Finance Committee on April 18th, 2018

[The Chair, Liberal, Wayne Easter]

You'd better cut it to one.

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

Okay, thank you.

You recommended dividing the bill in two to deal with money laundering and terrorist financing separately. Can you elaborate on that recommendation? Has that been done in other countries? Would it be very helpful to do that?

[Dr. Christian Leuprecht]

That is an excellent question.

This is a problem that exists throughout the world so we're not starting [Inaudible--Editor] comparatively in the number of jurisdictions. Everybody, every financial intelligence unit, struggles with the problem that the money laundering and terrorism financing legislation are crafted onto one another, but there's sort of a dictum in policy studies that you use one instrument to achieve one policy objective. These are fundamentally different problems, and I'd be happy to speak to you in person or provide a separate detailed brief on why the current legislative regime is highly problematic in trying to deal with both these issues within the same legislation. If you ask people from the community, you will find a large consensus that these two issues need to be taken into separate legislation. I think Canada can lead by example here, and I can provide, as I say, very detailed examples.

If you would allow me, with regard to your previous question to Ms. Iafolla—

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

Please.

[Dr. Christian Leuprecht]

—the banks are not the major part of the problem here. Everybody fingers the banks, but as I point out in my brief, the problem is that 90% of this illicit money never flows through banks. The banks already do a pretty good job, not just because of legislation, but primarily because, on the one hand, they're afraid of fines, in particular U.S. fines, and the reputational risk associated with them. We can see this with regard to Commonwealth Bank of Australia. The banks, I think, are actually doing a reasonably good job. What the banks need is much better collaboration with FINTRAC in terms of domain awareness. Hence, I cite the Australian precedent, but there are other precedents, for instance from the U.K. and other jurisdictions, that I could cite. There are best practices that we could implement and which current legislation in Canada explicitly prevents FINTRAC from doing.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Albas.

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

Thank you, Mr. Chair, and to our witnesses for your testimony here and helping us with our report.

I'm going to start with Ms. Iafolla. Thank you very much for your presentation. You've said there are prescriptive rules that are brought out but that there is no guidance. That seems to be one of the sticking points here, so I'll give an example of a low-tech approach and then a high-tech approach and just ask you to comment.

A low-tech approach would be when you have a new teller who subjectively views someone as suspicious based on whatever criteria and makes a report to FINTRAC. From what we've heard from the perspective of Minister Eby from British Columbia, there's a warehouse where that report goes, and whether or not it goes anywhere else is up.... So there's no feedback to help the bank that may have a lower-tech approach to dealing with these things.

Then we have a high-tech approach where maybe it's a bank owned by a foreign subsidiary that's doing business lawfully in Canada and it has an algorithm that ferrets out these kinds of issues, whether it be anti-terrorism or money laundering. What ends up happening, though, because these are prescriptive rules and because they're basically forced to put it into a FINTRAC report, is that FINTRAC may not have the capacity to say “this is what our algorithm says” as the case for it.

Do we really have a mismatch with FINTRAC's one-size-fits-all approach?

[Vanessa Iafolla]

I think that's a fair characterization, and I also think there are problems on both sides with this low-tech, high-tech distinction you mention, and it's important to highlight them. High-tech doesn't necessarily mean objective. Individuals—you, me—could theoretically create an algorithm. While those algorithms are certainly based on best practices and expertise within institutions, they are still only as good as the rules or input that crafts them. I'm not really convinced that low-tech, high-tech is necessarily a useful distinction .

Also, it's important to note that within financial institutions that use this high-tech modality, they still use the lower-tech human-generated reports of suspicion in their assessments. Either way, you still wind up having that subjectivity coming into the reports.

I would like to comment briefly on your remarks about these reports being generated and then staying there, wherever they might be, either within the financial institution or at FINTRAC. I think it's important to note that where those reports are not necessarily based on truly suspicious financial transactions or activity but on ideas or suspicions having to do more with strangeness than true illegality, it's not particularly fair or equitable that those reports are made and retained in the first place. I think it's important to note that guidance or feedback could help to mitigate that issue. I wouldn't want my transactions to be put forth because somebody thought, as I was told in an interview, that my dark hair made me suspicious to talk to as a researcher.

I think it's very important for us to keep those issues in mind when we make these distinctions.

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

The Privacy Commissioner has also raised concerns about the retention of information. One thing I've been asking many witnesses about is the fact that FINTRAC, by its enabling legislation, is not allowed to actually share its information outside, to the RCMP or the CRA. I'm talking about case-specific information, where they believe there could be organized crime. I understand that, but there is a lot of data they collect that CMHC or OSFI or the Minister of Finance may not know about, from the regulated mortgage space, where there could be cash transactions.

Do you believe that information could be aggregated in a way that does not compromise personal information but gives policy-makers in a variety of different sectors more information? Basically, we're spending the money to collect it, so could we not put that information to better use?

[Vanessa Iafolla]

Absolutely. It's a huge resource. I don't think there's anything wrong with disclosing patterns and typologies, much in the way that FINTRAC does in its current reports but in ways that actually are useful to those bodies who are responsible for generating that intelligence in the first place. It's a huge wealth of data that's stored at FINTRAC, and it's a shame we're not able to use it in ways that help us better refine our processes. I completely with you on that count, yes.

[The Chair, Liberal, Wayne Easter]

Mr. Dusseault.

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

Thank you, Mr. Chair.

I want to thank all the witnesses for being here and for sharing their expertise.

My first question is for Mr. Howlett, but first I would like to thank the witnesses who provided their opinion on the issue of beneficial owners.

Mr. Howlett, I would like to hear your thoughts. In some countries, there will always be a degree of secrecy in financial or banking systems and even in company registries. The risk is that, even with company registries that are very transparent, certain company structures will ultimately still use foreign countries that do not have the same standards or the same transparency. That is part of the equation we have to bear in mind.

In your opinion, should we be worried about this?

[Dennis Howlett]

There is a global effort to try to address this problem. At this point Canada is a laggard. It's true that other countries may pick up the slack if Canada were to improve its game, but there would be international pressure to bear. I know that when the finance minister has gone to the G20 meetings, he has come under pressure from his colleagues on this. Similarly, international pressure can be brought to bear on countries that don't step up their game and try to bring their regimes up to international standards.

Now one of the issues here is that the FATF report, which the discussion paper referred to, is a bit outdated. Just coming up to scratch with those recommendations is not sufficient, because the EU and the U.K. have moved beyond that. I expect that in the next round of G20 meetings and so on, where these issues are being agreed on internationally, they will agree to a much higher standard. That includes a public, accessible registry of beneficial ownership information.

Now we're not saying the federal government does everything. We still want to have provincial and territorial corporate registries, but the same information needs to be collected, the same minimum standards need to be implemented, and they need to agree on some way to bring the information together in a searchable database. That would bring it up to the emerging new global standards. If countries don't comply with that, there will be pressure brought to bear in various ways for them to up their game.

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

Thank you.

In the time remaining, I would like to talk to Mr. Burns about slot machines. I have the sense that they are not the most problematic in casinos, which have very effective and elaborate technology to prevent money laundering.

Slot machines are not just in casinos, however. Are the regulations as strict with respect to the other place they are located? To what extent are those locations regulated? Are the measures against money laundering as strict in these other locations? For example, money can still be laundered in slot machines that are located in bars, restaurants and so forth, even if the amounts of money are smaller. Has this also been addressed?

[Paul Burns]

In the VLT market that you mentioned, with gaming machines and licensed establishments in various provinces, there is a denomination limit and an ability to pay out because it is the bar owner, in many cases, who would be cashing out. You would take a ticket out of a machine, if you put cash in, and play. The ability to move large sums of funds in any kind of way is extremely difficult in terms of those machines. It's the owners' ability to actually have that cash, because they're the ones who will be paying you out, on that ability. There are surveillance mechanisms and other mechanisms to limit those funds, and for people who choose to do that, it's not an entirely effective way if you're trying to move large sums of money, and that's why we say even casinos. The regulatory oversight, the lack of anonymity, is important.

In the VLT marketplace, it's limited by the ability of low denomination, acceptance of funds, and payouts because it is the responsibility for this holder to be actually the one. Within the regulatory oversight in various jurisdictions, those owners of those establishments are subject to licensing and background checks to ensure they're of suitable interest. There is an interconnection between liquor licensing in various jurisdictions and those gaming machines. So there is a very good sight.

[The Chair, Liberal, Wayne Easter]

We'll have to cut it there.

Ms. O'Connell.

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

Thank you, Mr. Chair.

Professor Leuprecht, I wanted to ask questions—and actually, Ms. Iafolla, I'll also get you in on this as well—on oversight of the actual tips presented, or the tips that FINTRAC would actually collect. I had questions earlier in some of these hearings on how anybody would know, when a bank sent something to FINTRAC, for example, one, whether FINTRAC then passed it on to the RCMP, CSIS, or whatnot, and two, how we would know if the RCMP or CSIS did anything with it. Maybe they didn't for good reason, but are there jurisdictions, or have you looked into other areas that have looked at this issue, and how we provide some oversight on knowing when items are actually moved forward?

[Dr. Christian Leuprecht]

There are two separate dimensions to your question.

You'll see that in my submission, I actually suggest that the new National Security and Intelligence Committee of Parliamentarians and the new national security intelligence review agency, as well as the Civilian Review and Complaints Commission for the RCMP, all have mandates to ask precisely these sorts of questions. NSIRA will have the mandate, provided the legislation passes.

I think your question is dead on. These are exactly the questions parliamentarians need to be asking of the organizations. What are the specific problems internally, and why is information not moving? There are actually significant amounts of data that move from FINTRAC to the RCMP. The challenge, it seems, is translating that into actual prosecutions. The RCMP will tell you that the data is also used for other purposes, such as for purposes of disruption. We also can see that when charges are laid with regard to proceeds of crime or money laundering, those are often the first charges dropped by the prosecution when the case actually proceeds.

Yes, there are coordination issues here, but there are also significant issues with acting on precisely the data that is provided. That gets to a previous question about the Government of Canada's data analytics generally. They do poorly. The one agency that actually does it and does it well is the Communications Security Establishment. There's a general challenge around skill sets and the ability to share and to actually translate that.

Of course, then we need to make sure that we have more people around the table. FINTRAC has essentially integrated itself. They have people from Revenue Canada and other agencies. In practice, we need to change the collaboration between the intelligence side and the law enforcement side. I also bring the precedent on the terrorism side, where we have actually figured out how to do this. The problem is that on the financial intelligence side, much of the legislation with regard to FINTRAC is so restrictive that it makes it very difficult to engage in the type of sharing your question suggests would be necessary to make sure that we actually have more prosecutions. It's also about the broader question of asset forfeiture and being able to identify beneficial ownership.

There are lots of things we can do. We're not going to arrest our way out of this problem. If we think that's the solution, we're never going to get there. We need to have a much broader preventative space, and that means making the whole matter much more transparent and also giving law enforcement better tools in the act, as I suggest here, with regard to specific U.S. precedent for how this can be done.

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

Thank you.

Sorry, I'm running out of time.

[The Chair, Liberal, Wayne Easter]

Ms. Iafolla, do you have anything to add?

[Vanessa Iafolla]

That was an excellent response. I'd just like to add that financial institutions themselves have taken up a sort of quasi-enforcement activity whereby they engage in a process known as de-marketing or de-risking. They wind up using the intelligence that's garnered through police transactions within their own institutions and then adjudicate and remove from their client roster individuals who exceed their risk tolerance based on that.

That's another particular way data is being used, but it's quite outside the legal framework that's prescribed.

[The Chair, Liberal, Wayne Easter]

Mr. Albas.

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

Thank you, Mr. Chair.

Ms. Iafolla, the Canadian Bankers Association has come before the committee and suggested that there should be a capacity between different financial institutions to share information when they come across a suspicious customer. Are you concerned about the same criteria? For example, if one bank were to identify someone suspicious on subjective and not verifiable information, it could cause someone to not be able to get a bank account at another one. Do you think that is a good idea, or do you think there should be some checks and balances on such a system of sharing information?

[Vanessa Iafolla]

Yes, there should be checks and balances. I don't think that capacity should be unfettered, by any means. I think it is very important that if that capacity is provided to financial institutions, and I believe it should be, that capacity should be based on as much verifiable, substantiated information as possible.

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

Here's a good question. If FINTRAC believes that there could be an issue, do you think it should play a preventative role, before an investigation is launched by either the CRA or the proper authorities, such as the RCMP etc. and say, “Here is someone suspicious”? If FINTRAC agrees, they could then notify banks that this person may be of interest, or do you think it can just be the current system, where they just relay that to law enforcement and allow an individual or individuals to continue to try to use financial institutions for their benefit?