Casinos in Canada are subject to reporting and anti-money laundering (AML) program requirements as set forth in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA, 2000). This includes obligations to implement and carry out Know Your Customer procedures, report large cash transactions of $10,000 or more and report suspicious transactions and attempted suspicious transactions (Duhaime, 2016).
Written by Kim Marsh for ACAMS MoneyLaundering.com | 2014
The revolutionary “Arab Spring” began in December 2010, destabilizing and supplanting regimes in countries across the Arab league, reaching Libya in February 2011. Libya had been an anomaly among Arab nations. Internally stable and relatively progressive, Libya enjoyed relative religious harmony with no significant presence of the radical Islamists who were driving much of the turbulence in other affected regions. This stability was attributable in part to oil wealth and to the 42-year absolute dictatorship of Colonel Muammar Gaddafi.
Born to a Bedouin goat herder, Gaddafi was the first in his family to obtain an education. Upwardly mobile through military
service, he became a communications officer in the Libyan army’s signal corps. With role models widely ranging from Abraham Lincoln to Sun Yat Sen, Gaddafi’s principal inspiration was Egyptian president Gamal Nasser, who had been a prominent advocate for pan-Arabism and socialist revolution. After organizing a group of fellow officers, Gaddafi led a bloodless coup in 1969, during a time when Libya’s King Idris was overseas on holiday. Gaddafi’s power gradually consolidated in the new Libyan Arab Republic, which by 1977 had become the “Great Socialist People’s Libyan Arab Jamahiriya,” a name reflecting Gaddafi’s increasingly idiosyncratic ideology.
The Libyan Arab Spring protests calling for Gaddafi to step down escalated into civil war, but Gaddafi held out, repeatedly declaring that he would rather die as a martyr than leave Libya. Despite Gaddafi’s determination to stay, his wife and three children escaped to Algeria in August, and substantial state assets, estimated at up to $160 billion, were also reported
to have been smuggled out. In Sirte, on October 20, a mob dragged Gaddafi out of the drainage pipe where he had hidden, and executed him. Initial reports that he had been shot in the head painted a rosy picture of the slaying. He had been beaten by a mob, bayonetted in his anus and rolled off a moving truck. His final bloody moments were filmed and uploaded to YouTube.
The search was on for the $160 billion. International organizations joined to locate and repatriate the missing assets, while the new Libyan government contracted private financial investigators to locate assets and manage the legal hurdles of repatriating them. Several successful cases validated these efforts, including nearly $1 billion recovered in South Africa from Bashir Saleh, aka Gaddafi’s banker.
I spent 25 years in the Royal Canadian Mounted Police (RCMP) before retiring in 1998 when I entered the private sector. Between 1983 and 1988 I was in charge of the Mounties’ national undercover program, and from 1988 to 1992 I was assigned to Miami with a mandate to work with U.S. law enforcement agencies on cases involving Canadians or Canadian investigations and interests. During my time in Miami I worked with a confidential source, also from Canada, who consistently provided high level information about contraband smugglers. These tipoffs enabled two high-value seizures with following criminal convictions.
After leaving Miami, I lost contact with this source until March of 2013 when I received an email from him. I had been easy to locate on the Internet with my new overt job description, working for IPSA International as a private asset tracing and recovery services consultant. The source needed this skill set as he had a friend who had a line on a large amount of cash that had been stolen from Libya and stashed in West Africa. The source told me he had a friend with connections to $240 million that had been shipped out of Libya to Abidjan, Ivory Coast, where it was now controlled by a former military officer who wanted it laundered.
Over the phone, the Canadian source introduced me to his friend, another Canadian, who was living in Thailand. He explained that he had met an employee of an African embassy in Bangkok, who had a cousin in the Sudanese Army who had helped pull $240 million out of Libya before Gaddafi’s fall. The cash was now secured near Abidjan’s international gateway, Port Bouet Airport. The lost assets were controlled by Ivory Coast military officers, who were prepared to pay 40 percent of the value to anyone who could export the cash, launder it and eventually park it in bank accounts they could access.
While the sources were all focused on the 40 percent, which amounted to about $96 million, I was troubleshooting the situation. Several things needed to be determined and resolved up front:
- Was this accurate information, or some kind of scam? Was the money counterfeit?
- What is the best way to deal with asset controllers in a notoriously corrupt country with no effective rule of law?
- How to conduct a complex stolen assets investigation without a badge. It is a lot easier with the benefits, access and immunities that are granted to law enforcement.
- Who was the client? Until the rightful owner of the assets was identified, there would be no contract and no legitimate right to take the money.
- How to pay for all of this. Proper logistical support would be critical and costly.
- How to keep it clean. Conducting a private international covert operation is tricky business. Secretly photographing a suspect may be okay in Hong Kong, but one could land in jail for doing that in Dubai. I was determined to be safe,
- not sorry.
I quickly allied with attorney Martin Kenney, who decided, along with his British Virgin Islands law firm, to participate as an equal partner with IPSA. I was well acquainted with Kenney and his reputation as an internationally acclaimed asset recovery specialist. Kenney had been working with the World Bank and its stolen asset recovery initiative (STAR) and had recently presented on asset recovery to government officials attending a conference in Cairo. Kenney agreed to manage the legal issues while IPSA was going to handle the project operations.
The Bangkok-based Canadian source had already briefed an Australian expatriate who was going to assist with matters he needed help with. I met him first by phone, and learned more about the African diplomatic source. Over six to eight weeks, after establishing some basic ground rules and completing a first level check on the information that had been presented, I travelled to Bangkok to meet directly with all the sources.
The Bangkok-based Canadian and the Australian expatriate knew my plans were straight, and there was still going to be handsome reward money in it for them too if they successfully assisted the recovery. They provided additional details and covertly introduced me to the African source, a Sudanese national working in one of Bangkok’s foreign embassies. I was presented as a trusted friend who lived in the U.K. and worked in the financial industry. My covert character possessed the contacts, experience and ability to transport and launder the money. During the meeting, the Sudanese diplomat disclosed that his cousin was a former Sudanese Brigadier General who had known the asset controllers for years. The controllers, he explained, included a Malian national who had been a diplomat based in Libya. During the disintegration of the Gaddafi regime, the Malian national coordinated the transportation of the funds across West Africa to Abidjan and now the group was looking for the right people to take the cash and manage its placement and layering.
My team thoroughly analyzed the new information and checked out the individuals who had been identified. They decided to send the Sudanese source to Abidjan, so he could collect more details and see the money. I said it was necessary to verify the assets were real by viewing and photographing them and also explained I needed samples and more information about how the funds had traveled to the Ivory Coast.
A couple of days after he arrived in Abidjan, the Sudanese source was taken to a bonded warehouse where he was shown a plastic wrapped, large cardboard box containing a steel locker packed with shrink-wrapped stacks of $100
notes. Photographs of the box showed Arabic writing on sealing tape and a label with the coat of arms of Gaddafi’s Great Socialist People’s Libyan Arab Jamahiriya. The asset controller said the box contained $20 million, and that there were 11 more boxes secured at another location. The assets could be flown out of the country, so long as one of their people was allowed to board the plane at the time of the pickup.
With no cases, there are no problems. Small cases have small problems, and big cases, like this one, often bring big problems. The Sudanese returned to Bangkok safely with the photographs he had taken, but only one of the five C-note samples he had collected in Abidjan made it back with him. He said he had left two with his mother and given two to a friend. The fact he had been able to pass four 100 dollar bills successfully did not prove the box had not been filled with counterfeit notes, so I contacted the leading experts on counterfeit U.S. currency—The United States Secret Service. After initially studying the photographs and deciding they thought the notes could be counterfeits, the Secret Service obtained the surviving sample note, revisited the photos and concluded that it was highly probable all the currency was genuine. They informed me that U.S. Federal Reserve Banks send bulk cash in $100 denominations boxed exactly like the ones shown in the photographs, except, of course, for the Arabic tape and Libyan crest. Bulk U.S. currency like this is routinely shipped to large banks in Zurich or London where it is then supplied to central banks located in Africa and elsewhere. The Secret Service was also able to analyze the serial numbers on the photographed notes and the sample to determine that they had been shipped from New York to Zurich in 2013, a troubling revelation considering Gaddafi had been executed in October 2011.
This anomaly merited a second viewing trip. This time, three people were selected to go. The Sudanese was going to fly out with the Australian where they would meet their third colleague “Banker Bill” who was going to be in Abidjan on other business. Banker Bill is a trusted former RCMP officer who was working as an investment banker in Hong Kong at the time. With the RCMP, Banker Bill had specialized in managing money laundering cases as an undercover cop. Wellgrounded and observant, Banker Bill was going to add accountability, discretion and survival skills to the operation.
Their objective was to inspect all of the boxes, acquire more samples, take more photographs, measure weight and dimensions and determine transportation logistics. If the assets were bona fide, Banker Bill was going to be introduced to discuss the finer details, including how the funds would be transported, laundered and disbursed.
Before the second trip, Kenney’s legal team was working out the details, dealing with the complex legal challenges and cross-jurisdictional issues that would arise if the team took possession of the funds. We still did not know the rightful owner of the assets; we were proceeding without a client or a contract. Because the $100 notes were genuine and all the evidence from the first viewing was consistent with how bulk cash is shipped, we decided to continue with the investigation.
One of the asset controllers said in a phone call that there were 12 boxes containing $20 million each and that their total weight was approximately 6,000 pounds. This confirmed with what the Secret Service had said would characterize that amount of cash. The team insisted they wanted to see all the boxes, collect random samples, shoot photographs, take measurements and gather more information for the removal stage. After being assured their demands would be met, the Sudanese and the Australian traveled to Abidjan at the end of October 2013. Banker Bill flew over a couple of days later and stayed at a different hotel, waiting for the viewing to occur.
The Sudanese and Australian arrived on Friday but were not shown any of the money until late on Monday, again at the same bonded warehouse. The controllers did not bring the 12 boxes as promised, but they did produce four, containing $80 million in total. The steel boxes were filled with $100 notes, wrapped the same as the first box and all displaying the Libyan crest from Gaddafi’s regime. Several photographs were taken, random samples were selected and counterfeit tests administered. All of the notes appeared to be genuine. As with the first viewing, three uniformed guards escorted the boxes.
With the notes looking good after the second viewing, Banker Bill met with the asset controllers inside a hotel lobby. They offered more information, the bills of lading on the boxes had falsely listed jewels instead of cash, and they did not have many questions, which seemed odd. They could not warehouse the money much longer and were eager for the cash to be removed from the country. They wanted 60 percent of the value deposited into accessible bank accounts and were prepared to pay a premium 40 percent for the successful laundering of the money. They also wanted $1.25 million to pay off customs
for the cash in the bonded warehouse. Banker Bill quickly adapted to this surprise. “No problem,” he said, “pull it out of one of the boxes.” This economical logic left no room for disagreement and the controllers did not rile after Bill’s retort. They also did not ask many questions about what was going to happen to the cash after it flew out of Ivory Coast, and this added to Banker Bill’s increasing suspicion.
He had been prepared to propose falsifying shipping documents to cover transporting the cash to a bank vault in Malta. Another option would have involved paying off one of a few Islamic banks, which had offered to take care of the first stage problem for 20 percent, including the private aircraft. This would have been expensive, but conveniently turnkey. The problem would be with the second tier distribution to more conventional western banks, which would use know your customer (KYC) and source of funds procedures that would likely raise red flags.
A better solution, the team had determined, would be to keep the cash in Africa, purchasing commodities, such as timber, cocoa and minerals, benefiting from Africa’s traditionally cash-based trading practices. The commodities could then be discounted and sold to legitimate overseas buyers and third-party payments could be made to “trading accounts” held in banks in western jurisdictions. Moving such large amounts of cash across Africa to make the transactions would invite exceptional security concerns though.
The best solution, Banker Bill was going to propose, would capitalize upon Africa’s endemic corruption. It would be possible
to approach some governments offering to co-invest alongside public-private partnerships to fund development of dams, roads, ports or whatever offered the lowest risk. The country requiring funding assistance (for UN or World Bank backed projects) would only receive the capital if they would accept the cash into their Central Bank, which would then make the country’s “contribution” to the project. The country would agree to make regular payments, including ongoing advisory fees, to the corporate entity established to make the deal with the country.
This careful troubleshooting would have been persuasive, but the asset controllers seemed cavalier and uninterested in the details.
As the team departed Abidjan, the sample notes they had collected were sent to the U.S. to be examined by the Secret Service. Like the first sample C-note, these six $100 bills were all genuine, and again the serial numbers revealed they had not left the U.S. Federal Reserve Bank in New York until 2013, well after Gaddafi’s fall in October 2011.
The investigation had been running for six months. Back in Bangkok, the Sudanese and Canadian sources were eager to close the deal. They were pressuring for progress to the removal stage so that everyone could have a payday. The money was real, but the team still did not know the identity of the rightful owner. In debriefing trip two, this detail combined with other impressions added up, encouraged a decision to disengage.
- Over the six months there had been inconsistent stories about how the money had made it to Ivory Coast.
- The circulation timeline determined by the serial numbers did not match the timeline ofthe assets’ purported liberation from Libya.
- Without a credible explanation for the delay, the money was not shown until late onMonday after the team had been waiting in Abidjan for three days.
- When Banker Bill met with the asset controllers, they did not show enough interest inhow the money would be laundered and parked.
- At both viewings there were uniformed guards accompanying the boxes.
- Finally, the asset controllers were now asking for $1.25 million to pay for customs kickbacks owing on the money that was being held in the bonded warehouse.
The presence of the uniformed guards especially raised questions. When Banker Bill stayed in Abidjan, his hotel was across the street from the Ivory Coast Central Bank, which was secured by guards who, he noticed, wore the exact same uniforms as the guards photographed at the viewing location.
Upon broader inquiry, the team learned of a “bait and switch” scenario being played out in several French West African countries. Military officers were allowed to borrow boxes of money for a short period of time to flash their marks in an “advanced fee” scam. Trusted sources in French West Africa revealed the ruse had started not long after Gaddafi’s fall. The IPSA team also learned they had been the second of two groups who had been shown the assets on the same Monday afternoon. They determined their viewing had been delayed until Monday because the “controllers” had to wait for the central bank to be open for business to coordinate the display.
All this information was turned over to appropriate authorities and the matter was placed under investigation. IPSA still has not received any feedback from the investigating agencies and does not expect to. People who can access central bank funds are well aware of the stolen money being sought by financial investigators. Some see this as an opportunity to lure legitimate professionals into a trap. It is unclear how the ruse would have played out for the IPSA team, but we did learn that others had been bilked out of considerable amounts of money and also wound up being criminally charged and jailed. IPSA’s street sense, attention to detail and clear perspective enabled us to deflect the demand for a funds storage fee/customs kickback, and to stay out of trouble. If we had been any less cynical or more ambitious, we could have been scammed.
Kim I. Marsh, CAMS, CFE,
As published in ACAMS Today
Investing in Citizenship
Citizenship by Investment Programs (CIP), also known as Immigrant Investor Programs, grant citizenship to high net worth individuals who meet eligibility requirements and make significant capital investments toward stimulating a nation’s economic development. Under eligibility requirements, applicants must pass criminal and security checks, and establish that no portion of their investment capital and net worth was obtained through criminal activities. Applicants deemed as high risk based on the nature or location of their business activities and country of origin, may undergo more in-depth due diligence investigations (IDD) in accordance with international anti-money laundering (AML) and counter-terrorist financing (CTF) policies and procedures.
The following article deals with recent international trends and challenges in the customer identification program (CIP). A review of these issues may lead to a better understanding of the risks posed to national governments and the need for investigative due diligence professionals with deeper international expertise.
Citizenship by investment programs have been around since the 1980s when countries began offering residential and citizenship opportunities to high net worth (HNW) individuals. Early participating countries included Canada and St. Kitts and Nevis. Today, there are many more countries such as the U.K., U.S., Switzerland, Dominica, Belgium, Austria, Antigua and Barbados offering a wide range of investment and citizenship options to HNW applicants. The variance in the investment requirements range between US$100,000 and US$16,000,000. In addition, several other countries are in the process of developing and launching similar CIP offerings.
Over the last eight years, there has been considerable growth in the industry. This has been driven by a number of factors including:
• The need for increased government revenues in both developed and developing countries
• Increasing levels of wealth in emerging economies including China, Russia, Nigeria and India
• Political and economic uncertainty in the Middle East and other parts of the world
• An increase in demand for passports that allow more visa-free global movement
• Tax regimes that are considered by some to be draconian
Furthermore, recent trends in the structure and management of CIP, along with increased global AML and CTF regulations, highlight the need for investigators with longstanding expertise conducting.
Over the last few years there has been a noticeable spike in the number of applicants in most of the programs being offered. There continues to be strong interest from Russia and China, which is mostly driven by a desire for travel without the hassle of applying for visas. There has also been a dramatic increase in applicants from the Middle East where civil strife is wide spread and showing little likelihood of changing anytime soon. Lastly, the nouveau riche are interested for a host of reasons including education, residence, safe haven and wealth diversification
Aspects of the industry are now being regulated because of the large dollar amounts involved, with said funds being transferred between countries and held in escrow accounts. Due to increased regulation, bank policies and other factors, participants in the industry have come to realize how imperative it is to conduct proper Know Your Customer (KYC) due diligence on applicants.
All of the countries offering programs have procedures that require applicants to complete numerous forms, provide supporting documentation and adhere to a rigorous due diligence process. An initial “front end” desk top due diligence is conducted during which the applicant provides basic information which allows the offering country an opportunity to screen out anyone who is unlikely to make it through the process. The next steps include interviewing the applicant and reviewing all information and documents provided. The applicant is required to complete a consent form waiving their right to privacy.
Historically, most of the vetting procedures were completed by government agencies, however, the current trend is to outsource reputational due diligence aspects of the procedure. The outsourcing of due diligence by authorized firms is due to increased multijurisdictional regulations, along with the realization by many countries that there is a responsibility to ensure the reputation of the industry is protected and the value of the passport is not diminished.
When conducting CIP due diligence assignments, an investigator may oversee the screening process on hundreds of engagements and for the most part, the applicants are acceptable. However, when an opportunity is being offered at a global level to HNW subjects, some nefarious characters will attempt to take advantage of the system. While the due diligence service provider is not normally asked to opine on the findings, the research, if completed thoroughly and reported in an effective manner, will support sound decision making critical to the CIP process.
Lessons Learned from Past Case Studies
The following case studies provide insight into the challenges encountered and expertise required to successfully conduct CIP IDD:
1. Lack of Public Information — This case study involved an applicant who was a Japanese national, living and residing in Tokyo. Japan is a challenging jurisdiction to conduct due diligence because of a lack of critical public information. In Japan, it is not possible to perform random searches in the criminal courts and third parties cannot access the national criminal record database. Finding information on the applicant was only possible by way of a proprietary database search to determine if the applicant had been previously convicted and incarcerated on a fraud offense which he had not disclosed. This case study underscores the importance of access to alternative information sources when conducting research while at the same time, ensuring local laws are not violated.
2. Inconsistent Information — The following case study involved a number of red flags, not from information that was located but rather from inconsistent and unverifiable information. Part of the due diligence process involves verifying certain information such as schools attended, addresses, employment and business history. While conducting the due diligence it became clear that the applicant had provided erroneous information in numerous categories. Also, it could not be determined where the applicant had acquired his wealth. It became clear this applicant was a “straw person” for someone behind the scenes who had acquired wealth through unlawful means and/or had a checkered past. This case demonstrates that when confronted with a pattern of inconsistent information it is imperative to use deductive methods to access available information which, in this case, led to an obvious decision.
3. Politically Exposed Persons — The third case study covers an area of focus by FATF for the past 10 years and affirmed in 2012, specifically, the identification and risk assessment of Politically Exposed Persons (PEP). In this instance, a PEP who did not want to be transparent for obvious reasons put forward a family member as the CIP applicant. The PEP’s family members are often a daughter/son or spouse but to avoid detection someone with a different surname is preferred. This way an immediate connection to the PEP is not made and allows for a better opportunity to get through the screening process. In this case, the use of in-country sources familiar with the local political scene proved instrumental in exposing the connection between the CIP applicant and the PEP. It is important to note that proprietary database searches will often not make this type of link.
4. Citizenship History — This case involved screening an applicant from the United Arab Emirates where there was a high probability that the applicant was not indigenous to the country as 85 percent of the population in the UAE originates from elsewhere. For this reason the applicant was compelled to disclose at least a 10 year history on where they have resided and left a footprint. It is critical for countries offering investment and residence opportunities to have set standards as to how far back the research will include. As itinerant criminals are always looking for a new place to park themselves and their illicit funds, the 10 year record of the applicant’s citizenship history allowed researchers to drill down far enough to detect an undesirable person who may have otherwise gotten through the CIP application process.
5. Sanctioned Country — The final case study involves an applicant who originated from a sanctioned country. As part of the application process he indicated degrees were obtained from a university located in Canada. While no record of the person attending this institution could be located, everything else about the applicant came back positive. However, this one deception from an applicant residing in a high risk, sanctioned country was a big red flag that could not be ignored.
CIP applicants from emerging economies represent numerous challenges that must be overcome when conducting background checks and investigative due diligence. Often there is little or no open source information available in emerging economies and therefore a local source is required to obtain any meaningful information. If a local source is used, it is imperative to engage someone who has the appropriate background, is licensed (if required) and can be discreet when necessary. To expose your client to any third party who is not competent, consistent, professional and trustworthy brings tremendous risks to all parties involved.
When conducting thorough due diligence on a subject residing in an emerging economy, the use of proprietary databases only is not feasible. It is estimated that in 20 percent of cases, critical information is missed when solely relying on this type of information. Local sources are essential to the process. Also, some jurisdictions are notoriously corrupt by allowing convictions to be expunged; political interference in criminal, civic and judicial matters; the dissemination of unreliable media reports; and a host of other equally challenging obstacles.
Over the past 10 years, the global economy has undergone several major changes which have resulted in more stringent regulation of AML and CTF, which have in turn contributed to increases in regulatory and due diligence requirements for CIP. Today, governments offering citizenships to HNW individuals understand that conducting due diligence in emerging, high risk and sanctioned countries involves a myriad of challenges which require advanced solutions carried out by senior investigators with proven expertise and methodologies. Governments offering CIPs must ensure citizenship status is awarded to worthy applicants so as to preserve their country’s standing in the international community, maintain the value of their passports and mitigate risks associated with opening their borders to HNW individuals. IDD conducted by experienced professionals with incountry expertise, multiple language research capabilities and access to a large network of international resources is one of the most critical components of any immigrant investor program.
Kim I. Marsh, CAMS, CFE,
As published in ACAMS Today
Kim Marsh Intervied by Payments Compliance | Originally Published May 18th, 2015
Canada must do more to tackle financial crime, experts claim, after another money services
business was fined for multiple violations of anti-money laundering legislation.
Foreign exchange business Québec Inc., based in Montreal, was fined C$20,780 by FINTRAC, Canada’s top anti-money laundering (AML) regulator last week.
The company was found to be in breach of seven anti-money laundering (AML) requirements, including the failure to report a cash transaction above the value of C$10,000.
More than half of the fines that FINTRAC has issued in the last seven years have been levelled at money service businesses (MSB).
Financial crime expert and former investigator Kim Marsh, now executive vice president at fraud intelligence firm IPSA International, said that although enforcement has improved in Canada, significant problems remain at the level of federal execution. He told PaymentsCompliance: “In some of the provinces, regulators appear to be more proactive in trying to deal with some of the financial crimes that are happening. “Historically, money service businesses were a high risk industry for illicit funds coming into the system. “FINTRAC have done a good job of cleaning up that industry.”
However, Marsh said that the funds, skill and time needed to investigate high-level money laundering are too often in short supply. He said: “The prosecutors seem to have a reluctance to pursue it, and I think they have a lack ofexpertise all the way up the line.
“It’s very onerous to get that type of case through the courts, and there are very few fiscal charges by law enforcement.
“I think the system’s broken at every level.”
Marsh’s comments echoed the findings of a recent U.S. Department of State report into global money laundering and financial crimes. That report states: “Canada has a rigorous detection and monitoring process in place to identify money laundering and terrorism financing activities, but should further enhance its enforcement and conviction capability.
“Obstacles to successful enforcement include privacy rules that prevent FINTRAC from freely sharing information with law enforcement; complex investigations that can take understaffed police agencies years to finish; and overworked Crown Prosecutors.”
Compliance and financial crime expert Bonny Murray, an associate at the Toronto practice of Blakes law firm, said that the issue is complicated in Canada because not all businesses involved in payments are necessarily subject to AML legislation. She said: “It’s a federal regime, and it applies first based on the type of entity you are, and then the type of activity you carry out.
“That’s different to other jurisdictions, where the first trigger would be the type of activity carried out. “So if you’re in Canada and you’re not a type of regulated entity that’s covered by the AML legislation, you’re just not covered, even if you’re doing an activity for which a different type of entity would be covered by the AML regime.” Murray added that businesses that are subject to the regime are required to put in place a compliance regime, which involves risk assessment of all products as well as identification, record keeping and reporting requirements.
The Financial Action Task Force (FATF) acknowledged last year that Canada has made “significant progress” in addressing AML deficiencies since 2008.
However, FATF expressed some concern that Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) is not entirely keeping its recommended controls. It stated: “Only those activities for which there is a proven ML/TF risk are covered by the PCMLTFA, whereas under the FATF Methodology a list of financial activities and operations must be covered by the AML/CFT regime unless there is a proven low risk of ML of TF.”
Canada was, however, removed from FATF’s follow-up process for non-compliant jurisdictions.
Kim Marsh interviewed by the Vancouver Province Newspaper | Originally Published August 25, 2015
LEGAL EXEMPTION: Loophole involving lawyers and trust funds increases laundering risk, experts say
Money-laundering experts say there is no way for Canadians to know how much dirty money is being laundered in Vancouver real estate through Canadian lawyers.
As a Province investigation revealed Monday, Canada’s financial intelligence unit, Fintrac, has ramped up an audit of Vancouver’s booming property market because of concerns realtors may be turning a blind eye to money laundering.
Realtors face jail time and fines up to $500,000 per offence if Fintrac finds they have failed in their legal obligations to report suspicious deals.
But apart from Fintrac’s probe of realtor reporting, some experts say an even bigger money-laundering risk in B.C. real estate is a loophole involving lawyers and trust funds.
After fighting for years in the courts for an exemption from Fintrac’s reporting requirements, Canadian lawyers claimed a decisive victory in February when the Supreme Court of Canada ruled the federal government could not hold lawyers to the same standards as other Fintrac-regulated sectors because that would violate solicitor-client privilege.
The result is that lawyers do not have to report suspicious transactions to Fintrac and do not face the same federal scrutiny as that of realtors, all amid concerns of vast flows of illicit offshore wealth into Canadian property.
“Now that the Supreme Court has ruled that lawyers are exempt from money-laundering laws, I feel they have opened a huge hole for illicit funds to flow into Canada,” the owner of a Vancouver real estate company told The Province.
“I suggest to you there would be a high percentage of lawyers who would not care where money came from.”
Fintrac documents and a 2015 Canadian department of finance report say both the real estate and legal sectors are at risk for money laundering, specifically because “real estate transactions usually involve lawyers and their trust accounts,” and these legal trusts “can knowingly or unknowingly provide legitimacy and/or obscure the source of illegally-sourced funds.”
Also, documents show the real estate and legal sectors are vulnerable to illicit foreign investment and “politically exposed persons” — which means rich foreigners with government connections.
Christine Duhaime, a Vancouver anti-money laundering lawyer, said Canada appears to be the only developed nation that gives lawyers a pass on federal money-laundering reporting. Canadian lawyers can be wired any amount of offshore funds that can be placed in trust and used to buy Canadian assets without informing Fintrac, and with no questions asked by banks, Duhaime said.
“When it comes to realtors and lawyers, we are very loose about antimoney-laundering law,” she said. “The problem is, not all lawyers are self-policing on financial issues.
“And the realtors I talk to in Vancouver don’t a have a clue what a suspicious transaction is or when to file one.”
The B.C. Law Society was asked if it could respond to criticism against the Fintrac reporting exemption, and provide data on B.C. real estate transactions and money spent on real estate from legal trusts. In a written response, without providing figures, spokesman David Jordan said the society requires lawyers to keep accurate records of all monetary trust transactions, which are subject to review by the Law Society.
Jordan said lawyers are prohibited by the Law Society from handling more than $7,500 in cash in any transaction, “except in limited circumstances” and he reiterated the Supreme Court’s ruling that exempts lawyers from reporting to Fintrac.
“A lawyer must not engage in any activity that the lawyer knows or ought to know assists in or encourages any dishonesty, crime or fraud,” Jordan wrote.
“The law societies are above the law,” said Kim Marsh, a private money-laundering investigator and former RCMP international crime unit head.
“Now, the (money-laundering detection) system is broken all the way through. I don’t think anyone predicted this, but the effects are showing up in Vancouver’s realestate market.”
Duhaime said she can understand if real estate brokerages hesitate to engage with Fintrac rules because installing a robust reporting system would cost the average firm about $1.5 million.
It was only after international banks faced billions in fines that financial institutions spent the money to set up and staff effective anti-money-laundering regimes, Duhaime said.
“I think we look terrible in Vancouver because we have turned a blind eye to what looks like a lot of illicit money coming in from Asia,” she said.
“I think a lot of realtors will have to be fined by Fintrac in order to change things.”
A Fintrac official said the current real estate examinations in Vancouver should be complete within six months, then it will be clear if any realtors are to be fined or charged.
- The Province
- 25 Aug 2015
- SAM COOPER firstname.lastname@example.org
Kim Marsh is interviewed by ACAMS MoneyLaundering.com | Originally Published August 31, 2015
Lax enforcement of Canada’s anti-money laundering laws and regulations have helped make British Columbian property an attractive investment for criminals, according to Kenneth Marsh, a former investigator of organized crime for the Royal Canadian Mounted Police.
Because prosecution rates remain low and the real estate sector as a whole has reported few suspicious deals to the Financial Transactions and Reports Analysis Centre (Fintrac), the province has become a “pretty risk-free place” for money launderers, said Marsh, now an executive vice president with IPSA International in Vancouver.
In a recent interview with ACAMS moneylaundering.com reporter Larissa Bernardes, Marsh advocated for tougher money-laundering measures and discussed Canada’s upcoming evaluation by the Financial Action Task Force (FATF). What follows is an edited transcript of their conversation.
A recent report drafted by Grant Thornton for Fintrac concluded that real estate in British Columbia is particularly vulnerable to money laundering. What makes the province an attractive destination for dirty money?
It’s become attractive to people from outside of the country as a good place to live in, over probably the last 20 years. The laws are pretty lenient when it comes to money laundering. There have been very few prosecutions that have happened since 2007, when the new legislation came into place. The penalties are also very low compared to the U.S., where there are hefty fines. So I think overall it’s a pretty risk-free place for people wanting to put money into the market.
There are a lot of residential building going on—condos similar to Miami—and that’s attractive to people wanting to get money into the market and not necessarily live there. A lot of the money is coming from offshore and there’s no understanding of where the money may have come from. So that’s a big part of the issue with prosecutions.
What should be done to curb illicit activity?
The fines have to be increased and the legislation has to be strengthened so that [an individual] loses money if [he or she] can’t give a legitimate reason for bringing in cash. But there’s a reluctance to do that in Canada and our courts and Supreme Court seem to be reluctant to allow tougher penalties and legislation.
The Supreme Court of Canada has given the legal industry an exemption from [anti-money laundering regulations] so the law doesn’t pertain to their profession. The legal societies have said they will be handling and administering money-laundering compliance, but there is no transparency. There is no accountability for them outside of their own professional associations.
What do you attribute the reluctance to?
It’s part of our culture. We used to have a minimum sentence for certain crimes, but when our constitution came into place in 1982, that type of penalty was found to be unconstitutional. Our courts do not like legislators to give them sentencing guidelines. They won’t accept it.
Generally, Canadians as a society are forgiving. That’s until you get a situation like Vancouver, where the real estate market is out of control and where prices are being compared to the likes of New York and London. Canadians are now asking themselves, how did that happen?
Also, it’s pretty well known that if you have the right amount of money and legal assistance, things like extradition can be delayed for years. It’s taken 10 or12 years to extradite people.
There are reports that Chinese nationals are buying real estate with illicit proceeds. What types of property are we talking about and how are the purchases typically made?
From what I’ve seen from my own cases, they are residential, high-end residential properties, with some commercial buildings as well. They will set-up offshore entities and, historically with the Chinese, the British Virgins Islands have been popular [as well as the use of] international business corporations. I’ve been told [there’s a new trend to use the] Cook Islands out in the Pacific. Often, they will list family members as the registered owner of the property.
What should banks look for?What should banks look for?
In my own experience, trust accounts don’t get a lot of attention by the banks. So I would be focusing on the money coming into trust accounts that have been set up by lawyers and law firms. I don’t think people are coming in with a bag of cash to buy a house. [That money will probably] be arriving through wire transfers.
The Grant Thornton report claims the real estate sector as a whole is not meeting its AML obligations. What evidence is there of that?
According to Fintrac, there have been seven disclosures [by firms] since 2007
Do you believe the government will levy sizeable fines against noncompliant firms?
I hope so. I’m not optimistic. We have an election at the end of the year. If the conservatives win, they would be more likely to put in tougher legislation, but they will have a tough time making it stick. The Supreme Court has previously struck down nine portions of [financial crime laws, citing constitutional issues].
How do you think Canada will fare in its next FATF evaluation?
I can’t see [Canada] faring very well. It will probably get a bad score on many levels and I hope that will change things. But the changes can’t be as cosmetic as they have been in the past. That was what happened in 2007 and since then there’s been almost zero prosecutions.
What do you believe FATF would cite?
I think there has to be a more effective regulator. Why has the real estate industry only made seven disclosures so far? Industries need to be compelled to be compliant. [Regulators] need to loosen up on what information can be disclosed. Law enforcement needs this information, so how the information is shared should be looked at.
Then pressure also has to be put on law enforcement. I think they have lost a lot of their expertise on financial crimes. There has been a shift from investigating organized crime and financial crime to public safety issues because of gang activity. These gangland shootings are happening regularly in Vancouver, so [law enforcement] has been focusing on that. I would put the prosecutors in the same categoryThen pressure also has to be put on law enforcement. I think they have lost a lot of their expertise on financial crimes. There has been a shift from investigating organized crime and financial crime to public safety issues because of gang activity. These gangland shootings are happening regularly in Vancouver, so [law enforcement] has been focusing on that. I would put the prosecutors in the same category.
You served for 25 years in the Royal Canadian Mounted Police. How have Canada’s vulnerabilities to financial crime changed over that time?
The police are not focusing on financial crime and they have lost a lot of their expertise. That’s gone to the private sector. [Financial crime] cases [are often] international and require a lot of travel and resources to pull it all together. It’s become not really feasible to prosecute and use the court system. As a result—and you won’t get people to say it openly but you have to look at the facts—there are very, very few prosecutions.