Evidence of meeting #138 for Finance in the 42nd Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was lawyers.
A video is available from Parliament.
Liberal
The Chair Liberal Wayne Easter
Let's call the meeting to order.
As everyone well knows by now, we're doing a statutory review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
We have a number of witnesses. Thank you all for coming. Please keep your opening remarks brief and then we'll go to questions, back and forth.
We'll start with the Canadian Jewellers Association, and then we'll go to Jewellers Vigilance Canada Incorporated.
Mr. Land.
Brian Land General Manager, Canadian Jewellers Association
Thank you, Mr. Chair, for inviting the Canadian Jewellers Association to this meeting regarding your review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
My name is Brian Land, and I'm the general manager of the Canadian Jewellers Association.
For 100 years, the CJA has been the voice of the Canadian jewellery and watch industry, providing leadership in ethics, education, and communication; building trust, awareness, and desirability for Canadian jewellery products. The CJA promotes consumer confidence and assists its members in following best business practices. We have over 1,000 locations in Canada, and our members consist of retailers, manufacturers, wholesalers, and goods-and-services providers.
In 2017, the CJA acquired Jewellers Vigilance Canada. With the acquisition came the JVC crime prevention program. This 18-year-old program has delivered to industry and law enforcement valuable information on crime against jewellers, including organized crime in the form of gangs. This program also trains law enforcement in the specific attributes related to jewellery crime.
Joining me at the table is my colleague Phyllis Richard, representing Jewellers Vigilance Canada.
I would like to take a few minutes to give you a brief overview of the jewellery industry in Canada. For the purposes of the act, we are known as dealers in precious metals and stones, or DPMS, although not all of the industry is covered under the act. A 1997 Ernst & Young study commissioned by the CJA states that 90% of 4,400 jewellry firms in Canada employ less than 20 people, and 65% have fewer than five employees.
The significance of these statistics defines the fabric of the Canadian jewellery and watch industry, 20 years ago. Our industry was, and is even more so today, an industry of mostly small businesses. Many of these small businesses exist in smaller communities across Canada. Often they are second- and third-generation jewellers in that same community. They tend to know the vast majority of their customers.
The jewellery manufacturing industry in Canada thrived in the latter part of the 20th century, but, like so many other industries, the manufacturing sector declined with the advent of offshore and foreign manufacturers who were able to produce jewellery products much more cheaply. The world was opening up with the age of the Internet and the online revolution.
Well over 20 significant jewellery manufacturers closed their doors or went bankrupt between the latter part of the 20th century and today. Importers, wholesalers, and distributors have become more prominent than manufacturers as suppliers to retailers in Canada. Those Canadian manufacturers still producing have sought other markets to sell into such as the U.S., Britain, and Europe.
The retail side of the Canadian jewellery industry has also changed dramatically. Unlike other retail operations, such as clothing and hardware, which are dominated by chain stores, our industry consists of small, independent retailers. Three of the largest chains from the 1960s to the 1990s— Peoples Jewellers, Mappins Jewellers, and Birks—are now owned by foreign companies. In addition, many of the Canadian-owned jewellery chain stores have closed their doors. Retailers like Ben Moss Jewelers, Walters Jewelers, and Ostrander's Jewelers are no longer in business. Big-box stores such as Costco and Walmart also carry fine jewellery and new chain stores such as Michael Hill from New Zealand have arrived from foreign shores.
Statistics about the Canadian jewellery industry are not available, other than those supplied in the Ernst & Young report. However, it has been documented in the U.S. that approximately 60% of jewellery sales are done through multi-line merchants such as Costco and Walmart. In Canada these types of retailers generally are not part of the CJA. This would be also true of department stores like the Bay.
From an international perspective, it is noteworthy that precious metals, stones, and finished jewellery are not a common medium of exchange in Canada. While some items such as gold bars or ingots may be used as a store of value, this is generally not the case for finished jewellery. It is estimated that in the resale of a piece of finished jewellery in the Canadian market, the loss of value would be between 75 and 95 per cent of the retail price on average. This is to say that an item purchased for $100 Canadian would have a resale value of between $5 Canadian and $25 Canadian. That being said, products that lose less value when resold are the most vulnerable—the same items that are targets of thieves in a robbery—brand name watches and high-end larger diamonds.
The CJA is committed to attaining a higher level of AML/ATF compliance within our membership. We strongly believe that a better understanding of the fabric of our industry by the Department of Finance and FINTRAC will lead to more realistic compliance requirements and in turn a much higher rate of compliance.
I look forward to any questions after my colleague gives an overview of the DPMS sector and AML/ATF compliance. Thank you.
Liberal
The Chair Liberal Wayne Easter
Thank you, Mr. Land.
We turn to Ms. Richard with the Jewellers Vigilance Canada Inc.
Phyllis Richard Former Executive Director, Jewellers Vigilance Canada Inc.
Thank you, Mr. Chair, for this opportunity to comment on your review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
My name is Phyllis Richard. I'm the former executive director of Jewellers Vigilance Canada, and now serve as chair of the Canadian Jewellers Association, government relations committee.
With my colleague's overview of the Canadian jewellery industry in mind, I would like to speak about the dealers in precious metals and stones sector and their requirements under the act.
Unlike other reporting entities, there is no licensing requirement specific to the part of the DPMS sector covered under the act, and very few specific regulations in general that pertain to jewellers. This is in sharp contrast to many other reporting entities, such as financial institutions, which have a very structured and regulated environment. The parts of the DPMS sector captured under the act are entrepreneurial in spirit and business practices, outside of the multi-line retailers such as Costco, Walmart, and The Bay.
As a general rule, the DPMS sector at the independent retail and wholesale levels lacks technological sophistication, with a limited communication channel. This is in contrast to the mining sector, which embraces new technologies and has a significant level of sophistication.
In reviewing the vulnerabilities to money laundering within the captured segment of the DPMS sector, various products present various risks. These risks need to be understood in order to develop measures to mitigate them. As an example, cut, polished, and/or finished gemstones may in some cases be used as a store of value. The available liquidity in is highly dependent on the type of stone, with diamonds generally having more available and stable markets than coloured stones. By “stable”, we are referring to the valuation of an item when assessed by different parties.
In the case of coloured stones, the assessed value of an item can vary significantly. Within the more liquid diamond trade, there are a number of controls in place to ensure the pedigree and authenticity of stones, particularly those of high value. These include processes to ensure that diamonds have points of origin outside of known conflict zones. While such processes are neither universal nor perfect, they are believed to have significantly impacted corruption in the diamond trade.
In addition, there is a trend toward more transparency about diamonds and gemstones. In the case of diamonds, we are seeing some major mining companies looking towards blockchain as a method to bring transparency to the product history.
Finished jewellery purchased at retail rates represents little money laundering or terrorist financing risk in the Canadian context, in particular when these items are bought and sold at retail rates. To the best of our knowledge, there are very few money laundering typologies that involve the actual purchase and/or sale of finished jewellery in a retail setting.
Unlike finished jewellery, precious metals in the form of bars, ingots and/or coins maybe used as a store of value. However, such items have limited liquidity, particularly in large quantities, at the jewellery retail level. The sale of high-value items would often require interaction with either a regulated entity or an auction house.
Many jewellers purchase and/or accept trades of broken, scrap, or resale jewellery. These items are most often melted down to extract the precious metals and either used to create new items or sold for the value of the metals. The risk posed in such cases is that these items themselves may be the proceeds of crime as stolen property. Insofar as we are aware, most jewellers collect identification and KYC information in the case of such transactions, and do not accept such transactions if the property in question is believed to be stolen. Where property is believed to be stolen, local law enforcement may also be contacted. As such, retail jewellers are not likely to be the path of least resistance for criminals who wish to dispose of stolen property. The exception here would be bad actors, who unfortunately exist.
My colleague mentioned the JVC crime prevention program. The many security steps taken by members to this program have inherent AML mitigating properties. These would include video cameras, staff training, and in the case of wholesalers and manufacturers, trade references as a requirement.
Within the DPMS sector there is a segment of industry that is not covered but would seem to be vulnerable to money laundering, and that is auction houses.
We hope this gives the committee some insight into the complexity of the DPMS sector, and I thank you.
Liberal
The Chair Liberal Wayne Easter
Thank you very much, Ms. Richard.
Turning then to the Federation of Law Societies of Canada, Ms. MacPherson, president, and Ms. Wilson, executive director of policy and public affairs, the floor is yours.
Sheila MacPherson President, Federation of Law Societies of Canada
Thank you very much, Mr. Chair.
I would like to thank the committee for the opportunity to provide comments in conjunction with your review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
By way of background, the federation is a coordinating body of the 14 governing bodies of the legal profession of Canada, which together regulate more than 120,000 lawyers, 3,800 notaries in Quebec, and nearly 9,000 licensed paralegals in Ontario, all in the public interest.
I want to start by assuring you that the federation and its member law societies support Canada's efforts to fight money laundering and terrorist financing. We recognize the importance of the objectives of the act, and we support those objectives.
As the Supreme Court made clear in its 2015 decision, in meeting those objectives it is imperative that important constitutional principles be respected. You will have heard a number of witnesses describing the situation resulting from the 2015 decision as a major gap in Canada's anti-money laundering and anti-terrorist financing regime. With respect, these comments ignore the fact that the federation and the law societies of Canada have demonstrated their commitment to protecting the public by taking meaningful constitutional action in this area. Our written submission outlines the efforts of the federation and the law societies to ensure there is effective regulation of the legal profession in this area, so in the interests of time, I will only give a few details as to what steps the federation has taken in this regard.
The no-cash rule developed by the federation in 2004, and implemented and enforced in every law society in Canada, prohibits legal counsel from receiving cash in amounts over $7,500 in the aggregate from a single client or for a single client matter. It requires legal counsel to keep a record of cash transactions as part of their accounting record-keeping. It bears noting that the threshold in the federation's rule, $7,500, is stricter than that in the regulations for reporting large cash transactions, that being $10,000.
While we have taken a different approach to that of the government, the rule addresses the risks associated with the handling and placement of large amounts of cash. It has been recognized by government representatives, including the minister of finance in office at the time the rule was implemented, as an effective alternative to the large cash reporting requirements that apply to other reporting entities under the federal anti-money laundering regime.
When the government introduced client verification regulations, rather than simply pursuing a remedy in the courts, the federation and the law societies moved proactively in drafting and adopting a second model rule, this one establishing extensive client identification and verification obligations. This rule, enforced in all jurisdictions since 2008, closely tracks those in the financial regulations. Together, the two rules—the no-cash and the client ID rules—achieve the following objectives.
Firstly, they impose on lawyers and Quebec notaries a rigorous standard with respect to cash transactions, and they limit the ability of legal counsel to accept cash from clients. On this point I would note that these restrictions are unique. Legal counsel elsewhere, including in the United States, are permitted to accept cash in any amount. These two rules also impose extensive due diligence requirements on legal counsel.
Secondly, these rules also address the activity of lawyers and Quebec notaries as financial intermediaries, but they do so through law society regulations rather than through federal legislation.
Thirdly, these rules respect the constitutional principles articulated by the Supreme Court of Canada in its 2015 decision.
It's important to understand that these two rules also exist within a larger legal and regulatory context. Canadian lawyers and legal counsel are bound by the criminal law and, like everyone else in the country, can be subject to prosecution for engaging in money laundering and terrorism financing activities.
In addition, legal counsel are subject to comprehensive rules of professional conduct imposed and enforced by the law societies that prohibit them from engaging in or facilitating unlawful conduct in any way. All members of the legal profession are also subject to comprehensive financial and accounting regulations by virtue of their membership in their various law societies.
We note that in its 2016 mutual evaluation report on Canada, the Financial Action Task Force was critical of law society regulations to combat money laundering and the financing of terrorist activities, suggesting that there was no incentive for the profession to apply these measures or to participate in the detection of potential money laundering and terrorist financing activities.
In the view of the federation, this suggestion ignores the serious regulatory initiatives of Canada's law societies in this area and the ongoing monitoring that law societies engage in, including both periodic and risk-based audits. Measures to ensure that legal counsel comply with law society regulations include annual reporting obligations, practice reviews, and financial audits. Law societies also have extensive investigatory and disciplinary powers, including the ability to impose penalties up to and including disbarment when members fail to abide by the law society rules and regulations. In the submission of the federation, any actual or perceived gap in the legislative scheme as a result of the exclusion of the legal profession from the provision of the act has been filled by the actions that the law societies have taken.
We do recognize, however, that it is important to ensure that the regulations in this area are as robust and as effective as possible. To that end, the federation is currently engaged in a comprehensive review of its model rules and the associated compliance and enforcement measures used by the law societies. We have just completed a consultation on proposed amendments. Comments were due by March 15. We are currently reviewing those comments. This consultation process will clarify some of the provisions and it will also add additional obligations on Canadian legal counsel.
Most notable amongst the proposed additional obligations is a proposed requirement for legal counsel to obtain and verify the identity of beneficiaries of trusts and the beneficial owners of organizations. In addition, requirements for ongoing monitoring of the professional relationship and activities of clients have also been proposed. The special working group that is currently conducting the review has also proposed a new model rule that would tie the use of trust accounts to the provision of legal services, thus ensuring that lawyers' trust accounts cannot be used for purely financial transactions. A comparable rule is already in place in Ontario, Quebec, and a number of Canadian jurisdictions, which together regulate approximately 75% of the lawyers in Canada. Final rule amendments are expected to be approved by the federation's governing board in June of this year and to be implemented by law societies across the country later this year.
We also recognize that effective enforcement of the rules is critical, and for that reason, we are also reviewing law society compliance and enforcement activities, and we are preparing guidance on best practices to assist law societies. Additionally, equally important in our view is that members of the profession should understand their legal and ethical obligations. To this end, we are currently preparing comprehensive guidance and educational materials that will focus on compliance with the various rules but also on understanding the money laundering and terrorism financing risks that lawyers and Quebec notaries may encounter in their professional activities. We anticipate that, in addition to general guidance, these educational materials will provide specific guidance aimed at different practice groups, particularly those practice groups identified at higher risk, for example, real estate and other transactional activities.
Before concluding my remarks, I would like to comment briefly on the issue of beneficial ownership information, and specifically, the current lack of verifiable information. As I've already mentioned, the proposed amendments to the federation's model rules would add a requirement for legal counsel to obtain and verify information on the beneficial owners of organizations and the beneficiaries of trusts.
We are aware of criticisms of Canada in this regard, and we recognize the value of capturing this information. We have to stress, however, that compliance with such a rule, which would mirror the requirements in federal regulation, will be very difficult, and in some cases, likely impossible in the absence of publicly accessible registries of beneficial owners.
It's my understanding that FINTRAC's guidance indicates that obtaining information on beneficial owners only from the client does not constitute verification of that information. That makes complete sense, but at the moment it is the only option available to lawyers.
In the view of the Federation of Law Societies of Canada, a rule that cannot be complied with is neither a reasonable nor effective rule. For that reason we urge the government to move forward quickly with legislative amendments that would not only require organizations and trusts to record beneficial ownership information and to provide it to the government, but also to establish a publicly accessible registry of that information for lawyers across the country to use.
We recognize that federal legislation will only reach a small percentage of corporations, and we hope that the government will push the provinces and territories to follow suit and to do so without delay.
We should also add that consideration should be given to extending rules on the recording and sharing of beneficial ownership to the ownership of real property.
Mr. Chairman, I want to conclude my remarks by saying that in their testimony before this committee, a number of witnesses have indicated an interest in engaging with the legal profession on this issue. On behalf of the federation and on behalf of our members, I can say without reservation that we would welcome the opportunity to engage in that debate.
Thank you very much, Mr. Chairman.
Liberal
The Chair Liberal Wayne Easter
Thank you very much, Ms. MacPherson.
I believe you said that your consultations were over on March 15, so if you have anything further you could forward to the committee, that would be helpful. We hope to complete a report by June, but we won't be tabling it until September or October. Anything more that you could forward to us would be helpful.
Ms. Johnson is here as an individual.
Welcome, Ms. Johnson. The floor is yours.
Mora Johnson Barrister-Solicitor, As an Individual
Great. Thank you very much. I'm a lawyer working in the field of anti-corruption and anti-money laundering.
It is a great pleasure to be invited today. Thank you.
I'm the author of certain reports on beneficial ownership transparency, and I will make sure that these get into the record of the committee.
Given the shortage of time, I'm going to quickly make a number of brief points.
First, I welcome the announcement by the federal and provincial finance ministers in December on making corporations more transparent. I would recommend that Canada follow the example set by European Union jurisdictions in creating public beneficial ownership registries. I will leave with the clerk a copy of this report, which highlights best practices and lessons learned from European Union efforts. They have a couple of years under their belt, and it would be useful to look at that.
I would also highlight one point from this report, which is that beneficial ownership registries must be fit for due diligence purposes. IDs and other information provided by corporations, upon incorporation, for example, must be verified by the registrar, and risk-based due diligence must be performed. The registrar should have an anti-money laundering and counterterrorism mandate, which currently is not the case with the business registries.
If criminals can simply provide fraudulent information to the registry, then repeat the same fraudulent information to a bank or a law office and say, well just check the federal registry, then that registry will be useless. Banks and others will not be able to rely on it for due diligence purposes.
A verified risk-managed registry will cost more, but there will be aggregate savings across the economy and even within government, because right now you have all kinds of people doing the same due diligence on the same companies. You could simplify that. Federal-provincial co-operation would be required to create a one-stop portal to conveniently search all registries.
Second, I would recommend the creation of new legal duties for nominees, agents, trustees, essentially people representing third parties, including nominee shareholders and directors. Those representing others should be required to always disclose their status, as well as the identity of the third parties they represent, to federal and provincial officials, including beneficial ownership registrars as well as financial institutions, designated non-financial businesses, and professions. Currently in the statute, financial institutions and others have an obligation to ask clients if they are representing third parties, but there is no statutory obligation to answer this truthfully.
Third, all designated non-financial businesses and professions should be required to inquire about beneficial ownership of corporations, entities, and arrangements as part of their due diligence obligations, but only when processing large cash transactions. Obviously this would be a huge burden on businesses, but not if there's a public beneficial ownership registry that's convenient and contains all the information. That would make it a very simple task.
Next, I want to briefly address the role of lawyers in the money-laundering scheme. As we heard, there are rules in place by, and enforced by, the law society, not FINTRAC. These rules as such are very useful. In my view, “no cash over $7,500” is an excellent and really important rule. Personally, I would take some of these rules further, but there's a process that's ongoing right now.
There are a lot of questions raised about the efficacy of this regime, and I feel that more empirical data is required to fully answer them. For example, what is the extent of the problem? Do we know? Do we understand? Money laundering is very difficult to detect. There's no dead body. How do we know the extent of the problem? What are possible advantages and disadvantages to restoring the cash due diligence record-keeping obligations of lawyers in the statute, as opposed to leaving them in the rules? Because of solicitor-client confidentiality, detection of these crimes must occur in other parts of the financial system.
As a simple example, imagine a situation where a lawyer were to deposit huge volumes of cash into his or her trust account in presumed violation of the rule. Would a bank be more likely to flag this to FINTRAC as a suspicious transaction if it were a legal breach rather than a rule of the law society? What about judges issuing warrants? What is the impact of there being a legal scheme versus the current scheme?
These are the types of questions that I think we need to answer before we decide whether or not the statute is the right place for due diligence obligations.
In terms of who should supervise the enforcement of these rules, it's pretty clear from the Supreme Court decision that it's unconstitutional for FINTRAC to access lawyers' files in the absence of a warrant and the Lavallee procedures. This will always hamper FINTRAC's ability to be a supervisor of lawyers.
Even if this committee were to conclude that due diligence obligations for lawyers should be restored to the act, could the law society remain a supervisor and enforcer of those obligations? This is currently the case in certain other jurisdictions, such as the English bar, and it might be a possible solution to some of the difficult issues.
Furthermore, I wanted to add that if the government plans to simplify the prosecution of money laundering offences, including facilitating money laundering by reducing the mens rea to a reckless or willfully blind or negligent standard, then a defence should be provided to lawyers and others of a reasonable due diligence.
Last, I wanted to mention something about Export Development Canada, which as I understand it, is currently exempt from the proceeds of crime act because it does not accept deposits.
However, recent media reports of its support for corrupt transactions have shown that it is at a high risk for handling the proceeds of crime. For example, if it makes loans of tens or hundreds of millions of dollars to companies that obtained business through bribery, EDC is at risk of being repaid with proceeds of corruption, some of which goes into the government coffers through corporate dividends. While the Proceeds of Crime (Money Laundering) and Terrorist Financing Act is not ideally suited for these types of risks, as it focuses a lot on deposits, and there are currently no statutory due diligence obligations in place for EDC, this might be something worth looking into, as the committee reviews risks of proceeds of crime entering the financial system.
Thank you very much for this opportunity. I'd be pleased to answer any questions.
Liberal
The Chair Liberal Wayne Easter
Thank you, Ms. Johnson.
We'll turn to seven-minute rounds. During the rounds, I would assume that everybody has seen the Finance discussion paper. To a certain extent, I think we're using that as background or a guideline, whether we agree or disagree with what's in it. At the end of the day, I'll guess we'll see. If you do have any comments you feel strongly about with regard to that discussion paper, don't be afraid to raise them at any point during the question period, because I think that's what we need to target as well.
We'll turn to Mr. Fergus for seven minutes.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
Thank you very much, Mr. Chair.
My thanks to all the witnesses today.
I will give you a few moments to adjust your earphones. Mr. Dusseault and I will be asking our questions in French.
Ms. Wilson, Ms. MacPherson and Ms. Johnson, my questions are mostly for you.
There is no doubt that the last two parliamentary reviews of this matter have identified a shortcoming with lawyers and the Canadian justice system. You mentioned that you have capped payments in cash to a total of $7,500 per client. That reflects well on your profession. It is very important, for the reasons you mentioned.
My first question goes to Ms. Johnson.
Your fifth recommendation is to impose due diligence obligations for clients. Can you tell us more about that? How can we strengthen those obligations? How far can we go, given the Supreme Court decision?
Barrister-Solicitor, As an Individual
Thank you very much for the question.
So you are asking me about the details on the amendments I would make to the current regulations.
I'll answer that question in English.
As somebody who works in the area of anti-corruption, I'm sensitive to some of the issues that come up in that context. Where lawyers are conducting financial transactions on behalf of clients, and they're using negotiable instruments at risk of money laundering, I would impose greater know-your-customer and due diligence obligations as appropriate to verify if clients are politically exposed persons, including family or close associates, and if they're on sanctions lists or are otherwise high risk. I would also require lawyers to make inquiries about the source of funds in these types of cases.
I'll give you a couple of examples. If you are a lawyer and you have someone in your office who has negotiable instruments and would like to purchase a house, it would be really good to know if, for example, they are on a sanctions list, because people on sanctions lists need lawyers for certain purposes. If they're supposed to be subject to an asset freeze and they give you the stocks and bonds and bearer shares, it would be really useful to have that information. Similarly, it would be good to know if they were representing the Mugabe family or someone at high risk of receiving the proceeds of corruption.
These types of obligations are currently on the financial system, but because of the no-cash rule, it would really be when you have a serious risk of money laundering because, obviously, everyone needs a lawyer from time to time for whatever reason. Here I'm talking about high-risk transactions and high-risk situations.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
Ms. Wilson, Ms. MacPherson, from the federation's perspective, what is the current standing and how would you react to that proposal to have a higher level of obligation on those potentially risky transactions?
Frederica Wilson Executive Director and Deputy Chief Executive Officer, Policy and Public Affairs, Federation of Law Societies of Canada
It may interest you and Ms. Johnson to know that the draft rules, which of course are not finalized yet, are amendments to the client identification verification rule and include requirements to inquire into sources of funds. They include requirements that are not simply for one point in time, but are ongoing in the course of the relationship. From the feedback I have seen so far, I have every reason to believe that those provisions will survive the consultation period and be put forward as amendments to the rules.
I think Ms. Johnson and the Federation of Law Societies are on the same page on that, based on the feedback we received.
The issue of politically exposed persons for us is a slightly more complex one, but I co-chair the working group that's doing this work and we have it on our list to pursue and to look into further. The launch of our consultation predated the release of the Department of Finance's white paper. We want to return to a number of things in the white paper, so you may see that there will be more than one cycle or more than one round of amendments. We would prefer not to wait to move forward with what we think are important amendments that will strengthen the rule until we have everything in it, or have looked at all the other things we may also wish to add.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
I have a subsequent question. At what point are your members obliged to report if you suspect that the proceeds of a client are illegally obtained?
Executive Director and Deputy Chief Executive Officer, Policy and Public Affairs, Federation of Law Societies of Canada
I think, in fairness, it's not so much framed as obligations in the constating legislation, but more as the powers that law societies have to share information. Of course, they are bound by privacy laws and so forth, and because they enter into the sphere of privilege, when they investigate a lawyer, which is say that privilege is not waived or lost when the law society conducts an investigation, they have some obligations. They have an absolute legal obligation to protect solicitor–client privilege.
However, they all also have the power to share information with law enforcement agencies, and they do so. Individual law societies have different policies as to when that is. I would note with some interest, however, that in our inquiries to the law societies, we've discovered that reports of suspicion of criminal activity often may be for something like mortgage fraud. So it's not restricted to money laundering activities and does not necessarily meet with any enthusiasm on the part of law enforcement to investigate. Indeed, sometimes what the regulators are told is, “Well, you acted, you've suspended or disbarred the member; we have compensation funds and insurance funds that compensate the victims of these things”, so it is not unusual for there to be no further law enforcement action even where there is a report.
The other thing that I think needs to be said is that law societies are looking at compliance with their rules. Of course when they, for example, audit a law firm, they look at the accounting records and they are looking for breaches of the no-cash rules. They are looking for things that don't look right to them, but they are also looking in a broader context, so it's not always about crimes. It's often about failure to obey the regulations of the law societies.
Liberal
The Chair Liberal Wayne Easter
Sorry, Greg, you're well over the time. You may get a second round.
We'll go to Mr. Albas.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
I certainly will continue on some of this, so hopefully I'll catch some of the same ideas.
In regard to it, I do understand that the process is such that many might say in law enforcement that they have to get a judicial order, that in fact some of the processes you may have are more immediate and can be more far-reaching because of multiple different complaints across different files, and that you may ask for demand documents on a whole host of fronts. So, I certainly appreciate that there is a system in place and that for the most part it works.
Ms. Johnson said not a lot of data is shared. Now, is that something that the committee is going to be making recommendations on?
Executive Director and Deputy Chief Executive Officer, Policy and Public Affairs, Federation of Law Societies of Canada
Yes, in fact, we've begun our work on best practices, and we have identified the lack of consistent data as a weakness and something we would like to see changed. I mentioned that law societies are enforcing their rules and they keep pretty good data on the breaches of this obligation for trust accounting or breaches of this provision of the rules of professional conduct. However, they have not been necessarily separating out from that breaches of the rules that, although they also have other purposes, are aligned with or intended to address the same objectives as the federal anti-money laundering and terrorism financing regime. A couple of law societies have begun to do that, and it will be our recommendation that we move to standardized and consistent data collection in this area.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
That's important because for many people the data would say that the system is performing or not. They can ask about trends and whatnot. But if you don't have that kind of forthcoming and there's anecdotal evidence, people may lose faith in that system and then we would have to rejig the system, I guess, to make sure, because we can't have any light between these kinds of cases. I do understand there is a solicitor–client privilege that needs to be maintained.
Now, just switching gears slightly, have either of you, or maybe even Ms. Johnson, heard of cases where courts—I'm thinking at the provincial level, so they are civil claims—and certain lawyers may unwittingly be involved in money laundering? Some countries have capital requirements, so that if they are going to bring money into another country like Canada they have certain stipulations for bringing in that capital. One strategy I have heard of anecdotally in a particular conversation—because members of Parliament speak to all sorts of different people, and I think that's a good thing—is that a subsidiary of a particular company doing business in Canada will make a private arrangement with another corporation or entity. That will create a contract and then break the contract. Then one of the parties will sue for damages. Obviously the subsidiary would then take it to court, and then the court may find that that subsidiary broke contract and demand payment, which then goes to the host country, which, of course, requires a court order to have those monies. Then those monies are brought into Canada and then distributed for other purposes than what they were intended for. Have you heard of this kind of strategy, and if so, is it being addressed by your committee?
Executive Director and Deputy Chief Executive Officer, Policy and Public Affairs, Federation of Law Societies of Canada
We talked about and worried about that kind of strategy in the committee that I co-chair. The people I'm working with are people working directly in investigations, enforcement, and similar activities at the law society. They're not the politicians; they are the people who are doing that work. I have not heard of any specific examples, but I will say that, while this only deals with cash, our no-cash rule picked up some exceptions that come out of the federal regulations—although, of course, that's about suspicious transactions and large-cash reporting. I can't recall whether this is right out of the regulations or whether it simply seemed like a good idea back in 2004, but the no-cash rule includes an exception for money that is paid as a result of a court order, which could include exactly what you're talking about.
We've said that we don't think it's an exception that we should maintain. We think it should come out of the rule. Again, that's only dealing with cash, but we looked at it and said it's a clunky way to launder money, but if you're a major corporation with a major contract with very high stakes, for example, it could nonetheless be an effective way to deal with large quantities of money, and we've taken that out.
Beyond that, I can't say that I have anything more specific to offer.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
A court order is issued awarding damages, and then money is transferred from a foreign jurisdiction into Canada. Is FINTRAC aware of that and of the rationale for that? If someone was to have multiple payments over a period of time, perhaps that may show up.
I'm not privy to whether or not this is something that's done in one big shot at a time or if it's done over a series of different contracts being brokered with different entities.
To me the question is, are we creating a structural ability where we're allowing our courts...? To be fair, when I talk to people, many people feel that they're not able to see their case as quickly as they'd like. I'd like to know if this is a small problem, or even if it is a problem, and whether or not there should be some oversight of some of these court orders to make sure that FINTRAC or the law societies are able to account for them and to flag them if there's an issue.
Executive Director and Deputy Chief Executive Officer, Policy and Public Affairs, Federation of Law Societies of Canada
I'll say one thing and then defer to Ms. Johnson, because I think she may have more insight to offer than I do on this.
Your question really demonstrates to me the important point to keep in mind, that in many cases and many transactions, there are a number of players, some of whom have reporting obligations and some of whom may not. The courts don't and, of course, lawyers don't, but banks do. It's always important, I think—and we've talked about this a lot in our work—to think about that web.
On a tangentially related point, we are concerned about the fact that it is possible for somebody to deposit money into somebody else's account. If you are a lawyer with a trust account, it is possible for someone to go to the bank and deposit cash into your trust account or in another form, and you can't stop it. We've talked to banks. There's some possibility of flagging the account—they're supposed to phone—but it's very porous. We are unable in many cases to get that information from the banks as to who made the deposit.
I mention that only because it's a tangled web with many players, each of whom may present a risk and may have a role to play in the monitoring activities.
I imagine Ms. Johnson has more.
Barrister-Solicitor, As an Individual
Thanks very much.
I think you raise a fascinating question, and I don't know the answer, but it raises a much larger issue, which I think I touched upon when I talked about EDC. The statute that you're reviewing and all this work that you're doing is really focused on deposits and flow through, which is where the major risk of money laundering is. When a trust account is used for flow through, like a real estate transaction, that's where there were really huge risks—in the old days they took cash—and it's the same with financial institutions.
However, that's not the extent of all the risks. They are just the ones the statute focuses on. I know that the law society rules include things like client fees and bail. There are other exceptions as well—again, where it's not a flow through. It's the same with some of the rules for financial institutions, which is why EDC is not covered at all.
This might be a larger theme that the committee might consider looking at: money laundering risks or risks of receiving the proceeds of crime in cases where you're not looking at a flow through, if that makes sense.
Liberal