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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.

[English]

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.

[Translation]

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.

[English]

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 Carney.

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 strategies.

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 those sanctions.

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 mechanism.

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 oversight.

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 deposit-taking institution.

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 shared.

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 question.

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 sense.

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 some controls?

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 suspicious.

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 our job?

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 located?

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 concerned about.

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 of it.

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 processing capabilities.

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 time frames.

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 similar comments.

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.

[Translation]

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?

[English]

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.

[Translation]

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 Financing Act.

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?

[English]

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.

[Translation]

You do a lot of inspecting. Would you be the first on the frontline to detect anything suspicious?

[English]

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.

[Translation]

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 bank books.

[English]

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 systemic transaction.

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 activity.

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 on that?

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 information.

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 bank.

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 financial institution.

Were you involved in identifying those penalties and dealing with those financial institutions?

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 process?

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 annual budget?

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 you.

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 that?"

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 issue guidelines?

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 our sector.

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 implement them.

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 witnesses.

The Chair: We would be happy to discuss that with you.

Senator Ringuette: Okay.

The Chair: This meeting is concluded.

(The committee adjourned.)