Finance Committee on March 27th, 2018

[Denis Meunier, Senior Advisor on Beneficial Ownership, Transparency International Canada]

Good afternoon, Mr. Chairman, and members of the committee.

Thank you for the opportunity to contribute to the committee's review. I will be giving my presentation in English but would be happy to answer questions in English or French.

I am an Advisor on Beneficial Ownership and Anti-Money Laundering with Transparency International Canada. I'm a former Deputy Director of FINTRAC and former Director General with the CRA's criminal investigation directorate.

Transparency International Canada is a member of the world's leading non-governmental anti-corruption organization, with more than 100 chapters worldwide and an international secretariat in Berlin. TI Canada has been at the forefront of our national anti-corruption and transparency agenda.

TI Canada welcomes the review of PCMLTFA. We recognize and support the work played by all the anti-money laundering/anti-terrorism financing partners in Canada and the critical role reporting entities play as a first line of defence in this fight.

We will be providing to this committee and the Department of Finance a more comprehensive submission on our recommendations. As we don't have much time, I would like to move directly to TI Canada's five key recommendations.

First, TI Canada recommends implementation of a nationally integrated, publicly accessible beneficial ownership registry of corporations in an open data format. The registry would be a one-stop shop with registrars, or a registrar, having appropriate powers to apply proportionate and dissuasive sanctions when information is untruthful.

Also, the act should be amended to require all reporting entities, including what are called DNFBPs—basically the ones that are not financial entities or institutions, such as real estate, which is now exempt from the obligation to identify beneficial ownership—to determine and verify the identity of the beneficial owner; determine if their customers are politically exposed persons, family members, or associates; and ensure that no accounts are opened or financial transactions completed until the beneficial owner has been identified, with their identity verified by a government-approved ID. Of course, this recommendation will be facilitated by the implementation of a publicly accessible beneficial ownership registry.

Canada needs to make beneficial ownership transparent. In Canada, more rigorous identity checks are done for individuals getting library cards than for those setting up companies. We need a proactive corporate registry function harmonized and integrated across Canada with powers to audit, compel information, apply sanctions, and detect and report suspicious activities.

Pending final legislative approvals, all 28 European Union member states are expected to implement a public registry by the end of 2019. A majority of the 37 FATF members—the international standard-setting body on money laundering—are expected to implement a publicly accessible beneficial ownership registry. It's not a stretch to anticipate that such a public registry will be the new FATF standard in a few years. That's the standard Canada should meet.

We welcome the positive steps the finance ministers announced on December 11, 2017 to ensure appropriate authorities know who runs which corporations in Canada. However, we believe they must go further. They must make the registry publicly accessible and look to also create a registry of trusts.

A public registry will allow all reporting entities, the public, and the media to work together to prevent and dissuade the abuse of corporations and trusts by secretive beneficial owners. This will lighten the burden on reporting entities and anyone doing business with corporations to more accurately assess their business risks. A publicly accessible registry is an investment in prevention. It would also ensure that Canada keeps up with international best practices such as those adopted by the UK and our new EU free trade partners.

Second, Canada's 2015 risk assessment was clear: legal professionals are inherently highly vulnerable to money laundering. The FATF evaluation of Canada also highlighted the gap created by the absence of lawyers from the AML/ATF regime and the lack of scope in their own regime. Without an independent expert assessment, Canadians have little information to be assured that the legal profession's rules and practices meet the current Canadian standards set by the act or even the FATF standards in protecting against money laundering and terrorist financing.

We recommend that the government bring legal professionals into the ALM/ATF regime in a constitutionally compliant way. The Solicitors Regulation Authority that regulates solicitors in England and Wales is a model that the Federation of Law Societies of Canada and the government should seriously explore.

We also recommend that the act should designate as high risk all financial transactions by legal professionals, especially those using trust accounts, and require reporting entities to take enhanced due diligence measures on those transactions, including determining the beneficial owner and the source of funds.

Third, we recommend strengthening the regime by expanding the number of DNFBPs covered under the act, as per the Department of Finance’s recent consultation paper, especially for non federally regulated mortgage lenders because of the high vulnerability of real estate to money laundering.

We understand from law enforcement that money laundering charges by prosecutors are abandoned because of the complexity of linking money laundering to the predicate offence. The government should consider recklessness or gross negligence as a standard of proof.

This leads to our fourth recommendation, that the government bring Criminal Code amendments to make money laundering easier to investigate and prove, and that resources for police and prosecutors be re-examined to better support enforcement. Otherwise, laws without adequate enforcement are meaningless.

Concluding with our fifth recommendation, we recommend that comprehensive annual reports be published by the Government of Canada, in collaboration with all provinces and territories, on the AML/ATF regime’s results for all Canadian jurisdictions, including the number of compliance violations, penalties issued, money laundering investigations, charges laid, prosecutions, convictions, forfeitures, and seizures, as well as activities by the Canada Border Services Agency that are related to the act.

We believe that more information and transparency should be available publicly on the results of the AML/ATF regime.

Thank you for the time you have offered us to speak today. I’d be happy to answer your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much for the extensive brief.

As an individual, we have Mr. Jeremy Clark from Concordia University.

Jeremy, you're the last one.

[Jeremy Clark, Assistant Professor, Concordia Institute for Information Systems Engineering, Concordia University, As an Individual]

Thank you, Mr. Chair. I'm Jeremy Clark. I'm an Assistant Professor at the Concordia Institute for Information Systems Engineering in Montreal, at Concordia University. I received my Ph.D. in 2011 from the University of Waterloo. It was around that time, about eight years ago, that I first became interested in Bitcoin.

Bitcoin is an emerging digital currency that uses cryptography in a novel way to provide a secure cash-like system for creating new money, enabling transactions between participants, and recording transactions in a decentralized way on a ledger that we now call the blockchain.

Given my expertise as an engineer or a technologist, I feel that I can best assist you by providing the technical details of how Bitcoin and blockchain technologies work. I have had many conversations with regulators at FINTRAC, as well as Bank of Canada, the AMF in Quebec, the Department of Finance, CRTC, the RCMP, and others. I could perhaps play a policy expert on TV, but I'll stick to the technology for the purposes of today.

I continue to maintain that successful regulation in these areas requires an accurate understanding of the technology. Cryptocurrencies, including Bitcoin, are decentralized. What does that mean? It means they're operated by a network of computers. Anyone can join or leave at anytime from anywhere in the world with no one company or server in charge. Transactions are deemed valid or invalid through the consensus of this network. For the best cryptocurrencies, transactions clear and settle in the order of seconds and can be conducted 24/7 with e-mail-like efficiency.

I want to emphasize that after the transaction is confirmed by the network, the unit value has actually moved. It's not like a digital authorization and then there's some actual settlement that happens behind the scenes. Once it's confirmed, the unit of value is actually settled and cleared.

If you hold Bitcoin, what does that actually mean? What is a Bitcoin, and where is it? It simply means that there's an entry on Bitcoin's ledger for you, and a balance that can go up or down. It's basically intangible beyond that. One parallel you might think about is cellphone minutes. What's a cellphone minute? Why do you have it? What exactly is it? It's basically just a ledger entry. Cellphone minutes have coincidentally been used as a makeshift currency in countries such as Kenya.

Anonymity is often ascribed to cryptocurrencies, but the level of anonymity varies. For Bitcoin, all transactions are recorded but without real world identities. Other cryptocurrencies might obfuscate identities further and/or hide transactional amounts. In all cases, transactions are Internet packets that originate from a computer and are no different from other forms of online communication that might be of interest to regulators or law enforcement. Cryptocurrencies have been suggested as being perfect for various financial crimes, such as tax evasion, terrorist financing, and currency smuggling. Governments have primarily looked at the on ramps and off ramps between cryptocurrencies and, say, the Canadian dollar. This is sensible in the short run.

There is also concern about the use of cryptocurrencies on online markets for illicit goods. Law enforcement has a very good track record of shutting these markets down, essentially by framing the issue as tracing Internet packets rather than focusing on the currency that is being used.

If we can zoom out for a second, we can take one of two postures in dealing with illicit cryptocurrency activity. We could try to take a stance of prevention, or one of detection. I think prevention will fail. Cryptocurrencies are open. It's an Internet-driven technology, and Bitcoin is just the first attempt at strong confidentiality and anonymity. It would honestly be technically easier and perhaps more productive to ban paper money than Bitcoin. Instead, we should focus on detection of criminal activities.

Finally, inside of Bitcoin, underlying it, is a novel technical innovation called the blockchain. We've seen blockchain projects from within the government, for example, from the Bank of Canada and the National Research Council. This technology has the potential to bring changes to accounting practices, transparency to procurement processes, new methods for raising capital within a company, and new ways of organizing financial markets. We're hopeful that blockchain technology generally adds transparency and accountability to the financial system.

I've tried to keep my remarks concise and brief. I once taught an entire course on Bitcoin, so I can literally talk about it for 24 hours. Thank you for your time. I look forward to answering your questions.

[The Chair, Liberal, Wayne Easter]

You might have to talk to us for 24 hours on it.

Joël, the briefing was supposed to start at 6:30. Is that delayed until we're done?

[Joël Lightbound, Liberal, Louis-Hébert, QC]

It's going to start at 6:30.

[The Chair, Liberal, Wayne Easter]

That's a real problem for some of our members, because if anyone should be there, it should be finance committee members. I guess there's nothing we can do about it, but I certainly think the department should take into consideration that finance committee members need to be there for the briefing on the budget implementation act. I don't know what we can do about it at this stage.

Dan.

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

I would just like to register my disappointment that again, at around 11:15 this morning, we got notice that there was going to be a technical briefing. During the previous parliament, there was at least a weekend, so that people knew. Again, I'm not going to be hard on the parliamentary secretary, because obviously it's not up to him when the tabling and the technical briefing are made available. That's something I would hope, though, that he would take back to his minister.

[The Chair, Liberal, Wayne Easter]

Yes, as Chair, I think that when we get a document this thick, we do need a day before we go to a briefing by departmental officials. Anyway, we'll leave it alone for now. It's something we'll have to sort out for the next one for sure. It's no fault of yours, Joël, but it is a problem because we have witnesses here, who have come to town, and we can't ignore them.

Go ahead, Mr. Julian.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Mr. Chair, the briefing could be postponed. It was scheduled at the last minute and I don't think that it shows respect for members of Parliament. The parliamentary secretary does have the ability to postpone it until tomorrow night, which I think would make a lot more sense.

[Joël Lightbound, Liberal, Louis-Hébert, QC]

Mr. Chair, out of respect to all the officials who will be there tonight and the other parliamentarians who plan to attend, we'll proceed with the briefing. However, for the parts that members of the committee might miss, we'll see what we can do to offer perhaps another briefing on those parts members missed because they were at committee.

[The Chair, Liberal, Wayne Easter]

Yes. I just noticed it on my BlackBerry, so that's why I asked you the question. We'll leave it at that, but certainly—and I don't think any members would be offside on this—for a briefing on a budget implementation act, we really need a day to see it first, before we have an opportunity to go to a briefing.

With that, we'll start with questions. We have about an hour.

Ms. O'Connell, we'll go to five-minute rounds.

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

Thank you, Mr. Chair, and thank you all for being here and for your testimony.

I'm going to start with Mr. Kemper. I'm paraphrasing you a little bit, but you talked about regulations not going too fast and suffocating the development of the technology moving forward, which I can certainly understand. Regarding Mr. Clark's testimony too, the opportunities for blockchain technology are certainly interesting. I think from governments to private sector, everyone's very interested in what this can mean.

My specific question is around the type of regulation that maybe other governments or places around the world have gone too far, too fast with. I say this notwithstanding Bitcoin, because I think there are other issues in that regard; but in terms of blockchain technology, do you have specific examples where you're concerned about regulations that will stifle its development?

[Kyle Kemper]

Thank you for that good question.

One of the challenges with managing innovation is understanding that the effects of our decisions in in these rooms can have enormous consequences for the industry at large. Before we can go and make these regulations, it's really important that we understand the technology and its scope or the opportunities it presents.

Blockchain technology is a paradigm-shifting technology. It is like the Internet. It is like the automobile. It stands to change the very fabric of society. Around here, we have been discussing the rules and the regulations and looking at this from a wax and wick point of view, and now we have electricity. We need to be building sockets to encourage and utilize the benefits of this technology.

Listening to my fellow panellists here, they mentioned an open corporate registry. Absolutely. Blockchain can solve this perfectly. As far as real estate goes, and putting real estate titles onto a blockchain, absolutely.

As far as FINTRAC and compliance go, having proof that all of those records are submitted and are verifiable would be excellent, excellent, excellent.

The scope of the opportunities is just incredible. From an investment point of view, being able to track that, and thinking about when we register a corporation, as opposed to just assigning a number that says 100,000 shares to you and 100,000 shares to you, we could actually use tokens that are tied to digital identities, tied to permissions about whether you can vote, about who's the officer, who's the secretary, who's the legal counsel, and do you have access to a building. It all comes full circle.

Where are the regulations that are hindering it? I think there are those who speak very negatively about it, or suggest potentially banning the cryptocurrency. We saw that in New York, as one example, with their BitLicense agenda, to requires anybody who is developing solutions around Bitcoin and cryptocurrencies to have state approval. It actually pushed a lot of the businesses away.

If we develop regulations that way, if we think about the Internet, and if we require people to get licences to open websites, people are just going to open websites in other countries. They're going to move away to jurisdictions that are more friendly.

We need to understand that we're in a time of convergence where we have technologies like artificial intelligence, robotics, and automation all coming together as one, and that in order to register your company, you're going to be looking for the best conditions do that. So it's our duty. Thank you.

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

I don't mean to cut you off, but I only have five minutes. I appreciate your idea.

Mr. Kemper, I don't disagree about the technological potential of blockchain, but I think what governments and regulators around the world are going to have to deal with is the separation or distinctions with issues around cryptocurrency. I fully understand that blockchain technology comes from cryptocurrency, but given the risks of money-laundering and terrorism financing on the cryptocurrency side, moving forward, how can regulators not stifle its technological development while addressing the very real issues I mention? Even if you don't want to get into the issues of terrorism financing and money-laundering, just look around the world at what we're seeing now in the sale of the currencies, and the illicit sales that are going on there, and people having all their money taken from cryptocurrency organizations that are not legitimate.

Mr. Clark, how do we as regulators round this issue?

[Jeremy Clark]

Sure. Once again, I'm more on the technology side than the policy side, but I'll try to answer as best I can.

On whether or not different countries have taken different approaches to regulating cryptocurrencies, I don't have a shining example of a country that did it wrong. There is a lot of criticism of something called the BitLicense in New York state. The community seemed to feel that this was a regulatory overreach.

In Canada, most Bitcoin people, or cryptocurrency or blockchain people, are fairly happy with the current state where exchanges are sort of operating as money service businesses. They're doing financial reporting. There are some concerns about banks, commercial banks, shutting down the bank accounts of businesses that operate with Bitcoin. That's maybe one criticism I've heard.

But, yes, sometimes regulation also can pave the way to say that we like this technology, and so sometimes remaining silent on certain issues as well can be a detriment. I know one bureaucrat, whom I won't name, who was basically shopping around a blockchain project and said, “I stopped asking whether we can do this, and I started asking, 'Do you know of a specific rule that you can point to that would get broken if we try to do this'”?

That was their approach for trying to make these blockchain projects work within government policy.

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

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, all.

Mr. Kelly, go ahead.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Thank you.

I'll start with Ms. McNeil. I was involved for many years in the mortgage industry, including being its industry representative on the Real Estate Council of Alberta. Many of the things you said struck me as quite familiar. It sounded to me like you were conveying a sense that the honest practitioner at times finds it onerous to comply with regulations, leading to a situation wherein the people who know the rules the best are the criminals, who then have the knowledge to circumvent or to find end runs around regulation. Is that similar to the experience of your members?

[Dina McNeil]

Do you want to take this one?

[Simon Parham, Legal Counsel, Canadian Real Estate Association]

Sure. Thank you for the question.

The first comment that you made, that some of our members—honest, well-meaning members—find this onerous, is certainly correct. I brought this little brick here as an example. This is 555 pages of guidance and regulation and the act itself that a brokerage would have to read to fully comply with the legislation. This does not include the 1,207 pages of policy interpretations that FINTRAC has issued, not all of which apply to the real estate sector, but they would still have to read through them as well as FINTRAC advisories. There's a lot.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Are there any particular irritants that your members talk to you about?

[Simon Parham]

It does vary. The difficulty we have is we do hear anecdotes and stories, and I'll give you one example. We recently heard of a situation in which a B.C. member was examined and cited by FINTRAC. We don't know the full details. We talked to the member, and they were cited for writing “Vancouver, B.C.” on their identification form as opposed to “Vancouver, British Columbia”. That kind of nitpicky distraction frustrates our members and sometimes takes people's eye off the ball of what is actually supposed to be accomplished here, which is detecting money laundering. That's an anecdotal observation.

The difficulty is that we don't have any aggregate statistics from FINTRAC about where our members are having difficulties, and that's the kind of information we could use. We've asked them many times for it.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

With compliance?

[Simon Parham]

Exactly. We've asked them many times how we can help them and for them to show us over time where our members are struggling. We said that we could use our resources and that they could leverage us to help communicate that to our members. They've given us snapshots and said, “We heard this story out in B.C., and here's something from Toronto,” but they do not provide us with any information—as far as we can tell, they don't have it—on where there are trends over time and where the problems are. For example, maybe there are bigger problems in B.C. than Ontario. We just don't know.

We hear a lot of stories, but at the end of the day they're anecdotes, and it would be much better if we had a complete picture from them.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Mr. Meunier, if I may, I'm looking at the preamble to your fourth recommendation, the concern that law enforcement is abandoning money laundering charges because of their complexity. What about even just getting to the investigation stage? In my career I repeatedly heard about the reluctance to prosecute fraud at all. Money laundering and terrorist financing are particular types of fraud. Was that your experience when you were at FINTRAC and the CRA?