Features | From Pivot Magazine

Money laundering is a national crisis. What now?

Canada has turned a blind eye to dirty money for too long. It’s time to act

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photo illustration of a man sweeping money under a curled back photo of Vancouver cityIn 2018, $46.7 billion was laundered through Canada (iStock)

Dirty money is here. Over the last year or so, Canada’s pervasive money laundering problem has entered the mainstream consciousness. Newspaper headlines across the country have sounded the alarm, drawing clear connections between dirty money from overseas and the housing crises in Toronto and Vancouver. This awareness has prompted a crescendo in the calls for better laws and stronger oversight, as well as more prosecutions, in order to stop the abuse of Canada’s system and mitigate its downstream effects on Canadians. 

Why has it taken so long for Canadians to become outraged by this crime-turned-crisis? One reason might be that the mechanisms of money laundering—like other financial crimes—are complex and can be challenging to understand. Money laundering involves funnelling ill-acquired assets through an often-convoluted web of shell companies, financial institutions and jurisdictions in order to conceal their origins and cleanse them of criminal taint.

Money laundering is a crime of the smart and powerful. Channelling funds through a complex international web is not cheap or easy. The secret to making it work is to compartmentalize the knowledge of the web so that nobody besides the money launderer has a complete picture of the entire network of transactions. You also need willing participants—intermediaries that can lend their reputation and credibility to the process, while turning a blind eye to the illegal conduct. Money launderers seek refuge in the strong brands of financial institutions, respected professionals such as lawyers and accountants and, above all, prosperous, stable countries like Canada. In so doing, they erode the credibility of institutions and individuals. Canadian real estate is a prime target for money launderers, especially attractive in our dynamic, safe and diversified metropolises like Toronto and Vancouver.

The authors of a recent report commissioned by the government of British Columbia, “Combatting Money Laundering in B.C. Real Estate,” estimated that approximately $46.7 billion was laundered through the Canadian economy in 2018, with B.C. accounting for around $7.4 billion. The authors noted that B.C.’s real estate market makes up about 72 per cent of that figure. In their accompanying letter to B.C.’s minister of finance, the authors of the report asserted: “Money laundering is an urgent issue, but not just in B.C. It requires concerted federal and provincial efforts to overcome the barriers that currently hold back an effective criminal justice and regulatory response in Canada. International best practices clearly illustrate that we can do better.” 

While Canada has been slow to respond and prosecution has been inadequate, the federal government and B.C. in particular have introduced new regulations and legislation to bolster the tools and resources sorely needed to tackle the problem. The latest federal budget has allocated millions toward the issue, but better coordination, more funding and a real willingness to enact change will be needed in the coming years.

Businesses and governments at the federal and provincial level need a robust, multi-stakeholder framework to prevent, detect and respond to indications of money laundering and related forms of misconduct. To be effective, such a framework should include several core elements. 

First, it should establish secure channels for whistle­blowers to report concerns about potential misconduct without fear of reprisal or discrimination. 

Second, it should define incentives to ensure that key stakeholders in business put in place effective corporate compliance programs. 

Third, it is important to offer channels for businesses to self-report incidents to authorities (beyond mandatory suspicious activity reports) while creating effective mechanisms for resolving cases that are reported.

Fourth, the framework should create registries or a registry of legal persons to provide insight into the ultimate beneficiaries of Canadian assets. New legislation in Ottawa and B.C. is making the latter element possible, but a registry of beneficial ownership information requires legislation in all provincial jurisdictions to effectively deliver transparency across Canada. 

Fifth, we need to further promote a culture of doing the right thing, doing business in a sound and sustainable manner and speaking up when we see indications of misconduct. Canadian leaders need to focus more on who they do business with and how they structure business, as well as understanding where funds are coming from and applying a responsible (rather than legalistic) mindset. 

Beyond our borders, there has been a significant push to develop stronger and more effective anti-money laundering (AML) tools, and Canada is leveraging this to bolster our own efforts. In February, the Financial Action Task Force (FATF), an intergovernmental organization and global standards-setter for combatting money laundering, introduced draft guidance to assist countries, authorities and professionals such as accountants and lawyers in the application of a risk-based approach (RBA) to AML. The public consultation period has ended and a final version, replacing the 2008 guidance, will likely be approved this year. The guidance is intended to provide support to both the private sector and public authorities, by focusing on money laundering, terrorist financing risks and associated mitigation measures. Canadian accountants can lead the charge by understanding the risks involved, referring to the RBA, following provincial codes of ethics and applying our good judgment.

I recently joined a Canadian delegation to the FATF’s annual Private Sector Consultative Forum in Vienna, hosted by the United Nations Office on Drugs and Crime (UNODC). The forum provides an opportunity for the FATF and its members to engage directly with the private sector on AML and terrorism-financing issues. One of the issues highlighted at this year’s forum was the importance of AML in the context of combating public corruption. This should resonate for Canadians; in one of our country’s most significant corruption matters to date, Swiss authorities arrested and prosecuted a Canadian executive for laundering money in support of allegedly improper business deals in Libya.

Some of the tools that can be particularly useful in the fight against money laundering are those that help accurately determine the beneficial owners of assets such as real estate. For example, registries that contain beneficial ownership information help the public know who owns certain assets and thus better understand their potential clients and business partners, as well as the risks they present. 

These tools promise to greatly increase transparency and can make a significant difference. However, tools by themselves are not enough to prevent savvy and resource-laden criminals from abusing the system. Robust prosecution of individuals and organizations is also critically important to serve as a warning to money launderers’ would-be accomplices (bankers, lawyers, accountants and other professionals) that wilful blindness does not pay. Accountants in particular cannot be wilfully blind or negligent. They are expected to do their due diligence on their clients, understand beneficial ownership, and follow the law and established principles of the profession (including code of ethics requirements when facing non-compliance with laws and regulations). The federal government is working to amend the Criminal Code to add an alternative requirement of recklessness to the offence of money laundering. Indeed, ignorance is not an excuse. 

Canada’s fight against dirty money and dirty business is still in its infancy. The collateral social, economic and political effects of money laundering are real, and the public is becoming more and more aware of them. This has come as a harsh wake-up call to a country that has tended to regard itself and its institutions as shining examples of prudence and integrity. At last, the era of innocent thinking in Canada has come to an end. The tough, critical thinking that will replace it may be our best hope for continued stability and prosperity in this increasingly global world.

The Financial Action Task Force’s risk-based approach serves several important functions:

1) Lists services that at-risk professions provide, as well as their vulnerabilities to money laundering and terrorist financing risks

2) Highlights the importance of client-acceptance and engagement-acceptance policies and measures to deal with higher-risk scenarios (e.g., if a client is a politically exposed person)

3) Addresses the importance of monitoring the accuracy of information provided by clients, such as beneficial ownership information

4) Stresses the need for ongoing monitoring of a client’s activity and reporting of suspicious activity