What is money laundering?
Money laundering is the process used to disguise the source of money or assets made from criminal activity such as drug trafficking, smuggling, extortion, and corruption. Due to the illegal nature of these transactions, it's difficult to measure the global impact, but the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) estimates that some $590 billion to $1.5 trillion USD is laundered worldwide each year.
Why is Canada a haven for money launderers?
Canada–and more specifically financial centres such as Toronto, Montreal, and Vancouver–is known to be a haven for illicit financial activity. We even have our own names for laundering money, “snow washing” and the “Vancouver Model”. A network of professional criminals exploits Canada's weaknesses, using mainly real estate and casinos to clean money. In fact, it's estimated that money laundering accounted for $5.3 billion in real estate transactions in B.C. in 2018.
Below are some areas where Canada falls short in its fight against money laundering, causing criminals to take advantage:
Firstly, Canada lacks requirements to disclose the beneficial owners of a corporation or a trust, enabling individuals to conceal who truly owns it. Secondly, there is a lack of public access to information about who the shareholders or beneficiaries of a corporation are, providing an extra layer of safety for launderers.
Canada's anti-money laundering (AML) controls have significant loopholes when it comes to certain non-financial businesses and professions, such as real estate agents and lawyers. For example, lawyers and law firms handle client funds and are at risk for money laundering. Large sums of money held in trust accounts make them susceptible. However, lawyers are largely exempt from FINTRAC reporting requirements due to the nature of the profession (i.e., solicitor-client privilege). Read more about how law firms can detect and prevent money laundering in:
Canada's justice system tends to be comparatively lenient on white collar crime. There is typically tougher sentencing for violent crimes than white collar crime. If an individual is caught in a financial crime, the consequences are not as severe as in other jurisdictions, such as in the U.S. or U.K.
Canadian businesses need to be vigilant and armed with AML solutions. Even if your organization is an unknowing participant to such schemes, you could be exposed to punitive enforcement actions, substantial fines, and reputational damages.
Canada's updated PCMLTFA regulations and what you need to know
Canada has been working on strengthening its enforcement regime. The international Financial Action Task Force's (FATF) 2016 Mutual Evaluation Report found that Canada lagged significantly in its commitment to compliance. The report recommended enhancing its AML regulations, including bolstering its law enforcement effectiveness and oversight of non-financial businesses and professions.
In 2019, Canada announced amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) that came into effect in June 2021. These new regulations aim to address many of the deficiencies identified by FATF and encourage Canada's regulators and businesses to keep pace in an ever-changing global environment.
The new regulations expand reporting requirements for current reporting entities as well as extend those requirements to several industries and businesses that did not previously fall under the PCMLTFA. Current reporting entities, including insurance companies, credit unions, casinos, real estate agents, and accountants, now have the same regulatory reporting obligations as financial institutions. The industries and businesses that now fall under the PCMLTFA regulations and are now subject to reporting requirements include: foreign money service business, life insurance companies offering credit facilities, as well as businesses dealing in virtual currencies and prepaid access products.
What you need to do
1. Conduct a review of your business and confirm if any activities or products fall within the expanded reporting framework. Even businesses with existing AML controls should carefully review the amendments to identify gaps and ensure compliance with the updates.
2. If your business activities do fall under the scope of the new regulations, you need to implement or update your procedures to ensure compliance with reporting requirements, including:
- Expanded “know your client” (KYC) measures - Require businesses to gather detailed information to verify the identity of their clients, extending to corporations and trusts and the ultimate beneficial owners of those entities.
- Updated transaction reporting rules - Require businesses to report more information in the current Electronic Funds Transfer Report (EFTR), Large Cash Transaction Report (LCTR), and Suspicious Transaction Report (STR) within a shorter time frame such as, beneficiaries for outgoing electronic fund transfers, email addresses, and online identifiers (e.g., IP addresses).
- Additional products and transactions that require reporting - For example, virtual currency transactions, prepaid access products and accounts, and insurance company loans and mortgage products must now be reported.
For more information about the new PCMLTFA regulations and how to remain compliant:
Download our guide hereOngoing AML challenges
Despite Canada's efforts to regulate, and business' efforts to comply, combatting money laundering remains a challenge. Canadians tend to be very trusting and often give the benefit of the doubt to business partners. We are making strides in this area but do need to do more to make a sizeable impact. It's important to ask the difficult questions when appropriate and develop a sense of objective scepticism in order to fight economic crimes.
Additionally, the average business has limited resources to create and execute the complex compliance requirements. Leveraging experienced experts who provide best practices and tools can make enforcement and compliance more effective and economical.
How BDO can help
BDO has the resources to help organizations design and implement proactive AML solutions. We can help navigate the complex regulatory landscape both domestically and internationally. We will work with you to understand what regulations your business is subjected to and ensure AML compliance. We also provide a third party, independent review of your AML compliance program.
If an issue does arise, and you are an unwitting participant to financial crimes, our team can help with investigations as well as litigation support.
Contact a BDO expert today to learn more about creating tailored AML solutions that suit your needs and unique requirements.
Alan Mak, Partner and National Leader, Forensic Disputes & Investigations
Chetan Sehgal, Partner, Forensic Disputes & Investigations
Daniel R. Ma, Senior Manager, Forensic Disputes & Investigations