Money Laundering Vancouver Style - part 4- Off the beaten FINTRAC.

Codex Compliance
May 23, 2019
8 min read

The name is a misnomer, it should be FINoTRAC, FINTRACtable or FinLIB - I won’t create acronyms as it will be entirely gratuitously negative and offensive. Yes I’m being a little harsh, but this is a result of and focused on the (lack of) work done in relation to the situation in British Columbia/Metro Vancouver - so it’s warranted criticism and the FIU is a big part of the conversation ( - the one I was having with myself). The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is the financial investigation unit (FIU) for, that’s right, Canada.

What is an FIU? I hear you ask, actually most anti-financial crime peoples will know that, but for the lay, and clarity let’s cover it. The common definition of an FIU is;

“… a central, national agency responsible for receiving, (and as permitted, requesting), analyzing and disseminating to the competent authorities, disclosures of financial information:

(i) concerning suspected proceeds of crime and potential financing of terrorism, or

(ii) required by national legislation or regulation, in order to combat money laundering and terrorism financing.”

That’s good to know isn’t it - there’s a lot going on behind the scenes in the global fight against financial crime (not in BC obviously). The Egmont Group of Financial Intelligence Units is an informal network of 159 financial intelligence units, the above definition is penned by them, and aligns with the FINTRAC about us spiel (1), “FINTRAC is Canada's financial intelligence unit. Its mandate is to facilitate the detection, prevention and deterrence of money laundering and the financing of terrorist activities, while ensuring the protection of personal information under its control.” Except it historically hasn’t (not entirely it’s own fault) and presently doesn’t really do these things very well - actually I imagine they do protect personal information well.

This part 4 post was meant to wrap up the Vancouver model articles but as I was looking at the particulars in relation to key changes I want to see, it became apparent that this important FIU issue wanted a slightly deeper dive. A dressing down, to uncover the dressed up FIU it actually is. So here’s one angle on how it should work in theory; Bank ABC Ltd sees some unusual transaction activity on one of their accounts, they create a suspicious activity report (SAR) and send it to the their FIU, the FIU confirm receipt, and analyse the submission. They discover that two other SARs have been sent in the last week that show two accounts at other banks that are registered at the same address have also seen unusual account activity. They send the info to the their internal investigations team who contact the banks in question to gather further information. The FIU then compile a case and enough information and evidence to show that something illegal is going on, they advise all banks to freeze the accounts and arrest the individuals who are put in jail for many years.

That’s a simplified look at one of the basic functions of an FIU. It’s pretty neat when it works and can get very complex (see end of post - Russian FIU investigation), hence the point of a well resourced, empowered, globally connected entity with national oversight. Leading the way are FinCEN (Financial Crime Enforcement Network), the US FIU, they have significant resource and are particularly effective, leading the way with a comprehensive regime, and a good number of scalps to show for it - obviously it’s an ongoing battle and each country has their own challenges. In comparison, the way FINTRAC works is that once reports are with them they are analysed and then stored until requested by the provincial parties investigating criminal ongoings.

| Is FINTRAC in essence a glorified library?

This is how I imagine all the reports are stored at FINTRAC / Image: Michale D Beckwith / Unsplash

Is FINTRAC in essence a glorified library? I hear you ask, good question. Well in my eyes they don’t actually investigate to a conclusion so maybe they shouldn’t be called a financial investigation unit (though not all FIUs have law enforcement powers - I think they all should to an extent). Neither does the system have the required infrastructure, or resources to deal with the threat level accordingly and therefore are not fully operational - hence in my opinion they are not the bonafide FIU that Canada needs (2).

What does FINTRAC do? From what I gather they;

- receive reports on suspicious activity from all entities that are required to report.

- disseminate information to police and relevant authorities when required

- collaborate with & support other FIUs

- respond to requests for information

- they can issue fines up to a max of CAD 1m

- deal with regular FIU mandated tasks nationally and globally (meetings, training, etc).

They have not or do not;

- issued a fine in the last 3 years as they were reviewing their policy (?!)

- tried to improve the state of national AFC ongoings (and are more focused on external matters)

- allow law enforcement to work on their sites

- have the power to investigate fully / this is done locally via police.

- have the power to freeze assets.

Apparently their penalising powers have been restored now (Feb 2019 - 3), but what a state of affairs. The banking regulators in Canada are OSFI and FCAC, prudential and consumer respectively. There has been little action from these entities that I have seen evidence of that is constructive in preventing or effective in punishing financial crimes. So apparently the Office Of The Superintendent Of Financial Institutions (OSFI), and FINTRAC can each issue fines up to $1m, and the Financial Consumer Agency of Canada (FCAC) can issue half that, this is a little weak considering the kind of fines I like seeing, either way I don’t think they’ve been up to much in that sense. Again it’s the enforcement that’s lacking and now looking at the wider picture with all these other authorities and agencies involved, it’s clear that the issues are systemic.

There have been calls for banks to be audited and investigated in relation to profit ‘gouging’ and lack of transparency. The same article from June 2017 states, “Democracy Watch says the FCAC has issued just $1.7 million in fines to banks since 2001. By comparison, Britain's Financial Conduct Authority (FCA) has issued penalties totalling more than US$3 billion since its creation in 2013, while in the U.S. the Consumer Financial Protection Bureau (CFPB) has issued more than US$5 billion in fines since 2011” (4). And lets not get into all the fines the BoE, SEC, and US Treasury/OFAC have dished out over the years (See Chart - 5). In 5-10 years I hope to see a similar chart relating to action the Canadians have taken to clean up the dirty dealings in their finance, casino and real estate sectors. Of course they have to be able to investigate, enforce and prosecute for that to happen.

Reports, Retorts, and last Resorts.

“The number of reports received by FINTRAC is staggering. In 2016, it received over 27 million financial transaction reports across all sectors. With respect to casinos, it received 172,289 CDRs alone. FINTRAC utilizes sophisticated software to analyze submissions from reporting entities and ultimately disseminates the information in vetted form to designated law enforcement and security agencies.” - Report 1. Now with that kind of intel, there should be investigations, arrests, court cases, convictions, and all that financial crime fighting frenzied media sensationalism that we like to see in the news. I haven’t gone into BC specifics but there isn’t anything stated about BC investigations in the FINTRAC annual report, which does point at recent successes etc.

It seems the conversion rate for disclosures of information from FINTRAC into actionable prosecutions is quite low, and that may have to with the resources that are available on the policing side. There is a disjunct here, I believe the whole process of analysis, investigation, indictment, asset freeze and should be within the purview and power of the FIU - as it very often is, as per UK NCA and US FinCEN. As I understand it FINTRAC do good work in terms of analysis, and the quality of the disseminations is great, as is the support they provide other FIUs and entities. So this isn’t a case of lack of expertise but structural and organisational matter in relation to their mandated duties, and the process of dealing with reports they receive.

Can the Royal Canadian Mounted Police (RCMP) save the day - they need the one from that show 'Due South' from way back when, he was a true hero / Image: Nic Amaya / Unsplash

On the kind of bright side, for the 2019 budget announced in March this year, the Canadian government announced a pilot program for the optimistically-named ACE Team, or Anti-money laundering action and co-ordination team. I’m not exactly sure how that comes out as ACE, but whatever. The initiative hopes to combine the expertise and resources of the RCMP, FINTRAC, Canada Revenue Agency, and federal justice department prosecutors (6). I have previously bashed the lack of policing and interest in the shipping industry and trade based money laundering - involving import/export of goods and the illicit transfer of value/assets using this sector. This is also to be addressed by FINTRAC and Canada Border Services who will collaborate to create a “Trade-based Money Laundering Centre of Expertise” - whatever one of them does, I don’t know - sounds like another library.

These collaborations are a key step in the larger battle, but what is happening is potentially a continuation of the siloed and disjointed approach that has hindered the process thus far. Why not open FINTRAC to become the defacto investigations entity and allow law enforcement some room to manoeuvre internally, encompassing asset freezing and extended powers. If the above proposals materialise, it is moving the bar further away from the traditional FIU set up, a set up which can work well and is logical. The reports are flowing in, so in a sense that side of the process is working - but shipping the information back out to external regional entities doesn’t make sense. Sure regional FINTRAC offices (as there are now) are necessary, but they need to be the tentacles of one organism not entirely separate cells. They are throwing money at the problem, creating new structures but they are essentially building on wobbly foundations.

“Most large land developments and commercial purchases in B.C. are handled by lawyers. Notaries handle many residential real estate transactions. Ironically, lawyers and notaries may represent parties to the same real estate transaction, with one side not reporting to FINTRAC and the other reporting. It is hard to rationalize this irony within the same transaction.” - Report 2. They need lawyers to report to FINTRAC, that’s all there is to it, if they don’t, they’ll never be on top of the problem. The Law Society that has lobbied against reporting (successfully), and is a an authority in the sector, needs to be brought in on reporting or squashed altogether (in this context).

It's all shadows and silhouettes behind the scenes of financial regulation in Canada / Image: Nicola Fioravanti / Unsplash

In the bigger picture, if there isn’t something being worked on already, a real key to this revamp working, and a consideration for the future ACE Team and the other one mentioned above, is a focused Canada-China bi-lateral enforcement effort. The Chinese have cracked down significantly on corruption and though they have their own methods and motivations, I’m sure they would like to lock down on the criminal elements circumventing their controls, evading tax and causing harm to their economy. Of course this rolls into the realms of politics and other ongoing matters such as the Huawei scandal that has Canada stuck in between China and the US. That’s all part of the game I guess, but they’ll need to think of something as it's likely that if ACE actually get to do some investigating they are going to appreciate some cooperation from China, who unsurprisingly, are not part of the Egmont Group.

It’s reasonable to say that if the government, both provincial and national, started cracking down on banks, casinos and illicit flows in real estate, actually prosecuting and levying meaningful fines/penalties that they might actually be able to make some of the money back that they lose from shutting the dirty money out of the system. Canadian regulators need their powers increased and to take the lead from the other global regulatory authorities; take a stand, crack the whip and don’t back down for love nor money (obviously).

Below are some snippets from an example taken from the Egmont Group 2017 Annual Report (7) showing a Russian investigation which their FIU (Rosfinmonitoring) got to the bottom of. Don’t ask me to break it down, I have no idea what the diagrams are but it looks impressive, like a job well done! Yes Canada, in this case you are the bad guys - so do something about it and maybe you’ll get out of the naughty corner and into a future annual report as a StAR* pupil.

Al.

* StAR = Stolen Asset Recovery, a World Bank initiative - https://star.worldbank.org/