Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 15 - Evidence - March 28, 2012
OTTAWA, Wednesday, March 28, 2012
The Standing Senate Committee on Banking, Trade and Commerce met this day
at 4:15 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.
Adam Thompson, Clerk of the Committee: Honourable senators, as
clerk of the committee, it is my duty to inform you of the unavoidable
absence of the chair and the deputy chair and to preside over the election
of an acting chair. I am now prepared to receive a motion to that effect.
Senator Greene: I would like to nominate Larry Smith as acting
Mr. Thompson: Are there any other nominations? Seeing none, I will
put the question: It is moved by the Honourable Senator Greene that the
Honourable Senator Larry Smith do serve as acting chair of this committee.
Is it your pleasure, honourable senators, to adopt the motion?
Hon. Senators: Agreed.
Mr. Thompson: I declare the motion carried and invite Senator
Smith to take the chair.
Senator Larry W. Smith (Acting Chair) in the chair.
The Acting Chair: First, I would like to thank our guests for
attending. Second, I will introduce some of the participating senators here
from both sides: Senator Stephen Greene, Senator Gerry St. Germain, Senator
Ghislain Maltais, Senator Pierrette Ringuette and Senator Paul Massicotte.
Thank you very much for your participation today.
This afternoon we will continue our five-year parliamentary review of the
Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This is
our twelfth meeting on the subject. In conducting this review, the committee
has heard from a number of so-called regime partners involved in the
implementation and administration of this legislation. In recent weeks we
have been hearing from those familiar with and impacted by the regime,
including industry groups and associations, as well as independent experts
in the field, and we continue that work today.
In the first half of this meeting we are pleased to welcome a panel
representing jewellers. We are pleased to welcome David Ritter, President
and CEO of the Canadian Jewellers Association. He is accompanied by Phyllis
Richard, Executive Director of Jewellers Vigilance Canada Inc.; and
Alexander Barcados, President of C.D. Barcados Co. Ltd.
Colleagues, we are ready to start. I would like to introduce Senator
Wilfred Moore, another of our senators here today.
Mr. Ritter, the floor is yours.
David Ritter, President & CEO, Canadian Jewellers Association:
Good afternoon. Thank you very much, Mr. Chair, for the kind introductions
of my colleagues today. I will refer to the Canadian Jewellers Association
as CJA throughout this presentation. Joining me today is Alexander Barcados,
President of C.D. Barcados Co. Ltd., and Past Chairman of the CJA; and
Phyllis Richard, Executive Director of Jewellers Vigilance Canada. This
presentation is on behalf of both of our associations.
First, we appreciate the opportunity to contribute to the committee's
review of the Proceeds of Crime (Money Laundering) and Terrorist Financing
Act. We join other stakeholder groups in our firm commitment to combatting
money laundering and terrorist financing. The jewellery sector is directly
affected by organized crime, perhaps more than any other reporting entity,
through the violent crimes against our industry. We are keen to assist in
eliminating this scourge.
The Canadian Jewellers Association was established in 1918 and is the
national trade association representing the jewellery sector. CJA is the
voice of the Canadian jewellery industry, providing leadership in ethics,
education and communication.
Jewellers Vigilance Canada, JVC, was established in 1987 as an
independent, non-profit association with a mandate to advance ethical
practices, establish a level playing field for the Canadian jewellery
industry and provide crime prevention education for the trade, as well as
assistance for law enforcement.
The Canadian jewellery sector is estimated to be over 5,100 retail
companies and approximately 1,000 manufacturers and suppliers. In 2010,
Statistics Canada reported that the jewellery sector represents over $3
billion in sales.
The jewellery sector is unique. For example, in comparison to most other
retail sectors, such as clothing, shoes, household and hardware goods, where
chains and big box stores dominate the marketplace, the jewellery retail
sector is comprised mostly of privately owned entrepreneurial small
businesses with the exception of a few large chain stores. It is estimated
that the majority of independent retail jewellers have an average annual
sales volume between half a million and three quarters of a million dollars.
The jewellery manufacturing and supply sector is also dominated by small
Approximately one quarter to one third of the Canadian jewellery sector
belongs to an industry association. Adding to this challenge is the sector's
slowness to embrace and use new technology. For example, we still have
industry members without email access. This, combined with the unstructured
and entrepreneurial nature of our industry, makes education and distribution
of information challenging.
In June 2007, the Department of Finance entered into the formal
consultation phase with the jewellery sector on the expansion of Proceeds of
Crime (Money Laundering) and Terrorist Financing Act and regulations, which
would include dealers in precious metals and stones, DPMS, as of December
A dealer in precious metals and stones is defined as a person or entity
that in the course of its business activities buys or sells precious metals,
precious stones or jewellery. The definitions apply to the entire industry
with the following exceptions: jewellery and watches that do not include
precious metals or stones; transactions for the purpose of manufacturing
jewellery; and manufacturers, unless they sell to the public. Mining,
polishing and cutting activities are excluded from the definitions and are
not captured under the regulations.
Many of the concerns and challenges discussed with the Department of
Finance in the months leading up to the December 2008 implementation of the
amended AML/ATF regulations remain with us today.
The AML/ATF regulations are primarily designed for financial
institutions. These institutions generally have sophisticated electronic
systems, managerial infrastructures and communication channels. There is a
"top down'' authority and an environment where compliance with very specific
criteria is the norm. These stakeholders are better equipped for the
administrative burden of a detailed AML compliance regime. In addition, the
clients using these institutions are conditioned to accept a certain level
of disclosure of personal information and certainly presenting of personal
In stark contrast, the DPMS sector lacks technological sophistication,
with a limited communication channel. The consumer walking into a jewellery
retailer does not have the expectation to reveal personal information nor be
questioned and asked for ID. The jeweller is attempting to create an
atmosphere of enjoyment, and in some cases romance, over a few feet of
counter space. That is the focus that will enhance the jewellers' businesses
and keep consumers returning to their stores.
These small companies have built their businesses on trust. Consumers
have come to expect their right to privacy, especially when shopping in a
retail environment. Auction houses are excluded from the DPMS AML/ATF
regulations, which create an uneven playing field even within the jewellery
sector and is an area open to potential money laundering and terrorist
Jewellers compete with every other form of luxury products that consumers
have to choose from, such as electronics, cars and boats. Other luxury
product retailers are also not covered under the AML regulations and
therefore do not have the obligation of attaining consumers' personal
information. Some DPMS also face indirect compliance burdens from their
financial institutions. Financial institutions are doing this as part of
their CDD and risk assessment and mitigation, but it may represent
unintended collateral compliance burdens for the DPMS.
Compared to some other countries, Canada's DPMS sector represents a lower
risk for money laundering and terrorist financing. This is particularly true
of countries where the local banks or currencies do not enjoy the same
confidence of the populace as they do in Canada. In these jurisdictions,
gold and diamonds play a far greater role in the storage and transfer of
wealth. A lower risk assessment for Canada's DPMS sector is consistent with
the risk-based approach outlined in the FATF 40+9 recommendations and with
the most recent FATF recommendations made in February 2012.
Unlike other reporting entities, there are no licensing requirements
specific to the DPMS sector, and very few specific regulations that pertain
to jewellers. The DPMS sector is somewhat unfamiliar with the intensity and
detailed compliance requirements to such complex regulations as posed by the
AML regime. This, combined with the unique small business nature of our
industry among reporting entities, must be taken into account when
developing AML/ ATF regulations to ensure that they are effective and avoid
creating an excessive compliance burden.
FINTRAC has requested assessment reports on compliance regimes from the
DPMS sector this January for the first time since the DPMS sector has added
to the AML regime in December 2008. We do not know the results of these
assessment reports and, consequently, have yet to see an example of a
compliance regime that FINTRAC considers compliant. It seems premature to
look at extending the scope of the regime for the DPMS sector until we are
able to assess the current sector compliance and effectiveness of the
current regulations and guidelines.
We would like to comment on specific areas of concern for the DPMS sector
in the November and December AML/ ATF regime consultation papers. From the
November 7, 2011 consultation paper, we are concerned about the introduction
of the concept of enhanced CDD and the recordkeeping of this concept as it
may apply to the DPMS sector.
While we appreciate that from the Department of Finance's perspective
these regulations essentially mean "being mindful'' of a customer after a
$10,000 cash or suspicious transaction and therefore should not represent
too much of a burden, we have strong concerns that the regulations as
written, when translated by FINTRAC into guidelines, will go beyond the
scope discussed with the Department of Finance and be an extreme burden on
DPMS. Specifically, we are concerned with how FINTRAC may interpret DPMS to
comply with guidelines designed for financial institutions.
Unlike financial institutions, DPMS are not always able to identify and
trace customers on an ongoing basis to nearly the same extent. For most
financial institutions, the enhanced CDD requirements are a small extension
of the current model building on existing practices.
For DPMS this could require potentially radically new processes that
would be very harmful to business, especially in the retail environment.
Given the low risk within the DPMS sector of money laundering and
terrorist financing activity not currently covered by the regime, there
would seem to be marginal, if any, additional benefit beyond the current
From the December 21, 2011 consultation paper, we recommend that proposal
2.7 be more specific about the additional exclusions to the DPMS sector
reporting requirements relating to the sale or purchase of metals and stones
that are used in the manufacturing process. In dialogue with the Department
of Finance, they indicated that this was to exclude industrial non-jewellery
use of metals and stones. Within the DPMS industry, the term
"manufacturing'' may have several different meanings that are not consistent
with the intention of the proposed changes. For example, manufacturing can
mean the actual process of making jewellery or could also mean the cutting
and polishing of diamonds. The intended use and types of activities when
referring to manufacturing need further clarification.
In closing, we would like to recommend the following: The current
compliance level with the existing legislation for the DPMS sector should be
assessed and understood before additional requirements are extended to the
jewellery industry. Until such time, the DPMS sector should be exempted from
the enhanced CDD regulations, specifically proposal 3.2, 3.3, 3.4 and 3.5
from the November 7, 2011 consultation paper.
One size does not fit all. Future compliance obligations need to be more
tailored to our unique small business sector that would alleviate the
compliance burden now placed on the DPMS sector, giving consideration to the
privacy of the purchasing consumer. This is particularly important as the
regime moves from adopting amendments to the development of guidelines.
It is important for both government and the jewellery industry to work
together to strike the right balance when strengthening Canada's AML/ATF
legislative framework as it applies to the DPMS sector.
Thank you for the opportunity to address this committee. We would welcome
your questions at this time.
The Acting Chair: Thank you, Mr. Ritter.
Ms. Richard and Mr. Barcados, do you have any comments that you would
like to add at this point before we get into questions?
Alexander Barcados, President, C.D. Barcados Co. Ltd.: I am okay
waiting until questions.
The Acting Chair: I would like to introduce you to Percy Mockler,
a senator who has just joined us.
We actually have a couple of people on the questions list. I would not
mind starting off with the opening question, if possible.
The involvement of the industry, in terms of the legislation, started in
2007 when the first discussion took place and in 2008. You have raised some
flags or points for consideration. Where are you at in terms of where you
started and where you are going? You have made recommendations but what is
the thinking among the members of your group? It is an open, general
question that can maybe lead us on to further questions with the other
Mr. Ritter: I defer to Mr. Barcados or Ms. Richard.
Phyllis Richard, Executive Director, Jewellers Vigilance Canada Inc.:
I will start. In the beginning when we first started to work with
finance on the development of the regulations as they would apply to us, we
entered into dialogue in trying to have Department of Finance understand the
uniqueness of the jewellery industry here in Canada. There was a lot of
focus on that and given that at the time financial institutions were the
model that was being used, it became apparent to us that it possibly could
prove to be quite onerous for independent retail jewellers, for example —
which make up the vast majority of our industry — to have compliance
regimes. Many of them would not have had cash transactions over a $10,000
amount. It would be a rare occurrence for many of them and for some it would
never happen. Our concern then was that the regime would be putting an
onerous additional bureaucratic function on these small business people —
what we call moms and pops and entrepreneurial small businesses — that would
have a difficult time in doing that.
We are just entering now into the phase where FINTRAC is actually
assessing our industry with regard to those compliance regimes. We really do
not know how well or how it has fared. However, anecdotally, both Mr. Ritter
and I have received many calls from our members needing help to understand
why this is, and how is this to work. They are just not used to that kind of
Mr. Barcados: Going back to the initial discussions, the regime in
Canada for our sector, DPMS, goes beyond the recommendations that FATF
created for DPMSs. The thresholds are lower in Canada, and compared to other
countries in FATF, the Canadian regulations have gone further in terms of
our industry. I would say as well, our industry itself is a diverse industry
between retail, wholesale, and lots of different sectors. The way things
have developed is that the low-risk sector of our industry — the mainstream
jewellers — seems to be facing the bulk of the compliance burden. Yet the
high-risk sectors seem to fly under the radar and not be captured by it.
That creates some frustration among industry members that want this to be an
effective regime. Mr. Ritter mentioned crime is a real problem in our
There is a feeling that the focus is not on the sectors in our jewellery
industry that it should be. I think it is fair to say that we have not seen
what a compliance regime should look like. There are lots of descriptions of
one, but we have not seen an example of one. It sometimes feels to some
people that the company reads the requirements but it would be nice to see
an example of what one might look like for a typical company.
The Acting Chair: Let us get into some questions.
Senator Ringuette: I have a few questions to set the context and
the record straight. In regard to the group of people that roams around
Canada buying gold, are they part of your association?
Mr. Ritter: At this particular stage, it depends. Some of our
mainstream jewellers do buy gold and they do buy jewellery from the
consumer. However, there are a lot of other businesses out there that will
buy your gold that are not.
Senator Ringuette: For cash.
Mr. Ritter: For cash. They are not part of our industry, no. We
feel they could be high risk as well.
Mr. Barcados: I would emphasize that most people in the industry
would consider that to be an extremely high-risk sector and unfortunately,
because they are not a mainstream jeweller that has a fixed address, they
are not even on the radar in terms of compliance assessment. They should be,
but part of the problem in that sense is they are not listed in a registry
or anything like that. They are not even being looked at.
Senator Ringuette: Exactly. That is why I wanted to clear the air
in regard to your association and your members and say that it is completely
different from what we have seen happen in the last five years in the
Since 2007, you have been asked to comply. How many reports would your
members have sent to FINTRAC since you have been asked to comply? Has that
led to any kind of further investigation and court proceedings?
Ms. Richard: I believe it was Mr. Barcados who mentioned that we
are just now being assessed by FINTRAC; in fact, we do not know what the
response has been. We know from a FINTRAC report on suspicious transactions
that the DPMS sector sent in 52.
Mr. Barcados: We do not know large cash transactions. We do not
have access to that information.
Ms. Richard: No, we do not have numbers on that. We were not
actually captured until December 2008. Basically, it has been just over
three years that we have been captured by the regulations.
Senator Ringuette: I will give you a few scenarios, and you tell
me. Right now, the minimum of $10,000 is the standard that has been
established. The white paper that was submitted to be reviewed in this
process says that we go down to zero dollars; and that is certainly a red
Let us say, for instance, that I inherit all the jewellery from Aunt
Agatha, which is worth $50,000. It is an inheritance. You assess the
jewellery and say that you will give me X dollars, which is more than
$10,000. Would your member jeweller have to report such a transaction to
Ms. Richard: It is our understanding that it is the transaction
where the consumer is trying to give the jeweller $10,000 or more in cash.
Mr. Barcados: Are you saying that the jeweller would do this by
cash or give you a cheque for it?
Senator Ringuette: He would give me a cheque for it. I want to
make clear that when we talk about a cash transaction, either cheque or
credit card, it is anything above the current standard of $10,000. If you
sell a piece of jewellery above $10,000, it is my understanding that you
would have to report it.
Mr. Barcados: To be clear, consistent with the FATF
recommendations for DPMSs, which actually sets a threshold at $15,000, the
$10,000 threshold for DPMSs is for cash only transactions. If it is by
cheque or credit card, there is no threshold. There is no threshold limit
for a suspicious transaction; it is any value if it is deemed suspicious.
However, for something to be triggered by threshold only reporting for large
cash, it is a cash transaction of $10,000 or more.
I can build further on your example. That leads to one of the other
sectors that I would suggest is at high risk in our industry: jewellers
buying from the public. For example, in the suspicious transaction
indicators put out by FINTRAC, that area is not discussed at all. As Ms.
Richard mentioned, all the suggested points to look for, look at the
jeweller selling a piece as opposed to buying it.
Senator Ringuette: Give me an example, from your perspective, of a
suspicious transaction of money laundering or terrorist financing that could
occur in a small membership retail shop.
Mr. Ritter: Right now, in terms of suspicious transactions, it has
not been defined properly to us at this particular stage what is suspicious.
When someone comes into a store, do you look at their clothes and at their
mannerism? It is very difficult for a jeweller to understand who is
suspicious and who is not.
I would think that if someone comes in with a large amount of cash,
jewellers, especially ones in our association, would question that. They
would start a specific process that they would want to follow with their
staff to determine whether this is a true transaction.
Mr. Barcados: I suggest there is actually a high level of
awareness by jewellers because they are constantly looking at people walking
in their stores. On one level, they wonder if the person is going to pull a
gun out and on the other level, they are worried about other types of fraud
and theft. They need to be aware of who is coming in. One suspicious
transaction that would jump out at me is someone coming in with a lot of
jewellery to sell. From talking to the RCMP I know there is a typology that
happens a lot where people steal jewellery and rather than sell it for money
and buy drugs with the money, they trade the jewellery for drugs directly
with the drug dealers.
If someone comes in with a collection of wedding bands and a large amount
of personal jewellery and it does not seem right for that person, it
immediately raises alarm bells in my mind.
Senator Massicotte: I read your brief and I understand what you
are getting at. Obviously, we are talking about cash transactions in excess
of $10,000. I understand that you have filed approximately 12 to 13 FINTRAC
reports per year across Canada. Is that a good summary?
Mr. Barcados: I believe that number is for suspicious
transactions. We do not have large cash transactions. I could not find that
number from FINTRAC anywhere.
Senator Massicotte: The information we have is that you submitted
52 reports to FINTRAC.
Mr. Barcados: I believe those were suspicious transactions.
Senator Massicotte: How many do you file a year? Does it happen
often that people come in with $10,000 or $15,000 in cash?
Ms. Richard: It is not a frequent occurrence anywhere in the
sector, but it does happen from time to time, for sure. For the vast
majority, particularly the independent retailer, it does not happen.
Senator Massicotte: You have to understand where they are coming
from. Sometimes your product could be a commodity, highly liquid and used as
equivalent to cash. I suspect that is only a small proportion of the
products you sell. I suspect that once you sell a product, the next day it
is worth a lot less, much like a car, which means it is not very liquid. I
suppose it might apply more to diamonds. Try to help me out. I suspect your
comments would be more useful if you said that this has a street value, is
quite liquid and maintains its value. What would that be if you could
satisfy all those criteria? Where are they coming from?
Mr. Ritter: When people are trying to launder money through a
jeweller, given the markup margins on individual jewellery, they would not
get what they wanted out of it. Say someone comes in and buys something for
$5,000 retail value; the price includes the cost of developing the piece and
the rent they have to pay and so on. There is a markup on the item. In terms
of trying to resell that product, it could be worth $2,500.
Senator Massicotte: Probably half the retail value would be
normal, I would suspect. Is that the case for all your products? Are
diamonds the exception? Is there something out there that maintains a high
proportion of value? FINTRAC reports refer to diamonds in cross-border
issues. Is that because they maintain a higher value because they are more
Ms. Richard: It is because diamonds, in the past, have been used
as a source of currency or wealth. The concern is diamonds crossing borders,
and this regime does not cover that aspect. We know through the RCMP, as I
think Mr. Barcados mentioned, that our industry has been targeted by all
kinds of criminal gangs, from small street gangs right through to highly
organized gangs that have moved up from the U.S. and originally from
Those gangs that operate here steal jewellery — many other things, but
jewellery is their main focus — and that merchandise leaves the country,
leaves Canada and goes somewhere to fence. The RCMP could probably help you
more on that.
Senator Massicotte: They are looking to steal, not money
Ms. Richard: They are looking to steal. In other words, what they
have stolen then leaves to be liquidated somewhere else. That is where there
is the possibility of diamonds, or gold for that matter, having a wealth.
Mr. Barcados: You would look at those thefts as proceeds of crime,
Senator Massicotte: It is not money laundering, though.
Mr. Barcados: I agree with you that walking into a Birks or
People's, Mappins or a mainstream, independent store and buying jewellery to
launder money strikes me as a poor decision in that sense because when you
look at the margin and you look to sell it, there must be better ways.
Senator Massicotte: If we look at some of the retail businesses,
they operate, and they basically run along with the regional operation which
loses money, yet they are prepared to pay their 40 or 50 per cent income tax
for the sake of having the other 50 per cent basically in a bank account
that they can transfer. They are prepared to accept a 60 per cent dilution,
if you wish, of their value for the sake of money laundering. Could that be
achieved in your industry, or is it even lower than that? If you pay 10,000
bucks, what is the street value of that 10,000 bucks to the drug dealer?
Ms. Richard: We would have to defer to the RCMP on that, for that
kind of information.
Senator Massicotte: It is at least lower than half because in
leaving the shop you lose half the value.
Mr. Barcados: As well, there is a limited selling it back into it
as well. I would agree with you on that. I do not have a number that I could
say "it is this per cent,'' but that strikes me as reasonable.
Ms. Richard: You have to have the market to sell it into,
Senator St. Germain: I thank the jewellery industry for being
I would like a little bit of clarification. You said there is a group
that is flying under the radar. Who are you referring to when you say that
there are people who are aligned to your industry that seem to be flying
under the radar and should quite conceivably be considered under this
legislation or under these regulations?
Mr. Ritter: There is really more, it is not just our industry.
There are a number of different areas and businesses that are not captured
on a compliance regime at all: the pawn shops, the auction houses, anyone
dealing with high-end goods like boats or even cars or furniture. We feel it
is not just the jewellery industry that should be captured. We feel all
industries should be captured over a $10,000 limit, or hopefully a $15,000
Really, with the level of scrutiny that our members and jewellers are
constantly looking at in terms of trying to protect themselves from theft,
trying to protect themselves from any robberies or any kind or crime, we
feel that our industry is very cautious of what is going on. If I were to
want to launder money, I would definitely not go to a jewellery store. I
would go to some other place that was not captured under the regime.
Senator St. Germain: Luxury cars and car dealerships are not
covered under a regime at all?
Ms. Richard: Art dealers.
Mr. Barcados: Art dealers, exactly.
I think I mentioned the term "fly under the radar.'' I was talking about
people who should be captured under this regime that maybe, by the letter of
the law, should be complying with it but do not. I do not see, the way it is
currently set up, how they will be assessed or captured.
As we talk about some of the ''we buy your gold'' type operations, some
of them are mobile; they will set up in hotels in cities. I have customers
who received assessment letters for companies that closed three years ago.
It is tough for FINTRAC to have a current listing of who DPMSs are. You can
see how, if someone wanted to start a new company every year and go around
different cities and buy jewellery, that they will fly under the radar,
whereas the ones who actually represent the low risk — who have the
mainstream distribution channels where they are buying, set up, they are
visible, they have a storefront — they are the ones that will be getting the
compliance burden, but it is backwards. They are the low risk. The high-risk
people are not really being focused on, which is not the way — to my mind, I
am just a jeweller — to effectively spend your resources to combat this.
Mr. Ritter: Most of our members, as well as a lot of people in the
industry, have been around for 90 plus years, in some instances it is 100
years, and it is all a family business. People who join our association and
JVC, they sign a code of ethics. This basically means that they will ensure
that they run their businesses in a very ethical and forthcoming way, one
that will protect the consumer as well as project an image that when the
consumer goes into their stores they can be trusted.
Other people who are not part of an industry or on the tertiary or the
outside of the industry, often we get a number of complaints about people
who have a wrong appraisal or when they go and buy something it is the wrong
price or that it is too high or whatever.
We have mom and pop stores, where basically sometimes there are only two
people running the store but it has been with their family for generations.
As I said, they sign a code of ethics. As you can see with our logo, we have
a sign of trust.
Jewellers Vigilance as well, in terms of the work that they do in the
marketplace to ensure that things are ethical and people are following
things the way they should, is what we are trying to portray in the
Senator St. Germain: How onerous is the paperwork for reporting?
You said you started reporting in 2008?
Ms. Richard: We were captured in 2008. The assessment reports
request from FINTRAC just went out this January with a due date of March 2
for only part of the sector. FINTRAC would not reveal to us how many DPMSs
were targeted with this assessment.
Senator St. Germain: It is random? They send so many out in a
random sort of way?
Ms. Richard: We have to assume it is random.
Mr. Ritter: They have not provided us with that information. We
asked in terms of who they are sending it out to and how many, and that has
not been forthcoming to us. As well, in terms of answering your question
about how onerous, both Ms. Richard's office and my office received hundreds
of calls within a week of these letters going out. Some of the small
jewellers do not have a compliance officer or do not have a compliance
regime or do not have, as we mentioned from the financial institutions, an
opportunity to have someone help them with these particular areas.
We, as associations, developed a compliance kit, a binder, for our
members. We requested FINTRAC to look that over, and so far we have not had
an opportunity to meet with them to say that they would. We would love that
opportunity, to be able to give them our compliance kit and see what they
think about it. There are no examples for an individual store or for
multiple stores of how to fill out a compliance report.
As of today, we have not had any feedback from FINTRAC in terms of the
reports that have been sent to them in this particular mailing.
Mr. Barcados: To be clear, it is not so much the compliance burden
of the reporting that we are initially talking about. There is a difference.
Even if you have never done a cash transaction that we are reporting, as a
jeweller you need to create your compliance regime. You need to appoint an
officer and do risk assessment. Even if you might never see anywhere close
to $10,000 cash, you need to do all this. That is as opposed to, for
example, in the U.K., where if you want to be able to accept over $15,000
cash you need to apply and go through the process. I would argue that there
are lots of people creating the compliance regime for their company that is
at extraordinarily low risk and should never have to go through that for
Senator Massicotte: Would you agree that your members could commit
themselves that they will never accept a cash transaction of $10,000 and if
they sign that document they do not need to provide all that security stuff?
Mr. Barcados: Quite frankly, from my perspective, that should be
the law for jewellers or any other art dealers, any other businesses. Unless
you register and do your compliance regime, you should not be allowed to
accept $15,000 I would suggest, because that is consistent with the FATF
recommendation threshold. That would be an excellent solution and simple,
and it would reduce the burden on FINTRAC to try to find all the jewellers
and do all the mailings.
Senator Massicotte: If one of your members did accept $10,000 or
$15,000 for credit, it is a criminal activity and they are subject to going
Mr. Barcados: Unless they have been registered and have their
compliance regime and have been licensed to do that.
Senator Maltais: Thank you for your most interesting presentation.
The vast majority of retail jewellers are small jewellery stores that
make between half a million and three quarters of a million dollars in
sales. I assume that they are not the ones making transactions worth $10,000
What is the breakdown of jewellery sales in Canada between small
jewellers and large chain stores, such as Birks, say? Does the average
Canadian purchase more from small jewellers or big box stores?
Mr. Ritter: It is an interesting question. In terms of consumers
buying from smaller jewellers or chain stores, most of the major chain
stores are probably doing well over $1 million-plus in terms of their annual
sales; otherwise, they could not be in a mall. From a consumer, in terms of
giving a percentage, I do not have a percentage. Mr. Barcados may have an
idea in terms of a percentage.
The difference between going to a major chain and an independent is most
of the independents are doing custom design and one-of-a-kind designs for
the consumer, whereas at a mall or at a major chain store you are looking at
some commonalities in terms of the actual product.
I would think it really depends on the buying decision and the buying
direction that the consumer is looking at in terms of the type of product
they want or what type of jewellery they want designed for them.
Mr. Barcados, do you have a better idea of the percentage?
Mr. Barcados: No, is the short answer. I do not. That kind of
market information is not readily available for our industry, unfortunately.
Senator Massicotte: If you were to guess at the market value for
the chains, it must be 80 per cent or 90 per cent.
Mr. Barcados: Actually, it is not. That is one of the things with
our industry that is interesting in Canada. There are some significant
chains. There is the Zales Group, Peoples, Mappins, Birks, Charms, but the
landscape for jewellers in Canada is actually dominated by small
Senator Massicotte: I do not mean from a frequency sense but from
a dollar sense.
Mr. Barcados: That I do not know.
Ms. Richard: Many are private companies, so we do not have access
to that information. Certainly by location, there are far more independents.
Mr. Barcados: I have heard it suggested that Costco is the largest
jewellery retailer in Canada, but I do not know how that breaks down by the
Senator Maltais: I know you do not have any percentages with you,
but you just told Senator Massicotte in your answer that, in the manufacture
of specific pieces of jewellery, for a wedding or an anniversary, for
example, the big box stores deal more with ready-made things. If a customer
is not satisfied, he will go to a small jeweller and have a piece
custom-made. Do you agree that there is more of a direct relationship with
the buyer at a small jeweller's than in a large chain store?
Mr. Ritter: I would think that a smaller jeweller has customers
who come in on a recurring basis. There is trust and camaraderie with a
small, independent jeweller, specifically in a small town where people have
been coming to that store for years and years, and families have been coming
to their store for years. I am not saying that the Birks of the world or any
of the other chains cannot do custom design, but an individual does that.
When I am going around the industry I see more of that being done with our
Senator Maltais: We agree that a small jeweller is going to know
his customer better than a salesperson in a big box store who will never see
him again. In the case of a small jeweller, the customer will visit him two
or three times with specifications in order to get the piece he wishes to
have. So there is a closer relationship between a customer and a small
jeweller than one in a big box store. Are we agreed on that?
Ms. Richard: If you are trying to draw a direct correlation
between an independent jeweller and the knowledge of their client or their
consumer, certainly independent jewellers would know of the vast majority of
their consumers because of their smaller communities. I would also say there
are some chains that also would experience that because they are perhaps
higher end and therefore it is an ongoing relationship that they would have.
Senator Maltais: From that can we conclude that a small jeweller
is at less risk of a swindle or money laundering than a large chain store?
You said there were 52 suspicious reports made to your association. I
will not ask for the percentage, but I imagine there are more from the big
box stores than the small jewellers?
Mr. Ritter: We were speaking to a jeweller this afternoon before
we came here who has four stores, which is classified as a small chain. He
mentioned that his store and the major chains have a strong regime in terms
of cash transactions. I think to launder money with a large chain would be
Ms. Richard: Not impossible.
Mr. Ritter: Not impossible.
Senator Maltais: Is it easier in a small jewellery store?
Mr. Ritter: As we mentioned before, if someone were going to
launder money, they would not go to a jewellery store. I would go someplace
else that was not captured by the regime at this particular stage.
Senator Moore: Mr. Ritter, on page 3 of your brief — and you
touched on this in responding to Senator Maltais — you say auction houses
are excluded from DPMS, which creates an uneven playing field even within
the jewellery sector and an area open to potential money laundering and
terrorist financing abuse.
For the record, could you give us an example of how an auction house
would be involved in a potential abuse as opposed to a firm in your
Mr. Barcados: Even within auction houses there are different
models. Some of them will travel around and sell estate jewellery. The whole
set-up of an auction, where there is an anonymous buyer and seller, you do
not have that customer due diligence or the type of relationship that the
senator was referring to in the previous question; it does not give the
opportunity. In a jewellery store, a jeweller interacting with the buyer can
be aware of the situation and maybe look for suspicious transactions or
typologies because of the very separated section, and who is buying and
selling is not known. Of all the business models in our industry, it seems
one of the odder ones to not be captured. Our understanding is it is
specifically excluded from the guidelines.
Senator Moore: Would an auction house not have a record of who was
consigning an item for sale at auction? Then if something was sold, the
auctioneer takes a percentage and they have to pay the proceeds balance to
that consignor? Would they not know that?
Ms. Richard: They do not have to report it. I could go into an
auction with a lot of cash, buy an expensive diamond ring from that auction
house, pay cash — whatever amount, $50,000, $20,000, $100,000 — and the
auction house does not have to report that as a cash transaction to FINTRAC.
Once I have paid with my cash, I have this piece of jewellery, I can go and
resell to someone, get a cheque for it, and melt it down if it is gold.
Senator Moore: You mentioned that since December 2008, 52
suspicious transaction reports have been submitted to FINTRAC. Are these
reports are submitted by the individual members of your respective
Ms. Richard: Not necessarily.
Mr. Barcados: We got that information from a FINTRAC report and
the association members do not notify the associations when they do a
Senator Moore: It is the individual members who submit these
reports to FINTRAC?
Mr. Barcados: Absolutely.
Senator Moore: How do you assess whether or not a transaction is
suspicious? Individually, have you had to report anything? What kind of
circumstances? What is the demeanour of the customer? What triggers, in your
mind, or your members', what makes a transaction suspicious in nature?
Mr. Barcados: I can take that. I have not, but I am on the
wholesale side. I have established clientele that I have known, with whom I
work repeatedly, and so I have not encountered that at this point.
Senator Moore: I was thinking more of the retail side when I asked
Mr. Barcados: That is a frustration. Jewellers are aware of people
walking in and because they are concerned about their safety and fraud,
people will get a feeling of what is wrong. People try to pass off bad money
orders as well. I think the description of what typologies FINTRAC would
like jewellers to look for has been perhaps lacking. You go online and look
at the descriptions and they are very general, very vague, including someone
looks like they are buying more than what they can afford, or someone does
not haggle over the price. There is not a specific typology. We would love
more information from FINTRAC as to what they would recommend we look for
specifically. I would also suggest that someone coming in to sell a large
quantity of jewellery, while it is not money laundering, it is proceeds of
crime, and that in and of itself can be a suspicious situation.
Senator Moore: Is that response equal to your respective
associations, Mr. Ritter, Ms. Richard? Is it similar?
Ms. Richard: Yes.
Mr. Ritter: Yes.
The Acting Chair: We are running close to being out of time. A
quick question and then we would like to have a summary from the witnesses
in terms of what jewels you can give us with the take back.
Senator Massicotte: I agree with your answer earlier that if one
wants to be complicit with money laundering, the risk is probably with the
smaller jewellery because the person has less discretion and usually owns
his own shop. I think that is what you answered.
Let me talk about proceeds of crime. They also tell me that very often in
the industry, many small retailers, especially with large transactions, that
cash transactions are favoured by some industry members because they do not
have to pay GST, TPS or income tax. That seems to be prevalent in your
industry. How do you respond to that?
Mr. Ritter: Some of our members or non-members, yes, they are
dealing in cash in order to perhaps not pay for a credit card or something
along that line, or give a discount to a consumer. When someone comes in and
asks to pay cash for something, the radar goes up automatically for any
jeweller, especially if it is a large amount. If someone comes in and wants
to spend $1,000 or $2,000 in cash, that can happen with a number of
different incidences over a year or so.
We have some jewellers who have clients who come in and all they do is
pay cash, because of the nature of the consumer coming in with their
business. A small jeweller in terms of money laundering and someone coming
in with cash, the radar will go up automatically. They will be very careful
in terms of who that individual is, especially if they do not know that
Mr. Barcados: Cash can be difficult for a business to handle if
they have payroll, or they have to wire money for purchases. There are
legitimate times when someone pays cash. Perhaps they do not want it on
their credit card statement for their partner to see, that type of thing. In
terms of cash to avoid the taxes, I think you will see that happens less and
less, at least certainly not on a large scale.
Senator Ringuette: Can you tell us what all these gold buyers do
with the gold or jewellery they buy? What is their next step?
Senator St. Germain: That was going to be my question.
The Acting Chair: We will wrap it up after that.
Senator St. Germain: Are they not, to me, the most likely to be
the launderers? To me, if you go and buy gold that is where the
vulnerability or the money laundering could take place.
Mr. Barcados: To classify them as high risk might be better.
Ms. Richard: Yes.
Senator Ringuette: We need to know what they do with that.
Mr. Barcados: They take it to a refiner and get money.
Ms. Richard: They have it melted down by a refiner and get a
cheque for it.
Mr. Barcados: They can get cash for it.
Senator Massicotte: Are you talking about bars of gold or small
pieces of gold?
Ms. Richard: At the bank? I would assume financial institutions.
Senator Ringuette: Are they selling gold bars?
Ms. Richard: You are talking about people buying gold jewellery
for cash — all those businesses.
Senator Ringuette: Yes.
Ms. Richard: The person who pays out the cash takes the consumers'
gold jewellery, has it melted down at a refiner and gets a cheque for it.
They have taken their cash and given it to the consumer; and then taken the
gold or whatever and had it melted down.
Mr. Barcados: We are saying that area needs to be looked at. At
this point it is not being addressed.
Senator St. Germain: It pays to have been a policeman.
Ms. Richard: It certainly does.
The Acting Chair: It is clear that you have talked about the size
and scope of the members in your industry. For all of our members here
today, a $500,000 to $750,000 business is a small business, so you have some
back-office challenges in terms of the sophistication of your operation, the
recording and the tracking, if I understand correctly what you are saying.
You also mentioned that pawnshops, auction houses and art dealers are not
covered by the regulation. I would like a summary on your part. You talked
about a compliance model that you built, and you would like to have FINTRAC
approve it. Could you summarize for the committee? You came up with a couple
of points as recommendations: 3.1, 3.2, 3.3 and 3.4. We are not used to that
jargon. Could you summarize two key recommendations that you would like us
to make on your behalf?
Mr. Barcados: Can you combine all of our time in one person?
The Acting Chair: Yes.
Mr. Ritter: In addition to the two recommendations we mentioned in
the presentation, we would like to raise the cash transaction reporting
threshold to $15,000 as recommended by FATF. We would like to extend that to
all industries, not just the DPMS sector. We would like to exempt the DPMS
from compliance regime if they do not engage in cash transactions above the
reporting threshold, as in the U.K., thus eliminating an unnecessary
compliance burden in a low-risk sector. Review the proceeds of crime from
the perspective of purchasing jewellery and precious metals from the public,
thus strengthening the STR portion of the regime. Develop government support
through marketing material, i.e. consumer brochures, explaining the need for
ID and other information when purchasing large cash amounts, which is also
done in the U.K. The guidelines, as they pertain to the DPMS, need to be
more specific about typologies regarding money laundering and DPMS activity.
Supply a sample compliance regime that is tiered from small to medium to
large DPMS businesses. We would also suggest, to help alleviate the existing
compliance burden on DPMSs, no further amendment until the DPMS sector has
been properly assessed by FINTRAC. Is it necessary to have DPMS, who never
have had a $10,000 cash transaction, to have a compliance regime?
The Acting Chair: Mr. Ritter, would you be able to submit those
recommendations in writing to the clerk?
Mr. Ritter: It would be our pleasure.
The Acting Chair: On behalf of the committee, I thank you. It was
a fascinating conversation. Thank you for spending time with us today.
Senator St. Germain: It was an excellent presentation.
The Acting Chair: We will move to our next panel of witnesses. In
the second half of our meeting, we turn our attention to the investment
industry. We are pleased to welcome, representing The Investment Funds
Institute of Canada, Ralf Hensel, General Counsel and Corporate Secretary;
and representing the Investment Industry Association of Canada, Michelle
Alexander, Director of Policy and Corporate Strategy. Accompanying Ms.
Alexander by video conference from British Columbia is Amanda Archibald,
Vice-President, Compliance and AROP for Raymond James Ltd.
I must inform you that the Chair of the Canadian Securities
Administrators, William Rice, who also serves as Chair of the Alberta
Securities Commission, had hoped to be here. Unfortunately, due to flight
delays, he will be unable to join us. We have one hour for this session.
Mr. Hensel, welcome and please proceed.
Ralf Hensel, General Counsel, Corporate Secretary, Director, Policy —
Manager Issues, The Investment Funds Institute of Canada: Mr. Chair and
members of the committee, I am pleased to be here today to provide the
mutual fund industry's thoughts on your review of Canada's Anti-Money
Laundering and Anti-Terrorist Financing Regime. As you have heard, I am the
general counsel, corporate secretary and director of policy for manager
issues at the Investment Funds Institute of Canada, which I will refer to as
IFIC is the trade association representing most Canadian investment fund
managers, fund distributors and organizations that provide services to the
investment fund industry. Investment funds offered by IFIC members are
sponsored and managed by registered investment fund managers, and their
units or shares are offered on a continuous basis and are redeemable at any
time. An investor purchases units or shares in Canadian mutual funds through
registered dealers through their networks of individual advisers. I should
note here that investment fund managers and dealers are collectively defined
in the regulations to the act under the term "securities dealers.''
This is a thoroughly regulated industry. Canadian mutual funds as a
product are generally regulated under provincial securities legislation and
nationally applied rules. Fund securities must be sold to the public either
through prospectuses filed with and cleared through securities commissions
or pursuant to prospectus exemptions. Dealers that distribute funds must be
registered in each province in which they have clients, and they are
regulated and subjected to examination by securities commissions and
self-regulatory organizations. Advisers are also licensed and regulated by
The fund industry takes its AML obligations seriously, recognizing the
importance of this endeavour, and we believe the current regime works very
well. Advisers are the client-facing representatives who first establish the
business relationships with clients, obtaining required information about a
client's identity, risk tolerance and investment objectives as part of the
stringent account-opening and know-your-client requirements under securities
regulations. Dealers must maintain these accounts, including the collected
information and documentation for each client who has purchased funds
through them. They can then monitor that account for any unusual activity.
Once the client decides to buy a mutual fund, information needed to execute
a purchase transaction is transmitted to the manager of that fund. An
investment fund manager does not deal directly with clients prior to the
purchase of the manager's funds and must rely on the dealer to obtain and
retain all necessary identity verification information about the client.
Fund managers have very little additional information about investors in
their funds. However, from the time a purchase transaction has settled, the
fund manager is in a position to monitor ongoing transactions of that client
in mutual funds managed by that manager. With this dual account monitoring,
both dealers and fund managers submit suspicious transaction reports to
FINTRAC in respect of suspicious client activity in their accounts or in
their mutual fund investments.
An important point for me to emphasize is that for many years the
Canadian mutual funds industry has operated these comprehensive
identification, monitoring and reporting procedures in an allocated manner
between dealers and fund managers — what we call "the allocated compliance
model.'' This is permitted by section 62(1)(b)(i) of the regulations.
This provision recognizes the effectiveness of the allocated compliance
model, exempting mutual fund managers from the record-keeping and
identification requirements of the act, where there are reasonable grounds
to believe that dealers have ascertained client identity as required. This
eliminates repetitive information collection and record-keeping, which is
not only efficient and cost-effective but also ensures that sensitive
personal client information is not collected and maintained by more firms
than is necessary to adequately perform the AML requirements, which also
limits possible contraventions of privacy legislation.
Our views on the proposals submitted so far are mixed. As noted in our
submission, we completely support those proposals that are designed to
enhance the operational efficiency of the regime, thereby alleviating the
administrative obligations on our members. We applaud the Department of
Finance for identifying areas where existing business processes can be
adapted to meet AML objectives and for identifying other existing non-AML
business requirements that could adequately, without creating a lower
standard, serve in place of adoption of duplicative AML requirements.
However, our members fear that some of the proposals as described in the
consultation paper will impose unwarranted additional administrative burdens
in order to meet the policy objectives, thus complicating business processes
and, in one instance, setting a requirement that will be impossible to
Clarification is needed regarding several proposals so our members can
understand the additional requirements that would be created. Clarification
is also necessary to ensure that none of the proposals are intended to, or
will in practice, result in changes to the long-standing allocated
compliance model that this industry uses.
I will conclude by saying that the exemption in section 62 is well
reasoned, incorporates existing business processes to avoid unnecessary
duplication of administration and has resulted in a very effective AML/ATF
Regime within the investment funds industry. Our members would be very
concerned about any changes to the allocation of responsibilities or changes
that would require personal client information to be collected and held by
numerous entities in a duplicative manner, potentially contravening current
privacy obligations and thereby increasing their compliance expense without
any additional benefit to the regime that is currently working well in our
industry. Thank you very much. I would be happy to entertain any questions.
The Acting Chair: Thank you. Ms. Alexander, please proceed.
Michelle Alexander, Director, Policy and Corporate Secretary,
Investment Industry Association of Canada: The IIAC is pleased to be
here to discuss the Proceeds of Crime (Money Laundering) and Terrorist
Financing Act. The IIAC advances the growth and development of the Canadian
investment industry. We represent the interests of our registered dealer
members on securities regulation, tax and other public policy matters to
improve the savings and investment process and to achieve efficient, liquid,
competitive markets that benefit the investing public and the issuing
public. Our 180 member firms range from regional institutional boutiques and
small retail firms to large full service companies that employ thousands of
Canadians across Canada.
As mentioned, I am here with my colleague, Amanda Archibald. We will do a
bit of tag team today. She is Vice- President, Compliance, Raymond James
Ltd. and is Chair of the IIAC's anti-money laundering subcommittee. Our
remarks today will focus on two particular aspects of Canada's AML/ATF
Regime. The first pertains to section 62(2) of the regulations, which
provides exemption relief from certain provisions relating to record-keeping
and ascertaining identity when an account is opened by a Canadian securities
dealer, life insurance company, investment fund, pension fund or other
We have made submissions on this numerous times in letters to the
Department of Finance. We met with the financial sector division in the
summer of 2011. Ms. Archibald and I met with them earlier today to talk
about our submissions, in particular these two exemptions that we are
looking at. Specifically in section 62(2) we are looking to extend the
current exemptions to equivalent foreign regulated entities that are subject
to comparable regulatory regimes in their home jurisdictions or through the
stock exchanges on which they are listed in order to create a level playing
field and to permit our members to compete in the global capital markets.
Currently, the underlying rationale for the exemption relief provided in
section 62(2) is for Canadian regulated entities is in part due to the
regulatory oversight of these entities provided by a government regulatory
body or an industry-specific, self-regulatory organization. Regulated
entities are less likely to pose AML risks relating to identity, identity
verification of its authorized officers and record-keeping because they are
already subject to significant registration requirements, disclosure, audit
and reporting requirements, and enhanced regulatory scrutiny over their
business conduct and operations.
Foreign regulated entities that are subject to a similar regulatory
regime in their home jurisdictions should be eligible for comparable
exemption relief under the regulations. As a result, if, for example, an
industry was regulated by the financial services authority in the U.K. or
the Securities Exchange Commission in the U.S., Canadian dealers would be
able to verify the identity by confirming and documenting the entity's
registration and to rely on the regulatory review by that home jurisdiction.
We further note from the recently published consultation paper on
December 2011 by the Department of Finance that they are considering
removing the $75 million net asset test for one of the regulations. Under
the existing regulations, reporting entities are not required to keep
records when conducting transactions for corporations with $75 million in
net assets and shares traded on a recognized stock exchange.
Removing the $75 million threshold is something that the IIAC has asked
for awhile. It appears that this will be the case. The rationale in the
consultation paper states that listed corporations are considered to be at a
lower risk for money laundering and terrorist financing as they are subject
to stringent disclosure obligations outside of the act. The IIAC suggests
that the same argument applies to a foreign regulated entity that is subject
to similar stringent regulatory oversight.
Amanda L. Archibald, Vice-President, Compliance and AROP, Raymond
James Ltd., Investment Industry Association of Canada: As the IIAC has
outlined in earlier submissions, where a securities dealer outside of Canada
opens an institutional account for a Canadian regulated entity, it is not
required to obtain copies of corporate documents and identity information
regarding authorized officers, nor is it required to verify such identity
information through face- to-face meetings with its employees or agents or
other means. Foreign dealers are permitted to rely on information posted on
SEDAR, EDGAR, and other government and regulatory sources and public
databases in conducting due diligence in order to satisfy AML concerns
relating to identity and record-keeping requirements.
As a result, when our members ask a foreign regulated entity for its
corporate documents and detailed information and for a face-to-face
verification meeting, many of these entities balk at the request, electing
instead to take their business elsewhere because of the inconvenience to
them. They can easily open an institutional account with an SEC or FSA
registered securities dealer without similar onerous requirements.
Our purpose in seeking the proposed amendments to section 62(2) is to
address this disparity in order to level the playing field and to enable our
members to compete more effectively and on equal footing as other securities
dealers in the global capital markets for foreign investments and from
foreign regulated entities. The lack of an exemption from this section
impedes our ability as members to attract foreign investments from
institutional investors that are regulated entities in their home
I will turn this back over to my colleague.
Ms. Alexander: In our previous discussions with the Department of
Finance when we raised these arguments, one of their responses was that we
should be providing some evidence of how other jurisdictions deal with the
issue that we have been raising. The IIAC has found examples in legislation
in countries such as the United Kingdom, which states that where financial
services firms, which are subject to the money laundering regulations or
equivalent, and which are regulated in the U.K. by the FSA, or in the EU by
an equivalent regulator, simplified due diligence may be applied, which
means not having to verify the customer's identity.
Likewise, in France we found that where a client is established in a
third country that imposes equivalent obligations in the fight against money
laundering and terrorist financing, firms are not subject to the same
requirements with respect to anti-money laundering measures.
Similarly, in the United States, under the U.S. Patriot Act, it states
that customer identification procedures must include risk-based procedures
for verifying identity of each customer, to the extent reasonable and
practicable. Therefore, while dealers must have a customer identification
procedure in place, they are able to use a risk-based approach to the extent
reasonable and practicable. The risk-based approach permits simplified due
diligence, so that the fact that the entity is regulated suffices as
verification of identity.
Ms. Archibald: This brings us to our second point. We would submit
that there should be an expanded use of the risk-based approach in Canadian
anti-money laundering legislation and regulations. A risk-based approach
should be relied upon to provide certain exceptions from AML where the
business case supports it.
As of June 2008, as set out in Canada's AML regime, a firm's compliance
program must include an assessment and documentation of risks related to
money laundering and terrorist financing in a manner that is appropriate to
that firm. A risk-based approach has numerous advantages, as it is a process
that allows a firm to identify and measure potential high risks and develop
firm strategies to identify and mitigate these.
To identify potential money laundering and terrorist financing risks, the
principle behind a risk-based approach is for a firm to focus its resources
where they are most needed to manage those risks. A firm-specific risk
assessment allows each firm to identify high-risk situations within its
particular business lines for which additional controls and monitoring may
Under this approach, there is no universally accepted risk factor or risk
scale. Each member must examine its own operations and make its own
determinations on higher or lower risk factors. A firm-wide risk assessment
usually begins with a determination of the factors relevant to the firm's
business that will differentiate higher- from lower-risk businesses or
customers. For example, some factors will not be relevant to some dealer
members because they do not deal in the relevant kinds of products, types of
transactions, types of customers, or outside of a local jurisdiction.
We strongly believe that an effective regime, designed to detect and
deter money laundering and terrorist financing, must be balanced and not
impede the legitimate business of Canadians. While the regime must provide
effective deterrence, it is also essential that stakeholders not be
overburdened with unnecessary and possibly duplicative or confusing rules
Further, given that other jurisdictions are comfortable with exemptions
for foreign regulated entities and recognizing the important benefits of a
risk-based approach in providing an effective and efficient AML regime, we
would respectfully request that the Senate committee consider our request
for an exemption for foreign regulated entities and the expanded use of a
risk-based approach in the legislation.
That concludes our remarks. We would be pleased to answer any questions
that you have.
Senator Massicotte: Thanks to all of you for your presentations.
Let us talk about the risk-based approach. It is logical, it makes sense,
it sounds good, but how do you manage that? In fact, your argument is saying
every business and every situation is different. How does the government get
satisfied that people do it adequately? Anyone, including the incompetent,
can say, "It is risk based. I tried my best but, sorry, there goes a couple
of million dollars to money laundering.'' How do you manage that? How does
the government ensure it is well done?
Ms. Alexander: Currently in the legislation, the government does
permit a risk-based approach for some measures. We are arguing that it
should be expanded to some degree in some areas, for example, allowing a
Canadian firm to open an account for an institutional firm in the United
Kingdom. We are saying that using a risk-based approach in that regard would
allow the firm to decide. If that other entity is regulated by the Financial
Services Authority in the U.K., which has stringent oversight
qualifications, we could use that as a starting point, and then the Canadian
firm looks at other measures to decide what else needs to be undertaken in
terms of identity.
Senator Massicotte: You are not saying to forget the $10,000. You
are not saying make it wide open, risk based. You are basically saying that,
with certain exceptions, maybe list the countries we are satisfied with,
from a governance sense, and for those countries we give exclusion. Is that
what you are saying?
Ms. Alexander: Yes, exactly.
Senator Massicotte: It is limited risk based; you are not throwing
it wide open.
Ms. Alexander: Absolutely not. There are some areas where the
government has recognized that because the legislation is trying to
encompass securities dealers, auction houses and jewellery, it is so wide
based that for different types of businesses, and even within the investment
dealers, the businesses are so varied that to put the same requirements on a
small firm that deals with only retail clients, as opposed to another firm
that deals only with institutional clients, to ask them to have the same
standards would be unreasonable and unworkable.
Senator Massicotte: Mr. Hensel, if I understood your comments, you
are basically saying there is a duplication of information. You have the
dealer, which sells the investment, and you have the manager, and they both
have to report. You are saying: Get your act together. Minimize the
duplication. Is that what I heard?
Mr. Hensel: Actually there is not a lot of duplication at this
point. What we are saying is that in some of the proposals, it is not clear
whether what we call the allocated compliance model, whether that continues
to apply. Right now, the managers are allowed to rely on the dealers to a
large extent because they have to be satisfied the dealers are doing their
job reasonably for the identification purposes.
Senator Massicotte: You are basically responding to a concern you
may have, given the lack of definition of the proposed regulations?
Mr. Hensel: Lack of clarity in the proposal, yes.
Senator Maltais: You mentioned that the United Kingdom, France and
the United States have some quite strict verification methods with which you
What other countries have less stringent regulations than the United
Kingdom, France and the United States, that you deal with?
Ms. Archibald: My understanding of the question is that we were
able to point out specifically some regulatory regimes that have similar
requirements to Canada and whether or not we were able to provide some
information on jurisdictions that may not have comparable requirements. Is
The Acting Chair: That appears to be the question.
Ms. Archibald: What we would propose is not necessarily that we
specifically list countries but rather that we have a recognition within the
risk-based approach that if a country is an FATF country, and not only FATF,
and they have a comparable regulatory regime to Canada, essentially a list
of criteria that they meet with respect to registration requirements,
minimum capital requirements, disclosure, transparency, filing, reporting,
very comparable, where, by way of verifying that an entity is regulated by
that regulator, we are able to take a level of comfort that there is
significant due diligence and disclosures and transparency there in that
entity, that we would be able to exempt certain requirements.
Certainly, we are familiar with some jurisdictions more than others and
the IIAC did significant research into specifically the U.K. and the United
States because we had knowledge of those particular countries. There are
other countries where we know they have some comparable requirements.
However, we have not gone country to country and done an analysis on this
industry. If this was something that the Senate and the Department of
Finance would be willing to consider, we would be willing to work with them
to come up with a solution on how to apply this risk-based approach in this
Ms. Alexander: One reason we did focus especially on the United
States and the United Kingdom is that that is a huge part of the business
that our members deal with, institutional clients in those countries. As a
contact person for the industry, I get numerous calls from our members
saying, "I was just trying to open an account for an institutional firm from
the U.K. and when I told them I needed to see the driver's licence of the
trading officers they laughed in my face and said it was ridiculous.'' It
sounds like a little issue, but we have seen time and time again firms
telling us that these accounts are being taken elsewhere to other
jurisdictions where they do not have to jump through the same hoops to open
an account, especially for an entity regulated by the Securities and
Exchange Commission; for us to say we need to see the driver's licence of
some of their trading officers is somewhat ludicrous.
I will acknowledge that there are some countries that have not gone the
way we are proposing. I did speak to some colleagues in Australia who are
seeking the same types of exemptions that we are seeking as well. It is not
widespread, but certainly the United States and the United Kingdom are where
most of the clients are where we are trying to attract the business from and
we are suffering because we do not have access to them as much as we would
The Acting Chair: Mr. Hensel, do you have any comments you wanted
to make related to that?
Mr. Hensel: No.
The Acting Chair: I have two questions. Mr. Hensel, in your
presentation on page 4, you said: "Clarification is needed concerning
several proposals so our members can understand the additional requirements
that would be created. Clarification is also necessary to ensure that none
of the proposals are intended to, or will in practice result in, changes to
the long-standing allocated compliance model . . .''
You said that everything is good in the industry. What are you talking
Mr. Hensel: You are right. We are saying that things are running
pretty well as they are and we want to ensure that none of the proposals
will upset that by actually requiring duplication where there is not
currently duplication. On the enhanced customer due diligence, it is not
clear whether that enhanced model fits within what we now call the allocated
model, so managers would be required to duplicate the client's due diligence
even though the dealer has already done that. That is what we are saying. It
would be a bit of a shame to take a step backwards for us, given that we
think it works quite well.
There is another provision where they would require going back and taking
a look at politically exposed foreign persons, to go back through all of the
databases of current clients to determine whether any of them would be, even
though it was grandfathered at the outset when that rule was first put in.
We would think that would be quite a dramatic requirement for us to do,
given that a lot of the information that we would rely on anyway is sitting
with the dealer. It would be an odd request for the managers to go back to
these clients and ask for this information. It would throw up many red flags
and we would have no way of knowing whether we are getting any sort of
reasonable response. People may just refuse to respond. There is no way of
forcing them to respond. What would we do then? Would we have to remove them
as clients or put them on the watch list from that point forward? There are
many complications where we do not know at this point what the implications
The Acting Chair: Ms. Alexander, on page 1, you mentioned you had
discussions with the Department of Finance. What feedback has Finance given
you? Maybe Ms. Archibald will have something to add.
Ms. Alexander: We have been trying for a while with this argument.
In our meeting today they definitely seemed more open than they have in the
past. One of our arguments earlier on was that would be sufficient as long
as it was an FATF country. We realize that not all FATF countries are the
same, and that is why Ms. Archibald mentioned having it being a foreign
related entity, FATF plus additional criteria, to make sure they measure up
to a regime similar to Canada.
In terms of the fact that they have gotten rid of this $75 million net
asset test, as long as a company is on a regulated stock exchange, that
helps support our argument. They have recognized that a stock exchange has
certain criteria for listing and therefore whether the company has $10
million in net assets or $5 million or $20 million should not matter. We
have argued that the $75 million was too high. They are removing the $75
million requirement. That has helped buttress our argument that as long as
you say they are on a regulated stock exchange, that is sufficient; by the
same token, if they are a regulated foreign entity, that should also be
sufficient in terms of reduced ascertaining identity and record-keeping
requirement. They did seem open to that.
The dialogue is continuing. They were appreciative of the list of
countries and the specific provisions that do allow it in other countries. I
think that helps.
In our meeting earlier this afternoon, I think they said they would go
back and consider it further.
The Acting Chair: Is it safe to assume that all three of you are
happy with the way that the process works and that changes or modifications
would be limited and not great in scope?
Ms. Alexander: In terms of the process of amendments and feedback,
I will certainly say, maybe because my esteemed colleague Bill Rice is not
here, I find the Department of Finance more open to changes and listening to
the industry sometimes than, for example, the Canadian Securities
Administrators are at times.
The Acting Chair: Mr. Hensel, you seem to be quite engaged.
Mr. Hensel: I would just remind my colleague that this is on the
Ms. Alexander: You would not disagree with me, would you, Mr.
Mr. Hensel: It depends on the issue.
Ms. Alexander: It depends on the issue, but they have certainly
been open. We have had many face-to-face discussions which are extremely
helpful. Today, I think Ms. Archibald would agree, they asked lots of
questions. In relation to the previous consultation paper that was released
in December of 2011, they acknowledged that there were some things they
thought were clear which became apparent from the comments were not clear,
and they agreed to go back and work on it. We are pleased with the
We did get some wins in that consultation paper. They specifically told
us to go back and point out some legislation, which we did, and they
recognize that we are making an effort to meet them halfway in terms of what
we are seeking.
The Acting Chair: Do you feel the Department of Finance has a true
understanding of your situation, your needs and is there a trust
Ms. Alexander: I believe they do understand. I will let Ms.
Archibald jump in because she is on the public-private committee. I forget
its exact name. Part of it is an education process. They obviously are not
as familiar with the ins and outs and intricacies of our business but they
are obviously willing to learn.
Ms. Archibald: That is fair. I act as the security sector
representative on the Department of Finance Public/Private Sector Advisory
Committee. I agree with Ms. Alexander's remarks. There is a general
understanding, but there also is acknowledge, which is appreciated, that the
securities industry is not their subject matter of expertise. They are very
willing to listen to our remarks and are very open to having
question-and-answer sessions. Certainly, as things progress and
conversations go on, the scope of their understanding of the business has
Today I think we made some progress. In our original proposal, similar to
our feelings about consultation papers, there might have been some
misunderstanding about what exactly we were proposing in the way of an
exemption. There was some clarity today in our conversations around that. As
well, we had conversations specifically about the industry, the type of
clients, the type of business lines and products that we offer. They are
very open and welcoming to receive that information so they can better
understand the industry and our needs.
Ms. Alexander: We recognize the challenge they have of not just
regulating our industry but a wide variety of industries under one set of
legislation, which can be very difficult to do.
The Acting Chair: I have a simple question on the risk-based
approach. Is there a common definition of the risk- based approach, or does
it depend on the organization?
Ms. Archibald: There is a guideline for the risk-based approach.
FINTRAC has provided a guideline for the risk- based approach, so it
specifically states what areas your risk-based approach should cover, such
as product risk, transaction risk, client risk, jurisdiction risk, and it
provides examples of the sort of factors you should consider within that.
There is a base guideline for developing a model. The actual risk-based
approach, how you will apply it in terms of your enhanced monitoring and
enhanced due diligence, will vary firm to firm because it will address that
firm's specific business lines.
For example, a small investment dealer may only deal with individual
clients in Canada and only with Canadian equities. However, a full-service
investment dealer that is bank owned may have a global reach and deal in
foreign products and banking transactions, as well as securities
transactions and loan transactions. Their risk-based approach will certainly
be much more wide reaching, as they will need to address so many different
lines of business.
Senator Moore: I want to ask about the reciprocity arrangement.
Ms. Alexander, you mentioned on page 3 of your brief, "The IIAC has found
examples in legislation in other jurisdictions which permit such an
exemption.'' You talked about the U.K. and you quote the section. It says,
". . . regulated in the UK by the FSA, or in the EU or an equivalent
jurisdiction, by an equivalent regulator. . . .'' I guess Canada qualifies
as an equivalent jurisdiction. ". . . simplified due diligence may be
Right now will they accept a Canadian dealer within their system?
Ms. Alexander: Correct.
Senator Moore: By applying simplified due diligence.
Ms. Alexander: Correct.
Senator Moore: What is the simplified due diligence? What amount
or what level of information or disclosure do you have to give to the
regulator in the U.K. in order to be accepted?
Ms. Alexander: It would not be the regulator; it would be the U.K.
dealer you are opening an account with. However, it would not be showing the
traders in Canada their passport or driver's licence, for example. It would
be: Let us check your corporate documents to ensure the Canadian corporation
exists. Are you regulated in Canada? You show us that you are regulated by
the Investment Industry Regulatory Association of Canada. They might ask for
a couple of other documents, but then away you go.
Senator Moore: They would want to see your certificate of
incorporation provincially or federally?
Ms. Alexander: Yes.
Senator Moore: Would they want a list of officers and directors?
Ms. Alexander: I could not say for sure. I do not know exactly the
documents, but it is certainly not the face-to-face documentation
requirements that are required in Canada.
Senator Moore: If you are trying to impress upon the Department of
Finance that we should follow that system, it might be useful for you to
have the information as to what they do and what are those items of
simplified due diligence.
Ms. Alexander: That is a good suggestion. Thank you.
The Acting Chair: Are there any other questions for our panel? If
not, I would ask Mr. Hensel, Ms. Alexander and Ms. Archibald to give a
summary of their thoughts in terms of how we can use pertinent information
to put forward in our report?
Mr. Hensel: As was said several times in the remarks and
subsequently the questions, we are quite happy with the way it works. We
think our existing business model is quite conducive to making this work. We
collect a lot of information anyway and so this is a very effective way. The
allocation of responsibilities between the dealer and the manager is quite
important for us. Again, the concern would be that anything in the proposals
that would change that allocation or would duplicate requirements or
procedures that are not currently duplicated would be a step backwards and
we would like to make sure those are avoided.
Ms. Alexander: Primarily our intention to have the committee
consider the exemptions for foreign-regulated entities would assist Canadian
firms to compete more effectively on the global market, put them on a more
level playing field with other securities dealers and with the risk-based
approach. We think that works more effectively both in terms of an effective
and efficient AML regime in Canada.
The Acting Chair: Is there any comment from Ms. Archibald?
Ms. Archibald: I would like to have it on record that our industry
regulator for the securities industry, IIROC, has very stringent due
diligence requirements. In fact, in many areas they are more stringent than
the AML legislation. We would just like that to be a consideration as well
as we move forward with these requests, as we are not actually requesting to
be exempt from all due diligence requirements as we have regulatory
obligations that we will be meeting anyway. We would always be collecting
information on the client, verifying its existence, its officers and
directors and information of that nature, as that is a regulatory obligation
we already have.
The Acting Chair: I would like to thank you on behalf of the
committee for participating in the discussion today. The information was
very informative, open, and we thank you for your time.
Honourable senators, is it agreed that I will serve as the acting chair
for tomorrow's meeting. Are we in agreement? Do we have a motion?
Hon. Senators: Agreed.
The Acting Chair: All for and none against. Thank you very much.
(The committee adjourned.)