Presentations and Speeches

Remarks by Jeanne M. Flemming, Director,
Financial Transactions and Reports Analysis Centre of Canada,
to the Canadian Life and Health Insurance Association

Proceeds of Crime (Money Laundering) and Terrorist Financing Act: Why Compliance with the Law Matters

Toronto
May 13, 2010


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Introduction and Outline

Thank you for that introduction

I would like to thank Frank Swedlove for inviting me to speak today. Frank has been a long-time leader in Canada's efforts to combat money laundering and terrorist financing. As president of the Financial Action Task Force, he worked globally, upholding the standards to which each country strives in their anti-money laundering and anti-terrorist financing regimes. I think you are fortunate to have him as the president of your association.

FINTRAC is part of a larger global effort. Every country in the world, perhaps with a few notable exceptions, is engaged in finding ways to protect the legitimate financial system from those who would abuse it—finding ways to detect and deter and prevent money laundering and terrorist activity financing.

At the root of Canada's Proceeds of Crime (Money Laundering) and Terrorist Financing Act are those concepts of detection and deterrence and prevention. That's why the law created reporting compliance obligations for reporting entities like yourselves and FINTRAC to ensure compliance with those obligations.

At FINTRAC, we find ourselves squarely between the businesses that provide financial transaction reports to us and the police and other investigators who benefit from the financial intelligence we produce. Being in the middle, we add value to the information that is provided; we move it further along and offer real insight to assist the investigation of serious crimes.

I want to provide you an update this morning that will give you some context to explain how this effort is working. I realize there have been a few questions about this initiative and perhaps a few myths floating around. That may be the consequence of being a financial intelligence agency that operates behind the scenes. At FINTRAC, we do guard our information very closely.

One myth I would like to dispel this morning involves criminal convictions. FINTRAC does not lay charges. FINTRAC does not prosecute. Trying to measure FINTRAC by convictions would be similar to asking a roomful of lawyers and compliance officers what their sales numbers were last year.

FINTRAC is in the business of assisting investigations, not conducting them. We do that by getting relevant financial intelligence into the hands of those that investigate crime. We assist investigations every day, making use of the information that is reported to us. Taking all the financial transaction information that we have at our disposal and bringing analysis to bear in turn—analysis which identifies criminal proceeds and providing some useful financial intelligence to the investigations and prosecution.

I realize that many of you have a long tenure in this business. I would like to emphasize that when it comes to money laundering, it is simply the proceeds of crime re-entering the legitimate financial system. It is any attempt to transport, conceal or otherwise convert those proceeds of crime. I would encourage you to approach the problem of money laundering as one that related to all those crimes that can generate criminal proceeds, such as drug trafficking and fraud.

FINTRAC does spend a considerable amount of time and resources working on money laundering cases where fraud is the original predicate offence. And we make use of all the information that is reported to enable us to conduct our analysis and ultimately make our disclosure to assist the criminal investigation. We are only as good as the information we have and our ability to analyze it.

When it comes to deterrence and prevention, the work that FINTRAC does to ensure compliance with the law strives to keep illicit funds from entering the legitimate Canadian financial system. This involves ensuring that proper records are kept, that identification is obtained, that risks are being assessed and the other elements of a compliance regime are in place.

All the entities that make up Canada's financial system have a stake in ensuring that the level of deterrence is high. Life insurance companies have a stake in this too.

When it comes to detection, FINTRAC's intelligence assists investigations and it assists prosecutions. Financial intelligence sheds light on the transactions that can be related to criminal activity. It assists investigators in making decisions about where to seek evidence, who to include or exclude as part of the investigation, how the targets are connected and where the assets may be hidden.

I'd like to give you a reference point for how we search transactions that we suspect to be relevant to money laundering in our database of more than 100 million transaction reports. Let me say that searching this information is like looking for a needle in a haystack, in a field of haystacks. On their own, transactions linked to criminal activity may not stand out or be noticeably different from millions of innocent transactions. However, we have developed data mining tools and methodologies over the years that enable us to detect patterns of suspected money laundering and to start following the money trail.

The other thing that can guide us is information we receive from law enforcement and other agencies—as part of ongoing investigations that may have already identified targets. In these cases, we can start from what is known and shed light on the existing investigation. Roughly 80% of the time, information from investigative agencies is the starting point for our disclosure of financial intelligence. This ratio may change over time. For the moment, the demand to assist ongoing investigations is high. High demand from prospective recipients does speak well of the product.

The financial intelligence that we produce can be complex and it can show the great efforts that criminals go through to hide the source of their funds. We have cases where the suspected criminals have used up to 16 or more financial institutions across the country to disperse and hide their assets. Being the recipient of financial transaction reports from across the country, and having access to information from other financial intelligence units from other countries, does give us an advantage when trying to piece together the money trail.

The Problem That We Face

Before becoming FINTRAC's director, I was not aware of the extent of the lucrative criminal enterprises that appear to be operating in this country. Seeing cases each day has had some affect on me. After two years in this job, I am occasionally asked what things preoccupy me, or more specifically, what are the questions that keep me up at night. For me it comes down to "are we doing enough to make this country a hostile place for those that launder money and finance terrorist activity?"

There are criminals in this country and they are getting up to some pretty bad things. They are fleecing and defrauding some of the most vulnerable members of our society, committing fraud, they are selling drugs, corrupting institutions. And, when it comes to mortgage fraud, they are stealing whole houses. We are not talking about petty crime here; some of these criminal activities appear to be large ongoing enterprises with a damaging impact on our society. The victims also include the institutions you represent.

I feel I have to make this point about the scale of criminal activity in this country because it concerns me. Perhaps that is a function of working at FINTRAC and of having a perspective on the many criminal investigations and the money that seems to be moving in these suspected criminal networks. It can be disheartening, at times.

This perspective has brought me to the view that Canadians can be naïve and perhaps overly optimistic in their view that crime and, in particular, organized crime are not Canadian problems. I want to assure you that they are and that they have an impact on Canada's communities large and small. Crime affects us all. Even those of us who are not victims of fraud or theft will feel the residual effects in a system that is compromised by the presence of a criminal element.

I want to call your attention to the larger Canadian financial system and the role that you have as operators within it—and as the stewards and occasionally gatekeepers of this system.

Those of you who work with insurance products must surely have your own perspectives on crime and perhaps a perspective on fraud and money laundering within your own industry. I want to make the connection between money laundering and fraud very plain because too often money laundering is viewed as an esoteric subject removed from the real crimes that produce real profits.

Financial intermediaries, such as brokers or agents, can actually do something to make it more difficult to operate a criminal enterprise in this country. You have that opportunity. It is an opportunity to strengthen the integrity of Canada's financial system and to shut out the criminals that would abuse and exploit this system. At the same time, it may also help curb frauds committed against insurance companies in this country.

The connection that I want to make for you is that any fraud against an insurance company will generate criminal proceeds that must be laundered. Even if those proceeds are in the form of a cheque from an insurance company, it is still criminal proceeds. When that cheque is carried to a bank or credit union, depositing that cheque is money laundering. Transferring those criminal assets to another account, that is money laundering too.

So, why does it matter that businesses send us reports?

It is important because the police don't have our unique data base to follow the money trail. FINTRAC provides the leads and the information necessary to assist police in acquiring search warrants. FINTRAC's information can also reveal new targets for an investigation and previously unknown connections between individuals, bank accounts and companies. We also have an international perspective on transactions that is made possible by the reporting of electronic funds transfers and from the exchanges of information with financial intelligence units in other countries—both of which assist in following money into other jurisdictions and from those jurisdictions to Canada.

When your business sends in a suspicious transaction report it is important to keep in mind that several other institutions, in a variety of financial sectors, may have also provided reports about the same individual. As I mentioned earlier, we have cases in which 16 different financial entities have been used to obscure the trail of the money from its criminal origin to its final destination. Last year, 43% of our case disclosures involved reports from six or more reporting entities. So, as you can see, the cases can be complex and the transactions are seldom limited to a single institution. This highlights the benefit of collecting the data in one place and analyzing it with other contextual information like corporate registry information and other open-source data. It is particularly satisfying when we have the information at our disposal that allows us to connect these dots and then be able to show the money trail to police.

We also do the same for our international partners who are interested in transactions that occur in Canada that can have some significance to criminal investigations in other countries. Money moves easily around the world, FINTRAC plays a role in cooperating with financial intelligence units in other parts of the world, helping the global effort to curb the flow of illicit money and to detect criminals through their financial activity. As of today, we have entered into agreements to share information with the financial intelligence units of 69 other countries. This has opened a window on financial activity beyond our borders that also benefits Canadian investigations.

FINTRAC disclosed 556 cases to investigators last year, more than any previous year. These case disclosures, which involved more than 100 thousand transactions, were supplied to assist investigations of money laundering related to drug trafficking, fraud, smuggling of contraband, terrorist activity financing and a variety of criminal activities that can generate the proceeds of crime. We provided this intelligence to federal, provincial and municipal police forces. We also provided intelligence to CSIS, the Canada Border Services Agency, Canada Revenue Agency and to our international partners during the year.

Looking at all these cases as they are pulled together by FINTRAC's analysts, it is truly remarkable the lengths to which people will go to keep transactions out of their own name or to have nominees carry them out on their behalf only to have the funds ultimately returned through series of transactions and bank drafts to businesses under their control or accounts held in their name, here or in other countries.

Often the money laundering technique is simply moving the funds into an account and withdrawing them quickly in the form of a bank draft or transmitting the whole amount to a foreign account shortly after the deposit. It can often make no business sense to run the transactions through a series of accounts en route to their end destination but this is also sometimes done.

We have received a suspicious transaction report submitted to us from the life insurance sector that highlights that information can come to your attention long after the initial transaction. When that information does come to light, you may look back at those earlier transactions in a different way. As an example of just such a case, a Canadian life insurance company had written a policy on a man who was subsequently determined to be a notorious criminal. This came to their attention after a very public attempt on the man's life had failed. The newspaper reports detailed his role in the local crime scene, including a history of charges and accusations that had been brought against him over the years.

The insurance company began to wonder why they held the policy, how it got written and if the premiums might have been paid with the proceeds of crime. To be fair, the payments may have seemed normal at the time. Payments were made by cheque. The decision to look back to the original transactions on this policy and report them as suspicious was a good one. The important thing is that once you arrive at a suspicion that proceeds of crime may have entered into the transaction, this should trigger the filing of a suspicious transaction report.

Proceeds of crime can enter the system in a variety of ways. When it comes to insurance transactions, it may simply be a cheque drawn on a bank account. It may be hard to spot. If you have other contextual information, you should add that to your examination of risk.

The Criminal Intelligence Service of Canada estimates that there are 750 organized crime groups in Canada, each engaging in a variety of criminal activities that generate large amounts of money. When it comes to dealing with these groups, we should strive to make their operations more difficult to run and easier to find.

As financial intermediaries in the larger Canadian financial system, your organizations are at the forefront of detecting and deterring the financial transactions that can facilitate the activities of these criminal networks. The transaction reports that you send are critical to this effort and you are uniquely placed to make this contribution. That is why we have this law.

Diligence is needed to continually foster a culture within your organizations that meets the compliance objectives of the law. This includes effective training. Training is an ongoing activity in every business and so it should be with your compliance programs.

You should also review your own compliance programs to assess any inherent risks of money laundering and terrorist financing within your business lines and your different products. Once you assess the risks, there is a need to implement controls to mitigate your exposure to such risks. This was the intention of the risk-based approach that was adopted two years ago. It is now a requirement of the law but the diligence that is required to make it work is an important element as well. As we know, these are not things that can be done once and set aside. They have to be part of the business and an ongoing effort.

There is also a need to identify and to report suspicious transactions. The obligation has been the law for nearly ten years and should not require a reminder. But after ten years, the level of reporting from the life insurance sector remains unusually low. I say that because there has been one exception. There is one company that is reporting more than the rest and the suspicious transaction reports appear to be appropriate. I would like to encourage a race to the top among the life insurance companies assembled here to be diligent in your review of risks within your own product lines and to ensure that you are meeting your reporting obligations.

Looking Forward

And to speak for a moment about the enforcement of the law, in late 2008 FINTRAC gained the power to issue administrative monetary penalties. Also known as AMPs, these fines have been used in the last year where we have identified violations of the law. They are a proportional penalty, one that takes into account not only the nature of the violation but the size of the entity or business that is being fined, their ability to pay and their compliance history.

Administrative monetary penalties serve as an adjunct to existing criminal penalties. This means both criminal and civil penalties will not be issued for the same instances of non-compliance. They are intended to encourage compliance not punish past non-compliance with the law.

These new penalties mark a change in FINTRAC's approach and perhaps in FINTRAC's tone. After ten years of outreach and efforts to raise awareness, there is a greater expectation that businesses should have effective compliance regimes in place, and that the requirements of the law should be part of the normal course of business. FINTRAC will now issue penalties when the violation of the law merits such a response.

Looking further out into the future, Finance Minister Flaherty has indicated "the government will be relentless in its efforts to combat money laundering and terrorist financing and that it will do what must be done to protect the interests of Canadians and ensure a safe and strong market for investors here and around the world."

An expression of that commitment came in the 2010 federal budget. FINTRAC's operating budget was increased by eight million dollars to improve our compliance regime and to expand the definition of predicate offence for money laundering to include tax evasion thereby increasing FINTRAC's ability to make disclosures in this area.

With the proposed new funding, FINTRAC will be able to hire new staff and increase the number of compliance examinations that we are able to conduct. This increase will allow us greater ability to ensure compliance with the law in all sectors. For example, FINTRAC will be conducting enhanced compliance activities involving federally regulated financial institutions (FRFIs) which will be independent of the OSFI reviews. Our intent is to increase the examination coverage of this sector with a focus on improving the data quality of the reports.

Finally, the 2010 federal Budget also announced new measures to strengthen Canada's anti-money laundering and anti-terrorist financing regime. These are included in Bill C-9, the Jobs and Economic Growth Act, which proposes new authorities for the Minister of Finance to issue directives to advise the financial sector of foreign jurisdictions and entities that pose an illicit financing risk and to require appropriate countermeasures. Under the proposed new authorities, the Government could also limit or prohibit financial transactions with designated foreign jurisdictions or foreign entities which are found to be at high risk of facilitating money laundering and terrorist financing. This will help ensure that Canada does not unwittingly become the destination of choice for illicit funds looking for a home. For the moment, the legislation has been published and is now available through the parliamentary website.

Thank you for taking the time to listen and thanks once again for inviting me to your conference.