The FATF’s 1997 evaluation of Canada’s performance noted that, while Canada’s regime was in substantial compliance with most of the 40 recommendations, its reliance on a voluntary suspicious transaction reporting system had not proved effective. The FATF suggested that Canada implement a mandatory reporting system and establish a central financial intelligence unit to manage the information gathered.
In 2000, the Proceeds of Crime (Money Laundering) Act (“the Act”) was passed, establishing a system of mandatory reporting of suspicious and other prescribed transactions, a cross-border currency reporting regime, and Canada’s financial intelligence unit in the form of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
It has now been 10 years since Canada passed the proceeds of crime legislation that created FINTRAC and established Canada's anti-money laundering/anti-terrorist financing regime. The past decade has seen changes in the legislation in an effort to step up to global standards in the fight against money laundering and terrorist activity financing.
The effectiveness of Canada’s Anti-Money Laundering/Terrorist Financing (AML/TF) framework depends on the collective efforts of all stakeholders, including those entities that must comply with the Act. Given the significant milestone, the Department of Finance has announced the commencement of its 10-year evaluation of Canada’s anti-money laundering and anti-terrorist financing regime.
The evaluation is anticipated to include feedback from the various key stakeholders. The purpose of the evaluation is to assess the success of Canada’s AML/TF efforts and the extent to which the regime has made progress towards achieving its objectives. The 10-year evaluation comes in advance of the next round of FATF mutual evaluations, which are expected to be undertaken within the next year or two. Further amendments to the legislative framework are also expected in the coming months.
Over the past decade, and in stark contrast with the Financial Crimes Enforcement Network (FinCEN), its US counterpart, FINTRAC has adopted a collaborative approach to enforcement aimed at educating entities that are subject to compliance. In recent months, though, FINTRAC’s approach has shifted from outreach and awareness building to more enforcement action. Since December 2008, when FINTRAC gained the power to issue such penalties and to publicize names, it has issued 15 administrative monetary penalties and publicly named seven of the recipients.
FINTRAC has slowly progressed from a development phase to a mature, experienced organization, steadily increasing its output of financial intelligence since it became operational. Financial intelligence has become an important part of investigative work that can shed light about how criminals are connected and where the assets may be hidden.
In June 2008, changes to the Act mandated that every organization subject to it is required to conduct a review of its compliance program every 2 years. These reviews must be conducted by a knowledgeable party that is independent of the anti-money laundering program and can be internal or external to the organization.
With the earliest of the 2-year periods for these reviews now ended, we can reflect on these reviews and what has been learned.
Based upon reviews conducted by KPMG Forensic, larger entities face the challenge of attaining truly cohesive AML programs given the large number of individuals and systems required to manage their requirements. On the other hand, smaller entities face the challenge of building effective AML programs and implementing systems with smaller budgets while still being able to manage all requirements under the Act and cope with growing needs and businesses.
We found that our independent reviews helped identify issues that have hindered the effectiveness of AML programs in place and to start a conversation to enhance AML compliance programs.
Now that FINTRAC has reached the decade milestone and addressed key deficiencies noted in the FAFT’s latest mutual evaluation issued in February 2008, it expects advances of the same nature from reporting entities. FINTRAC expects those businesses that have been subject to the requirements for almost 10 years to have mature compliance programs as well. The effectiveness of these entities’ programs is ultimately measured by the extent to which they are able to provide valuable financial intelligence that can have a meaningful impact on investigations.
The US regulator, FinCEN, created in 1990, had a 10-year head start on FINTRAC, and its enforcement actions reflect not only its maturity, but also perhaps a different enforcement environment. Hefty penalties are levied and not just because an entity simply failed to have a compliance regime. Failure to have an appropriate anti-money laundering (AML) compliance regime that has been reasonably designed to detect instances of suspicious activity can cause entities in the US to face monetary sanctions and resulting reputational damage.
The signs are that FINTRAC wants to follow FinCEN’s example, and it is starting to clearly communicate its dissatisfaction with the quality of the AML compliance programs at reporting entities in Canada. FINTRAC expects that entities will by now have identified and addressed any gaps in their programs.
FINTRAC has also steadily increased its examination coverage rate, a reflection of its maturation with respect to compliance and the enforcement of the Act. Its enforcement mission will benefit from measures that were announced by the Minister of Finance in the 2010 Federal Budget. The Budget included an CA$8 million increase in FINTRAC’s operating budget aimed to improve its compliance function.
This budget increase is anticipated to give FINTRAC much needed resources toward compliance enforcement and a greater presence in all sectors. As a direct result, FINTRAC will be conducting enhanced compliance activities involving federally regulated financial institutions (FRFIs) which will be independent of reviews conducted by the Office of the Superintendent of Financial Institutions. FINTRAC clearly laid out its expectations and its intent to increase the examination coverage of the FRFIs sector with a focus on the quality of the reports.
Although FINTRAC has an important role in monitoring compliance, its ultimate purpose is to turn transaction reports into meaningful financial intelligence to help law enforcement in the fight against money laundering and terrorist activity financing. Over the course of the past decade, FINTRAC has significantly ramped up its case disclosures, assisting investigations of drug trafficking, smuggling, terrorist activity financing, fraud, and other predicate offences of money laundering. The financial transactions behind these crimes provide invaluable assistance in a diverse number of investigations.
The 2010 Budget also put forward measures that would amend regulations under the Criminal Code, making tax evasion a predicate offence for money laundering. This will enable FINTRAC to provide financial intelligence to police in cases where money laundering is suspected in relation to tax evasion. The measures proposed in the 2010 Budget are aimed at ensuring that Canada continues to keep up with the global efforts to fight money laundering and terrorist activity financing.
FINTRAC recognizes that its success is tied to the ability of reporting entities to deliver timely and good quality financial transaction reports. Compliance with the reporting obligations set out in the Act ultimately serves the production of financial intelligence. Good and timely information at the front end of this process can make all the difference.
Susana Johnson is a Vice President in KPMG’s Forensic practice where she serves as Head of Anti-Money Laundering Services. She has 19 years of experience in a broad base of fraud risk and compliance assignments. She has assisted financial services clients with Anti–Money Laundering (AML) projects, including management of money laundering investigations, providing employee training, and performing independent reviews to assess compliance with anti-money laundering and counter-terrorist financing requirements of Canada, the United States, and the United Kingdom.
Contact: Susana Johnson, Vice President, KPMG Forensic and Head of Anti-Money Laundering Services. firstname.lastname@example.org (416) 777-8939