Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 15 - Evidence - March 29, 2012


OTTAWA, Thursday, March 29, 2012

The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.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 Larry W. Smith (Acting Chair) in the chair.

[English]

The Acting Chair: Good morning. My name is Larry Smith, and I am pleased to welcome you here this morning.

Honourable senators, this morning we will continue the five-year parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This is our thirteenth meeting on the subject. In conducting this review, the committee has heard from a number of the 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 with that work today.

In the first half of this meeting, we are pleased to welcome, representing MasterCard, Ms. Andrea Cotroneo, Vice- President, Canada Regional Counsel; and Mr. Richard McLaughlin, Senior Vice-President, Global Products and Solutions; representing Western Union Financial Services (Canada), Inc., Mr. Derek McMillan, Director, Compliance (International); and representing Amex Bank of Canada, Mr. Scott Driscoll, Vice President, Chief Compliance Officer and Chief Anti-Money Laundering Officer, and Mr. Wilf Gutzin, Vice-President and Senior Counsel.

We have one hour for this session. Ms. Cotroneo, if you could begin your presentation, please.

Andrea Cotroneo, Vice-President, Canada Regional Counsel, MasterCard Canada Inc.: Good morning. Joining me from MasterCard is my colleague, Richard McLaughlin, head of our global products and solutions business in Canada. My remarks today will focus on two areas: MasterCard's role in the Canadian payment system and the protections that MasterCard has in place globally that are designed to prevent MasterCard branded prepaid products from being used for money laundering and terrorist financing purposes.

MasterCard is a global payments and technology company that connects billions of cardholders, thousands of financial institutions and millions of merchants, governments and businesses, enabling them to use electronic forms of payment instead of cash or cheques. MasterCard seamlessly processes billions of transactions representing trillions of dollars each year. We drive innovations that deliver value to cardholders, merchants and our financial institution customers.

Now that I have told you what we do at MasterCard, it is also important to provide you with an overview of what we do not do. MasterCard as a payments network does not issue credit cards or other payment cards and does not contract with merchants to accept MasterCard-branded payments. Those functions are performed by MasterCard's customer financial institutions located in Canada and around the world. Our card-issuing customers, such as Bank of Montreal, are known as issuers. Our customers that contract with merchants for payment card acceptance are known as acquirers.

Generally speaking, we focus our anti-money laundering, AML, efforts on our customers, the issuers and acquirers, and we require our customers to focus their AML efforts on their customers, the cardholders and the merchants. This structure is important. In Canada, participation in the MasterCard system is open only to regulated financial institutions. Also, we conduct thorough due diligence on prospective issuers and acquirers from an AML perspective, and we impose limits and conditions on the prepaid cards that are processed on our system to further mitigate AML risk.

We would like to briefly set out the different MasterCard prepaid products in market and address our approach to these products. As defined by the Department of Finance's consultation document, a financial product is considered prepaid if it allows customers to load funds to a product that can then be used for purchases and, in some cases, access to cash or person-to-person transfers. The prepaid product most familiar to consumers would be one that is anonymous and non-reloadable. These cards are branded with the MasterCard logo and can be used anywhere MasterCard credit cards are accepted. They are available for purchase at many retailers across the country. Generally speaking, there is no cash-back option for these cards; cardholders cannot use them to withdraw cash from an ATM; and they have a maximum load limit at the time of purchase.

For anonymous non-reloadable prepaid cards, MasterCard has established program standards and guidelines to significantly mitigate AML risk. For example, in addition to the conditions I mentioned earlier, for anonymous non- reloadable prepaid cards sold in a retail environment, the maximum value that can be paid for with cash is $500. Any purchase of cards above this amount must be completed with another more traceable form of payment, such as a credit card.

The second type of prepaid card in the Canadian market is a reloadable prepaid card. These types of cards include prepaid payroll cards, expense reimbursement cards, travel cards and government benefit cards and can be reloaded with additional funds and used to withdraw cash from an ATM. Since these types of prepaid cards can have a greater maximum value and can be used to access cash, MasterCard's rules require issuers to follow a due diligence process with cardholders that is very similar to opening a bank account. This process requires positive customer identification, such as a government-issued photo ID, and other applicable know-your-customer checks.

In conclusion, MasterCard believes that a risk-based AML approach to prepaid cards is appropriate, more specifically with respect to prepaid cards that are low value, anonymous and non-reloadable that do not provide cash access. We believe these very constraints make such cards unattractive for money laundering and terrorist financing, and that the risk of such activities occurring on these kinds of cards is relatively low. Accordingly, we believe that imposing customer identification requirements would create burdens that would outweigh the corresponding AML benefits.

In addition, because of the essential role that card issuers play in any prepaid card arrangement, MasterCard believes issuers are in the best position to perform customer due diligence requirements for re-loadable prepaid cards. We also believe such an approach would be relatively simple for the Department of Finance and FINTRAC to implement and supervise. We would be pleased to answer any questions.

The Acting Chair: Thank you very much.

Does Western Union have a statement to present to us? Afterward we will have questions.

Derek McMillan, Director, Compliance (International), Western Union Financial Services (Canada), Inc.: Thank you for the opportunity to appear before the committee. Before I discuss our position on the act and the proposed amendments to assist the five-year review of legislation, I would like to give you a brief overview of our business and the services we provide to Canadians and how the business has changed since the implementation of the act.

Western Union continues to be a global leader in the money transfer of business, with a network of over 450,000 locations in 200 countries and territories. We have been in Canada since 1991 and now have more than 3,800 locations in Canada. This retail network allows Canadians to financially assist family members overseas by providing a fast, efficient and secure method of transferring funds, and provides those underserved by large financial institutions a way to send and receive funds without holds as well as to pay bills and expenses.

Our business in Canada has evolved and matured, and we continue to develop partnerships with other regulated entities to provide account-to-cash services at reasonable costs to customers of financial institutions, both online and in branch.

In addition to our core remittance business, our Western Union Business Solutions division offers foreign exchange services and large principal bank-to-bank transfers to individuals and businesses in Canada and around the world. Western Union Business Solutions includes Custom House, a Victoria, British Columbia business acquired by Western Union in 2009; and the former Travelex Global Business Payments business, which we acquired in November 2011.

Compliance is an integral part of the Western Union business. We participate in regulatory outreach in a variety of settings including in Canada, representation for the money service businesses industry on the public-private sector advisory committee on AML and CTF and on the steering committee for the Canadian chapter of the Association of Certified Anti-Money Laundering Specialists. We have also participated in the private sector consultations in relation to the FATF's updates to the 40 plus 9 recommendations.

Additionally, we work with countries and territories across the globe to educate and guide efforts to AML regulators and policy-makers. We take our role and our responsibilities to this end very seriously.

Western Union and Western Union Business Solutions support the principle of enhancing and strengthening Canada's AML/CTF regime and the implementation of a best practice approach to the Canadian AML program, but want to ensure a balanced and measured approach when implementing requirements that may be overly burdensome or costly to the industry, where those changes do not enhance the ability to detect and prevent money laundering or terrorist financing.

There are two areas where we would respectfully request that consideration be given to achieving this balance. One example are proposed changes to the risk-based approach, and second relates to the ability to rely on customer due diligence conducted by other reporting entities.

Starting with the risk-based approach, with our core Western Union business, we require ID when sending $1,000 or more or receiving over $300. We further require personal interviews with anyone sending sums of over $7,500. We have strong monitoring systems that identity, analyze and report attempts to split large sums of money into smaller amounts to avoid detection.

We also have a risk-based compliance program to assess our agents' compliance with the regulatory requirements and Western Union policies and procedures.

Western Union has implemented processes to report prescribed transactions and to monitor transactions that meet established risk thresholds through a risk-based approach. Some proposals made to enhance the current legislation would have significant impacts on the current risk-based approach methodology. These include the proposals to extend ongoing monitoring obligations to all risk levels of customers and activities to which the act applies. This monitoring will invariably identify the same patterns of activity that are currently identified under the risk-based program with the added costs, processes and infrastructure to review all transactions.

For example, the proposal to implement a business relationship would require the same amount of due diligence, monitoring and reporting for transaction-based customers who may never conduct another transaction, as for account-based customers with whom we would expect ongoing, more extensive relationships. This is a material change to the business model utilized by many MSBs and would require significant infrastructure processes and system changes with conceivably little additional intelligence than that gleaned from the current risk-based model.

Turning to the example of reliance on CDD, consumer due diligence, conducted by other entities, Western Union would be supportive of the proposal to allow for the reliance of one reporting entity on another for customer due diligence, record-keeping purposes and scenarios relating to introduced businesses. An example of a scenario affecting Western Union relates to the provision of our services to Canadian banks. Such customers are introduced to Western Union and access these money transfer services via the bank's online banking platforms. At the current time, a customer cannot send an online transaction over the prescribed limit of $1,000 without having their identity ascertained and verified in person by an agent, as available non-face-to-face methods do not support a real-time transaction. The customers of Canadian banks are subject to CDD at the time of opening an account with the financial institution, which are required to maintain certain records.

FINTRAC's confidence in the AML/CTF procedures of Canadian banks is evidenced by the acceptance of the cleared cheque method of customer verification. If an MSB is unable to rely on the consumer due diligence conducted by the Canadian financial institution, there will be two unintended and negative consequences. First, the services offered by the financial institutions are restricted, notwithstanding that customers who wish to use the services have been fully subject to customer due diligence by Canadian banks. Second, there is a duplication of effort and duplicate documentation maintained by two reporting entities.

We support the general direction of enhancements to the legislation but ask the committee to take a balanced and reasonable approach to the implementation to ensure the industry is not overburdened by requirements that do not meet the overall objectives. We have provided a copy of a more detailed submission, and I welcome questions from the committee.

The Acting Chair: Thank you very much, Mr. McMillan.

Moving forward, we will now hear from Mr. Driscoll and Mr. Gutzin of Amex Bank.

Scott Driscoll, Vice President, Chief Compliance Officer and Chief Anti-Money Laundering Officer, Amex Bank of Canada: Good morning. Mr. Chair and honourable senators, I would like to thank you for inviting us here to participate in the parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. My name is Scott Driscoll, and I am the Chief Compliance Officer and Chief Anti-Money Laundering Officer for Amex Bank of Canada, a Schedule II bank here in Canada since 1991. I am joined by my colleague, Mr. Wilf Gutzin, Vice-President and Senior Counsel for Amex Bank of Canada.

It may surprise you to be aware that American Express is celebrating 162 years as a company, but what might surprise you even more is that we are celebrating 159 years as a proud Canadian employer. We opened our first offices in Canada, in Hamilton, in 1853, and today we have over 3,700 employees across the country.

I would like to highlight that we operate like a virtual bank, having only one limited service retail branch location, located in Markham, Ontario, where our Canadian headquarters for American Express is located. Accordingly, almost all of our customer contact and communications are virtual, not through a branch network. Amex Bank of Canada issues American Express cards in Canada, provides American Express merchant services and provides other merchant and financial services to Canadians.

Amex Bank of Canada has been an active participant in the discussions on the AML environment in Canada with government officials for many years, with the goal of achieving an effective regime to combat money laundering and terrorist financing, at the same time ensuring a balanced approach that does not place unreasonable burden on consumers and businesses. To that aim, Amex Bank of Canada has recently contributed comments on the Department of Finance consultation papers through the Canadian Bankers Association and with a group of smaller banks focused on credit card issuing in Canada.

I want to mention that we are a member of the CBA and we are aligned with the positioning they put forward during their appearance at the committee on March 8. In particular, we believe that any new measures need to be risk- based and flexible to accommodate the rapidly evolving state of the financial sector in Canada.

We would like to take this opportunity to highlight two specific areas to the committee. One is a challenge, the other is an opportunity. The challenge is for financial institutions that operate without a branch network across the country, and the opportunity is the need for new and seamless electronic customer identification methods to meet the needs of Canadians that are serviced in a non-face-to-face environment.

The payments task force appointed by the Minister of Finance noted that anti-money laundering and anti-terrorist financing measures, with customer identification measures in particular, create barriers to innovative payment systems. To that end, we would like to see the government support new and additional, robust, non-face-to-face identification methods, including approaches similar to those in other jurisdictions where the government facilitates identification through access to specific government databases for such purposes.

For example, both Australia and the United Kingdom have made electoral registries and voter registries publicly accessible for non-electoral purposes. Other measures could include expanding the acceptance of electronic copies of identification and other documents.

Due to the pace of innovative change and to ensure that the Canadian payments regime does not fall behind, it is imperative for the government to enable the adoption of new digital identification and authentication measures to support mobile payments. Currently, the methods of identification are prescribed in regulation, not easily changed and have become less useful and relevant over time. There is a need for a more timely administrative approval process for new identification processes and methods. For example, an excellent move forward would be assigning appropriate authority to FINTRAC or other government authorities to take a risk-based approach to permitting acceptable identification measures. To support electronic channels and the move to digital products, written signature requirements should also be eliminated from the regulations. We commend the Department of Finance for re- evaluating this requirement in the consultation paper.

We appreciate the consultative approach that the government has taken and the acknowledgement for the need to strike an appropriate balance for Canadians and the private sector, particularly as it relates to potential compliance challenges related to implementation time frames. In order to be effective, the government needs to provide sufficient time to implement changes arising from this review. We look forward to having further discussions with the government in this regard.

We would like to reaffirm our support for a strong and solid anti-money laundering and anti-terrorist financing regime in Canada and look forward to continued open and transparent dialogue with the government in this regard.

Thank you again for providing Amex Bank of Canada with the opportunity to share our perspective. I would be pleased to accept any questions you may have.

The Acting Chair: Thank you very much, Mr. Driscoll.

Do you have any comments Mr. Gutzin, or will you be available to answer questions if asked?

Wilf Gutzin, Vice-President and Senior Counsel, Amex Bank of Canada: Yes.

[Translation]

Senator Maltais: First, I have a question for Ms. Cotroneo from MasterCard. Is MasterCard listed on the Canadian Stock Exchange?

[English]

Ms. Cotroneo: Yes, MasterCard is publicly traded.

[Translation]

Senator Maltais: Can I buy MasterCard shares?

[English]

Ms. Cotroneo: MasterCard is a publicly traded company on the New York Stock Exchange, not on a Canadian stock exchange. Yes, it is possible to buy shares in MasterCard.

[Translation]

Senator Maltais: You talked about prepaid cards. Several other witnesses have told us that these prepaid cards are a good way to launder money. I see that this would be fairly difficult to achieve based on the maximum amount you allow. It would take a lot of $500 transactions to buy a Porsche. Do you know whether any attempts to launder money have been reported to FINTRAC by your organization?

[English]

Ms. Cotroneo: We have not seen any money laundering attempts that we would have to report. Allow me to explain that.

MasterCard is not a reporting entity to FINTRAC. The cards are issued by MasterCard's customers, who are some of the largest banks in Canada. They are sold by those financial institutions and other financial institutions. Those entities would be the appropriate reporting entities to FINTRAC for any anti-money laundering compliance issues.

[Translation]

Senator Maltais: Today, the vast majority of cards issued by American Express or MasterCard contain a chip. What information does this chip contain?

[English]

Ms. Cotroneo: I am sorry. Is the question: What type of information is on the chips? I will ask my colleague, Mr. McLaughlin to take that question. He is the head of our products and services in Canada.

Richard McLaughlin, Senior Vice-President, Global Products and Solutions, MasterCard Canada Inc.: It is important to differentiate that the prepaid cards we are speaking of do not carry those chips. However, to specifically answer your question, the chips on credit cards store the information that allows the authentication of the customer using a PIN. It communicates with the host system to ensure that the person using the card is the owner of the card.

[Translation]

Senator Maltais: A few years ago, some credit card issuing banks included a picture of the person on the card. I particularly recall that CitiBank did that. Was it not a good security measure for financial institutions?

[English]

Mr. McLaughlin: In fact, it was not. In our experience, the clerks in stores do not look at the front of the card. They rely on the security systems that we have in the background to ensure that the card is valid. Those photos did not serve any security purpose.

[Translation]

Senator Maltais: Somebody mentioned the voters' list. But it has no photos. So how could the voters' list help you better identify individuals? If it is not a good picture, of what use would it be? What about DNA? I do not know. How did you come to that conclusion?

[English]

Mr. Driscoll: Such systems are available in other developed countries in terms of identification measures. This in and of itself would not be the only measure we would take. However, it would provide us the ability to verify the information that we collect on an application basis before granting an individual a piece of plastic or a card and entering into a relationship. This is a data point that we could use that is government housed that we could use for verification purposes. It is not intended to be a point-of-sale device for verifying the actual plastic holder at a merchant location. It is meant at the application stage. We would verify certain data points on the application that we have received.

[Translation]

Senator Maltais: However, a photo is standard on our passports, on our driver's licences and our medical insurance cards, together with the relevant information. Why would that not be good enough for you? If the salesperson makes a mistake, that person should be fired and someone who can do the job properly should be hired.

[English]

Mr. Driscoll: The option for us is that unfortunately we are not in a face-to-face environment for all of our customers. We do not have an extensive branch network, so when customers apply for credit cards, we only have one limited service retail branch location to see people face-to-face. We are looking for robust identification measures where we actually do not see the customer face-to-face. One of the options we put forward is that we would like to be able to receive electronic copies of identification as a measure to record. That being the case, we do not see our customers. This is true for a large portion of the industry in Canada. We do not see our customer on a face-to-face basis so the photos are not that valuable to us for matching an individual with an application.

Senator Ringuette: Earlier, I said to the clerk that we have the fantastic plastic people before us this morning.

Ms. Cotroneo, you say that MasterCard's rules require issuers to follow a due diligence process with cardholders that is very similar to opening a bank account. The bottom line is that MasterCard and your competition, Visa, have no reporting mechanism because you give your transaction responsibility to either the bank or other issuing entities and to the technology providers that deal with the merchants, and so forth. You wash your hands of any kind of situation in regard to having an obligation to report to FINTRAC. However, my first question to you is, of all your issuers and all your acquirers, what is the feedback that you are getting in regard to your prepaid credit card system — both systems?

Ms. Cotroneo: Both systems?

Senator Ringuette: Both prepaid card products that you have on the market.

Ms. Cotroneo: I would like to set the stage to try to answer that question by saying that MasterCard has very robust AML-compliance programs that are in our rules and that our issuers of prepaid cards must follow.

MasterCard absolutely supports the AML regimes in every country in which it transacts and also supports our customer issuing banks in their AML compliance requirements.

We do not have specific contractual arrangements with cardholders in Canada, so we believe that prepaid issuers — primarily banks, in this country — and other deposit-taking institutions that are subject to the customer due diligence requirements and to extensive regulatory scrutiny like FINTRAC have compliance departments. They deal with AML on a day-to-day basis, and they are the best entities in the system to ensure that AML compliance is undertaken in respect to these products.

In terms of what we have heard from our issuers and acquirers, on the issuing side, we know that prepaid products, both non-reloadable — the anonymous ones you could purchase at a retail location — and the reloadable cards that might be less familiar to you, are valuable products for our issuers. We know that Canadian consumers —

Senator Ringuette: My specific question to you was in regard to compliance with FINTRAC. I know very well the entire scenario of Visa and MasterCard, but I want to know what you know from the issuers that you deal with in regard to your two prepaid products.

Ms. Cotroneo: The issuers do not necessarily report to MasterCard their FINTRAC reporting obligations, so we do not have specific oversight into the issuer's reporting obligations to FINTRAC.

Senator Ringuette: At any time, did any of the issuers contact MasterCard to say, "We have concerns in that we think that we have issued a prepaid card to a high-risk individual, and we want you to make a stop payment or stop transaction order on these prepaid cards''?

Ms. Cotroneo: I am not aware of any such incident in Canada.

Senator Ringuette: Okay. Thank you very much.

In regard to Amex, I know you are pretty specific in your field of action. I find it quite unbelievable, in this day and age of general public concern about "big brother,'' that you are asking the Government of Canada to allow you to have access to government data banks, whether they are from Elections Canada or elsewhere. I am sorry, sir, but if you want to deal in the marketplace and provide a very specific kind of product, the legislation is quite specific. You have to know your customers. You are responsible for how you deal in the marketplace.

The Acting Chair: Maybe Mr. Driscoll could give you some background to expand on why it is of interest for Amex to make that request. Would that be a fair question?

Mr. Driscoll: Yes. First, I want to say that we are not necessarily looking for complete access to these databases. We are looking for the ability to match the information in these databases through a mechanism that would protect the privacy and confidentiality of Canadians' information. This is access to the information from a matching perspective, to identify the individuals that we are granting credit to and providing these cards to.

In many other countries, they have done similar types of exercises to allow for the overall government need of identifying individuals and preventing money laundering from occurring in the system, while facilitating access, by their individual consumers, to this credit and these products. It is a scenario where there could, perhaps, be an interface; we would submit the information we have, and certain data points could be verified on the government database and come back as a match or a not a match. It does not necessarily provide us with any additional information other than that which we already have on our systems and/or that the customer has provided to us with full protection from a privacy perspective.

Senator Ringuette: When you say "other countries,'' could you give us the names?

Mr. Driscoll: The two I have highlighted are Australia and the United Kingdom.

Senator Ringuette: Western Union is also in a very particular situation where you need to rely on the information provided by a Canadian financial institution. What kind of scrutiny can you count on in regard to dealing with other countries because of the international transactions that you are doing?

Mr. McMillan: Thank you for the question.

The way Western Union works is good background to help answer that. We are a closed system. When a transaction goes through Western Union's system — a typical consumer-to-consumer transaction, someone in Canada sending money to India, let us say — someone will walk into a location in Canada, and we will have an agent in Canada collecting information. Western Union is in the middle, and then it is a Western Union agent, on the other end, who is paying out the transaction. Like in Canada, there are, I think, over 40 countries where we, directly, are the regulated entity. There are a lot of others where we are master agent locations, largely banks and post offices, and another country owns that licence. We work with them to ensure that they meet our overall global compliance program.

Senator Ringuette: The amount standard of $10,000 is quite an issue because you were looking at an average of $7,500.

Mr. McMillan: No, our Canadian average transaction is probably in and around the $400 mark. One of our concerns would be that the prescribed threshold for which we report a cross-border transaction is $10,000. To bring it down to dollar one would flood data and cause a lot of work, and I am not sure that the benefit matches that additional work, cost to, and collection of information from consumers.

Senator Baker: Thank you for permitting me to ask a question.

I have followed this act since its inception in the year 2000. At various points, since the year 2000, the provisions of the act have come into force. In other words, the entire act did not come into force in 2001, but provisions came into force over a period of time. The most recent period of time in which provisions came into force was 2008. Therefore, it is good that the parliamentary review is taking place at this time.

The reason I was interested in addressing one question on this subject is because six months ago the act was struck down as being unconstitutional as it applies to law offices or to lawyers. We only have one lawyer here, so the only safe place for documents would be in the office of — we have two. No, we have loads on the committee. We have lawyers everywhere on the committee, too many, some people would say, including the chair, who is an expert in his own right.

One of the questions before the court, which has been talked about much since the inception of this act, is the permission granted, which we granted, to FINTRAC for purposes of investigation or compliance with the act to enter upon any premises, any offices of any premises such as yours, at any time without a warrant and to look at all of your documents.

We also have in the act the provision that if, for example, the documents were in someone's residence or home, you would need a warrant issued by, as I recall, a justice of the peace.

Given that this act has been struck down for any of the documents held in lawyers' offices or in offices of law firms, do you have any concern at all or anything to add — you do not have to if you do not wish. I am not suggesting you have to address this question, but do you have any concerns at all as to provisions 62 to 65 of the act, of which 63.1 only came into force in 2006, as it relates to the warrantless provisions in the act that allow FINTRAC at any time to enter your offices and obtain your documents?

Mr. Gutzin: Let me comment generally that we are always balancing both our requirements under anti-money laundering and anti-terrorist financing to meet the requirements of this legislation, and at the same time, to meet our obligations under privacy legislation. They are both equally important policy objectives and obligations on us as a Canadian bank.

Today, we ensure through our legal department that any requests for information, be they in private litigation where there are court orders or attempts or government institutions or law enforcement that are regularly asking us for information, we ensure there is proper authority before we release any customer information. We review every request carefully, and if those requests do not have authority, then we will not provide the information.

I guess anything that makes it easier for this information is probably going to lead to more requests.

Senator Baker: Yes. However, FINTRAC is what is called, as the chair would say, an agent of the state.

If the committee decided in its wisdom at the end of the day after looking at this and at the recent court judgments concerning this that a provision were included that would require some kind of judicial authorization, be it by a justice of the peace or a judge, do you have any comment as to whether or not you would object to that? Would you defer to the committee's wisdom?

Mr. Gutzin: We would defer to the committee's wisdom, but you have heard our general comments in that we believe this legislation should have a risk-based approach, and we think that a risk-based approach includes weighing privacy against money laundering and terrorist financing and weighing the impact on the consumers, the businesses and the financial institutions that serve customers. We think that has to be looked at very carefully to find the right balance.

Senator Massicotte: Thank you for being with us this morning. Obviously, this is a very important issue to the integrity of our economic system, but it is also very complex, and you have made very detailed recommendations.

Let me make it a bit broader. Everybody recommends a risk-based approach, and who can disagree? It sounds good and it is the right approach. Nowadays we are getting more conceptual and less rules-oriented, but sometimes one can interpret it to say, "Trust us, we will do it right; and if we do not do it right, at least we tried.'' Government agencies are basically saying that is not good enough; they need something more finite.

When you say "risk-based,'' what does that mean? Is it a broad base that lets us decide the best system that applies to our customer base, or should there be rules as proposed? Mr. McMillan or Ms. Cotroneo, could either of you comment?

Mr. McMillan: From Western Union's standpoint, I think there is a place for having the prescribed requirements and certain amounts to report certain information.

Our comments on this risk-based approach are more that the regulations as proposed bring anything down to every single transaction conducted requires something. In my mind, the risk-based approach we are referring to is getting away from that. We do not think the benefit of sending these small remittance transactions and reporting them to FINTRAC would add much value. Applying a risk-based approach means using our monitoring systems to identify certain scenarios within smaller transactions that we would identify as unusual, allowing us to focus our efforts that way, rather than prescribing such a low threshold.

Ms. Cotroneo: I would add that from MasterCard's perspective, we would like our different products in the market to be considered. There are different types of prepaid products; I went through them in my submission. Certainly, there are very low-risk products out there in the prepaid space, like these anonymous, non-reloadable products, low value, no access to cash. We would suggest that they perhaps would not warrant the type of attention that other products in market would.

We also support the submission by the Amex Bank of Canada in terms of establishing principle standards for non- face-to-face customer identification rather than specifically prescribing data sources. That is what we considered when we were advocating for a risk-based approach.

Senator Massicotte: Do you realize that the current legislation gives caps, such as for $10,000, but the rest is risk- based? This removes your responsibility, but you still have the responsibility to investigate all suspicious transactions.

What you are really saying is that for international transactions, $1 is not serious; it is too detailed. What should that dollar amount be, then, for international transactions if you think $1 is too low?

Mr. McMillan: It is at $10,000 today. The identification threshold today is at $1,000, and that is where we are required to ascertain the identity of someone conducting a transaction. Possibly having the EFT threshold reduced to that point where we are already required to get more information would make sense.

Senator Massicotte: $1,000?

Mr. McMillan: Yes, perhaps.

Senator Massicotte: Let me ask your advice. On the international side, the experts have said that our country reporting is where the exposure is. We have gotten very detailed and we have pretty good control of what happens within Canada when someone comes to an institution regarding cash transfers. However, internationally we are exposed because people can work in countries that have less revision or are more corrupt and have more flexibility. I suppose Western Union must be exposed to this. It is like a competition by the agency to keep track of the criminals and their processes.

What do you see happening? We are always several years behind. What are criminals doing today to basically get their proceeds from criminal activity into the system? Is there something we could learn or should we be careful of or watch out for something?

Ms. Cotroneo: MasterCard and other payment providers would certainly point to cash as one of the biggest risks to the system in terms of anti-money laundering and terrorist financing. We have protocols in place for our products to ensure that, as required, there is customer due diligence. We believe that some focus certainly should be on cash and how it moves across borders and through the system. It is no surprise to this committee, I am sure, that cash is a focus for FINTRAC.

Mr. McMillan: I will support that comment. One of the things we discussed with the Department of Finance at one time was differentiating between a cash transaction at a retail location and one done in a non-face-to-face method. In many cases, the non-face-to-face transaction may carry less risk if it comes from a Canadian bank account and someone had to log into their banking website in order to initiate that transaction.

Not having the same identification requirements for cash transaction and an online transaction based on the transaction amount, and not how it was paid for, potentially would be a good idea. It would be a good idea to separate the two.

Senator Massicotte: I make the observation that people in the know say that billions of dollars in cash transactions are done each year in the drug trade in Canada. The government has closed down many areas, but I understand that the drug trade has not diminished in volume. Where is the cash going? These people are smart and change their methods. Where is the cash going? What is happening? You folks are in the sector, so you must talk among yourselves or see what is happening.

Mr. Driscoll: I would comment that within the banking sector we are heavily regulated by OSFI and FINTRAC to ensure that we have the measures in place to monitor and report all that activity. I would say that what does happen is they move to the areas that have fewer controls and regulations to find the weak points in the system.

Senator Massicotte: Where is that?

Mr. Driscoll: I would say that cash-based activities and businesses that are cash intensive would likely be weak points.

Senator Massicotte: Such as what?

Mr. Driscoll: I would hate to point to any specific one, but sectors such as jewellery, real estate and auto dealerships are or could be cash-intensive businesses. They might not have the same type of oversight as banking regimes have or be as heavily regulated.

Senator Stewart Olsen: Western Union's individual transfers are relatively small, but you can do them in tranches. Is that correct? One person coming into the same address could do multiple transactions. Do you have a limit on those tranches?

Mr. McMillan: We have monitoring systems in place where we will aggregate across consumers. One good example is the identification of a potentially suspicious activity of a consumer that walks into a location on one side of the street and then walks over to the other side of the street to send money as well. That is a good example of what our transaction-based monitoring systems are looking to identify and to report. We actively report to FINTRAC on such scenarios.

Senator Stewart Olsen: What kind of rules and regulations do you put in place before granting Western Union agency?

Mr. McMillan: We have a number of different controls. We have class-of-trade restrictions, criminal record checks on the ownership of our agent locations and government-sanctioned checks on the ownership of our locations around the world. A piece of our program is focused on looking for suspicious consumer activity, and we have an agent compliance support division that focuses solely on monitoring an agent location. We monitor for suspicious behaviour and try to determine whether we have an agent that may be complicit in some activity or perhaps in need of training because it looks like they have unusual activity going through the system. We have specific controls set up as part of our compliance program.

Senator Stewart Olsen: Do you review an agency on an annual basis for compliance?

Mr. McMillan: We have our compass model — a comprehensive strategy — for identifying the risk of agent location. In Canada, we run over 3,800 locations and each one is run against this risk assessment model where we take into consideration a number of different factors from the transaction activity done at the location to identify where we think we have an agent that has suspicious activity.

An example would be a person who walks in and sends just under our ID threshold at an agent location three times in a month, or all in the same day, or just minutes apart. We would vary the score accordingly. That risk-based model drives where our compliance officers would go to a location and do a compliance review with that location to determine whether we need additional training or whether we need to shut that location off.

Senator Stewart Olsen: For MasterCard, how do you monitor compliance? I realize it is quite different but nonetheless you should bear some responsibility for what your agents are doing.

Ms. Cotroneo: In MasterCard's model it is a bit different in terms of our issuing bank customers being those that issue prepaid cards, in this case. While the specific practices of each individual financial institution would be better addressed by them, we certainly require issuers to have robust anti-money laundering compliance programs in place. We have audit controls over those programs, ongoing due diligence and ongoing suspicious activity monitoring. As well, we require them to have record-keeping proceedings.

Senator Stewart Olsen: To American Express, this is a request for a follow-up. I am interested in your suggestions about moving into the digital age with better ideas of identification. With the committee's and the chair's permission, would you be able to send to us some of your ideas of how this could be done? I will not take the time now, but I think these are very interesting ideas that everyone would have to look at.

Mr. Driscoll: Definitely, we will take that away and provide that information.

Senator Moore: MasterCard is not a reporting entity to FINTRAC. Is that correct?

Ms. Cotroneo: Yes.

Senator Moore: Amex and Western Union are reporting entities. Is that correct?

Mr. Driscoll: Yes.

Senator Moore: Could you tell us how many suspicious transactions you have reported to FINTRAC and over what period of time?

Mr. Driscoll: I would have to take away to get a specific number for you. I can tell you that it is in the neighbourhood of 200 transactions that we would report annually based on a review. I can get specific details broken down by monthly statistics going back many years, if you would like.

Senator Moore: Since you have to report, could you send an annual figure to the clerk of the committee? It would be useful.

What is the experience of Western Union, Mr. McMillan?

Mr. McMillan: We are one of the largest suspicious transaction reporting entities to FINTRAC. I can get those numbers as well, but the difference in our business model drives that. Occasional transactions with a person going to a couple of different locations would cause us to file a report. Our typical STR is a much smaller dollar amount than you would see at a financial institution.

We have a lot of those reports going to FINTRAC, so I can provide you with that. On the flip side, the prescribed reporting is much smaller with our average transactions being around $400. We do not do a lot of LCTR reporting.

Senator Moore: When you have someone doing two or three transactions from one place and going across the street to another outlet to do more, would you be talking about more than the cross-border figure of $10,000 or less than that?

Mr. McMillan: In many cases, we do not get near that amount. It could be that three transactions under our ID threshold that we have tied to the same sender are all going to the same geographic area in the world. We would file an STR for $3,000, for example.

Senator Moore: How many transactions from one sender would trigger suspicion that would cause you to make note and report?

Mr. McMillan: We use a decision matrix to identify activities such as that in reviewing the data on our transactions. It would populate a queue for an analyst to review and then file a report to FINTRAC or not file to FINTRAC for one reason or another. In the past we have not shared those rules with the bad guys. We do not want those rules necessarily getting out there.

Senator Moore: Could you send in those figures, as asked from Amex, to our clerk?

Mr. McMillan: Definitely.

The Acting Chair: I have one question for each of you. Given the number of players involved in this process and the complexity of the legislation, I would like to hear a summary from each of you on your number one issue and your number one recommendation to us in terms of how we can improve or advance the legislation.

Mr. McMillan: One thing we would focus on is the introduced business situation. In many cases in Canada, our agents are becoming more and more financial institutions. However, with the way the regulations are today, when conducting a Western Union transaction, bank A is acting as an agent of a money servers' business and has to comply with MSB requirements for non-face-to-face identification and what not. It would help out Western Union and other MSBs that work with other regulated and reporting entities to be able to rely on the account opening work that the bank has done if the transaction is initiated through that bank account by the bank as an agent of a money server's business.

I hit you with two: the introduced business concept as well as accounting for the non-face-to-face situation when the introduced business has the information but they happen to be conducting a transaction through their online banking website to a consumer who picks up their money at a Western Union location somewhere around the world.

Ms. Cotroneo: With respect to prepaid products, which have been the focus of MasterCard's submission, I would respectfully ask that they be considered in their entirety as there are different products. Any additional AML requirements should be subject to a very principled risk-based standard. We believe that these products in market are valuable to Canadian consumers and represent a fairly low risk on AML and terrorist financing. We believe that the issuers that promote and sell these products are already subject to extensive regulatory scrutiny and are in the best position to ensure that their compliance regulation and regulations are in place for these products, and generally that they are low risk in the sphere of AML and ATF.

The Acting Chair: Basically, we do not need to have protection. Is that what you are saying?

Ms. Cotroneo: No. I would say that we already have robust compliance programs in place, both at the network level and at the issuer level.

The Acting Chair: That category is fairly well scrutinized.

Ms. Cotroneo: Absolutely. It is also represented in the legislation today.

Mr. Driscoll: I would say that for us and for many other players in the financial sector that one of the biggest challenges we face is coming up with new and robust non-face-to-face identification methods. This has been flagged by the Department of Finance and by the task force on the payment system. It is where we are going in terms of digital mobile payments, where individuals do not necessarily go into a branch to show identification. We need to develop robust and effective methods of identifying our customers in a non-face-to-face environment.

The Acting Chair: Will you send the clerk a list of some of those suggestions and recommendations you have made from a technological perspective?

Mr. Driscoll: Yes, I will.

The Acting Chair: Thank you for participating this morning. It has been insightful, and we appreciate the information that you have shared with us.

Honourable senators, in the second half of our meeting we are very pleased to welcome, representing the Canadian Chamber of Commerce, Mr. Matthew McGuire, Chair, Anti-Money Laundering Committee; and representing the Canadian Real Estate Association, Mr. Gary Simonsen, Chief Executive Officer, and David Salvatore, Director of External Relations.

We have one hour for this session. Mr. McGuire, if you would start, we would appreciate it.

Matthew McGuire, Chair, Anti-Money Laundering Committee, Canadian Institute of Chartered Accountants: Thank you and good morning. On behalf of the Canadian Institute of Chartered Accountants, we appreciate the opportunity to provide input on the committee's five-year parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

Together with the provincial chartered accountant institutes, the CICA represents approximately 80,000 chartered accountants in Canada. Our members are committed to working together in the fight against money laundering and organized crime. My comments today specifically focus on issues related to accountants and accounting firms arising from the consultations undertaken by the Department of Finance in recent months, particularly on strengthening the regime for combating money laundering as well as the proposed regulatory amendments under the act.

I am a chartered accountant and the chair of the anti-money laundering committee of the CICA, which was constituted to address the consultations and proposed regulatory amendments on behalf of the profession. I am also a partner and the national anti-money laundering practice leader for MNP LLP, which is the seventh largest public accounting firm in Canada. Together with my team of anti-money laundering advisers, my professional life involves designing and evaluating risk-based anti-money laundering compliance programs for all sectors and all sizes of reporting entities across Canada and has been since my time as an intelligence analyst with FINTRAC in 2004.

The first area I would like to comment on relates to clarifying reporting obligations under the act for the accounting sector. There are certain activities performed by accountants that currently trigger reporting requirements that are inconsistent with the original policy intent of the legislation, particularly with respect to insolvency services and the roles of trustee in bankruptcy. The government recognizes this issue and has proposed that the act be amended to exclude from certain reporting requirements those activities undertaken by the accounting sector when providing trustee in bankruptcy and insolvency services, acknowledging that these activities are indeed similar to others performed by accountants that would not trigger reporting requirements.

Proposal 2.8, which deals with clarifying reporting obligations to the accounting sector, is contained within the December 2011 consultation document issued by Finance Canada. While we welcome this proposal, it does not go far enough to address the activities that are properly outside of the act.

To illustrate, the interpretation notice issued by FINTRAC, known as Interpretation Notice No. 7, recognizes that, in addition to trustee in bankruptcy services, acting as a receiver or a monitor in an insolvency context would not be considered to be triggering activities. That interpretation notice recognizes that in these scenarios, the accountant is not working on behalf of the client, but rather to carry out a court order as an officer of the court and under the supervision of a court. However, such interpretation notices do not have the force of law.

As well, there are other relevant services provided by accountants in an insolvency context, such as receiver-manager and interim receiver, which are not addressed specifically by proposal 2.8. As such, we believe that it should be broadened to encompass the roles of trustee in bankruptcy, receiver, receiver-manager, interim receiver and monitor.

The government has also proposed broadening the requirement to report suspicious transactions to encompass activities conducted for the purpose of a financial transaction. This wording is ambiguous, in our view, and could be interpreted to encompass assurance services, which are currently outside the ambit of the act. We are therefore looking particularly for clarity on the scope of that proposal.

We are also seeking clarity on the regulations that will support laws relating to ministerial countermeasures. The boundaries of these countermeasures are not known, and therefore, we are concerned about the practical extent to which systems and processes can be designed to adhere to them.

My final comment deals with proposed amendments to regulations under the act that deal with the introduction of ongoing monitoring of business relationships. These are defined as any financial relationship established to provide financial activities or transactions.

Beyond the burden represented by ongoing monitoring and record-keeping contemplated under this proposal, we are concerned that the definition is sufficiently broad as to bring currently excluded assurance services under the ambit of the act, and therefore, we are looking for clarification in that respect as well.

We understand that a balance must be struck between reporting and record-keeping and identification requirements that properly deter and detect money laundering and terrorist financing activities while minimizing the compliance being placed on the private sector.

We appreciate your consideration of these issues identified in the course of the committee's review of the act, and we would be pleased to answer any questions.

Gary Simonsen, Chief Executive Officer, Canadian Real Estate Association: Mr. Chair, honourable senators, on behalf of Canada's over 100,000 realtors, thank you for the opportunity to discuss the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

As noted, my name is Gary Simonsen. I am the CEO of the Canadian Real Estate Association. I am joined by our Director of External Affairs, David Salvatore.

Our industry understands the fundamental importance of combating money laundering and terrorist financing. However, the money laundering and terrorist financing regime does not always understand our industry. Rules that are applicable in one sector are not necessarily feasible in another sector.

Unlike banks, with massive infrastructure, a slew of salaried employees and literally millions of transactions, the majority of our members are entrepreneurs and small business people. Over 76 per cent of our members conduct fewer than 10 transactions per year. For them, simplicity is key, time is precious and red tape is counterproductive. Indeed, an hour spent interpreting a law or regulation, filling out paperwork or filing records is an hour away from earning a living.

Over the past 10 years, our members have adapted their business operations, taking on both a heavy paperwork and record-keeping burden to comply with the money laundering regime.

This is not to say we do not have a role. We do. However, there is an important lens through which money laundering measures should be viewed, assessed and implemented. They must be applicable to a given reporting sector. This means they should be targeted and feasible in practice. Furthermore, they must not make compliance with an already onerous regime more difficult.

It is along these lines that your review is an opportunity to not only assess additional proposed measures contained in the Department of Finance's consultation papers, but also to address challenges and lessen the compliance burden with the existing regime where appropriate.

This is the approach we took in our responses to the two Department of Finance consultation papers. I will not get into all of the details of our submissions at this point, but I would like to highlight three proposed changes that are of greatest concern.

First, it is impractical for realtors to monitor clients and conduct due diligence on an ongoing basis. Because real estate is a transactional business, client relationships have a defined start and end point; they correspond with the beginning and end of a property transaction. Requiring ongoing monitoring of clients in the real estate sector is impossible, and as such, would not add any meaningful prevention of terrorist financing.

Second, while we support the objective of providing information that should have previously been submitted under the money laundering regime, there are a number of external factors that may prevent a reporting entity from obtaining the information.

As an alternative to the proposal to fine reporting entities until they provide the requested information, we recommend FINTRAC require reporting entities to take reasonable measures to obtain the information in order to file a missing report. This approach is also consistent with other aspects of the money laundering regime.

Third, we are concerned about some of the proposed countermeasures for designated foreign jurisdictions and entities, in particular ones that would require total reliance on face-to-face identification verification methods. This is impractical as it would necessitate either the realtor flying to the buyer's country or the buyer flying to the realtor in order to be identified. Non-face-to-face verification methods are critical, are currently allowed and must continue under the proposed countermeasures.

Our submission also raises a few important issues that were not addressed in the Department of Finance consultation documents.

Our members often deal with elderly clients who only possess expired identification. The current regulations require realtors to verify a client's identity using valid ID only, providing no exceptions for expired ID. From a risk assessment perspective, it seems clear this instance is one that calls for some leeway.

Furthermore, this review is also an opportunity to close a huge loophole that allows criminals to launder money by purchasing or selling real estate through a for-sale-by-owner company. Currently, for-sale-by-owner companies are not subject to the FINTRAC regime, creating a loophole for criminals to exploit.

We also strongly support an overall compliance approach of awareness and education over penalties and citations. We encourage FINTRAC to re-energize its education efforts to ensure that stakeholders understand how to implement modifications to the regime, as well as how to meet existing expectations and challenges. We also recommend a grace period before FINTRAC is able to fine for non-compliance under any of the new regulations.

Again, thank you for the opportunity to appear, and I look forward to your questions.

The Acting Chair: Thank you very much, Mr. Simonsen, for your very concise and precise disclosure.

Mr. Salvatore, do you have anything to add as an initial opening comment?

David Salvatore, Director, External Relations, Canadian Real Estate Association: No, but thank you for the opportunity.

The Acting Chair: Maybe I could ask a question to Mr. McGuire. Senator Massicotte has asked this a few times, and it is an open-ended question, Mr. McGuire. In your statement you said, "My professional life involves designing and evaluating risk-based anti-money laundering programs for all sectors and sizes of reporting entities, and it has since my time as an intelligence analyst with FINTRAC in 2004.

Thinking of how some of the criminal element could think, Senator Massicotte has asked this before, but, to open it up, give us some feedback on how you see perspective opportunities for the criminal element. We have asked that question a few times, and we have never had anyone give us too much feedback on that.

Mr. McGuire: Thank you for your question. Just to clarify, is what vulnerabilities there are today and how money is being laundered essentially the core of question?

The Acting Chair: Yes.

Mr. McGuire: It is a wonderful question, and one that has not had enough empirical research done on it, in my view. Based on the analysis that we have done, with reporting entities, of suspicious transaction reports, suspicious transaction reports are largely, in this country, driven by cash being deposited into financial institutions. There are so many other ways that are common. We have a real issue with bulk cash smuggling in our country, smuggling cash from across the border or across water into jurisdictions where it is easier to deposit cash without scrutiny, and then, for instance, wiring it back or sending the value back into Canada. A number of studies have also supported the fact that trade-based money laundering has been used to launder money in Canada — selling goods across the border at artificially inflated or deflated values in order to transfer value. These are a few examples of what seems to be occurring at the moment.

With MNP, we have a cross-country risk tour where we bring together financial institutions and law enforcement to talk about what they see in their areas and what the level of sophistication is of the schemes being seen by law enforcement. The response that we continually get is that it is not as complicated or sophisticated as you might expect. People are following very basic schemes in Canada to be able to launder money.

Senator Tkachuk: Mr. Simonsen, what does a real estate agent have to report —every sale over $10,000? What does a real estate agent have to report to FINTRAC?

Mr. Simonsen: The $10,000 threshold is dealing with cash, so it is not that they are having to report every real estate transaction that occurs but only ones that have that involved in the transaction, which are very, very rare.

Senator Tkachuk: If I am selling a house and some guy gives me a briefcase full of cash, it will be caught up in the bank when I deposit it because it would be a rare thing that I would deposit that amount of cash into a bank account. On the private end, I would think that would solve part of the problem. Once the seller gets the cash, he has to deal with it somehow, and the only way to deal with it is to deposit it in the Bank. Therefore, in the end, it would be reported to FINTRAC. Do you want to add something to that?

Mr. Salvatore: Could I expand a bit? The large cash transaction is for anything above $10,000, but any time a realtor receives funds, they have to fill out a receipt-of-funds report. Before a transaction, they would also have to ID their client, so those are some of the record-keeping requirements currently required under the FINTRAC regime.

Senator Tkachuk: The client is identified anyway. Someone has to buy the place. Someone has to register a deed. Someone has to take possession. In the end, whoever buys it would be identified in some way or another.

Mr. Salvatore: Under the current regime, realtors would have to identify their clients.

Senator Tkachuk: Right. That would make sense. How many transactions, on average, would a realtor have to reveal to FINTRAC? There would be very few, I would think, where cash would be king.

Mr. Simonsen: In terms of the overall reporting of any suspicious transactions or others that would go to FINTRAC, obviously you would have to confirm with FINTRAC, but our understanding is that there are very, very few. It would be a handful.

Senator Ringuette: I have one question for Mr. McGuire to start with. Do chartered accountants have fiduciary responsibility or activities?

Mr. McGuire: That is to say, are there standards that are imposed on us as a profession?

Senator Ringuette: Yes.

Mr. McGuire: We have provincial institutes that, first of all, govern us from a perspective of things like specifying that we cannot associate ourselves with false or misleading information or do things that would bring disrepute to the profession. Furthermore, we have a significant volume of accounting and auditing standards. There are also a hefty number of standards in situations where we have to deal with reporting if we observe illegal activity, by way of example.

Senator Ringuette: Of the gambit of activities that chartered accountants would enter into, would fiduciary activities, on behalf of a client, be part of that?

Mr. McGuire: I am sorry; I misunderstood the question, senator.

Senator Ringuette: Maybe my question was not clear.

Mr. McGuire: My answer to the question that you did not ask was very good. In terms of, for instance, a trust, a chartered accountant, in some situations, would be called on to operate a trust, yes.

Senator Ringuette: Just like lawyers, you would, as a professional, administer a trust fund on behalf of a client?

Mr. McGuire: Certainly, but without the benefit of privilege. Yes.

Senator Ringuette: As far as you know, what would be, in the last year or two years, the suspicious transactions that would have been reported to FINTRAC from your membership?

Mr. McGuire: We do not have that information. I am not sure how we would obtain it.

Senator Ringuette: It is on an individual basis, I guess. You yourself monitor the screening process and the education process for your membership?

Mr. McGuire: I see what you mean. The CICA has an educational component, senator. They are advised that in those situations where they are in public accounting and receiving or paying funds on behalf of a client or giving instructions to do those things, those are covered by the act and they have responsibilities around it.

Senator Ringuette: Mr. Simonsen, as far as you know, would your association would deal with about 80 per cent of real estate transactions, 90 per cent, 95? What is the percentage of real estate transactions that your membership does in a given year?

Mr. Simonsen: I cannot tell you what the overall percentage would be. I can tell you the total number of transactions that occur through multiple listing systems across the country. In the last few years, it has been around the 400,000 mark.

Senator Ringuette: How many transactions would sales by owners have in a given year?

Mr. Simonsen: Again, we do not have statistics on the number of for sale by owners.

Senator Ringuette: Out of those 400,000, how many would be of a commercial nature?

Mr. Simonsen: Again, that would be a statistic we would have to get back to you. I do not know from our multiple listing service as to what the exact number would be.

Senator Ringuette: I want to go back to Senator Tkachuk's question because that is an issue we are trying to understand. No different from any other Canadian, we certainly hear of money laundering happening in the purchasing of apartment buildings or the building of apartment buildings or condos and then being rented or sold and so forth. Would you know if any of your members have reported to FINTRAC such activity?

Mr. Simonsen: Again, our understanding is that it is a small number. I think our concern is to ensure that it covers all types of transactions, that it is not just realtors but also companies engaged in for-sale-by-owner business, that it also captures that as well. That is a loophole that exists, because they are not required to report under the present regulations.

Senator Ringuette: A rural property in New Brunswick that is sold for $60,000 by an owner would be an interesting venue for money laundering. In your experience, and in the experience of your membership, there must be some triggers that would put a question mark on a certain transaction. What are the triggers within your association that your membership would be using to provide suspicious transaction information to FINTRAC?

Mr. Simonsen: That is the sort of information that is covered off in education training materials that we provide to our members across the country and which is obviously in accord with the FINTRAC regulations that specify the kinds of things they should be looking out for. We have provided a very extensive education support to our members so that they have awareness of the kinds of things they should be looking for that comply with and that are related to money laundering.

Senator Ringuette: Give us an example of what you would provide in that education kit to your membership.

Mr. Simonsen: I could turn to my resident expert.

Mr. Salvatore: If it is okay with the committee, is it possible for us to get back to you with that information? We do have a guide that we provide to our membership. FINTRAC I also understand has information on its website, which we provide to our membership.

I want to clarify that CREA provides education on this, but we do not have a mechanism internally because we are not a reporting entity. Our members are reporting entities. We do not track the suspicious transaction reports. We do not track that type of information.

Senator Ringuette: For instance, when you have membership meetings and so forth, I guess the issue of money laundering and terrorist financing would be discussed among your membership. I am supposing, just like in any other group, that you would have some, "Oh, did you hear?''

We are trying to get a pulse on the reality out there so that the legislation we are reviewing can address this.

The Acting Chair: If you could get back to us with some information, that would be helpful.

[Translation]

Senator Maltais: I have a question for Mr. McGuire. Regarding bankruptcy, you play two very specific roles. First, as an accountant, you can be a trustee in bankruptcy, and second, you can also act as a receiver or a monitor in an insolvency context, and be the depositary of the assets of the bankrupted entity. Is that correct?

Mr. McGuire: That is correct.

Senator Maltais: Can the same person play both roles?

Mr. McGuire: No, not simultaneously.

Senator Maltais: I imagine that you, as a trustee and an accountant governed by your professional order, must inform the proper authorities when you realize that a false bankruptcy has taken place. Is this what you do as a trustee, that is, inform the RCMP or another security service?

Mr. McGuire: Thank you for your question.

[English]

Yes, it is the duty of the receiver or trustee to inform the court, so it is a very public process that would likely lead to law enforcement intervention.

[Translation]

Senator Maltais: The second part of your recommendation relates to separating the role of receiver-manager from that of the asset comptroller. Is there a specific reason for that?

[English]

Mr. McGuire: The reason is that in both of those cases there is oversight by the court; it is a court order that is being fulfilled by a court officer. To contrast with the other activities that are covered, in each of those instances the accountant is acting on the instructions of a client. That is the risk that the Financial Action Task Force has identified in their last paper on the risk-based approach as being germane to accountants; when a client is telling us what to do in terms of receiving or paying funds or buying or selling assets, that is where the risk lies. In this case, the client is not pulling the strings; the duty is to the court as a court officer.

[Translation]

Senator Maltais: When, as an accountant and trustee, you realize that goods were acquired fraudulently or improperly, and you transfer them to another accountant who is in charge of monitoring them, can you tell us how the legal system disposes of these goods, for which, for all intents and purposes, you are still responsible?

[English]

Mr. McGuire: That is a wonderful question to which I do not have an answer, senator. I am not sure. I would be happy to have an undertaking to reply.

Senator Massicotte: Thank you for being with us today. It has been very informative.

Maybe I will start on the real estate side. I heard your presentation and read it. What you are saying is that we are not heavily involved in this sector, and what FINTRAC is demanding is very burdensome. Yet, I am sure if you have followed some of our other witnesses, every time we ask an expert witnesses where the cash is going, real estate is often mentioned, along with car dealerships, money exchanges and so on. In fact, by coincidence this morning in La Presse, we understand that the son-in-law of the ousted Tunisian president owns significant property in Old Montreal.

Obviously, the cash is coming in and the international community has been alerted to that cash, but the cash is coming in nonetheless. How do we rectify the problem? It is significant cash. How do we get there? Everyone says it is too burdensome, but there are still significant loopholes occurring, particularly in real estate. How do we get there and contravene that?

Mr. Simonsen: I think we have identified one area, recognizing that our members are covered. It should be comprehensive to treat all of those involved in real estate transactions such that they are subject to the same requirements.

Senator Massicotte: Direct sales by the vendor or buyer.

Mr. Simonsen: It is not necessarily just direct sales. It is by those companies that are assisting.

Senator Massicotte: I have been in the real estate sector for a couple of decades now, and there are an infinite minority of transactions. In fact, the Tunisian son-in-law did not use a broker. It could be a real problem, but brokers are still heavily involved in many of those transactions. Maybe there are some less honest than others, but there are significant dollar sums involved. Everyone says it is burdensome and complicated and maybe they are not adequately informed, but there is obviously a problem. What do we do, raise up our hands and say we cannot get there? It is still happening.

Mr. Simonsen: I think part of what we are saying is ensure that it is simple and focused. It is reflective of the fact that we have probably around 9,000 broker offices across the country. They are small business people. Many of them, most of them are in fact a handful of folks working in offices.

Some of the requirements are ones that apply universally, whether it is extensive, large banking institutions, as I have referred to, who have legal counsel on staff and folks who can assist in the interpretation and the application of it. Our members do not have that kind of expertise, resources and capacity, so it is a challenge.

Senator Massicotte: One of the witnesses we had yesterday used the same argument in saying most of their customers are client-based and do not do transactions as they are burdensome. They suggested they would be prepared to sign a document. For instance, brokers would sign something saying, "We will never deal in a transaction with cash less than $10,000, we are totally disqualified, we do not want to take up the program, and if we do, it is criminal activity.'' Would you agree with that also? Those who do should take measures to ensure they properly identify their client base and do the risk-based analysis and so on?

Mr. Simonsen: Going back to when the legislation was initially put in place and the threshold of $10,000 was identified, the number of cash transactions that take place where a realtor is involved is incredibly rare.

Senator Massicotte: Maybe they should not be allowed to do so, period. Those who do, which are probably more commercial, should have to take on the obligation as opposed to applying it to all of your members. Would that be an acceptable solution?

Mr. Simonsen: We would have to consult with our members on that.

Senator Massicotte: Internationally you said that is a problem because obviously these people are, by definition, not in this country, so how do you identify them? What do banks do? They have the same obligation to identify their client base. What do they do when dealing with an offshore client? How do they get around that issue?

Mr. Salvatore: Unfortunately, I do not know. We are saying that identification should still occur but that the non- face-to-face verification method should be allowed. We totally understand the need for countermeasures; we are supportive of that. We just ask that with respect to the non-face-to-face verification methods, that it is practical.

Senator Massicotte: That is the same for the banks, I presume?

Mr. Salvatore: I honestly do not know how banks operate in that respect.

Senator Massicotte: Mr. McGuire, you are experienced and actually head up the money laundering division in your company. You mentioned three examples earlier of how money laundering is still occurring, basically by trade and bulk cash being transferred across the borders. What should we be doing that we are not doing to counter those measures?

Mr. McGuire: In terms of bulk cash smuggling, it is either scrutiny at the border, which is in place now, or scrutiny to the transactions that are re-entering the country. At the moment, there is no guidance on which countries pose a greater money laundering risk as transitory countries, for instance, or the source of criminal proceeds into Canada from the government. If, for instance, financial institutions were given a list of such countries and have them subjected to more scrutiny, I think that would assist.

The second part of that due diligence is really comparing those transactions to the documentation that supports them to assess the reasonableness.

Senator Massicotte: With respect to bulk cash, if I understand your point, someone comes in with a bag of cash; I assume he will look for a place to deposit it or wash it somehow, right? If he deposits it at the financial institution, he gets caught and immediately has a record. If he deposits it with a real estate broker, he gets caught. What does he do with that cash?

Mr. McGuire: Either it is smuggled outside of Canada to countries where it is easier to place that cash or, alternatively, he buys assets that are easily transportable here and takes them across the border. Still unregulated are other dealers in high-value goods, such as auction houses, car dealers, boat dealers.

If I might respond to your earlier question to my friends here, generally when banks are dealing with identifying overseas customers, they use the provisions of the act that allow an agent to identify on your behalf. The act provides that you can enter into a one-time agreement with someone overseas, to identify someone on your behalf in a face-to- face manner.

Senator Massicotte: Could that apply to real estate brokers? Do you know?

Mr. McGuire: It does.

The Acting Chair: Mr. Simonsen, before we wrap up, with respect to the level of awareness of your members, small business people, I think most of us understand the difference between small and bigger businesses and the complexity that bigger operations have in terms of compliance, especially with the banks and financial institutions within the legislation.

How aware are your members? Is this an issue? There is a cost-benefit analysis we do in business. How aware are your members and what is their sense about this legislation?

Mr. Simonsen: Let me address the awareness issue first. As a national organization, we have about 100 plus boards and association across the country. It has been an area we have been extensively involved with in terms of preparing customized education materials for realtors as well as brokers. We are also working with our boards and associations to create some customized materials for brokers across the country.

There is a high level of awareness within organized real estate. It is a challenge, admittedly, with 9,000 or so offices and 104,000 individual entrepreneurs, many of whom are in effect operating as though they are their own business within a brokerage.

The response from our members, from the introduction to the proposed amendments put forward now, is that it is cumbersome, not responsive and one-size-fits-all. It is not responsive to looking at the types of industries and individuals affected and their capacity and capability for dealing with some of the suggested changes.

As well, the track record that we know is that very few reports are coming in. Does that reflect that they are not happening or that the regulations have become so problematic that it is difficult for people to report? I am not sure, but certainly we know the reaction from our members and we have seen some of the proposed changes. The things to be contemplated are incredibly problematic. Flying to another country or having a client or customer come to Canada in order to be identified is unrealistic in terms of independent, small-business people. Those sorts of proposed changes are hugely problematic for our members.

Senator Massicotte: If I am a member of the association and just the little guy, it is not my problem because I am not going to do a transaction of $10,000 in cash with a non-resident. I suspect that if 99 per cent of your members said that, it would be not be a problem. Is that not correct?

Mr. Simonsen: No. Let me address the issue about the amount of cash. I would strongly emphasize that the number of transactions involving cash is very small.

Senator Massicotte: That is what I mean. If I am not going to do any transactions, why would I worry about the legislation?

Mr. Simonsen: The issue is the identification of clients. Increasingly across the country, we are getting much more involved in the international arena. We are seeing that from our members. We support training programs to show international opportunities that exist for them within the real estate sector. It is a growing sector and will not diminish; it will increase. That kind of requirement, if anything, will become more problematic rather than less.

Senator Ringuette: Maybe I am wrong, but I understood that in order to acquire and register real estate, one needed a lawyer. Therefore, the international entity ID could be and should be available through the lawyer residing in Canada who represents that entity. Am I wrong?

Mr. Simonsen: Lawyers are exempt from the regulations with FINTRAC.

Senator Ringuette: I get the picture; thank you.

Senator Tkachuk: Mr. Simonsen, if you do not have face-to-face identification, I can understand the problems with that. What other suggestion would you have for identification? We still have to do the identification, which you are not denying. You are just saying, "Let us not do it face-to-face because it is a problem.''

Mr. Simonsen: Correct.

Senator Tkachuk: How else could you do it?

Mr. Simonsen: In the existing regulations, as my colleague identified, there are "mandatories'' that you can use in other jurisdictions to identify. We suggest not changing that.

Senator Tkachuk: You could use a scanned passport with its picture. You should be able to identify some person who is buying a piece of property. Mr. McGuire, do you have a comment?

Mr. McGuire: The confusion is happening around what regime currently exists and what is being proposed in the proposal being rallied against.

Senator Tkachuk: I am not confused. I want to know how else you could it other than the way we have. Instead of face-to-face, how else could you identify the client?

Mr. McGuire: Other industries rely on combinations of information, for example a passport, with good procedures in place to identify a fake passport, and attestations by guarantors who are of certain professions — these sorts of scenarios.

Senator Tkachuk: It could be a lawyer or a banker.

Senator Massicotte: On the identification of a resident, does the $10,000 apply or must you identify every client, even for $50.

Mr. Simonsen: The requirement is to have identification for every client.

Senator Massicotte: Identification means what? You have his name and his civic address.

Mr. Simonsen: There is a list of pertinent kinds of documents that can be used to validate that, and the broker agent is required to keep those on file.

The Acting Chair: Thank you very much, gentlemen, for your participation with us today. It was very informative and hopefully we covered some issues that are important to you. We have your submissions but if you have a précis in terms of bullet points or notes that you want to send to the clerk on final recommendations, we would appreciate that information.

(The committee adjourned.)