Appearance before the Senate Standing Committee on Banking Trade and Commerce on the Review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act

March 1, 2012
Ottawa, Ontario

Opening Statement by Jennifer Stoddart
Privacy Commissioner of Canada

(Check against delivery)

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Good Morning Mr Chair.

Thank you for inviting me to appear before this committee. I am pleased to have the opportunity to share my comments on the Review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

I am accompanied today by two of my experienced officials, Carman Baggaley, strategic privacy advisor, and Mike Fagan, manager in the Audit and Review Branch.

My Office has commented frequently on this Act and its associated anti-money laundering and anti-terrorist financing regime. As such, we appeared before your committee in 2006 to comment on Bill C-25, which significantly expanded the number of organizations covered by the Act and the types of transactions subject to scrutiny and reporting.

Bill C-25 also gave my Office a statutory mandate to conduct a biennial review of measures taken by the Financial Transactions and Reports Analysis Centre (FINTRAC) to protect information it receives or collects. Our first audit report was published in 2009 and we are currently conducting our second review.

General concerns with the anti money laundering and anti-terrorist financing regime

I would now like to discuss some of my general concerns regarding the anti-money laundering and anti-terrorist financing regime. We know that money laundering supports criminal activities. As well, we are certainly aware that the financing of terrorist groups leads to an increased threat to our security. That said, my concerns with respect to the current regime have remained consistent over the years:

• Although the regime cost over half a billion taxpayer dollars to implement – and this does not include the cost borne by the private sector to fulfill its obligations – it is not transparent and is not widely understood by the public;
• FINTRAC operates what is probably Canada’s largest data-mining undertaking. The personal information collected allows FINTRAC to create a comprehensive profile of an individual's life and behaviour. Moreover, our 2009 audit report found that FINTRAC received and retained information beyond its legislative authority;
• Over 300,000 reporting entities are currently required to collect specified information and maintain detailed records on their clients’ identities and transactions – which are not needed for their business purposes – all the while making speculative assessments based on their customers’ transactions;
• The threat of fines for failing to report creates an incentive to over report information. Indeed, our audit report found cases of Suspicious Transaction Reports sent to FINTRAC, which actually did not meet the threshold of “reasonable grounds to suspect” that the transaction was related to money laundering or terrorist financing;
• Finally, and perhaps most importantly, while the scope of the regime has expanded significantly since 2000, assessing the necessity, the proportionality and the effectiveness of the measures put in place has remained very difficult both for my Office and for other observers.

Even the “10-Year Evaluation of Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime” Report, which otherwise endorses the regime, is unable to assess how many investigations led to actual charges and convictions. In fact, it could only conclude that the regime likely contributed to the creation of an environment hostile to money-laundering and terrorist financing. This does not appear to be conclusive evidence.

Specific concerns with the proposed amendments

I would now like to turn to some of the specific concerns we have about the proposals contained in the Department of Finance Consultation Paper.

Eliminating the $10,000 Electronic Funds Transfers Threshold

One of the proposals in the Paper seeks to eliminate the $10,000 threshold which triggers the reporting obligation to FINTRAC of an electronic funds transfer, or EFTs. If the proposal were to be adopted, reporting entities would be required to report all EFTs entering or leaving Canada.

Beyond the very pragmatic issue of how to handle and safeguard the sheer volume of EFTs to be reported – which in and of itself is a cause for concern – I expect many ordinary Canadians to be deeply affected by such a measure.

Think of the naturalized Canadian citizens who regularly send remittances to family members in other countries. According to the most recently available data from Statistics Canada, 1 in 5 Canadians were born outside the country. Think of the small and medium enterprises that sell goods and services in other countries. Think of the parents who are sending money to their children studying abroad. The majority of EFTs in these cases would presumably fall below the $10,000 threshold.

Even if a case could be made for lowering the threshold to detect more terrorist financing, I would suggest that capturing large numbers of harmless transactions constitutes a significant unintended consequence that would be disproportionate to the intended objective of the proposal.

Prepaid Access Devices

Another proposal deals with prepaid access devices. These would include retail gift cards, prepaid cards issued by financial institutions, and mobile payment devices.

As an attempt to tackle potential money laundering and terrorist financing risks posed by prepaid access products, the government proposes to impose customer due diligence requirements on the providers of prepaid access devices.

Introducing customer due diligence requirements would result in the increased collection of personal information. Given the popularity of prepaid access devices, to require providers of these products to obtain identifying information would be a significant undertaking. It would potentially extend customer due diligence obligations to an even greater number of organizations – many presumably in the retail sector – and require them to collect and create large databases of personal information that they do not need for internal business purposes.

If the Government is convinced that it needs to address the risk created by the growth of prepaid access products, I would strongly suggest that it consider measures that do not necessitate the additional collection of personal information and the creation of databases.

For instance, a 2010 Report by the Financial Action Task Force suggests that the risk posed by an anonymous product can be effectively mitigated by measures other than identification and verification procedure, such as imposing value limits.

Expanding the Information Contained in FINTRAC Disclosures

The 2000 legislation had built-in safeguards that limited the information that FINTRAC could provide to law enforcement and other authorities. However, these safeguards have been gradually weakened. The Act has been expanded to allow FINTRAC to share information with the Communications Security Establishment, the RCMP, CSIS, the Canada Revenue Agency, the Canada Border Services Agency and Citizenship and Immigration.

It is now proposed that FINTRAC be permitted to, and in some cases, required to share more information with law enforcement and intelligence agencies.

The government did not provide any compelling arguments to justify expanding the amount of information and the number of agencies to which the information can be provided. I am of the view it should do so before moving forward with this proposal.

Moreover, if FINTRAC were to be given the ability to share more information with more organizations, the Government should also consider increasing oversight of FINTRAC to ensure these disclosures are appropriate. My Office has responsibility for conducting audits every 2 years, but this is retrospective and not the same as operational oversight.

Broadening the Requirement to Report Suspicious Transactions

The legislation currently requires reporting entities to report suspicious transactions as well as completed or attempted financial transactions that give rise to a suspicion of money laundering or terrorist financing.

As I already mentioned, this has always been one of the most troubling aspects of the Act because it requires reporting entities to make judgments about the motives of their clients and customers. We are not aware of any other legislation that imposes similar requirements on this scale.

It is now proposed that a suspicious transaction be redefined to include an activity undertaken for the purpose of a financial transaction that gives rise to a suspicion of money laundering or terrorist financing.

While this proposal is presented as a simple clarification of the current definition, it would presumably encompass activities that can occur before a financial transaction is actually made, such as opening an account. This will further increase the likelihood of over reporting.

I would suggest that the Government may wish to address the issue of over reporting before considering new measures that could exacerbate the problem further.

Conclusion

I would like to reiterate that I recognize the objective of combating money laundering and terrorist financing. I also understand that Canada has international commitments to honour.

However, I am concerned that Canada’s anti-money laundering and anti-terrorist financing regime would again be expanded without any clear assessment of whether these changes are needed to address domestic problems.

Canada already has an expensive, secretive and intrusive regime that collects – and over collects – vast amounts of personal information about Canadians while failing, so far, to provide conclusive evidence as to its effectiveness and its impact on Canadians.

In fact, rather than considering further changes to the Act, it may be time to fully assess the effectiveness of the regime and to explore whether other measures could be more demonstrably efficient and less privacy intrusive to combat money laundering and terrorist financing.

If it is the Government’s view that additional changes to the regime are absolutely necessary for law enforcement and national security purposes, it is important that the Government provide public justifications for these changes, supported by data and evidence. Increasingly sophisticated forms of surveillance require increasingly higher thresholds of justification, and I would suggest that the case has not yet been made to justify the proposed changes to Canada’s anti-money laundering and anti-terrorist financing regime.

And with that, I look forward to your questions.