A missed opportunity: Canada's Cullen Commission
Money laundering in Canada
Welcome to a special (Friday!) edition of Insight Intelligence, brought to you by my annoyance with Canada’s anti-money laundering regime. This week, the Cullen Commission released its much-anticipated report on money laundering in British Columbia. The mandate of the commission was to look at a variety of different aspects of money laundering in the province, including through real estate and in BC casinos. The commission produced an 1800 page report, and 101 recommendations. Here’s a brief overview of what I think they got right, and what they got (very) wrong.
Before we get into it, let’s talk about why Canadians should care about money laundering. Money laundering (the process of taking funds raised through criminal activity like drug trafficking, sanctions evasion, corruption, etc, and “washing” the money through various techniques in the financial system to make it appear to be the proceeds of legitimate activity) is a big problem in Canada. How big? We really have no idea. The commission itself suggests its in the tens of billions of dollars; I would tend to agree — based on my experience looking at FINTRAC disclosures, and my general knowledge of financial crime, I would estimate it in the ballpark of billions of dollars a year in Canada.
This means that criminals are making billions of dollars in Canada every year, and using our financial system to launder those funds. Think about what this looks like: million dollar frauds, billion dollar drug trafficking networks, and much more. All of this makes Canada a home for crime.
For international readers, why should you care about this? Well, from a risk-management perspective, the commission report clearly highlights that Canada is a safe-haven for money laundering. Adjust your risk profiles and investments accordingly.
What the commission got right
The commission got a lot of things right in its recommendations, sometimes by accident. Reading the report, I would not describe many of these recommendations as evidence-based. Instead, when they make good recommendations, it’s usually despite their flawed analysis (basically analysis that doesn’t really illustrate a causal chain between problem, solution, and outcome).
Beneficial ownership registries: the report recommends that British Columbia implement a beneficial ownership registry that is publicly accessible. These types of registries allow individuals, reporters, law enforcement, etc to see who actually owns a company. Company ownership (particularly anonymous or hidden ownership) can be used in money laundering / criminal activity to create a layer between the crime and the ultimate beneficiary (i.e. the person who will ultimately benefit from the criminal activity) and can create a veneer of legitimacy. They can also be used to store assets. This is an important recommendation because, while the federal government has committed to a beneficial ownership registry, the majority of corporate registrations happen at the provincial level. So we really need the federal government and provinces to have similar rules in place in order to create a solid foundation to prevent money laundering / hiding assets in corporate entities.
Money laundering has been neglected by the RCMP. This is very true. The RCMP has had a very difficult time protecting resources dedicated to investigating financial crime and money laundering, hiring experts, and bringing these cases to a successful conclusion. Frankly, this has not been a priority in Canada and we are now seeing the consequences of that. Of note, however, is that the commission does not talk about the role of prosecution services in this: do prosecutors understand money laundering and financial crime, are they confident that they can explain it to a judge or jury, etc? I suspect there are some issues there and the flaws in our system cannot be laid at the feet of just one organization.
Canada needs to do a better job of regulating money service businesses. FINTRAC holds responsibility for regulating MSBs when it comes to anti-money laundering and terrorist financing compliance. They take a risk-based approach to this, meaning that in any given year, a small number of businesses are examined for their compliance with regulations. This function is, in my opinion, terribly under-staffed. FINTRAC recently re-vamped its ability to issue administrative monetary penalties that penalize reporting entities that fail to meet their compliance obligations, but frankly, I think we could turn this function up to about a 10 and still miss a lot. More resources for FINTRAC here (and a demand for results!) would go a long way.
What the commission might have gotten right
Unexplained wealth orders : the commission recommends that British Columbia implement unexplained wealth orders. These orders essentially create a reverse onus on individuals to prove where they got their money from. If you can’t prove that your funds were obtained legitimately, they could be subject to forfeiture. This tool can be particularly useful against criminal activity, corruption, and even oligarchs. However, there are likely some big hurdles to developing a Charter-compliant version of unexplained wealth orders, and even in countries that have implemented them, it’s not been all sunshine and roses.
What the commission got (very) wrong
This is the part that gets really disappointing. Despite spending years working on this, the commission does not seem to fully understand our federal anti-money laundering system, or much about the work of FINTRAC. They lay far too much blame at the feet of this one organization when in reality, the problems in our system are the result of a lot of different organizations doing a mediocre or poor job. Take all of that under-performance together and you get where we are.
The commission concluded that our AML system is not effective, largely because of how FINTRAC does its work. The commission concludes this, in part, because the number of disclosures (information packages) that FINTRAC produces and shares with law enforcement is not commensurate with the volume of reports they receive. On the face of it, this assertion is true: FINTRAC doesn’t come anywhere near close to producing tens of millions of disclosure packages every year (see the figure below for the number of reports FINTRAC receives every year). Unfortunately, the commission relied on some bad expert testimony on this issue. For instance, one expert commented that the relationship between reports received (30+ million a year) and disclosures (2000+ per year) was the product of “defensive reporting”. But this isn’t true. 98-99% of the reports FINTRAC receives are threshold reports, meaning that they are reported automatically. You might be able to argue that there is defensive reporting in suspicious transaction reports, but this was never explored.
Interestingly, last year, FINTRAC shared a lot of information with law enforcement in British Columbia. That included disclosure on 674 individual subjects (this could be individuals or entities) and more than 15,000 transaction reports, and many of these reports themselves contained numerous transactions. (Suspicious transaction reports sometimes contain multiple transactions because individually, there’s nothing strange, but taken together, reporting entities find them suspicious.) FINTRAC disclosed approximately $6.1 BILLION in value in transactions, all of which was suspected to be relevant to money laundering investigations.
The commission also failed to acknowledge that:
FINTRAC disclosures often contain dozens, and sometimes hundreds (and even thousands!) of individual reports.
98-99% of FINTRAC reports are threshold (basically: automatic) reports. These reports are filed without any grounds for suspicion and include large cash transaction reports, international electronic funds transfer reports (both for amounts of $10,000 or more), etc. The ~vast~ majority of these transactions are legitimate and should not be disclosed (and they aren’t).
FINTRAC did share 335 disclosures with law enforcement in British Columbia in 2019-2020. However, the commission doesn’t tell us what (if anything) law enforcement did with them. I don't recall seeing $6.1 billion worth of money laundering investigations / disruptions taking place.
Basically, I think that our system is not particularly effective, but for different reasons than the commission. We clearly have a disconnect between information disclosed by FINTRAC and what law enforcement does with it. But it’s not clear where the real problem lies. Is it with FINTRAC and it’s “slow” disclosure process? I don’t think that’s the full story, since FINTRAC does do “fast track” disclosures, and based on the numbers above, seems to be disclosing far in excess of what law enforcement is able to process and investigate.
Does law enforcement have a hard time understanding the value of FINTRAC data? Absolutely. It’s ~really~ technical, and frankly, it took me several years to be able to quickly read and understand a FINTRAC disclosure. It’s doubtful many in law enforcement have this skillset. (But this is actually a pretty easy fix with a dozen or two dedicated analysts co-located with investigative units.)
Another expert also testified that “much of the intelligence provided by FINTRAC to law enforcement agencies is often nothing more than information concerning specifc
transactions and is not connected to other suspicious activity or otherwise accompanied by any explanation about what is happening from a money laundering perspective.” Again, this is not accurate, and was provided by someone who has probably never seen a FINTRAC disclosure, and certainly hasn’t analyzed many. FINTRAC disclosures contain a variety of helpful information, including publicly-available information, indicators of money laundering, and often link charts describing what’s happening in the transactions. Further, FINTRAC is prohibited ~by law~ from disclosing much more. It’s the facts only.
Missed opportunities
There are a lot of opportunities that were missed in this report, unfortunately. The report appears more concerned with using FINTRAC as a punching bag than actually exploring some of the real problems in Canada’s anti-money laundering regime.
The first real issue I see is the question of corruption. I find it hard to believe that the commission did a thorough review of all the public officials involved in turning a blind eye to money laundering in British Columbia and didn’t find any evidence of corruption. I suppose it’s possible that they were all just that incompetent, but I also can’t help but think that someone was personally profiting from this system and incompetence. Unfortunately the commission doesn’t really unpack its reasoning behind this finding.
I also think that the commission missed the opportunity to talk about state-enabled criminal activity, and potential threat financing in British Columbia. As many people can attest, there are a number of criminal gangs that operate in Canada with ties to different states. And while those ties tend to be difficult to qualify or quantify, there is a clear state-nexus, either in turning a blind eye, encouraging the activity, profiting from it, or other activities. The commission would have been an excellent opportunity to explore this in more detail.
Fundamentally, the report fails to systematically outline the problems in Canada’s AML regime. To be fair, this wasn’t the commission’s mandate, but they certainly examined enough evidence that they ought to have been able to do it. Unfortunately, due to a combination of inexpert witnesses, misunderstanding the roles and responsibilities of some of the institutions in our AML regime, and weak analysis, we are back where we started: with no clear path forward that will fix our financial crime and money laundering problems.
All in all, this report was pretty disappointing. It didn’t really tell us much we didn’t already know and pointed the finger far too much at FINTRAC. While there’s a lot that can be improved with how FINTRAC operates, its mandate, and its legislation, they are far from the weakest link in the chain. And unfortunately, this report doesn’t tell us who that is, or how to fix it.