Canada takes first tentative steps towards becoming a serious country

Budget 2023

Hello, and welcome to a special edition of Insight Intelligence, coming to you on a Friday thanks to the federal budget. For the hundreds of folks who are new around here this month, welcome! Today I’m going to be discussing the various financial crime-related measures announced in Canada’s federal budget, along with a few other recent announcements and related issues. So get comfortable, because we’re going to wonk out.

Budget 2023

On Tuesday, the Federal Government released Budget 2023, with a significant financial crime component (an entire sub-section!). [Many thanks to the handful of you who flagged this to me and called it “Jess’s Budget” 🤣.]

The Threats

So first of all, it’s important to note in the pre-amble to the section that the government outlined a handful of threats that these measures are meant to counter: money laundering, terrorist financing, sanctions evasion, oligarchs and kleptocrats, corruption, and foreign interference.

This is a pretty comprehensive list of threats facing Canada, and all of them have a significant financial component. The one thing missing from this list is fraud: increasingly, Canada is home to a number of frauds (some small, some sprawling), and we lack effective mechanisms to deal with this. Further, many of these frauds are backed by non-state actors (think large organized crime groups), or even state actors (including some advanced persistent threat groups).

Basically: financial crime is not just the domain of criminal entities. States are getting in on the action too. 

The responses

First of all, the government noted that it is in the process of responding to all of the Cullen Commission recommendations. As readers of this newsletter know, I have mixed feelings about that commission. But “responding to” does not mean “implementing”, so there’s that at least.

A missed opportunity: Canada's Cullen Commission

A number of these measures were basically a summary of what the government is doing on financial crime, and few (if any?) were funded. But that’s okay, because we are starting to see some progress on financial crime issues.

Of course, there’s the ongoing public consultation on the Foreign Influence Transparency Registry (basically Canada’s foreign agent registry, although we use the term “foreign principal”.) And there’s the beneficial ownership registry, the legislation for which has been tabled. Of course, one of the major weaknesses of that registry is that it only applies federally; the provinces will need to either opt-in, or create their own registry. (Welcome to federalism.) So the budget calls on provincial and territorial governments to get on board with this registry, which is fairly strong language.

The budget also outlined a number of other issues that the government is considering, many in the context of the five-year review of Canada’s anti-money laundering laws, the PCMLTFA. As an aside: we all owe a debt of gratitude to the drafters of this legislation for creating this requirement. It creates a mechanism to force the updating of the legislation every five years. (Maybe we don’t always go far enough, but it’s definitely better than nothing, which is what many of our other national security laws have…)

• Freeze & seize virtual assets: So technically, law enforcement can already do that. (I talk about how the RCMP has done this, as well as other police forces in Canada, here.) But I’m told that it’s all about streamlining the existing provisions in the Criminal Code to make it more explicit. In fact, I’ve heard a number of rumblings recently about needing to streamline / update existing legislation to make some of this stuff more explicit (technology-related issues), so expect to hear more on this.

• Improved information-sharing between law enforcement and the Canada Revenue Agency, and between law enforcement and FINTRAC, Canada’s financial intelligence unit. It’s really not clear what this will entail, so we’ll have to wait for more robust proposals to find out. Maybe increasing the amount of information that FINTRAC can share? Added disclosure recipients for FINTRAC information? Greater ability for CRA to disclose to law enforcement?

• New offence: structuring transactions to avoid FINTRAC reporting requirements. Basically, this means that if someone is deliberately trying to circumvent the CA$10,000 or more reporting threshold, and they get caught, they’ll face additional fines (perhaps also criminal penalties?). Right now, this is largely captured through suspicious transaction reporting: basically, someone at a bank would have to notice that you’re trying to do that. It might also be something that seeks to address the issue of professional or third party money launderers. Perhaps if we can’t get them on other charges, they can at least be fined for structuring? We shall see.

• Criminalize the operation of an unregistered money service business. As many of you will know, if you are a money service business in Canada, you MUST register with FINTRAC. Making this a criminal offence (as opposed to a fine) will be a big step towards serious compliance.

• FINTRAC to disseminate strategic analysis relating to financing of threats to the security of Canada. Currently, FINTRAC can only disseminate strategic intelligence relating to money laundering or terrorist financing. There are some cases where other threats (like espionage, foreign interference) do not have these components, so FINTRAC can’t disseminate that intelligence. This closes a gap in the system.

• Obligations for the financial sector to report sanctions-related information to FINTRAC. This is intended to help on the issue of sanctions evasion. Right now, there is no requirement for financial entities to report attempts at sanctions evasion unless they’re related to money laundering or terrorist financing. (I bet most take a pretty liberal interpretation of that, but it’s still better to be explicit in law about these things). It’ll be interesting to see what more information FINTRAC starts to share about this with reporting entities…because they will need information to be able to better detect this. And right now, technically, FINTRAC can’t conduct strategic intelligence analysis on sanctions evasion (again, something the gov is proposing to fix in the five-year review).

• Unexplained wealth orders. This is going to be…consulted. Should be interesting. I personally have a lot of questions about the constitutionality of such potential orders, but I’m confident Canada can make them work. My only real question is whether the watered-down Canadian version will actually make anything better. I’m keeping an open mind, and will engage on the consultations.

There are two other elements the government is thinking about here as well: Provide whistleblowing protections for employees who report information to FINTRAC; and broaden the use of non-compliance reports by FINTRAC in criminal investigations. There are too few details to be able to comment on these, so stay tuned to the parliamentary review for more on that, I would imagine.

OSFI

There were a few changes to the way OSFI (Office of the Superintendent of Financial Institutions, the regulator for financial institutions). These include a role to ensure that banks can be protected against foreign interference, and the ability for OSFI to take control of a federally-regulated financial institution under broader considerations, including threats to the security of Canada. Now, I don’t know exactly why this is being considered, but the first thing that occurred to me when I saw this was this story from earlier this year.

For those who didn’t see it, Wealth One (a federally-regulated bank) was fined $676,500 for failing to comply with anti-money laundering measures. Wealth One and three principal shareholders had also been under investigation (!!!) by CSIS since 2021, according to the Globe and Mail. As Minister Freeland noted in a letter to the bank, there were concerns that “the three founders “could be vulnerable to coercion” from China. It also said the government believes “you may have been involved in financial activities that other regulated institutions have assessed provide reasonable grounds to suspect such transactions are related to the commission of money laundering.”

That definitely raised some eyebrows around town.

The OSFI proposals will also allow the director of FINTRAC to share strategic analysis for national security purposes, and OSFI will become a disclosure recipient for threats to the security of Canada. This is actually really big (adding a disclosure recipient is a big deal!), and demonstrates how serious the issue of foreign interference in Canadian banks is being taken. Finally. At last.

Canadian Financial Crimes Agency

Many of you probably remember that back in 2022, the government announced plans to create a new enforcement agency. The government provided $2 million at the time to fund the stand-up of the agency (so if you read the budget, this was not new money!). The budget announced that we will have a decision about what this will look like by the fall 2023 economic update. So Public Safety Canada is going to be ~busy~ this summer. (For what it’s worth, Mike Nesbitt and I wrote a piece describing how this needed to be studied in depth, so it’s good that PSC is taking its time…but it’s also good that the government is putting a firm deadline on.)

Crypto

This next part made me laugh out loud. Federally-regulated institutions will need to disclose their cryptocurrency holdings and assets. This seems to me to be a direct response to some banks holding way too much crypto, and making themselves ridiculously vulnerable to the volatility of the crypto market. (Here’s looking at you, Signature Bank and Silvergate Bank - US examples, but still.)

And then there’s the issue of federally-regulated pension funds having to disclose their crypto holdings. To me, this reads like a direct response to the tremendously irresponsible decision by the Ontario Teachers’ Pension Plan to invest rather heavily in cryptocurrency, specifically FTX. In 2021, the plan invested US$75 million in FTX international. There have been serious questions raised about the due diligence that was (or rather, wasn’t) performed for this investment (which some people have described as a ponzi scheme). Anyway, I don’t think the OTPP is a federally-regulated plan (being a provincial entity..) but it reads like a direct response to this…issue.

Foreign Interference

In addition to some of the measures outlined above that relate to financing of foreign interference, the budget announced $48.9 million over three years for the RCMP to investigate foreign interference and to engage communities. Public Safety’s National Counter-Foreign Interference Office is getting $13.5 million over five years, and $3.1 million ongoing. This is important funding, and long overdue. As many of you will know, I can’t get on board with giving the RCMP more money while it continues to have a bifurcated mandate (federal policing and contract policing). We need to reform the RCMP. But in the meantime…I guess this is better than nothing. But we all know that these resources will be snapped away from foreign interference as soon as another threat comes along. Resource protection is not an RCMP strong suit.

TL;DR? There isn’t really any new money for financial crime in Canada, but we are starting to take our first tentative steps towards solving the problem. It’ll be a long road to getting this right; buckle up, it’s going to be bumpy.

Anyway. On to more fun things:

Terrorist Financing Analysis: An eLearning Course

I’m very excited to tell you all that next month (April 2023) we’re launching a new offering from Insight - an elearning course on terrorist financing analysis. This course will be perfect for anyone who wants to learn more about terrorist financing. It’s focused on four key audiences: policy makers, counter-terrorism practitioners, compliance officers, and researchers. It’s specifically designed to help you operationalize the knowledge you acquire, and apply it to real-world problems. If you’re interested in learning more, sign up at info@insightthreatintel.com to get on the list (or click the image below). It’s gonna be good!

And finally, if you’re a student studying in Canada or a Canadian studying aboard working on security, defence or intelligence issues, you should submit an essay to the CASIS essay contest! Well worth your effort to do so, and there are cash prizes!