Finance Committee on Feb. 8th, 2018

[The Chair, Liberal, Wayne Easter]

Thank you, both.

With regard to the recommendations in the Senate report, I asked this of a finance department representative before. I'm told it is hard to respond directly to each recommendation, but on Pierre's question, if you could link as closely as possible what's been done on those recommendation, I think it would be helpful to the committee, so that we're not retilling the same ground, if I could put it that way.

Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Chair.

I welcome everyone.

I've been doing preliminary reading, and I think all of us on the committee are going to be doing a lot of reading in the next couple of weeks. The Library of Parliament provided a really good chart of all the agencies, be they federal or provincial. The majority are on the federal side, everybody from CBSA to CSIS, CSE, and CRA—a lot of resources and very large bureaucracies, of course.

It's great to see there are a lot of resources dedicated to the very important issue of money laundering and terrorist financing. It was interesting, because yesterday CMHC came out with a report. It was about 225 pages. I read some of the headlines. Part of the report dealt with foreign purchases of housing here in Canada.

Tiptoeing off what Mr. Albas was saying and the concerns out in B.C. specifically, there were concerns about being able to track and identify when foreign investors purchase homes in Canada and the source of their funds. I'm going to read to you The Globe and Mail tidbit from the article that was posted yesterday:

The Law Society of B.C. told CMHC that much of the information lawyers had on the identity of foreign buyers and the source of funds used for home purchases was covered by privacy laws. Lawyers have also been given an exemption to the requirement to report financial transactions of more than $10,000 to the Financial Transactions and Reports Analysis Centre of Canada, which tracks money laundering.

Despite the large bureaucracy that I referred to, which is using literally tens of millions of taxpayer dollars at a very granular or micro level, we can't even track and identify the source of funds that are being used by foreign investors to purchase real estate in Canada. I love foreign investment, but we don't know where the money is coming from.

Is that a correct statement?

[Annette Ryan]

The issues with real estate and the various themes that you put forward are really at the crux of some of the more difficult and important issues that we hope to move forward with in this review and subsequent legislative changes.

If I may say, the issues that you spoke to include the inclusion of lawyers in the regime and the ability to assess the beneficial owners of a corporation. Corporations have been cited in a number of studies of real estate transactions.

On the issue of lawyers, you quite rightly point out that lawyers are responsible for a number of financial types of transactions that in other countries are parsed between the aspect of solicitor-client privilege versus that which is more transactional in nature and covered by FINTRAC and its reporting requirements.

I would agree with the member that these issues relate to serious problems that speak to our deeply held objectives.

In terms of the question of real estate specifically, I would point to efforts by our colleagues at FINTRAC to work closely with the real estate associations and the industry to flag to them their responsibilities to be on the lookout for suspicious transactions that speak to knowing their client—that's a fundamental principle in this space—and looking for suspicious transactions. That speaks to questions like the source of funds, the nature of the transaction, and so on. I would say that these are issues at the core of what the committee has struck for itself as its mandate.

On all fronts, I would say that we agree that the problems are serious. The efforts that are being put to these questions are comprehensive. There are a lot of resources at play. There are additional resources at play in the private sector. The ability to have the most comprehensive and targeted regime to address these problems is, I think, a shared objective of all of us here today.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you.

Can I have a follow-up?

The source of funds is very important for my residents. People go to work every morning. They save their money to make a down payment on a home. To me, there seems be something offside with the idea that foreigners, or people coming from other parts of the world, can come here to purchase a house and don't have to disclose the source of their funds, or are protected from doing that, while Canadians work hard and save their money to purchase a home....

With regard to beneficial ownership, I do agree that we need to move forward in a balanced manner between the protection of privacy and disclosure. My personal feeling—and maybe it will change during this study—is that the pertinent authorities should have the right for disclosure, but the general public, in my view, should not.

I would like to hear some brief comments on what other jurisdictions are doing on beneficial ownership in terms of protecting the rights of people who do undertake risk, invest, and create wealth versus their rights to privacy.

[Annette Ryan]

The issue of beneficial ownership is an important one. To reiterate, we think that the point of having corporations in the first instance keep basic records in a standardized way that can be used by law enforcement entities or be provided to financial institutions as current requirements exige, for those corporations to have access to the financial sector is simply an important first step that will allow us to have that discussion.

I would describe the issue of beneficial ownership internationally as being a quickly evolving field. Many countries are making efforts to increase their requirements to have beneficial ownership provided either to law enforcement agencies or through public registries.

I will turn to my colleague Ian, who is more active in the international space, to speak to which countries. We also can certainly follow up with a summary to the chair.

[Ian Wright, Director, Financial Crimes Governance and Operations, Department of Finance]

If you look at the international experience, the U.K. is held up as the gold standard right now. It has a public registry of what it calls “people with significant control”. It's a statutory requirement not only for corporations, but also shareholders, to report their ownership above a certain threshold.

The European Commission has a directive that also requires that its countries have and create registries as well, and are, themselves, moving toward public registries.

As for ours, as Annette pointed out, we're making those steps forward. The Americans are also bringing in similar sorts of moves now to try to create requirements on...advise...and to collect beneficial ownership information.

Internationally, within the FATF, there are 37 countries involved. However, we also have this network of FATF-style regional bodies, which covers some 190 countries. As you're all well aware, some of those international financial centres are where some of the challenges come from. I think that's where the value of the FATF and ourselves as active participants within FATF is: to work with these regional bodies and to apply the type of peer pressure that will enable us to build a good global network and to deal with this. It is a global issue. We know that. We've seen complicated structures within corporations. It requires a good international effort across all of those groups.

[The Chair, Liberal, Wayne Easter]

Thank you both.

We're going to five-minute rounds.

Mr. Albas.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

I just want to continue along the same thrust as the previous member. You mentioned “significant control”. In my mind, there are certain cases where it would be helpful for people in positions of authority or the general public—again, I'm not going to establish which ones should have it right now on the beneficial ownership side.... But then, if you have a case where someone has a lease to operate a particular business, to my knowledge, in Canada there is no formal lease registry. Someone could, for example, own a gas station and then lease it to someone who may be involved in organized crime and may then use that operation.... Is that the kind of situation you're talking about with regard to some sort of registry for significant control?

[Annette Ryan]

In the first instance, the efforts are focused on beneficial ownership of a corporation. We have different thresholds and concepts at play in different federal and provincial statutes right now. At the federal level, under the PCMLTFA, the level of control is 25%. That differs by province or territory and under the federal corporations act.

To answer your question about leasing, I would point that there is a range of legal relationships and entities that have been identified as subject to possible manipulation that you name. That could include trusts, and it could include partnerships or any number of other transactions. We are mindful of that wide sweep of relationships and have taken steps in the trust space to build transparency and so on.

In terms of the specific issue of leasing, I think I'll propose that we get back to the committee and that Maxime will answer.

[Maxime Beaupré, Director, Financial Crimes Policy, Department of Finance]

To build on an answer that Annette provided previously, I would just add the point that, under the PCMLTFA, reporting entities have obligations to know their customer.

The type of work that is happening on beneficial ownership in this particular instance would be to try to understand who owns the corporation, but as the operator of that particular corporation is establishing a business relationship with a reporting entity, it would be incumbent upon the reporting entity to know its customer and to get a good understanding of what their business is, including who the principals are.

In that sense, in this particular setting, the bank, for example, should have a good understanding of who's involved in the business. It's a bridge further to try to get better information on the beneficial owner—in this case, the owner of the corporation.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

I know there's a bit of a rabbit hole when we talk about these issues, but again, if someone owns an asset and then issues a lease that is not registered anywhere to someone else, and that someone else is operating that asset in a way that is used to launder money, we're not going to know about that, because there is no formal registry.

I do understand that we are in a world where we are coming to terms with many of these arrangements, that things like beneficial ownership and significant control are relatively scattered terms, and that trying to bring some consistency with international standards is difficult. I do think that it might be one area, perhaps, that the government may be wanting to investigate because, again, if you make a change, then organized crime will make changes to their behaviours to structure their affairs in a way that is compliant but allows them to continue their opportunities.

I'd like to to switch gears. In your consultation paper, you stated that the FATF report “notes that making the penalties for violating these [anti-money laundering] laws more proportionate and dissuasive would assist in the deterrence of money laundering and terrorist financing”. What stronger penalties do you think would be appropriate in this regard?

[Annette Ryan]

Ian is closer to this one. I'll turn to him.

[Ian Wright]

Right now, if you look at the sentences when people are being prosecuted for money laundering and terrorist financing, you see that they tend to be concurrent sentences, and they tend to be of a term that's equivalent to the underlying predicate crime.

One of the challenges, I think, one of the areas that we're working on with our law enforcement and prosecution colleagues, is the difficulty: ML is a very difficult crime to investigate and to prosecute. I think what the FATF felt is that at times there were cases where the ML charges would dropped for the pursuit of the underlying predicate crimes, which puts people away and gets the bad guys behind bars over a suitable time.

As Maxime would be able to talk to, there are some discussions within the paper about trying to address some of these issues with regard to the prosecution and the law enforcement.

[Annette Ryan]

Mr. Chair, I have one specific point, which is that we've done an operational review of our effectiveness as a regime, and we see a need to address the standard of prosecution in this space.

Right now, we require the standard of proof to tie the money launderer to the discreet knowledge of the predicate crime. We would like to see that standard changed to be a standard of recklessness for which there's reason to believe that the money is associated with crime or terrorism.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you.

[The Chair, Liberal, Wayne Easter]

Ms. O'Connell.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you.

The 2014 budget implementation act gave FINTRAC the responsibility of conducting public awareness campaigns to help deal with terrorism financing. Have you seen any areas of improvement or success? Are there things that we need to continue to look at? Have you seen tangible results since the public awareness campaign, or has it caused any kind of additional issues that have been brought up?

[Annette Ryan]

I think our colleagues at FINTRAC would be very happy to speak to their efforts in the public awareness space. It is an important activity that FINTRAC undertakes, and they have been making progress in any number of areas to bring a wider swath of Canadians, particularly those who are reporting entities, into a more active awareness of the value of the information they may have through their transactions.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Okay, fair enough. I can ask that when they appear.

You touched on the gap with regard to politically exposed persons. Could you clarify some of the gaps there that we need to be looking at?

[Annette Ryan]

I would be happy to.

The concept of politically exposed persons was developed by the Financial Action Task Force, the FATF, and it speaks to a specific risk of money laundering and terrorist financing, particularly in the space of corruption. This is an aspect that plays to both the international integration of standards and laws, as well as to domestic objectives of making sure that corruption in particular is kept in check.

I would start with the observation that, happily, Canada is a country that has some of the fewest incidents of corruption in the world. We rank as ninth in a standard of some 170 countries when it comes to not having corruption as an issue. However, identifying people as politically exposed persons, which in Canada goes from the Governor General to mayors right now or to the heads of international organizations, speaks to the financial institutions' reporting entities having the right information in the transactions they survey to be able to pick up patterns that relate to corruption in particular.

The standards are there essentially to have an information base that can allow the identification of the particular stream of transactions that are problematic. This is more so in other parts of the world than in Canada, but as part of that integration and as a domestic objective, it's information that's pertinent and therefore part of the regime.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Okay, thank you.

In terms of the beneficial ownership question—and you stated that the U.K. and the European Commission tend to be the gold standard—it seems that, based on the conversation here, part of the issue is really around lawyers. That seems to be a big gap, an opportunity, and I understand there was a court case that allowed for some of the...but the U.K. doesn't have that different a legal system. Obviously, the laws are different, but I'm curious if the department—or maybe this is a better question for Justice—is looking at the legal framework in the U.K. that meets that test while being in line with their own privacy laws and could help us close this gap? Again, their legal system is not completely dissimilar from ours. Why is it something that their rule of law can accommodate but ours seems to be missing? Is there language or a process that needs to be better addressed that we can look at?

[Annette Ryan]

It's a great question. We're working very hard on that question, with Justice and other partners.

We are looking at other international examples that could shed light on how we could structure our response to that court case, yet the Supreme Court cited the Canadian Charter of Rights and Freedoms. We do need to find a made-in-Canada solution, but our stated intention is to find a legal solution that will work in the Canadian context and has similarities with the structure and objectives of other countries.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

It hasn't been brought up yet, but I think cryptocurrency is going to be a big area and component of this study as well. I assume that somewhat fits into your comments about innovation. You're talking about innovation on the side of monitoring, but I think this committee can somewhat agree that we need to also look at the innovation on the criminal activity side. Even if cryptocurrencies might not have been established solely for that, it seems to be a very welcome place for that activity.

Do you have any comments or suggestions on how we could try to scope cryptocurrency in our study of that?

[Annette Ryan]

That's another great question, Mr. Chair.

The issue of cryptocurrencies—virtual, digital currencies—is one that's under careful study in the MLTFA space.

If I may, I would perhaps make three points. The first is that we have been taking steps. We've noted our intention to bring forth regulations in respect of dealers in virtual currency so that we can re-establish the level playing field in that space, in the sense of how money service businesses transact, as the member said, across borders and so on. There is work coming forward shortly that will address that specific space.

A second point is that the innovation in this space has both risks and challenges. The inherent challenge is the anonymity of the currencies, and the requirement to meet requirements to not have anonymity, to know your customer, is an inherent tension between how the new technology is being used and the regime. That's something we are actively mindful of and watching carefully.

That said, I think the technology has another potential that has been flagged, to have the record of who is behind what transactions. That has an area of discussion around it called regtech. In this space, the question is being posed as to whether you could in a sense build in the requirements to know your customer and make sure that transactions are compliant with the objectives and structures of the regime, so that as these technologies evolve, maybe we can lighten our requirements on the private sector and have that innovation move to a place that can bring all the benefits that are promised, as well as build in the important safeguards that the space concerns itself with.

[The Chair, Liberal, Wayne Easter]

Thank you. We were well over on that round.

Mr. Albas.