Presentations and Speeches

Notes for remarks by Jeanne M. Flemming, Director, FINTRAC, to the annual General Meeting of the Canadian Gaming Regulators Association

Halifax
July 16, 2009

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Compliance Obligations for Canadian Casinos

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I would like to thank you for the opportunity to speak to CAGRA about the risk of money laundering in Canadian casinos and the unique role gaming regulators have in national efforts to combat money laundering and terrorist financing.

What I want to do this morning is to give you some insight into what is being done in Canada to combat money laundering and terrorist financing and to make a meaningful connection to the important work that you undertake as regulators and what we do at FINTRAC.

Let me state what is obvious but is not often apparent.

Money laundering is a criminal offence. Money laundering is a crime that is always connected to some other criminal activity. For example, fraud, theft, drug trafficking and the smuggling of contraband create profits that need to be laundered.

If you leave here today to find that someone has stolen your car that would be a crime. If the man that made off with your car sold it for cash, he would be in possession of the proceeds of crime. To be fair, if he still has the car, he would also be in possession of criminal proceeds. Almost anything, other than mere possession, that he does with the criminal proceeds is a money laundering offence. He might bring the cash to a bank, a credit union or a casino in order to make its origins appear legitimate.

Many criminal activities can produce a profit but the point I wish to make is that all of them require that the criminal proceeds be brought back into the legitimate financial system. In addressing money laundering, FINTRAC is also addressing other criminal activity with well understood social harm and we are assisting police with the investigation of the laundering of the proceeds of crime and sometimes the predicate offence as well.

The efforts to deal with the proceeds of crime have some history in Canada and knowing something about the origins of this national initiative should provide some context for where we are today. The development of Canada’s anti-money laundering regime has been driven by the domestic needs of law enforcement and by an ever-increasing push by like-minded countries that together we needed to adopt much stronger laws against money laundering.

It begins with the simple principle that criminals should not enjoy the proceeds of their crimes. Measures to codify that principle in law have taken a number of turns dating back many years. A major development in Canada came in 1989, when changes to the Criminal Code dealt with all aspects of the proceeds of crime: special offences, a special warrant, a restraint order, and a confiscation regime. These measures enhanced the tools available to Canadian police to deal with criminal proceeds.

In 1991, Parliament adopted the Proceeds of Crime (Money Laundering) Act whose purpose was to establish record-keeping requirements in the financial sector in order to facilitate the investigation and prosecution of money laundering offences. This legislation brings us closer to what we have today, with record keeping as an important component of the regime. It was an important change, one that underscored the importance of being able to follow the money trail of financial transactions.

In July 2000, the government implemented new legislation, the Proceeds of Crime (Money Laundering) Act. This made mandatory the reporting of suspicious and certain prescribed financial transactions as well as the cross-border movements of large amounts of currency and monetary instruments. These new requirements would apply to prescribed financial institutions, persons engaged in the business of foreign exchange dealing, casinos and other financial intermediaries. This legislation also created the Financial Transactions and Reports Analysis Centre of Canada or FINTRAC, as we are known, with a mandate to detect, deter and prevent money laundering.

A breakthrough on an international level came in 1989, when the G-7 summit agreed to create the Financial Action Taskforce, or FATF, that would serve to promote the adoption and implementation of appropriate measures to combat money laundering globally. The FATF continues to promote effective financial intelligence units, such as FINTRAC, greater scrutiny for financial transactions and stronger measures to combat money laundering and terrorist financing. Canada, being one of the G-7, was on a course to create an anti-money laundering regime in Canada.

In 2001, following the attacks of September 11th, Canadian legislation was amended to include terrorist activity financing and the legislation became known as the Proceeds of Crime (Money Laundering) and Terrorist Financing Act or PCMLTFA. These attacks led many countries to expand the work of their financial intelligence units to include terrorist financing as well as money laundering. Under this expansion, the work of scrutinizing and analyzing financial transactions would serve both objectives. And I should mention that today almost every country in the world has a financial intelligence unit, albeit most not as sophisticated and far-reaching as FINTRAC.

To bring us to more recent events, the latest round of legislative changes was brought about by Bill C-25, which was adopted by Parliament in December 2006. This bill was shaped by the international standards promoted by the FATF. As you are no doubt aware, the last of the changes included in C-25, which will come into force on September 28, 2009, will require casinos to report to FINTRAC disbursements of $10,000 or more.

Canadian casinos also have compliance obligations that include keeping records, checking identification and reporting certain transactions. All these requirements came into force under the PCMLTFA, starting in 2001.

In Canada, FINTRAC has a dual role: first, we exist to ensure compliance with Part 1 of the Act that is to ensure compliance with the law. This places us in the realm of regulatory bodies with many similar roles and functions that are common in those working toward regulatory compliance. This role will be familiar to many of you.

At the same time, however, FINTRAC is a financial intelligence agency with a mandate to assist the detection of money laundering and terrorist financing by analyzing the financial transactions that are reported to us and providing financial intelligence to police and national security agencies. This gives our agency a separate dimension. Both functions serve the larger objective of combating money laundering and terrorist activity financing.

As FINTRAC’s Director, I know first-hand that following the money and making connections through financial transactions does benefit police investigations where proceeds of crime and money laundering are involved. We have been able to offer assistance in following the money trail to numerous drug trafficking, fraud and other types of investigations in the last few years.

Through our analysis, we are sometimes able to expand what is known about an existing criminal network by identifying individuals and businesses that were previously unknown to police. Often, we can shed light on the size and scope of a criminal network or the length of time it has been operating. Ultimately, the financial transactions create a trail to assets that may be seized.

But to do this we need accurate and complete reporting from the financial entities required to send reports to us.

This is where I want to look specifically at the casino sector.

I will be frank. The casino sector needs to improve their compliance programs, and specifically the quality and quantity of their reporting in some areas. It is clear to us at FINTRAC that more can and should be done. Let me explain why.

FINTRAC undertook compliance examinations of 10 entities in the casino sector in the fall of 2008, involving 22 casino locations. Our examinations were detailed: we reviewed thousands of records, interviewed hundreds of casino staff involved in compliance including supervisors, dealers, and those working in the cash cage, as well as in security and surveillance. We have also conducted research to look at the information that was being reported to us by the casinos.

The combination of these on-site examinations and our analysis of the information that has been reported provided some important insights.

Overall, we found that about 98% of the time, casinos were keeping the required client records. Unreported transactions were not identified as a major issue. Many provinces are also providing us with good to excellent information in the description section of their suspicious transaction reports.

But we do have some concerns with the casinos' compliance regimes. We found that over half the casinos reviewed did not have an effective anti-money laundering training program in place.

We also found that many casinos are struggling with reporting large cash transactions in accordance with the 24-hour rule. Casinos are required to report large cash transactions of $10,000 or more but if a series of smaller transactions are conducted within a twenty-four hour period that total $10,000 or more, this also triggers the obligation to report. Specifically, in some provinces this reporting rule was not complied with 95% of the time.

We think that our findings show that the casino sector requires more attention and assistance from us. Over the next year, we will be working toward raising the level of compliance among the casino operators. We will conduct more on-site examinations. Under federal legislation, FINTRAC officers have the legal authority to access all records and all areas of a casino relevant to ensuring compliance with the law. We will exercise our legal authority to determine if client identification, record keeping, reporting and other requirements set out in the Act are being met.

We will identify deficiencies in compliance programs that seem common to many operators and we will do what we can to focus their attention on these shortfalls so that improvements in compliance will result. For example, casinos have a legal obligation to make a risk assessment of their operations to identify risks of money laundering and terrorist financing and to put appropriate procedures in place to mitigate those risks. This is something that needs to be done in every casino as part of their compliance regime. To date, it is being done in too few casinos.

We hope to increase the degree of transparency and openness that we have taken with compliance with both casino operators and gaming regulators.

As a first step, we will pursue a pilot project with the Alcohol and Gaming Commission of Ontario. This pilot will include sharing our findings with the regulator in advance of providing them to the casino and finding a way for the AGCO to be involved in observing the examination from start to finish. The findings of an examination are not negotiable, but the regulator should be able to comment if something seems out of line.

But we want to go much further. We want you as regulators to re-evaluate your role in supporting compliance with the PCMLTFA. What can you do to help us ensure that the gaming industry is made less vulnerable to money laundering and terrorist financing? Surely, it is in our collective interest to see that casinos are not unwittingly providing assistance to criminal activity within the provinces that casinos operate. If there are ways for us to work together to advance our shared interests, I want to hear them.

Why do we want all this? Because greater compliance will help achieve two objectives: deterrence and detection. If casinos can make improvements to their compliance regimes, they will effectively lower their risk of being used to launder money by criminals. This is a good objective. It will make them less vulnerable to criminal activity and this is surely in the social and public interest.

Detection is the other objective. FINTRAC needs better information from all reporting entities, including casinos, in order to enable us to assist police with their investigations relating to money laundering and proceeds of crime.

It is also clear from our analysis of casino reporting that this role is not well enough understood by many casino operators. So we are going to redouble our efforts to demonstrate to casino operators and regulators why it is important to get good reporting from the casino sector. Not just tell them, show them.

What we are going to do is replicate a very successful report we produced recently with the banking sector called Money Laundering and Terrorist Financing Typologies and Trends in Canadian Banking. It will be available on our website by the end of July, should you want to consult it.

What this report did was show the banks exactly what is done with the millions of reports they send to us, how we analyze them, how we uncover money laundering and terrorist financing, basically, how their compliance programs are helping us help law enforcement and national security agencies protect public safety. In the report we also talk about trends and typologies of money laundering and gave them a case to illustrate how we do our work.

So for the fall, FINTRAC will produce a report on money laundering trends in the Canadian casino sector. In doing this, my hope is that the casino sector will become more aware and more engaged in the efforts to combat these crimes.

If you have questions that you feel should be answered by our casino research report, please send them to me or to my staff. FINTRAC would benefit from the support and cooperation of all the provincial gaming regulators in this research project and in the larger project of achieving compliance within the sector.

Let me conclude by reiterating that money laundering and terrorist activity financing are crimes. They are the types of crime that can be prevented from happening in Canadian casinos. And there are measures that can be taken to detect these crimes when they do occur. For those of us who have a regulatory role in this sector, it is incumbent on us to do both.

Thank you again for affording me the time to speak to you today. It is much appreciated.

I look forward to hearing from you.