Finance Committee on March 21st, 2018

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you, Mr. Chair.

First of all, I would like to thank all the witnesses for being here and for the sage advice they are giving us.

Ms. Johnson, you talked about a

verified and risk-managed registry.

Of course, that is intended to make sure that the information is exact, realistic and, let us hope, regularly updated.

Can you give the committee an example that shows that such a public registry is trustworthy, meaning that the authorities can verify whether the information that people give is accurate? Are there places where the authorities have strong enough powers to make sure that the regulations are complied with?

[Mora Johnson]

Thank you very much. That is a very good question.

When I researched that question in preparing my report, I saw no examples, but everywhere in Europe, people have been wondering whether the registry can really be trusted.

To go one step further, currently the federal government registry for corporations is completely passive. People send the information, you create a new corporation, and the information simply gets transferred into the registry. There are no verifications right now, not even ID checks, not even to show a driver's licence to confirm that the person even exists. Of course, it was never created for anti-money-laundering purposes. However, this could be changed with a registrar who is able to do those kinds of verifications.

Obviously the more verifications they do beyond ID checks, the more expensive, cumbersome, and complicated the process is. A risk-based process might also work, which means that the person is someone with compliance skills, someone who understands how corporations are formed, and so on, and who is able to flag suspicious things, maybe send reports to FINTRAC, maybe contact the corporation for more information and ask for more documents. This is what we have in mind, someone who is able to really uphold the rigour of the registry.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

I would like to talk about one aspect that you perhaps did not get into, but I feel could present a danger. If I am mistaken, you can correct me.

Often, company structures are very complex. The structure may extend into a number of countries. A number of companies do business with foreign firms, in fact. They may share part of the structure of those companies, but they may be located in countries where there is no obligation to keep a registry of beneficial ownership. Could that be a danger? Is it something that the committee should look into?

[Mora Johnson]

One of the recommendations I made in this report is that in any complex corporate structure where a company is a 100% shareholder of a subsidiary and 100% shareholder of another, or even more complex, the whole chain be included and all related companies be part of the disclosure.

The other thing is that when we're talking about beneficial owner, we're really talking about the ultimate beneficial owner. That cuts through all the chains to the ultimate owners. However, you're certainly right that in some cases, even for one simple corporation, it's not always clear and obvious who the beneficial owners are. There's a control definition, which would typically include directors; and then there's a benefit or ownership, which is who owns the shares, for example. Sometimes in a family-owned business there might be a patriarch who actually has the powers, pursuant to a unanimous shareholder agreement, to dismiss all the directors, to hire and fire everyone. That person would clearly be a beneficial owner in the control arm, even if they're not listed as a shareholder, for example, or a director.

It's a really complicated issue, which again requires a sophisticated, knowledgeable registrar. Some are basic, but others would require the registrar to go back and ask more questions, follow up, seek more documents, and go deeper.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

We have mentioned diligence in verification. I think that it was Ms. Johnson who mentioned mens rea, but my question perhaps goes more to the Federation of Law Societies of Canada. As I am not a lawyer, I will not get into legal terminology too much, but I would like to ask about the difference between the two paradigms. The current approach is based on mens rea, meaning that there has to be proof of criminal intent. With diligence in verification, all that is needed is to make sure that the lawyer or notary has not turned a blind eye to a situation that, to any even marginally intelligent person, could appear suspect.

Can you explain the difference between the two approaches? What is the current situation? Should we move to a system based more on diligence in verification instead?

[Mora Johnson]

Are you asking me?

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Actually, perhaps Ms. MacPherson can answer first.

[Sheila MacPherson]

Thank you, Mr. Dusseault. That's an excellent question.

In the regulatory world, a lawyer can commit an infraction of the rules intentionally, and that would be something that would be not only professional misconduct but likely also criminal misconduct. If somebody were knowingly engaged in money laundering, for example, they should be caught by law society enforcement, but they would also be caught by the larger criminal systems that we have.

Lawyers can also be targeted for breaching rules because they're acting negligently or without oversight. They don't necessarily have to intentionally mean to participate in money laundering if their practices and structures are sloppy or careless. If it's an oversight, that can be a breach, and lawyers can be disciplined for breaching the law society code. A good example is client identification. Sometimes lawyers get busy. They may not properly identify their clients. They don't intend to break that rule, but those types of failures should be caught through a law society auditing process, and the lawyer can be disciplined for that even though they didn't intend to breach it. The negligent performance or the lack of attention to detail doesn't need to be intentional.

That is the strength of having a number of different layers. The law society can act not only on intentional wrongdoing but also on negligent wrongdoing, and even on wrongdoing that occurs simply because you believe you're doing the right thing but you don't comply with the rules for whatever reason. That could still be a breach. It may be a defence, in terms of how you deal with a complaint or prosecution, that you've tried to do your very best, but it can certainly be a breach.

I don't know, Ms. Wilson, if you want to add anything.

[Frederica Wilson]

I do very briefly. I'm respectful of everybody's time. I started my career as a criminal lawyer. It's been a long time since I was practising so I don't want to misspeak, but there is very well-developed law on mens rea, and strict and absolute liability offences. They are tied, in part, to the consequences that may prevail. If there's a risk of imprisonment and so forth, there are higher standards required when we're talking about the criminal law, and of course quasi-criminal, which can be regulatory offences.

My only comment on this would be that while, of course, it may be interesting to explore a lower standard of proof, which is what we're talking about, you need to proceed cautiously in that area so as not to run up against what is, as I said, very well-established law on what is permissible. This has to do with the charter. It has to do with your charter rights and your ability to make full answer in defence in the face of serious potential sanctions.

[The Chair, Liberal, Wayne Easter]

Okay. Thank you all.

I'm turning to Ms. O'Connell for seven minutes.

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

Thank you all for being here.

I'm going to start with Ms. Richard and Mr. Land. I'll get you in this a little bit. Are there any requirements—and forgive me if you said this at the beginning and I didn't catch it—to report to FINTRAC or other bodies large sales of jewellery?

[Phyllis Richard]

Yes, there are. Are you referring to large cash transactions?

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

Not just cash, but I could see this being a very neat way to launder some money. What's the requirement then?

[Phyllis Richard]

Large cash transactions, over $10,000, must be reported to FINTRAC. If there is a large transaction, but it is not cash, the only reporting requirement there would be if, in some way, it were suspicious or you knew that criminal activity was involved.

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

You mentioned at the very end of your intervention that an area of concern is auction houses. Can you elaborate? That's kind of where your delegation then ended.

[Phyllis Richard]

The thing with auction houses is that at the moment, one can go into a jewellery auction.... There are many, many of them across the country. Some move, some are permanent houses, and some of them are absolutely legitimately good businesses. You can go in there and literally have $200,000 in cash and there is no requirement to report to FINTRAC that kind of transaction. There's no requirement for a suspicious report either, other than if there's a good corporate citizen, they would hopefully alert law enforcement. It is a gap within the sector that could be tightened up.

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

What about on the other side of it with auction houses, if individuals have under the $10,000 cash limit? Let's say they're right have $8,000 or $9,000, so the jeweller where they're purchasing the items doesn't necessarily immediately flag that. However, if you acquire several pieces of that value and then walk into an auction house to sell them, basically, in an estate sale or in estate type situation, what are the requirements for auction houses to know their clients, for the sale of this merchandise? Are you aware of any?

[Phyllis Richard]

I'm not aware of any, other than, obviously, if a stranger is walking into any kind of sales environment, the seller wants to know who they are or at least know that they're verified, and that if they write a cheque, the cheque won't bounce, and that sort of thing. There's no actual requirement.

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

I'm going to turn back to the law society. Can you tell me how many audits have occurred specifically as a result of the money laundering, anti-terrorism financing regulations over, let's say, the last five years?

[Frederica Wilson]

The simple answer is no, because of the point I made earlier about how the data is collected. What I can tell you is that law societies—all but our tiniest law societies.... And as you'll appreciate, we have three northern law societies that are required to do all of the same things as the larger law societies, but they are very, very under-resourced, so they face more challenges with some of these activities and need to turn to some of their other fellow law societies to help them with this. It may be a little more ad hoc, but all other law societies have regular audit programs that are random. I can tell you that the frequency ranges. For example, in Prince Edward Island, they audit every law firm every year. In Ontario it would be roughly every law firm every five years. In Manitoba, I believe it's something like every law firm every three years. That just gives you a sample.

I mention that because when they go in and audit, in addition to looking at good accounting practices and compliance with the trust regulations of the law society, they are looking specifically at no cash, and client identification and verification. The way these audits are done, as you can appreciate, is much the same as when have your books audited in your company. Your sample files are pulled, and if they have any concerns about what they see, they pull more and look at them, as well as looking at all of the actual ledgers and transactions, of course.

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

I don't mean to cut you off, but my time is limited and I have several questions.

I recognize those audits. However, there's much more that the legal community could be doing to address money laundering than just identification and cash. Oftentimes it's a lawyer setting up a corporation, setting up articles of incorporation, setting up all of the parameters around things that may actually be the tools for money laundering and financing of terrorism. So my questions about audits are important not just in terms of the cash and identification points.

If law societies are essentially self-regulating this based on the Supreme Court decision around money laundering and anti-terrorism legislation, how can they demonstrate to governments and the public, that the legal community is adhering not just the idea of no cash, but to preventing any suspicious behaviour that could be in the realm of money laundering and terrorism financing? How can we, as legislators, feel comfortable—and I read the Canadian Bar Association brief, and I recognize that's not in your submission—in saying that the majority of lawyers are following these regulations? How do we know that, if there's no data to suggest that the audits are being done as specifically targeted by this legislation? How can we know this, and why have other common law jurisdictions been able to have more of a microscope and focus on the follow-up in regulations to ensure that this is actually being done, and not just in those two areas of identification and cash?

[Sheila MacPherson]

The law societies are looking at enforcement of the rules that actually replicate or mirror what is contained federally. Rather than having enforcement occur through that vehicle, law societies are charged with enforcement, and those are things like cash and money laundering.

The other area of enforcement is to ensure that lawyers' trust accounts are not used for purposes other than the provision of actual legal services. As we indicated, the majority of Canadian lawyers are already governed by a rule in that regard, and, indeed, there have been prosecutions of lawyers who have used their trust accounts for purposes other than the delivery of legal services, in other words as repositories of money inappropriately. The proposed new rules would provide that all law societies will adopt a rule that will prohibit lawyers from using their trust accounts for purposes other than connected with the delivery of actual legal services. That, I think, will be an important thing to bear in mind, and the law societies will be looking for enforcement of those issues.

The issue or challenge generally with respect to the role of corporations in money laundering is that if a lawyer sets up a corporation, that corporation is a legitimate way of doing business. The lawyers can be acting completely appropriately. The corporation goes off and does its business. The lawyer has no subsequent involvement necessarily with that corporation in terms of its transaction. So arguably the responsibility for looking at those corporate structures as vehicles of illegal activity rests through the corporate registry structure.

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

That's the exact point. When the lawyers continue to act via the mechanism of these corporations because there is a protection, because they are exempt, there is a real benefit to keeping the lawyer involved in the corporation moving forward because they're exempt for money laundering purposes.

[The Chair, Liberal, Wayne Easter]

We'll have to end it there, Ms. O'Connell. You're over your time, but Ms. Johnson wants to add to the answer.

[Mora Johnson]

I would add just one small supplementary point to what was already said, which is that there are numerous cases where the lawyer will actually act as the nominee shareholder or director. When law enforcement or banks or whoever are seeking information about the beneficial owners, the lawyer will say, that's privileged, solicitor-client information. That has definitely been an issue. Although, again, if the government passes beneficial ownership...changes corporate law, then that would remove any privilege from that information. At that point, it's not privileged; in fact it will be available in a public registry.