Canada’s anti-money-laundering regime has the big banks worried

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

Blandly entitled “Improving Canadian prosperity, competitiveness and financial security,” the submission calls out weaknesses in the regulation, reporting and prosecution of money laundering in Canada. The Financial Transactions and Reporting Analysis Centre of Canada (FINTRAC), an analysis and supervisory body created in 2000, draws particular attention. It is supposed to “combat money laundering, terrorist activity financing, sanctions and threats to the security of Canada” by overseeing “thousands of businesses” in addition to banks, which 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 have, as the C.D. Howe Institute recently highlighted, spent the last decade piling on regulations that are causing “higher compliance costs and decreased competitiveness.”

That this criticism came through the CBA is noteworthy.

A black box to most in Canada, including many bankers, the 133-year-old organization operates today on a consensus basis, meaning Canada’s five largest banks must agree to policy statements made by the CBA. This includes Toronto-Dominion Bank, which is facing a potential US$3-billion fine tied to allegations from U.S. regulators that criminal drug gangs laundered $US653-million through TD branches in three U.S. states.

Criticizing Canada’s AML framework as lackluster now suggests it is hurting the industry’s reputation abroad, especially in the U.S.

The CBA thinks we have lots of AML sizzle and no steak — that Canadian banks are compelled to comply with an endless list of transaction reporting requirements that have little relation to real AML risks (all sizzle) that, in turn, generate relatively few intelligence reports and convictions in Canada for AML offenses (no steak).

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Banks and other businesses (brokers and agents, casinos, money service businesses, real estate brokers, sales representatives etc.) that report to FINTRAC “submit 12.5 times more reports than those in the U.S., and 96 times more reports than those in the U.K,” notes the CBA, yet FINTRAC “provides a disproportionately low number of intelligence reports to law enforcement.”

Interestingly, according to the CBA, “in 2022-23, FINTRAC received over 36 million individual reports and disclosed only 2,085 intelligence reports.” The CBA rightly refers to this as “high-volume, low-value reporting.”

Bizarrely, 27 per cent of those reports were generated by FINTRAC itself working with private businesses and banks, in effect, acting as a bank supervisor, a supervisor of “thousands of other businesses,” and sleuths who, like Agatha Christie’s Miss Marple, investigate crimes (e.g. human trafficking, drug dealing etc.) that rely on money laundering in the hopes of handing over evidence to the police to pursue criminal charges. Noble as this seems, the outcome of the entire FINTRAC process is cause for concern, with the CBA pointing out that there has been “a decline of (money laundering) convictions throughout 2010-2020.”

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The CBA submission to the Finance Committee offers solutions that should be part of a new AML framework in Canada. For example, the CBA promotes new guidelines focused on suspicious activity reporting, rather than suspicious transaction reporting, which is more likely to generate higher-value, lower-volume outcomes than the current process where the roughly 300-strong staff at FINTRAC are deluged with millions of transactions to sort through.

Importantly, the CBA recommends that the Liberal government of Justin Trudeau make good on its promise to establish a Canadian Financial Crime Agency that will “undertake both investigative and prosecutorial roles of complex financial crimes and provide statistics to public and private stakeholders on investigations, prosecutions, convictions, and asset forfeitures in Canada.” This would add transparency to our AML effectiveness.

Also needed is the clear alignment of expertise and purpose with supervisory responsibilities — a point the CBA could not bring itself to make, though it should have.

The supervision of banks is the business of Canada’s bank 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 should be reinstated, and the supervision of bank AML compliance left to OSFI alone — the muddling of who supervises AML at the banks may explain why OSFI let down its guard on AML compliance in the case of TD.

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FINTRAC was designed to “facilitate the detection” of money laundering, not to do the detection itself, which should be left to the new Canadian Financial Crimes Agency. Moreover, FINTRAC cannot be reasonably asked to supervise thousands of businesses in Canada that must report on suspicious transactions and supervise complex, global businesses that our banks have become. It best serves as an AML analysis and intelligence hub, rather than a supervisor of banks.

TD’s AML troubles, low-value reporting requirements, relatively low numbers of intelligence reports to law enforcement, and the decline of money laundering convictions between 2010 and 2020 are red flags indicating change is needed now to effectively deter money laundering in Canada and to ensure Canadian banks are not weak links in the fight against money laundering in the U.S. and abroad.

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

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