Testimony to the House of Commons Finance Committee on the Review of the Proceeds of Crime (Money Laundering) and Terrorism Financing Act

Remarks Made to the House of Commons Finance Committee, March 21, 2018:

Thank you very much.  I am a lawyer working in the field of anti-corruption and anti-money-laundering.  I authored some reports on beneficial ownership transparency and will provide them to the clerk.  I will keep my remarks brief. 

First, I welcome the announcement by the federal and provincial Finance Ministers in December regarding making corporations more transparent.  I would recommend that Canada follow the example set by European Union jurisdictions in creating public beneficial ownership registries.  I will leave with the clerk a copy of a report I prepared with best practices and lessons learned on beneficial ownership registries from European jurisdictions, but will highlight one point from that report.

Beneficial ownership registries must be fit for due diligence purposes.  IDs and other information provided by corporations must be verified by the Registrar and risk-based due diligence must be performed.  The Registrar should have an anti-money-laundering and counter terrorism mandate.  If criminals can simply provide fraudulent information to the registry, then repeat the same fraudulent information to a bank and say, “check the federal registry”, then the registry will be useless and the banks and all others with due diligence obligations will not be able to rely on it.  A verified and risk-managed registry will cost more, but there will be aggregate savings across the economy and even within government.  Federal-provincial cooperation would be required to create one stop portal to search all registries. 

Second, I would recommend the creation of new legal duties in the Proceeds of Crime (Money Laundering) and Terrorism Financing Act (PCMLTFA) for nominees, agents, trustees - essentially people representing third parties including nominee shareholders and directors.  Those representing others should be required to always disclose their status as well as the identity of the third parties they represent to federal and provincial officials, including beneficial ownership registrars as well as financial institutions and designated non-financial businesses and professions.  Currently, financial institutions and others have an obligation to ask clients if they are representing third parties, but there is no statutory obligation to answer this truthfully. 

Third, all designated non-financial businesses and professions should be required to inquire about beneficial ownership of corporations, entities and arrangements as part of their due diligence obligations when processing large cash transactions.  You might wonder – is that a huge burden? However, a public beneficial ownership registry would make this a very simple task.

Fifth, I wanted to address the role of lawyers in the money laundering scheme.

Currently, as was explained by the Federation of Law Societies, Law Society Model Rules are in place and enforced by the provincial law societies, not FINTRAC.  These rules as such are very useful – and the no cash over $7500 rule is excellent.  Personally, I would take these rules further, although I am aware that the law societies are currently revising these rules. 

Where lawyers are conducting financial transactions on behalf of clients and the clients are using negotiable instruments at risk for money-laundering, I would impose know your customer and due diligence obligations, as appropriate, to verify if the clients are Politically Exposed Persons (PEPs) including family and close associates of PEPs, on sanctions lists or otherwise high-risk.  I would also require lawyers to make inquiries about the source of funds. 

There are, however, some unanswered questions on the efficacy of the current regime and I feel that more empirical data is required to fully answer them.

Is the current system effective?  What is the extent of the problems?  What are the advantage and disadvantages to restoring lawyers’ cash, due diligence and record keeping obligations in the statute as opposed to in the Rules?  Because of solicitor-client confidentiality, detection of alleged crimes must occur in other parts of the financial system.  So as a simple example, imagine a situation where a lawyer were to deposit large volumes of cash into his or her trust account in presumed violation of the current cash rule.  Would a bank be more likely to flag this to FINTRAC as a suspicious transaction if it were a breach of the law rather than a breach of a Law Society rule?  Would a judge issuing a warrant on reasonable and probable grounds that an offense was committed care if due diligence breaches were based in statute or Law Society rules?  These are the types of questions we need answered in order to assess the efficacy of the current regime and whether changes are desirable.

On the question of who should supervise the enforcement of these Rules or laws, we know from the Supreme Court’s decision in Attorney-General of Canada vs. Federation of Canadian Law Societies that it is unconstitutional for FINTRAC to access lawyers’ files in the absence of a warrant and the Lavallee procedures.  This limitation would seriously hamper FINTRAC as a supervisor of lawyers in the future under any circumstance. 

So even if this Committee were to conclude that due diligence obligations for lawyers should be restored to the PCMLTFA, could the Law Society remain the supervisor and enforcer of those legal obligations?  This is currently the case with English solicitors and that might be a compromise for Canada that most can live with. 

Sixth, if the Government plans to simplify the prosecution of money laundering offences including facilitating money laundering by reducing the mens rea to a reckless or a willfully blind or a negligent standard, then a statutory defense should be provided to lawyers and others of reasonable due diligence. 

Seventh, Export Development Canada (EDC) as I understand it, is currently exempt from the PCMLTFA because it does not accept deposits.  However, recent media reports of its support for corrupt transactions have shown that it is at high risk for handling the proceeds of crime.  For example, when it makes loans of 10s or 100s of millions of dollars to companies that obtain business through bribery, EDC is at high risk of being repaid with proceeds of corruption - some of which goes into government coffers through corporate dividends.  While the PCMLTFA is not ideally suited for these types of risks, there are currently no statutory due diligence obligations in place for EDC and this might be something worth looking at as the Committee reviews risks of proceeds of crime in the financial system.

Thank you once again and I would be pleased to answer any questions.