Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 30 - Evidence - May 26, 2015
OTTAWA, Tuesday, May 26, 2015
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:16 p.m. to examine the subject matter of those elements contained in Divisions 14 and 19 of Part 3 of Bill C-59, An Act to implement certain provisions of the budget tabled in Parliament on April 21, 2015, and other measures.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good afternoon and welcome to the Standing Senate Committee on Banking, Trade and Commerce. Today is our first meeting on Bill C-59, An Act to implement certain provisions of the budget, tabled in Parliament on April 21, 2015, and other measures.
Our committee has been assigned two divisions of Bill C-59 for pre-study. Division 14 of Part 3 amends the Proceeds of Crime, Money Laundering and Terrorist Financing Act to require the Financial Transactions and Reports Analysis Centre of Canada to disclose certain information on regulatory offences to provincial securities regulators.
Division 19 of Part 3 amends the Trust and Loan Companies Act, the Bank Act, the Insurance Companies Act and the Cooperative Credit Associations Act to modernize, clarify and enhance the protection of prescribed supervisory information that relates to federally regulated financial institutions.
Today our meeting is split into two. We will hear first from department officials on both Divisions 14 and 19. We will then hear from representatives from the Canadian Security Administrators and Autorités des marchés financiers on Division 14.
Moving to our first panel, I am pleased to welcome, from the Department of Finance, Financial Systems Division, Financial Sector Policy Branch, Ms. Lisa Pezzack, Director. As honourable senators may recall, Ms. Pezzack was before us during our digital currency study. We also welcome Ms. Heather Kay, Senior Economist. I am also pleased to welcome, from the Financial Transactions and Reports Analysis Centre of Canada, better known as FINTRAC, Mr. Dan Lambert, Manager, Financial Analysis and Disclosures.
Mr. Lambert will not be making an opening statement, but he is here to answer any relevant questions.
Ms. Pezzack and Ms. Kay, welcome. The floor is yours.
Lisa Pezzack, Director, Financial Systems Division, Financial Sector Policy Branch, Department of Finance Canada: Thank you very much. We will begin with Division 14, amendments to the Proceeds of Crime, Money Laundering and Terrorist Financing Act. As you mentioned, the Financial Transaction and Reports Analysis Centre of Canada, or FINTRAC, is Canada's financial intelligence unit and is required to disclose designated information relevant to money launding or terrorist financing to other government departments and agencies. The Proceeds of Crime, Money Laundering and Terrorist Financing Act establishes those recipients to whom FINTRAC will disclose.
Division 14 of Part 3 amends the PCMLTFA to require the Financial Transaction and Reporting Analysis Centre of Canada to disclose certain information on regulatory offences to provincial securities regulators. This change will strengthen Canada's anti-money laundering and anti-terrorist finance regime and improve the ability of provincial authorities to combat securities-related offences, thereby helping to address white collar crime and increasing the safety and security of Canadians in the financial sector.
Division 19 relates to the protection of prescribed supervisory information. Under these proposed amendments, the government seeks to modernize, clarify and enhance the protection of prescribed supervisory information that is prepared by the Office of the Superintendent of Financial Institutions. This measure will enhance confidence in the supervisory process and the stability of the financial system, while balancing the need to ensure transparent and fair judicial processes.
Division 19 of Part 3 amends the Bank Act, the Cooperative Credit Associations Act, the Insurance Companies Act and the Trust and Loans Companies Act to classify prescribed supervisory information as privileged in the context of legal proceedings. The amendments also create an exception to the privilege provision so as to enable the submission of prescribed supervisory information in legal proceedings under specific circumstances.
We welcome your questions.
The Chair: Thank you very much. Ms. Kay, do you have something to add?
Heather Kay, Senior Economist, Financial Systems Division, Financial Sector Policy Branch, Department of Finance Canada: Not at this time, thank you.
The Chair: Mr. Lambert, you do not have any opening comments so I will move directly to our list.
Senator Black: In terms of Division 14, would that type of step proposed there be consistent with the type of step taken by our trading partners? I am thinking of the U.S., the U.K. and Australia. Is that the kind of thing you would see in other jurisdictions?
Dan Lambert, Manager, Financial Analysis and Disclosures, Financial Transactions and Reports Analysis Centre of Canada (FINTRAC): There are other jurisdictions. FIUs work with the other jurisdictions, securities officials and so forth that provide similar information on the civil side.
Senator Black: Would your evidence be that this proposed amendment in Division 14 is to bring us in line with the position of other countries, or are we ahead or behind other countries?
Mr. Lambert: It would best be described as being in line.
Senator Black: To bring us in line.
Mr. Lambert: Yes.
Senator Black: Thank you very much. In terms of Division 19, I apologize, I have not a clue what is going on there. Can you try that one again, please?
Ms. Pezzack: All right. Let me explain in part what "prescribed supervisory information" is.
The banks are required under regulations to provide a whole bunch of information to the Office of the Superintendent of Financial Institutions. They analyze that information and provide opinions back to the financial institutions about what they need to do. That is "prescribed supervisory information."
Senator Black: Okay.
Ms. Pezzack: There is already a requirement for financial institutions to treat that information as confidential and for them to have limited sharing of that information within their organizations. We are essentially saying that we will encode in law that the information is privileged with certain exceptions. If a case were brought forward about whether or not the supervisor has done their job, obviously that might be an instance where the information would be allowed to be shared with the court. Or if a winding up of a company were to occur, clearly there were issues with how the bank was performing.
The goal of keeping that information privileged is to ensure that there is an open and frank exchange of information between the regulated organization and the OFSI.
Senator Black: The question is: Why are you doing this? Is the answer — and I do not want to put words in your mouth — because it encourages open and transparent dialogue with the banks?
Ms. Pezzack: Absolutely.
Senator Black: Got it. Thank you for speaking slowly.
Ms. Pezzack: It is a very technical issue.
The Chair: I would like to ask you to stay at the same tempo because we have other senators' questions now, including Senator Massicotte. With Senator Ringuette you can speed up a bit but not with Senator Massicotte.
[Translation]
Senator Massicotte: My questions are actually along the same lines. I am trying to figure out the reason behind Division 19. My understanding is that the right to share privileged information with lawyers is being lost. Under the Constitution, if I am found guilty, I am entitled to all the information germane to the ruling. Why then, in this case, is it not mandatory to disclose the information, as per the Constitution, even if it is privileged under the act?
Ms. Pezzack: That's a good question. I would say it's to favour an open and transparent dialogue between OSFI and financial institutions. With respect to legal proceedings and financial institutions, it is possible to obtain the information, just not the superintendent's opinion on the information.
Senator Massicotte: If I understand correctly, then, when a business seeks the advice of a chartered accountant for the purpose of filing its tax return, the information is not privileged, as far as the courts are concerned. The idea is to promote the free flow of information, but why is disclosure allowed in the case of a criminal proceeding? After all, that's more important than financial advice.
Ms. Kay: You're asking about criminal cases?
Senator Massicotte: Yes.
[English]
Ms. Kay: The exceptions are written into this proposed legislation. If a criminal case were brought against a bank, that information would be compellable by the court. If the Minister of Finance, the Superintendent of OFSI or the Attorney General of Canada were to bring the case, then the prescribed supervisory information could be considered relevant, in particular where they have allowed it in the event of a criminal case.
Senator Massicotte: Okay. Let us say it is the reverse. Why would that information be available? Why is it only available if it is initiated by a government representative? Why is it not the reverse?
Ms. Kay: There is a case where we allowed it in the exceptions to the amendments. "Bank" includes credit unions and bank holding companies. I use the example of the bank in the case of the Bank Act. If one of those institutions were to bring a case against the government, the Minister of Finance, the Superintendent of OFSI in this case, it would be essentially a judicial review of their activities in the case of PSI being needed should it be under one of these acts that we are looking to amend — specifically, in the administration by the government of one of these acts.
[Translation]
Senator Massicotte: What is the purpose of the bill if the information is disclosed in a criminal case initiated by the government? How is it beneficial to keep the information confidential? I don't understand.
Ms. Pezzack: In the case of a dispute between two companies where a shareholder requests access to the information, it would be protected.
Senator Massicotte: In a criminal or civil case?
Ms. Pezzack: Civil.
Senator Massicotte: Okay.
[English]
Senator Ringuette: I have many questions. I'll start with Division 14. The premise for my question is that it is my experience in 28 years as a legislator that bills are presented in reaction to an event or many events. What are the events that have triggered the legislation, the changes that you are seeking in Division 14 and Division 19?
Ms. Pezzack: I wouldn't say that there is any specific event — I will start with Division 14 — that triggered this amendment. It is in addition to an already existing list. I think we recognized it as a shortcoming, as something that was missing in our toolbox. That is, the ability to provide this information to provincial securities authorities so that they could pursue white collar crime, which hasn't been something that we have used FINTRAC disclosures for in the past. I don't know, Dan, if you had anything else.
Senator Ringuette: Go ahead, sir.
Mr. Lambert: Exactly as you had said, but there has been experience where law enforcement has been involved in investigations with provincial securities authorities where, because of the joint nature of the investigation, the securities commission has received FINTRAC information from law enforcement because it is a joint investigation that they are working on and so forth. It has been deemed very helpful in terms of them, in terms of the prosecution within their own provincial securities legislation. I would say that there has been a desire, on their behalf, to have this information in order to fulfil their mandate because of what we could provide.
Senator Ringuette: FINTRAC collects the information and analyzes it to see if there is a trend somewhere or something like that, but they don't do that with regard to securities. They do that with regard to the flow of money.
Ms. Pezzack: Securities fraud will generate proceeds of crime. That creates the flow of money, which is then being tracked by FINTRAC.
Senator Ringuette: I am trying to see. Securities fraud would not necessarily be triggered as a red flag to FINTRAC, but the analysis that FINTRAC would do of the cash flowing would be going to the policing authorities.
Ms. Pezzack: And now also to the securities regulators, who may take those indications of where the money is flowing and be able to link it back.
In fact, there are two tests that FINTRAC has to meet before the information would be disclosed. They are the same two tests that they already use before they can disclose information. Maybe, Dan, you could explain those.
Mr. Lambert: Exactly that. When we disclose to law enforcement or national security agencies, we have to have reasonable grounds to suspect that it would be relevant to the investigation or prosecution of money laundering or terrorist financing offences. With the addition now, it does not change that. We have to meet that primary threshold first in order to be able to disclose. We have always been able to receive information from provincial securities authorities. We now have to meet that first threshold. Under this legislation, we would have to meet a second threshold, much as we do when we provide information to the Canada Revenue Agency based on legislative changes a couple of years ago. We have to meet the first threshold, and we also have to have reasonable grounds that it would be relevant to the investigation or prosecution of an offence for that provincial securities regulator.
Senator Ringuette: But the police entity investigating would already have that information and be sharing it in order to —
Mr. Lambert: In not all cases do law enforcement and the securities authority work together on every single case at the same time.
In the past, when there have been joint investigations, law enforcement could share the information that FINTRAC has provided, after meeting its threshold, to the securities authority. But we have not been able to disclose directly to the securities regulator in the past. We are going to have that ability to do that when they have an investigation.
Senator Ringuette: Will that include the international cooperation of information with FINTRAC with regard to securities?
Mr. Lambert: The international cooperation?
Senator Ringuette: Yes.
Mr. Lambert: Countries where we have an MOU?
Senator Ringuette: Yes.
Mr. Lambert: Yes, it would.
Senator Ringuette: It would? Okay. Chair, if I may —
The Chair: Sure.
Senator Ringuette: It is just because we have heard in the last few hours a major issue with regard to securities that started in Europe. It seems to have also been within the Canadian securities sphere. I hope that this will help it along.
I will go to Division 19. What is the event that is triggering this?
Ms. Pezzack: In December 2014, in the context of a class action law suit between La Société Financière Manuvie, Manulife, and Mouvement d'éducation et de défense des actionnaires, MÉDAC, in the Quebec Court of Appeal, the Quebec Court of Appeal rendered a decision on supervisory information regulations. That is, the regulations surrounding the use and sharing of prescribed supervisory information. The view of the Court of Appeal was that there was no absolute bar to the disclosure of prescribed supervisory information, and this was not consistent with the original intent of the regulation, where we had always intended that regulation information to be treated as confidential and not shared. This is to address an issue that has come up in this Court of Appeal ruling.
Senator Ringuette: When I read the intent with regard to putting as privileged information under legal proceedings advice that is given from a supposedly very professional organization, which is OSFI, to any banking institution that they have to supervise, that advice has to be, from my perspective, expert, so expert that, if it has to be challenged in a court of law, in any kind of court proceeding, it should be.
I don't agree with this. If we have an institution of expertise, the mandate of which is to supervise with regard to our financial institutions and, in the course of their job, they issue a piece of information or a request or any kind of document, these documents should be disclosed in any kind of court proceeding because they are supposed to be extremely professional. I don't agree with this.
The Chair: Ms. Kay, do you have a response to that?
Ms. Kay: Thank you for your question. The principle essentially underlying the prescribed supervisory information regime, the idea of protecting this information, is that it could do serious damage to consumers in the financial system if it were to become public.
Senator Ringuette: Or significant damage to the banking institution. That is what you are saying and probably more important with regard to this legislation.
Ms. Kay: In the event that the superintendent was to issue some sort of advice to a bank, we do like to provide an opportunity for the bank to make some sort of changes to the system to improve the situation.
Senator Ringuette: Yes.
Ms. Kay: So we would like the opportunity to make sure those changes could be made. If this information was to become public, either prior to an improvement being made or afterwards, it could cause problems within the financial sector. It could cause bank runs and people to panic, which, overall, has a greater damage to the financial system.
Senator Ringuette: What kind of situation would happen, if it was such a dire issue for the banking institution to make change, that would be delayed for such a period of time that, in the meantime, there could be a class action by a group of consumers?
Ms. Kay: I'm going to add to your point about the ability of a consumer to have access to this information. The information that is provided to the superintendent and the office of the superintendent to make such a decision, all of these underlying facts are still available to be submitted as evidence in the context of a court case, and parties to that litigation, the bank and consumers could still bring in their own independent experts to testify on that information.
In this case, it's simply the opinions of the supervisor that we are seeking to protect. You're saying that there are concerns as to whether the supervisor has properly performed their job. In those cases we have made exceptions in the legislation so that a financial institution could compel the prescribed supervisory information to be disclosed as evidence.
Senator Ringuette: Only if the banking institution agrees to it.
Ms. Pezzack: If they were to bring a case against the government and say they had not been supervised properly or hadn't been provided the right guidance, they would be able to challenge that. And the prescribed supervisory information in that instance would be available as part of the disclosure for the court proceedings.
[Translation]
Senator Hervieux-Payette: My sense is that the same level of oversight isn't being applied to securities. Billions upon billions are being paid in brokerage fees for stock transactions across the country. It's necessary to take into account people's privacy, but it's important to examine the source of all that money. People are buying all kinds of securities, not necessarily stocks. And that information is never reported directly to FINTRAC in Canada, is it?
Are all bank transactions over $10,000 automatically reported? Are all stock exchange transactions over $10,000 reported automatically? If not, why not plug that hole?
[English]
Mr. Lambert: Currently under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, international wire transfers into and out of Canada, $10,000 and above, a report is provided by a financial institution or money service business, whatever it would be, to FINTRAC. That's held in the FINTRAC database. It's not acted upon just because it's sent to FINTRAC.
[Translation]
Senator Hervieux-Payette: When someone sends a request to purchase half a million shares, whether they are in France, Germany or somewhere else, that person doesn't go through the bank, they use a stockbroker. Today, people can even buy shares themselves and avoid going through a brokerage firm altogether. Brokerage firms aren't banks.
[English]
Ms. Pezzack: I do not believe we track foreign purchases of shares as a normal course of business, and they're not reported to FINTRAC.
[Translation]
Senator Hervieux-Payette: I believe that's what my colleague wanted to know, since that's how I saw the issue. If we spend all our time monitoring everything that happens in the banking system, even though people can bypass it using brokerage firms, we'll miss a lot of transactions.
[English]
Mr. Lambert: No. That aspect is what FINTRAC also receives. They receive suspicious transaction reports from banks which would also include the security dealers. There is nothing that prevents them from providing a suspicious transaction report. It has nothing to do with the threshold of $10,000 and above. It's the banking activity, and if they find that to be suspicious and relevant to an investigation or possible prosecution as part of the compliance under the PCMLTFA they would send that to FINTRAC; so FINTRAC would maintain that information.
[Translation]
Senator Hervieux-Payette: You seem to be forgetting the fact that the person isn't going through the banking system at all. I'm talking strictly about a transaction on the stock market that doesn't involve a bank. People can transfer money directly in order to buy shares. They can manage their own portfolios. They don't have to use their bank account. Banks will never find those who are guilty of spending staggering amounts of money on shares.
I'll give you an example. The mafia in Quebec purchased enough shares of high-tech company Biochem Pharma to gain control of the firm, which manufactured a wonderful drug to treat AIDS. What makes you think that authorities are now sophisticated enough to prevent a situation like that? First of all, these people know how the banking system works and they aren't foolish enough to use it. But, clearly, they can spend their money on things other than boats and paintings. By investing their money in shares, or rather securities — I'll talk about securities in general because there are many different types — they fall completely outside our oversight.
[English]
Ms. Pezzack: But brokers do have the ability to report a suspicious transaction. So if they're dealing with the same securities dealer, they could say, "Well, I'm a little bit concerned about what is going on here" and make a report to FINTRAC. FINTRAC, if appropriate, would put that information together with other information and do their analysis and potentially report it to securities dealers under this provision, should the information lead them to believe it would meet the two tests.
It's not a requirement, but there is already an opportunity for securities dealers to disclose information to FINTRAC for suspicious transactions.
[Translation]
Senator Hervieux-Payette: I'll give you another example. When people go that route and put their money directly in the stock market, they pay a brokerage fee on the shares they purchase. They can use a small brokerage firm for the transaction and it will collect a huge fee. It's a lot more expensive than putting their money in the bank, but they certainly get a much better return.
As far as Canada's economy is concerned, it's a very big sector and certain transactions automatically fall outside the government's oversight. That's the conclusion that can be drawn. So we are suggesting that may be something for the department to consider next year, when preparing its budget.
Ms. Pezzack: That's an issue we can address another time. I'll take note of it.
Senator Hervieux-Payette: It would seem that our timeframe for amendments is fairly tight. Basically, I would eventually like to see all financial transactions subject to the same oversight.
Ms. Pezzack: That's a good point. We'll look into it. But we always strive to balance privacy with the need to tackle criminal activity.
[English]
It's something that we would have to consider in terms of do you find enough actionable intelligence there to justify a potential privacy invasion? That's always the balance that we're trying to find when we legislate and regulate in this area.
Senator Tannas: Along the same lines, with respect to Division 14 — and I'm trying to understand — this won't help provincial regulators unless there is actually anti-terrorism and money laundering going on alongside of a securities fraud. If it's just a plain old securities fraud, and they're shipping money to Switzerland and other hiding places, this is not going to help that situation because of the two-level test; is that right?
Mr. Lambert: Well, I think, putting the terrorism aspect aside, the focus can be on money laundering and so forth. That's probably the best way to look at it, especially when looking at the securities area. In my experience and in working with law enforcement, I think this is probably a question that can be asked to our colleagues afterwards as well. It's the fact that there are aspects of money laundering, indications of money laundering, because you're trying to deal with criminal activities within the financial sector. You don't have to necessarily be charged with money laundering at the end, but there are aspects or indicators of money laundering.
Senator Tannas: If I'm running a mining scheme, collecting money from little old ladies to go to a mine here but it's really going somewhere else by virtue of me engaging in that deception and shipping money, it's money laundering or reasonable grounds for it to be money laundering.
Mr. Lambert: FINTRAC has an internationally recognized set of indicators, as well as through the Egmont Group, that we use when we put our cases together. These are indicators of money laundering. One indicator on its own perhaps wouldn't be strong enough to provide a disclosure to a law enforcement agency or the OSC. When you look at a number of activities, and you gave me an example in terms of collecting money and how someone would do that, a number of indicators would come to our attention related to the activities going on. Maybe multiple institutions would be reporting on the individuals doing it — multiple bank accounts and so forth. You would meet that threshold and in meeting that threshold, you would be able to provide the information.
Senator Tannas: That makes it much clearer for me. I didn't understand the connection between money laundering and securities fraud.
On Division 19, Senator Ringuette was looking for examples of what kind of situations we could see where information would need to be protected. I can think of a number of them. There're always discussions with supervisors around banks and staging. That's a great example.
A bank or a financial institution may not have its compliance regime up to snuff. It's could be any number of things. It's a tool that a regulator has to say you are in the penalty box. If it got out, it could have a huge impact on consumers, not just on the institution.
The idea is to protect those kinds of things in a civil action, right?
Ms. Pezzack: Yes.
Senator Tannas: What caused this was the fact that a judge somewhere decided that it was allowed in a civil action and, therefore, more of this could happen; is that right?
Ms. Pezzack: Yes.
Senator Tannas: Thank you.
Senator Ringuette: The purpose of OSFI is to make sure that our banking system is working appropriately because consumers have their investments in those banks.
Ms. Pezzack: And their deposits, yes.
Senator Ringuette: A good portion of these investments is also protected by the taxpayers of Canada.
Ms. Pezzack: The deposits would be protected, yes.
Senator Ringuette: You said there was a class action case in Quebec against Manulife.
Ms. Pezzack: Yes.
Senator Ringuette: The judge decided that the directive information coming from OSFI was a legal document and could be subpoenaed as information to be tabled in that class action. I don't see why we would approve any legislation that would remove that ability from a judge with regard to either an individual action against a financial institution or a class action.
As far as I know, parliamentary documents are privileged. The documents of information between a lawyer and his client are privileged and that stops there. Actually, Finance went to court because FINTRAC tried to remove the solicitor-client privilege of FINTRAC a few years ago and you lost.
You're looking at me quizzically but the fact is that in this country there are only two kinds of documents that are privileged: The inside operation of Parliament and solicitor-client documents. Any other document should be available for any kind of court challenge. Otherwise, we're impeding the administration of justice.
Ms. Pezzack: Other pieces of information are protected and privileged, such as under the Statistics Act, for example. In the decision of the Manulife MÉDAC case, the court pointed to the Statistics Act and said, "If you want to claim absolute privilege, here is the type of wording you should have used in your proposed legislation to make sure the privilege is protected."
Senator Ringuette: That was not the intent of Parliament, nor should it be.
Ms. Pezzack: Under the Statistics Act?
Senator Ringuette: You are saying that the judge in this specific case said that the legislation did not prohibit the disclosure of that document. So you're saying that with these amendments, in this omnibus bill, we will protect these documents against any court proceedings. That's my personal view. I think that this is not right.
Ms. Pezzack: It was always our understanding that privilege did exist. Certainly, the policy intent behind the regulations was to make sure that there was space so that the supervisor of OSFI and the supervised financial institutions could freely and frankly exchange views in the interests of supporting the safety and soundness of the financial system. In fact, different courts across Canada have approached it somewhat differently. Part of what we're trying to achieve is a consistent approach across the country to protecting this information.
Senator Tannas: You summed it up well. I don't need to say it again, but I will anyway.
This proposed amendment will restore what was always the intent, as you understand it, of Parliament, for the bureaucracy and the Office of the Superintendent of Financial Institutions around the confidentiality and privilege for supervisory documents.
The Chair: I thank our guests today so much for helping us on our study of these two divisions. On behalf of the committee, I express appreciation.
In this second part of our meeting on Bill C-59, we will focus on Division 14, which proposes to amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Representing the Canadian Securities Administrators, I am pleased to welcome from the Autorités des marchés financiers, AMF, Jean-François Fortin, Executive Director, Enforcement Branch; and Marianna Ferraro, Lawyer, Legal Branch - Montreal.
As I am sure you will recall, Mr. Fortin appeared in March before our committee on digital currency. It is a great pleasure to have you back, sir. Mr. Fortin and Ms. Ferraro, the floor is yours for opening statements.
[Translation]
Jean-François Fortin, Executive Director, Enforcement Branch, Autorité des marchés financiers, Canadian Securities Administrators: Thank you, Mr. Chair. This is indeed my second appearance before the committee. We have a presentation, after which, we will be available for questions.
On behalf of the Canadian Securities Administrators, or CSA, and the Autorité des marchés financiers, or AMF, I'd like to thank the committee for the opportunity to discuss Bill C-59, specifically, Division 14 and the amendments related to FINTRAC. As the chair mentioned, I am the executive director of enforcement at the AMF, and my colleague, Marianna Ferraro, works in our legal department. The CSA asked us to appear before you to discuss possible amendments.
Both the CSA and AMF looked at ways that the Proceeds of Crime and Terrorist Financing Act could be amended, and we were entrusted with the task of explaining why we believe these amendments are needed and how much they will help us in performing our duties.
I'd like to begin by sharing an example that illustrates how beneficial FINTRAC information can be to our investigations. As part of an investigation into market manipulation involving numerous foreign bank accounts, local police sought the assistance of a provincial securities regulator. For the purposes of its criminal investigation, the police shared information obtained from FINTRAC with the regulator's investigator.
The information obtained from FINTRAC, and ultimately provided to the securities regulator and police, was paramount in establishing beyond a reasonable doubt that multiple bank accounts were used and in identifying the account holders. As a result, it was possible to identify and go after the individuals behind the market manipulation scheme. In our terminology, we would call it a pump and dump scheme, a fairly common way of manipulating market securities.
Senator Hervieux-Payette: And for those of us who aren't familiar with the technique?
Mr. Fortin: I'll give you a quick explanation. Pump and dump is a scheme used to generate hype about a stock, through blogs, news releases or the purchase of large quantities of shares, in order to drive the stock price up. Those behind the scheme, having already acquired shares at a much lower price or for free, then sell them off, or dump them, in a large chunk and collect their profits. The stock price plummets and investors lose their money. Typically, a pump and dump scheme occurs over several months or even weeks; some people do it over and over again.
Senator Hervieux-Payette: Were those people arrested?
Mr. Fortin: In the case I described, yes. But there are many. In the past year, the past six months in fact, the AMF has laid criminal charges in three such cases. It's a fairly common problem in Canada, not just Quebec, and it's one that we are certainly focusing on right now.
The purpose of my example was to show that, without the FINTRAC input, the information wouldn't have been shared with the securities regulator or police and a number of the bank accounts wouldn't have been identified as part of the investigation. It simply wouldn't have been possible because, under the current regime, no direct information-sharing mechanism exists between FINTRAC and Canada's various securities regulators. We aren't among the organizations subject to the exception whereby access is permitted under the criteria provided for in the legislation.
I'd also like to mention the common role that FINTRAC and provincial securities regulators play; their roles do intersect. We have a shared mission. Our mission is to protect Canadians and investors from fraud. Similarly, FINTRAC's mission is tied to safeguarding the public and Canada's financial system.
As part of our enforcement activities, we pay close attention to financial crime. On the one hand, FINTRAC's role is to combat money laundering, and on the other hand, we focus on cases involving Ponzi schemes, market securities manipulation and insider trading.
Just consider Ponzi schemes. Fraud, within the meaning of the Criminal Code, is closely connected to the use of proceeds of crime. Therefore, as I will explain later in my presentation, the type of information that FINTRAC can provide would facilitate or speed up the process of obtaining freeze orders. We have the authority to seek freeze orders to freeze the assets obtained by fraudsters from investors.
FINTRAC's pool of information on brokers, banks, portfolio managers and money service businesses is central to our mission of protecting investors.
Follow the money measures are another important component. Senator Hervieux-Payette, you said earlier that, when an individual buys shares, it concerns us. But it isn't necessarily the stock transaction alone that we care about but, rather, the perpetrators of fraud who are able to collect money in exchange for shares that we focus on at the end of the day. And that very money is often deposited into a bank account and moved from account to account over and over again, and sometimes in foreign jurisdictions. And that's where the capacity to follow the money becomes key. We have limited capacity in that area, but the information is reported to FINTRAC.
I'd like to mention a few elements that underscore how important it is for FINTRAC to share information with us. Issuing a freeze order in a timely manner is essential. FINTRAC should voluntarily disclose to securities regulators information pertaining to their investigations and notify them of situations they aren't yet aware of.
FINTRAC has the ability to identify a lot of bank accounts and parties who are involved. That includes not just the people receiving the money, but also those behind the scenes. FINTRAC's information would help us identify others who are involved in the scheme, as well as potential witnesses who could provide us with additional information. That would allow us to focus our efforts more effectively.
Obviously, it would have a direct impact on the effectiveness and efficiency of our investigations, not to mention how it would improve our ability to assess potential investor losses. And, ultimately, it would have a direct impact on the sentences imposed on perpetrators. Judges could consider the scale of the fraud when sentencing the perpetrators or those who committed other offences.
FinCEN is FINTRAC's American counterpart. It has already signed cooperation and information-sharing agreements with the Securities and Exchange Commission, or SEC. We work very closely with the SEC, and, according to our American counterparts, FinCEN is a major source of information. FinCEN supplied information in roughly 50 to 75 of the SEC's investigations. Australia has the same type of arrangement with AUSTRAC, its version of FINTRAC; there, authorities working to combat money laundering and securities regulators share information.
Now I'd like to turn to the issue of privacy and personal information, including information disclosed under intelligence-sharing partnerships with police. We have protection safeguards. Our investigations are completely confidential and are conducted behind closed doors. We take steps to protect all information obtained in the course of our investigations and we have safeguards in place to protect information obtained from FINTRAC.
As you know we are in favour of the proposed amendment. Over the past few years, we produced working documents for the Department of Finance asking for such an amendment, so that we would be on the list of organizations that have access to this information.
It is important to understand the proposed amendment well. It is a two-track exercise. We could submit requests to FINTRAC — specific requests — and FINTRAC could also sometimes voluntarily provide information.
I thank you, and I am at your disposal to answer questions.
[English]
The Chair: Thank you very much. Ms. Ferrero, were you going to add anything?
Marianna Ferraro, Lawyer, Legal Branch - Montreal, Autorités des marchés financiers, Canadian Security Administrators: Nothing to add, thank you.
The Chair: Thank you very much, I will start with the deputy chair of the committee, Senator Hervieux-Payette.
[Translation]
Senator Hervieux-Payette: Earlier I talked about a seamless system. If we ask the banks to report the transactions that are above a certain threshold, that should also apply to the securities commissions. This mechanism would have to be automatic, and should not only be used when suspicions are raised. This would allow you to reduce the number of fraud incidents and the manipulation of certain securities that have little value. You probably remember the UraMin case? That business was worth a few million dollars one year, $300 million the following year, and then $1.5 billion two years later, even though it was not doing any real business. There was no mineral ore in actual fact.
In short, I find it aberrant that our financial system focuses only on banks. There are also all of the products that have to be reported to FINTRAC, and gigantic sums that are invested and are not supervised. I understand that the broker can report some information, but the broker who knows he will obtain a generous commission may find that job harder than the banker who will not be getting a commission.
There are not very many means at our disposal to encourage brokers to disclose. Are there any brokers who contact you to denounce potentially nebulous securities and to share their concerns?
Mr. Fortin: That is what we call supervision reports. We can obtain them through IIROC, the body that regulates brokers. We also obtain some from various brokers, banks and trusts.
You mentioned that organized crime can purchase stocks. Obviously we cannot prevent anyone from purchasing stocks. In a case where organized crime attempts to take control, this goes beyond our area of jurisdiction somewhat in connection with fighting organized crime. We are talking about pure criminality, and this is more the concern of police organizations. It is probably more difficult, but it does not mean that we do not have a role to play or that we do nothing.
As for the manipulation of markets, perhaps in that type of case there may be organized crime bodies that may be tempted to do that. There are examples of past cases where we did have a role to play, but we also coordinated our efforts with joint teams involving the RCMP and the Sûreté du Québec, in order to do lawful investigations in compliance with our act, but also as permitted under the Criminal Code. We cooperate with police forces to try to intervene in this type of situation.
Senator Hervieux-Payette: You agree that our system does not oversee about two-thirds of the investments that are done in Canada, and that things are done on a case-by-case basis, as events arise — and not all events are supervised, as are the $10,000 transactions in banks. Do you not think that this would be necessary? I think that you are in the best position to answer my question.
Mr. Fortin: In my opinion, that would probably be a good thing. I don't know if it is possible to do that through FINTRAC.
Senator Hervieux-Payette: That is a sector that is not covered at all. I understand all of the good will and the small mechanisms in place to allow you to find a few groups or individuals who are committing fraud. However, we are talking about billions of dollars. I get the sense that the mesh squares in the net are much too big and the fish are getting through.
[English]
Senator Tannas: I always find I learn things from Senator Hervieux-Payette, and I am very surprised that there is no requirement for securities dealers to report suspicious transactions to FINTRAC. I don't know why. I just assumed that they would be caught up in that the same way a money exchange would be caught up in that.
Given that we heard some testimony that they do it for whatever reason, do you have any sense this this change might actually encourage dealers to report more suspicious transactions to FINTRAC, given, from a dealer's point of view, that they have a customer so that reporting something that might seem a little off right away to the securities regulator might give them a way in which they can say, "Well, this is somewhat suspicious, and, if we reported it to FINTRAC, it would get aggregated and perhaps find its way back"? Do you think there is any potential for this to spur additional reporting by dealers on it?
[Translation]
Mr. Fortin: The FINTRAC representatives were here earlier, and I don't know if they answered the question directly, but my understanding is that they have the same obligation as the banks concerning any suspect transaction and any transaction of more than $10,000 as well. They have these obligations. Also, as I mentioned earlier, there are supervision reports and the same thing goes for stock exchanges. If the stock exchanges suspect that there is market manipulation going on, they have to report it to the securities commissions.
Now to get back to your question, senator, regarding whether the amendments might generate more declarations from brokers, to the extent that they already do this, perhaps not. However, we are certainly convinced of the great usefulness of the information obtained from FINTRAC, as well as from brokerage firms and any other bodies that have the obligation to report to FINTRAC.
[English]
Senator Tannas: That got something clearer in my mind.
Again, maybe to the senator's point, the suspicious transaction has a huge amount and of discretion to it, right? It is up to each organization to decide what they think is a suspicious transaction. If there are limited amounts of those going on, is there a chance that this will actually spur brokers to report more because they won't be reporting a client directly to the securities regulator? They will be reporting him to a clearing house where, if there are other transactions going on, potentially then they will get it right, rather than worry about getting it wrong and putting a client in the glue right off the bat. Is that the potential outcome here, do you think?
[Translation]
Mr. Fortin: I think so; my understanding of suspect transactions may not be perfect; I know that they have to be more than $10,000, and that each transaction of $10,000 or more has to be disclosed. Moreover, because it would be too easy to only do transactions under that $10,000 threshold, another component that triggers examination of suspect transactions is taken into account; even if these are transactions of less than $10,000, if, when you put them together, they look like suspect transactions, that is the second trigger that prompts a disclosure obligation for FINTRAC.
Senator Ringuette: Mr. Fortin and Ms. Ferraro, it is always a pleasure to have you here with us, because you give specific answers.
Over the past two or three years, how many investigations did your members conduct?
Mr. Fortin: I do not have the figures for Canada.
Senator Ringuette: Approximately?
Mr. Fortin: We probably do about 150 to 200 investigations a year.
Senator Ringuette: So we are talking about 150 to 200 investigations a year. Are these investigations initiated by the various police corps?
Mr. Fortin: No.
Senator Ringuette: Do you have an internal system with indicators?
Mr. Fortin: I should mention one aspect related to one of your questions on the difference between police investigations and ours. In some regards there is an overlap zone where certain offences involving the Securities Act, such as illegal investing, insider trading and stock manipulation, are also criminal offences. And so the offence of fraud was recently added to the Securities Act in Quebec, and to other laws at the national level, a number of years ago. So it is a statutory offence according to our legislation, as it is in the Criminal Code. The vast majority of our investigations are done internally, in the securities commissions, and we have teams of attorneys who have the necessary powers to launch proceedings either before an administrative tribunal — in the other provinces it is within the actual commission, before commissioners, but in our province it is before an independent administrative tribunal — or as a criminal matter before a Quebec court. This work is done in the framework of the regulatory duties of the Autorité des marchés financiers, the securities regulator. For the same criminal offences, we have joint teams where we work with the police, and at the end of criminal investigation the crown prosecutors, provincial or federal, can begin criminal proceedings.
The vast majority of investigations the AMF does have been generated in-house, either because of denunciations, complaints, or inspections or monitoring. We watch the markets. We cooperate with the IIROC, which is a Canadian self-regulation organization tasked with overseeing the markets directly and referring cases to the securities commissions if there are suspicions about insider trading and the manipulation or distortion of markets. This is an important source of investigations for us. We also do cybersurveillance whereby we monitor illegal solicitation on the Internet, on social media or elsewhere.
Generally speaking, the vast majority of our investigation files related to regulations are self-generated.
Senator Ringuette: I congratulate you, because you seem to have put in place a system that allows you to do from 150 to 200 investigations a year. That sounds considerable to me, despite the fact that I do not know the stock market all that well.
How did you come to the conclusion that an additional source of information from FINTAC would be useful to you?
Mr. Fortin: In several different ways. First of all, a typical fraud case will be generated by those who file complaints. Most of the time, when someone comes to see us to complain, it is because his or her investment has gone belly up and they cannot obtain a reimbursement.
For instance, in Ponzi scheme cases, the first thing we do is validate the bank information to determine in which bank account the money was deposited. If it is possible, we try to intervene rapidly to obtain orders to block bank accounts and assets that allegedly belong to the investors.
Senator Ringuette: You have considerable powers.
Mr. Fortin: We have powers; we can obtain bank information with subpoenas. But there are limits when those requests are based on information obtained by the complainants, for instance. That is where information from FINTRAC could play an essential role in allowing us to identify other bank accounts.
FINTRAC does not only collect information, it also analyzes it and the relationships between various bank accounts, persons' names, family names and the companies that may be involved. For instance, even if we have information about one or two bank accounts, the scheme may use several bank accounts, and if we knew what they were, we could also freeze the money deposited in these other accounts. In several cases, this would have allowed us to act more quickly because in the scenario I gave you earlier, it often happens that we arrive too late and when we manage to obtain orders to freeze the accounts, there is not much left in them. So that would allow us to take those measures also.
Senator Ringuette: Among the 150 to 200 investigations you do on a yearly basis, what percentage derives from information from a police force that contacted you and informed you about a suspect situation?
Mr. Fortin: I will explain how we work in partnership with the police. In fact, the process is more often the reverse. The vast majority of investigations begin with us, with the mechanisms I explained earlier. First, there is an administrative investigation, and if we determine that this is a case of fraud, we consult our police partners so as to decide whether a criminal investigation is necessary. We think this justifies the efforts involved in a criminal investigation and a more severe penalty. Often the file goes through our hands, and we refer it to the police force. That does not mean that the reverse does not occur, but it is less frequent. Often, police forces will ask for our help, because of our expertise.
I might add that aside from the joint investigation teams, we also have joint intelligence teams with the police forces, wherein we share information that comes both from us and from the police, and that can generate investigations. You may have heard about the Integrated Market Enforcement teams, the IMET, joint investigation teams that look at financial markets, made up, among others, of RCMP officers, officers from the Sûreté du Québec, and from the AMF in Quebec. We also have a similar team with the Sûreté du Québec. So, there are two teams available to conduct criminal investigations on financial markets in Quebec, and similar teams exist elsewhere in Canada.
[English]
The Chair: Ms. Ferraro and Mr. Fortin, it is always a pleasure to have you before us. You are very informative and help us with our deliberations. Thank you very much for your testimony today.
Mr. Fortin: Thank you for inviting us. We will come again.
(The committee adjourned.)