Keynote address by Jeanne M. Flemming, Director,
Financial Transactions and Reports Analysis Centre of Canada,
to the Money Laundering in Canada Conference 2011
Victoria, British Columbia
October 17, 2011
Check against delivery
Thank you for that introduction.
I am pleased to return to this conference and I commend Chris Walker for once again convening this event and bringing everyone together. We all have a stake in Canada's efforts to combat money laundering and terrorist activity financing. For many of you, the law creates obligations that must be met. For others, for example, those who work in law enforcement, the benefit is found in the financial intelligence that is produced at the end of the line.
Regardless of individual roles, you all make important contributions to the integrity of the Canadian financial system and help ensure that those who would abuse it are detected in their attempt-- or deterred before they even begin.
The theme for this year's conference is “raising the bar in compliance management”. From my perspective, it is hard to quarrel with that. If you are responsible for a compliance program or if you work within one, setting higher goals for your approach to compliance is a good thing. The expectation that we hold at FINTRAC is that reporting entities need to understand their legal obligations and consistently meet them.
After ten years, businesses should have well established policies, procedures and training programs. And, since 2008 they should be conducting risk assessments. These are just a few of the elements of an effective compliance program, but I will pay particular attention to risk assessment in my talk this morning. It is a fundamental concept that guides our own compliance program when we decide where to allocate resources and where to conduct exams.
This morning, I have divided my talk into two parts: compliance with the law and the production of intelligence. First, I will describe FINTRAC's approach to ensuring compliance and reflect on how that approach has progressed over the years along with the law itself.
As I mentioned earlier, the evaluation of risk plays an important role in that approach, as do the efforts that are made to mitigate the identified risks.
Second, I want to update you on FINTRAC's work as a financial intelligence agency. As much as the law will permit, I will tell you what is being done with the transaction reports that are being sent to FINTRAC and how we are using that information to produce financial intelligence.
After ten years, we have improved our ability to analyze the data that we hold and our ability to provide assistance to a variety of criminal investigations. That assistance takes the form of both tactical and strategic intelligence and I will describe the difference between these two forms so that you might have a clearer sense of FINTRAC's finished products.
I will conclude my remarks with a forecast of the coming year. The most significant upcoming event appears to be the Parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The future is hard to predict, but if the past review is a prologue to the future, the upcoming review is something that may influence future legislative change and the work that we all share.
I will begin with compliance with the law. The law creates legal obligations for many persons and businesses. For many of you, your relationship with FINTRAC is centred on those obligations. As such, it seems a sensible place to start.
Examinations continue to be our primary method of ensuring that reporting entities are complying with the legislation. Our compliance work is focused on both onsite examinations and desk examinations. To give you an idea how this work breaks down, we completed 684 examinations in the last fiscal year, of which:
- 376 were onsite examinations, or 55% of the total; and
- 308 were desk examinations, which represents the other 45%.
In terms of FINTRAC's process for selecting which reporting entities to examine, we have applied a risk-based approach. This approach is driven by two fundamental considerations: the risk of non-compliance with the law and the impact that non-compliance would have.
With respect to the current fiscal year, FINTRAC further refined and enhanced its risk-based approach. We did so by focusing, in part, on two important groups, namely, financial conglomerates and large reporting entities.
Regarding financial conglomerates, we are examining the many business lines that exist within them. It is possible that the approach to compliance will differ across the business lines of the conglomerate, but the fundamentals should be there and risk should be assessed in each of them. New business lines need to approach compliance with the law as a vital and necessary part of the business, rather than merely a cost centre. For this to happen the tone from the top is very important to the way compliance is approached by the business line. It falls to senior management to set this tone.
As for large reporting entities, they represent the key market players in their respective sectors. They have been given weight because of the number of transactions that they conduct and their importance to the whole regime.
To assist all reporting entities in evaluation of risk, FINTRAC has published a series of Trends and Typologies reports. Our most recent report deals with suspicious transaction reporting and some of the trends that we have observed in Canada thanks to the reports that have been sent to us. Our analysis has revealed that what is found to be suspicious appears to be biased toward cash transactions.
If you operate in a line of business that involves few or no cash transactions that does not mean that you are immune from money laundering. There is a perception that seems to have taken root in some businesses that they will likely never encounter money laundering because their business involves so very few cash transactions. Not so, the proceeds of crime can be, or can be converted into any type of asset or commodity. This is an important consideration to keep in mind if you are conducting risk evaluations of different business lines.
Every reporting entity is required to conduct a risk assessment that takes into account factors such as the client, the geographic location and the product or service being offered.
Reporting entities are also expected to complete a review of their own compliance programs every two years. The purpose of this review is to test the effectiveness of their compliance regime. These reviews and the training of staff these should be approached as ongoing activities that, along with risk assessment, are the cornerstones of a robust compliance program.
The use of a risk-based approach is now commonplace around the world. It has become the adopted practice in most countries that have anti-money laundering legislation and this fact was reflected in a recent survey of world's 1000 largest banks, commissioned by KPMG in 2010. This survey has been repeated over a number of years. It initially found, in 2004, that 81% of banks indicated that they were applying a risk-based approach to every new account. This has climbed steadily over the years, with 91% of banks in 2010 responding that it is now their practice.
Conducting a risk assessment of the client must be taken into account and it is welcome news that it has become a global practice. It must also be weighed against other factors, such as the business or service being offered and the potential vulnerability to money laundering and terrorist activity financing. Geography is something that must also be considered in a risk assessment.
When it comes to a risk-based approach for compliance, there is a parallel between the risk assessments that are conducted by reporting entities and those that are conducted by FINTRAC. We have to make decisions about where to allocate our resources and where to conduct examinations. In doing so, we take into account many of the factors that I have described as well as the potential impact of non-compliance on the whole regime.
Those questions give us a means to evaluate risk, a way to set priorities and tailor our compliance efforts. As I have mentioned, this has led us to focus our efforts on financial conglomerates and large reporting entities.
Over time, FINTRAC has moved from what had initially been a focus on outreach and awareness to more of a focus on enforcement of the law. Now, after ten years, we expect awareness and compliance with the law, which includes submitting reports to us and we stress that negligence in these areas will lead to enforcement actions and penalties.
It has been ten years since the obligation to report suspicious transactions came into force in November 2001. It is an anniversary worth noting. There have been legislative amendments and other compliance obligations, but the coming into force of STR reporting was an important milestone because it began an important flow of information from reporting entities to FINTRAC. With the arrival of the first STR reports we had the start of a database that would allow us to produce financial intelligence.
The transaction reports that are sent to FINTRAC and the quality of the information that they contain are the foundation of our intelligence work. Before moving on to describe what we are achieving with that information, let me underscore the importance of data quality. Any field of transaction data can become a necessary linking point in our analysis. We rely on the transaction reports and their quality matters to us.
After ten years, the transaction information we hold is a remarkable resource that we seek to exploit to the best possible advantage to fulfil our mandate. It allows us to conduct analysis and produce financial intelligence that benefits a variety of recipients.
FINTRAC is doing more than ever before to support the work of the Canadian Security and Intelligence Service, the Canada Border Services Agency and the Canada Revenue Agency. Our output of case disclosures to these agencies has grown considerably.
- For CSIS, we produced 21 case disclosures in 2005-06; five years later, the number has grown to 120.
- For the CBSA, the growth has been from a single case in 2005-06 to 82 last year.
- The growth is even greater with the Canada Revenue Agency, where we sent 3 case disclosures in 2005-06; last year, the number had grown to 136.
Most of FINTRAC's disclosures to the CRA concern persons suspected of deriving taxable income from illegal activities, and these cases may subsequently result in criminal investigations when suspected tax evasion has been established. In 2010–11, the 136 case disclosures that FINTRAC provided helped the CRA to identify cases of significant tax non-compliance, and resulted in the reassessment of more than $27 million in federal taxes.
I can see three drivers for the increases in case disclosures that I have just described:
- The first is a growing demand for financial intelligence as more of our partners recognize its benefit.
- The second is the result of striving to produce something that is relevant and helpful for these partners and aligning with their priorities when it comes to investigations.
- The third driver for the increase is that FINTRAC has matured to the point where we have the ability and the data necessary to produce better intelligence more quickly.
Here is a concrete example of why the reports sent to us are critical. In the last year, our output rose to more than 700 case disclosures. These disclosures were a type of tactical financial intelligence; that is to say, they are packages of information dealing with the transactions of individuals and businesses that are quite often already the subject of criminal investigations.
In one case last year, we worked with the financial intelligence unit in another country to identify wire transfers of funds from Canada that were part of a suspected international fraud. The fifteen victims of this alleged fraud were all in Canada. They were all between fifty and seventy years old and part of the same cultural group. Over six years, the victims had been tricked into sending money to nine different countries to assist a relative in jail, or to resolve other problems for a relative in a foreign country. Our analysis revealed that despite the many destinations for the money, the money trail led back to one man, a suspected con artist living in yet another country. He was the ultimate beneficiary of all money that was sent.
So, you can see tactical intelligence can give a ground-level view that helps an investigator seek evidence in a case. We have produced tactical intelligence to assist money laundering investigations where the suspected predicate offences have involved organized crime, drugs, corruption and fraud. In addition, our tactical intelligence has allowed law enforcement to understand relationships between individuals suspected of involvement in street gangs and has allowed them to gain new insights into the financial relationships between different gangs.
When I became Director of FINTRAC, I recognized there was a need to develop another type of intelligence as well. The other type of intelligence that FINTRAC now produces is strategic financial intelligence, which examines higher-level patterns and trends over time related to money laundering and terrorist activity financing. It provides interpretation and possible explanations of the methods and techniques used by launderers and terrorism financiers.
To date, we have produced strategic intelligence reports that examined financial activities of terrorist and criminal groups conducted through various business sectors and multiple jurisdictions. Some reports have also focused on the flow of funds between Canada and specific countries or regions of the world in an effort to identify and explain unusual financial patterns. Other strategic financial intelligence products assessed vulnerabilities posed by emerging technologies or new methods of money laundering. In a nutshell, FINTRAC's strategic financial intelligence served to inform and educate reporting entities, other domestic and international regime partners, and therefore assisted decision and policy makers.
The anti-money laundering and anti-terrorist financing regime has come a long way, as has FINTRAC. As I have mentioned, demand for our product has grown steadily, as has the appreciation of it. This is exemplified by the recognition we received recently by the Canadian Association of Chiefs of Police. The association adopted a resolution at their national conference in August that acknowledged FINTRAC's significant contribution to organized crime investigations.
The resolution recognized that “financial advantage is the key goal for all criminal organizations and that consequently financial intelligence must be an integral component of all organized crime investigations.”
The CACP's resolution went even further to say that FINTRAC has been recognized as a key partner and should be made aware of the law enforcement priorities across Canada. Knowing the national and provincial priorities of police will allow FINTRAC to target high-priority criminal investigations and to offer greater assistance to investigators.
It is very gratifying that FINTRAC's financial intelligence has been recognized in this way.
Now let me give you my forecast for the coming year. I can tell you that at FINTRAC we will continue to conduct compliance examinations based on our evaluation of risk. We will continue to align the financial intelligence we produce to the highest-priority investigations of our partners. We will continue to produce strategic intelligence assessments to help you, policy makers and other stakeholders in your work and your setting of priorities.
As I said, there will be a Parliamentary Review of our Act. No date has been set for this review but one is mandated by law every five years. The last review brought significant changes to the legislation, including the introduction of an Administrative Monetary Penalties regime.
Just as the law requires that reporting entities review their own compliance regime regularly, so too the law and the whole regime must have regular reviews that take into account new risks, changes in business operations, the deficiencies and gaps within the current law and, above all else, how to improve and ensure that it continues to serve its objectives.
So, if the last ten years are any indication, FINTRAC and the law that governs us will continue to evolve, as will the world's efforts to combat money laundering and terrorist activity financing.
Thank you and I wish you a successful conference.