Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 27 - Evidence - November 29, 2012
OTTAWA, Thursday, November 29, 2012
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.m. for the review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (S.C. 2000, c. 17), pursuant to section 72 of the said Act.
[English]
Barbara Reynolds, Clerk of the Committee: Honourable senators, there is an unavoidable absence of the chair and deputy chair. As your clerk, it is my duty to preside over the election of an acting chair.
[Translation]
I am ready to entertain a motion to that effect.
[English]
Senator Oliver: I would like to move that Honourable Senator Larry Smith be the acting chair.
Senator Massicotte: I second that motion.
[Translation]
The Clerk: Any other candidates?
Hon. Senators: No.
[English]
Ms. Reynolds: It is moved by the Honourable Senator Oliver that the Honourable Senator Larry Smith be the Acting Chair of this committee.
Is it your pleasure, honourable senators, to adopt the motion??
Hon. Senators: Agreed.
Ms. Reynolds: Thank you. I declare the motion carried, and I invite Senator Smith to take the chair.
Senator Larry Smith (Acting Chair) in the chair.
The Acting Chair: Welcome to our witnesses. We have three witnesses here today. We are continuing our five-year parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This is our twenty- first meeting on the subject. In conducting this review, the committee has heard testimony that money laundering might take place in certain sectors, notably the sales of luxury goods.
Today, we will hear from the representatives of three types of luxury goods: cars, boats and fine art.
[Translation]
Let me introduce our witnesses.
[English]
From the Canadian Automobile Dealers Association, Richard C. Gauthier, President and Chief Executive Officer; from Boating Ontario, Jeff Wilcox, Governor, and President of George's Marine and Sports; and from Heffel Fine Art Auctioneers, Andrew Gibbs, Ottawa Representative. Welcome.
We have conducted 21 sessions, and we are far along in our process. However, we wanted to make sure that we had you three gentlemen with us today. I would ask Mr. Gibbs, Mr. Gauthier and Mr. Wilcox if you have opening statements. We will go with those and then have questions and interaction with our senators. Could we maybe start with Mr. Gibbs?
Andrew Gibbs, Ottawa Representative, Heffel Fine Art Auctioneers: Certainly; thank you. Acting chair, honourable senators and members of the committee, thank you very much for giving me the opportunity to attend this meeting as a witness.
I was invited to attend today as a representative of Heffel Fine Art Auction House. I have worked for Heffel since 1999, but my experience of the art auction business goes back 25 years to 1987, when I first started working for an auction house in England. During those 25 years, I have worked as an auctioneer, appraiser and director with four different auction houses and have, I believe, gained a broad knowledge of the workings of the art auction business.
Heffel Fine Art Auction House is the largest art auction company in Canada, and I believe it is for this reason that we were selected to speak as an authority on the art auction market in Canada. I shall give you a brief synopsis of the company and its place in the art auction market.
Heffel was founded in Vancouver in 1978 as an art gallery specializing in high-end Canadian and international art. In 1995, the gallery held its first auction. Over the past 17 years, the company has grown enormously and now has galleries in Vancouver, Toronto and Montreal, and sells over 60 per cent of all the art sold at auction in Canada. Live auctions are held twice a year, in Toronto in November and in Vancouver in May, with previews of the artworks in our three galleries. These auctions have regularly broken records for the prices achieved for individual artists and for the overall auction sale totals.
A typical auction will include around 180 lots — 180 paintings or works of art — and have a sale total of around $15 million, representing an average sale price of around $85,000 per artwork. Our record sale total was $23 million in 2007, and we have held the top 14 art auctions in Canadian history. Our nearest competitor is Sotheby's, with recent sales totals of less than half of ours.
We also hold 11 online auctions a year and these usually include artworks valued from around $1,000 to $100,000, although we have sold artworks in online auctions for over $700,000. Our auction sales are predominantly of Canadian art, but twice a year we hold auctions of international art, and these normally range in total value from around $500,000 to $2 million per auction.
I hope that this has given you an understanding of the level at which Heffel operates within the art auction business in Canada.
Now, I will turn to the question that was asked of Heffel: Is the art auction business in Canada an industry in which there are large amounts of cash transactions and opportunities for money laundering?
The simple answer is that it is extremely rare to be paid in cash for any artwork. We never use cash when paying a consignor, and we do not believe that there are opportunities for money laundering. We encourage buyers to make payment by wire transfer. According to our terms and conditions of business, we specifically say that payment should be made by bank wire, certified cheque, bank draft or cheque accompanied by a Letter of Credit from the buyer's bank.
We do accept credit card payments of up to $25,000, if paid in person, or $5,000 if paid over the phone, but we do not encourage the practice as it represents a significant cut of our commission as the transaction fee is based on the overall value of the artwork while our commission is based on a percentage of the value of the artwork.
I have consulted with David and Robert Heffel, the owners of the company, and I have been reliably informed that, since its inception as an auction house, Heffel has only rarely received cash as payment for artworks sold at auction. Over the past few years, despite a growth in the overall business, we have received fewer cash payments each year. In the past few years, this would have amounted to less than a total of $10,000 received in cash per year. Measured against a total receipt of some $30 million to $50 million a year, I think it should be fairly evident that Heffel is not being used as a conduit for the laundering of money through the process of buying art in exchange for cash. I would expect the same extremely low proportion of cash sales to apply to our competitors in the art auction business.
I would now like to address the question of the use of Canadian art auctions in the whole process of money laundering.
I received the transcript of the meeting of the Standing Senate Committee on Banking, Trade and Commerce held on Wednesday, March 28 and 29, 2012. Reading the transcript, I noted that various comments were made by representatives of the jewelry industry about auction houses and their vulnerability to being used by money launderers. One comment struck me in particular. It was made by Mr. Barcados, President of the C.D. Barcados Co. Ltd. On page 22 of the report, he is reported as saying:
The whole set-up of an auction, where there is an anonymous buyer and seller, you do not have that customer due diligence or the type of relationship that the senator was referring to in the previous question; it does not give the opportunity.
Having read Mr. Barcados' comments, I feel that there might be a misconception that auction houses operate in a shadowy world of anonymous buyers and sellers, as though we do not know the identities of the people who are asking us to sell their million dollar paintings or the names of the mysterious billionaire buyers who bid at our auctions. The truth is that the high-end art auction business in Canada is notably transparent.
Yes, there are people who are anonymous in the sense that we do not reveal the identities of the buyers or sellers to the press or to the general public, but knowing our buyers and sellers is probably the most important part of our business. Many of them are among the biggest names in Canadian business and public life.
Regarding the procedure for accepting artworks from consignors, we do not take an artwork for sale unless we feel 100 per cent confident in both the artwork and the owner's right to sell the work. As well as the ethical barrier to selling an artwork from an unknown source, there are also huge potential financial risks if the work is subsequently found to have been illegitimately procured. As a company, we all adhere to a strict code of ethics as published on our website, www.heffel.com.
It is always worth our while to take the extra steps required to establish the provenance or history of an artwork going as far back as possible, sometimes right back to the day the artist signed it. Getting to know the sellers can also help us to become more knowledgeable about the artworks that they are offering. Often, the art has been passed down through the generations and interesting information about the original acquisition of an artwork can add to its value and sometimes to our knowledge of an artist's work.
One of the best tools we have for tracing the provenance of an artwork is our own publicly accessible database of Canadian artworks that were sold in auction over the past 45 years. Known as the Heffel Canadian Art at Auction Index, it includes some 80,000 artworks, most of them illustrated and including works from all of the top art auction houses in Canada.
The due diligence that we undertake to establish the identity, creditworthiness and interest of our buyers is always important. The last thing we need in the auction process is an untraceable buyer. Imagine the loss of reputation that would follow the sale of a million dollar painting to a buyer we did not know. It is absolutely in our interests to keep very close tabs on all of our buyers and sellers.
At Heffel, we are fortunate enough to have the luxury of a strong geographical presence in Canada, as we own our own galleries in Vancouver, Toronto and Montreal and have an office here in Ottawa. It is in these locations that we meet most of our buyers during the preview process and ask them to register with us in order to bid or join our mailing list. One cannot bid in one of our live auctions without first having presented identification, and the registration process for our online auctions requires the inputting of significant personal and banking details. All of our offices are connected by a network to our own central database of buyers, sellers and artworks.
In my opinion, using the high-end Canadian art auction market for the purpose of money laundering would be a fool's game. Unlike goods from other industries that can be broken down into anonymous components, an artwork is forever recognizable. Every artwork is individual, expertly catalogued and photographed for posterity, and the records are available for public view either online or at the National Gallery of Canada's archives. Meanwhile, the buying and selling process that we provide is completely transparent and Heffel's accounts, which include the names, addresses and contact details of all buyers and sellers, are available for inspection by Revenue Canada or the police in the event of a suspicious transaction.
I hope that this reassures the committee that the art auction industry in Canada, certainly as exemplified by Heffel, is far from a haven for money launderers.
The Acting Chair: Thank you very much, Mr. Gibbs.
Richard C. Gauthier, President and Chief Executive Officer, Canadian Automobile Dealers Association (CADA): I am president and CEO of the Canadian Automobile Dealers Association. We are extremely pleased to have been invited here today to assist you in any way possible with your ongoing deliberations.
CADA is the national association for franchised automobile dealers that sell new cars and trucks. Our over 3,300 dealers represent a vital sector of the Canadian economy and employ directly almost 140,000 men and women in well- paying jobs everywhere throughout Canada. We represent all brands of vehicles available in Canada, and our dealers are located in virtually every community in the country.
I am very happy to present today to the Standing Senate Committee on Banking, Trade and Commerce on the issue of money laundering and organized crime. First, I will provide a little background about our industry.
[Translation]
In 2011, our member stores sold more than $80 billion worth of goods and services to Canadian consumers.
This number is equal to more than 5 per cent of our country's GDP and represents a 5 per cent jump over 2010. It also represents 20 per cent of retail sales. So far in 2012, growth in our industry has been very strong and has outpaced almost all other sectors in the Canadian economy.
Last month was in fact the best October for new car sales in the history of Canada and for the first ten months of this year, total new vehicle sales are up almost 7 per cent over 2011.
[English]
In the context of otherwise modest, overall economic growth, this is indeed a positive result for our members, the auto industry and the economy at large.
Over the years, too many of our members have been victims of organized crime. Our members are too often affected by the concerted effort of criminal organizations to steal large numbers of vehicles at one time, often with values totaling millions of dollars. As a national association, we have a long history of cooperation with the government when it comes to cracking down on organized crime. On money laundering, we have the very same approach.
[Translation]
Though our members are too frequently victims of organized crime, I have to admit that the first time I heard of the issue of new car dealers as a channel for money laundering was from the Senate Committee on Banking, Trade and Commerce, and media reports surrounding it.
As a result of this committee's work, CADA reached out to its dealers to survey how frequently they see large cash transactions.
The results were as clear as they were predictable: 85 per cent of our dealers reported that hard cash transactions in excess of $10,000 represented less than 2 per cent of their sales. The vast majority of the rest of our members reported that such transactions accounted for less than 5 per cent of sales.
[English]
When these types of transactions do take place, they are fully documented at the dealership and at the dealer's financial institutions. As with any business, when a car dealer is in possession of a large amount of cash, the first place they go to is their bank.
The reality is that the vast majority of new car buyers finance or lease their vehicle. Historically, low interest rates and intense competition in the industry mean that they can do so more easily than ever before. The prevalence of zero- per-cent financing means that even customers with the means to purchase in cash often have the incentive not to do so. Therefore, large cash transactions are exceedingly rare.
The committee needs to be clear, however, that car dealers are a special breed in the retail landscape. They sell very large ticket items. They have, therefore, a much smaller number of total transactions than other retail stores that sell a greater volume of smaller goods and services. There exists already a great deal of documentation for each and every new vehicle transaction that takes place at a car dealership.
[Translation]
Between the manufacturer and the dealer and between the dealer and the customer, there is extensive documentation of all new vehicle transactions that take place in Canada, and how these transactions are financed. Because of this extensive tracking of inventory to purchaser, any cash transaction over the current $10,000 amount is already captured by the bank.
A very straightforward but rare example would be that of a customer who buys a vehicle and pays cash. That vehicle would then be tracked as leaving the inventory, and the bank or financial institution providing floor plan financing would be alerted to the fact that the car was sold. From there, the cash deposit for the car would also be reported and tracked by the bank upon deposit.
This is very different from the retail sales of other items.
[English]
Dealerships that would avoid this reporting process risk the cancellation of their franchise agreement, a risk far greater than a simple fine. That said, as strong corporate citizens, CADA and its members are ready to cooperate with the government with regard to the documentation of these transactions, however rare they may be.
As the government moves forward with the Red Tape Reduction Commission action plan and the one-for-one regulatory elimination, it is worth pausing and ensuring that any new regulations will actually deliver results and target new sectors of the economy. It makes practical sense. We ask you, as a Senate committee, that any recommendations you make on new reporting requirements be consistent with the government's oft-cited goal of red tape reduction.
As stated earlier, CADA is ready to cooperate with this committee and the government on any initiative that makes life harder for criminal organizations. Our record on these issues is clear and will not waver.
Thank you for your time. I will be more than happy to respond to any questions later on.
Jeff Wilcox, Governor, Boating Ontario Association: Good morning, honourable senators; I am governor with Boating Ontario. I also own two marine dealerships, one in Ottawa and one in the Ottawa Valley. We are very pleased to speak with you folks and explain our position in the marine industry.
Boating Ontario, previously known as the Ontario Marine Operators Association, is the largest recreational boating trade association in Canada. With close to 600 members, the association represents all facets of the boating market from marinas and dealers to suppliers and manufacturers. Our members come from the private sector, as well as municipal officials and public members.
In 2007 we conducted an economic impact study that showed recreational boating represented over $25 billion when all factors were taken into account. Ontario represented approximately 50 per cent of this total. Many thousands of jobs and government revenues are generated by the boating industry. At present we are updating this report and the new study is expected during the first quarter of 2013.
For the year ended March 31, 2012, approximately 46,000 new and 58,000 used boats were sold in Canada. Since the recession of 2008, the U.S. marketplace has seen a serious downturn in the sale of recreational boats, as has the Canadian market. However, we have weathered the storm slightly better than the U.S. with a decline in the sales, but not to the same extent as the U.S. market. Canadian manufacturers have been hard hit with the change in the value of the dollar, wage rates and government costs. In fact, many of the Canadian boat manufacturers are no longer in business at this time.
The segment that has been hardest hit is our large market or cruiser market of boats larger than 25 feet. This segment has seen double-digit drops over the last five years and recently the number two manufacturer announced that they are exiting this part of the business in North America.
Another major manufacturer to make this move just happens to be a Canadian manufacturer, BRP, based in Sherbrooke, Quebec. They are also the number one manufacturer of jet boats in the marine industry and have announced that they can no longer be profitable in such a small and unstable market.
The marine industry does have its bright spots, however, and that is within the affordable aluminum pontoon business, which has seen remarkable gains in popularity, setting new sales records and attracting new business to the water.
Like the automotive industry, our regulations and controls are quite stringent to prevent money laundering of any sort. Financing has become a large portion of our business and will continue to be so in the future. Thank you.
The Acting Chair: Thank you, Mr. Wilcox.
To position our discussion today, our mandate is to review the legislation that was created in 2000. We have had one review and we are in our second review now. Our objective as a committee is to try to find ways to improve the system. In our discussion today, and thinking about how we can make it better, we welcome comments and ideas from you folks in terms of the question period. Senator Massicotte, would you like to start?
Senator Massicotte: Sure, I would love to start. This question is for all three of you. You all say that cash transactions are extremely rare. On the auto side, it is 2 per cent to 5 per cent that are cash transactions and you say this is exceptionally rare. We are talking about cash, but we are concerned here about cash transactions in excess of $10,000, that is, payment in real cash and not by credit card. Is the right percentage 2 per cent to 5 per cent?
Mr. Gauthier: It is actually under 2 per cent in our case.
Senator Massicotte: That is a lot when you think about someone coming in with a small box of $10,000 in cash because we do not print $1,000 bills anymore. What do you say when someone does that? I know you have the bank and you get a transfer of the title, but, unless you obtain information on the person, taking ID and checking his bank, what do you do? Obviously, you must be immediately suspicious when someone comes up with $10,000 cash.
Mr. Gauthier: The information is quite extensive. First, at the dealership level, you cannot even take a test drive without producing information such as driver's licence and those kinds of things. You cannot even go on a road test, let alone buy a vehicle. It is rather extensive.
The important point here is that once the vehicle is sold that money would be deposited in the bank. A lot of our dealers today feel or act as if they are regulated. Because they are obligated to report these types of cash transactions, the bank will automatically push that down to the dealer level. The dealer then applies the same kind of rigorous identification process that the bank would.
Senator Massicotte: My understanding of the regulations today is that the bank would get the cash. They then need to prepare a report saying that they got this from whomever. That is it; that is all. Their response to ``where did the cash come from'' would be the dealership, but they will not know who the customer is who actually deposited the cash.
Mr. Gauthier: They are asking that of our dealers now.
Senator Massicotte: Would that be in every case?
Mr. Gauthier: Yes, if it exceeds the amount whereby they are obligated to report.
Senator Massicotte: Let us say the person says, ``I do not need a test drive; I will buy the car from you.'' What information do you get from the buyer who comes up with the cash?
Mr. Gauthier: We get everything. Again, I only used the test drive as an example of how rigorous the screening process is at the dealer level. I was not trying to imply that is where it stands and that is all that is required. The information that you get is everything pertaining to the customer because, at the end of the day, there are insurance factors that come into play here. As for Banking, as I said earlier; these transactions need to be reported to the financial institution and the financial institutions will do rigorous credit checks. They will know where you work.
Senator Massicotte: Let us say you pay 100 per cent cash.
Mr. Gauthier: Again, that probably would not then hit the finance institution from the standpoint of doing a credit investigation, but it certainly would require you to know the driver of the vehicle, the driver's licence, who they are insured with, where they live, and their social insurance number.
Senator Massicotte: Why?
Mr. Gauthier: That would be for licensing and warranty registration purposes. I would say in the vicinity of 80 per cent to 90 per cent of people will buy after-market products and extended warranties. All of that needs to be registered at the dealership level, so it is passed on to the various insurers or re-insurers. You just do not walk into a dealership and drive away with a car.
Senator Massicotte: If you have that information, do you find it offensive that you need to file a report with FINTRAC to say you received $10,000 cash?
Mr. Gauthier: We certainly would not find that offensive. As I said in my opening comments, I am here today and we want to work you. We have a long record. We worked with the Minister of Justice regarding the new tough stolen vehicle legislation that was implemented last year and we received praise from the government with regard to our assistance in that.
Again, the point that we are trying to make is that there are only a few and a rare number of transactions that occur at the dealer level; that is all.
Senator Massicotte: Mr. Gibbs, you talked about the art market. You obviously know that real well; you dominate the market. You have given us a lot of information on your situation of being extremely rare and so on.
In your case, given your reputation and the importance of the marketplace, you have an important reputation to protect. Therefore, you do take a lot of the information about anyone coming in with cash. However, I suspect there are some people in your industry who are less conscious or more morally flexible than you are. I have read articles in the newspaper about this. Would that not be a good venue to try to find someone who is more flexible than you are and actually funnel cash through the system for the purchase of art? Art is a commodity. They can resell that piece of art back again.
Mr. Gibbs: If we are talking about over $10,000, there are not that many auctioneers who are handling paintings worth over $10,000.
Senator Massicotte: What about in the case of dealers?
Mr. Gibbs: If you are talking about dealers, again, the number of dealers who are handling secondary market works over $10,000 are few.
You may well have contacted ADAC, which is the professional association of art dealers. They would probably be the people to speak to on this.
I suppose there are opportunities that may be greater than through the auction process, because in the auction process it really is so transparent. If a dealer is presented with the opportunity to sell a painting for cash, if that is what we are talking about, then, yes, I am sure that opportunity is there. You really should be speaking to the Art Dealers Association of Canada rather than to the auctioneers, if you are talking about those potential possibilities.
The Acting Chair: To interject, we have approached the Art Dealers Association of Canada.
Ms. Reynolds: They will send a written submission.
Senator Massicotte: Mr. Wilcox, in your brief you do not give us any information on this. Are there such things as cash transactions for making significant boat acquisitions?
Mr. Wilcox: We are much like the automotive industry in the sense that we are regulated heavily within our industry. Cash transactions are minimal, given the extent of financing that comes into effect for people to own our products today. Most of our products range from $10,000 to well over $1 million in purchase price, so cash is very minimal. Is it less than 2 per cent? Yes. We are not as regulated maybe as the automotive industry is. We do not have the exact number of what that cash transaction would be. Just as the automotive industry has to report, we also have to report in excess of $10,000. In addition, we transfer all ownerships for our customers, so we need identification from them, whether the transaction is $10,000 or under $10,000. We transfer all registrations into the customers' names according to Government of Canada legislation. We have identification on those customers long before we get into a cash transaction.
Senator Massicotte: You said that currently you have to report cash transactions in excess of $10,000. Is that the case? Do you file a report with FINTRAC?
Mr. Wilcox: We do that with our banks, who request the same thing as the automotive industry. We will have on file who that customer is.
Senator Massicotte: What percentage of boats in excess of $10,000 is purchased on credit or other form of financing?
Mr. Wilcox: Most dealers claim that they are running anywhere from 65 per cent to 75 per cent financing.
Senator Massicotte: Therefore, 25 per cent to 35 per cent of your customers pay cash.
Mr. Wilcox: Yes, whether through their own means, personal drafts or other means.
Senator Massicotte: If you were asked to file the report with FINTRAC when you have a cash transaction of $10,000, would it be burdensome on your industry?
Mr. Wilcox: Not at all. Most of our regulatory systems are done well inside our business and can be handled without any issues at all. It is not cumbersome at all.
The Acting Chair: I have a quick question for Mr. Gauthier. You mentioned in your opening remarks that organized vehicle theft in Canada is a $1-billion-per-year industry. Would that area potentially be tied to money laundering and criminals?
Mr. Gauthier: That is a good question, senator. Not being of the underworld, I am not sure that I could tie one to the other.
The Acting Chair: You have your Movember moustache.
Mr. Gauthier: In my case, I tried to shave it off, but my wife said, ``After 35 years, you are not going there.'' I was not able to make a statement in support of this noble cause.
Vehicle theft, primarily the $1-billion industry we referred to, is primarily for the resale of parts within Canada and for the export of vehicles abroad. This new and stringent stolen vehicle legislation has come in and has given additional powers to customs agents, for instance, to investigate open containers in shipping yards and so on.
Primarily, the theft is for the resale of vehicles. They remove serial numbers and move the vehicles to places like Saudi Arabia or other countries.
Senator Oliver: The very question I was going to ask dealt with that $1 billion.
The Acting Chair: I apologize.
Senator Oliver: I have a different slant on it, if I may.
All three of you said that the amounts of cash are so low that there is very little opportunity for money laundering. In your paper, you said that what worries your members is the concerted effort of criminal organizations to steal large numbers of vehicles at a time, often with values in the millions of dollars. The vehicle theft rate is historically much higher in Canada than it is in the United States. That worries me. You said that organized vehicle theft in Canada is a $1-billion-per-year industry. This sounds to me like organized crime.
Mr. Gauthier: It is.
Senator Oliver: The question that our chair put today is so that we might determine ways to improve the system. What things can the automobile industry do to avoid the billion dollar loss that is taking place in Canada? Since the problem is worse in Canada than it is in the United States, what are the Americans doing to reduce the problem there?
Mr. Gauthier: That is a very good question. I cannot speak, obviously, for what is going on south of the border. As far as what is happening here in Canada, we believe the new legislation that was implemented last year or a year and a half ago was a great and powerful step in that direction. It has actually criminalized the theft of vehicles. In the past, the theft of a vehicle might not have been considered in the same category of crimes under $5,000. Today, even the modification of serial numbers is considered to be a criminal act and, therefore, subject to imprisonment. If someone is repeatedly caught stealing vehicles, even if it is for a joyride, it will result in jail time today. We think that will obviously curb that particular industry.
Dealers and insurance companies are also working together to secure their lots more than they have in the past. We hear a lot in our industry about imaging, which is manufacturers insisting on vehicle dealers and networks enhancing their facilities. The same thing applies with insurance companies who insist on such things as fences, monitoring systems, cameras, guard dogs, et cetera, to insure those properties. The insurance industry really did not insist on that before.
There has been a concerted effort on the part of our industry to work with government with regard to clamping down on this sector of criminal activity, everyone has gotten into the act. We will probably see a major dent in that area of activity over the next 5 to 10 years.
Senator Oliver: Apart from cameras, fences, dogs, et cetera, is there anything else you can recommend that this committee recommend for improving the system?
Mr. Gauthier: Given that I am here to answer your questions with regard to some of the activity related to money laundering, I am not sure what I could recommend at this time that would address your concerns. I know my business, but I am not at all familiar with the business of these other gentlemen.
The average transaction price in the auto industry is somewhere between $20,000 and $25,000. Again, while I am not wired with a criminal mind, I would have to ask myself, if I were to try to launder money, whether I would want to do that $20,000 at a time and do it repeatedly over 10 to 15 transactions, which would automatically set off alarm bells at the financial institution. The financial institutions will look at whether someone repeatedly purchases vehicles. If someone buys four, five, six or seven vehicles in a year, that immediately sets off the alarm bells at the financial institution, unless the person is a fleet buyer, and then I would look at major corporations like Bell and so on, which I do not think would raise suspicions at FINTRAC.
If you are going to try to launder money, you might as well do it in a way that you can launder a large amount of cash, $400,000 or $500,000 at a time, as opposed to making repeated transactions of $20,000. I just know it does not happen. We do not have $300,000 transactions in our industry. I would hate to point to other industries, but maybe home construction and renovations. That is an area where a large amount of cash would be required.
Senator Oliver: You said that in the vehicle business most people finance or lease. If someone walks into one of your dealers with a personal cheque for $150,000 to buy a vehicle, do any special bells go off? Maybe the cash was put into an account for money laundering.
Mr. Gauthier: A couple of bells would go off. First, it would have to be a pretty fancy car, because the average transaction is between $20,000 and $25,000. When you look at the market penetration of those kinds of sales vis-à-vis the 1.7 million cars and trucks sold in Canada, probably less than 1 per cent of all vehicle sales would fit into that category.
Second, again because of the sheer amount involved here, that would automatically be picked up at the bank. The bank would automatically say, ``Tell me about this buyer.''
There are a lot of built-in mechanisms within the typical vehicle transaction price. As I mentioned to Senator Massicotte earlier, there are a number of stakeholders involved. It comes under rigorous scrutiny. The financial institution would be asking questions, as would the insurers. The aftermarket companies would be asking questions, those being extended warranty and rustproofing companies and that kind of thing. Many people would require a full itemized detail of that transaction.
If you are trying to fly under the radar, I am not sure that you would want to be making a transaction that comes under the rigorous scrutiny of so many stakeholders.
Senator Massicotte: You say that the bank will catch it. I suppose most auto dealers make a deposit once a day?
Mr. Gauthier: Yes, once a day.
Senator Massicotte: I presume that most people would put a couple of thousand dollars down on their car purchase, so I suppose your cash deposit must be at least $50,000 to $100,000 a day. How many cars a day do most dealers sell?
Mr. Gauthier: Contrary to popular belief, a dealer who sells five cars a day would be having a very good day.
Senator Massicotte: Therefore, each day he must deposit up to $30,000?
Mr. Gauthier: Again, there is very little cash involved. Unlike my colleague in the boating industry, the finance penetration in our industry is in the low- to mid-90 per cent.
Senator Massicotte: You are saying that if you deposit $15,000 at the bank after a day's work they are immediately alarmed?
Mr. Gauthier: In cash, yes, but that would be from a single transaction.
Senator Massicotte: When you fill out your deposit slip, they do not know whether it is a single transaction or 10 transactions. You are saying the bank will catch it. I do not know if they will catch it. I am not sure that a deposit of $50,000 after a full day's work at a dealership that is selling 20 to 25 cars will ring alarms bells.
Mr. Gauthier: My understanding of the legislation is that banks are required to query any deposit of $10,000 or over. They go to the source.
Senator Massicotte: The source is you when you make the deposit. They must report that they got money from this dealership.
Mr. Gauthier: And that trickles down to the transaction itself.
The Acting Chair: Mr. Gauthier, give us the number of vehicles that a large dealer, a medium-sized dealer and a small dealer would sell per year. We can correlate that to potential volume per day, which goes back to Senator Massicotte's question.
Mr. Gauthier: The average car dealer in this country sells fewer than 400 cars a year. The average number of sales is 386 based on our last annual review.
The Acting Chair: And your biggest ones sell how many?
Mr. Gauthier: The biggest ones right now would sell about 650 vehicles a year on average.
The Acting Chair: That is sale and lease?
Mr. Gauthier: That is right; sale and lease. We report and track all retail transactions, so a sale or a lease is considered to be the same. That is published in our annual review.
The Acting Chair: Mr. Gibbs, following the same line of questioning as that of Senator Oliver, what type of circumstances could exist between auctioneers and art dealers that would stimulate potential money laundering? I am not asking you to be a criminal, but we are interested in your knowledge of the business. In your document you established the values and norms on which your business works. The first question that comes to mind is whether everyone else is working with the same values and norms as you. Within the industry as a whole is there anything to be seen on which you could construct a case that would support the idea of money laundering?
Mr. Gibbs: There is really no cash buying of art through the high-end art auction houses, and I am sure that applies to the top five auction houses in Canada, which covers almost all of the art sold. If we are to assume that money laundering is not taking place as a result of a client paying cash at the auction house, then we have to, I suppose, go one step back and work out if people are paying cash for a painting that is then sold through an auction house.
In my opening statement I made it fairly clear that, because we know our sellers as well as we do, it is a straightforward process to find out if someone is being completely honest about the provenance of the painting, that is, where they got it from.
However, let us say that were not the case and someone had bought a painting for cash, either through a private individual or a dealer, and then presented that painting to the auction house and sold it for $100,000. That, in my view, is the only way that the process could work.
How many people are able to sell a painting for $50,000? That should raise alarm bells. Private people selling paintings for $50,000 to a middleman, who then sells it through the auction to get a legitimate cheque from the auction house is a possibility. It is unlikely that they would then sell that painting through Heffel or one of the other big auction houses because, in my opinion, everything is so transparent. The transactions would be traced if there were a problem, if that person was suspected of other underhanded dealings.
Senator Oliver: You said that you know who your buyers and sellers are, but I would think that a number of major Canadian names would not buy something in their own name but rather would have professional agents who would do their negotiating and buying for them. If that is the case, what work and surveillance do you do on those agents?
Mr. Gibbs: You would be surprised, but the big people do buy for themselves, with the exception of only two or three major dealers who act on behalf of perhaps 10 clients, and not only do we know the clients but we know the dealers as well.
It would seem like a possibility, but the sort of people who are buying $50,000, $100,000 or $1 million paintings are very established in the art world. They know what they are doing. It is very difficult to break into that world as a corrupt middleman.
Senator Ringuette: My first question to all three of you gentlemen is the following: In the last five years, are you aware having participated in or been asked to provide information to a money laundering investigation?
Mr. Gibbs: In my case, no, definitely not.
Mr. Gauthier: I am not aware of anyone being asked.
Mr. Wilcox: I have no knowledge of anything like that.
Senator Ringuette: My second question is to Mr. Gauthier and Mr. Wilcox. You put a lot of emphasis on the bank following closely your activities because they would be supplying the capital for the inventory. What would happen in a scenario where a person with a high-end car or high-end boat would come to a dealer and say, ``Well, listen; I need some cash. I will give you a commission. There is no requirement for the item to be in an inventory''?
I imagine that that scenario is happening. How often would it happen? Currently there is no mechanism whatsoever for either of your organizations to send a red flag to any investigative body with regard to the activity that went on.
The Acting Chair: Your question, senator?
Senator Ringuette: Yes or no?
Mr. Wilcox: If you are asking are we accepting products to be sold for cash, without specific ID and all rest of that, we have a system in the boating industry called boat brokerage, where we will accept products from private individuals to resell through our boat brokers. Most of our boat brokers are registered under ABYC, the American Boat Yachting Corporation. They have a specific set of guidelines on how to handle boat brokerage, which goes back to ownerships of existing boats.
We must have a customer who has ownerships for not only the boat but also the trailer, because we must have in our possession two separate pieces of identification here to this product. The trailer is registered with the province where it came from; the boat is registered with the federal government. We have two pieces of ID that we need to represent that. When that is, in turn, resold, it is often sold through a financial institution. Therefore, again, they will also ask for ID of the purchaser.
Senator Ringuette: Specifically, I understand that you have the identification or presumed identification of an individual, but currently you would not alert any investigative body with regard to perhaps abnormal events.
Mr. Wilcox: Are you asking whether the dealer is purchasing the product from the customer prior to or is he reselling it for the customer?
Senator Ringuette: Either way, we would be dealing in cash that would not necessarily be deposited in your financial institution and that would also not be registered as part of your inventory.
Mr. Wilcox: As a brokerage dealer, they would not enter it in inventory, yes, for sure. However, as far as documentation goes, that still has to be full and present.
Senator Ringuette: I understand. I am saying that to have the documentation and the identification of the individual is minimal, but there is no requirement as of yet for your association to signal such an activity. We are talking here about a risk base situation. Right now, there is no requirement in the legislation for your organization to assess whether there is a potential risk and, if there is, to signal it to a body of FINTRAC, the RCMP, or whatever.
In the boating industry, there is brokerage that is paid on commission. There is no financial institution inventory involved, and so forth. I suspect that there is also some of that in the car dealership situation.
Mr. Gauthier: Respectfully, senator, I would not agree with that. The source of product inventory for our dealers is strictly from the vehicle manufacturer, for example, Toyota, Honda, and General Motors. Dealers do not act as brokers in our industry. Most consumers who wish to dispose of their current vehicle would do that through a private sale, but dealers do not take on the role of brokers, not in our industry.
If I may — because this may partially address the point where I think you are going with this and, at the same time, I would like to potentially get back to Senator Oliver's earlier question about what I would recommend or suggest — a source of vehicle sales that is currently completely under the radar, unregulated, are what we call in our industry brokers and curbers. These are people who purport to be private individuals, selling vehicles, but in essence they are selling vehicles on a commercial basis. They are a mini car dealer but completely unregulated, usually operating out of their homes. They do not have licences in order to be able to sell products. As I said, they will actually advertise one car at a time in a local paper and purport to be a private seller.
Obviously, because they are an unregulated entity with no infrastructure, they are usually a one-man operation and they have almost no overhead. Those kinds of transactions, obviously, do not attract financing arrangements. They do not need to have inventory financed. That is a large cash industry. I would suspect that most transactions done through brokers, these unregulated sellers, are done in cash.
Senator Oliver, if I were, in hindsight, to provide an area where you might want to look at with a little more scrutiny, then I would say maybe those private sellers. Again, that will be difficult. They are not organized and they do not have associations or bodies representing them. They are basically operating on the fringe of legality. They are not regulated, for instance, by the Ontario Motor Vehicle Council, OMVC, or by its equivalent in Alberta or B.C.
Senator Ringuette, as to your question, our dealers typically do not act as brokers. They do not take vehicles on consignment. It goes against the nature of their business. Our dealers are very keen and focused on turning their inventory. You can have an inventory of $4 million, $5 million, $6 million, or $7 million. Furthermore, because of consolidation today and the dealers coming together, inventories can run as high as $15 million or $20 million, on which they are paying interest every single day. It can run from $250 to $300 a day in interest on specific vehicles, depending on the cost of those vehicles. They are only focused on turning their inventory, let alone having consigned vehicles, if I might call them that, on their lots, and having their salesmen focus on that when they should be turning their own inventory. Our business is one that is completely focused on turnover of 30 or 60 days. Once a vehicle gets into the 90- to 120-day age bracket, this becomes an area of tremendous attention on the part of the dealers and their sales management staff.
Again, I understand where you are going with that, but it is not something that is common to our industry.
Senator Tkachuk: I have a number of questions for Mr. Gibbs.
Would you get offshore cheques for payments?
Mr. Gibbs: We do. Most of the payments that we have are bank wires. We do get some offshore, but they are for offshore purchases. When we are selling international paintings, which we do twice a year, many of the buyers are from Europe or further afield. Offshore cheques are less likely, but I guess it comes to the same thing.
Senator Tkachuk: How are paintings followed? Despite the bill and all the regulations we have and the big bureaucracy, we are not finding the money; that is the problem we have. My view is that they probably take the money somewhere outside Canada because it is difficult here, and deal with it in Mexico, South America or wherever. If someone buys a painting in, say, Mexico or South America and brings it to Canada, is that painting worth half a million bucks trucked, or is the owner carrying it on his arm in the airplane?
Mr. Gibbs: I have had to bring paintings back from England myself in an airplane, so it is possible to do that, yes. You have to declare it when you come into Canada, and you pay the GST, or HST now.
Senator Tkachuk: You declare it; you say you bought that painting somewhere else?
Mr. Gibbs: Yes. Generally speaking, we do not buy paintings ourselves. We are doing this for clients, so the very opposite; we are acting as brokers all the time, effectively, rather than owning the paintings.
Let us take the case where I brought a painting back from England. It was a painting that had been painted in Canada, taken by a diplomat to London, sold by his daughter 40 years later, and then brought back to Canada. That is not remotely suspicious, in my mind.
Say a private individual wanted to do that with the purpose of using the painting to launder money. If you read on the Internet about a process, yes, I understand that is a process that people use in certain countries where there are limits on taking cash out of a country. They can take a painting out of the country and then sell it in another country. That is a possibility. Again, it is not something we have come across or would expect to come across. It has not happened to us, in our knowledge, and I do not think it would be a normal thing to do, that is, using a Canadian auction house to launder money.
Senator Tkachuk: Mr. Gauthier, does your organization represent independent used car dealers?
Mr. Gauthier: No, we do not, senator.
Senator Tkachuk: Is there such an organization?
Mr. Gauthier: There is in Ontario.
Senator Tkachuk: Are they provincial or are they national?
Mr. Gauthier: They are provincial. To my knowledge, there is not an equivalent used car association that represents used vehicle dealers nationally, but there is one in Ontario.
Senator Tkachuk: They sell fairly expensive vehicles.
Mr. Gauthier: They can.
Senator Tkachuk: At least in our city, I notice a lot more high-end vehicles on the road.
Mr. Gauthier: The vehicles last longer and the quality is better. There are approximately 4 million used vehicles sold in this country. Our association represents new vehicle dealers only, that is, dealers who have a franchise from a vehicle manufacturer.
Senator Moore: Thank you, gentlemen, for being here.
I want to follow up on Senator Tkachuk's question, Mr. Gibbs. When you brought that painting back into Canada, in the example that you cited, at customs, did you have to file or show a qualified appraisal document?
Mr. Gibbs: Yes. You have to present the value of the painting, but that is purely so that the correct amount of HST is paid.
Senator Moore: What establishes the value?
Mr. Gibbs: Well, the value would be established by fair market value, which is an estimation of what the painting would sell for at auction.
Senator Moore: In your catalogues, which I subscribe to, it is a range. When you go through customs, are you saying, ``It could be worth $20,000 or we could get $30,000 for it; we are not sure''? Do you have a written appraisal from a qualified appraiser in, say, London or Canada?
Mr. Gibbs: Yes. A fair market value is an individual figure. An auction estimate is usually a conservative estimate of what we expect the painting to sell for. Let us say that we had an estimate in the catalogue of $50,000 to $80,000. It may well be that we expect that painting to sell for $80,000 and, therefore, the fair market value would be $80,000. In the case of this particular painting, my recollection is that the fair market value that was declared was marginally higher than the actual sale price.
Senator Moore: What I am getting at is how is that fair market value established? Is that Heffel's own piece of paper?
Mr. Gibbs: Yes.
Senator Moore: It is not from an appraiser in London?
Mr. Gibbs: No.
Senator Moore: Because they would not know that market?
Mr. Gibbs: Yes. They would not know that market at all. We would establish the value. If it was a private individual doing the same thing, they may well contact us or they may well contact another appraiser and ask, ``What value should I declare this at in order to be honest about the value?''
Senator Moore: Is the painting taken out of the frame and rolled up or is it carried in the frame?
Mr. Gibbs: In this case, the painting was still in its frame and put in a suitcase, which was then put into the pilot's locker. I said to the Air Canada staff, ``I would rather take this on the airplane than risk putting it in the hold,'' and they were happy to go through that process, particularly when I told them the value of the piece.
Senator Moore: Mr. Gauthier, I want to get back to a question that Senator Oliver asked you. Our vehicle theft rate is historically much higher in Canada than in the United States. You said it is about $1 billion in Canada. How much is it in the United States, and how do you know?
Mr. Gauthier: I do not know the specific numbers, senator, but I believe that that was reported through the Insurance Bureau of Canada, their association. When we say historically higher here in that Canadian in the United States, we are looking at per capita. We are taking into account the number of vehicles stolen and the population of Canada versus that of the United States.
This is only conjecture, but I suspect that was because we had much more relaxed legislation here in this country and a lot less scrutiny of the shipping yards and at customs prior to this new, more rigorous legislation that it is in place today.
Senator Moore: When you talk about the theft rate, you are talking about vehicles, on a per capita basis, Canada versus the United States?
Mr. Gauthier: Correct.
Senator Moore: I find it interesting that you would say that you do not know what their business is or how they are managing to have less theft. Would you not talk to your counterpart in the U.S. at any time and say, ``You guys seem to be doing better here in preventing crime''? Do you not do that at all?
Mr. Gauthier: No. We have a counterpart organization in the United States called NADA, but our communication to this point certainly has not been in that area. That has not been an area of focus for us.
Senator Moore: A billion dollars would get my attention.
Mr. Gauthier: It certainly would. As the Canadian Automobile Dealers Association, our organization is focused on helping our dealers to prevent vehicles being stolen from their lots.
Senator Moore: I know, but would they have a few ideas that might help you out? That is all I was wondering about.
The Acting Chair: Mr. Gauthier, if you are able to find out that fact that Senator Moore asked about, it would be helpful if you could get it to our committee because it would give us an idea of scope.
Mr. Gauthier: We will do that, senator.
The Acting Chair: That would be very helpful.
Mr. Gauthier: Thank you for the question.
The Acting Chair: We have about a minute left. Are there any closing comments by any of you three gentlemen that you would like to share with us to help us in our study? They have to be about 30 seconds each, so it is a quick little clip. Mr. Gibbs, anything you want to leave us with?
Mr. Gibbs: I am grateful that you have invited me here. From the bottom of my heart, I believe that the auction industry, particularly the art auction industry, is not the place that this kind of thing would happen because the whole process is so transparent. As to whether art is used for money laundering, it appears, from what you read on the Internet, that it has been used, but I believe that it is unlikely to happen in our industry.
The Acting Chair: Thank you. Mr. Gauthier?
Mr. Gauthier: I would like to thank you all for giving us this opportunity. If I leave you with anything today, it is that the Canadian Automobile Dealers Association is more than willing to work with you and cooperate with you with regard to any initiative that you wish to take.
My point today was to point out that, in our business, because of the nature of our business and the competitive nature of financing, few transactions are in cash. If you wish to be, I guess, as efficient as possible with regard to curbing this type of activity, there might be other areas that could probably produce better results, but we will work with you in any way that you wish.
The Acting Chair: Thank you, Mr. Gauthier. Mr. Wilcox?
Mr. Wilcox: I agree with Mr. Gauthier. We are a fledgling organization in comparison to the automotive industry. We are struggling to get as many people as possible to follow our guidelines, and it is working. The industry itself is doing quite well in comparison to a lot of other industries. We are more than willing to work with the committee in whatever way they decide. Thank you, as well.
The Acting Chair: Thank you very much. Gentlemen, we appreciate your input today and your interest in assisting us.
In our next meeting on Wednesday, December 5, we will review the draft report on money laundering, which you should receive in your offices Monday afternoon.
On Thursday, December 6, we will have Gérald Cossette, the new director of FINTRAC.
That is our schedule for next week. I thank you all for your attendance and adjourn the meeting.
(The committee adjourned.)