FATF mutual evaluation identifies significant faults in Canada Anti-Money Laundering regime

Canada's anti-money laundering (AML) regime is obstructed by inadequate investigation, prosecution, and deterrence of money laundering offenses, the Financial Action Task Force (FATF) said in a 200-page report released on Thursday. The international AML standard-setter found that the priorities, resources, and expertise of Canadian law enforcement and regulatory agencies failed to adequately mitigate the threats posed by money laundering.

Multiple agencies responsible for AML investigation and enforcement did not immediately respond to requests for comment, including the Public Prosecution Service of Canada, the Financial Transactions and Reports Analysis Centre (FINTRAC), and the Royal Canadian Mounted Police (RCMP).

Major findings from the FATF's 
Mutual Evaluation Report on Canada (PDF) include:

Ø  Over the last five years, Canadian authorities obtained only 12 convictions out of 35 dedicated money laundering cases. The FATF concluded that "Canada does not sufficiently pursue money laundering charges."


Ø  Criminal and supervisory sanctions are too light to deter offenders.


Ø  Prosecutions rarely result in money laundering convictions, because authorities focus primarily on predicate offenses and often withdraw money laundering charges.


Ø  Legal persons are "hardly ever prosecuted" for money laundering offenses, due to a "shortage of adequate resources and expertise."


Ø  Canada's law enforcement priorities do not adequately reflect the threats posed by money laundering.


Ø  Canada does not focus adequately on foreign investigative requests that may reveal domestic money laundering activity.


Law enforcement priorities misaligned

Canada identifies and investigates money laundering activity "to some extent only," the FATF said, adding that "the results obtained so far are not commensurate with Canada's money laundering risks". 

Canada's AML effort showed an "inadequate alignment of current law enforcement priorities," coupled with "resource constrains" that made it unable to mitigate fully the threats identified by the government's 
National Risk Assessment (PDF), the FATF said. It noted that several "very high-threat" criminal offenses—including fraud, corruption, and complex corporate laundering—were not adequately prioritised by authorities and were consequently "not pursued to the extent that they should" have been. 

Canadian law enforcement agencies mainly focused on drug offenses and national security crimes, "with insufficient focus on the other main money laundering risks," the report said. "In practice, most of the attention is focused on securing evidence in relation to the predicate offense and little attention is given to money laundering," the FATF said. 

The FATF's 
International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, issued in 2012, require countries to apply the crime of money laundering to all serious offenses that generate value, including physical property. 

Additionally, Canadian law enforcement agencies "generally suffered from insufficient resources and expertise to pursue complex [laundering] cases," the FATF found. 

The volume of illicit money confiscated by authorities was also not commensurate with Canada's money laundering threat landscape, "neither by nature nor by scale," the report said.

Insufficient prosecution

Canada's low prosecution and conviction rates for money laundering offenses attracted particular attention. Canadian prosecutors showed "insufficient focus" on laundering-related cases involving major crimes, the report found. "In addition, prosecutions of [laundering]-related cases focus on the predicate offenses, with the [laundering] charge(s) often withdrawn or stayed after plea bargaining and re-packaging of charges," it said.

Additionally, Canadian authorities did not adequately pursue professional money launderers, i.e. those whose criminal activity is limited to laundering and does not involve another offence. For example, since tax-evasion became a predicate offense to money laundering in 2010, none of the tax-evasion cases finalized by the Canada Revenue Agency (CRA) have included sanctions for money laundering, the report observed. 

When successful prosecutions do occur, the resulting criminal sanctions "are not sufficiently dissuasive," the report said. "The majority of natural persons convicted for [money laundering] are sentenced in the lower range of one month to two years of imprisonment, even in cases involving professional money launderers." 

In the 2010-2014 period, only 3.4 percent of criminal cases involving money laundering resulted in standalone laundering charges, and only 9.6 percent of cases involving the possession of proceeds of crime (PPOC) resulted in dedicated PPOC charges. 

Out of nearly 150,000 cases involving the possession of illicit funds, Canadian prosecutors withdrew the possession charges 75 percent of the time, with defendants only charged with and convicted of the predicate offenses. Roughly 40 percent of dedicated money-laundering charges were also withdrawn. 

Over the five-year review period, Canada obtained 169 money-laundering convictions (as part of broader cases), which the FATF described as "very low in light of the magnitude of the money laundering risks identified".

"Canada does not pursue the money laundering charges sufficiently," it said.

Specific loopholes and deficiencies

The FATF highlighted Canada's exemption of lawyers, law firms, and Quebec notaries from AML supervision and disclosure obligations. In 2015, the Supreme Court of Canada ruled that FINTRAC could not obtain client financial information from lawyers, because it would violate solicitor-client privilege.

"This constitutes a significant loophole in Canada's AML/CFT framework," the report said. "Legal persons and arrangements are at a high risk of misuse, and that risk is not mitigated."

The use of corporate vehicles and trusts was also a major concern. "It was clear from the discussions held with police forces and prosecutors that legal persons are hardly ever prosecuted for [money laundering] offenses, mainly because of a shortage of adequate resources and expertise," the FATF noted. "Investigators are nevertheless aware of the risk of misuse of corporate entities in [money laundering] schemes and that more focus should be placed on this risk." 


Turning to Canada's financial intelligence unit and national AML regulator, the FATF noted that the Financial Transactions and Reports Analysis Centre (known as FINTRAC) was hampered by restrictive rules preventing it from seeking additional information on suspicious transactions from reporting entities. Those restrictions "limit the scope and depth of the analysis that it is authorized to conduct," the report said. 

Half of FINTRAC's disclosures were proactive, while the rest were in response to requests made by law enforcement. "FINTRAC's analysis and disclosures are mainly prepared in response to the requests made by [law enforcement agencies] in Voluntary Information Records (VIRs)," the evaluation found. 

Repeating a familiar theme, the FATF also criticised FINTRAC for inadequate regulatory enforcement, specifically in terms of penalties. "The maximum [administrative monetary penalty] thresholds for serious violations raises doubts about whether it is proportionate or dissuasive," the report noted. 

The same criticism was levied against the Office of the Superintendent of Financial Institutions, Canada's federal banking regulator. At the same time, however, the FATF commended their overall supervisory system and lauded their efforts at improving compliance.

While noting that non-penalty remedial actions, such as enhanced supervision, were used effectively to improve compliance results, the FATF found that "the sanctioning regime for breaches of the 
Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PCMLTFA) has not been applied in a proportionate and/or sufficiently dissuasive manner". 

Financial firms

Turning to financial institutions, the FATF noted that most federally regulated firms, including Canada's six domestic systemically important banks, "have a good understanding of their risks and obligations, and generally apply adequate mitigating measures". 

The same was not true for FINTRAC-regulated non-financial business professions (DNFBPs), such a real estate agents. "[Reporting entities] have gradually increased their reporting of suspicious transactions, but reporting by DNFBPs other than casinos is very low," it said.

Additionally, the FATF noted that certain regulatory deficiencies undermined the effective detection of "very high-risk threats" such as corruption. "This is notably the case for the current requirements related to politically exposed persons (PEPs)," the report said. 

"The identification of beneficial ownership also raises important concerns. Although the legal requirements have recently been strengthened, little is done by [financial institution] to verify the accuracy of beneficial ownership information."

Daniel Seleanu is a correspondent for Thomson Reuters Regulatory Intelligence in Toronto.