Money Laundering in Canada:
Initially, gangsters from groups such as the Mafia earned huge sums of money from criminal activities such as extortion, prostitution, gambling and bootleg liquor. They needed to show a legitimate source for these monies. They achieved this by mixing the illegitimate money with legal earnings obtained from businesses. This process is known as money laundering. Thus, money Laundering refers to the conversion or “Laundering” of money which is illegally obtained, so as to make it appear to originate from a legitimate source. Money Laundering is commonly used globally by organizations related with crimes such as drug / arms trafficking, terrorism and extortion (Ganesh, 2006). It is estimated by the IMF that the total size of money laundering in the world could be somewhere between two and five percent of the worlds gross domestic product (Ganesh, 2006). Banks are often vulnerable targets of Money Laundering operations and financial crime because they are the source of many kinds of services and instruments that can be used to conceal the source of money. After the events of September 11, there is a global effort towards controlling the spread of terrorism. Accordingly, the government of Canada has also called for a rapid and coordinated effort to detect and prevent money laundering that leads to the misuse of the world financial system by terrorists.
A comprehensive money laundering operation is one that can satisfy three criteria: it should be able to convert the cash proceeds of the illegal activity to a less suspicious form; it must be able to hide the source of money and details of ownership and finally it must create a legitimate source of funds (CICA, 2004). Thus the money laundering process generally entails four stages: placement, layering, integration, and repatriation. The initial placement stage is when the cash enters the legitimate economy. During the layering stage funds are circulated through various economic sectors, companies, and commercial or financial transactions in order to conceal the criminal source and ownership of the funds and obscure any audit trail. Now the money is also totally integrated into the financial system and can be used for any purpose. The final stage of the process involves bringing back the laundered money into the criminal entrepreneur with a legitimate explanation regarding their source. The placement stage is the most dangerous for the launderer as it is at this stage that involves bulk handling of cash, that the offender can be suspected or detected (CICA, 2004).
Dirty money is often generated by crimes such as drug trafficking, murder, robbery, bribery, fraudulent manipulation of stock exchange transactions, possessing, issuing or circulating counterfeit money, theft, extortion, forgery and fraud. As more and more dirty money is introduced into the financial system, the money laundering process becomes almost continuous.
The effects of money laundering on the economy of a nation are as follows: causes damages to the financial-sector institutions that are critical to economic growth, reduces productivity in the economy’s real sector by diverting resources, encourages crime and corruption, which slow economic growth, distorts the economy’s external sector such as international trade and capital flows and causes damage to long-term economic development; and damages the chances a country has of establishing offshore financial centers (Bartlett, 2002). The economic growth of a nation is often reflected in banks and non-banking financial institutions and equity markets. These are the centers that facilitate the storage and flow of capital resources. Money laundering affects theses institutions in two ways: it corrodes the financial institutions by allowing employees to indulge in fraudulent activities and it destroys customer trust by increasing perceived risk to depositors and investors from institutional fraud and corruption (Bartlett, 2002). Money laundering has a more direct impact on the real sector as it diverts essential funds to non-productive businesses used by criminals. This happens because illegal money is usually used in sterile investments such as real estate, art, antiques, jewellery and luxury cars (Bartlett, 2002). Moreover, all legitimate industries are operated just for purposes of laundering dirty money. This blocks economic growth. Money laundering also increases the crime rate and corruption which in turn negate economic growth. Money laundering can also be associated with the international businesses a country has. Imports and exports arising due to money laundering are often non-profitable and can cause economic decline. Money laundering ignores the costly value added services of functional offshore financial centers. It rather tends to use notional OFCs which contribute the least to the country’s real economy (Bartlett, 2002).
To combat money laundering, the Canadian federal government enacted the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). The Act creates a mandatory reporting system and establishes an independent anti-money laundering agency called the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). FINTRAC’s mandate is to collect, analyze, assess and, where appropriate, disclose information relevant to the investigation and prosecution of money laundering and terrorist financing offences.
Chinese gangs from China, Hong Kong, Taiwan and Macau increasingly are using Canada as a base for operations in the United States and now constitute “a growing threat” to this nation, according to the International Crime Threat Assessment, produced by the CIA, the National Security Council, the FBI and specialists from 10 other federal agencies (Gribbin, 2000). Chinese gangsters enter Ottawa because of its loose immigration policies and then after becoming legal residents, they run major criminal enterprises in the United States. The Chinese gangs principally engage in heroin trafficking, credit-card fraud, software piracy and assorted high-tech crimes along with alien-smuggling, vehicle-theft, money-laundering and gun-running rings. There are two Chinese gangs from Hong Kong – 14K; the Sun Yee On triad (Gribbin, 2001). Both have branches in Canada and operate in the US. But China’s biggest, most expansive and successful triad is the Big Circle Gang, which has cells around the world, including Canada. “The Big Circle Gang is responsible for importing much of the Southeast Asian heroin entering Canada much of which is then smuggled into the United States and is the source for many of the counterfeit credit cards used in North America” according to this report (Gribbin, 2001). Money-laundering is a favorite activity of Japanese outlaws, too. They invest heavily in Canadian and U.S. real estate and are known to own golf courses and hotels, among other holdings (Gribbin, 2001).
According to a study “Money Laundering in Canada: An Analysis of RMCP cases” by Stephen Schneider, conducted in 2004, it has been found that drug trafficking represents the single largest source of criminal proceeds investigated by the RCMP in Canada. The study was based on the Royal Canadian Mounted Police proceeds of crime (POC) case files and included 149 cases. Of the 149 cases included in the sample, 111 (72.4%) involved some form of drug trafficking. Some of the major findings of this study are as follows (Schneider, 2004):
· Deposit institutions and real estate are the most frequently used sectors for laundering purposes. In fact, deposit institutions were used in 114 cases (76.5%) while real estate transactions were conducted in 83 cases (55.7%). The insurance sector was implicated in 96 cases (64%) mostly by purchasing insurance for big ticket assets bought will the proceeds of the crime such as motor vehicles, companies etc. In 26 cases (17.4%), currency exchange or cheque cashing companies were used (Schneider, 2004).
· The research showed that in the course of a single money laundering operation, a number of different interconnected sectors will be often used. For example deposit institutions have access to real estate and other countries (Schneider, 2004).
· Domestically-incorporated banks were used to launder cash in more cases than all other types of deposit institutions combined. Of the 114 cases that involved a deposit institution, 100 (87.7%) included at least one transaction conducted at a domestically-chartered bank. Credit unions, caisse populaires, trust companies and foreign incorporated banks were other points of entry for criminal money (Schneider, 2004).
· Deposit institutions also constitute the most significant point of entry for criminal revenue into the legitimate economy: in 94 of the cases involving deposit institutions, the proceeds of crime entered as cash (Schneider, 2004).
· The service used most frequently at a deposit institution for money laundering purposes was a savings or chequing account. Other commonly used products and services were bank drafts, mortgages, safety deposit boxes, and wire transfers.
· The proceeds of crime found their way into the real estate sector in the form of mortgages, cash, and monetary instruments. A mortgage was used in 65 of the 83 cases (73.5%) involving real estate. Cash was generally used for the deposit, down payment, or mortgage payments, although in some cases real property was wholly purchased with cash (Schneider, 2004).
· Police cases reveal that both operating and shell companies are established to facilitate the laundering process. There were many kinds of criminally-controlled companies such as currency exchange, retail fish sales, masonry, paving, painting, auto wholesaling, auto leasing, lumber supplies, fitness clubs, courier services, gas stations, hotels, restaurants, and bars, etc. (Schneider, 2004)
· Many techniques are used to hide the true ownership and source of criminal proceeds and they include use of nominees, use of smurfs, structuring of transactions, establishing companies, etc. (Schneider, 2004)
· The professionals that most frequently came into contact with the proceeds of crime were deposit institution staff, lawyers, insurance agents or brokers, and real estate professionals. Lawyers were implicated in almost half of the proceeds of crime cases.
Between 1978 and 1984, police estimated that members of a Canadian-based international drug trafficking group laundered more than (US) $30 million through personal and commercial bank accounts, mostly in Quebec and Ontario. During these years it was noticed that the deposited cash was quickly withdrawn in the form of bank drafts, wire transfers, or account transfers. Sometimes, the accused opened accounts in the name of relatives in order to conceal their identities. Smurfs is another money laundering technique where cash deposits are spread across different accounts (Schneider, 2004). In one of the RMCP cases used in the above study, a multi-kilo cocaine importer named Alex Burgess used the services of a health food restaurant, called the Korova Milk Bar, to launder his illegal revenue. With the help of the restaurant manager, cash generated from drug sales was co-mingled with the revenue from the restaurant and deposited into a bank account. These funds were applied to the purchase of a home registered in the name of the manager of the franchise, but which in fact was beneficially owned by Burgess (Schneider, 2004). This is a simple case of money laundering.
Another interesting method of money laundering involves purchase of winning lottery tickets from real winner at a price greater than the winning amount. During the course of an investigation into a Calgary-based lawyer who was alleged to have been involved in the money laundering conspiracy, police discovered that when in Toronto to attend a wedding, the lawyer cashed $215,000 worth of winning lottery tickets. In total, there were over 70 winning lottery tickets cashed by the lawyer, the average prize valued at below $5,000. The cheques issued by the lottery corporation were recovered during a police search of the lawyer’s Calgary home (Schneider, 2004).
Money laundering in Canada has introduced criminal elements in its society who create a serious negative impact through their illegal activities on the Canadian economy. Organized crimes have ensured that there is a flourishing illicit drug trade in Canada. The illicit drug trade has the greatest impact on Canada of all crime related activities. It is estimated that the economic cost of illicit drugs on Canada range from ‘conservative’ estimates of $1.4 billion per year to cost estimates of close to $4 billion per year for the three most populous provinces, Quebec, Ontario and British Columbia. These estimates are based on cost factors such as health care, reduced labor productivity and direct enforcement costs. The federal and provincial governments lose billions due to smuggling and distribution cost. Tobacco, alcohol and jewelry smuggling also cost the government a lot of money. Money laundering is related to organized crime and this is in turn related to economic crime. There are frauds in securities and telemarketing to the tune of five billion dollars every year. An estimated 8,000 to 16,000 people are trafficked into Canada with the assistance of people smugglers. The economic and commercial impact of migrant trafficking on Canada is between $120 million to $400 million per year. These money launderers also indulge in counter feit products such as counterfeit clothing, software, and even pharmaceuticals. This can cost the Canadian economy over $1 billion per year. The money launderers are also involved in motor vehicle theft in Canada. Vehicles stolen in Canada are now routinely shipped in large numbers to destinations in Africa, Asia, Eastern Europe and the Middle East. According to the Financial Action Task Force (FATF), estimates of the amount of money laundered annually worldwide from the illicit drug trade alone range between $US 300 billion and $US 500 billion. Between $5 billion and $17 billion are estimated to be laundered in Canada each year. In Canada, though this does not create much macroeconomic distortion there are damages to the nation’s basic values. It becomes morally unacceptable when individuals profit from criminal activities.
The money for laundering seems to come primarily from illicit drug trafficking. The size of the illicit drug market in Canada has been estimated to be between $7 billion to $10 billion. Expert opinion holds that between 50-70% of drug sales revenues are available for laundering and subsequent investment. Assuming in addition, as has been argued, that 50-70% of the funds laundered in Canada are derived from illicit drugs, then the amount of illicit funds laundered in Canada per year is between $5 billion and $14 billion. Generally speaking, the amount laundered in a country is on average equal to approximately 2% of that country’s GDP. This calculation is drawn from International Monetary Fund estimates that global ML is equal to approximately 2% of global GDP. Using this rule of thumb, the estimate of the amount of money laundered in Canada annually would be approximately $17 billion. Combining the two approaches results in a rough estimate of the amount of illicit funds laundered in Canada per year of between $5 billion and $17 billion. It is important to understand that this $5 billion to $17 billion range does not completely account for the economic costs involved in money laundering in Canada (Porteous, 1998). Laundered funds are integrated and flow along with Canada’s financial system mixed in with hundreds of billions of legitimate funds en route to another country and another economy will have less economic impact on Canada than those funds that remain within the domestic system (Porteous, 1998). Where does the laundered money actually go? The economic and commercial impact of money laundering raises questions as to whether the laundered money goes to few hands or is distributed among a wider network. Some argue that there are large stocks of illicit funds that are closely held by organizations like Mexico’s and Colombia’s drug ‘cartels’. Others point to Organized Crime kingpins with relatively little net worth (Porteous, 1998).
Money launderers often opt for the easiest way to recycle money rather than waiting the best rate of return. Hence, the proceeds of crime are often laundered through small and medium sized businesses (Porteous, 1998). This has an impact at the local level as it offers a competitive advantage to such businesses. By undermining the Canadian economy, money laundering weakens competition. Criminals are willing to lower profit margins in order to facilitate laundering (RCMP, 2007). Moreover, money laundering also undermines confidence of domestic and foreign investors resulting in a loss of tax revenue for governments and unfair tax distribution (RCMP, 2007). With regard to the Canadian economy, one of the significant impacts of money laundering happens in the realm of tax collection. This is because income obtained through organized crime is often misreported or underreported. However, on the positive side, when money is laundered, it becomes taxable and hence provides revenue to the government. Due to the uncertain nature of illicit funds in Canada, there can be no true assessment of the economic impact of money laundering. However, what is undeniable is that money laundering sends out a wrong signal to society – that crime does indeed pay. This emphasizes the point that money laundering should be controlled mainly because it is morally unacceptable. If the indirect impacts of money laundering are considered that includes all impacts of organized crime in Canada, then, money laundering would stand out as a socio economic evil that needs to be fought against.
Canada has long been a chosen destination for money launderers due to its proximity to US and due to its strong economy. Today, many new regulations have been passed to check the threat of money laundering.
· According to a new Bill, C-22, financial institutions, and other intermediaries that will be required to report suspicious transactions and this applies especially to regulated financial institutions, casinos, currency exchange businesses, as well as other entities and individuals acting as financial intermediaries such as lawyers and accountants. The maximum penalties for failing to report suspicious financial transactions under the Bill include fines of up to $2 million and imprisonment for up to five years. Under the Bill, individuals and entities that import, export or transport large amounts of currency or monetary instruments across the Canadian border will be required to report such activities to a Canada Customs officer and finally, there will be an independent government body to receive and analyze reported information about the suspicious transactions and cross-border currency movements described above. This new body, to be known as the Financial Transactions and Reports Analysis Centre of Canada, will be a central repository for information about money laundering activities across Canada (Craig-Bourdin, 2006). The Centre will analyze and assess the reports, together with other information available to it, and provide leads to law enforcement agencies.
· The Financial Action Task Force (FATF) is an international body established in 1989, that developed and promoted policies to combat money laundering and terrorist financing. The FATF published a series of Forty Recommendations in 1990, to prevent money laundering and these were revised in 2003. In 2001, the FATF added terrorist financing to its mandate and subsequently issued Nine Special Recommendations to combat terrorist financing activities. These combined FATF Recommendations have become the global standard against which national anti-money laundering and anti-terrorist financing regimes are now judged. Canada is a founding member of the FATF and has played an active role in the organization. Canada was last assessed by the FATF in 1997 and will be reassessed in early 2007 (DFC, 2006).
· The Asia/Pacific Group on Money Laundering is one of eight independent regional bodies that are modelled on the principles of the Financial Action Task Force. Canada has been an observer in the Asia/Pacific Group on Money Laundering since 2000 and as such, has participated in the annual plenary meetings as well as typology workshops. Canada has recently been accepted as a full member of this body (DFC, 2006).
· The Proceeds of Crime (Money Laundering) Act received Royal Assent in June 2000, and some of the related regulations are now in effect. The September 11 attacks also prompted to pass Bill C-36, the so-called antiterror bill, on October 15 (PR, 2006).
· ‘The Financial Transactions and Reports Analysis Centre of Canada’ (FINTRAC) requires that financial institutions and intermediaries must report financial transactions if there are reasonable grounds to suspect that that the transaction is related to money laundering. Horst Intscher, director of FINTRAC, said during the IMLC conference that he expects the agency to receive about 25,000 suspicious report transactions in its first year.
· The Integrated Proceeds of Crime Units deal with the seizure and forfeiture of the proceeds of crime. In this endeavor, a wide range of experts and partners work together and this includes investigators from the RCMP, the Canada Customs and Revenue Agency and provincial and municipal police officers, as well as Department of Justice lawyers and forensic accountants. There are currently 20 IPOC/POC sections operating in Canada (Craig-Bourdin, 2006).
· The RCMP’s Financial Intelligence Task Force was developed in response to the September 11 attacks, and is staffed by RCMP financial crime experts, along with representatives from other government agencies. Its aim, according to RCMP Commissioner Giuliano Zaccardelli, is to “develop a financial picture of the organizations involved in terrorism.” This intelligence will be sent on to the field, where police can act on the legislation (Craig-Bourdin, 2006).
· The Charities Registration Act will prevent organizations from masquerading as charities (Craig-Bourdin, 2006).
Thus the present laws ensure that the police are kept informed about all kinds of money laundering activities taking place in Canada. Successful prosecutions that benefit from the reported information can lead ultimately to court-ordered forfeiture of the proceeds of criminal activities. The report entrusts the task of detecting money laundering to individuals who are most capable and in the best position to detect it as it is occurring (DFC, 1999); Moreover, the report will be reliable, timely and consistent.
DFC (Department of Finance Canada) (2006). Canada takes lead international role in combating terrorist financing and money laundering. July 7, 2006. http://www.fin.gc.ca/news06/06-033e.html
DFC (1999). Backgrounder: The New Proceeds of Crime (Money Laundering) Act. http://www.fin.gc.ca/news99/data/99-046_1e.html
RCMP (2007). RCMP Feature Focus: 2005 Economic Crime (Canada). http://www.rcmp-grc.gc.ca/economic_crime/moneycan_e.htm
Porteous, D. Samuel (1998). Organized Crime Impact Study. http://ww2.ps-sp.gc.ca/Publications/Policing/1998orgcrim_e.asp
CICA (2004). Canada’s Anti-Money Laundering & Anti-Terrorist Financing Requirements: A guide for chartered accountants. February 2004. http://www.cica.ca/multimedia/Download_Library/Research_Guidance/Money_Laundering/English/eMLGuide0204.pdf
Ganesh. S. (2006). Money Laundering. http://www.rbi.org.in/scripts/BTCDisplay.aspx?pg=BTCMoneyLaunder.htm
Craig-Bourdin (2006). Special report on the International Money Laundering Conference. http://www.camagazine.com/7/3/5/8/index1.shtml
Bartlett L. Brent (2002). The negative effects of money laundering on economic development. May 2002. http://www.adb.org/Documents/Others/OGC-Toolkits/Anti-Money-Laundering/documents/money_laundering_neg_effects.pdf
Schneider, Stephen (2004). Money Laundering in Canada: An Analysis of RCMP Cases. March 2004. http://www.yorku.ca/nathanson/Publications/ML_study_v10.pdf
PR (Parliamentary Review) (2006). Stemming the Flow of Illicit Money: A Priority for Canada. October, 2006. http://www.parl.gc.ca/39/1/parlbus/commbus/senate/com-e/bank-e/rep-e/rep09oct06-e.pdf
Gribbin, August (2000). Chinese gangs target U.S. from Canada. The Washington Times. December 28, 2000.
Gribbin, August (2001). Global Crime Syndicates Target U.S. from Canada. Insight on the News, Vol. 17, February 19, 2001