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Taking The Starch Out of Money Launderers
Prepared By: Christopher R. Walker and Michael D. Lipton, Q.C.

Canada has been under increasing pressure from its G-8 partners to put in place stronger legislation aimed at controlling money-laundering practices. American law enforcement officials consistently refer to Canada as a haven for money laundering, citing our weak financial controls as an invitation to organized criminals to move their illegal profits through the Canadian economy in a variety of ways.

Canada's approach to dealing with money laundering has been somewhat limited to date. Under the 1991 Proceeds of Crime (Money Laundering) Act (PCMLA), financial institutions were required to maintain transaction records and determine the identity of their customers. That Act also gave police the authority to charge individuals with money laundering.

The reporting of suspicious transactions, however, has up until now been strictly on a voluntary basis. In fact, that reporting has been primarily restricted to Canada's major banks as a result of a Memorandum of Understanding between the RCMP and the Canadian Banker's Association. Research in that realm over the last six years by the first author has shown that this practice has been, at best, sporadic and limited. Internationally, the "voluntary" aspect of Canada's reporting system is viewed as minimally effective and counter-productive compared to the efforts of the other democratic nations with more stringent controls.

Canada has responded to this criticism by developing a new system of "Mandatory Suspicious Transaction Reporting" (MSTR), which is currently proceeding through the various approval stages in the House of Commons.

Who will be affected by the new Legislation?
The new legislation will result in a number of significant additions and amendments to the PCMLA, including the requirement for various institutions and "persons" to file a report in every instance where they identify a suspicious transaction.

The definition of "institution" is broad, incorporating a wide variety of financial organizations including banks, credit unions, caisses populaires, credit associations and societies, life insurance companies, and trust and loan companies.

Those "persons" affected include individuals dealing in investments and securities, operators of foreign exchange houses, casino operators, and all persons engaged in a business, profession or activity in the course of which cash is received for payment or transfer to a third party. The latter potentially covers a variety of services offered by lawyers and accountants, such as real estate transactions, client investments, and a number of other client/business-to-business transactions.

What is a Suspicious Transaction?
The definition of what makes up a "suspicious transaction" will more than likely be set out in a series of schedules, each customized to the various regulated groups. These transactions will be referred to as indicators, and will represent specific money-laundering activities that occur within each group. In addition, there will be more generic, subjective indicators that suggest to the reporting individual that there is something suspicious about the transaction, thereby warranting the submission of a report.

Where will the Transaction Reports be sent?
The legislation includes the establishment of a new authority, the Financial Information Agency (FIA), that will be given four key responsibilities including the collection and analysis of all reports sent in by the regulated organizations and individuals. The FIA staff will analyze the reports with the assistance of computer technology and identify any links between individual suspicious transactions and other available information about money-laundering activities.

The FIA will have the authority to disclose information related to suspicious financial transactions in three limited circumstances:

• to Canadian law enforcement agencies investigating a crime involving money laundering
• to foreign law enforcement agencies that officially request information pertaining to ongoing criminal investigations, and,
• to Revenue Canada taxation officials if the information relates to a taxation matter arising from money laundering activity.

How will Compliance be monitored?
The FIA will also be given the authority to undertake random audits of all organizations and individuals regulated by the legislation. Failure to comply with the legislation will be dealt with under law, through such penalties as fines and/or jail terms up to five years. In the case of a regulated organization, all sanctions will be directed at the organization rather than the individual employee.

It is clear that there will be penalties for such things as the failure to file a suspicious transaction report, filing a false or misleading report, and unauthorized disclosure of financial information. A provision is planned that would protect the reporting institution and/or individual from criminal or civil liability, provided the release of information has been carried out according to the required MSTR procedures.

Some concerns from the legal profession
The Canadian Bar Association's National Criminal Justice Section has challenged the federal government on a number of aspects of its proposed legislation, particularly those sections dealing with the disclosure of information and the proposed notion of a "suspicious transaction".

On the latter, it has been argued that unless the definition of a suspicious transaction is particularly clear and specific, the potential for over-reporting increases according to the penalty for failing to do so. This, the CBA argues, will have an unduly negative impact on the privacy of those being reported.

The inclusion of lawyers as a regulated profession under the new legislation, according to the CBA, will create an ethical conflict by requiring lawyers to break with their duty of confidentiality to their clients - thereby potentially breaching their provincial Codes of Professional Conduct. Those Codes impose on members a duty of confidentiality with respect to information coming from a client.

In response to these concerns, it has been suggested that the application of MSTR to the legal profession would likely involve only a narrowly circumscribed list of suspicious transactions, thereby limiting the list of reportable transactions to very specific activities and reducing significantly the risk of over-reporting.

In addition, the information to be reported would most likely be limited to that contained within accounting records, and since that information does not involve the giving of legal advice, the potential infringement on solicitor-client privilege may be satisfactorily avoided.

What will be important once the proposed legislation becomes law is that the application of the law finds a balance protecting the rights of honest citizens to undertake business freely and without suspicion, while reducing the opportunities for organized crime to willfully launder their illegal profits within the legitimate economy.

Money laundering expert Chris Walker is a Senior Research Officer with the Toronto office of Grant Thornton, responsible for developing the firm's MSTR Service Strategy. Civil litigation specialist Michael Lipton, Q.C. is a senior partner at Elkind & Lipton in Toronto and is collaborating with Grant Thornton to guide the legal aspects of its MSTR Service Strategy.

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