Finance Committee on Nov. 2nd, 2006

[The Chair, Conservative, Brian Pallister]

We are in session.

Welcome, first of all, to our witnesses and committee members.

Pursuant to our order of reference of Tuesday, October 24, 2006, this is 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.

Thank you for your patience in waiting for us to get here, witnesses. We have just come from another discussion that was pertinent to this topic.

We will begin with a presentation from the Canadian Bankers Association, Warren Law, senior vice-president.

Welcome, and proceed. Five minutes to you.

[Warren Law, Senior Vice-President, Corporate Operations, and General Counsel, Canadian Bankers Association]

Thank you very much, Mr. Chairman.

Honourable members of the committee, I would like to thank you for the opportunity to appear today to provide the views of the banking industry on Bill C-25. My name is Warren Law. I am the senior vice-president and general counsel of the Canadian Bankers Association. With me today is Ron King, who is the chief anti-money-laundering officer at the Bank of Nova Scotia.

I would like to make some introductory comments, and then of course we'd be pleased to answer your questions.

The Canadian banking industry recognizes its key role in combating money laundering and terrorist financing. It has consistently supported the efforts of the Government of Canada in developing an effective regime for these purposes. Indeed, we believe that the enactment of the proposed Proceeds of Crime (Money Laundering) and Terrorist Financing Act provides a solid platform for constructing an effective AML/ATF system.

The banks have invested tens of millions of dollars in the development and implementation of automated systems to meet the regulatory standards placed upon them. The banking industry has been proactive in meeting its obligations. We will continue to take these obligations very seriously, but there is always room for improvement. We recognize that with Bill C-25, the government is planning to implement measures that will address flaws in the current system.

Clearly, one of the most fundamental and vital objectives of AML/ATF measures must be to protect the financial system from criminal activity. We believe this must be done in a balanced way. An AML/ATF regime is unique in that in order to function well, it must interact with a wide range of stakeholders, such as law enforcement agencies, government departments, and financial institutions. We feel that no useful purpose is served, and in fact the effectiveness of the regime itself is diminished, by overburdening any of these entities with too many restrictions, rules, or requirements.

We strongly believe that an AML/ATF measure should be implemented with a risk-based approach. Once amendments are enacted, reporting entities and FINTRAC should be given enough lead time to implement the necessary changes to their systems and to employee training programs. In our view, the efforts to combat money laundering and terrorist financing will be significantly assisted if it is easier for reporting entities to receive more feedback from FINTRAC about their reports and FINTRAC is provided with more latitude to release information. We therefore welcome the enhanced disclosure provisions in Bill C-25.

For several of the measures set out in Bill C-25, we will need to consider the related regulations before we can make a comprehensive response. I would like to make some initial observations about a couple of provisions in the bill. In a short letter to the committee, which we believe has been provided to you, we provide more details about our views on these matters.

We have made recommendations for changes to the bill that will address those matters. For example, there is the issue of the impact on foreign subsidiaries and foreign branches of Canadian banks. Bill C-25 will add a number of new measures to the act, including new requirements on the foreign subsidiaries and foreign branches of Canadian banks. These proposals, particularly the requirement to impose Canadian client identification requirements, could impose extraterritorial legal requirements on Canadian banks. We believe this could cause significant problems for the banking industry.

To the extent permitted by local laws, Canadian banks already apply their internal AML/ATF policies and procedures on their operations in foreign countries. However, imposing specific Canadian regulatory requirements in foreign jurisdictions has the potential to have adverse consequences on the banks. It may place the banks in a disadvantageous competitive position, from a global standpoint. Rather than imposing extraterritorial legal requirements, we believe that a more effective approach would be to make it clear that the requirement to have compliance and risk assessment programs must cover all subsidiaries and branches, regardless of location, to the extent permitted by the local jurisdiction.

We recommend that these measures be enacted.

It's important to note that we are not asking to apply a lower standard to the operations of a foreign branch or subsidiary, only to have it recognized that there are other equally effective ways of achieving what I think we all want to do, and that is to create a balanced, effective deterrence regime.

There is also the issue of correspondent banking. We understand and support the need to enhance requirements relating to the provision of services to foreign correspondent banks. Bill C-25 includes an amendment to the act that sets out a number of specific measures to be followed by Canadian banks before entering into a correspondent banking relationship.

While the banking industry in Canada has already implemented most of these requirements, we do have a concern that the proposed definition of “correspondent banking relationship” in the bill is too broad and could lead to almost all interaction between Canadian banks and a foreign bank being captured by the definition.

[The Chair, Conservative, Brian Pallister]

I'm sorry, I'm going to have to cut you off there. I neglected to mention in my little preamble that I will give you an indication when you have a minute left, and I apologize for not doing that. I must cut you off at five minutes to allow time for exchange with the committee members.

But thank you, sir. I know there'll be time for questions.

Now from the Auditor General's office, Doug Timmins is here. Welcome, sir.

[Douglas Timmins, Assistant Auditor General, Office of the Auditor General of Canada]

Thank you, Mr. Chair.

I'm very pleased to be here today to discuss our audit of Canada's regime to combat money laundering and terrorist financing and how it relates to Bill C-25. We completed that audit two years ago.

During our audit we concluded that Canada's anti-money-laundering regime is comprehensive and generally consistent with international standards; however, we also identified a number of factors that impeded the regime's performance. Some factors could be addressed with the existing legal framework; for example, better coordination among the federal agencies responsible for implementing Canada's anti-money-laundering and terrorist policy, and better feedback to reporting agencies on the use of information they supply to FINTRAC.

Other factors involve issues that will likely require changes to legislation.

Foremost among these are restrictions on information sharing. To safeguard privacy rights, the existing legislation limits the information that FINTRAC may disclose to so-called “tombstone” data: when and where the transactions took place, the value of the transactions, the account numbers, and the names of the parties involved.

We found that these restrictions limit the value of FINTRAC disclosures to law enforcement and security agencies.

Law enforcement agencies told us that the “tombstone” information they receive is too limited to justify launching investigations. The exception is when a disclosure is related to an on-going investigation in those cases, the information disclosed can help corroborate findings or provide new leads.

An additional limitation on the effectiveness of the National Initiative is the exemption from reporting requirements that lawyers obtained as a result of successful legal challenges to the legislation.

Finally, we found that unregulated reporting entities, including money service businesses and foreign exchange dealers that are not licensed and do not have a formal body overseeing their activities, posed a significant compliance challenge. Indeed, there are no reliable figures on how many such firms are out there, so ensuring compliance with reporting requirements is obviously a difficult task.

Bill C-25 affirms the lawyer's exemption from reporting requirements. Our understanding is that the government is currently discussing with law societies compliance requirements by lawyers. The bill provides for information sharing and enforcing compliance by unregulated reporting entities. It will increase the type of information that FINTRAC can disclose to law enforcement if it suspects money laundering or terrorist financing.

Specifically, the legislation will now allow FINTRAC to disclose the grounds that led it to suspect money laundering or terrorist financing. The bill will also require registration for money service businesses, a recommendation of the Financial Action Task Force on Money Laundering, which is the international standard-setting body for efforts against money laundering and terrorist financing.

Several countries, including the United States and the United Kingdom, already require these businesses to register.

In short, while we have not studied Bill C-25 in detail, it appears to deal with the key findings reported in our audit of November 2004. We cannot say whether the proposed changes will be sufficient or whether they will effectively resolve all issues.

Further, it is not our role to comment on policy decisions contained in this bill.

This, Mr. Chairman, completes my opening statement. I'd be pleased to answer questions when the time comes.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. Timmins.

We continue now with the Canada Revenue Agency, Elizabeth Tromp, director general of the charities directorate.

Welcome.

[Elizabeth Tromp, Director General, Charities Directorate, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency]

Thank you for inviting the Canada Revenue Agency to be here today.

The CRA is impacted by this legislation in two distinct operational areas. As you may know, the CRA plays a part in Canada's anti-terrorism framework through its administration of the Charities Registration (Security Information) Act, CRSIA, which was enacted as part 6 of the Anti-Terrorism Act. That legislation recognizes the contribution the CRA can make to detecting and disrupting support for terrorism because of our responsibility to review the operations of organizations that are registered as charities or applying for such status.

However, our present information-sharing authorities fall short of the FATF standards. As you know, the FATF is the international standard-setting body. Consequently, the focus of these proposals, as they relate to charities, has been on allowing, within clear limits, the sharing of information so that, on the one hand, we will be able to receive information from FINTRAC that will help us administer Income Tax Act provisions relating to charities, and on the other hand, so that we can make available to appropriate investigative authorities information that can then be used to proper advantage in the government's overall efforts to combat terrorism.

These proposals take into consideration that the charities registration system already has a very long--over 30-year--history of drawing a policy distinction between the disclosure rules that apply to charities and the concept of complete tax confidentiality as it applies to other taxpayers. Very importantly, these changes continue to respect privacy concerns by ensuring that donor information would not be subject to these new disclosure provisions.

Turning to the issue of disclosures made to the CRA where there is a suspicion of tax evasion, the CRA has been a partner in the national initiative to combat money laundering since its inception. The PCMLTFA provides that FINTRAC may disclose designated information to CRA once it has determined, first, that the information is relevant to money laundering or terrorist financing activities, and second, that it is relevant to tax evasion or an attempt to evade taxes.

The proposed amendments to the PCMLTFA with respect to disclosures of information from FINTRAC serve to expand the type of designated information that can be disclosed to all recipients of FINTRAC disclosures; clarify that the concept of tax evasion extends to obtaining, or attempting to obtain, a tax rebate, refund, or credit to which the taxpayer is not entitled; and allow the CRA, following receipt of a disclosure from FINTRAC, to apply to the courts for a production order to obtain additional information on a specific disclosure.

Thus, these amendments will, in essence, clarify the forms of tax evasion and facilitate further disclosures to CRA while respecting the dual threshold as established in the legislation. When designated information is provided, it will assist CRA in its determination of the appropriate enforcement actions to be taken.

My colleagues and I would be very happy to answer any further questions you may have regarding the administration aspects of these proposals from the CRA standpoint.

I am the director general of the charities directorate, and I have with me Donna Walsh, who is the director of review and analysis in our charities directorate; and also, Mr. Denis Meunier, director general of enforcement and disclosures directorate in our compliance programs branch.

Thank you very much.

[The Chair, Conservative, Brian Pallister]

Thank you very much for your presentation.

We continue now with Brian Fox from Western Union.

Welcome. You have five minutes. Over to you.

[Brian Fox, Regional Vice-President Canada, Western Union]

Thank you, Mr. Chairman, for the opportunity to appear at this committee.

Before I discuss our position on this important legislation, I would like to give you a brief overview of our business, our clients, and the typical way in which Canadians use Western Union's services. Western Union is a global leader in the money transfer business. We operate a network of over 270,000 agent locations in more than 200 countries and territories. We have been operating in Canada for more than 15 years and today have approximately 3,500 agent locations across the country.

We operate a high-volume business with typically very low sums of money. In fact, the average transaction from one person to another in Canada is approximately $320 Canadian. As you might expect, this is not the first time that Western Union has been a partner with government to ensure safeguards for consumers and the financial system as a whole.

Our industry is not familiar to many Canadians, but we do important work by serving as an indispensable lifeline for the financial viability of tens of millions of people and dozens of developing economies worldwide. We have worked with countries and territories all over the globe to educate and guide the efforts of anti-money-laundering regulators and policy-makers worldwide. We take our role and our responsibilities to this end very seriously.

While our average transaction is only $320, there are people who need to transfer larger sums. We require government-issued photo identification for any sum over $1,000. We further require personal interviews with anyone wishing to transfer sums over $7,500. We also have a strong monitoring system that identifies, analyzes, and reports attempts to split large sums of money into smaller amounts to avoid detection.

I want committee members to know that Western Union supports regulations and efforts to prevent abuse of the global financial system. Much of this bill will succeed in that objective. However, there are a couple of elements of the bill, depending on the outcome of the future regulations, that may impede the well-meaning and normal day-to-day money transfers that take place in Canada. In several key areas, this bill may be unworkable, depending upon the future regulations.

As a responsible company with a history of leadership in this area, we currently have tiers of transfers that require more identification and advanced due diligence based on additional potential risks. Clearly, though, more due diligence will increase cost and may ultimately make it difficult for average Canadians to afford the use of this service.

While we agree that thresholds and compliance measures must be in place, we need to balance those requirements with the reality of the potential risks to Canada's financial system. Let's look closely and realistically at the required thresholds. Let's look at the systems in place to avoid splitting larger transfers into smaller ones. But let's not overburden the large number of Canadians, many of whom are new Canadians, who use these services to transfer small sums of money home to family and friends.

We absolutely support the need to track and report transactions between known public and political figures when it involves significant sums of money. But a requirement to do this for each and every transaction would put an unnecessary financial burden on all players, who would have to track small-sum transactions, which are not the ones we should be concerned about.

Western Union recognizes the value of Bill C-25, but urges the committee to recognize the clear difference between the transmission of small sums and the larger sums typically sent through the banking systems, which require greater scrutiny. We completely support the provisions of the bill aimed at creating a registration regime for money transmitters and foreign exchange dealers. Other provisions of the bill, as well as the pending regulations, must reflect the realities of our industry.

l welcome questions from the committee and the opportunity to work with the government to find the right balance and ensure that money sent home to support families abroad will not be unnecessarily burdened. We will be providing the committee members a more detailed submission regarding our concerns, the bill, and the pending regulations.

We would recommend that this committee review the regulations, given that so much of the bill is dependent on them. We welcome the opportunity to work with the committee on making the regulations in such a way as to balance the importance of a strong anti-money-laundering regime with the need for a safe, reliable vehicle for new Canadians to support their families back home.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. Fox.

We'll continue now with Jean-Pierre Bernier, from the Canadian Life and Health Insurance Association.

[Jean-Pierre Bernier, General Counsel, Canadian Life and Health Insurance Association Inc.]

Mr. Chairman and distinguished members of the committee, thank you for your invitation to participate in this study of Bill C-25.

In the interest of time, I will jump to the bottom of page 3 of my written remarks.

The industry welcomes the committee's initiative to review the proposed amendments to Canada's anti-money laundering and anti-terrorist-financing legislation to ensure that its provisions are consistent with the goals publicly stated by the Minister of Finance in the key recommendations of the Senate banking committee report.

The Senate banking committee, in its October 2006 report, recommended, under the heading "Life Insurance Companies", that the federal government, in considering amendments to the act, employ the risk-based approach in determining the level of client identification, record keeping, and reporting requirements for all reporting entities.

The risk-based approach is reflected in clause 8 of the bill, and in our view these provisions are drafted in an appropriate manner. We are encouraged by the fact that the Minister of Finance has stated twice in his backgrounder on Bill C-25 that the legislative amendments are designed for, and I quote, "minimizing the compliance burden".

This well-stated objective is of paramount importance to all reporting entities under the act, including life insurers and life insurance agents and brokers. A risk-based approach is the appropriate way to achieve the goal of minimizing the compliance burden while also achieving the goal of detecting and preventing money laundering and terrorist financing activities.

In essence, a risk-based approach takes into account the risk profile of the regulated entity's products and transactions and ensures that resources are focused efficiently and effectively. While the life and health insurance industry feels that the risk-based approach is appropriately reflected in Bill C-25, it is noteworthy that the word "prescribed", to mean prescribed by regulation yet to come, appears 54 times in the bill. This is a strong indication that a significant number of provisions will be subject to prescriptive rules, to be set in regulation. The use of the risk-based approach in drafting the regulations pursuant to Bill C-25 is crucial. Only a genuine risk-based approach would enable insurers to concentrate on managing the real money laundering risk they face rather than on simply trying to manage regulatory or compliance risk and worrying, as a result, about the details of the regulator's rules.

To make any compliance program effective and efficient, whether it is mandated by law or otherwise, people must think risk, not box-ticking. Overly detailed regulations must be avoided in order to deliver the three key elements of the risk-based approach: proportionality, flexibility, and cost-effectiveness.

With respect to corporate governance, the existing supervisory framework applicable to life insurance companies in Canada does recognize that institutions will adopt individual approaches to the management of reputation risk. Overly detailed regulations will not only be costly to implement but would provide very little flexibility, if any, to accommodate individual company circumstances.

In conclusion, Mr. Chairman, I would like to suggest, on behalf of the industry, two minor changes of a technical nature to minimize the compliance burden and to provide a global perspective.

First, foreign subsidiaries of Canadian financial institutions should not be obliged to comply with the specific Canadian compliance requirements in a country that has adopted the standards of the Financial Action Task Force.

Second, similarly, authorized foreign insurance companies should be exempted from the extraterritorial effect of Canada's anti-money-laundering and anti-terrorist-financing legislation. As is the case for the authorized foreign banks doing business here, I am referring specifically to the new proposed sections 9.7 and 9.8 of the act contained in clause 8 of the bill. I am providing to the committee possible wording for amendments to these two areas.

The industry stands ready to provide any further input that the committee would find useful in the context of this review. Thank you.

[The Chair, Conservative, Brian Pallister]

Merci beaucoup, monsieur. Thank you all for your presentations.

We move to questions. Mr. Pacetti, you have six minutes.

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

Thank you, Mr. Chairman.

Thank you, witnesses. It's been interesting. Basically, I want to focus my line of questioning on what amendments this bill needs. We didn't have the time to really study it, so we're relying on your expertise.

Mr. Law, I think the CBA suggested two or three amendments, but we don't have your brief. If you can get us your brief as soon as possible, we'd appreciate it.

[Warren Law]

Actually, Mr. Bernier has touched upon the one amendment that we would like to see with respect to the application of the bill to foreign branches and foreign subsidiaries of Canadian banks. We have a concern about that. Mr. King, of course, would be able to give you more information on that concern.

Also, with respect to the definition of “correspondent banking” in the bill, we believe it's a bit too broad. We think that, in particular, the inclusion of foreign exchange transactions in the definition would cause problems, and it's really not necessary from an anti-money-laundering standpoint.

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

Fine, but if you could, please send us a brief, because our time is limited. We only have a few minutes to ask questions, and that includes the responses.

One aspect of your brief that I did want to address was something you said about the additional regulatory restrictions being a problem. Could you give me an example of where the legislation is causing you more paperwork? Is that what I should have understood? Because of the additional regulatory restrictions, it's going to cause the banking industry more work, more paperwork.

[Warren Law]

Generally speaking, we're quite happy with Bill C-25.

With respect to this issue, which I raised in my opening remarks and which Mr. Bernier mentioned in his opening remarks, it's a question of competitiveness, for one thing. If you look at Bill C-25, in the case of banks in particular, there's a distinction that's made in the legislation between foreign subsidiaries of Canadian banks and foreign branches of Canadian banks. They're treated differently under the legislation with respect to extending client identification requirements to these entities. We have a problem with this, given the fact that it seems to be a bit of an artificial distinction to say that different requirements should apply to branches and different requirements should apply to subsidiaries.

There's also the issue—and I think this is also something Mr. Bernier touched upon—of the fact that in Bill C-25 the requirement is made that the client identification requirements apply to foreign subsidiaries in non-FATF countries—and that's the Financial Action Task Force. We think this is a bit too narrow. Given the fact there are other FATF-affiliated organizations that cover a wide range of countries in the Caribbean, in Africa, in the Middle East, Europe, and Asia—

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

I don't mean to cut you off, but I want to get a question in to Mr. Timmins.

We had the Auditor General here during the last parliamentary session, regarding, I believe, chapter 2, and the tombstone data. FINTRAC could conduct an investigation, and then all of a sudden they can't continue investigating that particular transaction or situation. Prior to this meeting, I spoke to the director of FINTRAC downstairs. I asked him if that's still the case and if the legislation covers that so that they can continue. He said this audit was conducted two years or three years ago and things have changed.

How do you respond to that?

[Douglas Timmins]

Mr. Chair, I would certainly agree that the audit, as I pointed out, was done two years ago. We haven't followed up on this audit, so I don't know—

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

But the legislation hasn't changed. It's going to change.

[Douglas Timmins]

It's going to change, yes. The issue, as I pointed out, is that it appears it would address the issue of what could be disclosed so that it would be more than tombstone data. As we pointed out, we recommended that it be looked at in terms of what additional information could be disclosed while respecting the issues of privacy. That is what our recommendation was in our chapter.

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

So the amendments to the bill would cover your recommendation?

[Douglas Timmins]

It would appear that it gives more latitude to FINTRAC to disclose more information that would provide the context of the basis of their determinations.

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

So your office doesn't have any more problems with the bill in terms of any additional amendments?

[Douglas Timmins]

No, we have not studied the bill in detail from the point of view of amendments. We would come back to do follow-up—

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

I see your closing comments, but superficially you don't seem to have a problem with the bill.

[Douglas Timmins]

As I said, it appears to address the issues, and it's now a policy choice as to whether those decisions are appropriate.