Canada’s anti-money-laundering regime has the large banks nervous

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Last month, the Canadian Bankers Association (CBA) delivered an uncommon submission to the House of Commons Standing Committee on Finance.

Blandly entitled “Improving Canadian prosperity, competitiveness and financial security,” the submission calls out weaknesses within the regulation, reporting and prosecution of cash laundering in Canada. The Financial Transactions and Reporting Analysis Centre of Canada (FINTRAC), an evaluation and supervisory physique created in 2000, attracts explicit consideration. It is meant to “fight cash laundering, terrorist exercise financing, sanctions and threats to the safety of Canada” by overseeing “hundreds of companies” along with banks, that are required to report “suspicious transactions.”

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Bankers in Canada are loath to publicly criticize their supervision, fearing blow-back from regulators and their political masters who’ve, because the C.D. Howe Institute not too long ago highlighted, spent the final decade piling on rules which are inflicting “larger compliance prices and decreased competitiveness.”

That this criticism got here by way of the CBA is noteworthy.

A black field to most in Canada, together with many bankers, the 133-year-old group operates immediately on a consensus foundation, that means Canada’s 5 largest banks should conform to coverage statements made by the CBA. This consists of Toronto-Dominion Bank, which is going through a possible US$3-billion positive tied to allegations from U.S. regulators that prison drug gangs laundered $US653-million by way of TD branches in three U.S. states.

Criticizing Canada’s AML framework as lackluster now suggests it’s hurting the business’s popularity overseas, particularly within the U.S.

The CBA thinks we’ve got a number of AML sizzle and no steak — that Canadian banks are compelled to adjust to an infinite record of transaction reporting necessities which have little relation to actual AML dangers (all sizzle) that, in flip, generate comparatively few intelligence reviews and convictions in Canada for AML offenses (no steak).

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Banks and different companies (brokers and brokers, casinos, cash service companies, actual property brokers, gross sales representatives and many others.) that report back to FINTRAC “submit 12.5 occasions extra reviews than these within the U.S., and 96 occasions extra reviews than these within the U.Ok,” notes the CBA, but FINTRAC “gives a disproportionately low variety of intelligence reviews to regulation enforcement.”

Interestingly, in keeping with the CBA, “in 2022-23, FINTRAC acquired over 36 million particular person reviews and disclosed solely 2,085 intelligence reviews.” The CBA rightly refers to this as “high-volume, low-value reporting.”

Bizarrely, 27 per cent of these reviews had been generated by FINTRAC itself working with non-public companies and banks, in impact, appearing as a financial institution supervisor, a supervisor of “hundreds of different companies,” and sleuths who, like Agatha Christie’s Miss Marple, examine crimes (e.g. human trafficking, drug dealing and many others.) that depend on cash laundering within the hopes of handing over proof to the police to pursue prison expenses. Noble as this appears, the end result of all the FINTRAC course of is trigger for concern, with the CBA stating that there was “a decline of (cash laundering) convictions all through 2010-2020.”

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The CBA submission to the Finance Committee affords options that needs to be a part of a brand new AML framework in Canada. For instance, the CBA promotes new pointers targeted on suspicious exercise reporting, reasonably than suspicious transaction reporting, which is extra prone to generate higher-value, lower-volume outcomes than the present course of the place the roughly 300-strong workers at FINTRAC are deluged with thousands and thousands of transactions to type by way of.

Importantly, the CBA recommends that the Liberal authorities of Justin Trudeau make good on its promise to determine a Canadian Financial Crime Agency that can “undertake each investigative and prosecutorial roles of complicated monetary crimes and supply statistics to private and non-private stakeholders on investigations, prosecutions, convictions, and asset forfeitures in Canada.” This would add transparency to our AML effectiveness.

Also wanted is the clear alignment of experience and goal with supervisory tasks — some extent the CBA couldn’t carry itself to make, although it ought to have.

The supervision of banks is the enterprise of Canada’s financial institution supervisor, the Office of the Superintendent of Financial Institutions. In July 2021, OSFI rescinded its AML guideline, B-8. That, in hindsight, was a mistake. It needs to be reinstated, and the supervision of financial institution AML compliance left to OSFI alone — the muddling of who supervises AML on the banks could clarify why OSFI let down its guard on AML compliance within the case of TD.

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FINTRAC was designed to “facilitate the detection” of cash laundering, to not do the detection itself, which needs to be left to the brand new Canadian Financial Crimes Agency. Moreover, FINTRAC can’t be moderately requested to oversee hundreds of companies in Canada that should report on suspicious transactions and supervise complicated, world companies that our banks have turn into. It finest serves as an AML evaluation and intelligence hub, reasonably than a supervisor of banks.

TD’s AML troubles, low-value reporting necessities, comparatively low numbers of intelligence reviews to regulation enforcement, and the decline of cash laundering convictions between 2010 and 2020 are pink flags indicating change is required now to successfully deter cash laundering in Canada and to make sure Canadian banks will not be weak hyperlinks within the struggle towards cash laundering within the U.S. and overseas.

John Turley-Ewart is a regulatory compliance marketing consultant and Canadian banking historian.

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