News & Press: Money Laundering

In latest evaluation, Canada strong on effectiveness, but needs to bolster oversight on attorneys

Thursday, September 15, 2016   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
bmonroe@acfcs.org
September 15, 2016

Canada has relatively strong countermeasures against financial crime and terrorism, aiding the country in identifying larger and more complex networks, but requires further improvements to be fully effective, such as more scrutiny and oversight of non-bank entities, according to a just-released evaluation of the country’s financial crime compliance framework.

The International Monetary Fund (IMF) conducted a detailed assessment of Canada’s anti-money laundering and countering the financing of terrorism (AML/CFT) framework, and the resulting report was adopted by the Paris-based Financial Action Task Force (FATF) as Canada’s 4th mutual evaluation report. FATF sets the global AML agenda.

The assessment found that the Canadian AML/CFT regime is “comprehensive and presents several characteristics of an effective system, but improvements in the legal framework and its implementation are nevertheless necessary.” The report centers much of its criticism on the areas of non-financial businesses, such as attorneys and real estate operations, which have been highlighted as areas of greater financial crime risk globally.

Canada faces significant money laundering and, to a lesser extent, terrorist financing risks, according to the evaluation, so must ensure there are no gaps in its oversight of certain groups, lest they become a conduit for criminal enterprises.   

Overall, Canadian authorities “have a good understanding of these risks and have put a number of mitigating measures in place,” including covering most high-risk areas for financial crime, except “legal counsels, legal firms and Quebec notaries,” according to the report.  

That is chiefly due to the Supreme Court of Canada declaring AML/CFT measures inoperative in their respect to those sectors, according to the evaluation.

Evaluators concluded that the “lack of coverage of these professions is a significant loophole in Canada’s AML/CFT framework and raises serious concerns. Legal persons and arrangements are at high risk of misuse for money laundering or terrorist financing purposes, and that risk is not satisfactorily mitigated.”

That also leaves a blind spot for Canada’s financial intelligence unit, Fintrac, which works closely with its corresponding body in the United States, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), which results in a lack of information and insight into criminal and terror financial flows for both bureaus.

Constitutional constraints “limit the analysis that Canada’s financial intelligence unit, FINTRAC, can conduct,” according to the evaluation.  “The fact that FINTRAC is not authorized to request information from any reporting entity creates a gap, however, FINTRAC does cooperate effectively with law enforcement agencies.”

Some success, but with caveats

Broadly, the evaluation notes that Canadian authorities “have achieved some success in combating money laundering, notably when conducting law enforcement efforts with the support of FINTRAC’s analysis,” a crucial positive.  

However, these efforts “are not entirely in line with the money laundering risks that Canada faces, and overall, the recovery of proceeds of crime appears to be relatively low,” according to the evaluation, noting that with the recent FATF focus on effectiveness, seized assets are a crucial barometer of success.

On the whole, financial institutions, including Canada’s six domestic, systemically important banks, “generally apply adequate measures to mitigate the money laundering and terrorist financing risks that they face,” according to the report.  

Designated non-financial businesses and professions, however, are “not as effective in their implementation of AML/CFT measures,” according to the report.  

The financial and non-financial sectors are subject to appropriate risk-sensitive AML/CFT supervision, but “further supervisory efforts are necessary with respect to the real estate and dealers in precious metals and stones sectors,” according to the report.

In terms of working with other governments, the Canadian authorities “cooperate effectively and frequently with their foreign counterparts,” according to the report.

Canada has a “strong framework for mutual legal assistance and extradition which it adequately uses in the fight against terrorist financing and, albeit to a somewhat lesser extent, money laundering.”

But the wording of the report, and direct tone of evaluation teams, is something other countries should take note of, particularly in light of how FATF is focusing more examination time on if metrics tied to financial crime, such as larger and more complex cases undertaken, convictions garnered and assets forfeited, are going up or down. 

“While Canada received strong ratings for effectiveness of its AML/CFT framework in areas such as its national risk assessment, international cooperation and imposition of preventive measures, it fared poorly in a number of areas, including: certain categories of Designated Non-Financial Businesses and Professions (DNFBPs), such as lawyers and notaries are not fully subject to the framework," said Ross Delston, a Washington, DC-based attorney and anti-money laundering compliance expert, adding that the report was tougher on Canada than would be expected for a G-7 country.

Because of a Canadian constitutional ruling, lawyers are not subject to AML/CFT supervision, as stated in the report, according to Delston.

“There is therefore no incentive for the profession to apply AML/CFT measures and participate in the detection of potential ML/TF activities,” according to the report.  

The exclusion of the legal profession from AML/CFT supervision is a “significant concern considering the high-risk rating of the sector and its involvement in other high-risk areas such as real estate transactions as well as company and trust formation. This exclusion also has a negative impact on the effectiveness of the supervisory regime as a whole,” stated Delston, citing the report.

 ‘Significant loopholes’ remain

Also, according to the report, Canadian companies and trusts “are at a risk of misuse for ML/TF [money laundering/terrorist financing] and mitigating measures are insufficient both in terms of scope and effectiveness....Most TCSPs [trust and company service providers], including those operated by lawyers, are outside the scope of the AML/CFT obligations and DNFBPs are not required to collect beneficial ownership information.”

These pose “significant loopholes in the regime (both in terms of prevention and access by the authorities to information). [Financial institutions (FIs)] do not verify beneficial ownership information in a consistent manner,” according to the report.

Finally, while financial institutions are required to conduct customer due diligence (CDD) on the beneficial ownership of their customers, the report states that “there is an undue reliance on customers’ self-declaration for the purposes of confirming beneficial ownership,” according to Delston.

“Interestingly, this sounds very similar to the new CDD rule from FinCEN in the US, which allows FIs to rely on such declarations,” he said.

Overall, “many of the criticisms in the Canadian report would also apply to the US, which does not augur well for the FATF report on the US which is due out by the end of 2016,” Delston said.  “So we don’t just share a long border with Canada, but also some of the same deficiencies in our AML/CFT framework. I hope another wall along the border is not in the offing.”


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