Finance Committee on March 28th, 2018

[Marc-André Pigeon, Assistant Vice-President, Financial Sector Policy, Canadian Credit Union Association]

Thank you for the opportunity to talk about the 2018 statutory review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

I'm going to approach this issue from the perspective of our 260-plus members that we often characterize as the small businesses of the Canadian financial sector. Our concerns, as you'll see in my comments, are really oriented from that perspective.

I would note first of all that the credit union system is pleased to see that the government is seeking a balance between regulatory compliance and the associated costs. Credit unions know they have a role to play in fighting these criminal activities. They are apprehensive, however, about the expansion of this framework to include sectors in which small entities, such as credit unions, do not always have the required resources or knowledge.

We also recognize that financial institutions have a responsibility to know who they are dealing with. That is the foundation of our business model. That said, our members maintain that due diligence as regards money laundering, collecting information, and documentation requirements is costly and prevents them from focusing on their core mandate, which is serving their members.

All this matters because our research, and research internationally, have found repeatedly that regulatory compliance, especially with money laundering and terrorist financing obligations, impose a disproportionately large and heavy burden on credit unions, smaller institutions, and smaller credit unions in particular. In fact, I think this creates a barrier to entry or good competition in the banking sector. It's a serious issue for us.

With the proposed expansion of the framework to cover new sectors, it would seem this load will spread to more entities. I know it's difficult to argue against the logic behind moving towards functional regulation, but it's also hard to imagine how collecting more information will necessarily lead to a more successful policy outcome. So far, the evidence we've seen does not bear that out.

It's true that some of the proposed changes try to make the overall framework more efficient and responsive. We are concerned, however, that some of these are just tweaks to what is frankly often a burdensome and not always efficient or effective system.

We'd like to suggest a different approach. We'd like to suggest the adoption of a model built around a simplified due diligence process for use in situations where there is little risk of services or customers becoming involved in money laundering or terrorist financing. Other jurisdictions have already adopted this approach. We believe that following their example would lead to the same results, namely reducing or at least limiting the increase in administrative burden imposed by the framework. Further, we think it would do so without affecting the value or quality of the gathered information.

This alternative model could also leverage new technologies to achieve the goal of capturing useful information while minimizing the cost of doing so. For example—I think this has been discussed publicly—the public sector might consider creating industry-wide information clearing houses. These clearing houses could collect beneficial ownership information, from annual tax reports, that could be keyed to unique identifiers assigned to each tax filer. By limiting a reporting entity's obligations to obtaining this unique number from their clients, the resulting compliance burden could be meaningfully reduced. Reporting entities would no longer need to go through the inefficient and duplicative effort of gathering this information from each account holder.

From the client's perspective, it would be less time-consuming and repetitive, especially for clients who hold accounts at several reporting entities. For the public sector, this approach could increase confidence that the information is secure, consistent, verified, and accurate. Since the detection of money laundering often hinges on observing the flow of funds among parties, policy-makers may also want to consider tying this approach into some of the changes that are being proposed as part of the payments modernization effort.

In short, we think the approach we are proposing would give credit unions and other reporting entities more time to focus on what is truly important, namely, explaining the context of transactions, rather than recording the usual, factual information.

The measures we are proposing are not simple to implement. We admit that. Yet if we are to strike a balance between costs and results, we encourage policymakers to carefully consider our proposals.

As I wrap up, I'd like to briefly shift to thanking this committee for the support it gave to credit unions as we worked to secure the right to use generic banking terms. Yesterday, as you know, the federal government introduced proposed changes as part of its budget implementation act that for us represent important progress on this file. This committee deserves credit for its support.

I'd be happy to take your questions on today's topic and also to appear on your Bill C-74 review.

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Pigeon.

From the Canadian Life and Health Insurance Association, we have Mr. Kohn, Counsel; and Ms. Birnie, Assistant Vice-President, Compliance. Welcome.

[Ethan Kohn, Counsel, Canadian Life and Health Insurance Association]

Thank you, Mr. Chair.

As you mentioned, my name is Ethan Kohn. I'm Counsel at the CLHIA. My colleague Jane Birnie from Manulife Financial is here. She is the Assistant Vice-President, compliance.

We'll begin with an opening statement, and then we'd be pleased to address any questions the committee might have.

The Canadian Life and Health Insurance Association is a voluntary association with member companies that account for 99% of Canada's life and health insurance business. The life and health insurance industry is a significant economic and social contributor in Canada. It protects over 28 million Canadians and makes $88 billion a year in benefit payments to residents in Canada. In addition, the industry has over $810 billion invested in Canada's economy. In total, 99 life and health insurance providers are licensed to operate in Canada, and three Canadian life companies rank among the 15 largest life insurers in the world.

Our industry is proud to do its share in fighting money laundering and terrorist financing. When proceeds of crime are introduced, layered, and integrated into the financial system, public confidence is eroded. Companies with weak controls risk having significant administrative penalties imposed, and they also risk considerable damage to their reputation.

This committee has heard from a number of witnesses, including FINTRAC, that a risk-based approach to compliance and to enforcement is an objective of Canada's AML regime. Because neither reporting entities nor government agencies enjoy unlimited resources, it is important that they focus on the areas of greatest potential exposure. In this regard, I would note that the insurance industry is relatively low risk. We offer long-term protection products for which a significant majority have a clear source of funds, which makes it unlikely that bad actors will exploit the insurance sector. To illustrate this point, in 2016 over three-quarters of premiums received were in regard to products that carry a low risk for money laundering and terrorist financing. These products include term life, group life, registered annuities, disability insurance, and uninsured health contracts.

I would also note that the personal insurance industry is unique among all reporting entity sectors—not only are insurers subject to the act, but so too are their primary distribution network, life insurance advisors.

Each individual advisor must have controls in place similar to those required of insurers.

For our industry, there really are belts and suspenders in place.

I will turn now to the question at hand, this committee's examination of the PCMLTFA as part of the five-year review. You've heard from previous witnesses that the FATF assessed Canada's regime as being largely effective in containing ML-TF threats, and that Canadian financial institutions have a good understanding of their risks and obligations, and generally apply adequate mitigation measures. We agree with that, though there is always room for improvement.

With that, I'll turn the floor over to Ms. Birnie.

[Jane Birnie, Assistant Vice-President, Compliance, Manulife, Canadian Life and Health Insurance Association]

Policy-makers have made good strides in examining and improving aspects of the system that present real challenges for insurers. One example is the requirement that institutions identify the beneficial owners of corporations. As you know, the government is working with the provinces in devising a system that would have corporations report their controlling shareholders. We understand there could be sensitive information in such a repository, and unfettered access may not be appropriate. Limited access by authorized financial institutions, however, would avoid the need for each institution to replicate the work of determining beneficial ownership. It would make a better customer experience when applying for our products, as there would be fewer questions to ask and less documentary evidence to produce. This would have a dual benefit of enhancing privacy rights and reducing regulatory burden on every legal entity in Canada.

We also appreciate recent enhancements to identification requirements. Last year, the government responded to industry and introduced greater flexibility in the documents that constitute acceptable forms of identification. Going forward, we support further efforts to expand ID methodologies, such as digital identification.

Over the past couple of years, amendments have also been made to enable FINTRAC to exchange information with more of its federal and provincial partners, such as securities regulators and national intelligence agencies. If this were extended to allow FINTRAC to share information with reporting entities, there would be benefit to industry and to Canadians alike.

In each of these areas, we see real signs of progress, and we encourage Finance, FINTRAC, and OSFI to continue their efforts in identifying and addressing other aspects of the regime that would benefit from streamlining, bearing in mind the primary objective of the act: minimizing the abuse of Canada's financial system by money launderers and terrorists.

Thank you for inviting us today, and we're pleased to answer any questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

Turning to Mr. Lareau, as an individual, Associate Professor at Université Laval, the floor is yours. Welcome.

[Prof. André Lareau, Associate Professor, Faculty of Law, Université Laval, As an Individual]

Hello. Thank you kindly for inviting me.

As you said, I am an Associate Professor in the Law Faculty of Université Laval, a tactful title for a retired professor who still makes a contribution to the university community.

I am not an expert on the application of the Proceeds of Crime and Terrorist Financing Act. I specialize in taxation only, so my comments today will be limited to taxation in international transactions. I do not claim to have the solutions, but I would still like to put forward some hypotheses that may or may not be borne out.

Laurent Laplante, a journalist and essayist who I greatly admired, told me about twenty years ago that we cannot control what we cannot see. That is true for the criminal activities we are discussing today. Applying that statement to taxation, we can see that crime draws its strength from secrecy. When essential information that is needed to understand a commercial transaction remains secret and is not disclosed to the authorities—who nonetheless should have access to it in order to do the necessary audits and calculations—that means that our detection tools are inadequate.

In short, these weaknesses of our tax system that I have identified—some fiscal, others more commercial—can be exploited by tax evaders. I will explain them in greater detail later on or in answering your questions.

First, our tax legislation is very attractive, especially to international players, as it provides a screen and camouflages illegal transactions through the exempt surplus. I will talk about this later on.

Second, the fines for tax evaders, tax criminals, are too lenient. Most of these people do of course have advisors, guides, who are experts in taxation and who do not act alone. Recently, a businessman in Quebec City told me that he had been approached several times by accounting firms to carry out large international transactions, using tax havens in particular. He was also told several times that it was risky, but that it should work. He turned down those offers.

There is a third element, something that could be discussed. I am referring to bearer shares, which are used in tax evasion and are often denounced. Unfortunately, the Canadian Bar Association made an exception to this rule and did not speak out against them. Stating that this would interfere with tax planning, it argued for the status quo.

The voluntary disclosures program is the fourth element. In spite of the most recent changes to the program, it needs to be completely reviewed and to a large extent scrapped. The United States has in fact just announced that it is scrapping its offshore voluntary disclosure program; the program will be eliminated in a few months.

The Jordan decision is the fifth element, and it is increasingly being raised in taxation matters. In a very recent decision regarding tax evasion of $31 million related to contraband tobacco, a Quebec Court judge dismissed the charges on February 26, 2018, in accordance with the Jordan decision.

The sixth element pertains to changes that should be made to paragraph 55(3)b) of the Proceeds of Crime and Terrorist Financing Act, in order to expand the powers of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to require it to disclose information to the Canada Revenue Agency. Paragraph 55(3)b) is poorly written, in both English and French, but I would say the French version is even worse.

Another element that I will discuss very briefly is the ability of foreign companies to pay tax-free dividends to Canadian parent companies through the exempt surplus.

My explanation is as follows: there is nothing stopping a foreign company that is located in a tax haven, where there are few controls, and that is affiliated with a Canadian company from smuggling firearms or selling illicit drugs and recording those revenues under the company's exempt surplus, since there are no controls in the foreign country. As a result, in many cases no one is the wiser when those amounts are repatriated as dividends payable to the Canadian parent company, because form T1134 requires very little information from the dividend recipient.

As a colleague from the Canada Revenue Agency told me recently, it is obviously worse when the parent company is not subject to an audit. It is smooth sailing because the Canadian parent company deposits the amount it receives in its bank account and not in a non-resident entity. The resident entity may deposit amounts from abroad. That is a major problem. As someone noted, a new generation of tax evaders could take advantage of this situation.

Why then should we not require the foreign entity that pays dividends to a Canadian parent company to obtain certification from an expert in the field to certify that the revenues earned are indeed from legitimate operations? And at the same time, of course, impose prison terms for experts who sign off on something that constitutes fraud?

Canada has concluded 23 information sharing agreements and more than 90 tax conventions, in some cases with countries that merrily engage in fraud.

On March 26, just two days ago, an article by Jeremy Cape was published in the Tax Notes International.

He is a tax and public policy partner with Squire Patton Boggs in London.

Mr. Cape said the following about Nigeria:

If I were a Nigerian living in Nigeria, I'm not sure I'd be wholly compliant with my tax affairs. In fact, there's a good chance I'd be a tax evader.

There is in fact a lot of tax fraud in Nigeria, and Canada has a tax convention with that country.

There are other aspects as well. I could mention Panama, with which Canada concluded an information sharing agreement. Article 6 of that agreement should include a foreign control mechanism to allow us to investigate what is happening abroad, but it does not. There is an article 6 in 22 other information sharing agreements, allowing Canada to investigate what is happening in those countries, but there is no such article 6 in the agreement with Panama.

As recently as yesterday, the Canada Revenue Agency told me not to worry about it, since Canada has signed the Convention on Mutual Administrative Assistance in Tax Matters. Article 9 of that convention does in fact provide that countries may conduct investigations in other countries, but Panama has set aside article 9. Since it does not subscribe to that article of the convention, Panama could refuse to let foreign countries conduct investigations within its borders.

[The Chair, Liberal, Wayne Easter]

Could I ask you to wrap up fairly quickly, as we're slightly over time?

[Prof. André Lareau]

I will be pleased to answer your questions.

[The Chair, Liberal, Wayne Easter]

Good. Thank you very much.

Given the time, we will go to six-minute rounds and for the first round, we have Ms. O'Connell.

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

Thank you all for being here.

I'm going to start with the Canadian Bankers Association. You mentioned the potential for PIPEDA changes and sharing of information between financial institutions. I can certainly see why you raised that. Would FINTRAC not contact...? For example, let's say they had a report from one institution and they could trace funds between one institution and another that may have shown up somewhere, would they not contact the other institution to make sure that they were at least aware that this has been flagged?

[Sandy Stephens]

FINTRAC is given information. It currently doesn't have the ability to provide information back down to private industry. There is sharing at the governmental level, obviously, but there's no ability to share back down.

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

FINTRAC themselves never come back to you...? I know what their role is, which is to receive the information, but they never come back to flag anything?

[Sandy Stephens]

No, but that is also one of our recommendations: that they have the ability to come back. Again, that would allow for more targeting, so you're not boiling the ocean so much with all of this reporting. With information sharing, etc., you can have a more targeted approach.

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

I'm assuming that you can at least understand.... I guess the concern would be how we ensure that institutions aren't sharing with each other or verifying risky transactions, making sure that everything's reported to FINTRAC, but also that there isn't, for example, some type of stigma for transactions that are fine and turn out to be totally legitimate, but perhaps banks say that if something was flagged for an individual they're just going to decide not to do business with them anymore.

[Sandy Stephens]

I think this is an incremental change. There's already a provision in PIPEDA under paragraph 7(3)(d.2) that allows for sharing for preventative purposes for fraud. It states specifically that it's where it's likely to be committed. It's not a wholesale sharing of information. It's a limited purpose for where it's likely to be committed. If you swapped in money laundering for fraud, it would be where money laundering is likely to be committed. I think it's an incremental ask. There are already constraints around how you could use it, to protect privacy.

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

You essentially want to duplicate those types of regulations but include money laundering and anti-terrorism?

[Sandy Stephens]

Exactly. It would just be adding in another element. It's not just fraud but predicate offences to money laundering, as well as money-laundering offences.

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

Okay. Thank you for clarifying.

I'm going to move to the credit unions, please.

We certainly heard this before when we had testimony from different officials in terms of credit unions. You mentioned in your testimony as well the model of knowing your customer and things like that. I can see that certainly in a lot of communities, but there are still credit unions in big cities and a lot of customers, and it would pose a challenge to know your clients all that well.

I understand that's the model, but in today's day and age that's certainly not possible everywhere. How would the credit unions see their role in ensuring that you do try to know your customers, but if you can't physically know them, that you have other conditions in place?

I'll ask you a two-part question all at once. Also, we know from the larger banks and the testimony we heard earlier that there are systematic flags built within the system. The average teller isn't going to know that even though it might be an amount under the $10,000 that is being transferred, there are flags built into the system. I can't imagine that every credit union—the smaller ones—could have that technological infrastructure. What role do you see in terms of knowing your customer and technology and those costs, then?

[Marc-André Pigeon]

I'll start with the framing. You're right. In the larger urban centres, that's where we tend to find the larger credit unions, as you might expect. In the rural settings, I would hazard to say that most credit unions do know most of their members. You're right. In the bigger institutions, there would be more challenges in that respect.

Similar to our friends at the CBA, we are advocating for a risk-based approach. That's where the simplified due diligence approach would help address the regulatory burden side of things while still keeping the trappings of the broader framework. Again, we know that other countries have implemented this, and this is a good way to address the regulatory burden side while still maintaining a robust system. Australia and the U.K., for example, have set thresholds where you report if a transaction goes above a certain amount or you do it on a periodic basis.

I might get my colleague Sabrina to add to this, if she has anything she'd like to build on.

[Sabrina Kellenberger, Senior Manager, Regulatory Policy, Canadian Credit Union Association]

Your comment that perhaps the smaller credit unions are not able to use technology as much is partially true, but most do have very sophisticated banking systems that do allow detection of the types of transactions you're talking about. For transactions that would violate the 24-hour rule, definitely, we do have the ability to pick those out from a technological perspective.

That said, there certainly is a component of knowing your customer, because it's a small community. In the larger credit unions, that is lost somewhat, but I don't think we're in any different position there than a bank or any other financial institution.

[The Chair, Liberal, Wayne Easter]

That will end that round.

Mr. Kmiec, go ahead for six minutes.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Most of my questions will be to the credit unions association.

You mentioned the simplified due diligence process, and then you also mentioned that others have done it. Can you explain what “others” includes? Who has done it? How did they do it? What type of simplification did they do? What were some of the reporting elements that they stopped asking for, or maybe asked for in a simplified way?

[Marc-André Pigeon]

I'll start off and then I'll ask my colleague to fill in.

The U.K. example is one that we've documented a little bit, and we'd be pleased to share more information after the meeting as well. In the U.K., they would approach the application of the simplified due diligence approach in cases where, for example—and I'll just read off my list here—the person's total annual turnover in terms of financial activity does not exceed 64,000 pounds, for example; the financial activity does not exceed 5% of the person's total annual turnover; the financial activity is ancillary and directly related to the person's main activity.... There is a long list of instances in which they would apply this simplified due diligence approach.

I don't know if Sabrina would like to add anything to that.

[Sabrina Kellenberger]

The FATF has actually, within its recommendations on financial inclusion in particular, put out quite a significant paper on how a simplified approach to due diligence can encourage financial participation in the economy. Some of the things they are citing are issues like verifying the customer identity or beneficial ownership after the establishment of a business account so that in cases of a small business you're not crippling that business from moving ahead financially by putting all this process around it. Then they put limits on it. Once you have done this for 12 months, you have to start meeting the full requirements of customer due diligence, or if you exceed certain transaction thresholds, you start doing it.

The idea is not dissimilar to the idea of fintechs and sandboxes in which, for a certain length of time, you allow participation on a compliance-relief basis, and then slowly move to a full compliance.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Just so that I understand, it basically sounds like a two-track system where, depending on your process or amounts or types of clients, you stay in one area, and then once you cross some type of threshold, you go into the regular “FINTRAC-esque” model in the U.K. system.