Canadian Business Magazine
By Raizel Robin
October 2001
Imagine for a moment that you’re a drug trafficker. Business is good—you’re raking in $300,000 in cash a week, which is not uncommon in your trade. The trouble is, those trunkfuls of cash are proof of your guilt. Not to worry: it’s surprisingly easy to launder money. So easy, in fact, that in Canada, up to $17 billion a year in dirty money—the proceeds of criminal activity—flows through banks, brokerage firms, life insurance companies, currency exchanges, real estate companies, casinos and car dealerships. It’s even exchanged for money orders at post offices. The beauty of it for criminals like yourself is that it’s laundered with the assistance of people who haven’t a clue what they’re dealing with. Or at least they haven’t, until now.
The Proceeds of Crime (Money Laundering) Act received royal assent 16 months ago and, as of Nov. 8, legally obligates those on the front line of defence—financial institutions and others in the financial services sector—to report any transactions they deem suspicious. The legislation refers to these irregularities as “suspicious transactions,” and mandates that they be reported to a newly formed intelligence unit called the Financial Transactions and Reports Analysis Centre of Canada—FINTRAC, for short—which operates at arm’s length from the government and the RCMP. FINTRAC analysts sift through all the reports and decide which ones warrant investigation. Those that do are then sent to the RCMP.
It’s an added layer of bureaucracy, but one that banks, police and the international community are welcoming. After all, our fellow G-7 nations have had FINTRAC-like bodies for some time. “Canada is the last industrialized nation in the world to set this up,” says Chris Walker, a criminologist who contributed research to the act in its early stages and who now runs ABCsolutions Inc., a Toronto-based company that teaches financial services sector employees about the act.
These days, just about anyone who deals with large transactions for a living—bank tellers, stockbrokers, CEOs—is required to report anything that appears suspicious. Perhaps best of all, the legislation finally recognizes that banks are not the only targets of money laundering: life insurance companies, securities dealers, currency exchanges, lawyers, accountants, some casinos and realtors jewelers and car dealers may even be required to report in the near future.
In light of the events of Sept. 11, the timing of the act couldn’t be more auspicious. “There’s been a lot of pressure on Canada to get its act together,” says Walker. But before you go thinking the current act will force our economic system to be scoured for terrorists, think again. The process that resulted in the legislation was well underway before the attacks on Washington and New York, and it’s intended to identify the proceeds of crime. But terrorists don’t always launder money to cover up criminal acts; often, they’re simply moving money around to conceal the benefactor—you know, the bin Ladens of the world. In response to that newly pressing reality, the federal Department of Finance says the government will announce changes to the act in late October that will specifically focus on tracking the sources of terrorist funds, regardless of whether they are the proceeds of criminal activity.
In the meantime, you can bet that our financial system will continue to be abused. The same dependable system that makes it easy for legitimate users to bank safely in Canada remains a haven for criminals—some of whom may have abetted terrorists. “Canada has a very friendly and secure economic system,” says Walker, “and a 4,000-mile border. By living next door to the world’s largest trading partner—which includes trading drugs—we were at one point named by the US as a haven for money laundering.” And no wonder: in the 12 years since Canada passed its first anti-money-laundering laws—which stated that banks and credit unions should report irregular transactions on a voluntary basis—Walker estimates that the RCMP seized only $200 million worth of assets gained from the proceeds of crime, while an estimated $100 billion to $170 billion in laundered funds slipped through the system.
A perfect illustration of the problem occurred between 1990 to 1994, when the RCMP ran an undercover currency exchange in Montreal. The Mounties identified 25 criminal organizations that laundered money through the exchange, but the force—understaffed and underfunded—had the resources to bust only two of them. In effect, the RCMP wound up helping criminals launder the proceeds of a four-year, $2-billion cocaine trafficking operation.
With the establishment of FINTRAC and its new reporting requirements, some of the financial and staffing burden will be removed from the RCMP, which should allow it to better do its job. And the act finally has teeth—sort of. Although reporting is now mandatory, it’s still up to the reporters to decide what a “suspicious transaction” is. There’s no clear definition in the act. “The easiest way to define it is as a transaction that’s outside the normal daily activity for a particular client,” says Chris Mathers, president of KPMG Corporate Intelligence Inc., which has been training banks in how to comply with the act. “What a criminal organization may be doing at one bank may not be suspicious, but if you look at the big picture of what it’s doing at six or seven other financial institutions, then all of a sudden it becomes suspicious. The point of FINTRAC is to see everything."
It’s clear how the system should ideally work. Imagine: you deposit your paycheque twice a month and suddenly begin to make additional cash deposits of $15,000 into the same account; the bank notes it and sends a report to FINTRAC. The next day, FINTRAC gets a report from your stockbroker stating that you bought $10,000 worth of securities with money you wired from an account in the Cayman Islands. Soon after, FINTRAC gets a third report, this time from a real estate agent who claims you paid for a $300,000 house with a mix of cash, bank drafts and money orders. The conclusion seems pretty obvious.
While it sounds like a good system, the onus will often fall on frontline employees, many of whom are barely able to handle their current workload. So the question is, how effective will the act be? “Your typical frontline bank employee is worried about being replaced by a bank machine more than anything else,” says Mathers. “They’re probably saying, ‘I’m going to go crazy over this? Forget it.’”
Still, they’re under a legal obligation. A bank teller convicted of failing to report suspicious transactions could receive a maximum $2-million fine and five years in prison. It’s not exactly a light punishment but, then again, it would likely never happen. (“When’s the last time you saw someone in Canada go to jail for something serious?” says Mathers, only half-jokingly.) Indeed, FINTRAC has set itself up as a partner, not a policing agent. Those who don’t report assiduously aren’t likely to get more than a slap on the wrist.
Still, if the will to seek out money launderers was lacking in years past, the terrorist attacks of Sept. 11 may well have changed all that. Financial institutions, for their part, say they’ve always taken the issue seriously. “There are bank staff who already know what to look for because the banking industry has been reporting suspicious transactions on a voluntary basis,” says Sharon Wilks, a spokesperson for the Canadian Bankers Association. But it’s not enough for people to know what to look for. In fact, the legislation mandates companies to develop compliance regimes that contain four essential components: a compliance officer; policies and procedures for identifying and reporting suspicious transactions within the company; an ongoing training program that must stay up-to-date with any changes in the act; and a regular review of the regime, which can be done internally if the company wishes.
Last year, KPMG sent out a survey to financial institutions, asking them to rate their systems for detecting and reporting money laundering. “Basically, the results came back with the banks saying they had it all together,” Mathers says. “They knew what they were doing. And to a certain extent, the banks do have a good handle on it. But there are so many different stages of transactions in a money launderer’s process that a bank here might be the fifth or sixth stage and have no way of knowing if it’s dirty money. So what I’m saying is the only way to know that you’re not laundering money is to know who your client is”—something that’s not easy to do when the owner of the money is concealed under layers of accounts and offshore shell companies.
Even if a company does have frontline employees who care, they may not be ready for the Nov. 8 deadline. Proceeds of Crime is a broad act that requires those in the financial services sector—many of whom, unlike banks and credit unions, haven’t even been reporting voluntarily—to set up new procedures and train their employees. And although the financial services industry will eventually be forced to comply, those who launder cash will probably stay one step ahead of them. “Criminals will be aware of what institutions have to report, and either go under the limits or find another way to do it,” says superintendent David Beer, the officer in charge of the RCMP’s Proceeds of Crime branch in Ottawa. Here’s hoping they’ll do it in another country.
Cashing In
The International Monetary Fund estimates that the amount of money laundered around the world each year ranges from 2% to 5% of global GDP, or US$600 billion to US$1.5 trillion. Here’s how it’s typically done:
Placement: In the initial stage of money laundering, the criminal—or an accomplice—deposits illicit cash into the financial system, often by making a series of smallish bank deposits. Another method: converting the dirty money at a currency exchange.
Layering: Here the money is converted into a different form. For instance, the criminal may have someone wire it to an overseas account or buy securities, commodities or property that might be registered in the name of a friend, family member or shell company. This creates complex layers that disguise the audit trail, along with the source and ownership of the funds. A launderer might even move money through several dozen accounts in as many countries to put it deeper into the financial system.
Integration: In this, the final stage, money goes back into the economy to create the illusion of legitimacy. Because it appears to have been legally earned, it’s difficult to distinguish between legal and illegal wealth.
Sources: International Monetary Fund; World Bank; FINTRAC