Finance Committee on Nov. 2nd, 2006

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Varro.

From l'Association du Barreau canadien, we have Mr. Skolrood.

[Ron Skolrood, Chair, National Constitutional and Human Rights Law Section, Canadian Bar Association]

Mr. Chair, Ms. Thomson will begin with a quick overview of the involvement of the CBA, and then I will add some comments.

[The Vice-Chair, Liberal, Massimo Pacetti]

No problem, but please keep your comments to about five minutes. Thank you.

[Ron Skolrood]

Yes, we will. Thank you.

[Tamra Thomson, Director, Legislation and Law Reform, Canadian Bar Association]

Thank you, Mr. Chair. The Canadian Bar Association is very pleased to have been able to accept the committee's invitation to appear today on Bill C-25.

I'd like to start by telling the committee members about the distinction between the Federation of Law Societies and the Canadian Bar Association, so that you understand the difference between our organizations.

As the body representing the independent regulators of the legal profession, the Federation of Law Societies is the primary party that is negotiating with the government around the application of the money laundering regime as it affects lawyers. The Canadian Bar Association, on the other hand, is the national professional association of lawyers across Canada. As such, our mandate is to assist the government in crafting the best possible law while protecting the rule of law and the rights of all Canadians with respect to their legal rights.

I'm now going to ask Mr. Skolrood, who is chair of the national constitutional and human rights law section of the Canadian Bar Association, to address a couple of issues in the bill.

[Ron Skolrood]

Thank you.

I'd also like to thank the committee for the opportunity to appear here today. I expect I will echo much of what Mr. Varro has said on behalf of the federation.

I'd like to make two points, if I may, concerning the proposed legislation. The first concerns the special considerations that apply when including the legal profession in the fight against money laundering. Second, I'll address briefly the proposed expansion of information sharing with international authorities.

To begin, let me say that the Canadian Bar Association supports the objectives of Bill C-25 insofar as the bill aims to protect society against the threat and impact of money laundering. Indeed, as Mr. Varro has touched upon, the legal profession, through the various governing law societies that regulate it, has voluntarily and proactively adopted regulations to prohibit lawyers from accepting large amounts of cash. This is specifically to address those rare occasions when lawyers might unwittingly be drawn into an illegal scheme. In addition, the law societies are now considering ways to address the government's goal of having a client identification scheme.

Clearly, lawyers have shown their willingness to aid the government to fight money laundering. However, given the importance of an independent bar in the administration of justice, and given the fundamental significance of solicitor-client privilege, we believe the proper approach to ensuring lawyers' compliance is within the sphere of self-regulation. We therefore strongly support and indeed commend the government for recognizing the importance of solicitor-client privilege by explicitly removing legal counsel and legal firms from the reporting requirements of the legislation.

We are also pleased that the recent Senate committee report recommended that negotiations between the federation and the federal government continue, and that it recognized the proactive efforts of the profession to address concerns about money laundering through lawyers by self-regulatory mechanisms. However, one aspect of the Senate committee report that we do take issue with is the suggestion that lawyers are a major problem in the fight against money laundering. The report suggested that lawyers either knowingly participate in money laundering activities or are innocent pawns used by criminals in money laundering schemes. Frankly, we disagree with that assessment.

The overwhelming majority of lawyers in Canada adhere to the highest legal and ethical standards. Like all citizens, lawyers are bound by the Criminal Code and other statutes, and they are rightly exposed to criminal prosecution for any violation of the law. Lawyers are also subject to demanding professional codes of conduct and other law society requirements, and as we have heard, efforts are ongoing to strengthen those requirements.

Briefly, with respect to the information sharing issue, Bill C-25 proposes a significantly expanded regime for information sharing in proposed section 38.1, including sharing information with foreign governments based on a reasonable suspicion of involvement in money laundering. Recent experience has shown that unchecked information sharing can lead to gross violations of the human rights of innocent Canadian citizens. This experience highlights the need for effective independent oversight and the accountability of all Canadian security forces. Our point simply is that there should not be expanded information sharing until effective independent oversight and accountability are in place.

Again, thank you for the opportunity to address the committee. I, too, would be pleased to answer questions.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Skolrood.

From the Investment Dealers Association of Canada, Mr. Boyce.

[Lawrence Boyce, Vice-President, Sales Compliance and Registration, Investment Dealers Association of Canada]

Thank you, Mr. Chairman. On behalf of the association, I'd like to thank the committee for the opportunity to comment on Bill C-25. The Investment Dealers Association is the national self-regulatory organization for full-service investment dealers. As part of our function we have commented extensively on Canadian money laundering law and regulations. We also audit and supervise our members in respect of their compliance with the current regulations. We have an information-sharing agreement with FINTRAC, and we share information with them on the results of those audits.

I also represent the association on the International Council of Securities Associations working group on anti-money-laundering procedures. As part of that, we have been involved in a project by FATF called the electronic advisory group on the risk-based method. It started with a meeting in Brussels last year to examine the application of risk-based approaches in the anti-money-laundering regimes.

We support the legislation. We believe that all of the issues it addresses are important and that it will significantly enhance the anti-money-laundering regime in Canada. I'll speak only about our reservations on a couple of issues. These are broader than the legislation itself, and they reflect our long-standing concern with some of the approaches in the current regulations.

I would like to focus first on proposed subsection 9.6(2). This is the beginning of a risk-based approach to anti-money-laundering provisions. Unfortunately, there is some difficulty with it. Proposed subsection 9.6(3) suggests that financial institutions should assess the risk of specific clients. In the event that they find these clients to be high risk, the institutions are required to take certain measures in dealing with them.

A risk-based approach should in fact work up and down the line. A full risk-based approach, which is what the FATF group is working at delineating, suggests not only that additional measures should be directed at high-risk customers and high-risk transactions, but also, on the other side, that there should be the opportunity to use less rigorous approaches toward lower-risk transactions and clients. In our current regime, the prescriptive nature of the measures that must be taken, particularly on the due diligence front, has resulted in a significant amount of resources being devoted to low-risk transactions or customers. They are considered by many in the industry to be largely a waste of time and resources. They bring about a checklist mentality, which deters financial institutions from bringing their expertise to bear and from placing resources where they would be most properly directed, namely, at higher-risk customers and transactions.

We are concerned about the prescriptive nature of this approach, not only in the legislation itself but also, prospectively, in the regulations. They prescribe procedures or activities that are a continuation of this approach. It will not enable Canada to compete with other countries, many of which are establishing a full risk-based approach to preventing money laundering. We already encounter frequent situations in which Canadian financial institutions, particularly those dealing with institutional customers and foreign dealers, are at a considerable competitive disadvantage. These institutions are required to undertake procedures that are not required in other countries and that in fact prevent them from doing business, simply because the customers in these countries consider procedures of this kind to be unnecessary and frequently intrusive. For example, consider the part of the bill dealing with PEP, politically exposed persons, proposed subsection 9.3(3). It outlines a number of positions that would be required to be approved in dealing with these kinds of clients.

By “senior management” of the financial institution, it's unclear exactly how senior that might be, but for example, if a retired or even a currently functioning family court judge in Buffalo decided they wanted to open an account at a Canadian bank because they have a cottage there and want to pay their utility bills, they would be forced, under these regulations, to meet whatever these prescribed account opening and also monitoring provisions might be, including the specific requirement to have the account approved by some senior management at the bank. One can wonder whether a risk-based look at who the customer was and what they intended to do wouldn't suggest that this was somewhat overboard.

I'll conclude my remarks at this point and welcome any questions.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Boyce.

I have the pleasure to have you here, Mr. Grafstein. It's my first experience having a senator testify before a committee, and I've only been here four years. So, welcome. You have five minutes.

Thank you.

[Jerahmiel Grafstein, Chairman, Standing Committee on Banking, Trade and Commerce, Senate]

Mr. Chairman, thank you very much, and thank you to all members of the committee for inviting me.

As chairman of the Senate banking, trade, and commerce committee, I have looked at this question. We have issued an interim report. The interim report was tabled shortly before the government introduced its legislation. I do not want in my comments today to pre-empt your review or prejudge what the Senate might do as a result of the deliberations in the House of Commons. The views that I'm expressing are my own, based on the findings in our report, which I think are very important. I'll touch on them very briefly and then open to the floor for any questions.

First of all, we were surprised by the scope of the problem in Canada. We were not able to put numbers around the scope of illicit funds or money laundering either for terrorists or from criminal activities, but we know the amount is in the billions. I know this from other information I received overseas at the OSCE. I'm an active member at the OSCE, the second senior officer there, and we discovered in Europe that worldwide illicit funds from criminal activities such as money laundering and illicit financing of terrorist activities are probably two of the largest growth industries in the world.

The size and the scope worldwide is larger than some countries' GDP and it's growing by leaps and bounds. The whole idea here was how we could, in a modest way, try to examine the loopholes in our regulatory oversight, which is FINTRAC, and how we might be able to plug those loopholes, but we're not naive. All of the members of our committee were not naive in understanding that these are very agile criminal minds with huge resources and talents, and it's big business--bigger, as they say, than some of the provinces of Canada. Therefore, whenever a loophole is closed, we know another loophole will be opened. We committed at the Senate that we would not only do the interim report, but we would then review very carefully the legislation when it comes from this place to us. In addition to that, we'll maintain an ongoing surveillance of it.

I want to pause by mentioning a couple of specific things. One thing we felt was important is parliamentary oversight of this activity. There are a number of questions that have been raised in Europe and elsewhere about the nature and the laws and the privacy of this oversight. We're concerned in that we don't want to have illegal activity undermine our constitutional rights of our charter. We also felt very strongly that there should be an oversight of FINTRAC itself. I haven't examined the legislation in detail. It's my understanding that the provision we made.... It's recommendation 14, because I think the real question here is not only what the law can do, but how we can maintain an oversight. We all know that parliamentary oversight is very weak. We have parliamentary officers, but essentially Parliament doesn't work very well in terms of key areas of oversight, whether it's privacy, bilingualism, and so on. Our system is there, but it doesn't operate as effectively as we would like.

We felt that one of the things we would recommend, and I would urge you to at least think about this, is whether you should establish another oversight committee. An annual review with a report to Parliament of FINTRAC's activities would be made by the Security Intelligence Review Committee, which is an oversight committee of CSIS. The reason we suggested that is because we felt that in Parliament itself we speak a good game, but we don't really do the hard work to provide ongoing oversight of activities that are under our purview on both sides. We felt that CSIS had done a very good job in terms of oversight with respect to security intelligence, and therefore we felt that was one. I'll just touch on two or three more and then leave on.

With respect to the lawyers, I'm a lawyer, a QC, a member of the bar in good standing in Ontario. Lawyers have a responsibility as officers of the court to fulfill their due responsibilities with respect to solicitor-client privilege. That's on the one hand, but by the same token, there's a national interest to make sure criminal activity doesn't carry on. What we were suggesting is that the lawyers should get at the negotiation with the government to come up with a formula that would preserve, on the one hand, the national interest of the country and, on the other hand, the solicitor-client privilege. We just said, get on with the work, and there was a delay on that.

There are a couple of other topics here that we felt were important.

I'll just conclude by saying I would propose that your staff look at the report. We circulated it. It has a number of recommendations. Some have been included; some have not. It's up to you to decide which of those recommendations commend themselves to you.

I'm ready for any questions.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Senator.

Thank you all for your comments today.

As a quick item of housekeeping, committee members, have your amendments to Bill C-25 to the clerk by five o'clock on Monday, s'il vous plaît. The meeting will be on Tuesday, with clause-by-clause from 12:30 to 1:30 on Bill C-25, but we'll precede that with an appearance by finance officials in regard to the pre-budget consultations. That will begin at 10 o'clock and go until 12:30.

Very good. We'll continue now with questions.

You have six minutes, Mr. McCallum, to commence.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair, and thank you to all the witnesses.

I'd like to address the issue of parliamentary oversight. I think we'd all agree that we always have to strike a balance between security needs versus privacy concerns. We were told, I believe, by the Department of Finance that this current bill extends the reach of FINTRAC vis-à-vis security but does nothing to improve concerns about privacy. So if the balance had been struck carefully in the original bill, maybe it's tilted now in beefing up the security side but not the privacy.

I remember from being Minister of Defence that with CSE we had an oversight committee headed by Antonio Lamer, and I think CSIS is similar.

Mr. Burbidge, is there anything similar--I believe there isn't--for FINTRAC?

[Nicolas Burbidge]

Thanks for the question.

I don't work for FINTRAC and I wouldn't presume to speak for them, but I'm fairly familiar with how the system works. My understanding is that FINTRAC is a body that is organized under its own act of Parliament--namely, this legislation--and that it is responsible to Parliament through the Minister of Finance. So its oversight, in terms of parliamentary oversight, is very similar indeed to that with which my office, the Office of the Superintendent of Financial Institutions, is overseen by Parliament. It's in a similar structure.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

Perhaps I could ask Senator Grafstein this. You've done quite a lot of work on this and you've been around the place for quite a while. Do you agree that I am right to be concerned? I think the damage to individuals who are potentially innocent until proven guilty can be very substantial, and I don't really see why the degree of oversight should be so radically less for FINTRAC than for these other agencies.

If you agree with me in principle, are there options other than your specific one, or how do you think we should proceed?

[Jerahmiel Grafstein]

I think that was one of the issues we spent a lot of time looking at. Our concern was that we felt there were adequate protections with respect to privacy within Canada because the law pertains. We do have privacy laws. We do have a privacy commissioner. There are, we think, reasonable questions of privacy in Canada. But that isn't the concern we had. This has a farther reach than Canada.

What happens if information obtained in Canada is then transferred to agencies outside of Canada to deal with the problem? That was, to my mind, a major gap in the legislation. Our committee came to the same conclusion, and we proposed in recommendation 13 that information from Canadian sources be given to foreign intelligence units where privacy legislation that is consistent with the Privacy Act in Canada pertains.

The reason I say that is that it would then allow a Canadian citizen not only access to his rights under the Privacy Act and the provisions here, but he would also have a consistent right to go against another country if information based on his privacy was breached.

I don' t think we've come to a good answer to this, but that was the best we could do. When the legislation comes back to us, I can tell you, we'll be looking at this question again.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you. I did ask that question at an earlier meeting, and there were certain safeguards, but I don't think to the degree of saying we would only share information with people with privacy laws equivalent to our own.

[Jerahmiel Grafstein]

I don't believe it's in this legislation.

[John McCallum, Liberal, Markham—Unionville, ON]

Do you know, Senator Grafstein, or anyone else on the panel, the rules under which FINTRAC decides whether to share information with the RCMP?

[Nicolas Burbidge]

We are not competent to answer that question, Mr. McCallum.

[John McCallum, Liberal, Markham—Unionville, ON]

I know FINTRAC is not here, so I'll leave it at that, Mr. Chair. Thank you very much.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. McCallum.

We'll continue.

We’ll continue with Mr. St-Cyr.

You have six minutes, sir.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Thank you very much.

My first question is for the senator who made the presentation. You talked about certain recommendations. I interpreted these to be suggestions for amendments to the bill; you spoke of potential amendments or recommendations. One of them had to do with parliamentary supervision in order to provide monitoring, and the other had to do with the specific clause dealing with lawyers.

Do you have a specific recommendation in this regard? I didn’t catch it.

[Jerahmiel Grafstein]

We had a number of specific recommendations about obvious loopholes, which included the jewellery trade, and then ATM machines, which are not really regulated. There were new issues then. There are gaps. The other gaps we discovered after our inquiry were for the automobile trades and insurance policy trades. There are a number of mechanisms that the agile criminal mind can use to move from one gap to another, and we think these are areas the committee should examine, to see whether the legislation closes these gaps.

I'm telling you, based on our experience, and I'm sure based on your own common sense, that there has to be ongoing surveillance of this, because as we legislate and we close it, hopefully we strengthen what we currently have, which is a prosecution that is not strong. The problem is that it's one thing to have a law, but it's another thing to make sure, in your legislation, that there is strong prosecution so that when you have a prima facie case, the prosecutors can move very quickly and swiftly to prosecute.

We're still not satisfied, based on our findings, that there are enough resources and skills in the prosecutorial part of this, so that even when you find a breach, they'll move swiftly. It's one thing to plug the loopholes; it's another thing to make sure the loopholes are properly plugged with prosecutions.

I would expect that you would look at this question. We did, and we weren't satisfied with the answers.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Okay.

I would also like to have your opinion on real estate, because everyone knows that real estate—properties, etc.—is also used for money laundering.

Do you think that this area should be covered by the act and also come under surveillance? Should we create a registry for land transactions, or something of the kind, to try to combat this type of crime?

[Jerahmiel Grafstein]

The deep problem we have is that we don't want to set up a whole set of laws that interfere with the free marketplace and the ability of business to do business. We don't want to increase the cost of business to the taxpayer and, ultimately, to the consumer.

But I agree with you that real estate, based on what we heard anecdotally, is a problem. We did not get direct evidence about that. I suggest that if your committee is interested, unless there are time pressures, it take a look at that question. I would take a look at them pillar by pillar. Insurance has nothing to do with automobiles. Automobiles have nothing to do with jewellery. Jewellery has nothing to do with lawyers. Again, I'm not criticizing the lawyers; I'm just saying that we want them to set up a voluntary code to deal with this issue within their solicitor-client relationships.

My point to you is that I think each of them has to be dealt with separately, but there's no question at all, based on the anecdotal evidence and the information we received both during and after our hearings, that these are gaps. The question is how you close the gaps without affecting the free commerce in the country. It's complicated, but it's pillar by pillar.