Year Five Evaluation of the National Initiatives to Combat Money Laundering and Interim Evaluation of Measures to Combat Terrorist Financing

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1 Year Five Evaluation of the National Initiatives to Combat Money Laundering and Interim Evaluation of Measures to Combat Terrorist Financing FINAL REPORT Submitted to: Jane Pearse, Chief Financial Crimes Domestic Financial Sector Policy Branch Finance Canada L Esplanade Laurier Floor: 20EE 140 O Connor Street Ottawa, Ontario K1A 0G5 EKOS RESEARCH ASSOCIATES INC. November 30, 2004

2 EKOS RESEARCH ASSOCIATES Ottawa Office 99 Metcalfe Street, Suite 1100 Ottawa, Ontario K1P 6L7 Tel: (613) Fax: (613) Toronto Office 480 University Avenue, Suite 1006 Toronto, Ontario M5G 1V2 Tel: (416) Fax: (416) Edmonton Office th St. NW, Suite 606 Edmonton, Alberta T5K 2J8 Tel: (780) Fax: (780)

3 TABLE OF CONTENTS Executive Summary...iii 1. Background Introduction... 1 a) Definitions... 1 b) Historical, Political and International Context Description of the Initiative... 5 a) Founding Legislation... 6 b) Objectives of the Act... 6 c) Initiative Partners... 7 d) Funding and Human Resource Levels Evaluation Background, Objectives and Issues Evaluation Findings Relevance a) Response to Law Enforcement Needs b) Reducing Social and Economic Costs c) Meeting International Obligations d) Combating Complex and Transnational ML/TF e) Alignment with Federal/Partner Priorities Design and Implementation of Activities a) Appropriateness of Activities and Partners for Attaining Objectives b) Contribution to Increased Public Awareness of ML/TF c) Contribution to Increased Cooperation and Coordination Among Stakeholders d) Appropriateness and Effectiveness of Compliance Measures e) Appropriateness of Performance Monitoring Mechanisms f) Appropriateness of Resources Success a) Achievement of Objectives b) Contribution to Investigations, Prosecutions and Seizures c) Contribution to Reduced Profitability and Incidence of ML and TF d) Unintended Impacts Cost-Effectiveness and Alternatives a) Cost-Effectiveness b) Alternatives Conclusions Relevance Design and Implementation Success Cost-Effectiveness and Alternatives Recommendations EKOS RESEARCH ASSOCIATES, 2004 i

4 Under Separate Cover: Appendix A: Legislative and Policy Context Appendix B: Logic Model: National Initiatives to Combat Money Laundering and Related Anti-Terrorist Financing Measures Appendix C: Matrix of Issues and Indicators Appendix D: Evaluation Methodology Appendix E: List of Documentation Reviewed Appendix F: Distribution of Interviews Conducted Appendix G: Recommendations of the Interim Evaluation of the NICML Appendix H: Indicators of Cooperation Among Federal and International Partners of the Initiative Appendix I: International Comparisions ii EKOS RESEARCH ASSOCIATES, 2004

5 EXECUTIVE SUMMARY This is the final report of the Year Five Evaluation of the National Initiatives to Combat Money Laundering and the Interim Evaluation of Measures to Combat Terrorist Financing (the Initiative). The Initiative was designed to assist with the implementation of the Proceeds of Crime (Money Laundering) Act (PCMLA), introduced in 2000 to establish a system of mandatory reporting of suspicious and other prescribed financial transactions, and create the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). In December 2001, the PCMLA was amended to include measures to fight terrorist financing activities and re-named the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). In addition to FINTRAC, the organizations funded under the Initiative comprise: the Department of Finance, the Royal Canadian Mounted Police, the Canada Border Services Agency (Customs and Immigration), the Canada Revenue Agency, and the Department of Justice. In addition to assessing the impact of the Initiative in relation to the anticipated outcomes identified, this study addresses issues of relevance, success, design and, where appropriate, costeffectiveness and alternatives. These issues were addressed using two main lines of evidence: a review and analysis of a large number of documents supplied by partner organizations; and interviews with 56 individuals representing the partner organizations as well as representatives of international organizations and experts in the field. The following are the conclusions of the evaluation. RELEVANCE The Initiative is both relevant and necessary as Canada moves forward in fighting financial crime (as well as organized crime and terrorism), both domestically and internationally in cooperation with its partners. Money laundering (ML) and terrorist financing (TF) are complex crimes necessitating sustained, concerted action. There are social and economic benefits to the country in reducing crime as well as advantages for financial institutions of anti-ml/tf measures in better managing reputational risk. Further, implementation of the Initiative has enabled Canada to meet its international obligations in the area. Maintaining support for it will enable Canada to continue to meet these obligations and uphold its solid international reputation in the area. Moreover, ML and TF are transnational in nature, necessitating the participation of all countries for their successful detection and deterrence. Finally, the Initiative is well aligned with the federal priorities to provide adequate tools to law enforcement to combat ML/TF, protect public security, safeguard personal privacy, and protect Canada s financial system. EKOS RESEARCH ASSOCIATES, 2004 iii

6 DESIGN AND IMPLEMENTATION The activities undertaken under the Initiative are comprehensive and appropriate for achieving its expected outcomes. All the necessary elements are in place under the Initiative for combating ML and TF from the reporting of financial transactions and cross-border currency movements to the eventual prosecution of criminals. Likewise, all the appropriate stakeholders are involved in the Initiative, and there has been a high degree of cooperation among them in regards to the exchange of information. The success of the Initiative depends critically on the reporting of certain financial transactions. Toward that end, FINTRAC has implemented a comprehensive compliance program to ensure reporting of transactions by financial entities, while the CBSA is responsible for compliance with respect to the reporting of cross-border currency movements. As the Initiative is only fairly recently in full operation, however, the complete range of activities needed to ensure its success and measure its performance was not fully in place during most of the review period. Nevertheless, early evidence suggests that the Initiative has induced greater numbers of reporting entities to submit financial transaction reports, the reports are improving in quality, and that large numbers of individuals crossing the border are filing reports on large currency movements. That this is culminating in cash seizures at the border and disclosures of both ML and TF suspected cases to law enforcement agencies for use in investigations, despite being in operation for less than two years, further indicates the effectiveness of these activities. There has been progress made in terms of establishing mechanisms to monitor Canada s performance in implementing the Initiative. FINTRAC is implementing appropriate performance measurement practices for monitoring its own role and activities. The RCMP has also done work to build systems to track performance related to FINTRAC disclosures and other ML intelligence. Performance monitoring of some other partners is weak, however, with challenges related to a lack of resources dedicated to the activity as well as measurement and attribution issues. The Initiative faces a number of resource pressures. One key pressure concerns technology at FINTRAC, for which there is currently no infrastructure evergreening (renewal) or disaster recovery support budget and only limited IT capital investment flexibility. The primary arguments for increased funding for technology renewal are to keep up with advancements in the technology used by both organized crime and financial institutions, as well as to replace outdated IT equipment, to acquire the newest computer security and spam control mechanisms, and to enable the maintenance of critical IT operations in the event of an incident. The Cross-Border Currency Reporting program also faces resources pressures as it continues to build on the very successful progress it has made to date. The number of currency seizures and forfeitures has far exceeded initial expectations, owing to the work of CBCR Teams and Currency Detector Dog Teams funded by the Initiative, thus warranting future expansion to combat money laundering/terrorist financing. This success has also directly resulted in pressures faced within the CBSA Intelligence Division to collect, develop, coordinate, and disseminate tactical and operational intelligence, which are making a significant contribution to the Initiative and have resulted in the improved efficiency of regional offices. As iv EKOS RESEARCH ASSOCIATES, 2004

7 well, CBSA Adjudication Division, which has not been funded under this initiative, faces resourcing gaps as it must conduct reviews on appealed seizure decisions. Pressures for increased funding are also currently being experienced to enable federal law enforcement (ML and IPOC Units) to conduct more investigations related to CBSA intelligence, FINTRAC disclosures, and future compliance related investigations, as well as to support its intelligence gathering, performance measurement, and private sector education efforts. SUCCESS The Initiative has made good progress toward achieving its formal objectives. In accordance with the Act, measures have been successfully implemented to detect and deter money laundering and the financing of terrorist activities and to facilitate the investigation and prosecution of money laundering and terrorist financing offences. This includes the establishment of FINTRAC as Canada s Financial Intelligence Unit (FIU). In addition, the implementation of the Initiative and measures have enabled Canada to meet its international commitments with respect to the fight against money laundering and terrorist financing. In particular, during the review period Canada was able to meet 27 of 28 key operational FATF anti-ml recommendations (out of 40), and has met six of seven special TF recommendations that were assessed. Moreover, Initiative partners such as Department of Justice and the RCMP have contributed significantly to FATF activities (e.g., assisting with the development and revision of the 40 recommendations, review of international legislation and law enforcement practices, and delivery of presentations to the FATF) and FINTRAC has met the requirements to become a member of the Egmont Group, the international association of FIUs. The Initiative and related anti-terrorist financing measures have also contributed to Canada s ability to meet other international commitments (e.g., the country s responsibilities associated with United Nations conventions). The Initiative and its measures have to date achieved an effective legislative balance, carefully struck by Parliament, between anti-money laundering and anti-terrorist financing goals on the one hand and privacy and Charter concerns on the other. In conducting its work, FINTRAC has sought to protect the privacy and Charter rights of Canadians, in compliance with its mandate and the provisions of the PCMLTFA, by implementing other strict internal security procedures and by providing only designated information in disclosures to law enforcement and national security agencies. Nevertheless, there are indications from law enforcement and national security agencies that insufficient information is being provided by FINTRAC in its disclosures, as the provisions of the Act and the Charter appear to limit the amount of information that can be disclosed. This being the case, amendments to the Act and its regulations on the amount of information that can be disclosed should be considered. Overall, the Initiative, through the work of various partners, has contributed to enhanced understanding of ML and TF and enhanced investigations, seizures and prosecutions. Disclosures have assisted law enforcement and security agencies, and in some cases even the revenue agency, through the provision of information that they might not have otherwise had access to. The evidence shows that many disclosures have added value to and initiated several investigations. The evidence further shows that the EKOS RESEARCH ASSOCIATES, 2004 v

8 cross-border currency reporting program has led to the seizure of significant amounts of currency and monetary instruments. Moreover, while it is too early in the life of the Initiative to measure its impact on the ultimate expected outcomes of reduced ML and TF (measurement difficulties notwithstanding), it is clear that the Initiative s reporting, client identification, record keeping and compliance regime requirements have resulted in an increasingly hostile environment for ML and TF activities in Canada and should in the long-run lead to reduced incidence of these crimes. COST-EFFECTIVENESS AND ALTERNATIVES The key elements of Canada s approach such as electronic reporting, a risk-based compliance program, a variety of legislative tools, and the involvement of partners each playing a necessary role in addressing criminal activity enhance the efficiency of the Canadian model. Moreover, the expenditure of $140 million up to March 31, 2004 is likely much lower than the reputational and economic costs that would have been incurred if the Initiative was not implemented and Canada was consequently judged to be non-compliant with international anti-ml/tf standards. Although a comprehensive, quantitative approach to an assessment of the cost-effectiveness of the approach would be desirable, this is difficult because of the paucity of data and analytic tools, as well as the lack of information on costs and outcomes of comparative foreign regimes. With respect to reporting entities, costs of compliance have been significant, but there are no reported negative impacts on competitiveness and there are benefits to enhanced integrity of the financial system and individual organizations which are difficult to quantify, including the avoidance of reputational, operational and legal risks as well as increased attractiveness to customers and stakeholders. In general, the Canadian model of addressing money laundering/terrorist financing is an effective one and compares well internationally. Moreover, features such as the use of electronic reporting and the rigorous compliance program, based on a risk-management approach, have been lauded and imitated by other countries. Given the inability to quantify cost-effectiveness in this evaluation, largely due to measurement difficulties, it is clear that further work needs to occur to fill this gap in determining the value received for expenditures on this initiative. This additional work includes development of an updated logic model and evaluation framework, outcome measurement tools, and a performance measurement framework. These elements must be in place before the suggested evaluation takes place in five years, when there will have been sufficient time to have realized outcomes. vi EKOS RESEARCH ASSOCIATES, 2004

9 RECOMMENDATIONS The following recommendations flow from the conclusions drawn from this evaluation. RECOMMENDATION 1: Continue to conduct consultations with representatives of the financial services sector, including organizations at the national and other jurisdictional levels, to help representatives see the value of their contributions. Before implementing any future changes to regulations or compliance activities, ensure that timely input is obtained from these organizations and that the potential for compliance fatigue in the financial services sector is taken into account. RECOMMENDATION 2: The Government of Canada should, at a minimum, consider maintaining current funding allocations to the Initiative s partners. In addition, it should consider responding over the short term to certain funding pressures, including: funding needed to finance IT renewal needs at FINTRAC; funding increases identified by the CBSA to expand the CBCR Teams and Currency Detector Dog Teams; to collect, develop, and to coordinate the dissemination of tactical and operation intelligence (CBSA Intelligence) and to deal with the high volume of appeals of currency seizures (CBSA Adjudication); increased funding identified by the RCMP to enhance its capacity for investigation of money laundering and terrorist financing intelligence, leads and tips provided by all sources; capacity to analyse and measure the impact of intelligence received; and delivery of educational programs for the private sector; and future funding pressures associated with the planning and conduct of the next full evaluation of the Initiative. RECOMMENDATION 3: It is recommended that the Government of Canada assess the feasibility of increasing the amount of information that may be included in FINTRAC disclosures in order to improve their value to disclosure recipients. RECOMMENDATION 4: Efforts need to be devoted to assessing the capacity of the existing evaluation model in demonstrating the outcomes and cost effectiveness of the Initiatives. These efforts need to occur at several levels: a) The existing logic model has not been revisited since its development several years ago. As logic models are not intended to be static, it should be revisited and updated to accurately reflect activities and intended outcomes of the Initiative. b) The evaluation framework for the Initiative will need to be updated in order to establish clear expectations around how the future success of the Initiative will be measured. EKOS RESEARCH ASSOCIATES, 2004 vii

10 c) Special studies to identify appropriate measurement tools and models to further assess current difficulties in determining outcomes or at least to understand the degree to which such tools and models can best be used. d) A continued focus on performance measurement is needed across partners to ensure that ongoing data collection tied to the revised evaluation framework occurs. RECOMMENDATION 5: As the current evaluation occurred when the measures had been implemented for only a short time, and given the measurement difficulties cited above, a full evaluation of the Initiative should be conducted again within five years. RECOMMENDATION 6: Canada should maintain its current strong level of commitment to combat money laundering and terrorist financing through the continued active support of this Initiative. viii EKOS RESEARCH ASSOCIATES, 2004

11 1. BACKGROUND This document is the final report of the Year Five Evaluation of the National Initiatives to Combat Money Laundering and the Interim Evaluation of Measures to Combat Terrorist Financing. The National Initiatives to Combat Money Laundering were implemented to assist with the implementation of the Proceeds of Crime (Money Laundering) Act (PCMLA), introduced in 2000 to establish a system of mandatory reporting of suspicious and other prescribed financial transactions, and create the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). In December 2001, the PCMLA was amended to include measures to fight terrorist financing activities and re-named the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). This chapter presents a description of the National Initiatives to Combat Money Laundering and related Anti-Terrorist Financing Measures (henceforth referred to collectively as the Initiative) including its historical and legislative context, as well as the scope of the evaluation. 1.1 INTRODUCTION a) Definitions Money laundering (ML) is defined as any act or attempted act to disguise the source of money or assets derived from criminal activity. Targeting the proceeds of crime and money laundering is seen as an effective means of combating organized crime, by removing the means by which criminals profit by their criminal activity. Measures to combat money laundering can also be used to combat terrorist financing (TF), which is the act of raising money through both legitimate and illegitimate means to finance acts of terrorism. When avenues for money raising and transmittal are shut down, terrorists lose their ability to commit future acts of violence and destruction. 1 1 Evaluation Terms of Reference. National Initiatives to Combat Money Laundering and Related Anti-Terrorist Financing Measures. EKOS RESEARCH ASSOCIATES,

12 b) Historical, Political and International Context The Initiative must be seen as part of a series of initiatives in Canada to fight drug-related crimes and organized crime more generally, and, more recently, terrorism. It must also be viewed as one element in a wider effort to address these crimes. Canada s legislative activity in the area began in This country has been a member of the Financial Action Task Force on money laundering (FATF) since its inception in 1989 at the G7 Economic Summit of that year. The FATF is the standard-setting international anti-money laundering and terrorist financing organization. In the same year, Canada enacted proceeds of crime legislation, which was consistent with the recommendations of the FATF and the UN at that time. In 1991, the Proceeds of Crime (Money Laundering) Act was proclaimed, establishing record keeping and client identification requirements in the financial sector to facilitate the investigation and prosecution of ML offences (through the preservation of financial trails for large financial transactions) under the Criminal Code. In 1993, cooperative arrangements were established between police and the banking sector in Canada under which the latter could voluntarily report any suspicions of money laundering activities. In the late 1980s and early 1990s, some FATF members began to create Financial Intelligence Units (FIUs). These specialized agencies collect, analyze and disclose financial information about proceeds of crime and money laundering. In 1995, a number of these FIUs came together to form the Egmont Group, the purpose of which is to provide an international forum for cooperation and exchange of information on money laundering, and now terrorism financing, matters. As a member of the FATF, Canada undergoes peer evaluations to assess the effectiveness of its anti-money laundering and anti-terrorist financing measures. In its second mutual evaluation report on Canada in 1997, the FATF noted Canada s lack of an FIU and that its reliance on voluntary (rather than mandatory) suspicious transaction reporting had not proved effective. 2 In response to this evaluation, Canada introduced the National Initiative to Combat Money Laundering. In 2000, the Parliament of Canada passed the Proceeds of Crime (Money Laundering) Act (PCMLA), which established a system of mandatory reporting of suspicious and other prescribed transactions, and created its own FIU: the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Canada s FIU was accepted as a member of the Egmont Group in In December 2001, the PCMLA was amended to include measures to fight against terrorist financing, in response to the events of September 11, As a result, the PCMLA was renamed the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). The amendments expanded FINTRAC s mandate to include the detection and deterrence of terrorist financing and the Centre FATF Mutual Evaluation Report. 2 EKOS RESEARCH ASSOCIATES, 2004

13 gained the responsibilities to collect, analyze and disclose information where there are reasonable grounds to suspect a terrorist financing offence or a threat to the security of Canada. To set the Initiative in context, the following is a brief historical review of key measures and legislation directed at proceeds of crime, money laundering, drug-related crime, organized crime, and terrorist financing: 1989: Criminal Code amendments made possession of proceeds of crime and money laundering related activities criminal offences. The amendments dealt with all aspects of proceeds of crime including the identification of specific offences, special search warrants, restraint orders and a confiscation regime. The legislation provided the authority to seize or restrain the proceeds of certain crimes and provided immunity to people who voluntarily reported suspicious transactions to the police. Offences for possession and laundering of proceeds were designated substances offences which were also added to the Food and Drug Act (and the former Narcotics Control Act since repealed and replaced by the Controlled Drugs and Substances Act (CDSA)). 1990: Guidelines and best practices issued by the Office of the Superintendent of Financial Institutions for combating money laundering : Proceeds of Crime (Money Laundering) Act proclaimed. 1991: The Canada Drug Strategy funded the establishment of three pilot Integrated Anti-Drug Profiteering Units (IADP) within the Royal Canadian Mounted Police (RCMP). 1993: Memorandum of Understanding (MOU) between the RCMP and the Canadian Bankers Association (CBA) signed. This MOU called for voluntary reporting of all suspicious transactions that might indicate money laundering activities. 1993: Seized Property Management Act proclaimed. Offences of possession and laundering of the proceeds of certain crimes were added to the Customs Act and Excise Act. 1996: Implementation of the Integrated Proceeds of Crime (IPOC) Initiative which established 10 more integrated units, supplementing the three existing IADP units and 1999: Amendments to the Criminal Code (Part XII.2) involving the Controlled Drugs and Substances Act (May 1997) and the Corruption of Foreign Public Officials Act (proclaimed December 1998), which involved two proceeds of crime offences. This addressed problems associated with corruption of foreign public officials for business advantage, an issue relevant to the OECD s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. 3 Office of the Auditor General (2003). Canada s Strategy to Combat Money Laundering April 2003 Report Chapter 3. Available at Accessed August EKOS RESEARCH ASSOCIATES,

14 2000: National Agenda to Combat Organized Crime implemented. The National Agenda, adopted by federal, provincial and territorial ministers, recognizes that the fight against organized crime is a national priority with money laundering being identified as a specific priority in need of attention : Proceeds of Crime (Money Laundering) Act (PCMLA) enacted, which established FINTRAC and client identification, reporting and record keeping requirements for reporting entities. 2001: Amendments to the Criminal Code (and related statutes) in respect of provisions dealing with proceeds of crime and offence-related property with the enactment of An Act to amend the Criminal Code (organized crime and law enforcement) and to make consequential amendments to other Acts (Bill C-24). It replaced the 1989 Criminal Code listing of predicate crimes to all major indictable offences approach to proceeds of crime and money laundering. The same Act included additional consequential amendments to the Mutual Legal Assistance in Criminal Matters Act, permitting Canada to enforce foreign seizure, restraint, and forfeiture orders. 2001: An Act to amend the Criminal Code, the Official Secrets Act, the Canada Evidence Act, the Proceeds of Crime (Money Laundering) Act and other Acts, and to enact measures respecting the registration of charities, in order to combat terrorism, entitled the Anti- Terrorism Act (Bill C-36), proclaimed. This amended the PCMLA to include obligations in respect of reporting suspected terrorist financing activities as well as to enlarge FINTRAC s mandate to include detection, deterrence and prevention of financing of terrorist activities 5. This Bill amended the title of the Act; it was changed to Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). A requirement was introduced into the PCMLTFA for reporting entities to send a TPR (terrorist property report) to FINTRAC when they are in possession or control property that they know is owned or controlled by or on behalf of a terrorist or terrorist group 6. If FINTRAC determines that there are reasonable grounds to suspect that the information under its control would be relevant to threats to the security of Canada, designated information is disclosed to the Canadian Security Intelligence Service (CSIS) : Immigration and Refugee Protection Act proclaimed. This act stipulates that a permanent resident or a foreign national cannot be admitted to the country if there are 4 Working together to Combat Organized Crime: A Public Report on Actions under the National Agenda to Combat Organized Crime, Available at 5 Information derived from Desjardins, J. (June 18, 2003). Presentation of the Proceeds of Crime (Money Laundering) and Terrorist Financing: The Act, Regulations and Related Issues. 6 See FINTRAC s Guideline 5: 7 For more details see: 4 EKOS RESEARCH ASSOCIATES, 2004

15 reasonable grounds to believe he or she has, is, or may engage in organized criminal activities, such as money laundering across national borders. 2003: Cross Border Currency Reporting Regulations came into force. The regulations made it mandatory for persons and entities to report the cross-border movement of currency and monetary instruments valued at $10,000 or more. 2004: Public Safety Act (Bill C-7) enacted. This act provides FINTRAC with the ability to collect information relevant to ML or TF that is stored in national security databases, and provides FINTRAC with the ability to share information with supervisory and regulatory agencies for purposes of ensuring compliance with Part 1 of the PC(ML)TFA. The Public Safety Act also allows the Office of the Superintendent of Financial Institutions with the ability to share information on how federally regulated financial institutions comply with the Act. It should be noted that there are a number of other initiatives in Canada that would also be expected to contribute to the long-term expected outcomes of the Initiative, that of reducing money laundering and terrorist financing. Some of these are briefly described in Appendix A. Canada s anti-money laundering/terrorist financing strategy includes participation in several international initiatives and organizations, such as: United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna 1988), to which Canada is a signatory; United Nations Convention for the Suppression of the Financing of Terrorism (1999); United Nations Convention Against Transnational Organized Crime, ratified by Canada in May 2002; United Nations Convention Against Corruption (2004); Organization of American States, for example, the Canadian government s ratification of the Inter-American Convention Against Terrorism (2002); FATF of which Canada has been a member since its creation in 1989, and of which Canada has adopted the 40 recommendations on money laundering and its eight special recommendations on terrorist financing; and The Egmont Group, an international partnership of FIUs, where Canada is engaged in the sharing of best practices and other activities. 1.2 DESCRIPTION OF THE INITIATIVE The Initiative is described in this section, including its founding legislation, its objectives, its partners and their roles, and funding. A summary of the Initiative s activities, outputs and expected EKOS RESEARCH ASSOCIATES,

16 outcomes (immediate, intermediate and ultimate) is provided in the Logic Model of the Initiative, presented in Appendix B. a) Founding Legislation As noted, the basis for the Initiative is the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). The PCMLTFA consists of five parts: Part I requires the keeping of records on financial transactions, client identification and the reporting of suspicious and prescribed financial transactions; Part II creates the obligation to report to Customs the importing or exporting of currency or monetary instruments of a value equal to or greater than $10,000 or its equivalent; Part III establishes FINTRAC as an independent agency to collect, analyze, assess and disclose designated information on financial transactions to assist in the detection, prevention and deterrence of money laundering and the financing of terrorist activities, while protecting Canadian s privacy; Part IV authorizes the Governor in Council to make regulations; and Part V creates offences, including the failure to report suspicious financial transactions and the prohibited use of information under the control of FINTRAC. The regulations accompanying the PCMLTFA were implemented in stages. The first phase of these regulations, requiring the reporting of suspicious transactions related to money laundering to FINTRAC, came into effect in November In 2002/03, the remaining phases of the regulatory regime came into effect introducing new obligations for client identification, record keeping, maintaining a compliance regime, and making it mandatory for the other types of reports to be provided to FINTRAC including cross-border currency reports. b) Objectives of the Act The revised objectives of the Act (reflecting the addition of terrorist financing to the initial mandate) are: To implement specific measures to detect and deter money laundering and the financing of terrorist activities and to facilitate the investigation and prosecution of money laundering and terrorist financing offences, including: Establishing record keeping and client identification requirements for financial services providers and other persons that engage in businesses, professions or activities that are susceptible to being used for money laundering and the financing of terrorist activities; 6 EKOS RESEARCH ASSOCIATES, 2004

17 Requiring the reporting of suspicious financial transactions, large electronic fund transfers, and all large cash transactions, as well as cross-border movements of currency and monetary instruments; and Establishing an agency that is responsible for analyzing, assessing and disclosing information; To respond to the threat posed by organized criminals and terrorists by providing law enforcement officials with the information they need to deprive criminals and terrorists of the proceeds of their criminal activities and funds to support terrorist activities, while ensuring that appropriate safeguards are put in place to protect privacy of persons with respect to personal information; and To assist in fulfilling Canada s commitments to participate in the global fight against money laundering and terrorist financing. c) Initiative Partners The Initiative involves a number of key partners, each of which is funded according to its role. The funded partners include FINTRAC, the Department of Finance, the Canada Revenue Agency (CRA), the Canada Border Services Agency (CBSA-Customs and CBSA-Immigration), the Royal Canadian Mounted Police (RCMP), and the Department of Justice (DOJ), in the implementation and delivery of the Initiative. The Initiative also has several non-funded partners, such as Public Safety and Emergency Preparedness Canada (PSEPC), the Canadian Security Intelligence Service (CSIS) and the Anti-terrorist Financing Group at the RCMP. The Minister of Finance holds overall responsibility for the PCMLTFA and its regulations. The overall success of the Initiative is dependent on the actions of all the partners. As well, each partner had direct input into legislative development through membership in the Mandatory Suspicious Transaction Reporting (MSTR) Working Group (now called the Interdepartmental Working Group), the primary working body with cross-initiative membership. i) FINTRAC FINTRAC, Canada s FIU, is an independent agency operating at arms length from the police and federal departments and agencies to which it can provide financial intelligence. FINTRAC receives, collects, analyses, assesses and discloses information to assist in the detection, prevention and deterrence of money laundering and terrorist financing activities. The Centre reports to Parliament through the Minister of Finance. FINTRAC was established by statute as a separate employer. FINTRAC occupies an important position among the Initiative partners and receives the majority of funding allocated to the Initiative. FINTRAC s work is situated near the beginning of a process that starts with the reporting of transaction information by reporting entities to the organization; proceeds with the organization s processing and analysis of this information and, in certain cases, the provision of disclosures based on this information to law enforcement and national security agencies which the latter EKOS RESEARCH ASSOCIATES,

18 may use to inform their investigations; and may culminate with the prosecution of perpetrators or with the confiscation of assets by law enforcement and other agencies. The discussion begins with a description of the reporting process and proceeds with a description of the analysis and disclosure process. The PCMLTFA, Part I, establishes the legal obligation placed on particular persons and organizations to report specific types of financial transactions. Financial institutions and intermediaries must report large and suspicious financial transactions (defined below) to FINTRAC. Regulations require these organizations to submit reports electronically wherever possible. The institutions and intermediaries, known as reporting entities, that report to FINTRAC are: Financial entities (e.g., banks, caisses populaires, credit unions); Life insurance companies, brokers or agents; Securities dealers, portfolio managers and investment counsellors; Foreign exchange dealers; Money services businesses; Agents of the Crown when they accept deposit liabilities and sell money orders; Accountants and/or accounting firms; Real estate brokers or sales representatives; and Casinos. These organizations must report the following: Suspicious transactions related to money laundering; Suspicious transactions related to terrorist financing; Possession or control of terrorist property and any transactions or attempted transactions with regard to such property; International electronic funds transfers of $10,000 or more (only for money service businesses and deposit-taking institutions); and Large cash transactions of $10,000 or more. 8 EKOS RESEARCH ASSOCIATES, 2004

19 The Act (Part II) obliges any individual or entity importing or exporting large sums of cash or monetary instruments ($10,000 or more) to report to the Canada Border Services Agency (CBSA) 8, which in turn transmits the information to FINTRAC. FINTRAC is mandated to ensure that all the reporting entities required to report under the PCMLTFA comply with the obligations set out in the Act and respective regulations. The Centre favours a cooperative approach in ensuring the compliance of reporting entities, working with them or their industry associations to help ensure obligations are understood and met. Towards this end, the Centre provides advice and assistance where needed, has developed a set of guidelines and report forms, and participates in outreach workshops with reporting entities and their representatives. The Centre also participates in quality assurance activities, whereby it verifies reports as to their completeness and has recently begun compliance examinations of specific reporting entities to ensure that they have appropriate processes and practices in place to detect money laundering and terrorist financing activities. In conducting its compliance activities, FINTRAC employs a risk-based approach, whereby it focuses on entities most likely to be in noncompliance or those whose non-compliance would have the greatest impact. Where necessary, the Centre refers cases of non-compliance to law enforcement. Along with suspicious and prescribed financial transaction reports, the legislation enables FINTRAC to receive and use information that is voluntarily provided to it. This includes information from law enforcement and other agencies, as well as information from the public, about suspicions of money laundering or of financing of terrorist activities. Foreign FIUs may also provide information to FINTRAC. In many instances, voluntary information enables FINTRAC to focus its analysis and contributes significantly to disclosures that FINTRAC makes (see below for discussion of disclosures). Analysis and disclosure are the core elements of FINTRAC s work. Specifically, FINTRAC conducts analysis of reported financial transactions as well as other information it has authority to access, to identify information that would be relevant to a money laundering or terrorist activity financing offence or a threat to the security of Canada. FINTRAC must disclose such information to the appropriate police force or CSIS, as appropriate. This is done in the form of a disclosure. The PCMLTFA sets out numerous provisions specifically designed to protect the privacy of individuals and defines the circumstances under which FINTRAC may disclose personal information. Among these provisions is that only designated information can be disclosed. When FINTRAC has reasonable grounds to suspect that information collected and analyzed would be relevant to the investigation or prosecution of a money laundering or terrorist financing offence, the legislation provides that the Centre must disclose only designated information (defined in sections 55(7), 55.1(3) and 56.1(5) of the Act and the Regulations) to the appropriate law enforcement agencies, or to CSIS in the case of threats to the security of Canada. Designated information includes: information about the place where the transaction occurred 8 CBSA now includes Canada Customs, formally part of the Canada Customs and Revenue Agency (CCRA) (now called the Canada Revenue Agency (CRA)). It also includes Immigration functions that were formerly part of Citizenship and Immigration Canada (CIC). EKOS RESEARCH ASSOCIATES,

20 (name and address of business); information about the transaction (type, date, amount, account number, name of all account holders, names of all parties); and information about the individual (name, date of birth, address) or corporation (name, address, date of incorporation, jurisdiction) involved in the transaction 9. Furthermore, the PCMLTFA provides for strict guidelines regarding to which organizations FINTRAC must disclose designated information, as follows: to appropriate police forces, when it has reasonable grounds to suspect, based on its analysis of information, that it would be relevant to investigations or prosecutions of money laundering or terrorist financing offences (paragraph 55(3)(a)), or to CSIS, only when the Centre has reasonable grounds to suspect, based on its analysis of information, that it would be relevant to threats to the security of Canada within the meaning of section 2 of the Canadian Security Intelligence Service Act (paragraph 55.1(1)) 10. Disclosure can also be made to the CRA and CBSA-Customs when a two-fold test is met and to CBSA-Immigration when a three-fold test is met, specifically: to the CRA and CBSA-Customs, where FINTRAC has reasonable grounds to suspect, based on its analysis of information, that the disclosure would be relevant to investigating or prosecuting a ML or terrorist activity financing offence and if it determines that the information is relevant to a tax or duty evasion offence (paragraph 55(3)(b) of the Act). to CBSA-Immigration, where FINTRAC has reasonable grounds to suspect, based on its analysis of information, that the disclosure would be relevant to investigating or prosecuting a money laundering or terrorist financing activity, and if it determines that the information would promote the objective set out in paragraph 3(1)(i) of the Immigration and Refugee Protection Act and is relevant to determining whether a person is a person described in sections 34 to 42 of that Act or to an offence under any of sections 117 to 119, 126 or 127 of that Act 11. This means that FINTRAC, in addition to determining whether or not there is possible ML or TF activity, must determine whether or not the information would promote the objective of international justice and security by fostering respect for human rights and by denying access to Canadian territory to persons who are criminals or security risks; and whether or not a person is inadmissible on any of the following grounds: security; human or international rights violations; serious criminality; organized criminality; health; financial reasons; misrepresentation; non- 9 Desjardins, J. (June 18, 2003). Presentation of the Proceeds of Crime (Money Laundering) and Terrorist Financing: The Act, Regulations and Related Issues 10 Desjardins, J. (June 18, 2003). Presentation of the Proceeds of Crime (Money Laundering) and Terrorist Financing: The Act, Regulations and Related Issues. 11 Desjardins, J. (June 18, 2003). Presentation of the Proceeds of Crime (Money Laundering) and Terrorist Financing: The Act, Regulations and Related Issues. 10 EKOS RESEARCH ASSOCIATES, 2004

21 compliance with the Act; inadmissible family member; or committed an offence of: organizing entry into Canada; trafficking in persons; disembarking persons at sea; counselling misrepresentation; or misrepresentation. 12 FINTRAC works with law enforcement and other organizations receiving disclosures to increase skills and mutual understanding of ML/TF issues and information needs. The disclosure of information can assist new or ongoing investigations. In some cases, the disclosure can identify a new suspect and support the initiation of a new investigation; in other cases, the information can contribute to an investigation that is already underway. Moreover, if the police or CSIS require information from FINTRAC, in addition to the designated information, it must obtain a court order (Production Order) (according to the PCMLTFA, no one else can procure a Production Order). As well, to contribute to Canada s international role and obligations in the fight against ML/TF activities, disclosures can be made to foreign FIUs with which FINTRAC has a signed information exchange agreement. This may occur if FINTRAC has reasonable grounds to suspect that the information may be relevant to the investigation or prosecution of a ML or TF offence. FINTRAC has agreements with a number of FIUs (e.g., Australia, Belgium, Mexico, and the United Kingdom). Another part of FINTRAC s mandate is to make the public aware of the issues surrounding money laundering 13. To fulfill this mandate, the organization produces pamphlets and promotional materials, maintains a public website to disseminate information, and conducts annual public opinion research. FINTRAC also publishes Annual Reports and Performance Reports that provide details pertaining to the activities and the results FINTRAC has achieved during the year based on performance measurement systems that have been developed (e.g., financial entity reporting; FINTRAC disclosures; future priorities). ii) Department of Finance The Department of Finance is responsible for the development of anti-money laundering and anti-terrorist financing policy, including the Act and its regulations. Finance is responsible for coordinating activities under the Initiative, and has a key role in liaison with the public and consultations with stakeholders. The Department participates in key domestic and international activities in support of the government s commitments to combat money laundering and terrorist financing activities. The Department of Finance also supports the Minister in his responsibility for the oversight of FINTRAC. In addition, the Minister may enter into agreements with foreign governments for the exchange of information between FINTRAC and other FIUs and must approve the agreements FINTRAC enters into with foreign FIUs. The Department heads the Canadian delegation to the Financial Action Task Force and participates in other international money laundering assemblies. 12 This information provided by FINTRAC to EKOS. 13 See FINTRAC website. EKOS RESEARCH ASSOCIATES,

22 iii) Royal Canadian Mounted Police (RCMP) The RCMP, through its Money Laundering Units, is the major recipient of money laundering intelligence or disclosures from FINTRAC. In addition to these disclosures, the Units receive money laundering intelligence from a number of other sources. These sources include: intelligence in relation to cross-border currency reporting incidences from CBSA-Customs; voluntary information received from reporting entities; information from other RCMP units, law enforcement agencies and other sectors. When intelligence is received, an investigative assessment is conducted to determine if a criminal investigation is warranted. The intelligence may add information on existing targets or provide new leads. A performance measurement system is in place to enter all intelligence and track their disposition. In cases where further action is deemed to be appropriate, the ML Unit will refer the matter to the appropriate RCMP Integrated Proceeds of Crime (IPOC) Unit, whose primary objective is to identify, assess, seize, restrain, and forfeit illicit and unreported wealth accumulated through organized crime activities. The IPOC unit will conduct a comprehensive file review and prioritization assessment to determine if resources will be allocated to pursue the investigation. If approved, ML Unit resources may support the IPOC investigation for example by preparing requests for Production Orders, thereby possibly granting access to additional information held by FINTRAC. The RCMP also provides Voluntary Information Reports (VIRs) to FINTRAC to support its intelligence gathering process. Finally, the RCMP plays a significant training and awareness-raising role amongst Initiative partners, the private sector, the public and in international fora. iv) Canada Border Services Agency (CBSA) Customs The PCMLTFA requires individuals and organizations to report on the importation/exportation of large amounts of currency or monetary instruments, including those transported by mail, to a Canada Customs officer. CBSA-Customs then transmits the information to FINTRAC. CBSA Customs officers are responsible for the enforcement of the cross-border currency reporting program, which includes conducting searches, questioning individuals, and seizing non-reported or falsely reported currency and suspected proceeds of crime. In particular, when a Customs officer suspects on reasonable grounds that the currency and monetary instruments may be proceeds of crime or terrorist financing they may seize the unreported currency or monetary instruments and as per the PCMLTFA, the ensuing intelligence may be passed on to the appropriate police force. CBSA also issues administrative penalties on non-reported currency and monetary instruments with a value of $10,000 or more in cases where it does not suspect ML or TF and where the currency is returned to the traveller. In addition, FINTRAC may pass disclosures on to CBSA- Customs Investigations where there is suspicion of ML/TF and evasion of federal taxes or duties. CBSA activities also include raising awareness of ML/TF in the general public, working with other partners and internally with staff to increase skills and understanding of ML/TF issues, and working with US counterparts. v) Canada Border Services Agency (CBSA) Immigration CBSA-Immigration, the former enforcement branch of Citizenship and Immigration Canada (CIC), plays a key role in denying the use of Canadian territory to criminals and persons who pose security threats to Canada. As noted above, if FINTRAC determines that information has relevance with respect to 12 EKOS RESEARCH ASSOCIATES, 2004