Finance Committee on March 28th, 2018

[Sabrina Kellenberger]

Yes.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Okay.

When someone becomes a member of a credit union, obviously, I figure that a lot of your members who do business with you do so for an exceedingly long time. The same goes for a lot of Canadians who stay at the bank they get when they're 18 or 16. It's typically the bank they stay with for the rest of their lives.

You obviously know quite a bit of information on your clients. You already know where you have problems. You don't have people just randomly walking in to open an account with you.

You already know so much about your client, but then FINTRAC makes you track more information about your client given the compliance related to it. Do you know how much it costs you, per client? Have you ever done an assessment or a cost analysis of how much extra it costs you to try to comply with all these rules for people you really trust and know, because they're members of yours?

[Marc-André Pigeon]

We haven't done an analysis for AML-ATF in particular. We've done analyses around total regulatory burden, but AML-ATF is always cited as the number one most burdensome regulatory policy out there.

I can give you some numbers from a study one of our member centrals did of Ontario and B.C. credit unions. They found that the compliance cost per member—and, again, this is for the entire suite of regulatory policy and positions—was $75 at the smaller credit unions, those with $250 million or less in assets. At the larger credit unions it was $22 per member, for those with $2 billion.

Just within the credit union system, you can see that the impact of regulatory burden is quite disproportionate, depending on your size, per member. We can imagine that, if we extended that to the large banks, the gap would be that much bigger.

These are real numbers we have gotten from surveys, from analysis, and again, this kind of research has been replicated in the U.S., in Italy, and elsewhere in Europe. We even did a study earlier, in 2011, with almost identical results where, within the credit union system, the big guys have five times less cost, from an FTE perspective, than smaller guys do.

[The Chair, Liberal, Wayne Easter]

You have time for a very short one, Tom.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

You mentioned a few international examples of where they have done similar studies. Would you be able to provide that information to the committee through the clerk and the chair?

[Marc-André Pigeon]

I would be pleased to.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Dusseault.

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

Thank you, Mr. Chair.

My first question is for Mr. Laureau, who provided some very interesting and different information from what we have heard in our study thus far. He focused on the international aspects. I would like to know more about that.

You said essentially that it is possible to repatriate funds from foreign countries, sometimes without paying taxes, and that most of the time there is really no due diligence or verification of the source of those funds. The funds could therefore essentially be the proceeds of crime. With regard to those foreign funds entering Canada, you said that there is practically no way of verifying where they come from or how they were generated.

Is that correct?

[Prof. André Lareau]

That is not quite right. There are rules for transfer pricing, which applies to the extent that it is possible to identify which assets were part of transactions. If the funds are only entering Canada, the recipient company has to fill out form T1134 and indicate the foreign country and the specific activity in that country that generated the funds.

On the assumption of good faith, it is assumed that the real activity will be reported. Since there is no tax audit, however, people can answer those questions as they wish. As a result, funds can enter the country relatively easily. Since we cannot control something we do not see, this is where things get tricky. This can pose a major problem.

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

Form T1134, where revenues from foreign companies are reported, would have to be more detailed and the Canada Revenue Agency would have to verify more of the information declared on that form.

[Prof. André Lareau]

Yes. There is no control upstream, that is, on the source of the funds. The Canada Revenue Agency has limited resources. So the payer would have to be subject to more rigorous control. That might require an on-site expert to certify the amount and source of the funds. In the event of fraud, the person would of course be subject to significant penalties.

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

Okay. That is very interesting.

I would also ask you to comment on beneficial ownership. Canada often ranks near the bottom on company transparency. I do not know if you are familiar with this area.

[Prof. André Lareau]

No, not enough. I have worked in the field of bearer shares, but I am not the right person to answer questions about beneficial ownership.

With regard to bearer shares, it should be noted that, despite the amendments to Bill C-25, bearer shares that have been issued will continue to be legal. In this regard, we could learn from the Netherlands, where bearer shares are no longer allowed. For the outstanding shares, namely, those that have been issued, a period of two years has been allowed for those shares to be returned into the system and for the shareholder to be authenticated. The Netherlands are a good example as regards bearer shares.

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

My next question is along the same lines and is for the Canadian Bankers Association.

When a company wishes to open an account, would a registry of bearer shares be a step in the right direction in order to gather more information about clients?

[Stuart Davis, Chief Anti-Money Laundering Officer, AML Enterprise, BMO Financial Group, Canadian Bankers Association]

Thank you for having me today and the opportunity to speak to such an important topic.

I think the opportunity for a shared utility that assists the banks in verification of customer information is an outcome that we would like to see achieved in this regime. Again, banks have multiple obligations. We have obligations to collect information. We have obligations to confirm that information and verify it. A registry really helps with latter part of that equation, but in some ways it also may ensure that we have complete information on our customers.

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

I would like to ask essentially the same question to the Canadian Credit Union Association.

Do you sometimes get the sense that you are targeted? I was thinking that the industry might feel that banks have very strict audits. Do you think you are sometimes targeted by ill-intentioned people who might see weaknesses in credit union audits, specifically regarding client information, but regarding audits in general.

[Marc-André Pigeon]

I will ask my colleague to answer that question.

[Sabrina Kellenberger]

To address your comment on whether we feel targeted, I think the answer to that is no. There seems to be a common misconception that credit unions somehow are weaker or less stringent in the exercise of their due diligence. I can assure you that's not the case. We have to live by the same rules as the largest of the banks. There is no fact to that; it could be a misconception, but that is all it is.

With respect to a registry, we definitely are in support of that. This is one of the areas where I think we could make meaningful reductions in the burden that we carry for compliance, if just the gathering of factual information such as beneficial ownership information can be done just once and it's held in a repository that's accessible to all. That way we could also be assured that everyone is seeing the same information, because right now there's no assurance of that. Clients could come to a bank and give certain information; they could go to another bank and give other information; then they could come to us and give other information. So you could have three sets of information out there that may not be entirely different but not necessarily completely the same either.

[Marc-André Pigeon]

I would like to elaborate on what my colleague said earlier.

Even small credit unions have access to fairly sophisticated systems provided by their head office. Head offices were in fact designed to develop shared, sophisticated, and modern systems. So we already have some systems.

Further, in smaller regions, we know our members better. I would even say this is an advantage in terms of these issues.

[The Chair, Liberal, Wayne Easter]

Thank you all. I didn't say this at the beginning, but if you have a comment you want to raise when somebody else has been questioned, just raise your hand and I'll let you in.

Go ahead, Mr. Fergus.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you, Mr. Chair.

My questions are for the so-called retired professor, Mr. Lareau, and the Canadian Bankers Association representatives.

Mr. Lareau, I'd like to discuss two of the regime flaws you mentioned: light penalties and bearer shares.

I intend to use your comments as the basis for other questions, so I'd like you to elaborate briefly on those two topics. That will also give you a chance to touch on anything you missed during your opening statement.

[Prof. André Lareau]

It's actually possible to look at a comparison with the United States. Since 2009, the Internal Revenue Service, or IRS, has initiated proceedings against 1,545 taxpayers in relation to activities abroad and 671 taxpayers in connection with tax violations.

In Canada, from 2011 to 2016, proceedings were initiated against 42 taxpayers in relation to tax evasion. A CBC/Toronto Star investigation recently revealed that, since 1977, the Royal Bank of Canada had registered 429 offshore companies engaging in tax evasion in Panama. The bank was asked to turn over information, and it complied. It shows, however, how prevalent the use of offshore companies is.

As for bearer shares, everyone agrees that there is a problem. Even academics are saying that Canada is lagging behind on the issue. We have a serious problem, and we can't continue to allow bearer shares to be issued on the market. We absolutely have to get rid of them, since that is what led to the whole Panama Papers debacle. The British Virgin Islands still have bearer shares. My personal prediction is that the Virgin Islands will be the site of the next Panama Papers-style scandal, precisely because they still allow bearer shares.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you.

That brings me to my question for the Canadian Bankers Association representatives.

Thank you very much for your presentation. We previously heard from witnesses who underscored the importance of financial institutions knowing who their clients were. You talked about client identification but wanted the rules to be more lax. You said, and I quote:

We believe the legislation needs to be expanded to allow for the use of advanced technology that has the ability to perform remote identification.

You're proposing that approach as opposed to mechanisms that would force people to have direct contact with their banker.

How do you think that would improve the system?

[Sandy Stephens]

I'll start, and then I'll let my colleague add.

We're moving to a digital environment. That is the way of the world. Innovation is being fostered at all levels, including the government level, and a lot of those transactions or account openings are moving into the digital sphere. I don't think it's weaker, because many of the technologies that are coming out could be stronger. There are examples, such as when you show your driver's licence. If you use it through a digital channel, they can home in and get some data to confirm that it's valid ID.

I don't think we're looking for it to be laxer. I think we're looking for flexibility within the regulations to allow for new technologies to be utilized that are possibly more secure. Right now a very prescriptive regime allows us to use these methods to identify our client. We're suggesting more flexibility. Again, they have to be secure—we're not asking for lax identification—but for flexibility so these new technologies that could be more secure than face-to-face interactions are allowed to be part of the regime.

I don't know if you want to add to that, Stuart.