Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 11 - Evidence - February 15, 2012
OTTAWA, Wednesday, February 15, 2012
The Standing Senate Committee on Banking, Trade and Commerce met this day
at 4:17 p.m. for the review of the Proceeds of Crime (Money Laundering)
and Terrorist Financing Act (S.C. 2000, c. 17), pursuant to section 72
of the said Act.
Senator Irving Gerstein (Chair) in the chair.
The Chair: Honourable senators, this afternoon we will continue
the five-year parliamentary review of the Proceeds of Crime (Money
Laundering) and Terrorist Financing Act. This is our fourth meeting on the
subject. To date, the committee has heard from a number of so-called regime
partners involved in the implementation and administration of this
legislation, including the Department of Finance, Public Safety Canada, the
RCMP, CSIS, CBSA, and FINTRAC.
This afternoon we continue in that regard with representatives of the
Office of the Superintendent of Financial Institutions Canada. Representing
OSFI, we are pleased to welcome before our committee Mr. Nicolas Burbidge,
Senior Director of the Anti-Money Laundering and Compliance Division; and
Mr. Alain Prévost, General Counsel in the Legal Services Division.
Welcome, gentlemen. Mr. Burbidge, the floor is yours.
Nicolas Burbidge, Senior Director of the Anti-Money Laundering and
Compliance Division, Office of the Superintendent of Financial Institutions
Canada: Mr. Chair and honourable senators, I would like to thank you
very much for inviting OSFI to participate in the parliamentary review of
the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the
10-year evaluation of Canada's Anti-Money Laundering and Anti-Terrorist
Financing regime. I am Nick Burbidge and I am the head of the Anti-Money
Laundering and Compliance Division at OSFI. This division is responsible for
OSFI's AML/ATF Supervisory Assessment Program. My division is also
responsible for stakeholder relations with the Department of Finance, the
Financial Transactions Reports Analysis Centre and other departments and
agencies involved in the regime.
As also mentioned by the chair, accompanying me today is Alain Prévost,
General Counsel in the Legal Services Division at OSFI.
One of the key elements of OSFI's mandate is to advance and administer a
regulatory framework that promotes the adoption of policies and procedures
designed to control and manage risk. It is within that framework that OSFI
evaluates measures by banks and life insurers to detect and deter money
laundering and terrorist financing, and promotes best practices, robust
processes and sound risk management structures and institutions.
AML/ATF controls are relevant to OSFI's prudential management because of
the potential risk to the reputation of a bank or a life insurer if it
failed to have adequate controls to detect and deter money laundering and
terrorist financing. Under such a scenario, the institution's customers and
other counter parties might cease doing business with it, which in turn
could create financial difficulties for that institution, ultimately
affecting its safety and soundness.
OSFI, like other major financial regulators around the world, is a member
of the Basel Committee on Banking Supervision as well as a member of the
International Association of Insurance Supervisors. We subscribe to these
bodies' core principles of prudential supervision, which are also recognized
by the Financial Action Task Force, which, as you know, sets international
AML/ATF standards. OSFI also plays a significant role in the Financial
Stability Board, which develops and promotes the implementation of effective
regulatory, supervisory and other financial sector policies at the
international level, and which is chaired by Bank of Canada Governor Mark
While OSFI does not have a legislated role under the Proceeds of Crime
(Money Laundering) and Terrorist Financing Act, it does have jurisdiction in
assessing compliance with fit and proper requirements in the federal
financial sector. These are part of the internationally agreed AML/ATF
standards, which in Canada are set out in governing legislation.
OSFI's AML/ATF Supervisory Program focuses on those institutions that we
consider most susceptible to money laundering and terrorist financing. OSFI
makes this determination based on transaction volumes, types of financial
products and other factors. These institutions include Canada's largest
banks and life insurance companies. OSFI assesses them on a regular
three-to-four-year cycle but does more frequent and detailed assessments
where circumstances warrant. Our assessments include the foreign operations
of Canadian conglomerates in order to evaluate the risk management standards
of the entity as a whole. OSFI also applies its AML/ATF assessment
methodology to those seeking to establish new federally financial
institutions in Canada.
Most Canadian conglomerate banks and life insurers have significant
operations outside Canada. The Financial Stability Board expects that home
supervisors for large international banks should provide host supervisors
with timely, accurate and comprehensive information on the parent financial
institution through the hosting of supervisory colleges and other
information-sharing arrangements. Currently, OSFI is developing plans for
thematic AML/ATF supervisory colleges to be held later this year. These
colleges offer OSFI and regulators from other jurisdictions the opportunity
to coordinate the identification of risks and to share risk-mitigating
Canada has been raising the bar on AML/ATF standards since 2002, when
OSFI first began assessing financial institutions AML/ATF programs. I would
like to add that we looked at AML issues before that date but, as you know,
the legislation came into effect shortly before that date. Our interventions
there were based upon a less systemic evaluation largely based on
information that came to OSFI as opposed to a more systemic assessment
methodology. Canada's banks and other federally regulated financial entities
are allocating significant dollar and people resources to the fight against
money laundering and terrorist financing. However, the quality of controls
and processes varies considerably across the federally regulated sector. One
of the most significant challenges for the sector is the ability to identify
high-risk customers and apply enhanced scrutiny to them and their
activities. Where necessary, OSFI monitors the remediation efforts put in
place by an institution and highlights any perceived deficiencies.
OFSI also works closely with FINTRAC on a daily basis. In 2004,
legislative arrangements were made that permitted us to share the results of
our prudential supervision with FINTRAC, and we have a memorandum of
understanding in place for that purpose. We work closely with the Department
of Finance and other key government departments on developing and
implementing AML/ATF policy. For example, OSFI is a member of the
Public/Private Sector Advisory Committee, which is chaired by the Department
of Finance. As mentioned previously, we also work directly with other
financial regulators on AML/ATF issues through the Basel Committee and the
FATF, and bilaterally with various other jurisdictions.
Over time, OSFI has developed a supporting role in another area:
notifying Canada's federally regulated financial sector of United Nations
and Canadian sanctions imposed on designated individuals and organizations.
As sanctions come into force, we bring them to the attention of federally
regulated financial institutions and follow up through our supervisory work,
including evaluating how effectively financial institutions are implementing
In closing, Canada continues to be viewed internationally as having a
strong AML/ATF regime in which we are pleased to play what we consider to be
an essential part. Mr. Prévost and I would be pleased to respond to any
questions that the committee may have. Thank you for your attention.
The Chair: Mr. Burbidge, as you know last Thursday FINTRAC
appeared before this committee. As I understand, the federally regulated
deposit-taking institutions and life insurance companies have reporting
requirements to FINTRAC. As we have heard from you today, they also have
reporting requirements to OSFI. Could you give us some indication of how you
coordinate those reporting functions between the two institutions?
Mr. Burbidge: I believe that the two sets of reporting you refer
to apply to two different sets of circumstances. The reporting to FINTRAC
falls into the category of reporting financial transactions that are either
suspicious or that exceed a designated threshold of $10,000. Those reports
do not come to OSFI. They are the reports for which FINTRAC was designed:
the receipt of financial intelligence for their analysis. The reports that
come to OSFI, which I referred to at the end of my remarks, are the ones
that the Criminal Code and the United Nations regulations mandate must be
reported to all financial regulators in Canada. In the federally regulated
sector, that is OSFI.
These reports are sent out from each financial institution whether they
have found any assets that are required by the legislation to be frozen; and
the number is reported to us in the aggregate. We then aggregate all that
information across the sector and keep a running total on a day-by-day basis
or a month-by-month basis of the aggregate of those frozen assets. There are
two separate kinds of reporting for two completely different things. I hope
that clears it up for you.
The Chair: It certainly does; thank you for the clarification
Senator Harb: In your presentation at page 3 you mention the
memorandum of understanding that you have with FINTRAC. Is the MOU publicly
available and, if so, could you provide a copy of it to the committee?
Mr. Burbidge: Yes, it is publicly available; and we will be happy
to get the committee a copy of that in both official languages.
The Chair: Kindly forward it to the clerk of the committee.
Senator Harb: You talked about OSFI developing a supporting role
by notifying Canada's federally regulated financial sector of UN and
Canadian sanctions imposed on designated individuals and organizations. Who
has the lead role in that?
Mr. Burbidge: It depends on which regulations we are talking
about. In the case of the regulations imposed under the Criminal Code, the
lead role is performed by Public Safety Canada. In the case of regulations
imposed under the United Nations Act, the lead role is taken by the
Department of Foreign Affairs and International Trade. In both cases, we act
as the agency of the Government of Canada that brings the information
immediately to the attention of the financial sector.
Senator Harb: You have the lead role, not a supporting one.
Mr. Burbidge: We do not classify it as a lead role, senator,
because we do not have any role in the determination of what names go on
what lists. That is not part of our mandate. In the case of the United
Nations, of course, this is done by the United Nations Security Council. We
have no role in that process, nor do we aspire to any. We are simply there
to make sure that the federally regulated financial sector has that
information immediately to hand as soon as possible after it is enacted so
that they can start the searching and, if they find assets, the freezing
Senator Harb: I suspect it is because of regulation or
legislation. For example, why is it you and not FINTRAC doing this
particular task? Is it as part of the MOU that you and FINTRAC sat down and
decided who would do what?
Mr. Burbidge: It is not part of the MOU, senator. It has to do
more with the mandates of the two organizations, which are fairly different
from each other. It started, of course, because the provisions were enacted
by Parliament in 2001, immediately after the 9/11 attacks, and it stayed in
the legislation ever since. At that time, FINTRAC did not exist. It only
came into being a year or two later. I believe that is the genesis.
The other thing to say is that we have a direct, day-to-day interfacing
role with all of the federally regulated sector. FINTRAC has a much broader
mandate, as you have heard. Probably the feeling was back in those days that
it would be better to have OSFI perform this role since we had that more
direct involvement with the banking sector directly.
Senator Harb: My final question deals with the members of the
regime. We had the members of the regime appear before us, and there has
been some criticism about the level of coordination that takes place between
the members. I wanted your thought on whether or not you see that there is
some importance here for us to nudge in our report the fact that there has
to be a strengthening of the relationship between the partners. I would be
interested in your comments on that. Should this regime be expanded? Should
we bring in other partners? Do you see any missing links?
Mr. Burbidge: That is a broad question, and I will answer the best
I can. It is a multi-stakeholder regime, as you know. There are several
different agencies involved. As I have said frequently to my colleagues, it
is a human construct. Every time there is a human construct, there is always
a way to do things better.
We work on a continuous basis with our colleagues in the Department of
Finance and FINTRAC to adjust things and make improvements to operational
responsibilities and division of work and do our best to work collegially
and collaboratively with all the other stakeholders. The ones we work
closest with are FINTRAC and the Department of Finance. Like FINTRAC, we are
supervised through the Department of Finance and the Minister of Finance. We
work very cooperatively with that group, and we regularly feed in
suggestions, comments and so forth to that.
As I mentioned in my comments, we are part of the public-private sector
advisory group, and we are regularly in a position to receive and evaluate
representations that come from the private sector as well in our role as a
prudential supervisor. We are playing a solid role in that regard. Where we
do have identified suggestions for improvements, we always share them with
the Department of Finance and FINTRAC.
Senator Harb: Have you shared any suggestions for improvement?
Mr. Burbidge: This is an ongoing process, senator, yes.
Senator L. Smith: On page 2, in terms of the 10-year evaluation
you said that the quality of controls and processes varies considerably
across the federally regulated sector. Is that within the groups that are
controlling the regulations, or are you talking about the banks and life
insurance companies in terms of their own internal processes?
Mr. Burbidge: It is the latter, senator.
Senator L. Smith: Would there not be consistency required for all
the banks and insurance companies to ensure that the Canadian industry had a
bar that it had to reach? It surprises me that there would be these
differences, especially with the number of people in the regulatory field.
You seem to have a bunch of people doing a good job, but there is a lot of
Mr. Burbidge: Speaking to the quality of what I said in my
comment, what I was getting at there is the fact that let us say there is a
compliance element to do such-and-such a thing. There will be a variety of
levels of effectiveness in various banks and trust companies and life
insurance companies as to how that is executed, but part of the
consideration as well is whether that is a big bank or a small
We do not expect small institutions to buy Cadillac systems when
Chevrolet systems will do. At the same time, all of the entities that my
group supervises are subject to the same rules, which is FINTRAC's job to
enforce. The common framework is there. What varies is the amount of effort
that different financial institutions put into those underlying risk
management processes and controls that enable the banks and the life
insurance companies to be in compliance with the legislation. That is what I
was getting at in my remarks.
Senator L. Smith: Having completed this 10-year evaluation, do you
have other recommendations to be made moving forward that are specific and
could help improve the system?
Mr. Burbidge: As I said earlier in response to Senator Harb, this
is something we do on an ongoing basis any way. The 10-year evaluation was
an opportunity for all the stakeholders to sit around the table and discuss
where there were gaps, and I am referring now more to operational type
issues and how those could best be fixed. We made suggestions, as I
indicated to Senator Harb, to the Department of Finance. The Department of
Finance, I think you are aware, is the government department that
coordinates the regime. Yes, we have made a number of suggestions for
streamlining, working closely together and all those kinds of operational
things, and we did that as part of the 10-year evaluation specifically.
Senator Massicotte: Obviously the objective of this act, as it is
so named, is to get a better handle on criminal activity from a lavage,
whitewash, money perspective, as well as terrorist activity. I know we view
a great amount of the effort of FINTRAC is tracking deposits or cash
transactions greater than $5,000 or wire transfers in excess of $5,000 to
outside the country, to another place. If you look at the objective, it is a
race between our police, your forces and those who wish to benefit from
criminal activity and so on. They are always trying to place their cash.
They give us a summary saying that on average they have frozen $200 million
in the last five years and have something like 36 or 38 convictions in the
last year. I understand that criminal activity in Canada is in the billions
of dollars, probably $40 to 60 billion from some articles I have read, and I
am concerned we are only touching a little bit. The RCMP said their budget
for the whole purpose of this act is $5 million a year, which does not seem
to be very significant. Your knowledge far surpasses ours from an
institution sense. Are we on the right track to concentrate on these cash
transfers? Is there a bigger system out there we are missing completely
regarding criminal activity from an economic crime sense?
Mr. Burbidge: There is a pretty wide range of territory there. The
threshold for the reporting you referred to I believe is $10,000 and, in
addition to that, the wire level threshold is also $10,000, and it applies
both to wire transfers which come into Canada as well as wire transfers that
leave Canada. There is a two-way flow that is tracked.
The focus of our work is basically what I like to call "where the rubber
hits the road." It is where the financial sector is generating financial
intelligence for FINTRAC. We do not normally get involved in some of the
areas you have just been talking about on a day-to-day basis. In terms of
what you have heard from the other witnesses, they will be more expert than
we are in sharing with you some of the concerns and comments that they have
The role of OSFI is simply to make sure that to the best of our knowledge
what our banks are doing in terms of implementing these requirements is
effective and responds to the need to comply with this legislation in an
effective way, which means: Are they generating what is considered to be an
adequate number of suspicious transactions? Are they in fact reporting to
FINTRAC all of the data that they are required by law to report? As I said
earlier, to engage in that work, we look at the processes in place to help
them to do that. I hope I have not missed anything important in your
Senator Massicotte: From your perspective of supervision of
financial institutions, do you deal with only financial transactions in
Canada? Most Canadian banks have subsidiaries in Caribbean countries, for
example. Are these subsidiaries subject to our laws relative to transactions
in those countries?
Mr. Burbidge: There are two ways to answer that question. First,
on a technical level I am not even going to try to do that and will ask Mr.
Prévost to comment on it in a second in terms of the extraterritoriality of
the laws. From our perspective, we want to make sure that as best they can,
our banks are applying the same standards to all their operations outside
Canada that they apply here. Of course, there are some things that they have
to do in these other countries that are a local legal requirement.
Obviously, we have to respect that. International standards in place speak
to that issue, and part of our work is to look selectively at offshore
operations and evaluate how well they do that.
Senator Massicotte: That is from a prudency sense and a solvency
Mr. Burbidge: We do that in all parts of our operation, not just
in my group.
Senator Massicotte: Does that include suspicious transactions?
Mr. Burbidge: In the case of suspicious transactions, we would
want to ensure that the local regulators in country A, for example, were
satisfied with the way the bank was supervising its subsidiary and
responding to the requirements in that country.
Senator Massicotte: Do we do that as a country? We all hear of
stories in smaller countries where there is immense corruption and they work
with warlords. They use the banking system in those countries to funnel cash
around the world. Do we have any control of that? I believe that the
Minister of Finance has a right to blacklist those countries. I understand
we have not done so, even though international bodies are concerned about
Mr. Burbidge: That is a good question. You have referred to the
powers, which are in the process of being drafted, that would give the
minister the authority to take such actions. That does not mean that we are
doing nothing. The Financial Action Task Force regularly identifies
countries that have strategic deficiencies in their anti-money laundering
regimes. They are doing that as we speak this week at their regular meeting
in Paris. When that happens, OSFI reviews all of that documentation and, in
the same way that we do for the freezing and searching regulations, advises
our federally regulated sector what the FATF is saying about countries in
general and which countries they should be concerned about if they are
looking at transfers coming in from a country on the FATF list.
The bank has to report those incoming wire transfers no matter what
country they come from. In terms of their monitoring for suspicion, they
also look at those transfers in that same light. They would pay more
attention to a transfer that came in from Iran, for example, than they would
from a country that was not designated by the Financial Action Task Force.
Senator Massicotte: You refer to money transfers. What about
cheques from a country that does not have the best reputation? Do such
countries have a responsibility? Do they do anything?
Mr. Burbidge: It depends in what currency the cheque is written
and on which bank it is drawn. If they were operating a payable through
account, the cheque was drawn on a bank in Canada.
Senator Massicotte: It could be a Canadian subsidiary in a
Caribbean country. Do they have a professional responsibility to ensure that
it is not suspicious in any sense or could they say that the law is clear
and applies only to money transfers and cash?
Mr. Burbidge: The ability to determine if a transaction is
suspicious applies in pretty much every country that we would talk about in
this discussion. Caribbean countries have laws similar to ours that require
entities in those jurisdictions to be able to determine if transactions are
Senator Massicotte: Is that our way of saying: It is not our
responsibility; we know they are corrupt, but it is okay and we have done
Mr. Burbidge: Banks are not expected to be policemen. The standard
is reasonable grounds to suspect. It is the job of financial intelligence
units like FINTRAC and FinCEN in the United States, for example, to take in
this intelligence and to make that determination. If they believe there are
reasonable grounds to believe that this is actually laundering, they will
disclose that information to law enforcement. You have had presentations on
that from the other agencies.
Senator Ringuette: I will follow up on the discussion of Senator
Massicotte. You talked about Caribbean countries and about the U.S.A. When
officials from FINTRAC were before the committee, they clearly indicated
that the U.S.A. does not have legislation compelling their banks, other
financial institutions and insurance and trust companies to report on a
routine basis any transactions of any sort. You just mentioned a U.S. entity
to us. What kind of teeth would a U.S. entity have without legislation to
support the disclosure reporting of suspicious financial transactions?
Mr. Burbidge: I mentioned that particular entity in the context of
my response to Senator Massicotte because I was referring to suspicious
transaction reporting. In the United States, FinCEN is the entity to which
banks in the United States are required to report suspicious activity. I was
not referring to systemic reporting, wire transfers and large cash
transactions. I hope that clarifies the response.
Senator Ringuette: In other words, you are saying that the U.S.
has some kind of legislation but it is pretty much watered down in
comparison to our legislative requirements.
Mr. Burbidge: I would not want to characterize what I said, and I
did not say that they watered down their legislation.
Senator Ringuette: I said it.
Mr. Burbidge: They have a different type of much more complicated
regime than Canada has because the banking sector is structured quite
differently. The United States has been rated very favourably in the past by
the FATF, so one assumes that they are generally right up there when it
comes to international standards.
The comment that I made earlier to Senator Massicotte referred to
suspicious reporting activity. In the United States, there is that
requirement as there is in Caribbean countries and in Canada.
Senator Ringuette: I guess the key word is "suspicious." It does
not have all reporting or standard reporting requirements like the current
legislation at $10,000.
Mr. Burbidge: I am not an expert on the U.S. legislation, senator,
so I would not care to comment. I understand that they are moving in that
direction, but I do not know where that stands in terms of their regime. I
would have to suggest that you ask some other expert that question because
we are not the best people to ask.
Senator Ringuette: You indicated in your statement that your
assessments include the foreign operations of Canadian conglomerates. When
you say "assessment," is that in regard to the reporting or the
identification of suspicious transactions?
Mr. Burbidge: No, I was referring to our on-site supervisory
activity. I think I referred to that earlier in the opening statement. It is
really directed at evaluating the strength and effectiveness of the
underlying controls that the banks have in place to make sure that they can
comply with, amongst other things, the systemic reporting and the suspicious
transaction reporting that they are required to make to FINTRAC.
Senator Ringuette: In the country where they are geographically
Mr. Burbidge: When we get outside of Canada, we are generally
familiar with what the regime is in another country. There, we work with the
local regulator first to determine if there are any issues they want to
bring to our attention, because quite often we can add pressure to a
financial institution if there are things that local regulators are
However, what we really look at is the way in which the home office of
the Canadian entity works with its offices in the host jurisdiction. It
supervises them and makes sure the standard or the quality of the program
that is in place comes up to their group-wide standards. We are looking at a
group-wide standard that does not address the multitude of individual,
minute technical compliance requirements but addresses in a broader way the
strength of the management or the strength of the resources that they apply
to this work in the host jurisdiction.
Senator Ringuette: How many resources do you provide to do that
kind of assessment outside of Canada?
Mr. Burbidge: Can I ask you, senator, to clarify? Are you
referring to the people that we have on this work?
Senator Ringuette: Yes, outside of Canada.
Mr. Burbidge: Outside of Canada. It is the same group. My office
and my group, my team, are based in Toronto. There are 12 people in my
group, including me. I would say that nine or ten are the ones involved
full-time on the assessment program. The assessment program covers mostly,
of course, domestic operations but, periodically, on the basis of various
factors that we take into account, we will select an institution and look at
its offshore or foreign operation. We have done that on a number of
occasions. It is not something we do every week, but we certainly do it on a
regular basis. It would be either the same team that goes into the bank at
home or sometimes a subset of that team, because you are talking about a
very small institution so it might not necessarily be the same people.
Senator Ringuette: When FINTRAC was here, they said they had
signed MOUs with 127 countries. With respect to Canadian conglomerates
operating in those 127 countries, could we say, since there is an MOU in
those countries, that they should also report to FINTRAC?
Mr. Burbidge: I cannot answer the question because I cannot speak
for FINTRAC in terms of who should or should not report to FINTRAC. However,
part of the answer is that, in those countries, there are other financial
intelligence units that are like FINTRAC in that they have the same kind of
mandate to receive and evaluate financial intelligence. Reports would go to
that entity in that country.
The MOUs you refer to that FINTRAC has are, I believe, MOUs with other
financial intelligence units that enable them to share information between
themselves under certain criteria and certain thresholds. I have to say I am
not an expert on what those are. I think that would be a question that would
probably be better addressed to FINTRAC.
Senator Ringuette: Since 2002, you have been working in
partnership within the regime. How many events have you identified that have
led to prosecutions?
Mr. Burbidge: To respond to that question fully, I just want to
take you, senator, through the process, which does not link directly OSFI
with someone making a prosecution. The process is that banks are required to
supply FINTRAC with reports of suspicious transactions. When FINTRAC
believes they have reached a level where they are reasonably, and I cannot
remember what the legal wording of the threshold is, but when they believe
they have a case that there is probably laundering going on, they disclose
that to law enforcement, who then conduct a regular police investigation
just the same as any other investigation. At some point, assuming it is a
successful investigation, as you know, charges may be laid. We are not
involved in the prosecution side of things.
Senator Ringuette: I am asking the question because I am assuming
that during probably the last 10 years OSFI has been allocating these
resources to make sure that Canadian banks or foreign-owned entities by our
financial institutions comply with their countries' regulations. I am
wondering, in regard to value for money, if Canadians are getting their
money's worth in regard to the 12 person years plus expenses. If the law
says that the financial institution and insurance have to comply and report
to FINTRAC, then I am questioning the entire role and the value of the human
resources and the funding that you have put into looking to see if our
banking institutions are complying with the reporting of that. I was under
the impression that the technology that is being used to transfer the data
to FINTRAC was pretty smooth running.
The Chair: Would you let Mr. Burbidge reply? I will put you down
for a second round, if you would like to continue.
Mr. Burbidge: Thank you, chair. I will get my colleague to respond
to the first part of the question. In fact, I will get him to respond to all
Alain Prévost, General Counsel in the Legal Services Division, Office
of the Superintendent of Financial Institutions Canada: It might be
useful for this and other questions that have been asked before. You will
probably see in Mr. Burbidge's presentation references to a prudential
regulator. I must admit it is not necessarily obvious what it means. It is a
technical term. It means the mandate of OSFI, the Superintendent of
Financial Institutions — I think Senator Massicotte made reference to it —
is a solvency regulator. "Prudential" means that we are trying to make
sure that institutions have procedures in place to limit their risk-taking
so that it minimizes their risk of failure, and therefore increases the
chance that Canadian citizens will get their money down the road and the
institution remains solvent.
It is not obvious to make the link with anti-money laundering and
anti-terrorist but, as Mr. Burbidge indicated, the risk is to the reputation
of the institution. Most Canadian citizens would probably no longer do
business with a bank if a bank was involved in money laundering. They could
lose faith in that institution. That is where OSFI comes into play by
ensuring that the bank has adequate systems in place to reduce the risk that
it might get involved in these types of transactions. Therefore, OSFI
indirectly supports the mandates of other agencies that look at it from a
law enforcement perspective.
Senator Moore: Mr. Burbidge, on the second page of your
submission, the third paragraph says "those institutions we consider most
susceptible to money laundering and terrorist financing. OSFI makes this
determination based on transaction volumes, types of financial products, and
other factors." What kind of other factors would get your attention?
Mr. Burbidge: An example would be a bank or other financial
institution that has regular dealings with financial institutions in foreign
countries and also whether they are involved in trade financing activities.
Depending on the financial arrangements, banks can be quite knowledgeable
about international trade where they see the individual transactions of
their clients and they are financing those transactions, for example through
letters of credit or other arrangements — in other words, where they are
actually providing detailed trade financing facilities beyond simply cheque
Senator Moore: What sort of volume would get your attention? Would
it be half a dozen transactions or is it looked at by the month or the week?
Mr. Burbidge: There is no fixed answer to that question. A
relative measure is applied based on the overall size of the institution. A
small institution with a lot of exposure to this type of work would elevate
it for us a bit. An enormous bank with only a small operation of the kind we
are talking about would be assigned a lesser priority. It would all depend
on the relative size.
Senator Moore: You go on to say, "These institutions include
Canada's largest banks and life insurance companies. OSFI assesses them on a
regular three to four year cycle, but does more frequent and detailed
assessments where circumstances warrant."
Do you perform those assessments on site? Do you go to the institution
and examine things or are you just looking at records that have been
provided to you?
Mr. Burbidge: We absolutely go on site. For a large bank, we would
be on site in a team of five to seven people for somewhere in the area of
two to three weeks. That would be preceded by a study period during which
the team would study materials provided in advance by the institution. It
would be followed by a similar length of time during which the team would
evaluate what they saw in terms of the controls that are in place and come
up with any recommendations that OSFI felt were to be particularly pertinent
to that particular institution. It is time-consuming and those are typical
Senator Moore: I will follow up on the question of Senator Smith.
At the bottom of that page you said, "However, the quality of controls and
processes varies considerably . . . . One of the most significant challenges
for the sector is the ability to identify high-risk customers, and apply
enhanced scrutiny to them and their activities." We heard before that
neither Canada nor the United States is up to snuff with regard to
identifying. What is the problem? Why are those institutions not able to
identify the high-risk customers so we can meet the standards that are set
by the Financial Action Task Force in Paris? Has this been an issue for a
while? Were we okay for a while and then we slipped back? What is
identifying all about?
Mr. Burbidge: This has been a common theme around FATF member
countries and is not unique to Canada. You can go to any of the mutual
evaluation reports published by the FATF on other members and you will find
With respect to the situation in Canada, the obligations to be able to
identify these high-risk customers have existed since June 2008, I believe,
when the FINTRAC legislation was changed to implement this requirement.
Although some are struggling, others are doing a good job.
Senator Moore: Do you mean some institutions?
Mr. Burbidge: Some Canadian institutions are doing a better job
than others. The reasons for that vary all over the lot. They range from not
having enough knowledge about how to do it to not having enough people to do
it. There could be a whole raft of reasons that one institution or another
was not doing as good a job. We try to see if we can identify what that
underlying reason might be. Often, we can make links between their
performance in this area and their performance in the management of other
risks. For example, if they are struggling in other areas, there may be a
broader systemic issue, which we can lever off and say, "We have made the
comments in other areas."
Generally speaking, I would say that the federal sector is getting better
at it, but it is not proceeding at quite the clip that we thought it would
proceed. There are still difficulties, and we are working hard with these
institutions to communicate our expectations more clearly.
One of the factors of this work is that although the legislation requires
this to be done, it does not say how it is to be done. I think that was
deliberate because the way that financial institutions implement these rules
varies greatly from institution to institution. There is no
one-size-fits-all approach. All we can do is look at the output: Given the
size, the products and the operations, does it seem reasonable that they
have identified this number of high-risk customers? We look at their
methodology and try to evaluate whether it seems reasonable that they have
identified those high-risk customers.
Senator Moore: Is this identification issue more prevalent in a
Canadian institution's business dealings in Canada as opposed to its
dealings offshore? Does that have an impact or cause the numbers to go up or
down? Do you go offshore to institutions' operations?
Mr. Burbidge: To the first part of your question, the answer is:
It is very common, although it is not something or any one area that I can
put my finger on. To the second part of your question, the answer is: Yes,
we do. We have looked at foreign operations in countries ranging from the
Caribbean to Crown dependencies of the United Kingdom and other countries.
Senator Hervieux-Payette: This refers to principles and methods. I
would like to ask the witness some specific questions so that I can
understand. First, I wonder if you could define the criminals we are talking
about. Are they involved in organized crime? Are their transactions directly
linked to drugs? Does the word "criminal" refer to all criminals, that is
those who defraud others, and there are probably a fair number of them? I
want to know what kind of criminals we are dealing with here. They have to
be identified. How you do that? Who is your criminal?
Mr. Burbidge: That question is probably better directed at another
agency like FINTRAC, the RCMP or the Department of Finance. However, I just
want to remind you of what I said earlier, which is that banks are not
expected to be policemen. They are not expected to be able to identify
criminal activity. However, they have to have processes in place to
determine whether there are grounds to suspect that a transaction may be
linked to criminal activity.
The other thing is that the regime as we understand it as OSFI is
predicated on the idea that the proceeds of crime are generated from a
number of underlying predicative offences. As you mentioned, this could be
the sale of illicit substances or various other kinds of criminal activity.
We are not necessarily the right people to ask that question about which
criminals and trying to define criminals. I want to ask Mr. Prévost to add
any comments he might have that will be helpful.
Mr. Prévost: I do not have much to add. I am not an expert but my
understanding is that all offences of a criminal nature are automatically
designated under the Proceeds of Crime (Money Laundering) and Terrorist
Senator Hervieux-Payette: There was a case in Quebec a few years
ago, that you may remember, with Biochem Pharma. Organized crime had
invested money in Biochem Pharma and made several transactions. A stock
issue was launched by one of the affiliates of a bank in the amount of $30
million. Ultimately, they even broke into the building. Are you the only
organization with access to bank records? If the bank does not tell you, you
are the only ones allowed to go and have a look at all its records. Can no
other organization do that?
Mr. Burbidge: That is a complicated question to answer. We are not
the only organization that has access to the records that you are speaking
about. In addition to OSFI, of course, FINTRAC can look at any documents.
Senator Hervieux-Payette: I am referring to your daily, regular
occupation at OSFI, going to banks and looking at whether they are
respecting the law. This is what you do on a regular basis. That is why you
are called an inspector.
You do a lot of inspecting. Would you be the first on the frontline to
detect anything suspicious?
Mr. Burbidge: Again, I will ask Mr. Prévost to add anything he
wants to after my response, but I can only reiterate what I said earlier,
which is that the legal obligation that is on our financial institutions is
to report suspicious activities to FINTRAC. There are a number of other
reporting obligations but I am for the moment focusing just on that.
Our work onsite is designed to help us evaluate whether or not a
particular financial institution has an effective process in place that
enables it to do just that. I cannot speak to the issue of what a bank or a
financial institution should do if it apprehends known criminal activity,
but I will get Mr. Prévost to answer that question. I am assuming there is a
way for that to be communicated directly to law enforcement. I hope that
answers the part of your question that deals with my group's role, which is
again carried out in the expectation that we do not expect our banks and
financial institutions to be policemen, but they are required to be able to
detect and deter, and that means they are required to be able to detect
potential suspicious activity and, if they believe it is suspicious, they
have to be able to report it, and they have to report it to FINTRAC.
Mr. Prévost: I do not have much to add except to remind you of the
mandate of our office. Yes, our office has access to all the information
that a bank has, but the goal of that access is to make sure that the bank
is in good financial health. It is not to look for criminal activity.
However, were we by chance to find such information, we would then tell the
bank to give that information to the police.
Senator Hervieux-Payette: My concern is that, if a criminal
organization purchases a significant number of shares — I am referring to
shares listed in Canada — and there are nearly no independent brokers left
since they are all affiliates of banks, and the banks have to be perfectly
pure and when someone is ready to launch an issue of $20 million, $50
million or $100 million, they do not have any higher responsibility as you
said, they cannot be policemen. It seems to me that this is a bit fuzzy.
We are talking about an industry worth billions of dollars. It seems to
me that it is easy for a group to write a check on a Swiss bank to purchase
a $50 million block of shares in order to launder that money by selling the
shares later on little by little.
I wonder who is going to detect that kind of offence. Who would be
responsible for finding it out and detecting it? There is a $10,000 limit
but that will not put our economy in danger; it is rather those millions of
dollars. How do you detect that kind of manipulation of the market? Let us
be frank here: after they buy in, they will try to manipulate the market in
order to raise the value of their shares, which is what happened with the
company I mentioned. So there was an offence at the beginning of the
process, with the issuing of the shares, there was an offence during the
issue, and then they sold their shares.
I do not remember ever having seen the RCMP very interested in this kind
of issue. Who has the resources to deal with that? You have access to the
Mr. Burbidge: There is quite a range of territory there. May I
answer this way? There is an expectation on our part that, in order to be
able to comply with this legislation, banks have to have measures in place
that enable them to know their customers very well. There is a legal
obligation, as we talked about earlier, that imposes an obligation for them
to be able to detect higher risk customers. Our understanding of the purpose
of that is simply to ensure that the financial institutions are in a
position to report suspicious activity in the places where they might
hopefully expect to find it the most number of times.
In the situation you postulated, we would expect a bank or financial
institution to have sufficient knowledge about their customer. When they see
those transactions, we would be expecting them to flag them and at least
check them out. That is part of what we do. We look at the process from
front end to finish by saying, "Okay, tell us what kind of indicators
trigger an internal alert or cause you to think that perhaps this is an
unusual transaction that might be suspicious but might not be suspicious,
and then what do you do to make that determination? What process or
resources do you apply, and how do you document that you have actually said
that is suspicious or not and why?" They are under an obligation to create
all those records and file that.
I wanted to pick up on one thing you mentioned. I would not want to give
the impression that there is a $10,000 threshold on suspicious activity
reports. There is no threshold on suspicious activity reports. Any amount
has to be reported in a transaction if it is the subject of a suspicious
transaction report. Of course, that could include a large cash transaction
or an electronic funds transfer if, in addition to reporting it routinely
and systematically, the bank also believed that it was suspicious. That
could be reported twice: once as a suspicious transaction and routinely as a
The regime writ large is designed to deter the kind of activity about
which you talk. The processes we have in place are designed to evaluate how
strongly our financial institutions implement those measures to ensure that
they can do the expected detecting and deterring.
Senator Massicotte: I was looking at the report that just came out
from FINTRAC dated April 2012; it must be hot off the press. The whole act
is Proceeds of Crime (Money Laundering) and Terrorist Financing Act. I was
surprised to read in the report about the attempts of FINTRAC to detect
money laundering through cash transactions or criminal activity. Nearly 36
per cent of all suspicious transactions relate to fraudulent transactions.
The highest percentage of fraudulent transactions relate to investment
In the report is an example of what they mean by that. Amazingly, the
example given is of people who sell a piece of real estate or other asset
that is non-existent and then they disappear. The reason they get caught has
nothing to do with money laundering; it is because they chose to do
transfers of cash through wire transfer. Once the criminals read this, they
will do cheques from here on. If they had used cheques, they would not have
been caught. That was the most significant result from FINTRAC. It had
nothing to do with money laundering or drug money. It had to do with fraud
and investments and securities. We think we have a huge net out there and a
lot of people trying to get to the issue, but we are spending most of our
time looking at fraud and investment transactions. Do you have any comments
Mr. Burbidge: The easy answer is that fraud is a predicative
offence in any event. It comes back to how well the financial institution
knows its customer. At the end of most of these discussions, it is a
question of how well the institution understands what the customer is doing
banking at that institution and what the purpose of these transactions is.
Banks are under an obligation when an account is opened to inquire about the
purposes of that account.
One of the things that we have looked at often is how granular that
information is. We expect that where a financial institution sees
transactions that are not consistent with that kind of stated purpose of the
account, they would conduct enhanced due diligence and make more inquiries
to find out why the customer is processing transactions that do not seem to
be consistent with that person's account. This borders on the area of art,
of course, because as fast as one institution can find out information,
criminals will simply change activity.
Senator Massicotte: I appreciate what you are saying, but they are
saying differently. The report says that most fraud in investment circles
has nothing to do with a new bank account or some problem person. Rather, it
says that it is usually prominent, reputable people with existing Canadian
bank accounts for years whose son, perhaps, decided to usurp and manipulate
circumstances to defraud people out of their money. It has nothing to do
with the $10,000 limit on transactions or with new bank accounts. They
simply got caught because they used a wire transfer and tried to leave the
country. You should read the report.
Mr. Burbidge: Actually, we have read it. I did not hear a
question, but I take the points that you are making. I think that one of the
reasons we do the work we do is to ensure that the processes are in place so
that FINTRAC can get the intelligence and come to those conclusions.
Senator Massicotte: It is probably good for Canada. It is a useful
benefit, but that was not the intended purpose.
Senator Ringuette: I will go back to my previous line of
questioning. You have 12 people so I assume your yearly operating budget is
between $3 million and $4 million. Am I close?
Mr. Burbidge: I am sorry, senator, I do not have those statistics
with me. That is a bit on the high side of an estimate, I think, but I am
afraid I cannot confirm the numbers; I do not have the statistics with me.
Senator Ringuette: When you were being questioned by another
senator, I was thinking that perhaps part of OFSI's budget comes from fees
that you receive from the financial institutions you regulate to ensure
compliance. Am I wrong? Could you confirm and give me the approximate
percentage of your budget that comes from fees?
Mr. Burbidge: I can tell you that the percentage is very high. I
do not have the exact numbers. Mr. Prévost may be able to give you more
Mr. Prévost: Virtually all of the expenses incurred by OSFI for
administering the legislation are recovered from the financial institutions.
Senator Ringuette: Does that include this portion, even though you
have no legislative role?
Mr. Prévost: Yes.
Senator Ringuette: My previous line of questioning was: Why should
a taxpayer foot the bill to protect the reputations of banks? I am happy
that taxpayers are not footing the bill.
Mr. Prévost: It is not so much to protect the bank's reputation
but to protect Canadian citizens from dealing with a potentially insolvent
Senator Ringuette: There is a difference between looking at an
insolvent bank and a bank that could be involved in suspicious transactions
in terms of one's reputation.
When FINTRAC was here last week, I asked how many administrative monetary
penalties were involved. They indicated that during the last three years
since 2008, there were 15 administrative monetary penalties imposed on a
Were you involved in identifying those penalties and dealing with those
Mr. Burbidge: The answer to your question is that the penalties
that FINTRAC applies are determined by processes internal to FINTRAC. They
make those decisions and OSFI is not part of that process.
Senator Ringuette: In order for them to apply monetary penalties,
those financial institutions were not complying with the legislation.
In the last hour and a half, you have been telling us that you have 12
people doing some kind of auditing of financial institutions in Canada and
sometimes outside of Canada to make sure that they have the processes in
place to meet the legislative requirements. There were 15 penalties in the
last three years.
Mr. Burbidge: I think the information you are looking for is
whether or not any penalties were applied by FINTRAC to federally regulated
financial institutions. Can I get some clarity on what information you are
trying to obtain, senator? I am afraid I do not understand the question.
Senator Ringuette: Your only area of responsibility is in regard
to financial institutions, as per OSFI legislation.
Mr. Burbidge: Yes.
Senator Ringuette: What I am asking you is, of those 15 penalties,
were you involved in either detecting that a bank was not complying or
afterwards making sure that they were complying and helping them put in a
Mr. Burbidge: The answer to your question is no, because to my
knowledge FINTRAC has not imposed any penalties under its administrative
monetary penalty regime against federally regulated financial institutions.
Senator Ringuette: What you are saying is that those 15 penalties
do not come from federally —
Mr. Burbidge: You would have to ask FINTRAC for sure, but I
believe those penalties were applied against other entities that are subject
to the regime but are not federally regulated financial institutions.
Senator Ringuette: That you have nothing to do with.
Mr. Burbidge: That is correct, senator.
Senator Moore: Just to follow-up on Senator Ringuette's questions
with regard to your operation, you mention you have 12 people. What is your
Mr. Burbidge: Senator Ringuette did ask that question, and I am
afraid I do not have those statistics with me.
Senator Moore: You could provide the clerk with that information?
Mr. Burbidge: Yes, we will undertake to get that information to
Senator Hervieux-Payette: It would be nice to have a breakdown.
Senator Moore: Yes, rather than just a lump. I would like to see
what the budget is.
You mentioned your expenses are covered by the financial institutions.
How does that come in? Does it depend on the size of the bank or how many
inquiries you make of a certain bank? Do you set the budget so this year it
will be $10 million and we have 10 companies or 10 organizations, so each
takes in a million? How does that work? Which comes first?
Mr. Burbidge: I will pass the question to Mr. Prévost because he
may be more familiar with the process. The process applies, of course, to
all of OSFI's operations. There is no separate process just for my part of
the operation. The process is complex, and there are quite a number of
factors involved. Mr. Prévost, could you respond to the senator's question
in more detail?
Mr. Prévost: That is correct. Basically, all of the costs incurred
by OSFI are assessed on the institutions, and it is based on the size of the
institution, either the amount of assets or the amount of net premiums in
the case of insurance companies, but basically the bigger ones pay a bigger
share of the costs.
Senator Moore: It is on my mind, so I might as well raise it.
There are no conflict situations here. No one ever leans on you and says,
"Hey, we are a big contributor; what do you mean you are pushing us on
Mr. Burbidge: Quite the contrary. We have financial institutions
who phone me up and they want us to come in and look at their operation.
They are very, very supportive of the AML part of our work. Yes, we get
calls eager for an inspection by my group. There is no issue there at all.
Senator Moore: I realize that you are mandated by various
statutes. A range of people are out there running businesses called
financial advisers of one type or another that deal in millions of dollars.
We have had Ponzi schemes. We have had the asset-backed commercial paper
debacle. Do you get involved in any of that, or is that outside of your
mandate? Would you like to be involved in it?
Mr. Burbidge: No. The short answer is no. We come across these
things indirectly. Sometimes it may happen that one of our financial
institutions may have had some sort of an indirect involvement, but in all
cases we simply take this information and store it up. When it is time for
an institution to be assessed for an anti-money laundering assessment, we
keep that information in our mind as we plan the work on site so that then
we can address if there were any weaknesses in that area. It is not the
primary focus of our work.
As I say, we do not expect banks to be policemen, so we do not go in and
say, "Give us a list of all the Ponzi schemes you have been involved in."
It does not work that way.
Senator Moore: I understand that. The OSFI issues anti-money
laundering and anti-terrorist financing guidelines and voluntarily updates
and posts terrorist lists. We got this from the Library of Parliament. You
issue these guidelines. Do you create them?
Mr. Burbidge: Create the guideline?
Senator Moore: Yes.
Mr. Burbidge: Yes.
Senator Moore: As a result of your assessments and your
experiences and historical corporate knowledge, you create guidelines, or
you see situations that need to be covered off, and then you prepare and
Mr. Burbidge: That is the process, sharing with guidance issued by
prudential regulators. It is intended to impart to the sector our knowledge
of best practices. Since we look at all of the financial institutions, we
are in a position to see what works well here and what does not work so well
over there. Part of the goal is to say what works well, and also
periodically to review and update guidance as more information comes to hand
from our accumulated work, our storehouse of knowledge about new and
emerging threats, how banks and financial institutions responded to those
kinds of threats, what processes seem to work and what processes do not seem
to be as effective. The purpose of the guidelines is to communicate that to
Senator Moore: You voluntarily update and post terrorist lists.
Voluntarily? I do not think that word applies here.
Mr. Burbidge: Voluntarily means that we are not statutorily
obligated to do it, but we do it because we think it is in the best
interests of Canada and the best interests of the financial sector that our
banks be on the ball. I am not suggesting they are not on the ball, but to
make sure that every bank, every institution, is immediately apprised of
what their obligations are and that they have processes in place to
The Chair: Mr. Burbidge, in preparation for this parliamentary
review, the Department of Finance has conducted consultations with various
stakeholders, which I assume you were one because you indicated you had
passed on recommendations to them. A paper was prepared by CAPRA, at their
request, and it includes a summary of the recommendations and the
recommendations that they want to go forward with. I wanted to ask first,
are you familiar with those recommendations?
Mr. Burbidge: I am, in a general way, although I regret to say I
do not have a copy of that document with me.
The Chair: The purpose of my question is, basically, are you
comfortable with them?
Mr. Burbidge: Yes, we are very comfortable with those
recommendations. We were part of the group that worked for about a year on
that work, and we had full input into the process and we were listened to
very carefully. We are satisfied with that.
The Chair: You mentioned you have continual dialogue with the
Department of Finance but, as a concluding remark, is there anything you
would like to recommend to our committee today that we should be taking a
particular look at that may not have been covered or that you would like to
put additional emphasis on?
Mr. Burbidge: Thank you for the opportunity. In a multiplayer
regime like this one, where you have a number of different government
departments and agencies working together, there are always opportunities to
improve the system, to regularly look at roles, responsibilities, and to try
to create as effective a regime as possible within the limits of what each
of our various agencies is mandated by Parliament to do. You have had an
expose today of the mandate given to us by Parliament and how we try to
execute it in terms of supporting this regime. We are very happy to play
that role and to continue to work with our federal partners, the Department
of Finance and FINTRAC, in helping to improve continuously this regime. I do
not have any particular recommendations for you today. Technical discussions
go on all the time. I would not want to bore you with all the details, but
we are certainly satisfied that we have a solid voice in making suggestions
and comments to our colleagues.
The Chair: Thank you for that, Mr. Burbidge. On behalf of the
committee, I would like to express our appreciation for your appearance. Mr.
Prévost, thank you very much for being before us today.
To the committee, I indicate that we will meet at 10:30 tomorrow, when we
will hear from the Office of the Information Commissioner of Canada and the
Public Prosecution Service of Canada as we continue this study.
Senator Ringuette, do you have a question?
Senator Ringuette: Yes.
In light of Senator Massicotte's question, and I have not read the
unreleased FINTRAC report, it is about securities and hearing from
The Chair: We would be happy to discuss that with you.
Senator Ringuette: Okay.
The Chair: This meeting is concluded.
(The committee adjourned.)