Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 13 - Evidence - March 7, 2012
OTTAWA, Wednesday, March 7, 2012
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:17 p.m. for the review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (S.C. 2000, c. 17), pursuant to section 72 of the said Act; and for the consideration of a draft budget.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Honourable senators, welcome to this meeting of the Standing Senate Committee on Banking, Trade and Commerce. This afternoon we continue the five-year parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This is our eighth meeting on the subject. Over the last month, the committee has focused efforts on hearing from a number of so-called regime partners involved in the implementation and administration of this legislation, including the Department of Finance, Public Safety Canada, the RCMP, CSIS, Canada Border Services Agency, the Office of the Superintendent of Financial Institutions, the Information Commissioner, the Privacy Commissioner, the Public Prosecution Service of Canada, Canada Revenue Agency, the Department of Foreign Affairs and FINTRAC.
Having heard the internal perspective, we will now begin our efforts to hear an external perspective. Over the next month, we will hear from those familiar with and impacted by the regime, including industry groups and associations as well as independent experts in the field. To get us started, we are delighted to welcome, by video conference from Toronto, Ms. Susana Johnson, Head of Anti-Money Laundering Services at KPMG Forensic. Ms. Johnson, the floor is yours.
Susana Johnson, Head, Anti-Money Laundering Services, KPMG Forensic: Mr. Chair and honourable senators, I would like to thank you for inviting me to participate in the parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, and the 10-year evaluation of Canada's anti-money laundering and anti- terrorist financing regime.
As you indicated, I am Susana Johnson, Head of KPMG's AML Services. As part of these services, KPMG has assisted reporting entities across a variety of sectors. We have assisted financial entities regulated by OSFI and other financial entities regulated by FINTRAC, money services business, casinos, security dealers and, to some limited extent, real estate developers and dealers in precious metals and stones. That has given me a very good view of issues across various industries. I have been involved in independent reviews of these various reporting entities where we assess their compliance regime against the legislative requirements.
In the past two years, I have been involved increasingly more in engagements where these reporting entities have received finding letters from OSFI and FINTRAC. I have noticed a concerted effort by the regulators in their monitoring compliance. As a result of this experience, I have come to appreciate a lot of challenges that this legislation poses and also its interpretation. Generally, I find that reporting entities have a desire to comply with their obligations, not only because it is a regulatory requirement but also because they have an increased focus on social responsibility and because of the reputational risk that goes with it.
As a personal observation, I have seen many entities that I audit in these independent reviews struggling to interpret the legislation. Many times they are trying to seek guidance from the regulators. I think that on many occasions, entities have a perception that they get limited guidance from OSFI or FINTRAC in terms of what it is they are supposed to be doing. That is only to the point in time when they get a findings letter where findings are spelled out. In my experience, I find that these findings letters are the best way to understand the regulations. It is only by going through findings letters that I understand what the regulators are looking for. It would be ideal to have this guidance before a findings letter or reporting entities.
The findings letters received from regulators sometimes mean that there may be a process, control or methodology that may have to be redesigned because the reporting entity may not have understood the requirements. I am aware of many entities, maybe not many but a lot of entities, in the financial sector who may have spent over $100 million trying to address findings. These are serious and significant issues, especially for large financial entities, in trying to address the funding for remediation and the time spent trying to remediate.
I am very happy to be invited here today to speak to you because I often point to the deficiencies in AML programs when I conduct independent reviews. I usually get challenged by the reporting entities as to why something is a deficiency. They may not challenge the regulator, but they are quite likely to challenge me. At times I can only respond, "You know what? That is the legislation. It may not make sense, but that is what the legislation says.'' We all have a need to have AML and ATF legislation that makes sense in order to achieve Canada's objectives to control, deter and detect money laundering and terrorist financing. At the same time, we need to have a balanced approach to ensure that the burden on reporting entities is not greater than the benefits gained from the regime.
To give a bit of background about myself, I am a forensic accountant with 20 years of experience in investigations of fraud dealing with internal controls to detect instances of fraud or misconduct. In the past five years, I have focused on AML issues. My investigative background has allowed me to better understand the needs of FINTRAC and the RCMP. In fact, sometimes I work with the RCMP or relay information from my investigations to them for their cases. I have a good understanding of what it takes to gather sufficient data from seemingly unrelated pieces of information to put something of value together.
One of the things that I keep in mind when I am investigating fraud is that we want to make sure we do not waste our clients' money. One thing we do is weigh the cost benefit analysis of the cost of conducting the fraud investigation and the benefit that you will get out of it. Sometimes you realize that the cost does not justify the benefit. I am not trying to imply that fraud is the same thing as money laundering because reporting entities really do not have a need — money laundering itself is not a real cost to them. They have to do it to comply with the legislation and fraud is a real cost to them. We still need to keep in mind that there has to be a cost benefit analysis when it comes to how much is required of reporting entities and what will be achieved from it. It all has to be kept in perspective.
As an observation, as part of my review of the 10-year evaluation of the compliance regime, I have to admit that when I had read it previously, I probably did not pay as much attention. I actually went through it again and was very surprised to find that there are about maybe 600 case disclosures that FINTRAC relays to various agencies and that about 60 per cent of these case disclosures go to the RCMP. Of these disclosures that go to the RCMP, 80 per cent deal with disclosures where the RCMP has related ongoing cases. It adds to their case and maybe adds missing links through additional information that was necessary to identify new parties.
However, the other 20 per cent of all other case disclosures to the RCMP money laundering unit for assessment and from there they go to the RCMP's integrated proceeds of crime unit. This unit does not have the resources to deal with case disclosures that deal with unrelated ongoing investigations. I found that very surprising because it takes a lot of effort I am sure for FINTRAC to put together these case disclosures. More and more from my understanding these case disclosures become bigger and bigger webs of many different reporting entities that are being used for one large organized crime scenario. A lot of work is put into that and if it is not fully utilized, I question some of the value FINTRAC is putting here if it is not being used by the RCMP and other agencies.
The point I am making with this is that there are a number of things in this proposed regulation that will be asking for more out of the reporting entities. A lot of these relate to lower risk factors because the Financial Action Task Force recognized that reporting entities do less when it comes to low risk, and they expect more. Doing more, when it comes to lower risk, will require a lot more from reporting entities. We have to question what else will be required of reporting entities if a lot of this information may not even be put to use. If there are limited resources at the RCMP or FINTRAC and they are not able to expand on the investigations, while at the same time we are asking more from reporting entities, then there needs to be a balance. It all goes to the risk-based approach.
I have reviewed the proposals, both from the first consultation in November 2011 and the second paper in December. I would be prepared to answer your questions or generally provide my comments as you wish. I actually got very short notice to come to this meeting on Tuesday, so I have not prepared comments and it is just really based on my experience. I am happy to approach it whichever way you want to.
The Chair: I thank you for your comments. I would like to move back, if I may, from the comments you have just made to some comments you made in a 2010 newsletter sent out by KPMG, which is available on their website. I would like to quote something to you, because this sets the stage:
Over the past decade, and in stark contrast with the Financial Crimes Enforcement Network (FinCEN), its US counterpart, FINTRAC has adopted a collaborative approach to enforcement aimed at educating entities that are subject to compliance. In recent months, though, FINTRAC's approach has shifted from outreach and awareness building to more enforcement action.
You follow that by saying:
The signs are that FINTRAC wants to follow FinCEN's example, and it is starting to clearly communicate its dissatisfaction with the quality of the AML compliance programs at reporting entities in Canada.
I would appreciate your comments. How do you view this major change, which I gather you are suggesting is quite a major change from what our friends to the south are doing?
Ms. Johnson: It is a huge change because, as you may know, the types of penalties down in the States easily are in the hundreds of millions of dollars for penalties for failure to have an effective AML program. I think FINTRAC has had the pressure to actually step up, because the penalties that are seen in the U.S. are not the ones we have seen in Canada. Maybe it is the Canadian way of trying to work with reporting entities.
I think it was a recognition that, starting in 2000, entities really did not understand the requirements. It was a process of education of the reporting entities. I think that they feel that 10 years after telling reporting entities what it is that they should be doing, they should know by now what is required. It is that expectation that the same way that FINTRAC has gone through a level or process of maturity from when they started in 2000, that reporting entities have also gone through that process of maturation, trying to figure out what should be in place.
Definitely, the past two years of my own work have been dealing with reporting entities that have so many different issues that it has just been overwhelming. The amount of reporting entities that come to us and say, "You know what? We have all these different findings.'' A lot of these findings deal with the methodology for a risk assessment, which is really the core of a money laundering regime. You need to be able to have a methodology as to how you are going to make your compliance program work. A lot of those reporting entities do not really have the context of how to put this together, so they go through a lot of growing pains and they find very limited guidance. There is some guidance in the guidelines as to how to put together a risk assessment, but when you have to actually implement it at your company, that guidance very limited to help you. It has really been through those findings letters that really reporting entities have begun to really understand what is required.
The Chair: Thank you very much. I will turn now to the deputy chair, Senator Hervieux-Payette.
Senator Hervieux-Payette: I am very happy. Even with short notice, I think you have given us quite a clear message. I guess when we want law to be functional — I am speaking English because she speaks English, but why does she not hear me?
Ms. Johnson: There is a truck going by.
Senator Hervieux-Payette: Anyway, thank you for helping us to go through this exercise. This is the second time we are going through this exercise, and we have to improve on this question. There are areas where I feel that we screened the financial sector — insurance, banks, trusts and co-ops and so on — but not when it comes to businesses like a real estate business or a restaurant. In Quebec recently, they have forced a restaurant to install a system so that people are obliged to give a receipt, and, of course, collect the taxes. All in all, there are sectors where we have the feeling that we have the Mafia involved, the people who are doing the money laundering. What would be your advice? How do we get to these people? There is probably millions if not hundreds of millions that we could find invested in these sectors. You have many countries. In developing countries, real estate is one place where you see a lot of investment by the drug cartels and so on. What would be your advice on how to get to these people? Are the people you work with aware of that? I have never seen a door whereby these people would enter into the net that we have put together so that we catch the big fish and not the small ones, necessarily.
Ms. Johnson: Real estate has now been subject to the act, because there is a recognition that criminals not only want to have an illegal business but they also want to be able to profit from it. Once you have actually generated proceeds of crime, that criminal is really seeking ways to enjoy that profit. That usually may be the purchase of a mansion or any high-value property. That is one of the ways that real estate has been now subject to the legislation, but it is still very new, and I find a lot of people in real estate are still not very sure. Again, they have just been submitted to the legislation very recently, so there is still a process of maturation. FINTRAC's expectations, when it comes to real estate five years from now, will step up. The first few years will be trying to educate as to why it is needed, and it is also a process of, even through seminars, making people aware of the requirements.
The issue with the restaurants in Quebec deals with something that is not actually — well, restaurants are not per se caught under the AML legislation. The only reason why I know about the fraud in Quebec deals with some fraud controls, because it is something that happens in the systems in restaurants where they actually underreport their sales. The system deletes receipts for meals, and it is actually a huge fraud issue as opposed to an AML issue.
Senator Hervieux-Payette: With regard to the stock exchange and foreign investors, do you feel we have, there again, a system that is going to help us to catch the big fish, those who are the drug lords, live outside the country, have tons of money and would like to recycle it again in buying stocks or other title, even government bonds? Do you think we have a system that will catch these people? This could be a huge amount of money.
Ms. Johnson: I would say that 10 years ago Canada was considered a haven for organized crime, and so there has always been this concern. I still remember how that was a view from 10 years ago. A lot has happened in the past 10 years to start doing the things that we should be doing. Canada has taken very much of a leadership position when it comes to money laundering and terrorist financing, even compared to the U.S. inclusive. I think things are happening. Things are being tightened. Things can get even tighter, but I think we are moving in the right direction.
Generally, all you can try to do is follow the direction from Financial Action Task Force as to what are the types of sectors that are really impacted by money laundering and try to do something through all of them. I mean, 10 or even 15 years ago you could put cash into an account, and nothing would happen. That is not a reality any more. You can no longer go into a bank account and deposit that amount of money. I also find that I get a lot of calls from people even outside of reporting entities who just call me out of blue and say, "You know what? I had a situation where somebody was trying to engage with me in a business deal that just looked so compelling and tempting, Could there be any money laundering?''
I think that is something new that would not have happened 10 years ago. People are beginning to question things in a way that they were not questioning before. Based on that experience and feedback from people, there has been an improvement in awareness overall.
Senator Hervieux-Payette: Did your firm or did you submit a paper during the consultation in 2011 or did you act as an adviser to certain entities? Did you or KPMG work with the Department of Finance?
Ms. Johnson: I am sorry. Did I work with whom?
Senator Hervieux-Payette: Did you work with the Department of Finance to help with the review of the bill. Did your firm or did you participate in the review?
Ms. Johnson: No. I have not been involved at all. KPMG proposed on the 10-year review of the AML regime, but we were not engaged to do the work. Now, we are just doing it on a volunteer basis. This is my first exposure to any of this process other than my own experience as a consultant to reporting entities.
Senator Hervieux-Payette: My last question is the following: We have the report of what has been spent. We have nine entities that are part of the regime. The RCMP, in 2009 and 2010, had $5.6 million and in 2010 and 2011, $3.8 million. You were talking about the lack of resources to proceed with all these inquiries. Do you feel it is the competence or the quantity of people or both that should be improved at the RCMP level?
Ms. Johnson: I think it is just the funding for the integrated proceeds of crime. If they do not have sufficient funding to add staff to be able to open up those cases and see what else is there, then why even start looking at a case that you will not be able to properly look into? I can see why the RCMP may say, "You know what? We are not going to have sufficient resources. Why do we not just concentrate on the cases that we know well, where we have good information and expand?'' If you have to use your resources, I would personally say, "If Canada really wants to make use of the information that has been achieved, it would make sense to add additional funding so that those additional 20 per cent of cases that now I am not sure what happens. It is only really by reading this 10-year review that I noticed what else could be done. I think it makes sense to fund to be able to look into these.
Senator Oliver: Thank you for agreeing to appear before the Standing Senate Committee on Banking, Trade and Commerce today on this important legislation. We are lucky to have you, based on your experience of twenty years as a forensic accountant with expertise in fraud. You also said that a number of the clients you have given advice to when you have assisted reporting entities have been casinos, security dealers and real estate developers, where there are large amounts of money and cash involved, where there could easily be deemed to be some kind of money laundering.
I am interested to know from you, at the beginning of this process, what you think of the criteria that are used now to determine whether a certain particular transaction is suspicious. What kind of advice are you giving to these reporting agencies about how they should handle the way in which they do their business, in view of the definition of "suspicious transactions?'' Could you start with that, and then I want to ask you a couple of other questions.
Ms. Johnson: Thank you for the question. I find it very interesting. Reporting entities struggle with what the threshold is to find something suspicious. There is a fear generally from reporting entities of under-reporting. They may have information on a client who has a whole lot of different transactions, but just do not know what to make of it. Could this be money laundering? You do not know. These reporting entities lack the vision that FINTRAC may have. When they have case disclosures, they can see a big web of what is going on, but when one small entity looks at one small transaction, it is difficult to say whether it is suspicious. I find it is always a struggle. It tends to lead to a lot of over reporting for fear that you may be not reporting something that you should. I am not sure how the definition could be improved. I have reviewed the definition, and it says "if it gives you some uneasiness.'' That is an interesting definition. I am not sure what else you can have with it. Sometimes if you are not able to answer why something is happening, maybe you should report it. Could there be too much false reporting to FINTRAC that may be choking the resources? This is not something like an AFT, which is an automated thing. This is something that someone at FINTRAC would have to review. If you have a lot of junk going in, it could choke their system. It is a matter of education and, from FINTRAC's and OSFI's point of view, a matter of expecting reporting entities to have appropriate training in place for the individuals who are looking at transactions. Those people need to understand or have the context as to what would be suspicious. It is a case of getting that guidance.
Senator Oliver: In your decade of experience with this definition of "suspicious transaction,'' have you developed any generic advice that you can give to your reporting agencies? Have you developed anything like "Here are some rule-of-thumb principles I would strongly recommend that you keep in mind when dealing with these various transactions.''
Ms. Johnson: No, I have not. I guess I can always think through it. It really boils down to my understanding. Sometimes I actually go through case by case when there is a specific situation, and we talk about it. Then I give my views as to what I think. There has to be an onus on the individuals in AML programs to understand money laundering. Some reporting entities look at money laundering and terrorist financing too much as a regulatory requirement. You need to have people there who truly understand schemes. That is why I think I was a good fit when I went from investigation of fraud and schemes to getting into this area. I understand schemes rationale, and you need to have people like that. I am used as a sounding board by many reporting entities when they have issues with these questions.
Senator Oliver: In your remarks today, you alluded to something that a number of other witnesses have alluded to. With the new rules that will go into place, all kinds of new additional costs will be imposed upon the reporting entities. Do you have some advice for this committee on things we might want to recommend to the government about ways that we can get the necessary information to protect Canadians while reducing, lowering and or perhaps alleviating some of these huge additional costs that will be imposed upon the reporting entities.
Ms. Johnson: Yes, I have a number of comments.
The main one that really concerned me dealt with the first consultation paper and proposal 3.2: Extend Ongoing Monitoring to all Risk Levels of Customers and Activities to which the PCMLTFA Applies; and proposal 3.3: Conduct Ongoing Monitoring in respect of Business Relationships. I had a lot of concerns because the best practice really is based on a risk-based approach. In a risk-based approach, you are assessing your risks. You are looking at where your inherent risks are. You then look at where your controls are that may reduce your inherent risk to a manageable level. Then you put your enhanced due diligence in those risks that are the most significant for your industry, for your business. The fact that you are extending or proposing to extend this ongoing monitoring to all risk levels will be really counter to a risk-based approach.
If you think about these compliance resources, it is not an endless pocket of funding by any of these reporting entities. You need to put your resources into where your risks are. Some of these entities may have 5 to 10 per cent of their clients being high risk, and all those resources are focused on those high-risk clients. Now you will go to 100 per cent. The implications are very significant.
I think much of this comes from the Financial Action Task Force's comments. I am not sure it is FINTRAC I should be alluding to, but generally the Department of Finance may want to accommodate these comments from the Financial Action Task Force. The question that I have is: How does this compare to best practices in other countries? If you look at the U.K. or the U.S., the basis on best practice is a risk-based approach. You always need to keep in mind that you should not lose track of the risk-based approach.
If you consider FINTRAC, I found interesting that, in the 10-year review, they had done compliance reviews for 0.3 per cent of all the entities that are subjected to the regime. That is based on a high-risk approach where the high-risk entities are the ones that are being monitored first. FINTRAC is taking a risk-based approach, and I think reporting entities should also have a risk-based approach to try to manage what is required, because I think a lot is required.
I also have a number of other issues that I would like to bring up. One of them deals with proposal —
Senator Oliver: 6.1 to 6.4?
Ms. Johnson: It is proposal 3.1 from the first consultation paper. This one deals with beneficial ownership. The requirements right now state that the reporting entity has to take reasonable measures to obtain beneficial information. The proposed regulation says no, now it is no longer take reasonable measures to obtain beneficial information as unique to determine beneficial information; and then, on a second step, you need to verify, under reasonable measures, the beneficial ownership. Now it is a two-step layer.
I think there are a lot of issues with this proposed requirement. Beneficial ownership of entities is not a straightforward exercise. It would require a lot more resources to try to figure out who may be behind an entity. One of the issues I have is that the original regulation says you take reasonable measures to obtain beneficial information, so you ask your client who beneficially owns the company, and then you get that information from the entity. Your reasonable effort is to ask the entity.
I think there needs to be some clarity as to what it means to now determine beneficial ownership, because what if you go to your clients and they say, "No, no one here owns more than 25 per cent of my company''? The issue is then with trying to verify that information, depending on the type of entity. Whether it is a corporation or whether it is a partnership or whether it is an offshore company or in the U.S., each one will have its own set of challenges. If you ask a company from the U.S. about beneficial ownership, there are no public records that show you beneficial ownership for a private company, so you do not have a way to verify the information that you are given. It requires a lot of work. If you are going to the States, each state has its own regulations as to what they will give you. Beneficial information for a company in Delaware is a long process. It becomes very costly for entities to actually go through this whole verification of beneficial ownership. I think a lot of care should be taken when it comes to beneficial ownership.
I do have other points, but I am open to questions.
The Chair: I understand we have a supplementary from Senator Eaton on Senator Oliver's question.
Senator Eaton: On criteria, what stunned me when I was reading about this was that the criterion for reporting is $10,000. I can understand why FINTRAC might be bogged down. Is that a realistic figure, and why was $10,000 arrived at for reporting? If you think of terms of real estate, casinos —
Ms. Johnson: Talking about large cash?
Senator Eaton: They say here sending or receiving international, transfer of funds that total $10,000 or more. Well, $10,000 in a casino or real estate is not a large sum of money by today's standards. Why would that raise a flag? Do people use aliases?
Ms. Johnson: I am not sure who came up with the $10,000, but the reality is that money launderers see $10,000 as their requirement, and they just go and deposit something underneath, so you will always have someone who is trying to launder money trying to go below the threshold of the money that is required. If it is $5,000, they are sure to go under $4,000. I think it is trying to manage what the trends are. There is some proposed legislation to lower that $10,000, and I think that is maybe a wise thing to do.
My guess is that lowering that threshold may not necessarily create additional problems because it is really an automated process. You just lower your threshold. I am not sure what the technological problems may be, but right now I am not sure there are necessarily a whole lot of issues. If it gives additional information to FINTRAC, it may be a useful thing to have.
Senator Ringuette: Thank you for your expertise. You have highlighted, just like our Canadian Privacy Commissioner, the fact that there is no cost-benefit analysis of the expense for the taxpayers and the expense to the different reporting entities. You indicated that you know of one financial institution that had to invest $100 million in a program in order to comply. What is suggested with regard to modification is, with regard to the threshold from $10,000 to $1 or $0 — I think it is $1 — and we were told that they are looking at gift cards as one of the products. You can go to any store now, even the dollar store, Dollarama, and they sell gift cards. That means that all these retail entities will now have to become reporting entities, and at what cost to them and even at what cost to the consumers? All these costs are passed on to the consumers. I would like to have your comments, based on your expertise, about what you have seen with regard to the cost implication. Is this working? Also, we found out only last week that, in 10 years, there was one prosecution in B.C., resulting in a six-month imprisonment sentence. Do we have the right system? I am seriously questioning that in regard to the goals that Canadians want.
Ms. Johnson: The way I look at it is can we not have an anti-money laundering and anti-terrorism system?
The reality is that we need to have one. We cannot ignore the issues. I am not sure we want to become a country like Mexico, where organized crime really rules. I do not think it is an option and there is a cost to it no doubt. When it comes to prepaid cards, I do recognize that this is an emerging trend and I do recognize that it is a very real risk. All of a sudden, you have a system by which you can put money onto a card, granted all those different entities put limits on how much money you can put onto a card, but it is for their control. What if there is no control and you can put $1 million on a card? I am not knowledgeable about the amount you can put on a card. It means that you can get outside of the financial system to conduct transactions. Look at the worst case scenario of a drug lord handing over a $1- million card to someone or 100 prepaid cards. Suddenly, you have things going outside of the system.
It is a wise thing to consider the prepaid cards. There needs to be an assessment of what type of prepaid card you need to include — maybe gift cards, which are very controlled. You may have a system where gift cards have up to a limit and you may decide those are not the ones that need to be subject to the act. You probably need to go through a process by which you learn. If you have a prepaid card that can only be used in the Bay, the risks that go with that in a closed loop system may be a lot less than the ones in an open loop.
One of the things I am aware of is digital cash. Digital cash is something where you can just suddenly, throughout the Internet in store value, move funds completely outside of the financial system. I think the risks are significant and money launderers are going to be using anything outside the normal system if it puts them outside scrutiny. It is a wise thing to consider the prepaid issues. That is not something to exclude because money launderers will go to the weakest link. The Financial Action Task Force recognizes that even in the U.S. prepaid cards are going through the motions to be included in the AML regime there. I think it is necessary.
Senator Ringuette: In relation to digital cash, are you saying that all the IT servers in Canada would become reporting entities? If you want to look at digital cash, then you have to include the knowledge provider of that, and the knowledge provider would be the IT server.
Ms. Johnson: There needs to be a process of trying to define who the different parties are. It may be the early stage of trying to determine who really at a point in time is to be able to identify transactions — who is in the best position to see suspicious activity going through or who is in a position to be able to report? I am not at the point where I can tell you specifically what party should be subjected to it, but it probably makes sense to look into it.
Senator Ringuette: I am not a lawyer, but we were told that FINTRAC is in a court process regarding the issue of lawyer-client privilege. I do not know how it will end up. In your audits, have you noticed any indication that the entity identified is laundering money by using law firms as shields?
Ms. Johnson: I have not personally seen a case of that nature. I simply know what the Financial Action Task Force says about mostly willing lawyers who may be working with organized crime to set up trusts. My speculation is that a law-abiding lawyer will not go out of their way to launder for organized crime. It will likely be a lawyer that is heavily connected to organized crime who will be setting up the trust. That lawyer is not likely to be reporting that activity. That is my reaction to it; and I am not sure that I can add more.
Senator Hervieux-Payette: We had a case of lawyers in Quebec who were associated with the crime world. They were charged, found guilty, lost their right to practice and went to jail. The lawyer-client privilege did not work very well with the court because they were condemned. You cannot commit a criminal act and think you can get away with cases like that.
Senator Massicotte: I would like to follow up on some of the same comments. I see it like a race where you have a criminal trying to beat the system; and we hope FINTRAC makes a contribution. I can buy that FINTRAC is a strong deterrent to the laundering of money. No one knows for sure but some experts would say that annually criminal activity in Canada is somewhere between $20 billion and $40 billion — a couple of percentage points of GDP. Yet, we are being told by the RCMP that with the efforts of FINTRAC we basically recoup $20 million a year for the last five years from criminal possession of property. I do not know but we seem to be losing. It is a small number compared to the level of criminal activity. Criminals are not stupid. They say, "If I deposit $10,000 somewhere, I may get caught.'' Senator Smith will tell you that there is still a lot of cash drug money floating around Montreal with all kinds of possessions. I always wondered how he knew about it.
There is a lot of cash going around. Where is it going? What is happening? Obviously, additional measures have to be taken because they have outflanked us. They have responded to the system and are not using it. It is significant what we are catching — it is a good deterrent. What is happening? Where is it going? What do we do next?
Ms. Johnson: I am not sure if you have seen the YouTube video where massive mountains of bills were found in an apartment. Criminals have a need to launder this money, which is why we are after money laundering. If you have organized crime laundering and creating let us say $1 billion, it is not like you can buy a huge mansion with $5 bills. There is a need to eventually channel it through the financial system. The money launderer wants to be able to enjoy the profits of their labour and integrate it into the normal legal system so it appears to be legal.
The point I am making is that we are trying to deal with the money laundering issue. We are not trying to deal with necessarily organized crime, per se. We know they have proceeds of crime and maybe some of it will never be laundered, per se. They might just spend it someplace else.
The regime is trying to say that we recognize this as an opportunity to find those threads whenever a criminal is trying to get it into the system and integrate it so they look like regular people and it looks like money earned respectfully. You need to have those threads and the opportunity to catch. The reality is they will try to use the financial systems. The fact that there is disclosure and the fact that the RCMP is able to find intelligence shows that it is something that actually works. Maybe you just do not have enough manpower. If you put double the people, you will be able to find double the amount of intelligence and information. It is just really a matter of how much money you want to throw at this. If you just put 30 people from FINTRAC, you will only get this many results. If you put more people, then you will be able to catch more. It is really a matter of what Canada wants, and you will just get the payback in terms of how much money you invest in it. There is no doubt that the amount of people is probably small for managing the actual issues that we have with money laundering. I think it is just something that will probably not be able to deal with the massive problems that we have. I just do not think it is an option to not have a regime. It is how much more money.
Senator Massicotte: Look at the report put out by FINTRAC two or three weeks ago relative to the results of their work. I think it is an important deterrent. I am not saying we should scrap it. They have obviously responded with another solution. They are laundering that money. They are buying those homes and businesses. It is significant cash, much more than the results of FINTRAC. It is an immense multiple of what we are finding. They have obviously developed another system. Is it with external banks from countries that are more corrupt? We have to respond to it. They have obviously outsmarted us. What is the next step? What do we do? Your response seems to just be saying put more money and more people to it and we will find more. That is not what FINTRAC is saying. Look at the results from the study. The most important consequence of FINTRAC, they said, is fraud. What kind of fraud? It is investment fraud. It is not drug money, but investment fraud. That was not even outlined when they gave us a reason for FINTRAC. It was supposed to be terrorism and money laundering. It just happened to be true about the information and paper flow. Where is the solution? Where is the money going? What do we do next?
Ms. Johnson: That is a very good question. I am not sure anybody can give you an answer more than a rhetorical question as to how to deal with it. I am not sure of the answer. The best you can do is to try to find where those trends are and where you think money launderers will go next. The money launderers probably were used to walking in with $1 million in a briefcase 10 years ago, and that is just not happening now.
In a way, if you can make it more difficult, I think you should, because if a money launderer knows that if they go to the U.S., they will have difficulty, but listen, you can go to Canada and you can deposit money, and it will not even get reported, then guess who is coming to Canada. You need to be able to stay up to par to where other countries are, because you simply want to ensure you do not become the easy target. If you can at least have the level that other countries have, at least you will not become the target country that will be the easiest one. That is the best I can tell you.
Senator Greene: I am also of the view, and I certainly take your point, that we have to have a system of some kind. It is inconceivable to me that we would not have a system. The fact that we do, I think, is a deterrent, even though it does not seem to be very successful at catching anybody or stopping anything.
By the same token, we seem to be collecting a lot of information, and a lot of personal information, and I just tend to think that the reason that we have not had a cost benefit analysis of what we have been doing so far or what is being proposed is that it is almost impossible to do because of the thought that, well, maybe tomorrow we will be able to catch that big crook and make the system actually seem to be working.
I wonder, given your private sector experience and your vast professional experience, if you could comment on whether you are at all worried about the amount of information that we are collecting and whether that is put to good use, and also if you have any concerns about the privacy of that information. Potentially, if a cost benefit analysis is done, the lack of privacy around that information would be a cost.
Ms. Johnson: I guess it can always be an issue to collect too much information. I am maybe biased because my background is that of a forensic investigator, so I always want more information than less information. I may not be helpful in defending the privacy part.
Senator Greene: You are probably the perfect person to ask because you are not a biased in favour of the questions.
Ms. Johnson: I find that ever since privacy has become more of an issue, it has become harder for me to conduct my fraud investigations. I find it to be sometimes frustrating because sometimes you could have the ability to find information that you truly need and you are not able to because privacy puts those obstacles in the way. Sometimes privacy tends to benefit the criminal. I would not personally use it to hurt someone who is not a criminal, but I can see how it could be subject to abuse. I can see why we want to make sure that privacy is always preserved, which is something you do not find so much in the U.S. It is just one of the values in Canada to preserve that privacy.
Senator Greene: I am interested by your comment about the U.S. How does the U.S. differ from us in this area with regard to privacy?
Ms. Johnson: It may be a feeling that I have always had that privacy has never played such a big role when it comes to the AML legislation in the U.S., and I am not sure why I have this information. Simply it may be from reading different pieces of information coming from the U.S. Privacy has just never had the same value that it has in Canada. I do not think there is such a review of the AML compliance regime the same way we have here, where the Privacy Commissioner actually takes a look at the AML program and has a report. By the mere fact that it likely does not happen, it shows you that privacy is something that is more valued here than it is in the U.S. That is probably all that I can say.
Senator Harb: You did a great job for someone who just found out about the appearance before the committee. Thank you for that.
You said a lot of good things in your presentation, but one of the things you said is that they want to be doing more and they are looking at lower risk, but that might require a lot more. Do you mean a lot more financial resources?
Ms. Johnson: Yes. If you now have to do a lot more client due diligence with those clients that were really a low risk where you did not have to spend resources to find out who is really behind this client, that takes resources. Looking at transactional activity for clients that are low risk, are you now going to have to allocate one full-time employee to look at all transactions in one business unit for all those clients? You would have to have one full-time employee just looking at all those low-risk transactions, and it can probably be a very boring job to find something where you are dealing with a client that is completely low risk. Why? It does not make any sense.
Senator Harb: You are correct. If I use this as a premise, then, in 2010-11 the electronic transfer reporting by FINTRAC was about 11 or 12 million cases. This is based on a threshold of $10,000. The proposal that came from the partners was to remove the threshold. As my colleague stated earlier, it could be $1, meaning that any international transaction would be reported. That could take it to probably a few hundred million transactions. In your opinion, would that mean we would need a lot more resources?
Ms. Johnson: Not necessarily because when it comes to that type of threshold, I usually find reporting entities just program their systems to automatically report the transactions to FINTRAC. If they simply have to shift the threshold from $10,000 to zero, there may not be a whole lot of resources spent because it is automated. Those things do not worry me much.
One of the issues I would have is whether FINTRAC would have the technological capabilities to manage a lot more volume of transactions because they will just get buried in the transactions, although they may have sufficient funding. At KPMG we do data analytics. We go into entities outside of money laundering and look at data. We can look at millions and millions of transactions with very powerful tools that can analyze 10 transactions or 100 billion transactions very easily. If you want to go lower, one of the issues is whether FINTRAC has the ability to manage that volume. It may actually have the ability to provide them with a better picture and if it or the RCMP feels that it would be useful, and it is, I would look at the cost benefit. If it is a very low cost for the reporting entities and the RCMP and FINTRAC would find value in it, then it would make sense unless you hear otherwise from reporting entities.
Senator Harb: FINTRAC issued a report on money laundering and terrorist financing trends between 2007 and 2011. In that report, they mentioned the top 15 countries where money laundering cases are taking place — drugs, fraud and investment and security fraud. Do you know what country is number one of those 15?
Ms. Johnson: No, I do not know.
Senator Harb: The United States.
Ms. Johnson: I am not surprised.
Senator Harb: As my colleague Senator Massicotte mentioned to you earlier, drugs seem to be taking pretty well almost 30 per cent of all cases reported. What is interesting about this is the fact that from 2007 to 2011, we are seeing a steady decline in the number of cases that deal with drugs. That could only lead one to conclude, as you were talking earlier, that some of these guys are smart enough to get out of the system completely. We are not catching them anymore. One of the witnesses or one of my colleagues submitted a scenario: If drugs were legal, you would generate a lot more money and you would not have to worry about wasting resources on something you collect taxes on and you could focus on something else and knock out the criminal business. Do you support that notion?
Ms. Johnson: That is a loaded question. Is your question as to whether certain drugs should be legalized?
Senator Harb: Right.
Ms. Johnson: I am not even ready for that question; and I am not sure what the answer should be. There is no doubt that if suddenly those are no longer crimes and you are able to channel them legally to collect taxes, you do not have the need to have things under the market. The money laundering is trying to get all that money that was not going to be taxed in the first place, but that is not the reason why. Again, how many drugs should be legalized? I think that a lot more dealing with other types of drugs will continue to be brought into Canada.
I am not sure that I am the best person to give you some feedback on that.
Senator Harb: You did well.
Senator Di Nino: It seems that over the past number of years, the systems that were created to reduce or to try to stop money laundering and or criminal transfer of funds for terrorism, et cetera, have worked. We are hearing that it does not seem to be as if we are catching a heck of a lot of criminals. The preventive component of it may have been successful. I am only proposing that because of the next question I will ask.
I do not think that is the case. I think you are right in suggesting that the criminals have said, "No, that is a trap; we will not go there. We will find some other way.'' I wonder if you could tell me how many countries in the world have bought into or are cooperating with systems to try to block the transfers of funds or those who abuse the system in whatever way — whether investments, real estate, or other real transfers of cash. How many countries in the world have bought into the system?
Ms. Johnson: I am not sure if you are aware that there used to be a list of Non-Cooperative Countries and Territories, NCCT, that are not cooperating with the AML regime expectations. The second that countries get on this black list, they realize there are implications to being on this list and very quickly try to get off the list. In fact, I do not believe there are any countries on that list of unwilling now because the implications of having a country that does not try to deal with AML are just too costly. Suddenly transactions going into your country will be questioned or there may be difficulties in doing business with desirable partners in the U.S. or Canada. All countries feel that obligation.
Also, you have the Financial Action Task Force, whereby every number of years there is a mutual evaluation. Every three or four years there is an evaluation to see how well you are doing, and that really puts the pressure on. In fact, Canada has felt that pressure to step up to standards in its AML regime. Global pressure is important and has been effective in trying to get all countries up to a level of comfort.
At the same time, the mutual evaluation reports show that a number of countries have very weak controls. Based on those reports, reporting entities in Canada should be aware of the types of risks involved in those countries that have lax AML controls. It is actually something that feeds into our informed assessments of other countries. All countries want to be careful not to be on that list because globally there is pressure to have systems in place and not be seen as the one country that will be the haven for it.
Senator Di Nino: I do not disagree with you, other than to say that there are countries that are weak and or countries that do not participate.
How do we treat them when we have transactions of any kind? How do we treat those countries that are part of the system? In your opinion, do we treat them the way we should and are we much more careful?
Ms. Johnson: Basically, reporting entities have an obligation to assess their risks. One of the factors they need to look at is geographic factors: Do you have clients in a high-risk geography?
Do you have clients who send money to a high-risk geography? Do you have clients who have customers or maybe beneficial owners in high-risk geographies? You are trying to look at different ways where geographic factor is a risk. There may be instances where, when you are entering into a new relationship with a potential client, the fact that the client may be at a high-risk location may actually lead the reporting entity to say, "This will be a type of client that we do not want to enter into a relationship with.'' I think that is how you blend in the geographic factor into the equation. You either do not allow those transactions to go on or you have a more enhanced due diligence when it comes to those transactions. Maybe they require a compliance officer to take a look at the transaction before it goes through. That is how you try to address it.
Senator Di Nino: Do you think, at least as it relates to Canada, we have strong enough systems to deal with that? Since we are going through a review, do you think that our systems are strong enough, A, to identify; and, B, to deal with those kinds of weaker geographical areas that we should be a little more careful with?
Ms. Johnson: It is funny, because all reporting entities are trying to figure out methodology to deal with geographic factors. If I go to 10 different clients, I will see 10 different methodologies. Every reporting entity will do its best to assess a high-risk factor. If FINTRAC were to provide guidance and say that these are the ratings that all different countries should have, it would be ideal because right now I think reporting entities are left to their own devices to try to figure out who should be a high-risk country or not. For the most part, you may see different reporting entities getting to the same conclusions, but not necessarily. I have seen many methodologies that have tried to look at different lists put together by different agencies to try to put together an informed way to figure out how to rate the hundreds of different countries, and that is the best a reporting entity can do, lacking any additional guidance.
Senator Moore: I have a couple of questions. Senator Massicotte mentioned the apparent receipts of $20 million versus $40 or $50 billion that are out there floating around in proceeds of crime. If that is so, or if it is anything near that, is that a function of the penalties that we have in Canada versus, say, the U.S.? Are the penalties for conviction of crimes of money laundering in the United States more severe than in Canada?
Ms. Johnson: From my understanding of the situation here in Canada, it may be harder to achieve that conviction or that threshold for the money laundering conviction. That does not still prevent trying to prosecute under other types of crime. Maybe those individuals who have been part of these cases followed up with RCMP may actually have been convicted under other types of crime. Maybe the actual predicate offence was the beginning as to why someone was actually caught for drugs. My guess is just because you do not see sufficient prosecution of money laundering may not be a fair indication that it is actually not happening through other types of proceeds of crime.
I am actually surprised when the RCMP has this raid and they uncover this big operation. Every time I see in the newspapers that the RCMP had this big raid, you really need to understand that much of this information has been possible because of all the intelligence that the RCMP may have gotten, and much of it may have been through FINTRAC, because FINTRAC gives the RCMP an open web of: Who else could be involved? You may not get the person on money laundering, but it opens up the door to try to get to someone. Maybe the money laundering conviction is something that may be an issue. I am not really an expert in what the thresholds are. It seems to be a very difficult criterion to achieve.
Something I notice in the U.S. is that it is probably to the opposite extreme, where just about anyone can be convicted of money laundering for just about anything. I think you also need to be careful because sometimes I have read about cases, and I am thinking: This would not have made it to a money laundering conviction in Canada. However, it actually makes it in the U.S. It seems like their threshold there is a lot lower, sometimes questionably lower. I think you need to be able to find that balance and to find out what are the cases that really prohibit money laundering convictions from happening, realizing that maybe there is a value there, but it has not been quantified because you just prosecute under easier-to-convict areas.
Senator Moore: Are the penalties any stronger there than in Canada?
Ms. Johnson: Penalties for what?
Senator Moore: For conviction of money laundering.
Ms. Johnson: The convictions that I am familiar with are penalties related to noncompliance with having anti- money laundering compliance regime. Those are the issues in the U.S. that we see. I am not sure about their prosecution per se, what types of penalties. The penalties are for hundreds of millions for entities that have not had their AML compliance effectively implemented.
Senator Moore: In your opening remarks, you mentioned that the Canadian regime, the various entities that do the reporting, struggle to interpret and meet the regulations. You mentioned findings letters from the Department of Finance, which are issued to reporting entities, I guess reviewed by you in your analysis. What are these letters? Is this something that the Department of Finance annually looks at these members of the reporting regime and issues a letter on it? What are they, and how often does it happen?
Ms. Johnson: No. These are findings letters from FINTRAC and from other regulators such as OSFI. OSFI conducts its own reviews.
Senator Moore: It is not the Department of Finance. You said finance earlier, but it is FINTRAC that issues such letters?
Ms. Johnson: That is right. These findings letters are the ones that show deficiencies. Really, there is an expectation from FINTRAC, or from OSFI, or from whoever is the regulator that the reporting entity will put together an action plan to try to address the deficiencies.
Senator Moore: When does that happen? Is this an annual look by FINTRAC at the practices of a given reporting entity?
Ms. Johnson: This is the part where I read in the 10-year evaluation that FINTRAC has actually been able to do compliance monitoring for about 0.3 per cent of all the entities that it regulates. It really has a very low penetration rate. Obviously, it is not something that happens on an annual basis. They are just trying to cover all different types of reporting entities. I think what they have tried to do is look on a risk-based approach which ones would be those reporting entities that would be at a higher risk to ensure that those are the ones they deal with first, but still trying to cover all different industry sectors.
Senator Moore: In his opening question, the chair asked you about FINTRAC's position vis-à-vis — I think you said FinCEN?
The Chair: Yes, FinCEN.
Senator Moore: Can you spell that so people listening know what that means and what it is?
The Chair: It is the Financial Crimes Enforcement Network, whose acronym is FinCEN.
Senator Moore: In the United States. I think you said that FINTRAC is moving closer to FinCEN's standards and trying to enforce those kinds of standards or getting our reporting agencies to adhere to those kinds of standards. Is that what you were saying?
Ms. Johnson: That is right. Basically, FinCEN has been very aggressive in trying to get reporting entities across different industry sectors to comply. In their reviews, they may find deficiencies and actually ultimately impose very significant fines. Historically, that has been the case. Their fines are easily in the millions of dollars for reporting entities for lack of compliance.
Senator Moore: Is FINTRAC experiencing that lack of compliance history with the Canadian reporting entities?
Ms. Johnson: It would be hard to say. All Canadian reporting entities are just abiding, and that is why FINTRAC is not finding any issues. I am not sure whether you can just say, "All these U.S. reporting entities are failing, and Canadians are not.'' I think it may be a matter of the funding and the ability to reach out to reporting entities. The one thing I have noticed in the past two years is that FINTRAC has been a lot more —
Senator Moore: Are they more aggressive?
Ms. Johnson: I am trying to find the right word.
Senator Moore: Is it aggression?
Ms. Johnson: Yes, probably. Maybe. I have noticed the findings letters from FINTRAC and OSFI have become I would say more detailed. There is a lot more substance now in terms of the depth of their review. It is also a process of maturation of the agencies that do the compliance examinations. I think that is kudos to them that they are getting better at it.
One of the comments I do find from reporting entities, though, is that the regulators do lack a business reality perspective. They can be very prescriptive: "This is what the regulation says.'' You have reporting entities that say, "I understand what you are looking for, but how do I implement that into my business without choking my business?'' I think there has always been that frustration from reporting entities that the regulators do not really have people who have the proper training.
I know I have occasionally requested additional guidance from FINTRAC and OSFI, and I find it hard to actually get something that may be of substance to me. I actually had an instance where I was asking for very detailed information for complex cases, and what came back was, "We cannot provide legal opinion.'' Where do you go from there? I am trying to provide advice to my own clients as to how they are going to deal with something that could be very expensive if FINTRAC were to opine one way, or it may be something they do not need to do. You really have reporting entities that are looking for that guidance, and then you do not have the guidance. The only thing they have is, when they actually comment, they may actually issue you a finding and a remediation.
I think reporting entities have this fear of the compliance examinations because they may not get the feedback while they are just in normal course of business and they are afraid they may be offside, yet they do not get sufficient feedback prior to those examinations to make sure they are on the right track, and yet they are concerned that they may be off track. I have had situations where compliance officers are trying to impose very high standards on the business side, and the business side says, "You are making us choke. We cannot comply with these regulations.'' The response from the compliance officer is, "FINTRAC may come here and we may be offside. We cannot afford it.'' Yet you have the people in the business saying, "We really cannot operationalize what you are trying to do here.'' It is a real struggle between the business and compliance.
Senator Moore: Where do FINTRAC and OSFI get these regulations that they are enforcing? Do they not ever sit down with people like you to try to achieve the balance?
Ms. Johnson: There are a lot of reporting entities that may be hesitant to ask the question because they are afraid they are going to be in the compliance radar. Sometimes you have this avoidance of asking questions. There is this perception that if you ask FINTRAC or OSFI what they think we should do here, they will call for the highest standard. Sometimes entities try to find a rationale as to why they should do things one way or the other because, if they ask the regulator, the regulator will go for the highest standard without really having a reality check. I think that is just a reality of how it works currently.
Senator Moore: Where do they get these standards?
The Chair: Can I put you down for round two?
Senator Moore: Yes, Mr. Chair. Thank you.
Senator L. Smith: Ms. Johnson, you are doing a great job. Listening to some of your words, FINTRAC was collaborative in the early phases and now has moved more to an authoritarian enforcement model. When FINTRAC was with us, we asked the question of role, and they said, "We supply information to the RCMP.'' It looks like their role has changed. In listening to some of the opinions and information that you are giving to us, which I think is very helpful, is there a clear definition of roles amongst the players? Is there bumping? Is there overlap? Are there efficiencies? If you had a magic wand and were able to reorganize or make recommendations, what changes would you make to make the system more effective?
Ms. Johnson: I think we should have gotten that 10-year review proposal.
Senator L. Smith: Do not skate. I know you are a hockey player, too.
Ms. Johnson: I think FINTRAC's role is well-defined. One of the things they do is provide information to the RCMP and other agencies. I do not think that has changed, and it will continue. It has been consistent throughout the past 10 years or so. I do not think that should change.
FINTRAC is unique compared to other FIUs in other countries. They do not just get the information; they actually go further with that information. It seems like FINTRAC has a very limited role, and I think it has to do with privacy. Aside from providing information to the RCMP, they just continue to simply interact with reporting entities. It is simply a shift in their approach to dealing with these reporting entities because they realize that you cannot just be educating, and also because they have had this criticism that, "You have not had any administrative monetary penalties that they are now able to impose on any of these reporting entities.'' I think they are criticized that they are not doing enough and they feel they need to do something.
I have seen situations, though, that sometimes are interesting, I would say, where you may have situations with potential representatives that really want to make sure that this will be whatever compliance examination may be the one example. You just want to make sure that FINTRAC is consistent in their approach to their examinations and that there is no such thing as, "We just need to make sure we make an example of a specific reporting entity,'' and just have a consistent approach to it.
There is a realization from everyone about how long you can just be educating. You need to have a shift to make sure reporting entities are aware that this is not something that will be not important; you just want to make sure that reporting entities take it seriously, and that is something that is necessary for FINTRAC to get the point across that it will just get more aggressive in their approach.
Senator L. Smith: Would it be helpful to have a council of practitioners such as yourself that could provide the judgment that perhaps some of these people do not have from a business perspective?
Ms. Johnson: Possibly.
Senator L. Smith: I am not trying to insult anyone, but if you have people working who give you the answer, "That is not within our mandate,'' and someone has to make a judgment, then it would appear that some of the judgments may not be the best for the people affected and/or the business or society. It was just a thought.
The Chair: Ms. Johnson, you have been very kind in answering our questions. During Senator Oliver's question, the subject of the consultation paper came up, and you indicated that there were some other issues that you would like to bring to the attention of the committee. Would you like to do so now so we have that on record?
Ms. Johnson: Sure. On the first consultation paper, proposal 1.1 talks about business relationships. I have some concerns about moving to the concept of business relationships. I think it has to be better defined what "business relationship'' means. Basically, when you have a reporting entity, triggering activities that create an obligation are really based on when an account is opened. When a chequing account is opened for a client, the clock starts ticking for that reporting entity to have obligations.
I think there is a move now, and a lot of it is coming from the evaluation from the Financial Action Task Force, that says you should have obligations when there is a business relationship, which is a broader concept than just an account. You may have relationships with clients with whom you do not have an account opened. All of a sudden, you will have a whole lot of other business relationships that will fall under the legislation. You just need to be careful that you are not including things that were not intended to be included.
One of the things with clients is that they may have with you a chequing account. You may also provide advisory services to that client. The new proposed legislation implies that if you have a relationship with a client where you have a triggering event, which is you open an account with that client, and that client has other types of relationships with you, all of those other relationships, even if they were considered low-risk or maybe not even within the realm of the proceeds of crime, suddenly will come under scrutiny. You find then reporting entities saying, "Wait a minute; what happened to all those extensions? Will we now have to worry about things that were not really part of this?' My concern is that there may be something lost in translation where the Financial Action Task Force says you need to take care of business relationships and look into them. Are we going overboard with these business relationships?
One specific example I can give you is the acquisition of portfolio, such as mortgages, for instance, from another party. Let us say you are a reporting entity and you want to acquire a pool of mortgages from a different entity. You are not really opening a new account, so the legislation should not really apply to you because the existing regulation says "on account opening.'' Now, that business relationship will create obligations that were not there before. Compare this to what they have in the U.S. In the U.S., these types of relationships are carved out completely and are exempted from the regulations. The point I am trying to make is that those business relationships will create a number of additional obligations, and the question is: Do you really want to create those obligations when they were not there in the first place?
I have other issues with proposal 2.1 and proposal 2.2, which deal with client due diligence regarding suspicious transactions or attempted suspicious transactions. Those transactions were previously exempted from getting to know that client or client due diligence; now they will require you to actually identify your client. There are some big concerns because this is in a way contradicting some previous legislation that says that when you have suspicious activity, you should not be getting additional information from a client, because you may be tipping off that client by asking for additional information. Now, you have this proposal that says that when you have a suspicious transaction or someone who attempted a suspicious transaction, you need to ask the individual to give you their name. How does that compare to the requirement not to tip off the client? There needs to be some clarity around this proposal.
The next one is proposal 3.4, where the new requirement is to document the purpose and nature of a business relationship with a client. The previous requirement was to document the purpose of an account opening. There are some issues as to whether it is necessary to have an overall purpose — a nature of a business relationship. What is the use of that? It may be a meaningless requirement. You may have 14 different accounts with one client, and you will require some descriptive purpose and nature of a business relationship. It may be lost what that purpose and nature of a business relationship may be. You may not be able at any given point in time to figure out what the nature of that relationship is. I am not sure if that would accomplish anything over and above the current requirement regarding understanding.
The Chair: Ms. Johnson, if I may interject, I have been advised by our clerk that our teleconference facility is going to terminate in a moment or two. I would like to suggest that you send to us in writing, if you can, to the clerk of the committee any additional items that you have on your list. We will welcome them. Of course, I would not want this teleconference to conclude without telling you, notwithstanding the short notice, that you have been an absolutely great witness — excellent presentations. We applaud you. Thank you very much and please forward any further items that you might have of interest to the clerk. We look forward to receiving them.
Ms. Johnson: Thank you; my pleasure.
The Chair: We have one item that I would like to deal with: the approval of the budgetary proposal to go to Internal Economy. It is being circulated now.
An Hon. Senator: Are we in camera?
The Chair: I do not think it is in camera, but I understand we are off broadcast.
Members of the committee, you have before you a budgetary proposal for the next fiscal year in the amount of $7,300. This is identical to the proposal that was submitted and approved for the current fiscal year. I might mention to you that the bulk of the money is allocated for the renewal of our subscription to the Financial Services Industry Monitor Daily Briefing and Developments Service, and the remaining $1,500 is to cover contingencies and courier fees. Both are within the limits set by the Standing Committee on Internal Economy.
I would remind you that the costs of witnesses travel, video conferences and other core requirements for the committee's work are paid out of the committee's directorate and do not need to be reflected in this budgetary request. I would add that this budget is for our consideration of legislation and should we, in future, undertake a special study that may incur special expenses, be it for travel or otherwise, we would make a separate budgetary submission to Internal Economy. I would ask for a motion to approve?
Senator Massicotte: I do not dispute the budget. I know that it may not be part of this budget but I urge us to be more ambitious with our agenda and to seek to do more and be more relevant to Canadians. Regarding this subject, I encourage us strongly not necessarily to travel because I do not mind the video conference, but to talk to other countries and learn their best practices. On this issue, I would not mind talking to the U.S. and to England. We are all having the same problem. We should find out what the other guys are doing and how they are faring. We would probably learn lots and probably do work that our own people are not able to do. I encourage us to be more open to that.
The Chair: You will be pleased to know that we will be bringing these people in as witnesses. You will be unhappy to know that we are not making a trip to Washington of London to visit them personally. Your point is well taken, and I can assure you that the steering committee is dealing with this.
Moved, seconded, carried.
Thank you. This meeting is concluded.
(The committee adjourned.)