Finance Committee on Nov. 2nd, 2006

[The Chair, Conservative, Brian Pallister]

Pursuant to the order of reference of Tuesday, October 24, 2006, we are here today on Bill C-25, An Act to amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the Income Tax Act and to make a consequential amendment to another Act.

Welcome to our witnesses this morning. We'll begin with a brief presentation.

Horst Intscher, director, is here. Welcome, sir, and over to you.

[Horst Intscher, Director, Financial Transactions and Reports Analysis Centre of Canada]

Thank you, Mr. Chairman.

Allow me to briefly introduce my colleagues: Glynnis French, Deputy Director, Strategies and Partnerships; Peter Bulatovic, Assistant Director, Tactical Financial Intelligence; and Yvon Carrière, our Counsel.

I'm very pleased to have the opportunity to make some opening remarks about FINTRAC and what we do. I will also say a few words about why the provisions set out in Bill C-25 are important to FINTRAC and to Canada's overall anti-money-laundering and anti-terrorist-financing efforts.

Following my brief remarks, I will ask Mr. Bulatovic to speak even more briefly to an example of a sanitized FINTRAC case disclosure. I think an illustrative case is perhaps the best way of showing how our intelligence product can capture the complexity of money laundering.

FINTRAC was created by the Proceeds of Crime, Money Laundering, and Terrorist Financing Act as an independent agency, and we are required to operate at arm's length from entities to which we can disclose information. I will touch upon the reasons for those arrangements a little later on.

FINTRAC is Canada's financial intelligence unit, or FIU. Our mandate is to analyze financial transaction information that a wide range of financial reporting entities are obliged to report to us. Upon analysis, and if there are reasonable grounds to suspect that information we have received would be relevant to an investigation of money laundering or terrorist financing, FINTRAC must disclose certain portions of that information to the police or to CSIS for investigation. In short, we provide financial intelligence leads to law enforcement and national security investigative agencies.

It's also worth noting what FINTRAC is not. We are not an investigative body and we do not have powers to gather evidence or lay charges. FINTRAC does not investigate or prosecute suspected offences. Instead, we are an analytical body that produces financial intelligence to be disclosed, if appropriate, to help further investigations conducted by law enforcement and security agencies.

On a day-to-day basis, FINTRAC receives reports on several kinds of financial transactions from financial reporting entities. We analyze these data in combination with information from other sources, such as law enforcement databases, commercially or publicly available databases, and sometimes, information from foreign financial intelligence units.

What we specifically look for are financial transactions or patterns that don't quite pass the sniff test and that give rise to suspicions of money laundering or terrorist financing. As you can imagine, the movement of illicit funds is often a well-hidden and complex affair involving hundreds of transactions as well as dozens of individuals and companies. Using state-of-the-art technology and excellent analytical skills, our analysts piece together the information and create a comprehensive picture of money flows. We draw a map that police or CSIS can use to examine the money flows and the suspected criminal activity.

Although we are required to operate independently and at arm's length from the police and CSIS, our objective is to support and facilitate their work by providing intelligence leads to them. We are one element in a larger constellation of organizations whose collective purpose is to combat money laundering and terrorist activity financing. Other elements include police at the federal, provincial, and municipal levels; security agencies; prosecutors; and the courts.

FINTRAC is situated near the front end of the process, and the information we provide is intended to assist other agencies to achieve the broader objectives of the act.

I'm pleased to say that the regime that has been put in place here in Canada is working. It's robust and successful and is widely recognized as such internationally.

I'm also pleased that FINTRAC makes an important contribution to that success. As we indicated in our annual report tabled a month ago, in 2005-06 we produced 168 case disclosures of suspect financial activity involving more than $5 billion in transactions. In fact, since FINTRAC began its operations five years ago, we have made a total of 610 case disclosures involving transactions valued at $8.2 billion.

The scope and complexity of our disclosures have also grown dramatically over the past few years, from an average of $3 million per case in 2003-04 to $30 million per case last year, and about 10% of our cases last year each involved transactions well in excess of $50 million.

Some 32 domestic law enforcement agencies and 10 foreign counterpart organizations have received disclosures from FINTRAC. I'm gratified that more and more financial intelligence contributed by FINTRAC is being reflected in investigations, charges, and prosecutions.

I'd also like to say a few words about the protection of privacy.

Our act was carefully crafted to provide the highest possible protection for personal information, while also making it possible for some information to be disclosed to law enforcement to facilitate the detection and deterrence of serious criminal activity.

The protections begin with the very nature of the institutional arrangements that establish FINTRAC as an independent and arm's-length entity that receives and analyzes reported financial transaction information and can only pass on such information if particular tests are met.

The information we hold cannot be accessed by any other outside body, except by a court-granted production order, and the act provides for serious criminal penalties to be applied to the unauthorized disclosure of information.

Our mandate entrusts us with a considerable amount of personal information from individuals and businesses across this country. Protecting it is a responsibility we take very seriously.

Members of this committee have expressed some concerns about the potential impact of the legislative changes on upholding privacy rights. I want to assure you that I share your preoccupation with privacy protection and firmly believe that safeguarding personal information is and must be the cornerstone of any effective regime.

Canada has a strong anti-money-laundering and anti-terrorist-financing regime in place, and we can be very proud of it, but we cannot rest on our laurels. Methods used to launder money are constantly changing. International standards that all countries are expected to meet are also rising. Adjustments are necessary to the legislative framework to keep pace with these changes.

In this regard, I want to note that there are three key thrusts to the proposed legislative package that are of importance to FINTRAC. They are: expanding the coverage of the act to new entities and professions; strengthening the deterrence provisions of the act; and expanding the range of information that FINTRAC may disclose.

Bill C-25 will expand the coverage of Canada's anti-money-laundering/anti-terrorist-financing regime by bringing additional business sectors within the ambit of legislation and regulations; for example, dealers in precious metals and stones, and lawyers. These sectors have an identified vulnerability to money laundering, and their inclusion will strengthen Canada's efforts to combat both money laundering and terrorist activity financing.

Second, the bill will strengthen the deterrence component of the regime by creating a registry for money service businesses and establishing a system of administrative monetary penalties. These proposed measures will improve compliance with the reporting, record-keeping, and client identification provisions of the law. This will not only contribute to FINTRAC's analysis, but will greatly strengthen the general deterrence of money laundering and terrorist activity financing.

Third, Bill C-25 will make it possible to enrich the intelligence product that FINTRAC can disclose to law enforcement and national security agencies by including some additional information in our disclosures while at the same time continuing to scrupulously protect the privacy rights of Canadians. This would respond to the needs of law enforcement and make FINTRAC's core product even more useful to them.

In conclusion, FINTRAC is very supportive of the amendments proposed in Bill C-25, which will ensure Canada's anti-money-laundering and anti-terrorist-financing regime remains strong and effective well into the future.

Thank you. I'd now like to ask my colleague, Peter Bulatovic, to give you a very quick presentation of a sanitized case that shows the work we do, how we do it, and what the results are from it.

[Peter Bulatovic, Assistant Director, Tactical Financial Intelligence, Financial Transactions and Reports Analysis Centre of Canada]

Thank you, Director.

Now, Mr. Chair and members, I'd like you to look at the first chart, entitled “Business Process Flowchart - FINTRAC”, which you have in hand. I'll briefly describe the chart, which will make it possible to summarize the information we receive and to explain who we receive it from, before focusing on the way we conduct our analyses.

I'd like to draw your attention to the left portion of the chart, in the box entitled “Receiving Information”.

We start with financial transactions, including deposits and fund transfers, when they are made by entities included in the list on the right, such as banks, savings and credit unions, foreign exchange brokers and casinos.

These entities must file reports with FINTRAC when they make electronic transfers to Canada or outside Canada, or deposits in the country of CDN $10,000 or more. They must also report dubious transactions, regardless of the amounts involved.

In the lower left corner, you see that we also receive reports of cross-border currency and monetary instruments of $10,000 or more, as well as reports of currency seizures.

Virtually all this information is forwarded electronically and entered in our data base. Our act also enables us to access information retained for law enforcement and national security purposes, as well as commercial and public access data bases.

We are also able to request information from foreign financial information units.

Lastly, any person may willingly provide us with information. Our partners at law enforcement agencies can also forward information to us on a voluntary basis.

How do we analyze that information? We very much rely on our staff and technology.

As regards technology, electronic reception of financial information enables us to use IT systems to sort reports and link financial transactions.

In the initial examination of these related transactions, we target trends in dubious financial activities and ask one of our analysts to pay special attention to them.

In developing a case, analysts look at partnership transactions. They then check the identities of individuals and businesses concerned by the transactions and the trends in dubious financial activities.

When an analysis shows reasonable grounds to suspect that the financial activity could be relevant to a money laundering investigation or the financing of terrorist activities, a report is prepared explaining the reasons for the communication.

I would now like to refer to the second graphic. It is what we call a link chart. It depicts a money laundering case.

This chart demonstrates our analysis of financial transactions and other sources of information that enabled us to link three separate clusters of suspect financial transactions into a larger financial network for investigators. These separate clusters are identified as boxes A, B, and C.

Let me begin by describing the activity in box A. A foreign financial intelligence unit advised FINTRAC of a money laundering investigation of four individuals and a business involved in wiring funds between a number of accounts within a bank in that foreign country. The individuals involved provided Canadian addresses and identification and were described as Canadian. The business would wire funds through several foreign countries, to and between accounts over which the Canadians held power of attorney. The FIU found this activity suspicious but had very little further information.

Upon receipt of this information, FINTRAC tasked an analyst to search our database for financial transactions to determine if there was any financial activity involving the individuals and the business identified. According to the financial transactions database, the company wired several millions of dollars to multiple companies in Canada, as can be seen on the chart between boxes A and B.

Searches of open sources conducted to obtain additional contextual information on the Canadian companies identified in box B yielded very little or no information. We found little or no information for the companies in the way of advertising, telephone directory information, or company websites. We were able to confirm that one of the companies was incorporated in Canada. However, the nature of the business was not identified and did not appear to justify the level of financial activity between the companies identified in boxes A and B.

Further analysis revealed a suspicious transaction report filed by a Canadian reporting entity on one of these companies. The reporting entity stated that the accounts were opened several years ago and were relatively dormant. The dollar value of the wire transfers received into the two Canadian business accounts suddenly began to increase. It further stated that over a short period of time, millions of dollars were wired to the accounts held by this business with no rationale as to why the increase occurred. Wires received from various foreign companies originated in a country with weak anti-money-laundering controls. In addition, the reporting entity indicated that the cheques were being issued from a foreign currency exchange and being deposited to the company's account, which was inconsistent with the company's business identified.

Several other companies were also found to be operating at the same address. Further, what is important, when the address changed for one of the companies, which occurred several times in the year, all the other companies followed suit with a change of address. Two of the companies shared the same directors and received wire transfers from the same country.

Our analysis then led us to another company, which enabled us to link the financial activity found in box C. It is this company, company 7 in the centre in the chart, that is key in our analysis of this case, and I will discuss it now.

A suspicious transaction report was filed on the company in box C involving the two Canadians originally identified by the foreign financial intelligence unit. The report stated that over a period of five months, two individuals received fourteen wire transfers from four different companies. Efforts had been made to contact the individuals, but the mail was returned unopened and the phone number provided was incorrect.

The reporting entity refused the receipt of several wire transfers. As a result, a male appeared at the reporting entity and claimed that funds were owed to him from his business overseas. When asked about the wires from the various foreign companies, he did not know the companies or why they were sending the payments.

It is unusual, indeed, that a customer would receive funds from multiple businesses and not know who these businesses were or why the funds were being sent.

We also received voluntary information from a Canadian law enforcement agency on the same two individuals. It was suspected that the individuals were using their personal accounts to launder proceeds of crime. As a result of our analysis, and all the information available to us, we suspected that the financial transactions identified in the chart would be relevant to investigation or prosecution of a money laundering offence.

The internationally recognized indicators of money laundering that follow were identified as applicable in this case.

In this particular case we had large and/or rapid movement of funds. We had large incoming wires on behalf of foreign customers with little or no explanation. We had unexplained disbursal of funds to multiple businesses. We had use of multiple accounts at a single financial institution for no apparent legitimate purpose. We had two ongoing investigations, one by the foreign financial intelligence unit, the other one by local law enforcement. We had reactivation of a dormant account where there was atypical business account behaviour.

If you look at the top right-hand side of the chart, you see that what was interesting in this case is that we were provided little information by the FIU when the information came in. In the bottom right-hand side of the chart is voluntary information from the law enforcement agency. Through analysis and looking at our records, we were able to identify the key company, which is company 7, in the centre of your chart, linking the three boxes.

Overall in this case, we received from eight different reporting entities in excess of 400 electronic transfer reports, several large cash transaction reports, as well as suspicious transaction reports. The case identified suspect financial transactions in excess of $21 million U.S. and $2 million Canadian.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you, sir.

Are there any further presentations? No?

Thank you very much, gentlemen, for your presentations.

Who's looking after FINTRAC? You seem to have quite a few guests here.

[Horst Intscher]

We still have a few people back at the ranch.

[The Chair, Conservative, Brian Pallister]

People taking calls and what have you? Okay, that's good.

[Horst Intscher]

Not all these people here are from FINTRAC; some of them are bank regulators.

[The Chair, Conservative, Brian Pallister]

All right. Very good. Welcome to our other guests as well.

We'll begin with five-minute rounds, Mr. Pacetti.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman. I guess we're popular this morning.

I'm trying to focus on the job at hand that FINTRAC has. I'm going to try to stay away from the privacy issues. I think some of my other colleagues will probably be interested in that aspect. I want to make sure that FINTRAC has the tools to do the job they need to do.

Are you happy with the amendments in this legislation, Bill C-25? Shouldn't we be looking to put in more amendments so that there's more interaction between departments?

I refer to the audit of the Auditor General, in chapter 2, where we found that the administration would “limit the value” of FINTRAC's disclosure to law enforcement and security agencies, and it goes on and on: law enforcement agents told us the tombstone data they receive is “too limited to justify launching investigations”.

I have a problem with that. I had a problem with it when FINTRAC appeared before the finance committee. I think FINTRAC should be given more ability to exchange information.

What's your feeling on that?

[Horst Intscher]

I think the OAG's observation was well-founded, but it was a snapshot in time about three years ago. Even before we arrived at the stage of seeking some amendments to the legislation, we had already taken a number of steps that allow us to expand the range of information we can disclose, in terms of the way we layer the transactions we can disclose by showing greater linkages between the different players, and so on, and by being able to disclose publicly available information in relation to the case as well.

The amendments that are proposed in the legislation we find quite appealing. They will go a long way to enriching the—

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I don't want to interrupt, but we're limited in time. I'm not asking you how you find the amendments that are in there, because I have no problem with the amendments, but about what amendments are missing that you would like to see. That's what my question is.

[Horst Intscher]

I think for the moment this is a very thorough package of amendments. But because the nature of money laundering activity and the patterns people resort to are constantly changing, these amendments will carry us through for two or three years, and then no doubt we'll be back for some additional ones as we identify new vulnerabilities and new methods that are being used.

The package of amendments that is proposed here is a very good one, and it will allow us to significantly—

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

So you don't feel you're going to have any restrictions when you're doing an investigation or that in conducting an investigation you'll be restricted in disclosing information to law enforcement or other security agencies?

[Horst Intscher]

There are always privacy concerns and privacy considerations in making any disclosures, but I think with this package of amendments we will be able to provide a richer and more contextual set of disclosures that will make it much easier for law enforcement when they receive our disclosures to discern what's going on.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I understand. Again I apologize for interrupting, but I have a problem when you state that you have 168 cases that you've disclosed, but you're not really sure what the end results were with the 168 cases that were disclosed. You don't know what the final product was in terms of leading to arrest, or money being recovered, or....

[Horst Intscher]

Let me begin by saying that the process of investigating and prosecuting a money laundering case, particularly if it has some complexity, is one that can drag on for a number of years.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I understand that part, and that's why I'm asking what would help you to make your job easier, so that we do actually prosecute the people who need to be prosecuted. That's really the question. If you're telling me that it's all in the legislation, then I'm okay with that.

[Horst Intscher]

I think actually the people who should be prosecuted are, by and large, being prosecuted, but it does take a lot longer. If we make—

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I understand that part. Is it as a function of the information you've given to the prosecuting agencies?

[Horst Intscher]

I'm trying to answer your question, sir.

We carry out a feedback survey from law enforcement in respect of our disclosures, because we're constantly trying to enhance their attractiveness and their usefulness.

Over the past year, 74% of the disclosures that we've made to law enforcement were deemed to relate to persons or businesses that were of interest to the police; 60% provided names and leads on people they had not previously known about; 74% provided useful intelligence; and 24% provided major contributions to their investigations.

Those are fairly substantial approval ratings. In my discussions with my counterparts in other countries, they would salivate at the prospect of getting approval ratings of that kind from their law enforcement agencies. Typically, organizations like ours will disclose more cases than the police are able to absorb and are able to investigate.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Okay. Thank you.

[The Chair, Conservative, Brian Pallister]

We'll continue with Mr. Paquette. You have five minutes, sir.

[Pierre Paquette, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Thank you for your evidence. It enlightens me a little, but I admit there's still a lot of work to do before we can completely decipher this chart.

I have a first question, and, as Mr. Pacetti says, we have little time.

In light of the presentation you've made, what more does Bill C-25 do? Ultimately, you've made a presentation to us on the method that already enables you to get results. So how would Bill C-25 add instruments that you don't have, compared to what you've presented to us?

[Peter Bulatovic]

What it would allow us to do is actually disclose more information.

For example, two key parts in the bill are reasons for suspicion and the indicators. At this point in time, we cannot disclose the indicators or reasons for suspicion. I think those are two new key elements, among other elements, in disclosures that we'll be able to do in the future when the bill passes.

[Pierre Paquette, Bloc, Joliette, QC]

You mentioned in your presentation that the protection of personal information was a concern. That's already been raised in previous meetings. In the document you presented, I see the following statement: “The information we hold cannot be accessed by any other outside body, except by a court-granted production order.” That “we” is FINTRAC.

Can you explain to us how an organization that doesn't have access to your information could ask a court for access to information the existence of which it is not supposed to be aware of?

Or else that organization is trying its luck, like in the lottery.