Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 14 - Evidence - March 15, 2012
OTTAWA, Thursday, March 15, 2012
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:33 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 Irving Gerstein (Chair) in the chair.
[English]
The Chair: Ladies and gentlemen, it is a pleasure to call this meeting of the Standing Senate Committee on Banking, Trade and Commerce to order.
This morning we continue the five-year parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This is our eleventh meeting on the subject.
Over the last month, the committee has focused its efforts on hearing from a number of so-called regime partners involved in the implementation and administration of this legislation. Having heard the internal perspective, we now continue our efforts to hear an external perspective. Over the next few weeks we will continue to hear from those familiar with and impacted by the regime, including industry groups and associations, as well as independent experts in the field.
In this first half of today's meeting we are pleased to welcome a panel representing the insurance industry. They will be followed by a panel from the gaming industry during the second half of our meeting.
Representing the Canadian Life and Health Insurance Association Inc. we are pleased to welcome again, and it is always a pleasure to have him before our committee, Frank Swedlove, President, and Jean-Pierre Bernier, Special Advisor to the President, Risk Management. Representing the Canadian Association of Independent Life Brokerage Agencies is Allan Bulloch, Chair, Legislative Committee.
We have one hour for this meeting. Mr. Swedlove, we will hear from you first, followed by Mr. Bulloch.
Frank Swedlove, President, Canadian Life and Health Insurance Association Inc.: I hope insurance is not too boring relative to gaming and that you will find our session of interest also. It is always a pleasure to appear before this committee. Today's subject is an area of particular interest to me over many years and we in the industry have a significant interest in this matter.
The Canadian Life and Health Insurance Association Inc. represents life and health insurance companies accounting for 99 per cent of the life and health insurance in force across Canada. Through a wide range of products and services, the life and health insurance industry pays out over $1.1 billion in claims to Canadians each week, protecting them and their families against the financial risks of premature death, illness and retirement. These products include individual and group life insurance, individual and group annuities, including RRSPs, RRIFs and pensions, and supplementary health insurance.
[Translation]
Mr. Chair, we welcome this opportunity to appear before the committee as you review the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
The industry believes that it is of crucial importance to update this legislation on a regular basis, particularly in light of the new and revised international standards that were adopted by the Financial Action Task Force — the FATF — last month.
[English]
I would like to open my remarks by noting the Canadian life and health insurance industry's appreciation for the following two statements contained in Finance Canada's consultation paper. The first statement says:
The Government also recognizes the need to minimize the compliance burden on the private sector.
The second statement says:
The Government recognizes that measures to enhance Canada's AML/ATF legislative framework should not place an undue burden on reporting entities, which are on the front lines of the fight against money laundering and terrorist financing.
My comments today will relate to the risk-based approach that is necessary for a cost-effective regime. Measures to prevent and mitigate money laundering and terrorist financing must be commensurate with the risks identified. This approach is meant to ensure efficient allocation of resources and minimize the compliance burden.
The general principle of the risk-based approach is that where there are higher risks countries require financial institutions to take enhanced customer due diligence measures, such as dealing with politically exposed foreign persons, and that, correspondingly, where the risks are lower, simplified measures may be permitted.
Insurance though, overall, is clearly less risky than banking. Unlike banks, insurers do not accept cash and are therefore not involved in what we call the placement stage of money laundering. Within insurance, some products are simply not suited as a vehicle for money laundering, such as term life insurance and critical illness insurance. For products such as these, one really questions the need for any AML review.
With respect to other products, a risk-based approach should be applied. Whereas a long-standing customer buying a life annuity through a captive life insurance agent would be considered in our view lower risk, a new customer purchasing the same product via telemarketing may represent a higher risk situation. In this simple example, an application of the risk-based approach by means of permitted, simplified measures in regard to the lower risk transaction would minimize the compliance burden of the insurer supplying this annuity product.
There are a number of ways of simplifying the rules for checking for money laundering activities where the risk is lessened. I will give you some examples. Companies could have the flexibility to verify the identity of customers after the establishment of the business relationship, or companies could reduce the degree of ongoing monitoring and scrutinizing of transactions, or companies could be relieved from seeking more information on the purpose and intended nature of the business relationship.
The existing Canadian AML/ATF legislative framework and the December 2011 consultation paper of Finance Canada are silent on the adoption by financial institutions of simplified consumer due diligence measures where the risk of money laundering or terrorist financing may be lower. In such circumstances, and provided there has been an adequate analysis of the risk by the financial institution, it would be reasonable for Canada to allow its financial institutions to apply simplified consumer due diligence measures.
[Translation]
On the international front, the FATF has made the risk-based approach its recommendation 1. This is a new recommendation fully supported by the international insurance community, and the financial services sector more broadly.
Moreover, the October 2009 risk-based approach guidance of the FATF for the life insurance sector will soon be updated in cooperation with the industry to identify characteristics of: (i) customer risk; (ii) product, service, transaction or delivery channel risk; and (iii) country risk, indicating that simplified mitigation strategies may be warranted.
[English]
Indications are that many countries will allow their financial institutions to apply, subject to national legislation, simplified measures when assessing risks under the internationally agreed risk-based approach. Hopefully Canada will do the same.
In conclusion, Mr. Chair, the CLHIA, on behalf of its members, very much appreciates this opportunity to participate in the committee's review of Canada's Proceeds of Crime (Money Laundering) and Terrorist Financing Act. We would be pleased to respond to any questions.
Allan Bulloch, Chair, Legislative Committee, Canadian Association of Independent Life Brokerage Agencies: Honourable senators, it is a pleasure to be here on behalf of the Canadian Association of Independent Life Brokerage Agencies. We call ourselves CAILBA for short. This industry is great for acronyms, so apologies beforehand. It is great to be able to participate in this parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act .
As was indicated, my name is Allan Bulloch, and I am the legislative director of CAILBA, which is a voluntary trade organization whose interests are the managing general agents in Canada. We like to call ourselves MGAs. Managing general agents are the largest distribution channel of life and health insurance policies in Canada. There are 400 such offices in Canada, and they range from a a nation-wide organization to a small local shop or operation. The majority of the life insurance processed in Canada by the MGA channel is processed by members of our association. My real job is to head up one of such managing general agents. Like the majority of the MGAs that are part of our association, we have contracts with the CLHIA life companies that this gentleman here represents.
For the purpose of today's discussion, I will refer to MGAs, distribution offices and intermediaries as interchangeable, because we get called different things, and likewise the discussion about agent, broker and market intermediary and advisor should mean the same thing. I am sorry for the confusion, but I like the softer word "adviser," so I will use that probably throughout the rest of my comments. The adviser holds the appropriate licences, governed by the provinces that they are representing, and they also have contracts with the insurance companies that they represent.
The function of an MGA is threefold. We are the back office support between the adviser and the insurance company, making sure that the transaction or the insurance application gets moved from the adviser through to the insurance company. We also function as sales and support to the adviser in giving them information about the product and what have you to help them market that product. We also are responsible for the compliance side, the market conduct compliance support for the insurer. Those are basically our three roles.
As Mr. Swedlove indicated, we, too, do not accept any cash, no matter the amount. Money orders or even bank drafts are very limited. There has to be a bunch of hoops to go through before we will accept even a bank draft.
In addition, I want to talk about how we, CAILBA, strongly endorses what CLHIA is having to say in their position paper. We believe this industry is a very low risk industry. In our opinion, life insurance is not a viable money laundering product. I could talk more about that later.
We think that the stakeholders on our side of the world, in the insurance world, can find some cost-effective ways that we can mitigate some of this risk, and I would be happy to share with you my comments on that.
CAILBA membership is a little concerned, though, about the manner in which the regulation currently exists. The way the regulation is set up right now, we are actually considered advisers, assuming that we have end customers, rather than just service providers. It is the adviser that meets with the client. It is the adviser who verifies and ascertains identification. It is the adviser who performs all of the mandated functions they have to do. It is the adviser who is in the position to determine whether or not the circumstances or the reasonableness of this transaction makes a lot of sense because they are meeting with the client face-to-face.
What will be interesting, though, is that MGAs started to exist in the early 1980s, perhaps, and the Bank Acts were set up prior to that. The Bank Act was not written to encompass MGAs. What is good, though, is that we have been working with the Canadian Council of Insurance Regulators, and that is the body that represents each provincial licensing area, and it is called CCIR. They are engaged in a review. We are pretty sure what the review will say. It should come out in the next couple of months.
What is of particular interest to us, though, is that B.C. has already published their guidelines, and they are one of the provincial jurisdictions. We believe that the rest of the provinces will follow something close to that. B.C.'s position paper makes it very clear that an MGA is not a broker adviser and cannot be expected to behave as one. B.C. has indicated that the MGAs are responsible first and foremost to the insurance companies, and the failure to adhere to their contracts with the insurance companies could cause them to be deemed unsuitable to hold a licence. That is, in summary, what they had to say.
To continue on, insurers do not delegate the anti-money laundering responsibilities to us. However, the insurers do expect us to follow guidelines that are in place. We are considered a reporting entity, just like the other 300,000 entities that apparently exist. We have put in place compliance regimes. We have put in place policies and procedures. We have trained our staff for anti-money laundering and all of that. They are up to speed on reporting and submitting of reports. CAILBA, the association, has created training material for independent advisers as well.
The current regulation imposes some extremely difficult and expensive requirements on MGAs, again because of this issue of us being considered the selling adviser. This new regulation is really ratcheting that up further, which causes us even more concern.
Of particular concern is the effort in the November 2011 consultation paper that establishes that there is a business relationship between the customer and us, when no such relationship exists. To create regulation that would indicate that and make us follow that compliance could really put us offside, because it is impossible for us to know. We have not met the client, and we do not know what the discussions were in the course of the transaction.
In closing, CAILBA members endorse strong anti-money laundering and anti terrorist financing regulation and policing. We know we have a part to play, and we are willing to play a part. We just hope that the current disconnect between how we are regulated and the actual function that we perform is not magnified again by some further changes and whatever is adopted takes into account the low risk nature of our business, what we do, our need for far more specific information about how money is really laundered and looking at it in a cost-effective way.
I welcome the opportunity to have some more dialogue, and thank you again for the opportunity to be here today.
The Chair: I would like to start by referring to something you said in your opening comments in points 2 and 3. I refer in point 2 to where you state: "In the course of processing business for the adviser and the insurance, we do not accept cash regardless of the size of the transaction." That is a very straightforward statement.
In point 3, you make the statement: "In our opinion, most life insurance contracts are not viable for money laundering." Well, most means, "perhaps there are some that are."
I take those two statements and refer to some testimony we heard yesterday from Capra International, who, as you know, performed the 10-year review. They talked about how the purchase of a life insurance policy with a large down- payment and the subsequent cancellation of the policy and return of the down-payment is one type of money laundering scheme seen in the life insurance industry.
Would you gentlemen like to comment on that, please?
Mr. Swedlove: We, of course, do not take the position that we should not be covered by the AML/ATF Regime and that there are no issues. We are suggesting that there are certain products that do not lend themselves to money laundering activity. The examples I gave in my presentation were critical illness insurance, for example, term insurance. With respect to policies that have an investment component, where there is a cancellation option, absolutely, there is a possibility for activity to take place. It does not involve necessarily cash, because that is not something that is part of our business, but it could lead to layering on activity in order for money launderers to hide certain practices and activities.
It is important to note that there are opportunities within our industry for that to occur, but relative, for example, to banking, those are more limited.
The Chair: Anything further, Mr. Bulloch?
Mr. Bulloch: If I could add, segregated funds are on the insurance side, so they perform a lot like an investment. That would be something that could be more viable for getting money in and out. Further to Mr. Swedlove's comments, the surrender charges on getting out of insurance policies and the delay in getting all of that work is pretty awkward, so it is not very attractive for quite a few life insurance products to get the money in and get the money back out again.
The Chair: The industry clearly is not totally immune from money laundering.
Mr. Swedlove: That is correct.
The Chair: I will go to my speakers' list.
[Translation]
Senator Maltais: Good morning, gentlemen. I am pleased that you are here today. Your language is not a problem for me because I was a broker for 25 years. So I am quite familiar with life insurance and general insurance companies.
Last night, I was really surprised, almost astonished, to hear what Capra International had to say to us here. Because of my knowledge of insurance contracts, the requirements of companies and the investigations that companies do on their future insured parties, I was surprised to hear that it was almost a sieve. I understood that they did not understand the system. That is what I understood from them. I am not saying that your system is 100 per cent perfect — there is someone who claimed to be perfect, but ended up on a cross. The system is not perfect, and there may be slight flaws. But I do not sincerely believe that the insurance companies, in how they operate in Canada and abroad, are places for laundering money from drug crimes. We are talking here about the proceeds of drugs. As you know, in an insurance contract, there has to be an insurable interest in the rider. So I do not see a terrorist taking out insurance on another, because he still has to die before getting access to the money. I do not think that insurance companies are getting into that.
We were told yesterday that someone can go to an insurance company, buy a policy for one or several million dollars, deposit the cheque, cancel the cheque two days later, and return the cheque. In practice, for the counsel and the people I have seen in 25 years, I do not think that this has happened. It does not even work. I do not think that someone can deposit a million dollars cash into an insurance company. I have never seen any cash transactions in insurance companies. Unless things have changed since I have been in politics, but it would surprise me. You have the opportunity today to set the record straight.
Knowing that you agree with the FATF and the review to take part in it is reassuring for Canadians, your clients who are involved in all the insurance companies. I would like to hear you tell us once and for all, to close this file, that insurance companies are not places for money laundering in the same way banks are.
Mr. Swedlove: Perhaps I will ask my colleague to respond so he can provide more details.
Jean-Pierre Bernier, Special Advisor to the President, Risk Management, Canadian Life and Health Insurance Association Inc.: I am a member of a committee of the Department of Finance, a multidisciplinary committee that meets at least twice a year. We have various interested parties give presentations.
I have been on the committee for several years now and, in the past 18 months, we have had two separate presentations. One was by the Royal Canadian Mounted Police, and the other was by the Sûreté du Québec. I took the opportunity to ask the police officers if, in their 25- or 30-year careers, they have had any knowledge of cases in which insurance proceeds have been used for money laundering. In both cases, the Royal Canadian Mounted Police and the Sûreté du Québec told me that they were not aware of situations in Canada where insurance proceeds had been used for money laundering.
Senator Maltais: That seems very clear to me.
[English]
Mr. Bulloch: The first thing that has to happen is the adviser provincially has to know his client by law. He has to ask the client a lot of questions about the individual to satisfy the situation. When the application is submitted, there probably is evidence, including blood and urine and all those fun things. There could be financial underwriting, such as two years or five years of corporate financial information, to justify the amount of insurance. Credit checks are done and there could even be two years of financials individually that have to be presented. A lot of things have no go into this package of $1-million premium. I am 39 years in this business and have not seen anything laundered or criminal in my world.
Senator Ringuette: OSFI was before us, and you are under the auspices of OSFI. They told us that they were helping the banks and the insurance companies with regard to risk assessment. I would like you to tell us if this is the case for your two different organizations. The other issue is in relation to the benchmark of $10,000. You are certainly not the first witness to bring to our attention that perhaps the blanket legislation with the benchmark of $10,000 is not the best way to approach the issue. Maybe risk assessing in the different sectors would be more appropriate.
First, how do you deal with OSFI in regard to the reporting requirement that you have to maintain? Second, because there has been consultation have you voiced, like many other witnesses, to the Department of Finance and FINTRAC the need to go to a risk-based approach instead of benchmarking an amount of money?
Mr. Swedlove: I will turn to Mr. Bernier to give more detail on the consultation process, but there is no question that for a long time as an industry we have been supporting the risk-based approach at all levels. In our mind that is the way you really get to deal with the bad guys in the system. Having a bunch of rules that people can figure out and get around does not resolve the problem. The most effective way is for us to focus in on the areas where there is greater risk.
We have spent a great deal of time as an association working with our international colleagues to get that understood at the international level and the FATF level, so we are pleased that they took steps recently to include that a risk-based analysis approach should apply as their first recommendation.
It is another thing to get governments to accept that, to move away from a rules-based focus and to accept that principle and concept because they have been dealing in a rules-based world for a significant period of time. It is very much a mindset. It is a way of thinking and an acceptance by the international community that that is an appropriate way to go.
In my past experience, because I was on the government side as president of the FATF at one time, it was difficult for them to accept the concept of risk-based approach so we are extremely pleased that they are now willing to accept that concept. It is now time for governments to react positively to that.
I will turn to Mr. Bernier to talk directly about the consultation process with OSFI.
Mr. Bernier: OSFI, as you know, is a prudential regulator. When it comes to federally regulated financial institutions, they focus on risk management and risk assessment, not on compliance for the entire money laundering legislation. The supervision of our members pertaining to compliance is done by FINTRAC, and OSFI is one of the best regulators in the world. They have an international reputation and, yes, we work with them cooperatively on risk assessment.
A few years ago, when this legislation was introduced, we sat down with OSFI. We looked at the products and services offered by like companies across Canada. We put them in broad categories and we put a risk assessment on each and every one of them.
We do not report on suspicious transactions to OSFI. We report to FINTRAC regarding suspicious transactions or suspicious attempted transactions. Because the risk-based approach at the international level is new in terms of recommendation, which is Recommendation No. 1 of the Financial Action Task Force, and was adopted very recently, we met with the FATF and we are soon to start with them into the development of how the risk-based approach will be implemented in the insurance industry. That work has to start.
There is also another international association or organization called the International Association of Insurance Supervisors, which is worldwide. They are meeting during the week of April 18, in Chicago, to apply how to implement the risk-based approach. Needless to say, the work we are doing with the International Association of Insurance Supervisors and the work we are doing with the Financial Action Task Force will be consistent throughout but the work is just starting. We will work with OSFI and FINTRAC once the international standards or criteria are set.
Mr. Bulloch: Perhaps I am the closest to where the rubber meets the road in many of the discussions. I will use an example. A client gives an adviser an $11,000 cheque. The adviser has to do checks to ensure everything is okay there and then hands it off to, say, our officer. My administration person has to do the same thing. It has to go to my compliance person because they have to check some things and then it goes off to the insurance company. I am not sure what all they do.
When they get it, they then deposit the cheque into their bank account. After they have done their check, their bank does their checks because they just got $11,000, and then when it clears the other bank that bank does the checks. We have five or six individuals doing checks and it is rules-based. When FINTRAC audits us and asks whether we got all the answers to this form, yes, we did and we have it on record, and that is a great audit.
Senator L. Smith: Mr. Bulloch, in your write-up on point 10 you said:
We know we have a part to play but sincerely hope that the current disconnect between how we are regulated and the actual functions we perform will not be magnified by the proposed changes.
What do you want to happen?
Mr. Bulloch: One of the things we are really crying for is to get information about what the crooks are doing or what the terrorists are doing. I will give an example.
A few months ago, I was in Toronto and got a call from my Visa card holder and I had just returned on Sunday from a golfing trip. I had booked my vacation for the winter and then just checked into a hotel in Toronto after getting gas at a service station. They thought all those things were weird to happen on the same day. They called and asked me some questions. The representative was professional and got the information she needed. I was complimentary and happy they did that. Someone pulled that information real quickly. That is what we need. We need to know what Billy the Kid looks like, what he is doing today and how we can make sure he does not come and meet one of our advisers.
Recently, I was driving down Highway 416 coming to work and the service light went on in my vehicle. I do not have an expensive vehicle but I pushed a button and they did a diagnostic check on my vehicle at 110 kilometres an hour. Can we not do that with this thing? We are in the 1980s here in this whole thing.
Senator L. Smith: We have had witnesses as of yesterday say that the regime seems to be working but certain things need to be done to move it forward.
In listening to your feedback, there have been some witnesses who have suggested there should be a special committee that would be made up of key players from the different sectors to help develop some form of strategy, identification or whatever measurement system.
Do you have comments about that, Mr. Swedlove or Mr. Bernier? How can you make the system better?
Mr. Bulloch: The problem is probably privacy and so forth, but when you are applying for an insurance policy you have to sign off and agree that the information will be stored and all of those things. I would think that in addition to agreeing to buy this product you agree that FINTRAC could get this information also. Maybe I watch too much CSI, but they are able to find out what a person has done in their bank account.
I will return to the example that I used earlier about the $11,000 cheque. None of those institutions are talking to each other; the adviser is not talking with us about this $11,000. There is a total disconnect.
We need to get it set up so that somebody up there is saying, "Okay, there is a pattern here. This gentleman has done this, this, this and this and with these organizations, and now we have to deal with it."
Mr. Swedlove: A common complaint reporting entities have is around the lack of feedback that they get from government, particularly FINTRAC, about the trends out there that we should be aware of. I think one of the greatest frustrations that financial institutions have is the fact that all of this information is being provided to FINTRAC. FINTRAC has very sophisticated computer software to identify trends, like Visa does with respect to credit card fraud, yet we do not seem to find out where the trends are and what is happening that would lead us to do a better job in actually catching the bad guys.
That has been a common complaint. As my colleague noted, there are privacy issues and so forth. However, surely more typologies that define behaviour could be provided to us so that we can do a better job as far as the process goes.
Mr. Bernier: To answer your question, I would like to move from money laundering to terrorist financing.
They are many lists today of terrorism and terrorist groups. Unfortunately, some are downloadable; some are not. Some are on paper. They come in different formats and are not always up to date.
It would be very useful and cost efficient if somehow the competent authorities could consolidate the lists of terrorist groups into one and keep it updated.
Senator L. Smith: Are you saying there are many silos; that people are doing good jobs but there is not enough communication, which goes probably to the privacy issues?
Mr. Bernier: That is correct.
Senator Harb: Thank you for your presentation.
The point you raised about the feedback seems to be a consistent message we have been hearing from all the people who have appeared before us so far. A gentleman from the Canadian Imperial Bank of Commerce told us that we need to communicate both ways.
This goes to the heart of the issue. I do not think any one of you will disagree about the importance of or the value in having a FINTRAC in place. What I hear you complaining about is the level of performance and how you can make the performance more relevant to what they are trying to do.
The notion of you reporting on people who do transactions over $10,000 is there. It seemed to me that you are complaining about that; you are saying that the current regulatory regime imposes extremely difficult and expensive requirements on MGAs.
If I am to tell you that one of the proposals before us is to remove the limit of the $10,000 — that you would have to report on everything, even a penny — how would you view that?
Mr. Bulloch: I think it is a complete waste of energy but we would manage it and we would deal with it. It would just mean that someone in our officers would have more work to do. It would solidify their career, I guess. We would live with it.
We really want to help in this whole world of terrorism. This is serious — we all agree — and we would like to do our part. It is just what is reasonable.
Mr. Swedlove: I was not complaining about FINTRAC not performing because its role is to gather the information and inform police authorities about possible money-laundering or terrorist-financing activity. They are doing that, and we see that the reports to the authorities are increasing and are presumably leading to more results.
What I noted was that, as they are doing this activity, it would be helpful to us, as the chair noted, that we as partners in the system get feedback for all the information that we provide. We want to know what is useful, what is less useful, and how do we better serve the process.
Senator Harb: Would you be surprised if I were to tell you how many countries around the world are part of the system? FINTRAC issued a report dated April 2012 and in it they look at the 12 top destinations of electronic fund transfers with money laundering cases attached to them. Canada is nowhere part of the top 15 countries, but would you be surprised if I tell you that the United States ranked first, followed by the United Kingdom? Then you have Japan, Germany, Italy, France, Switzerland, and so on.
These are hardly countries where you would suspect terrorist financing to take place. Six out of the G7 countries are in the top.
I guess it goes to the heart of what you are saying: We have to give our head a shake to find out exactly what we are trying to do here.
I think we will look at the government's side of things at some point in time. Would you be a proponent of the fact that perhaps there should be a governing body where you guys and the banks and all those who have to comply should be part of that, so you can have your voice more effectively heard?
Mr. Swedlove: I will be quick, Mr. Chair.
As my colleague noted, there is an advisory group that meets, and we participate actively in that group. The government does reach out to get input from us on a regular basis. That is important to note.
The reason that the countries on your list are listed high is that they are the ones that carry out the financial transactions. On a volume basis, it is not surprising the United States would be rated No. 1 simply because of the number of financial transactions that go through the United States.
Also, I wanted to note that we do not support the removal of the $10,000 exemption simply because we think it simply adds to the administrative burden significantly, given we believe there has been no demonstration of a real problem that exists for transactions that are that small.
Mr. Bernier: On the issue of feedback, Canada is one of the countries in the world that does not produce what we call a "threat assessment by sector." A growing numbers of countries are producing this threat assessment document.
In our submission to the Department of Finance on the act, we have made this recommendation to strengthen the AML/ATF regime, without the use of legislation or regulations.
The Chair: Thank you very much.
That concludes the questions in round one. I will move to round two. We have just over 10 minutes remaining.
[Translation]
Senator Maltais: I am simply wondering about something. Unlike the financial institutions — banks, credit unions, Visa cards, and so on — the companies have personal information about people, their health and family background, for instance. Would this information be useful to others?
There is privacy protection legislation in Canada that governs this particular sector. I do not know how the health of one of your clients might interest the RCMP if everything is in order financially and the person is not a criminal. Is there not a danger somewhere?
Mr. Bernier: For our industry, it is much more challenging to ensure that there is good coordination between privacy protection and the personal information we could communicate to police officers and even to FINTRAC.
Unfortunately, in Canada, there are still some problems — some of which seem insurmountable — between processing or compliance with the Privacy Act and compliance with the money laundering act.
Senator Maltais: What would you recommend to change that?
Mr. Bernier: Perhaps the Office of the Privacy Commissioner should sit down with the appropriate authorities and find solutions to the problem. These problems are not unique to Canada; we are discussing the same things at the international level.
[English]
Mr. Swedlove: To that point, as an example for the committee, when I was consulting internationally on this issue, the government required the companies to apply a global approach to the money laundering issue. In other words, the international operations of companies like Manulife or Sun Life or TD Bank also have to be covered by the Canadian authorities. You have to take a global approach and be aware of what your subsidiaries are doing and whether people are accessing both the parent and the subsidiary operations. That international requirement applies to our companies. At the same time, there is legislation on the books in most countries that restrict cross-border information flows to take place because of the privacy laws. You are damned if you do and damned if you do not on this issue because there is no way of complying with both standards.
That, as my colleague said, is something that exists not only in Canada but also internationally. There must be more work by the international community to find solutions in that area.
[Translation]
Senator Ringuette: Mr. Bernier, you said that you had asked the RCMP and the Sûreté du Québec about the possibility of money laundering in your industry and that the answer had been that, to date, there had not been any suspicious transactions in your industry.
Mr. Bernier: Yes, the two senior police officers who made separate presentations told us that they were not aware of any situation where insurance proceeds from our industry had been used for money laundering.
[English]
Senator Ringuette: In a given year, let us take last year for both of you, how many transactions did you report to FINTRAC and at what cost? Have you costed that?
Mr. Bernier: It was in the hundreds last year. Whether it goes to the tens of thousands, I do not know. We do not take cash, so we cannot be compared to banks with regard to the number of suspicious transactions that we report to FINTRAC. We are a low-risk industry, and this state of affairs has been recognized as well by the International Association of Insurance Supervisors.
Senator Ringuette: What would be your cost to do this reporting on a yearly basis or on a five-year basis or on whatever basis that you can tell us about?
Mr. Bernier: It will definitely in the millions of dollars.
Senator Ringuette: Is that per year?
Mr. Bernier: It is millions of dollars on an industry basis per year, yes. Before you report, you have to check internally and go through all kinds of processes to ensure that you are reporting right. If you operate worldwide, it is more expensive.
Senator Ringuette: Mr. Bulloch, do you have a comment?
Mr. Bulloch: I cannot comment on the association members as to how many or if they have had any. At our board levels, none of us had experienced any and at my office, none have been reported.
Senator Ringuette: Yesterday we heard from witnesses with Capra International, which did the evaluation of the system for Treasury Board and Justice, I believe. They informed us that all the data for the last three years had been forwarded from FINTRAC to the RCMP, but the RCMP did not have enough resources to look through all the data. Three years of operation by the different sectors — input reports, data, et cetera — was sent to FINTRAC and manipulated to get the most out of the data. That information was then sent to the RCMP. However, we were informed yesterday that for the last three years, the RCMP did not have the resources to follow up on that data. How do you feel about that?
Mr. Swedlove: I guess I would be nervous about letting my members know that for fear they would be totally discouraged.
This comes back to feedback. You incent people far more effectively when they know that even though they are required by law to comply what they are doing means something. Whether it be this kind of situation about support for the RCMP to carry out investigations or sufficient feedback to know what counts and does not count, I would put it all together as an important aspect of keeping our people focused on the major tasks of finding the bad guys.
Mr. Bernier: I would like to add that we in our industry are not aware of any prosecutions, never mind convictions, by the RCMP where life insurance products have been used. Prosecutions and investigations are different.
Senator Ringuette: We have asked for that kind of information, and we are hoping to have it soon.
The Chair: Witnesses, on behalf of the committee, I would like to express our great appreciation for your appearing before us today. You have been extremely helpful in our deliberations. Thank you.
In the second half of the meeting, we are turning our attention to the gaming industry. We are pleased to welcome, representing the Canadian Gaming Association, Mr. Paul Burns, Vice President, and representing the Ontario Lottery and Gaming Corporation, Mr. Derek Ramm, Director, Anti-Money Laundering Programs, Legal, Regulatory & Compliance.
Colleagues, I want to point out that Loto-Québec had also hoped to participate this morning, but their expert was unfortunately not available. We will make every effort to accommodate them at a future meeting.
Again, we have one hour for this session. Mr. Burns, the floor is yours.
Paul Burns, Vice President, Canadian Gaming Association: Thank you for inviting the Canadian Gaming Association to appear before your committee. I am Paul Burns, vice-president of the Canadian Gaming Association. My experience in the gaming industry goes back to the mid-1990s.
Our association represents major participants in Canadian gaming: facility operators, equipment manufacturers and service providers. We sponsor research and speak out on important national and regional issues. We welcome the opportunity to participate in the five-year review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act .
I would like to describe the Canadian casino gaming industry from a high level and suggest an approach to legislation as it applies specifically to casinos in Canada. I do not know how many of you are familiar with the workings of a casino but, if you are, you will understand there are the highest levels of security and surveillance. It is often said that, with high levels of surveillance and security, including constant video recording of all activities on the casino floor and adjacent areas, that only stupid criminals would attempt to launder money in a casino. That is not to say that they do not try; it is just that their attempts do not go unnoticed.
Casinos, like all other businesses that attract large amounts of money, such as banks and credit unions, are committed to working together with law enforcement agencies to combat money laundering. Specific to Canadian casinos, unlike practically everywhere else in the world, the casino gaming industry in Canada is conducted and managed by provincial governments through Crown agencies. As such, they are dedicated to effective compliance of the anti-money laundering and anti-terrorist financing legislation and regulations in Canada. This includes a rigorous system of internal controls, employee training and communications to ensure that all transactions required by regulation are reported to FINTRAC.
Casinos are highly-regulated environments, with rules on everything from how games are played to how cash and chips are handled. Provincial gaming regulators provide oversight of casino operations to ensure people can play in safe and secure environments. Gaming operators and provincial gaming regulators in Canada work cooperatively to identify risks and agree on means to eliminate them in a balanced and measured way. It is a relationship built on the highest levels of trust, transparency and communication.
With respect to customers, under Canadian law, only individuals are allowed to gamble at a casino. Gaming patrons are individuals. They are not corporations, trusts, partnerships or any other form of entity. The relationship of gaming provider and gaming patron is not part of a broader financial relationship as may exist in a banking relationship, nor are there any additional financial activities or transactions inherent in this relationship.
The impact of many of the current requirements and the proposed changes to the act are significantly different for the casino gaming industry from that of the financial services sector as the business relationship, nature of customer interaction, accounts and activity differ considerably between the two. Application of reporting requirements to the casino gaming industry encompasses the use of gaming patrons' funds — they walk in our front door to play games — and the consequence loss of those funds to the gaming provider and then any payments that arise out of chip cashing or winnings. Attempting to define a business relationship expanding on this direct gaming exchange does not appear to be either possible or relevant. It does not add to the understanding of the overall relationship in any manner that would enhance compliance with legislation, regulation or guidelines.
As a consequence of the strong regulation of gaming activities, there is effectively no change to the underlying basis of the business relationship between gaming provider and gaming patron. An unwillingness to recognize these differences by FINTRAC, even when FATF methodology does, can result in some practical impossibilities with effective compliance. The establishment of a specific definition would provide a better basis for compliance without undermining the aims, because the business relationship quite simply cannot be other than a straightforward one between patron and provider. Casino gaming does have an immediacy of execution of business transactions. People walk in the front door and like to play. Accordingly, it needs specific consideration on guidelines that provide an appropriate basis upon which compliance can be achieved. Entry into online gaming by the provincial corporations only heightens the need for better understanding. A simple recognition that money laundering can only occur if there is a payout to a player would be a good step.
We understand the intention of the compliance programming and that legislation and regulation that dictate that are not intended to unduly interfere with the delivery of a legal commercial transaction. It needs to be recognized that gaming in Canada is entirely unique because of its legal framework, and the proceeds of crime legislation needs to take this into account.
We strongly endorse both effective compliance and recognition that the legal business relationships and transactions within that relationship should be permitted to proceed on a reasonably unimpaired basis within the context of compliance.
Thank you, and I would be pleased to answer any specific questions you would have about FINTRAC's relationship with the gaming industry.
Derek Ramm, Director, Anti-Money Laundering Programs, Legal, Regulatory & Compliance, Ontario Lottery and Gaming Corporation: Mr. Chair and honourable senators, thank you very much for inviting the Ontario Lottery and Gaming Corporation to participate in the parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
My name is Derek Ramm, and I am the director of anti-money laundering programs at OLG. I joined OLG in September of 2011 after spending nearly eight years as an officer with the Financial Transactions and Reports Analysis Centre of Canada, FINTRAC. I would also like to bring greetings from our board and president and CEO, Rod Phillips, who unfortunately was not able to attend today.
To give you a bit of background about OLG, we are an Operational Enterprise Agency created by the Government of Ontario. As the Crown corporation accountable for conducting and managing gaming in accordance with the Criminal Code, OLG is currently responsible for 27 gaming sites and the sale of lottery products at approximately 10,000 retail locations throughout the province. OLG and its affiliated companies currently employ more than 18,000 people throughout the province, generating over $3.8 billion in economic activity that includes contributions to charities, hospitals, amateur sports and municipalities that host OLG gaming sites.
In addition to being regulated by the Alcohol and Gaming Commission of Ontario under the provincial Gaming Control Act, our gaming sites are subject to the provisions of the PCMLTFA. Further, as an agent of the Province of Ontario, we view our legal and social responsibilities to detect, deter and report suspected criminal activity with the utmost importance. Indeed, this philosophy is one of the fundamental cornerstones of the gaming industry as conducted and managed by OLG on behalf of the province of Ontario.
Honourable senators, I have spent the better part of my career trying to keep criminals out of legitimate Canadian business. As I stated earlier, I have had the privilege of working for FINTRAC. Prior to that, I worked for over ten years in the private sector in various compliance roles, including chief anti-money laundering officer at a Bay Street investment firm. I believe this experience has afforded me a balance and unique perspective on Canada's anti-money laundering regime.
My colleague, Paul Burns from the Canadian Gaming Association, has discussed the legal framework for gaming in Canada, which is entirely different than in other countries. Today, I would like to focus on two specific issues, however. First, is the challenges posed by the current non-face-to-face client regulations; and the second is the need for the Canadian proceeds of crime legislative framework to recognize the distinct nature of Canada's gaming industry, while respecting the Financial Action Task Force recommendations.
Earlier this week, Ontario Finance Minister Dwight Duncan and OLG Chair Paul Godfrey announced a new strategy to modernize lottery and gaming in Ontario over the next six years. As part of that plan, OLG will be offering online gaming to residents of Ontario in the near future. Unfortunately, the current non-face-to-face client identification and record-keeping regulations present a number of challenges to both legitimate businesses and regulators. I can say with some authority from my experience in both the private sector and with FINTRAC that the current regulations concerning non-face-to-face customers and transactions are overly complicated, difficult to operationalize, difficult to interpret, difficult to enforce and, ultimately, provide little in the way of analytical value to FINTRAC.
Further, the current requirements for non-face-to-face client identification and record-keeping put lawful regulated Canadian online casino operators at a severe competitive disadvantage to less stringently regulated offshore operators. For example, by requiring physical documentation, such as a signature card, a cleared cheque or a notarised copy of identification, the current regulatory framework only serves to drive prospective customers to those offshore operators, which cuts off the information flow to both FINTRAC and law enforcement. I think we can agree that requiring a customer to submit paperwork for an online transaction defeats the entire purpose of electronic commerce.
Recent enforcement action by federal authorities in United States against offshore Internet casino operators underscores the pressing need for legitimate and regulated online casinos for Canadian customers. The federal government has already recognized the important role that provincial lottery corporations can play in combating money laundering and other criminal activities. Indeed, section 207 of the Criminal Code establishes the framework for legitimate gaming in Canada. With very few exceptions, only a provincial government or agent of a provincial government may conduct and manage a lottery scheme in Canada.
Bill C-290, currently before the Senate, will amend the Criminal Code to allow single event sports wagering to be managed by the provinces. While there are certainly economic benefits to be had, there is no doubt that this amendment would take a significant revenue source out of the hands of organized crime.
We are asking that the federal government continue those efforts to combat money laundering and organized crime by adopting electronic client identification and record-keeping methods that encourage legitimate business and keep pace with the increasing prevalence of online transactions. To that end, OLG has provided a number of written suggestions on how to modernize the regulations in our submission to the Department of Finance.
The second matter I would like to bring to your attention involves the legislative framework and how it impacts Canada's gaming industry. Many of the current regulations and proposals contained in the consultation papers are workable in an account-based environment such as banks or credit unions. However, as my colleague has already pointed, casinos operate in a very different environment. A generalized and broad-based approach has the potential to create some intractable compliance challenges to the gaming industry.
I would draw the committee's attention to the Financial Action Task Force recommendations, which were updated in February 2012. Recommendation 10, which pertains to customer due diligence, states that entities should obtain information on business relationships as appropriate, and that the extent of customer due diligence should be determined using a risk-based approach. Further, the FATF sets a designated threshold of $3,000 for casinos.
I would point out that none of these concepts are recognized in the current or proposed regulations for casinos. I strongly urge this committee and the Department of Finance to adopt a legislative and regulatory framework that is both appropriate and effective for the Canadian gaming industry. This would also allow us to recognize the FATF standards.
In closing, OLG remains committed to the fight against money laundering and terrorist financing. I would be pleased to respond to any questions that the committee may have. Thank you for your attention.
The Chair: Thank you. Mr. Ramm, in your opening comments you made reference to United States enforcement activities. I note that last week on March 7, the U.S. Department of State's Bureau of International Narcotics and Law Enforcement Affairs submitted its 2012 International Narcotics Control Strategy Report to Congress. This report offers a brief synopsis of money laundering and criminal financial transactions in every country that may be of concern to the U.S. government. Regarding Canada, in Volume II Laundering and Financial Crimes, the report states at page 73:
The criminal proceeds laundered in Canada derive primarily from domestic activity which is controlled by drug trafficking organizations and organized crime.
On page 74, the report recommended, and again I quote:
Canada should continue its work to strengthen its AML/CFT measures within the casino industry . . .
The American government is clearly concerned about money laundering in Canada, particularly in casinos. I would be interested in your reaction.
Mr. Ramm: I read the report and have to say that I was disappointed that the report did not provide any context. The report contains a one-sentence statement that Canada needs to do more. I believe they are getting that from the 2008 mutual evaluation of Canada that was done by the FATF. It pointed to some deficiencies within the casino sector. Those deficiencies, though, did not have anything to do with the casinos or the operators or lottery corporations. The deficiencies had to do with the legislative and regulatory framework that was imposed on the gaming industry. I do not necessarily disagree with the U.S. State Department. I just wish that there had been more context in their statements.
The Chair: I thank you for that. I will turn to my list and start with Senator Tkachuk.
Senator Tkachuk: I do not gamble so I may sound a little ignorant of some of the procedures you use, so excuse me for that.
When a person walks into a casino and wants to buy chips to play games, do you have a limit on the amount of cash? What triggers a problem? Is it a person bringing in $3,000 in cash, or $4,000 in cash? What triggers the alarm bell to a problem?
Mr. Ramm: FINTRAC publishes guidance on what is suspicious. We have our own indicators as well. Certainly we are a cash-based business so someone who walks in with several thousand dollars in cash in and of itself would not be suspicious. However, if it was low denomination bills and the patron did not appear to be doing any gaming but was using our facilities for financial transactions, it would certainly send up a number of red flags. As Mr. Burns indicated earlier, we have real-time surveillance. We would engage them to observe the player's activity and, if necessary, report a suspicious transaction to FINTRAC. In Ontario, we also provide information to the OPP Casino Enforcement Unit.
Senator Tkachuk: Do you get large cash transactions of $10,000 to $20,000?
Mr. Burns: It is common in, say, the province of British Columbia. Until recently there was no ability for a patron who wanted to play large sums of money to transfer money into a casino through their bank. They were required to show up with cash, so there were large cash transactions by people walking in with significant amounts of money, but they were known and were regular players. There were reports made to FINTRAC because of the volumes of money, but the rules have subsequently been modernized in British Columbia so if a player wants to do that they do not have to come in with cash. The bank can make arrangements to send that money to the casino. That patron would leave with a cheque in most cases and there is identification required. There are often people showing up with large sums of cash.
Are they known to the casino where they play? Frankly, the casino makes the reports following FINTRAC's rules, so the report is generated.
Senator Tkachuk: The way you launder the money is there may be a certain percentage they may lose in the place, and this is illegal or stolen money, so they would play and buy $20,000 and lose $6,000 and bring the chips back in and pick up $14,000 of clean cash? That is the way they would do it?
Mr. Burns: Provinces have different rules. You may not be able to leave with cash of that amount in a certain province and certain casino. You would be given a cheque, and they would produce ID to get that cheque.
Senator Tkachuk: In some provinces you can?
Mr. Ramm: They can leave with cash or cheque. We do have procedures in place to verify gaming activity. If someone were to walk up to up the counter with a large amount of chips or even cash and want a casino cheque, we have a process, and it is in our internal control manual, to verify that that person was actually gaming. If they were not gaming, we may refuse to give them a cheque, or we may file a suspicious transaction report with FINTRAC.
Senator Tkachuk: There is a technology I pay my accounts with through the computer. You should be able, if you are a regular player, to just transfer what you want to play to an account that is owned by the casino and then go in there and you would have a credit of whatever the amount is.
Mr. Ramm: They are called front money accounts. At Ontario's resort properties, we do offer that facility to players so they do not have to come in with cash.
Senator Tkachuk: Is there any way for someone to get ownership of a casino, or are all the casinos non-profits or government-owned in this country?
Mr. Burns: There are private owners of the physical facilities. The business relationship is different in each province. Loto-Québec owns and operates and Loto-Québec employees run all aspects of the gaming in Quebec, but in other provinces, for example, British Columbia and Alberta, the ownership is private, the facilities are private, and the employees, but there is a business relationship that is a framework in how the proceeds are divided. The province will take X per cent. The operator gets to keeps X per cent and they pay expenses. It is done on a contractual basis to provide that, with oversight provided by the provincial lottery corporation. In British Columbia or Alberta's case, they supply the slot machines. They purchase them, they allot them and they allocate them, and it is regulated with oversight by them.
To become an owner, we like to refer to the casino gaming industry as a privileged industry. You have to submit to significant background investigation to become part of an ownership or a major participant in the industry, so that goes back to your banking records, your families' records, your history and your background. It is a significant process to follow, and it is not an easy thing to do.
Senator Tkachuk: I always have a concern about an institution that is governing itself. If the government owns its casinos and the government regulates the casinos, it is a lot different than when a government does not own the casinos and it regulates the casinos. In Saskatchewan, it is regulating itself. It owns one-third of the casinos, so corruption would be simple, I think.
Mr. Burns: They are not generally the same agencies.
Senator Tkachuk: What is the difference between a person who works for a government institution and a private institution? They all have the same opportunity to be corrupt. They are not any better people or more honest people than the people who work in a private one, but yet the same institution is governing those people. It is the government watching the government. I do not see how you can have a clean system if the government is watching the government.
Mr. Ramm: I understand what you are saying, honourable senator, and I can only speak for Ontario, and Mr. Burns can speak for the industry as a whole. In Ontario, the Ontario Lottery and Gaming Corporation is subject to a number of levels of review, including the Alcohol and Gaming Commission of Ontario, the OPP casino enforcement unit, the Auditor General, and at the federal level there is FINTRAC. There would have to be a massive amount of collusion if there were some sort of impropriety happening in the gaming system because there are so many levels of oversight within the province of Ontario and the federal government.
Mr. Burns: In most provinces, they report to different ministries, and there is different legislation they are required to uphold, so it is a strong system.
Senator Tkachuk: There was corruption in the lottery system where people that were selling tickets were not necessarily telling the truth with the ticket responders. It is not that it cannot be corrupt.
Mr. Burns: That was theft.
Senator Tkachuk: Exactly. That is what fraud is, basically. In a casino, it seems to me that it would not require that many people, any more than it would in a private casino, to collude to wash money through the casino.
Mr. Ramm: There have been examples, but the gaming industry is no different than any other industry, such as banking. When you have large amounts of capital or cash moving around, it is an unfortunate bad side of human nature that there will be some people who will try to take advantage of that.
Senator Tkachuk: You do not have banks watching the banks, though. You have governments watching the banks. You have two different entities. It is not the same ownership.
Mr. Burns: The governments take the responsibility, provincial governments, extremely seriously, and the structure has been designed in the provinces to ensure that there is a check and balance in the system. The entities often meet at the political level, which would be the only place where they come together in terms of the oversight of the government. The agencies operate in different silos in different organizations with different legislation. The collusion is again entirely possible but extremely unlikely.
Senator Tkachuk: When do you report a cash transaction? How big does it have to be in a casino before he it is reported?
Mr. Ramm: It is $10,000, same as the banks.
Mr. Burns: It is the same with suspicious transactions as well.
The Chair: Mr. Burns, in response to questions that Senator Tkachuk asked you, on two occasions you used the expression "significant amounts of cash." Could you put into perspective for the committee what is the range when you are talking about a significant amount of cash? It means different things to different people.
Mr. Burns: It does. The majority of players in the casinos are not playing with large sums of cash.
The Chair: That is not the question. What is the low end? We know what the low end is.
Mr. Burns: It could be $5 or $10 or $20.
The Chair: What is the high end of the range of what people can walk in with cash?
Mr. Burns: You would get players that would show up to play with several thousand dollars on occasion. In often cases, most of those customers are known and the reports are made. For the industry, the rules apply equally to everyone.
The Chair: Can someone show up with $50,000?
Mr. Burns: They can show up with $1 million.
The Chair: Do they?
Mr. Burns: On occasion, people do, and there are significant players, but again, the rules are applied equally. It is the same. The industry also has a requirement with FINTRAC to report on pay outs. If you walk in, you put $10 in a slot machine and happen to win $100,000, a FINTRAC report will be filed that the casino provided you with $100,000. On payouts, regardless of how much money you wager to receive that money, there is a report filed. If the money has come in, there is either a suspicious transaction report, and it was described how they watch the play, but also if there is money going out. For example, they will have 39 million visitors to their facilities a year. The average spend of a player would be less than $100, on average. The vast majority of people come in to play for a moment of entertainment, but some people like to play more and —
The Chair: I am not talking about the vast majority. I am talking about the upper end of the range. Can someone walk in with $100,000? Has it happened?
Mr. Burns: Yes.
The Chair: A half a million or a million dollars in a briefcase? I just want to understand that. Is it on occasion someone walks in with $1 million in cash to a casino?
Mr. Ramm: I do not know if we have ever had anyone walk in with $1 million in cash, but I can assure you that if they did, they would be noticed immediately.
The Chair: No question, but they can.
Mr. Ramm: They can. There are betting limits established by our regulator, but in terms of the amount of money that someone can buy in for, there are no real stated limits in law or in regulation.
Senator Moore: I have a supplementary to the chair's question. Could that same player come in with a certified cheque for $1 million?
Mr. Ramm: Yes. We would still notice that player. That is a very unusual player. As Mr. Burns indicated, in Ontario the typical spend per player is well less than $1,000. The players that get beyond that do get noticed, for various reasons.
Senator Ringuette: Like Senator Tkachuk, I am naive with regard to casinos. How many reports did you provide to FINTRAC last year on events that you viewed as suspicious?
Mr. Ramm: There are different numbers there. Looking overall in terms of large cash transactions, casino disbursements and suspicious transactions, which we are required to report by law, for the province of Ontario, which is all I can speak for, we probably made 50,000 or 60,000 reports, or a bit more.
Mr. Burns: Across the country there would probably be between 120,000 and 150,000.
Senator Ringuette: Of the events that you report to FINTRAC, do you know of any that have resulted in investigations?
Mr. Ramm: As a director of OLG I am not aware of any. I have another perspective from my career at FINTRAC but I am not allowed to talk about it. I know that when I worked for FINTRAC there were disclosures involving casinos. I am not in a position to comment on whether they were actually worked on.
Mr. Burns: We have been told anecdotally that there have been on occasion, although I do not know whether they were specific cases or part of some broader scheme or mechanism to move money.
Our role in the reporting chain is to ensure that the data is collected and sent to FINTRAC so that it can be processed and analyzed.
Senator Ringuette: I was thinking that an ordinary citizen may go to a casino and bet $100, $200, or even $1,000, but then I think of all the gaming that is being done on line.
You have talked extensively about problems with regulation. There is offshore gaming that no specific country can regulate or even identify. You say that we need appropriate legislation, and I assume you are referring to on-line gaming. What do we need in our legislation in order to be able to investigate?
Mr. Ramm: As I said in my opening comments, the current framework with regard to customer due diligence in the Internet environment, or what we call non-face-to-face, is extremely cumbersome for legitimate commerce, and that applies to online casinos, online banking, and anything to do with legitimate online commerce.
The regulatory framework that came into force in 2008, I believe, is extremely complicated. Depending on the type of account you are opening, you have to pick two of seven options, and some of them involve submitting paperwork or having a notarized copy of your driver's licence. In the 21st century that type of regulation does more harm than good when it comes to legitimate business. Does it actually help law enforcement or FINTRAC follow the money trail? Given my experience, I would argue that it does not.
There is other information that can be collected, particularly in the online world, that would be of far more benefit to FINTRAC and law enforcement when it comes to following the money trail, learning who was involved and what accounts were involved. That type of information is far more useful to investigative agencies than having a lawyer, who may or may not be in collusion with the client, notarize a copy of the client's driver's licence.
Mr. Burns: Loto Quebec, British Columbia Lottery and Atlantic Lottery all offer players the option of opening online accounts. Because by law they can only accept bets from citizens of their own provinces, they have to verify address and identity as part of the process of opening an account.
The second part of the system is that you can only cash out through a Canadian bank. They have dictated the terms under which you can get your money out, and that is through transferring it to a Canadian bank or, for large prizes, showing up in person with proper identification. It is impossible to be anonymous in the structure they have created. They have created a strong system that feeds back into the Canadian banking system.
Canadians are spending a significant amount of money offshore that is leaving the country. The offshore online gaming companies are reporting revenue out of Canada of over $1 billion. Some banks do permit their credit cards to be used on these sites now, but there is also electronic transfer ability through PayPal accounts and things like that, so it is significant.
Canadians like the gambling products online, and Canadians are adopting technology at a very rapid pace. The need to ensure that the laws keep pace with that has been everyone's challenge, as the challenge of the gaming business is to meet their customer needs by offering products in the way they want to have them.
Senator Ringuette: We were told by many witnesses that crime groups looking to launder money are also looking at making a profit with the proceeds of crime. I am sorry to say this to you, but it has always been my view that the odds are that people who go to casinos will not come out with profits.
Can you describe a scenario for laundering money through a casino?
Mr. Ramm: If a bad guy is going into a casino with the intent to launder money, he is probably not looking to make a profit. He is probably looking to do currency refining. In drug trafficking, for example, the bills tend to be in low denominations, so they are looking to lighten that load, because $1 million in $20 bills is a lot of weight. If you carry $1 million in $100 bills, you have reduced the burden by one fifth. They may be looking to change up that money from twenties to hundreds. They may be looking to leave the casino with a cheque to make it look like the money is legitimate, so when they go to the bank and the bank says, "What is this," they can say, "I won it at the casino."
Those are the two main ways for criminals to try to launder money in casinos. As Mr. Burns and I have both said, the level of surveillance at casinos and, particularly, the fact that there is a limited range of types of transactions that can be conducted at casinos, do make it easy for us to detect behaviours or transactions that are not normal for people that are just coming to the casinos for some gaming and fun.
Mr. Burns: One of the things about casinos, and there is an air about them and some history that is a fact of the industry, is they are highly regulated and there is strong oversight. We continually work to improve and commit to fulfilling the requirements and ensuring that reports are made. They are not in the business of catching criminals. We understand that we make the reports and file and we do our part. Some people may assume that we harbour and we do not. We do not encourage that. We discourage that. They watch play. All these things occur on a regular basis inside these facilities.
We are cognizant and aware of what large sums of cash attract people like banks and other forms of currency exchanges, so we do take it seriously. There was strong oversight, and because of the past and history of our business, we take it very seriously, and our transparency and our strong regulation are part of our success. If our customers do not think that it is fair, safe and secure, they will not come. We work every day to ensure we have the trust of our customers.
Senator Greene: It occurs to me it would not be that hard — not that I will try it — to launder $5,000 or $6,000 at this casino and $5,000 or $6,000 at another, et cetera, and in the course of a week, launder $100,000.
I wonder if you can respond to that.
Mr. Ramm: We provide extensive training to our staff, including cashiers, dealers and slot attendants. They are trained to look for certain things. We have analytical monitoring systems implemented to detect behaviour. I think that amount of money in a short period of time certainly would not go unnoticed, even initially if someone went to one casino and then another, particularly when you are talking about the same jurisdiction whether it is Ontario, Quebec, B.C. or whomever. Given the training that the staff has and that they are told to recognize certain behaviours and types of transactions and flag them — I will not say it will never be detected — but there is a high likelihood that that type of activity would, in fact, be detected.
Senator Greene: Do casinos talk to each other on a daily basis about activity like this?
Mr. Ramm: Yes. We have 27 gaming sites that OLG owns. In terms of private operators, there is not as much communication between the private operators, but the lottery corporation, such as OLG, we own all that player data, so we can see it from the high level.
Senator Greene: I will ask you a question which is probably not a fair question.
Mr. Ramm, you have had a lot of experience in this area. I wonder if, for a moment, you could take off your casino hat and answer this question: If you were a money launderer, and you had some money to launder, how would you do it? Would it be a casino, a bank or insurance company or what would you do? Which method has the lowest risk for you if you are a money launderer?
Mr. Ramm: In terms of the lowest risk, honestly, I am not saying this because they employ me now, but I think a casino is a lousy place to launder money. I am not saying it does not happen. As Mr. Burns said, there are people who attempt, but in terms of a high-risk place to launder money, I would say casinos and, to a degree, financial institutions, such as federally regulated banks, are not good places to launder money. It is not saying it does not happen.
When you look at less regulated businesses or businesses that are not subject to current proceeds of crime legislation, that is the place I would go if I were a criminal and had lots of money to launder.
Senator Greene: Why is a casino a high-risk place for a money launderer?
Mr. Ramm: I will speak about Canada's legislative framework. Looking at the proceeds of crime framework and the businesses that are caught under it, the gaming industry and banking industry are industries that have invested a significant amount of resources, whether it is people, money or software, into detecting and reporting suspicious behaviours.
If I am a bad guy, I do not necessarily want to go to the business that I know has put a lot of resources in trying to catch me. I want to go to the businesses where I know that they are either not subject to the regulatory framework or they do not particularly care about the regulatory framework, even though they may be subject to that framework. Those are the businesses you want to go to because you know there is less likelihood that any information will be reported to FINTRAC or passed on to law enforcement.
Senator Greene: With regard to the initial question I asked about a money launderer who would launder 5 or $6,000 at this or that casino, how would you track him when the FINTRAC requirement is $10,000?
Mr. Ramm: It is not a secret because we are required by law in Ontario, under the Gaming Control Act, to start tracking transactions at $2,500. We start monitoring cash transactions at $2,500 in Ontario. I do not know if that framework exists in every other province, but again, I can only speak for Ontario.
Mr. Burns: There is a 24-hour requirement, so within a 24-hour period FINTRAC requires the organizations to try to batch and match someone's activity within a 24-hour period as well. That requirement is already there and the casinos are doing that.
The fact is that in most of these cases, if there was suspicious behaviour, the reports would be filed on each transaction as they went through.
Senator Moore: Mr. Ramm, how many private casinos are there in Ontario? You mentioned you have 27 in your bailiwick.
Mr. Ramm: Technically speaking, none of them are private. What is interesting in Canada's approach to gambling is that it is illegal under the Criminal Code. Conducting a lottery scheme is illegal, and then section 207 sets out a few exceptions, one of which is the provincial governments being able to conduct and manage a lottery scheme. Technically speaking, none of the casinos are private.
Now, because there are multinational companies that have expertise in running the day-to-day operations of the casino, we do contract out some of the operations to private operators, but we own the premises and they are accountable to us. They could not exist without the Ontario Lottery and Gaming Corporation.
Senator Moore: Are they within your 27 or in addition to?
Mr. Ramm: They are within our 27. In Ontario, there are four properties currently.
Senator Moore: That are private people running for you?
Mr. Ramm: Yes.
Senator Moore: I was interested in your comment with regard to change up, where someone comes in with small bills. Do you have a point where you will not change up? If someone comes in with $2,500, is that it? If they come in with a bag of $10,000 in $20 bills, will you change that? If so, do you give them cash or a cheque?
Mr. Ramm: Usually it is cash for cash when they are changing up. You can throw in a foreign exchange element, where I have $5,000 in U.S. twenties and I want 100 Canadian twenties.
We do not have a specific policy that prohibits it, but it is something we flag. Anyone that changes up significant amounts will be flagged. I know we had discussions as to what "significant" means. It is contextual because what may be significant at one of our large resort properties will be different from one of the rural properties. We do not have a hard and fast rule as to what amount we will refuse to change up. However, we do reserve the option to not do the transaction; if we are not comfortable with it, we can simply refuse to do the transaction.
Senator Moore: Is a change up $9,000 viewed as a suspicious category?
Mr. Ramm: That would be significant and would warrant attention. There are two reasons: One, $9,000 is typically a larger amount than our average player spends, and second it is just below the $10,000 threshold. The question our staff is trained to ask immediately is if this person is trying to avoid reporting thresholds.
Senator Moore: Both of you answered questions about the number of reports of suspicious transactions that you make on an annual basis to FINTRAC. I believe Senator Ringuette asked about that.
Mr. Ramm, you said 50 to 60,000 total, and Mr. Burns I think you said 120 to 150,000.
Do those reports include a legitimate gaming win of $20,000? Are legitimate winnings also viewed as suspicious in nature?
Mr. Ramm: Not as suspicious, but the reporting —
Senator Moore: Because it is over $10,000?
Mr. Ramm: We are unlike the United States, for example. If you look at the regulatory framework as it pertains to casinos in the U.S., they exempted casinos from reporting legitimate jackpots. To win a legitimate jackpot, given the element of chance —
Senator Moore: It is a game.
Mr. Ramm: Yes, it is a win. Therefore, the U.S. took the approach that if it is a legitimate jackpot, it does not need to be reported.
Canada's framework took a blanket approach and said any time a casino disburses $10,000 or more, it must be reported. Therefore, I would say the majority of our disbursement reports we are sending to FINTRAC involve people who have legitimately won slot machine jackpots or have played at the table and won some form of poker tournament or whatever.
Senator Moore: Can you give us a percentage? Of the 50 to 60,000 that you report to FINTRAC, what per cent of those would be legitimate winnings versus actual suspicious, criminal activities?
Mr. Ramm: I apologize; I do not have specific figures. I am ballparking it, but if you look at the number of suspicious transaction reports that we send, which is in the thousands in Ontario on an annual basis, you are looking in the high 80s. That means 80 per cent or more are legitimate payouts that you can track right back to legitimate sources, given that slot machines are electronic.
The Chair: That concludes our questions. On behalf of the committee, I thank you for appearing before us. You have been helpful to the committee in our forming ideas and completing our deliberations.
I thank you again.
(The committee adjourned.)