Canada AML Agencies offer to address concerns of FATF
Several Canadian government agencies responsible for anti-money laundering and countering the financing of terrorism (AML/CFT) defended their work in responding to critical findings in a report evaluating Canada's AML/CFT regime published by the Financial Action Task Force (FATF) on Thursday. But some authorities also said they would address concerns raised by the international oversight body.
The FATF mutual evaluation report concluded that Canada's law enforcement priorities do not adequately reflect the threat it faced from money laundering. 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".
Financial intelligence unit
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.
In response, FINTRAC stressed that it was an administrative body and did not have investigative powers. "The legislation was crafted as such to respect the Canadian Charter of Rights and Freedoms and the privacy rights of Canadians," FINTRAC said.
FINTRAC added that it "receives various types of reports that are not provided to the vast majority of similar financial intelligence units around the world," but did not elaborate.
Insufficient AML enforcement
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 agency said its enforcement regime was "intended to change the non-compliant behaviour of businesses" by establishing action plans and conducting follow-up examinations, as well as issuing penalties.
"In deciding the most appropriate enforcement action to bring about behavioural change, FINTRAC assesses the overall compliance history of the business, the seriousness of the violation, and the extent to which the business has already taken corrective action," FINTRAC said. "The results of follow-up examinations conducted on previously penalized businesses have shown that, in most instances, these entities made demonstrable improvements in their level of compliance."
Since launching in 2000, FINTRAC has only imposed 95 penalties against reporting entities for AML/CFT violations, but it withheld the identities of 55 of those firms. FINTRAC's first-ever fine against a bank occurred in April 2016, when the AML regulator imposed its largest-ever penalty (C$1.1 million) for significant violations. FINTRAC declined to identify the bank and did not publicly announce the major enforcement, drawing strong criticism from AML professionals across Canada.
Critics accused FINTRAC of giving special treatment to the bank by protecting its identity. The 40 firms FINTRAC identified in previous penalties were small entities, such as money changers.
FINTRAC real estate focus
The FATF report also drew attention to the "very low" level of suspicious transaction reports (STR) filed by designated non-financial business professions (DNFBPs), especially in the real estate industry, which is currently the focus of intense money laundering concern.
FINTRAC said it has focused extensively on improving STR performance among non-financial reporting entities. "In delivering more than 30 presentations across the country in 2015-2016, FINTRAC provided businesses with practical guidance in relation to detecting and reporting suspicions of money laundering and terrorist activity financing," it said. "As a result of FINTRAC's efforts...suspicious transaction reporting increased by 24 percent in 2015-2016, and by 63 percent over the past five years."
The comprehensiveness of STRs has also improved year over year, "as observed by FINTRAC and the recipients of its disclosures," the agency added.
Focusing on the heightened AML risk in Canada's real estate sector, FINTRAC stressed that it had conducted over 600 examinations of real estate firms over the last three years, with a 33 percent increase over the last year.
"In British Columbia, FINTRAC nearly quadrupled its examinations of the real estate sector over the past 12 months, with the biggest impact in the Vancouver area," FINTRAC noted. "In addition, the Centre has dedicated significant time and effort to working with the Canadian Real Estate Association to increase the sector's understanding of their obligations."
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 FATF said. Additionally, prosecutions rarely result in money laundering convictions, because authorities focus primarily on predicate offenses and often withdraw money-laundering charges, the report found.
The Public Prosecution Service of Canada (PPSC) told Thomson Reuters Regulatory Intelligence that its operational manual includes a decision-to-prosecute test to determine if there is a "reasonable prospect of conviction based on the evidence" and whether prosecution would serve the public interest. The PPSC also noted that even if specific laundering and proceed possession charges are dropped from a broader indictment, "the accused may still be convicted of the offence that generated the [criminal] proceeds".
Illicit funds could also still be confiscated without obtaining a conviction, the PPSC added. On the issue of forfeiture, the FATF stressed that the volume of criminal proceeds confiscated by Canadian authorities was not commensurate with the threat posed by money laundering, "neither by nature nor by scale".
Banking regulations and enforcement
The FATF also criticized the sanctioning practices of Canada's federal banking regulator, the Office of The Superintendent of Financial Institutions (OSFI). "The lack of (administrative monetary penalties) AMPs being applied to (federally regulated financial institutions) FRFIs, and the relatively low level of fines imposed, negatively impact the effectiveness of the enforcement regime" in terms of deterrence, the FATF said. "The non-application of the AMP regime to OSFI guidelines also affects the effectiveness of the Canadian supervisory regime."
In response, OSFI stressed that its AML/CFT supervisory work focuses on the policies and procedures developed by firms to assess money laundering and terrorism financing risk. "We intervene when we identify issues and weaknesses and require financial institutions to implement remedial measures," the regulator said.
On the FATF's reccomendation that OSFI apply administrative sanctions to the AML/CFT guidelines, OSFI said it only had the power to "apply financial penalties for violations of FRFIs' governing legislation". Penalties for non-compliance with AML/CFT requirements were FINTRAC's responsibility, OSFI added.
OSFI, FINTRAC coordination
Addressing the FATF's finding that OSFI and FINTRAC need to coordinate resources and expertise more effectively, OSFI said both agencies were already working on a solution. "Both organizations are collaborating by exchanging information and conducting concurrent on-site assessments," OSFI said. "As part of continuous improvement initiatives, FINTRAC and OSFI agreed to further refine their supervisory approach and move to a joint examination process."
Their objective is to streamline each agency's independent review mechanism toward a "single and cohesive process," OSFI added. "A joint examination has been piloted, and OSFI and FINTRAC are further aligning their processes."
Additionally, the FATF found that OSFI did not have enough AML supervisors for the size of its supervisory population. OSFI did not address the specific issue of supervisory staffing levels, but emphasised its commitment to effective supervision.
OSFI stressed that it was monitoring the performance of its AML/CFT programs and that it was committed to addressing and effectively implementing strengthened FATF standards.
Department of Finance
The federal Department of Finance, a major policy stakeholder in Canada's AML/CFT regime, said it was reviewing the FATF recommendations closely. "Recent and soon-to-be released regulatory amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) will address a number of the identified areas for improvement in the report," the Finance Department said.