Witnesses provided comments with respect to how the regime could be improved in intelligence gathering and enforcement measures, which include:

• prosecution and legal standards,
• bulk cash and bearer instruments,
• Geographic Targeting Orders,
• trade transparency units, and
• compliance and enforcement measures.

A.  Prosecution and Legal Standards

(i) Background

Money laundering is a criminal offence under section 462.31(1) of the Criminal Code, and requires proof, beyond a reasonable doubt, that the accused intended to conceal or convert property or proceeds that they knew or believed were the result of a designated criminal offence,[20] or that they were wilfully blind to such a fact. In this context, “knowledge” is the subjective awareness of a fact that is objectively true, namely that the accused would be found guilty if they were, in fact, laundering proceeds of crimes and they were subjectively aware of that fact. “Willful blindness” is the subjective awareness of circumstances that should alert a person to the truth of a fact, and is accompanied by a deliberate refusal to confirm its existence. “Belief” is the subjective perception that a fact is true, whether or not it is objectively true.

“Willful blindness” is distinct from both “negligence” and “recklessness,” as discussed in R. v. Sansregret:

Negligence is tested by the objective standard of the reasonable man. A departure from his accustomed sober behaviour by an act or omission which reveals less than reasonable care.… In accordance with well-established principles for the determination of criminal liability, recklessness … is found in the attitude of one who, aware that there is danger that his conduct could bring about the result prohibited by the criminal law, nevertheless persists, despite the risk. It is, in other words, the conduct of one who sees the risk and who takes the chance. [Emphasis added]

In the U.K., the case of R v Anwoir [2008] resulted in it no longer being necessary for the Crown to prove – with respect to a money-laundering offence – that the crime from which the proceeds stemmed from was a particular crime or category of crime (such as Canadian designated offences), and instead can rely on the “irresistible inference” from the circumstances that the proceeds could only be derived from crime. For example, if the accused leads a lavish lifestyle but cannot account for the legitimate source of his/her funds, the Crown could argue that the circumstances justify such an irresistible inference and would not have to prove that funds stemmed from any particular crime or category of crime.

(ii) Witness Testimony

The RCMP indicated during their committee testimony that professional money launderers are aware that they have to be linked to the predicate offence to be convicted of money laundering, and have structured their criminal business accordingly to insulate them from the predicate offences, which makes it very difficult for the RCMP to investigate and prosecute these individuals. In order to address this, the RCMP recommended lowering the legal standard for an accused’s awareness of the criminality of the funds from wilful blindness to recklessness.

Marc Tassé recognized the difficulty prosecutors encounter in proceeding with money-laundering charges because of the complexity of linking money laundering to predicate offences. He explained that Canada’s reputation is in jeopardy, as terms such as “snow washing” and the “Vancouver model” of money laundering are now associated with Canada, and therefore recommends that the government bring forward Criminal Code amendments to make money laundering easier to investigate and prove, and suggests that additional resources be made available to law enforcement and prosecutors to pursue money-laundering crime. Canadians for Tax Fairness also made reference to “snow washing,” where criminals make use of legitimate Canadian investments – such as real estate – to “clean” the proceeds of crime, and argued in favour of stiffer penalties and greater transparency to be built into the AML/ATF system. Peter German, who appeared as an individual, noted that the RCMP largely abandoned their AML work to focus their efforts on terrorism in the wake of the 9/11 attacks, and are only now re-entering the area.

During the Committee’s travels, certain witnesses contended that the Canadian AML/ATF regime is not affective at curtailing sophisticated money laundering operations, though it may be more successful at curtailing smaller criminal operations. Some noted that there is a perception that Canada does not appear to take money laundering seriously, and the addition of dedicated prosecution units, expert witnesses, as well as specialized judges and courts would provide both perceived strength and actual benefit to the AML/ATF regime.

These witnesses also told the Committee that the U.K. prosecutes approximately 1,500 individuals for money laundering each year and has recovered over $2 billion since 2002 under their AML legislation. In addition, witnesses noted that the U.K. identified professional money laundering as the biggest problem for the AML regime in 2015, and remains the biggest problem today.

With respect to individuals charged with terrorist financing, witnesses believed that the U.K. prosecutes approximately five individuals each year, and they noted that public understanding of terrorist financing does not reflect the modern reality of the crime. In particular, they mentioned that the five most recent terror attacks in the U.K. were perpetrated at a total cost of under £4,000 and did not involve large or international transfers of funds, but rather inexpensive acts such as renting a vehicle to be used as a weapon. They contended that combatting terrorist activity through a financial lens should now consist of behavioural analysis software that has access to the suspect’s financial data. Other witnesses advocated that all AML risk analysis should move towards implementing this type of behavioural analysis, as opposed to purely financial pattern analysis.

B.  Bulk Cash and Bearer Instruments

(i) Background

The ownership of bearer shares, bearer certificates and bearer share warrants – which function like common share ownership – is not registered with the associated corporation, as these instruments exist only as a physical document the owner carries. The Financial Action Task Force and the Global Forum on Transparency and Exchange of Information for Tax Purposes have identified bearer instruments as vehicles for laundering money and financing terrorism.

Bill C-25, An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act and the Competition Act received royal accent on 1 May 2018, and amended the CBCA and the Canada Cooperatives Act to clarify that bearer shares, bearer certificates and bearer share warrants are prohibited from being issued. Under the Act, shareholders or cooperative members that currently hold such instruments can convert them into a registered form of security, such as a common share. Furthermore, in December 2017, the federal and provincial/territorial finance ministers agreed in principle to pursue amendments to federal, provincial and territorial corporate statutes to eliminate the use of bearer shares and bearer share warrants or options and to replace existing ones with registered instruments.

FATF’s most recent Mutual Evaluation of Canada identified bulk cash movement as a serious concern with respect to money laundering, as little to no record of ownership or origins may be ascertained. Furthermore, FATF notes that businesses that deal in large volumes of cash are highly vulnerable to money laundering and/or terrorist financing, such as: casinos, bars, restaurants, dealers in precious metals and stone, as well as the real estate sector.

(ii) Witness Testimony

André Lareau, who appeared as an individual, stated that bearer shares are commonly used in relation to tax evasion and noted that despite the amendments made by Bill C-25, bearer shares that have already been issued will continue to remain legal, and their holders are under no obligation to convert them into registered securities. He felt that the example of the Netherlands – where bearer shares are no longer allowed – should be explored by the government, as the system implemented in that jurisdiction allows holders of bearer instruments a period of two years to exchange them for register securities, after which they are deemed void. Transparency International Canada and Christian Leuprecht, who appeared as an individual, also recommended eliminating bearer instruments beyond the steps that the government implemented through Bill C-25.

The Committee heard testimony with respect to the Agreement to Strengthen Beneficial Ownership Transparency; in particular, reference was made to point 2 which states that “Ministers agreed in principle to pursue amendments to federal, provincial and territorial corporate statutes to eliminate the use of bearer shares and bearer share warrants or options and to replace existing ones with registered instruments.” Christian Leuprecht also supported amending both federal, provincial and territorial corporate statutes to eliminate the use of bearer instruments and to replace existing ones with registered instruments.

With regards to the movement of large quantities of cash, Christian Leuprecht suggested that only the actual account holder should be allowed to make cash deposits into an account, and above a certain limit, such deposits should only be allowed in person subject to identification requirements. Furthermore, he went on to promote the removal of $100 and $50 bills from circulation, as most Canadians do not use large bills for the majority of transactions, and these denominations are the greatest facilitator of money laundering. The Canadian Jewellers Association suggested that all luxury product dealers (i.e. cars, boats, works of art) should be required to report large cash transactions to FINTRAC. This position is supported by the Government of British Columbia. Moreover, it suggested that luxury items are of interest to money launderers because there is no tracking by government of cash purchases, and – with respect to bulk cash – that approximately $5 million per month of “suspicious cash transactions” entered the financial system through the casinos of British Columbia.

C.  Geographic Targeting Orders

(i) Background

Within the U.S., Section 5326 of the Bank Secrecy Act authorizes FinCEN to impose specialized reporting and recordkeeping requirements on financial institutions and nonfinancial trades or businesses over a limited time period. The requirements are imposed through a Geographical Targeting Order (GTO) that specifies the entities and geographical areas covered. FinCEN may issue a Geographical Targeting Order on its own initiative or at the request of law enforcement. For example, FinCEN issued a GTO in 2016 with respect to certain high value real estate markets, and provided detailed information to assist with their compliance to the order. Orders of this nature are currently not provided for in the PCMLTFA.

(ii) Witness Testimony

The Government of British Columbia recommended that the PCMLTFA be amended to enable law enforcement to utilize geographic targeting orders similar to those used in the United States. In their brief, they reasoned that geographic targeting orders can be useful tools in geographically specific high-risk sectors. This sentiment was also shared by the Canadian Life and Health Insurance Association who believed that geographic targeting orders could be a useful addition to Canada’s AML/ATF regime and could also provide reporting entities with useful information. Transparency International Canada also supported the implementation of geographic targeting orders, and went on to elaborate that these orders may provide the flexibility to the federal government to establish, on a temporary basis, obligations targeting persons or entities in certain geographic locations that represent a higher risk for money laundering and terrorist financing.

While traveling, the Committee heard from several witnesses who identified GTO’s as particularly useful to the U.S.’s AML/ATF regime.

D.  Trade Transparency Units

(i) Background

In order to combat trade based money laundering, which aims to misuse international trade to transfer value, the U.S. have established the Trade Transparency Unit to compare domestic and corresponding international trade data to detect and investigate anomalies that may be the result of trade based money laundering. U.S. Immigration and Customs Enforcement initiated the Trade Transparency Unit concept in Washington, D.C., in 2004 and subsequently established foreign Trade Transparency Unit partnerships with several countries.[21]

(ii) Witness Testimony

In their written submission, Transparency International Canada proposed strengthening the detection of trade-based money laundering by designating the Canada Border Services Agency’s imports and exports database for purposes related to law enforcement, and share access to it with FINTRAC in order to enhance FINTRAC’s ability to collect and produce financial intelligence on potential trade-based ML/TF. Additionally, Transparency International Canada indicated that the Canada and the U.S. should harmonize the collection and reporting of monetary instruments at the border.

During the Committee’s travels, witnesses noted that criminal typologies are changing rapidly, and sophisticated crime is becoming increasingly international in nature. Domestic financial intelligence units must adapt to this typology by building more co-operative international approaches to AML/ATF. They also noted that currency entering Canada in a manner that is designed to avoid other jurisdictions' currency controls is not necessarily the proceeds of criminal activity.

E.  Compliance and Enforcement Measures

(i) Background

FINTRAC and FinCEN are under the authority of the Department of Finance and the Department of the Treasury, respectively, which are responsible for federal finances. However, the USA Patriot Act authorizes FinCEN to undertake certain activities, described in Chapter 2, that FINTRAC is not authorized to undertake. Meanwhile, the United Kingdom Financial Intelligence Unit reports to the Home Office, which is responsible for security, counterterrorism, immigration and policing.

Having FINTRAC under the authority of the Department of Finance reinforces the links that exist between FINTRAC and Canadian financial institutions; it also ensures that developments in the financial system are quickly communicated to FINTRAC. That said, this structure could result in a degree of detachment between FINTRAC and law enforcement agencies.

Parts 4.1 to 6 of the PCMLTFA describe offences under the Act as well as the monetary penalties and other types of punishments that can be imposed by FINTRAC against entities that violate the Act. Section 73.22 of the PCMLTFA provides FINTRAC with the discretionary power to publicize certain information related to an administrative monetary penalty when proceedings with respect to a violation have ended, including all opportunities for appeal.

In the 2016 case of Kabul Farms Inc. the Federal Court of Appeal found that there was no transparency in the administrative monetary penalty FINTRAC levied against the corporation, which was inconsistent with FINTRAC’s obligations of procedural fairness. The court quashed the penalties and returned the matter to FINTRAC for re-determination of whether a penalty should be imposed and, if so, in what amount.

Subchapter II of the Bank Secrecy Act and its corresponding regulations authorize FinCEN to impose civil money penalties for violations of the Act and its regulations in the United States. For each failure to file a report, FinCEN may impose a civil money penalty equal to the amount involved in the transaction between $25,000 and $100,000 USD. Furthermore, FinCEN may impose a civil money penalty of $25,000 for each day that a financial institution has failed to implement a reasonably designed AML program.

Section 311 of the Patriot Act, which grants the Secretary of the Treasury the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, institution, class of transaction, or type of account is of “primary money laundering concern,” to require domestic financial institutions and financial agencies to take certain “special measures” against that entity in order to restrict their access to the U.S. financial system.[22]

In addition, section 319(b) of the Patriot Act allows the government to seize illicit funds located in foreign countries by authorizing the Attorney General or the Secretary of the Treasury to issue a summons or subpoena to any foreign bank that maintains a correspondent account in the U.S. for records related to such accounts. Section 352 of the Act requires financial institutions to establish anti-money laundering programs, which at a minimum must include: the development of internal policies, procedures and controls; designation of a compliance officer; an ongoing employee training program; and an independent audit function to test their programs.[23]

(ii) Witness Testimony

The Investment Industry of Canada, Transparency International Canada and Christian Leuprecht, who appeared as an individual, recommended publicizing the names those who have been found to have violated their obligations under the PCMLTFA. The Canadian Life and Health Insurance Association added that regulators should wait until the conclusion of proceeding before publicly naming violators of the Act. They also support the publication of criteria for publicly naming an offending entity as well as the criteria for the calculation of monetary penalties. However, Transparency International Canada indicated that penalties for non-compliance should be sufficiently large to dissuade entities from simply factoring them into their costs of doing business. Canadians for Tax Fairness suggested that there is need for stiffer penalties to improve transparency.

From the perspective of the regulators, the Department of Finance indicated that reporting entities are also partners in the AML/ATF regime, and the use of discretion in publicizing the names of those who violate their AML/ATF obligations can facilitate this partnership. In FINTRAC’s opinion, the government could consider whether the PCMLTFA’s penalty calculations should be directly in the regulations, but that it is currently conducting a review of its administrative monetary penalty program as a consequence of the decision of the Federal Court of Appeal in Kabul Farms. It further explained that they are consulting with the Department of Justice in this review, which they hope will be completed by summer 2018.

Christian Leuprecht suggested the expansion of FINTRACs mandate to allow for the legal authority to conduct investigations in addition to passive analyses.

While traveling, witnesses informed the Committee that the U.K.’s Financial Conduct Authority requires corporations to appoint an AML manager among its senior employees and publicizes the names of companies that are fined for AML violations. In addition, they mentioned that the U.K.’s HMRC and OPBAS, and the U.S. Treasury also publicize entities found to commit AML violations in their respective areas of oversight.

Witnesses also speculated that the expansion of FINTRACs mandate to allow for the legal authority to conduct investigations may be beneficial, but noted that the structure of a country’s anti-money laundering and anti-terrorist financing regime reflects that country’s needs.

Chapter 3 Recommendations

Recommendation 20

The Committee recommends, in recognizing the difficulty prosecutors have in laying money-laundering charges due to the complexity of linking money laundering to predicate offences, that the Government of Canada:

• bring forward Criminal Code and Privacy Act amendments in order to better facilitate money laundering investigations;
• any necessary resources be made available to law enforcement and prosecutors to pursue money-laundering and terrorism financing activities.

Recommendation 21

That the Government of Canada expand FINTRAC oversight to ensure that all casino operators, employees, and frontline gaming personnel are trained in anti-money laundering legislation.

Recommendation 22

That the Government of Canada establish an information sharing regime through FINTRAC and provincial gaming authorities to ensure more accurate and timely reporting.

Recommendation 23

That the Government of Canada amend the PCMLTFA to enable law enforcement agencies to utilize geographic targeting orders similar to those used in the United States.

• Federal, provincial, and territorial governments should collaborate to close the loophole regarding the transaction of sales between parties who are not subject to PCMLTFA reporting requirements, which creates vulnerability for money laundering to occur.

Recommendation 24

That the Government of Canada follow the example of the Netherlands, which gives holders of bearer shares – now prohibited – a fixed period of time to convert them into registered instruments before they are deemed void.