allow the institutions access to a pool of not-in-conflict board candidates that is as wide as possible.
The Chair: Ms. Dawson, would you like to add anything to this discussion?
Ms. Dawson: I can add perhaps explain how the Conflict of Interest Act would apply. I took the time to check the five boards mentioned in the proposed legislation to see how many of them would be under the Conflict of Interest Act. Very few of them would be, so I assume they would be under values and ethics.
You should be aware, I am sure, of another provision in this bill that gives the Governor-in-Council authority to designate different groups that they want to come under the Conflict of Interest Act. That's where that will be dealt with. I have no idea what the intentions are, but it might be helpful just as background.
There are so many different things I could say that it is probably better not to say anything at this point.
Senator Campbell: I would like to follow your wishes, Ms. Dawson, but I would really like to know your opinion on what your office thinks about these amendments.
Ms. Dawson: Basically, I don't have a lot of trouble with them. There are different rules that I would have to apply but, generally speaking, there is no prohibition, for example, in my legislation — assuming these people have been covered from the first repeal there. As the law stands now, there has been no prohibition.
There is a power for me under section 15 of the Conflict of Interest Act, which is the key section in these matters. It says that no reporting public office-holder shall, except as required in the exercise of his official powers, duties and functions, do a number of things, one of which is be a director or officer in a corporation; and that is what some of these things address.
There are exceptions, one of which is someone who is a director in a Crown corporation and wants to become a director in a financial or commercial corporation. That looks like it is approaching what we are talking about here, but it says if ``it is not incompatible with his or her public duties as a public office-holder.'' I would have to determine whether there was an incompatibility, and in trying to determine that, I would also have to consider whether there was a conflict of interest. I find incompatibility broader than a conflict of interest.
There's no specific rule in the Conflict of Interest Act that would come to the fore, but some rules could come to the fore in certain circumstances. There would not be an automatic rule that would prohibit it. For example, there is a rule against being given preferential treatment. I don't know how that would apply, but there may be a circumstance in this whole mix where preferential treatment is at play.
There are two or three similar provisions, such as insider information. You are not allowed to employ insider information, which does not mean you cannot have the job, but there have to be checks and balances against that. We have procedures under our act, such as conflict screens and other things that we put in place. You have to look at each specific case to see what the issue is, but there is room for this to happen.
Senator Campbell: Mr. Rudin, is there a dearth of qualified people for these board positions in Canada out of 33 million people? Do we need to make this change so we can make boards better? I don't understand this whole concept.
Mr. Rudin: Well, senator, I can tell you that there have been people on Crown corporation boards who wanted to be on the board of federally regulated financial institutions that we thought could make a contribution, and they were forced to make a choice.
Senator Campbell: No, Mr. Rudin, that simply is not an answer. Just because someone wants to do something within a realm within government, I could care less whether they want to do it. I am asking: Is there a shortage of qualified people out of 33 million in Canada to serve on boards of financial institutions? Why do we need to go into the government ranks for that role?
Mr. Rudin: Fair enough.
There are two aspects to what we are proposing. One is to remove what is effectively the prohibition of someone who is not a public servant to be on the board of a Crown corporation and a federally regulated financial institution. In that regard, there is a real interest that is supported by the Office of the Superintendent of Financial Institutions to have greater financial and financial sector expertise on the boards of federally regulated financial institutions. It is the view of the government that this would expand the pool of qualified candidates and, furthermore, that it would have the effect of encouraging or at least not penalizing those who are willing and able to serve on the boards of Crown corporations — to take away what would otherwise be a disadvantage, and in the government's view an unnecessary disadvantage to them, from participating in this.
On the financial institution side in terms of bureaucrats, I don't think this will make a significant difference. All that we are proposing is to rely on the existing and, in our view, comprehensive regime. For example, for federally regulated financial institutions it is a requirement that they have a conflict of interest policy for their boards. That, coupled with the code of ethics in the public service, seems to be more than enough.
I know I said earlier that I didn't have a handy example, but one has come to mind. We have created a framework for credit unions to come under federal jurisdiction if they wish to do so. You can imagine if a credit union for public servants, as we have had in Ontario or one that has a number of public servant members, became a federal credit union, under the current legislation it would have to tell those people that they would have to leave. This provision in the bill would allow them to stay on as long as they are not in a conflict of interest.
Senator Campbell: This is a solution looking for a problem.
Senator Ringuette: Not even a solution.
[Translation]
Senator Maltais: My question is for Ms. Dawson. This is not easy to understand, and I would just like to have some clarification. For example, could a member of the board of the Imperial Bank of Commerce sit on the board of CMHC?
Ms. Dawson: No.
Senator Maltais: And vice versa as well? A member of CMHC would not be allowed to sit on the board of the Imperial Bank of Commerce? I want to make sure I have a clear understanding because this is not obvious.
Ms. Dawson: These rules are set out in the Canada Mortgage and Housing Corporation Act. Each act has specific rules. That is the answer to your question.
Senator Maltais: Could a member of the Department of Finance or a senior public servant sit on the board of a union that has an administration fund, a financial fund?
Ms. Dawson: I believe so, but I am going to ask Ms. Robinson-Dalpé to elaborate on that subject.
Lyne Robinson-Dalpé, Assistant Commissioner, Advisory and Compliance, Office of the Conflict of Interest and Ethics Commissioner: Section 15 of our act very clearly states that, except as required in the exercise of his or her official powers, no reporting public office holder shall accept an appointment. So I assume that is in the case of an appointment. What commission were you referring to?
Senator Maltais: For example, could an employee of the Department of Finance sit on the board of the FTQ's solidarity fund?
Ms. Robinson-Dalpé: The employee must be subject to our act. If it were the deputy minister, he or she would be a reporting public office holder, and the answer would be no in that case.
However, in the case of designated persons who are not reporting public office holders, merely public office holders, section 15 would not apply and the answer would be yes.
It always depends on the scenario we are involved in. Consequently, the answer may be yes or no, depending on how the person is designated under our act.
Senator Massicotte: I am going to repeat myself somewhat; we are asking roughly the same question.
Mr. Rudin, if we allow senior public servants to sit on the boards of banks or other Canadian businesses, in 15 or 20 years, we will wind up like Japan, which has been strongly criticized for the excessively close between its government and private business. Other countries such as Russia have been criticized as well.
Are we not concerned about evolving into a system that we considered unsound a few years ago?
Mr. Rudin: At the risk of repeating myself as well, I would say no because we are already protected in two ways. A conflict of interest policy is required by the Office of the Superintendent and under the Values and Ethics Code for the Public Service for members of boards and federally regulated financial institutions. We have at least those two forms of protection. I would say that either one would work. Having both is enough. So we have both belt and suspenders. That is enough. We do not need a total prohibition because this may result in a situation where there will probably be no conflicts of interest, except in rare cases.
Consider my credit cooperative example. We are required to prevent someone from sitting on a board when that person has no conflict of interest under either the financial institution's system or under the public service regime.
Senator Massicotte: I understand that. Where there are conflicts of interest, it is clearly prohibited under existing regulations, but my concern goes far beyond that. In good relationships, we are human beings and the social aspect is important. I am not merely afraid of conflicts of interest.
Let us say there are no conflicts of interest. Consider the Deputy Minister of Health, who does not have a conflict with a financial institution, but it would nevertheless be intelligent on the part of Canadian bank to develop good relations with the government even if that is not directly related. Eventually, this nevertheless causes some concern within a conceptual framework. There may be an approach that should make us uncomfortable. Do you not see that?
Senator Hervieux-Payette: Based on your conscience.
Mr. Rudin: Frankly, no.
Senator Massicotte: Are you sure? Are you comfortable with that answer?
Mr. Rudin: Yes, of course.
Senator Massicotte: Ms. Dawson, one amendment provides that a senior public servant, the Governor of the Bank of Canada or someone else, may now request a loan without advising the ministers. How will we manage conflicts of interest? The banker would definitely like to offer a lower interest rate, without it being very obvious, or a larger loan. How we will be able to ensure that everything is transparent? Are any other mechanisms in place?
Ms. Dawson: In most cases, those people are not currently subject to our act. I do not know how many of those people will be subject to our act because authority to make regulations by order of the Governor-in-Council is provided under another amendment. I do not know who will be in that group, but there would be an obligation to disclose the information if they were subject to our act. We consider what we are told, and we offer an opinion if there are any problems, but it is impossible to write it down.
Senator Massicotte: My question is for Mr. Rudin. Consequently, the proposal is to amend the act as such, under which the Canadian government may request a personal loan without advising the minister and we do not know under what structure that would be done. We can speculate that this may perhaps fall under the Conflict of Interest Act. At that point, we would say no. How are we going to manage these potential conflicts of interest?
Mr. Rudin: It is entirely normal for a person to have loans with a financial institution, either a mortgage loan or because that person decides at some point not to pay his or her credit card balances or buys a car. That is entirely normal. The bill proposes to remove the requirement to advise the minister when the person considers doing something that is entirely normal. If the matter involves obtaining a lower rate than the one a person who is not a member of the committee would obtain, that of course is prohibited, but it is prohibited by either a relevant act or the Values and Ethics Code. Nothing in what the government proposes to change concerns interest rates or the fact that there will potentially be a benefit for that person that he or she would not obtain if that person were not a member of the committee. It is just that we now have to advise the minister before conducting those transactions, which are entirely normal.
Senator Massicotte: I do not doubt that they are normal, and I am questioning no one's integrity. I am sure that, when those conditions were set, people thought that everything was true, but these are high-risk transactions. They sought transparency, confirmation by the minister that everything was fine. Validity was established, and now they are saying that this will be completely removed. This raises concerns, without questioning anything whatever.
Mr. Rudin: Absolutely, but I remind you, as I said in one of my other answers, that there are one, two or perhaps three other systems that manage relevant conflicts of interest and that would address a conflict of interest created even by a loan.
Senator Massicotte: Thank you, Mr. Chair.
Senator Rivard: Thank you, Mr. Chair. My question will be very brief so as to give the other senators a chance to ask their questions.
If we adopt these amendments to the act, how will we stand in relation to comparable countries, the United States, Great Britain or France? Do those countries have provisions similar to the amendments being made?
Mr. Rudin: Excellent question. We will have to check and give you an answer at a later date.
[English]
The Chair: Would you be good enough to get that information and forward it to the clerk so it could be circulated to the committee? Thank you very much.
Senator Ringuette: Just to clarify, I guess we will deal with Divisions 9 and 13 at another meeting?
The Chair: No, they are following after this discussion. We have four areas to work on today.
Senator Ringuette: There are areas, Mr. Rudin, you have not covered. However, I hope that the committee will have the Superintendent of Financial Institutions here since, Mr. Rudin, you've alleged that the superintendent wishes to have more expert people on financial boards, and the only way to have that is to have people that are sitting on Crown corporations or high-ranking bureaucrats. I find it very bizarre that she would make such a comment and that you would relay such a comment to us.
Mr. Rudin: What I hope I said, senator, is that the superintendent and her office have been encouraging federally regulated financial institutions to have more financial-sector-related expertise on their boards. This, if I'm not mistaken, is a matter of public record, and I can find that for you.
As part of that, sharing that interest and concern, the government is proposing these changes which will expand the available pool of qualified candidates. I can't speak for the superintendent's views about this particular change.
What I can say, however, is that there is a view of the superintendent and her office that it's important for boards to have, in some cases, more or just in general to raise the level of expertise related to financial-sector issues on the boards of federally regulated financial institutions.
Senator Ringuette: And the only the way to do that, and it should have been the objective since their first incorporation of the financial institutions that are federally regulated, is to have as many experts on their board as they can, notwithstanding.
I've been in politics for 26 years looking at legislation, and legislation is always a reaction to either a request or an event. This particular legislation, included in an omnibus budget bill, has been triggered by either a request or a particular situation to help someone on a current Crown board or a high-ranking bureaucrat. This is a big balloon of ``maybe, maybe, maybe.''
For instance, you say that the credit unions may become federally regulated. They've had the possibility for two years now. They're still not there. It might be another five years before they're there, if they ever get there.
We have the examples that you've put forth, and there is the possible allegation coming from the Superintendent of Financial Institutions saying that currently our regulated financial institutions don't have enough expertise on their boards.
[Translation]
These are very broad arguments, and I am sorry, but, personally, of all the available Canadians, who are experts —
[English]
This does not jibe.
The Chair: We're on the first section at the moment, and they're going to stay.
Senator Ringuette: That's what I asked you earlier.
The Chair: They are going to be staying after we have this discussion and we're going to move to the next section, absolutely.
Senator Ringuette: Then I can continue with my —
The Chair: I know there's going to be a question. I've heard your comments on it.
Senator Ringuette: Yes. The question is: What is the particular request or event that has happened federally that has triggered this particular issue in an omnibus budget bill?
The Chair: Mr. Rudin, a very clear question.
Mr. Rudin: Senator, I believe I've already answered this question. There has been more than one instance in which a person has been forced to choose between being on a Crown corporation board and the board of a federally regulated financial institution. In the government's view those have not posed conflicts of interest and need not be prohibited.
Senator Ringuette: Could you supply this committee with the list of those many instances, please?
Mr. Rudin: I'm not sure whether I would be able to do that or not, but I will check into it.
The Chair: He will attempt to do so.
Senator Tkachuk: Welcome, Mr. Rudin. I have a couple of concerns. If this legislation passes, is accepted, give me an example of what candidates from the public service would qualify to sit on banks or other federally regulated bodies.
Mr. Rudin: Well, as I said, the best example I can come up with— and as I've said, I've come up with it on the spot — is this one about a federally regulated credit union. We have credit unions that are either designed to serve public servants or —
Senator Tkachuk: I understand that. That's not what I'm asking. I'm asking what kind of public servants would qualify to sit on the credit union. What pool would they draw them from?
Mr. Rudin: They might well have been a public servant who decided to become involved in that credit union, who had been an active member and had been on the board for a considerable period of time.
Senator Tkachuk: If the Royal Bank was looking for someone, what public servant would qualify to sit on a bank board?
Mr. Rudin: It's not clear to me that any particular public servant would qualify to sit on a bank board. All this would do is permit such a thing to happen if the person was not conflicted.
Senator Tkachuk: Then I don't understand why we have the legislation. So we're doing this all for the credit unions?
Senator Ringuette: No, no.
Senator Tkachuk: I don't understand this. If nobody qualifies for anybody else, and we're doing this so that credit unions would be able to keep the person they have on the board who is already a public servant — which I don't quite understand — and becomes federally regulated, then this legislation would make it okay for that person to stay?
Mr. Rudin: Yes.
Senator Tkachuk: Is it me or what?
Senator Ringuette: No, no.
Senator Tkachuk: I'm lost here, so let me ask another question, then.
If a person from the civil service retires, are there any restrictions as to how long that person has before they're eligible to sit on a board? In other words, if someone retires from Finance, can they sit on the board of a bank within a year, two years, three years or five years? How long do they have to abstain, or do they have to abstain at all?
The Chair: Ms. Dawson, would you like to answer that?
Ms. Dawson: Most of those people would not be under my act as it's currently drafted, but if they were under my act, there is a one-year cooling-off period. The test for the cooling-off period is whether they had direct, significant, official dealings with the entity that they're moving forward into. If their job didn't have them interface with this entity, they could take that job.
Senator Tkachuk: Okay.
I have one short question. The expertise that these people would be looking for — that you say we want to expand the pool of — would be people that have financial expertise, banking expertise, people who come from the securities agencies or places like that. So if they got a move to another department, that would not make them eligible. If they retire, they only have to wait a year.
Ms. Dawson: Assuming there is a problem in the first place.
Senator Tkachuk: So every year there are tons of these people retiring that would be eligible and would qualify to sit on the boards without having to mine the actual bureaucracy itself; is that correct? When a person retires, they might be 58 or 60 years old. They retire, wait a year, and then they could sit on a bank board. Why do we need to do this?
Mr. Rudin: I will refer back to a statement that another senator made.
It is not the position of the government that these measures are essential to assuring that there is a large enough pool of qualified individuals. I'm not making the claim that some dire thing would happen. We're saying that the government's view is that these restrictions, as they exist now, are unnecessary because of the robust conflict of interest regime that applies both to federally regulated financial institutions and to public servants. They have the effect of — most particularly but not exclusively the prohibition on people being on Crown boards and financial institution boards at the same time — restricting the pool of qualified applicants, and this is unnecessary. Therefore, the government is proposing to change it.
Senator Ringuette: Ms. Dawson, can you explain to me in which section of the Conflict of Interest Act, which you administer, a provincial government employee would be submitted to?
Ms. Dawson: None.
Senator Ringuette: Exactly.
Mr. Rudin, what jurisdiction does the Department of Finance have with provincial government employees, which this particular legislation is changing? You're including a group of people in here that are not under your jurisdiction. Provincial government employees are subject to the different provincial government acts, just like Ms. Dawson confirmed to us that the provincial government employees that this act amends are not subject to the federal Conflict of Interest Act.
Mr. Rudin: The federal government, through the Office of the Superintendent of Financial Institutions, establishes a requirement for federally regulated financial institutions to have a conflict of interest policy for their board that, in our view, is sufficient. On top of that, in the case of federal public servants who might arguably be in an even more sensitive position with respect to federally regulated financial institutions, we have the double protection of the code of ethics of the federal public service.
You are quite correct that the federal government does not establish a code of ethics for provincial public servants. However, it does require federally regulated institutions to have a conflict of interest policy for their boards, which is certainly in the case of provincial public servants who are not employed by the government that regulates federally regulated institutions. The conflict of interest policy of the board required by the Office of the Superintendent is sufficient.
Senator Ringuette: Ms. Dawson, have you consulted with your provincial counterpart in regard to this particular issue, the provincial government employees?
Mr. Rudin, have you contacted the different provinces to see if they are in agreement with this?
Ms. Dawson: I have not been involved in the preparation of this legislation at all, so I haven't consulted with anyone. I think the Department of Finance came over and consulted with my office some months ago about how our act worked, but it was a general meeting. I have had nothing to do with this legislation.
Mr. Rudin: Well, to the best of my knowledge, I haven't, and I don't believe my staff has consulted with provincial governments. A provincial government that wishes to prohibit its own public servants from sitting on the board of a federally regulated financial institution has all of the powers it needs to do so.
Senator Black: As a lawyer, I always tend to look for the other side of issues. Unfortunately, in this one I can't find it. I think, and correct me if I am wrong, that what you're proposing is simply to streamline and modernize a process with due regard to protections, as has been indicated by Ms. Dawson. I don't have a concern, but my colleagues are making me think perhaps I should be concerned because there are other possibly opportunities at play. What have I missed?
Mr. Rudin: I pride myself, senator, on being able to answer every question, but I don't have an answer for this one. My answer would be that we have a very robust —
Senator Black: You're modernizing; you're streamlining. There is no bogeyman here. You're just trying to bring this code, provisions into a modern context with regard to the fact that protections exist.
Mr. Rudin: Exactly, and that the introduction of some of these probably postdates the introduction of the restrictions and this makes the restrictions no longer necessary or relevant.
Senator Black: Ms. Dawson, would you agree?
Ms. Dawson: A number of those protections are in the individual pieces of legislation. I'm not familiar with each particular piece of legislation, so I can't opine on that. There is not an awful lot in the Conflict of Interest Act that relates to this.
Senator Black: Good. Thank you.
[Translation]
Senator Hervieux-Payette: Does the Public Service Act cover the obligations of all public servants in respect of their services to the public? Does this act cover all employees, including deputy ministers, assistant deputy ministers, directors and so on?
Ms. Dawson: No, it only covers senior public servants and those appointed by the Governor-in-Council.
Senator Hervieux-Payette: What act governs government employees?
Ms. Dawson: It is not an act that governs them; it is a code.
Senator Hervieux-Payette: So the conditions are contained in a code that has the same status as regulations?
Ms. Dawson: No.
Senator Hervieux-Payette: No?
Ms. Dawson: No.
Senator Hervieux-Payette: So this code is solely under the government's supervision.
Ms. Dawson: Yes, that is what I understand.
Senator Hervieux-Payette: I believe what is making us uncomfortable is not knowing whether public service employees will be there to serve the public or to serve shareholders. I believe that is the major question regarding the philosophy of this act.
The two might possibly coincide, but, between you and me, with the public service, which serves the Canadian public, can we have problems about serving shareholders when decisions are made by boards of directions?
Mr. Rudin, I asked you a question and you did not answer. What will happen to the compensation of members sitting on boards of directors? When you earn $150,000 and a director's fee for every bank meeting, is that a salary in addition to loans at favourable interest rates, which is currently the case at the banks? How objective will the members of those boards be?
Mr. Rudin: At the risk of repeating myself, it is clear under the Values and Ethics Code for federal government public servants that a federal public servant may hold another type of employment, such as a part-time job, for example. That is allowed, but only if it does not put the public servant in a real or perceived conflict of interest.
Senator Hervieux-Payette: I just want to make a suggestion that Senator Ruth will agree with. If there is a shortage of qualified people to sit on boards of directors, the 52 per cent of the labour force who are women would definitely be able to help the banks manage better.
However, I want to know what protection will be provided for all Canadians? How will they be protected when we do not even know who will be covered? Ms. Dawson told us earlier that that will come under regulations of which we will know nothing when the act comes into force. So we do not know what type of person will be covered.
Ms. Dawson, did I understand correctly that you told us that would come later and that you do not know when because you did not take part in it?
Ms. Dawson: Yes, but it is possible that many of those people will be governed by the Values Code of the Public Service. However, I do not know the details.
Senator Hervieux-Payette: Who will enforce the ethics if you do not cover those people? Where will that be done?
Ms. Dawson: There is an office in government that handles the code.
Senator Hervieux-Payette: So we have two kinds of ethics in government. There are two organizations?
Ms. Dawson: Yes.
Senator Hervieux-Payette: Perhaps we should invite the others because Ms. Dawson will not be covering everything. It seems to me the people responsible for enforcing the public service ethics code should appear before the committee because we do not have any information from those people.
[English]
The Chair: Ms. Dawson, thank you for your participation in Division 2.
Mr. Rudin, I believe you are going to change your panel and then we will move to Division 3.
Mr. Rudin: We'll just take a moment.
The Chair: Perhaps you might introduce our new panelist.
Mr. Rudin: Yes. To speak to the committee about Division 3, I have with me Eleanor Ryan, an executive in our branch.
To provide you with some background on Division 3, committee members may remember that as part of the review of financial institution statutes in 2012, Bill S-5 established the requirement that the Minister of Finance approve a particular type of transaction — a transaction where a federally regulated financial institution of sufficiently large size was making an acquisition of a foreign financial institution, where that acquisition was sufficiently large relative to the pre-existing size of the regulated financial institution. It also established a requirement that the approval of the Minister of Finance would be required before such a transaction could be completed.
It has since come to our attention that some members of the industry were of the view that the way that provision had been drafted meant it would apply certainly to some of those transactions but it would not apply to transactions structured in a particular way. The government's intention was always that it should apply to all such transactions, regardless of how they are structured. For greater clarity, the government is proposing technical amendments to ensure that ministerial approval for these types of transactions will be required regardless of how they are structured.
[Translation]
Senator Hervieux-Payette: Not so long ago, a Canadian bank acquired the operations of MBNA and that was a major transaction. Would that situation be covered under the new clauses?
Mr. Rudin: Pardon me, could you repeat your question?
[English]
Senator Hervieux-Payette: The MBNA credit card was operated by an American bank in Canada. It was sold — I would say auctioned — to some banks. Of course, the best proposal won and now it is held by Canadians. Would this proposal in the bill change the situation in a similar transaction today?
Mr. Rudin: I would have to look at the details of that transaction. At first blush, I would say no because I believe it was MBNA's Canadian operation that was acquired.
Senator Hervieux-Payette: Yes.
Mr. Rudin: I don't believe that the transaction for the acquiring bank was sufficiently large to trigger this approval, but I will undertake to check on both of those points.
Senator Hervieux-Payette: What you mean by that is the operation of a Swiss bank or other foreign bank on Canadian soil will not be covered. It applies only to Canadian banks acquiring banking operations outside our country?
Mr. Rudin: Abroad. That is the intention, yes.
Senator Hervieux-Payette: Will this be better protection for the shareholders? I have the French version.
[Translation]
. . . par l'acquisition d'actions.
So this is to ensure that all transactions, regardless of how the transaction is conducted, are covered and that the minister authorizes them in order to make the Canadian bank sector safe?
Mr. Rudin: Yes, that is correct. That being said, the minister may consider several factors, including the best interests of the Canadian financial sector.
Senator Hervieux-Payette: I almost feel like telling you that this is the opposite of the Foreign Investment Review Act. Will there be regulations setting limits, for example? Because the fact nevertheless remains that these often involve substantial amounts. When the Canadian banks buy operations especially in the United States, but they can have other operations in other countries. Are any ceilings or percentages considered? Will that all come in with the existing acts?
Mr. Rudin: There is no ceiling as such. There is a minimum threshold for this type of transaction to require the minister's approval. The minister has authority to make those decisions on a case-by-case basis.
Senator Hervieux-Payette: That could not affect the banks' most recent capital requirements, for example?
Mr. Rudin: The banks' capital and capital requirements are managed by the superintendent, and that is still relevant.
Senator Maltais: For your information, we are in the process of signing a free trade agreement with Europe. Does it also cover the financial sector?
Mr. Rudin: Yes, the agreement covers aspects relevant to the financial sector.
Senator Maltais: Let us consider the example of credit cards. Could the Banque nationale de Paris issue credit cards in Canada or vice versa?
Mr. Rudin: In our system, financial institutions must have the superintendent's approval to enter the Canadian market. Requirements vary depending whether they are considering establishing a branch or a subsidiary.
Senator Maltais: Which means that the European banks that issue credit cards could use Canadian territory as a clientele base?
Mr. Rudin: That is already the case. We have an agreement in principle. Some details remain to be determined, but European banks are already operating in the Canadian market. HSBC, for example, has a subsidiary and several branches, particularly in western Canada. Other European banks, such as Deutsche Bank, for example, also have subsidiaries.
Senator Maltais: Can the Department of Finance Canada exercise supervision over those financial institutions that have branches here?
Mr. Rudin: The federal government exercises supervision through the Office of the Superintendent of Financial Institutions.
[English]
The Chair: Ms. Ryan, you didn't have much to say. I don't know if you have anything to add?
Eleanor Ryan, Senior Chief, Financial Institutions Division, Department of Finance Canada: I agree with my boss' words of advice.
The Chair: Thank you very much.
Mr. Rudin, we will now have you assemble your panel for Division 9. Please introduce your associates.
Mr. Rudin: I have with me now Kevin Wright and Will Paterson, of my branch, who will be glad to help me answer your questions about Division 9.
I am very conscious, Mr. Chair, that the last time I spoke to this committee about reform of the over-the-counter derivatives area, I had some difficulty in making myself clear to the committee members. I'm also conscious of the time, so I'm going to give a very brief overview of this. Of course, we're here to answer your questions in whatever level of detail you would like us to do so.
Just to remind members of the committee, ever since the financial crisis, the G20 leaders have included in their work program for us to reform the market for over-the-counter derivatives and to make it more robust and less prone to causing instability in the financial markets. An important part of that has been to encourage the use of collateral in these transactions.
Briefly, in these transactions there are two counterparties and, as events in financial markets make the contract more valuable to one counterparty than another, as this can happen, the practice is for the counterparties to agree to post collateral to each other. In the event that they are unable to meet their obligations, the collateral that they have posted can be taken by the other counterparty to keep it whole. A number of parts of this agenda have encouraged the use of collateral in this area. The Government of Canada has taken a number of steps to support these initiatives.
This is a small but nonetheless significant step for the following reason: We have a handful of Crown corporations that are active in the over-the-counter derivatives market. Some of them are restricted by law, unable to post collateral against their obligations to their counterparties that are undertaken through over-the-counter derivatives. This amendment would give the Minister of Finance the authority to designate specific Crown corporations and allow them to pledge some of their assets, that is to say, to post collateral. This designation would come with terms and conditions. It would only be given to those Crown corporations that are going to do this to manage their financial risks.
I would be happy to answer any questions that the committee might have.
The Chair: Thank you. We will start with the deputy chair of the committee, Senator Hervieux-Payette.
[Translation]
Senator Hervieux-Payette: First, have most of the G20 countries accepted this standard for their state-owned corporations? Second, how will this measure protect our Crown corporations better from the vagaries of the market?
Mr. Rudin: Good question. I will check on the matter with regard to other countries. To date, we have adopted this kind of policy for the banks of England, Denmark and Sweden.
I would not say this will provide better protection for our Crown corporations. Under the current practice, when Crown corporations that are not allowed to provide guarantees enter into those transactions, they are protected provided the counterparty furnishes a guarantee. Then they have to look for counterparties that will allow the Crown corporation not to provide a guarantee.
The idea is probably not to increase guarantees that the Crown corporations receive. Why is this important then? It is because this will reduce the cost of entering into those transactions. If the Crown corporation refuses and cannot give a guarantee, the prices of those transactions will be higher for the corporation due to the fact that the counterparty will seek compensation for not having obtained a guarantee. This also prevents Crown corporations from taking part in improving the management of those markets.
[English]
Senator Massicotte: I want to make sure I understand the purpose of these amendments. I will put it in this context.
We have had previous witnesses come to talk to us about that. The purpose of that, as we saw from 2008, was there was a lack of transparency with all these cross transactions and all those other products. Therefore, the world concluded that we have to provide transparency and a guaranteed exchange of security, and we need a backstop to make sure this thing does not unravel because we did not know where we were at. We did not know who guaranteed what or the extent of the risk.
We also had witnesses tell us about their services because you have to find somebody, obviously, to do this stuff, to provide the registrar — and many came to us and said they are good at this. However, when you asked them the questions, it was very clear they wanted to provide their services but they would not provide their collateral, their guarantee of these transactions. You have to make sure the whole house of cards does not fall down. They wanted someone else to guarantee. They said they could do all the transaction stuff but would not provide the guarantee.
Is the solution to provide a backstop? We need somebody to provide assurance to the public marketplace that with the whole world doing these transactions, in the worst case scenario you can rely upon your side of the transaction without worrying about the whole house of cards falling down. Is that what we are trying to solve here? Therefore, are we saying what the government seems to be doing for the sake of financial efficiency, we will provide the backstop to make sure this house of cards not fall down. Is that what we're trying to get at here?
Mr. Rudin: We are not proposing that the Government of Canada backstop a great variety of transactions. There are two ways in which this is important. For example, under the capital rules, financial institutions across the world have to set aside capital against their risks. The Basel committee has instituted new rules that require financial institutions to take a clear and more conservative view of the risks they are entering into. In general, and in particular in over-the-counter derivatives financial transactions, when our financial Crowns who are prohibited from posting collateral want to enter into an agreement with a financial institution, the financial institution will say, ``If you are not going to post collateral, I have to take more precautions, hold more capital and you will have to pay more.'' Part of what we are doing is simply making it possible for the financial Crowns to enter into these transactions at lower costs. Now, they will have to post collateral, which has some costs as well, but nonetheless, this approach is being encouraged around the world.
The other aspect where this can be helpful, albeit indirectly, is with encouraging, to the extent possible, that these transactions between two counterparties be replaced by transactions through a central counterparty; and for the central counterparty system to work well, collateral needs to be available.
Senator Massicotte: I want to make sure I understand. The first part is obvious. In other words, where the Crown corporation is personally involved in the transaction the proposed legislation will allow them to provide capital to reduce their transaction costs. That is normal.
How about the second one? You seem to be suggesting in the second part of your answer that Crown corporations could be involved in transactions — not for their selfish account on behalf of all Canadians — but to provide the cushion or the assurance for this transparency in the marketplace. Is that a purpose of this legislation?
Mr. Rudin: No. That is not what we are proposing, senator.
Along with the other G20 countries, we are encouraging or requiring over-the-counter transactions wherever possible to be centrally cleared. We are not proposing that the Government of Canada or its Crowns provide central clearing services. However, we do want the transactions that we enter into, wherever possible, to be centrally cleared by someone else. If we are not posting collateral, it will make it difficult or impossible.
Senator Massicotte: You will provide collateral only where that Crown corporation has a personal interest in that transaction.
Mr. Rudin: Exactly.
Senator Massicotte: You are not trying to provide comfort to the market by saying you will backstop or to provide some comfort to all transactions?
Mr. Rudin: No.
The Chair: Mr. Paterson or Mr. Wright, do you anything to add? If not, we thank you for your participation.
Mr. Rudin, we will move to Division 13, which brings back many memories to us in our study of the review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
Mr. Rudin, would you like to introduce your associate and then proceed with your opening remarks?
Mr. Rudin: Mr. Chair, I am joined by Rachel Grasham, an executive in our branch.
In this section, the government is proposing amendments to sections 11 and 65 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which we often refer to as the PCMLTFA.
A recent decision of the British Columbia Court of Appeal has found some ambiguity with respect to the potential interpretation of these provisions. I would remind committee members that this arises in the case of litigation about the application of the PCMLTFA to the legal profession, which has now proceeded through two levels of the courts in British Columbia and will be heard by the Supreme Court of Canada.
The proposed amendments provide greater clarification as to the government's original policy intent in the PCMLTFA. It is the government's view that these amendments will simply make clear the intention that was already there and address the lack of certainty that the British Columbia Court of Appeal found in these areas.
Let's look first at section 11. It refers to reporting entities, which are operations generally required to make disclosures related to money laundering to FINTRAC, our financial intelligence unit. Section 11 currently provides that reporting entities are not required to disclose any communication that is subject to solicitor-client privilege. The proposed amendment to section 11 would explicitly clarify that this protection also prevents reporting entities from disclosing such information to FINTRAC under any circumstances, including when FINTRAC is conducting a compliance audit, that is to say, when FINTRAC is looking to see if the reporting entity is complying with the reporting entity's obligations under the PCMLTFA.
Let's turn to section 65. When reporting entities are found to be non-compliant with their obligations under the PCMLTFA, and these obligations might include ascertaining the identity of people they are transacting with and keeping records of these transactions, the existing section 65 allows FINTRAC to disclose these cases of non- compliance to law enforcement for the purposes of a criminal investigation into that non-compliance.
Reporting entities have requirements under the PCMLTFA, and sufficiently serious non-compliance with those requirements can be a criminal offence. This allows FINTRAC to make disclosures to aid in the investigation of that criminal offence. These non-compliance disclosures to law enforcement, as I said, have to be limited to the serious situations that could be an indication of criminal non-compliance according to FINTRAC. Annual reports on the order of 40 such disclosures have been made since 2001 — only three or four a year, on average.
The proposed amendments would clarify that when law enforcement receives such information — so disclosures about non-compliance with the PCMLTFA — it can be used only for investigating criminal non-compliance with the money laundering act and not to investigate other crimes that the person or entity subject to the act might be involved in. These disclosures about non-compliance to law enforcement can be used only for investigating criminal non- compliance with the PCMLTFA and cannot be used for investigating another crime that either the reporting entity or its clients or counterparties might be involved in.
With that, I would be happy to take your questions.
Senator Ringuette: Mr. Rudin, I have to say that I find you very precious in saying that the proposed amendment would further clarify the provisions of the act to ensure that it more clearly aligns with the government's policy intent. This committee did quite a review of FINTRAC. While we were doing our review, the Government of Canada was in front of the courts with attorneys on the issue of solicitor-client confidentiality.
I gather that thus far the government has lost their court action to have information under solicitor-client privilege; am I right?
Mr. Rudin: The court cases are about the application of the PCMLTFA to the legal profession and the Government of Canada has, I think it is fair to say, lost at both levels of the B.C. court up to this point, yes.
Senator Ringuette: Yes. So the government policy intent as stated in the documents that we have here is pushing it a little bit.
Regarding the issue that I'm concerned about, I come back to my prior comment that legislation is always triggered by a request or an event. Could you tell us what is the event that occurred so that FINTRAC would request, retroactively to 2010, that information provided to a law enforcement agency can only be undertaken by that law enforcement agency for that particular criminal intent as per the FINTRAC information? What happened to cause this being applicable retroactively to 2010?
Mr. Rudin: Just a moment while I check with my colleague about the retroactivity issue.
The aspects that I've been speaking about will not be retroactive. They will be on a go-forward basis. That said, the government's view — and I believe the government lawyers argued this in front of the B.C. Court of Appeal — was that the protection for solicitor-client privilege in section 11 applied throughout the act. The B.C. Court of Appeal was of the view that it either didn't or it might not — I'm not a lawyer. And so the proposed amendment to section 11 would clarify that this protection would prevent reporting entities from disclosing information that is subject to solicitor-client privilege to information to FINTRAC under any circumstances, including when it is conducting compliance audits.
As I said, I think the government's view is this would be true — at least it was the government's intention that this would be true — even without this amendment. But the B.C. Court of Appeal was of the view that this was, at a minimum, uncertain. So this amendment will make it clear.
Senator Ringuette: The document that I have here says, under clause 281, that this clause makes coordinating amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to incorporate amendments made to section 11 and subsection 65(3) under the Jobs and Economic Growth Act 2010, which are not yet in force with the amendments made under this act. That is retroactive.
You have not answered the second part of my question in regard to the request or event that occurred to trigger the restriction for any law enforcement agency in Canada with the information that they get from FINTRAC.
Mr. Rudin: As we were discussing, this question of the application of the PCMLTFA to the legal profession will be heard by the Supreme Court of Canada. As we were saying, the Government of Canada has so far, I think it's fair to say, lost these cases in the B.C. Court of Appeal. The B.C. Court of Appeal cited two concerns. They cited the potential failure of the act to sufficiently protect solicitor-client privilege and also cited the concerns about the use of disclosures to law enforcement about non-compliance with the PCMLTFA in other contexts. It is with this in mind that the government is seeking to clarify what it feels is already its intent about these provisions.
As you pointed out, some provisions of the act have not yet been brought into force, and it is necessary to complete this work to have some coordinating amendments as well to give full effect to the proposed changes to section 11 and 65. The event is the government learning that part of the issue that seems to have dissuaded the B.C. Court of Appeal with agreeing with the Government of Canada and its uncertainty or concern about the effect of these provisions. The government is seeking to clarify, as quickly as possible, what those provisions are actually for and address the concerns expressed by the B.C. Court of Appeal.
Senator Ringuette: Well, unless something has completely been lost, to my mind you have not answered the question that I asked. I understand the issue of the solicitor-client privilege. That's one issue.
The other issue that we are looking at in Part 3 is the use of information that FINTRAC provides to law enforcement agencies.
Mr. Rudin: I'm sorry, senator.
Senator Ringuette: Yes, you are. Thank you.
[Translation]
Senator Hervieux-Payette: I have a very simple question for the people who followed the proceedings of our committee on FINTRAC. We realized that only one national player was not covered, in that it was not required to reveal any information on cash transactions of $10,000 or more. The current act does not have the effect of violating solicitor-client privilege. Is it the government's final position that it will not address this matter, or does the government not dare to do so while the case is before the courts? I thought the basic issue was that all Canadians and all institutions were covered. Here we are starting with clause 279, which restates that the amendments will not violate solicitor-client privilege. This means that any members of the mafia who call a lawyer's office seeking representation in a case can still do so if they are paid in cash, from what I understand.
We are all aware, as my Quebec colleagues will agree, of what is going on with the Charbonneau commission. I get the impression that a lot of cash transactions are conducted. This concerns us because all those people have lawyers. What is the ultimate objective? Is it to ensure that, after we reaffirm that we agree that lawyers will not violate solicitor- client privilege, they should nevertheless continue not to be covered by the FINTRAC act? Then what was the aim of this clause? To gather evidence? What is the government's intention in clauses 279, 280 and 281?
[English]
Mr. Rudin: The government's position is that it continues to seek that the relevant sections that the PCMLTFA would apply to the legal profession. It tends to argue that this can be done in a constitutional way and wishes to address what appears to be uncertainty about the intention and use of the PCMLTFA by making these clarifying amendments.
[Translation]
Senator Hervieux-Payette: In clause 281, I find it odd that we have the English version on the left side and the French version on the right, but it is in English as well. Explain to me why the English and French versions in your bill are the same. It is a bit odd. We would normally have the French version; I do not understand.
[English]
Rachel Grasham, Chief, Financial Sector Division, Department of Finance Canada: Certainly it was brought to our attention. The Department of Justice does regular reviews of legislation to look for inconsistencies between English and French, and it was brought to our intention that there was an inconsistency. That's why those provisions are in there. My understanding is that it stems from the fact that in Quebec notaries are part of the legal profession and the concept of solicitor-client privilege and professional secrecy didn't equate properly between the English and the French. It was a technical amendment.
Senator Hervieux-Payette: But we still have section 11 in French that exists in the original law.
Ms. Grasham: I think we can find some answers for you from the Department of Justice that has proposed the technical amendment to us. That's my understanding.
Senator Hervieux-Payette: I could see that the interpretation could be different in Quebec and the rest of Canada, but what I cannot understand is that you now say it's for consistency. I suppose it was the English version that was not consistent, so only the English version has been changed. That is my understanding, but I want this to be confirmed because we don't have the French version in front of us.
Mr. Rudin: We will undertake to confirm that.
The Chair: And it will be circulated.
Mr. Rudin: Yes.
[Translation]
Senator Hervieux-Payette: I have no further questions. I ultimately agree with the government about covering all the professions. Especially with what is going on in my province, I consider it absolutely disturbing and immoral that people can evade and break the law on the pretext that they are members of a profession subject to professional privilege. If that is the case, perhaps physicians, who are also subject to professional privilege, could be excluded.
Senator Ringuette: Priests too.
Senator Hervieux-Payette: That is true, but there are fewer of them.
[English]
Senator Massicotte: On the same note — because we had the discussion before with FINTRAC — you're making amended legislation to counter-argue the fault or the weaknesses in the B.C. judgment. Is your objective still that where there is reasonable suspicion, and you have reasonable grounds, you would have access to trust accounts or lawyers' trust accounts to prove potential fraud or criminal activity?
Mr. Rudin: I want to be careful. I'm not here to evaluate in any way the B.C. Court of Appeal decision. It's clear that the government's intent in some of these areas is not expressed sufficiently clearly in the law to have these points be found reassuring by the courts. The purpose is to make sure that the government's intent for these provisions is made clearer in the law.
[Translation]
Senator Massicotte: But is it still your intention, your idea, that FINTRAC and the security agencies should have a right to information from a trust company or a lawyer where there are reasonable grounds to suspect criminal activity?
[English]
Mr. Rudin: The purpose of these amendments, as I said, is to seek to clarify these particular issues. In the government's view, they're not there to change the intention of the law as it would apply to the legal profession. It is the intention of the government, should it be found constitutional or that it's done in a constitutional way, that there would be requirements on the legal profession to be reporting entities under the act, and there is no attempt to change what those requirements would be.
[Translation]
Senator Massicotte: So you maintain your initial position, the one you held when the act was created. With regard to the second clarification, I wonder whether we are not reacting in the same way. We heard conflicting information in previous testimony. People from FINTRAC told us that the information gathered, the request for information made by a security agency, was only for a specific purpose, but people from Revenue Canada told us no: when they gathered information, the purpose might be to investigate criminal activity, fraud or other activity, but, if that information showed there was some fiscal irregularity, it could be used to prosecute the person in question. Are we correcting that?
In other words, if, when the information is gathered, other irregularities are found in addition to those suspected, can that information be used? Or is the purpose of the amendment to say that the information cannot be used if it is unrelated to the offence initially investigated?
[English]
Mr. Rudin: These amendments speak only to information about non-compliance with the requirements that fall on the reporting entity under the money laundering act. What this amendment makes clear — which the government argues has always been its intent — is that the disclosure of information to law enforcement about the failure of the reporting entity to comply with its obligations under the act should only be used to investigate criminal non- compliance of the act.
This does not exclude law enforcement from seeking information not from FINTRAC but directly from a reporting entity or its client. It's simply that law enforcement has existing tools to investigate these crimes, such as seeking judicial authorization through a warrant or a production order.
Senator Massicotte: Let me try this again. When we reviewed the FINTRAC legislation, we went to the United States. They got very good results compared to the sense we get from what we have in Canada. It's over a billion dollars a year of monies they recover.
But the reason they get very good results is they put together the different agencies — Revenue Canada, for instance, and the FBI. They have teams of people working together to look at what they consider odd behaviour or odd spending and they find a solution among all the tools they have. They're very flexible, and if you look at Al Capone, that's what happened. They got him on mail fraud.
Are you saying with this legislation we cannot do that? Let's say we accumulate information because we find criminal activity but, oh, we can't get him on this but why don't we get him on tax evasion? Are you saying it's prohibited using the FINTRAC information?
Ms. Grasham: Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, FINTRAC has a compliance function to ensure compliance with the obligations under the PCMLTFA. Those are record-keeping requirements and the requirement to have a compliance officer in place. There are reporting requirements, and there is the ability for FINTRAC to go into an entity and do a compliance audit.
I just want to clear up that when we refer to the term ``reporting entities,'' in the case of the legal profession, the requirements that are not in operation do not have reporting requirements. The requirements under the act for the legal profession are customer identification, record-keeping and compliance. Those are the compliance elements. They speak to FINTRAC's rule as a regulator of this piece of legislation.
FINTRAC has another role as a financial intelligence unit. It gathers information that banks, credit unions, securities dealers, et cetera, are required to report to it.
When FINTRAC meets the legal threshold at which it suspects money laundering or terrorist financing and has information that would be relevant to the investigation or prosecution of a money laundering or terrorist financing offence, it can disclose to law enforcement. So these amendments do not pertain to FINTRAC's role as a financial intelligence unit or to the information that it may disclose under the law to those law enforcement and other entities for investigating and prosecuting a money laundering or terrorist financing offence. These amendments only pertain to FINTRAC's role as a regulator for ensuring compliance under the Act.
Right now, the law says that when there is an egregious case of non-compliance — FINTRAC has tried to work with a reporting entity that has so far failed to meet its obligations under the act — FINTRAC has the option to refer that to law enforcement in a non-compliance disclosure for the purposes of a possible criminal investigation. It's really just to enforce the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. So that's the issue at hand right now. It doesn't pertain to FINTRAC's other role as a financial intelligence unit, which I think is what you're talking about.
Senator Massicotte: This legislation is motivated by the B.C. judgment?
Ms. Grasham: As Mr. Rudin said, there was ambiguity in the court's view. The whole discussion is around the coverage of the legal profession under the act. Those provisions are not in effect right now because of a court injunction, and so it's a hypothetical. They thought that there could be ambiguity in the interpretation. This was brought to our attention, and we're just trying to correct it.
[Translation]
Senator Maltais: Coming back to what my colleague Senator Hervieux-Payette said about the Charbonneau commission, we see that Revenue Canada has done a good job. It rounded up all those ``rats,'' fines were imposed and everyone ultimately paid. However, we can see that this is not money laundering. It is quite dirty money, thank you very much, large amounts of money that circulated in the personal circles of all those people. Does that not involve the Minister of Finance? That money was laundered from company to company and no income tax was paid. Does the Department of Finance have any recourse? Once the commission has wound up, could the Department of Finance recover a portion of the unpaid taxes?
Mr. Rudin: I will have to inquire about its right of recourse and get back to you on that.
Senator Maltais: Thank you.
[English]
The Chair: Mr. Rudin, to you and your associates, on behalf of all the members of the committee, I would like to express our appreciation for your appearance here today. Thank you very much.
(The committee adjourned.)