Archived - Year Five Evaluation of the National Initiatives to Combat Money Laundering and Interim Evaluation of Measures to Combat Terrorist Financing: 2

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2.3 Success

This section is concerned with the extent to which the Initiative has achieved what it set out to do. In particular, the evaluation study assessed the progress made towards achieving the Initiative's formal objectives of implementing anti-money laundering and anti-terrorist financing measures, balancing these with privacy and Charter concerns, and meeting international commitments. Also considered are: the extent to which the Initiative and its measures have contributed to an improved ability to identify targets and provide support for investigations; creation of a more hostile environment for money laundering and terrorist financing in Canada; and long-term outcomes of reduced profitability and incidence of money laundering and terrorist financing.

Before presenting findings and conclusions on the success of the Initiative, it must be re-iterated that measuring the difference the Initiative is making in detecting and deterring crime is an extremely difficult task. First, as noted in the 2003 Auditor General report,^[33] there are no reliable measures of the amount of money laundering that occurs, nor is there an agreed upon methodology, in Canada or internationally, for determining that amount. Second, law enforcement and other agencies use a variety of investigative techniques and intelligence sources to gather evidence against money launderers and terrorist financiers. Because the information to prosecute and convict criminals comes from different sources, it may be difficult to determine the effect of the specific information provided under the Initiative on the results of investigations. Third, investigations into proceeds of crime are usually quite complicated and involve long complex chains of evidence. Moreover, it is not unusual for several years to pass between the start of an investigation and a decision on the case. Thus, at this point, it will be difficult to measure the contribution the Initiative is making, particularly since it has been fully operational for less than two years. These points are important to bear in mind when assessing the results presented in this section.

These qualifications aside, there have been some early indicators of success, as will be elaborated upon below. Required and voluntary reports to FINTRAC have contributed to disclosures which, in turn, have contributed to a large number of investigations by recipient organizations, including the RCMP, CSIS and CRA, which will likely, down the road, lead to prosecutions. As well, the CBSA Cross-Border Currency Reporting Program has already reaped benefits in terms of a large number of currency seizures and forfeitures (detailed below), in addition to the considerable voluntary disclosures that travelers have made which will provide information for FINTRAC's database and potentially aid in future investigations. Indeed, it must be stated that, while investigations, seizures and prosecutions are tangible signs of success, the very collection of intelligence under the Act is crucial to the development of effective tools such as trends analysis and profiles, typologies and indicators, which serve to combat ML/TF.

a) Achievement of Objectives

i) Implementation of Measures to Detect/Deter Money Laundering and Terrorist Financing Activities

As already discussed, measures have been successfully implemented to detect and deter money laundering and the financing of terrorist activities and to facilitate the investigation and prosecution of money laundering and terrorist financing offences. The implementation of the Act and associated anti-money laundering and anti-terrorist financing measures has taken place as prescribed in the Act. Specifically, record keeping and client identification requirements have been established for financial services providers and other reporting entities; procedures are in place for the reporting of suspicious financial transactions, international electronic transfer of funds, large cash transactions, and the cross-border movement of currency and monetary instruments; and FINTRAC was established (and became operational in November, 2001) as Canada's FIU to deal with the reported and other relevant information. Relationships and roles have been specified for the collection, analysis and disclosing of this information. This objective has therefore been achieved.

ii) Achieving an Effective Balance with Privacy/Charter Concerns

Over the past five years, the Initiative and its measures have respected the legislative balance, carefully struck by Parliament, between anti-money laundering and anti-terrorist financing goals on the one hand and privacy and Charter concerns on the other. FINTRAC has successfully operated in a manner that carefully protects the privacy and Charter rights of Canadians, in compliance with its mandate and the provisions of the Act. In providing intelligence, the Centre has disclosed only "designated information" as defined in sections 55, 55.1 and 56.1 of the PCMLTFA.

There are extensive safeguards in the legislation protecting the privacy of Canadians. The regulations and processes that have been put in place are sufficient for protecting personal privacy. Among the safeguards in the legislation are FINTRAC's arm's length relationship with law enforcement and CSIS; restrictions on the amount of personal information included in disclosures (as well as heavy fines for improper divulging of information); and limitations on the amount of time data can be kept in the FINTRAC database. FINTRAC has introduced practices to manage information securely, including ensuring that its facilities and equipment are secure physically and that its employees follow security restrictions on information. The Centre has operationalized the requirement of making disclosures only in cases where there is reasonable suspicion, as provided in the Act.

There are currently two legal challenges under the Act, and only one concerns privacy, specifically with respect to a CBSA currency seizure. While other privacy challenges can still arise, the fact that there has only been one privacy challenge so far is encouraging.

At this stage in the life of the Initiative, however, it may be prudent to consider the feasibility of regulatory or legislative amendments that would enable additional information to be disclosed to law enforcement and other disclosure recipients in order to meet the needs for more detailed information and to optimize the ultimate effectiveness of the Initiative and measures in detecting and deterring money laundering and terrorist financing.

The general view of some organizations that receive FINTRAC disclosures is that the balance is currently too strongly in favour of privacy concerns. The current approach - characterized as too "conservative" or "risk-averse" by some - has led to insufficient information in disclosures, which has reduced the usefulness for investigations (in particular, for new cases), and difficulty in obtaining Production Orders for more information. Law enforcement partners express a need for more details (i.e., a narrative) on the analysis and rationale underlying FINTRAC disclosures. They argue that if more details were provided, this would reduce unnecessary duplication of intelligence effort (i.e., there would be no need to redo the analysis already conducted by FINTRAC), enhance availability of timely information, improve the usefulness of disclosures for investigations, and ultimately enhance the effectiveness of the Initiative and measures in detecting and deterring money laundering and terrorist financing activity. However, this degree of disclosure clearly exceeds the limits of the current legislation.

The Act and its regulations provide a listing of the prescribed information that may currently be disclosed (e.g., the alias, date of birth, address and citizenship of the client, importer/exporter or person acting on their behalf), but regulatory amendments could be considered to meet some information needs of partners.

To conclude, the Initiative has respected, from an administrative point of view, the current balance between anti-money laundering and anti-terrorist financing goals with privacy and Charter concerns for the Initiative's first five years as required by the Act. At this stage, regulatory or legislative amendments that would open up the exchange of information to some degree - in order to improve the usefulness of FINTRAC disclosures and the effectiveness of the Initiative's efforts - warrant serious consideration.

RECOMMENDATION 3: It is recommended that the Government of Canada assess the feasibility of increasing the amount of information that may be included in FINTRAC disclosures in order to improve their value to disclosure recipients.

iii) Meeting International Commitments

The implementation of the Initiative, including FINTRAC and anti-money laundering and anti-terrorist financing activities and processes, has enabled Canada to meet its international commitments, such as United Nations conventions, with respect to the fight against money laundering and terrorist financing. In addition, the Initiative and related anti-terrorist financing measures have enhanced Canada's compliance with the FATF 40 Recommendations and the 8 Special Recommendations.

Substantial progress has been made in Canada's compliance with the FATF recommendations. Canada's performance was initially assessed to be poor in the 1990s, and the second FATF mutual evaluation (1997) indicated that Canada's voluntary suspicious transaction reporting regime was ineffective. It recommended that Canada impose mandatory suspicious transaction reporting, implement regulations concerning the cross-border movement of currency, and establish an FIU. The Initiative was implemented in 2000 to address these shortcomings. A more positive assessment of Canada was obtained in the last self-evaluation (2002/03). At that time, it was determined that Canada met 27 of 28 key FATF money laundering recommendations^[34] (out of 40), and met six of the seven special TF recommendations that were assessed. Although Canada has been judged to be only partially compliant with one special recommendation due to this country's lack of provisions for the registration or licensing of persons or legal entities providing money value transfer (MVT) services, Finance Canada is currently considering a possible registration requirements.

Initiative partners, for example, the RCMP (Proceeds of Crime Branch and Anti-Terrorist Financing Group) and FINTRAC, contribute significantly to FATF's annual typology exercise, development and revision of the 40 recommendations, review of law enforcement practices including on-site evaluations and the training of evaluators. The Department of Justice has contributed to FATF meetings by providing advice on criminal policy matters and participating in discussions on the Special TF Recommendations. Canada is also part of the FATF Americas review group, which reviews the progress of non-cooperative countries and territories in implementing anti-money laundering and anti-terrorist financing measures, and supports the efforts of the Caribbean FATF (a FATF regional-style body). In addition, in June 2002 FINTRAC met the requirements to become a member of the Egmont Group, the international association of FIUs. Members of the Egmont Group meet regularly to facilitate international cooperation and share information and expertise.

The Initiative and related anti-terrorist financing measures have also contributed to Canada's ability to meet other international commitments, for instance: the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1998), Convention for the Suppression of the Financing of Terrorism (1999) and Convention Against Transnational Organized Crime (2002); and the Organization of American States (OAS) Inter-American Convention Against Terrorism (2002).

b) Contribution to Investigations, Prosecutions and Seizures

This section addresses the impact that the Initiative and its measures have had on investigations and subsequent ways of combating ML/TF activities prescribed under the Act. The first is through the reporting and analysis of large, suspicious and other financial transactions (and the provision of resulting disclosures to various Initiative partners) as stipulated under Part I of the Act. Second, requiring the reporting of all cross-border currency movements of $10,000 or more under Part II of the Act (and the provision of cross-border currency information to FINTRAC) also potentially plays a role in the reduction of ML/TF. The Cross-Border Currency Reporting Program was implemented January 6, 2003 to operationalize Part II of the Act, with CBSA-Customs taking primary responsibility for this, in cooperation with the RCMP. These regulations allow customs officials to search for and seize unreported currency and monetary instruments that are suspected of being linked to ML or TF activities.

Overall, the Initiative and its measures have contributed to investigations, seizures and prosecutions, as intended. This contribution has occurred through two main avenues: a) the financial transaction reporting, analysis and disclosure process; and b) the cross-border currency reporting.

Before presenting results of FINTRAC analysis and disclosures, it is important to note that all report types are being used in disclosures. In 2003/04, 49-59 per cent of FINTRAC disclosures contained each of the different types of transaction reports: 59 per cent for Suspicious Transaction Reports (STRs); 57 per cent for Electronic Funds Transfer Reports (EFTRs); and 49 per cent for Large Cash Transaction Reports (LCTRs). In that year, two-thirds of disclosures made use of Voluntary Information Receipts (VIRs) provided to FINTRAC from Canadian and foreign sources, with the proportion having tripled from 22 per cent in 2002 (similar data are not available for financial transaction reports owing to the delayed implementation of regulations for these reports). Also note that three per cent of disclosures have used cross-border currency and seizure reports.

FINTRAC's analysis of reports it receives from financial institutions and other entities is culminating in a growing number of disclosures to law enforcement and other agencies (Table 2.4). Over the period that FINTRAC has been fully operational, disclosures by the Centre to law enforcement and security agencies and foreign FIUs nearly doubled from 103 in 2002/03 to 197 in 2003/04, for a total of 301 (including one in 2001/02). Similar proportionate increases are reported for most destinations except CRA and CIC.

The increase in the number of disclosures may be attributed to several potential reasons. The main reason is the incremental implementation of the reporting requirements. Another reason could be that the detection system is working well. Alternatively, this increase may be due to increases in ML and TF activity. Finally, the implementation of memoranda of understanding with other countries may have had an impact on the number of disclosures.

The majority (80 per cent) of the disclosures are for suspected ML cases as opposed to TF. This may be due to several factors. One may be there is less TF taking place. Alternatively, TF activity is more difficult to detect as it typically occurs through small deposits and transfers, i.e., with a value of less than the $10,000 limit above which financial transactions (excluding STRs) must be reported under the Act.

With respect to destination, most disclosures go to the RMCP (Table 2.4). About 60 per cent of the disclosures went to the RCMP (178), with similar numbers being provided to each of the CSIS, municipal police forces, and foreign FIUs (ranging from 28 to 38). The lower numbers of disclosures to CIC and CRA are due, in part, to the more stringent tests that must be met before disclosures can be made to these organizations (as described in the previous chapter).

Table 2.4: Number of FINTRAC Disclosures, by Destination, Type of Crime, and Value 2002/03 and 2003/04

Type of Recipient and Crime and Value	2002/03	2003/04	Total
Total	104*	197**	301*
Type of Crime
Money laundering	78	153	231
Terrorist financing	25	48	73
Both***	4	4	8
Recipient Type
RCMP	87	163	250
Regional Police	20	46	66
Municipal Police	22	36	61
CSIS	23	36	59
CRA	3	0	3
CIC	0	1	1
Foreign FIUs	10	19	29
Total Approximate Value ($ million)	460	700	1,160
* There was one disclosure in 2001/02. ** Numbers in the columns add up to more than the total because disclosures are often sent to more than one recipient agency. *** Both means that in the disclosure money laundering and terrorist activity financing/threats are both suspected. They have been counted as disclosures in both these categories. Source: Data obtained from FINTRAC.

The total monetary value of FINTRAC disclosures until the end of the 2003/04 fiscal year is estimated to be $1.16 billion (Table 2.4). The value increased by roughly 50 per cent between 2002/03 and 2003/04 in line with the almost doubling of the number of disclosures. Evidence from the FINTRAC 2003/04 Annual Report indicates that the total value of transactions included in disclosures of suspected TF activity and threats to the security of Canada amounted to about $70 million in 2003/04, up from $22 million the previous fiscal year. Note that the transaction amounts identified in FINTRAC disclosures should not be interpreted as an estimate of the size or scope of terrorist financing or money laundering in Canada. They should only be viewed as an increase in its intelligence output, based on reasonable grounds for suspicion

FINTRAC disclosures are making a contribution to law enforcement investigations. Among the recipients of FINTRAC disclosures, the RCMP and CRA were able to report on how they were being used in investigations. First, the RCMP reported that all the FINTRAC disclosures it received were entered into its database for current and future use in investigations (Table 2.5).^[35] With respect to ML disclosures, over one-half (55 per cent) of the disclosures contributed either to the identification of new targets (33 per cent) or to existing investigations (23 per cent). Three high potential disclosures were not pursued because of lack of resources, while 52 low potential disclosures were not investigated by IPOC units because they failed to meet national/regional priorities set for the Force. Fourteen per cent of disclosures ("Dual Purpose") were forwarded to other relevant RCMP units. As well, one Production Order was granted to the London IPOC unit to access FINTRAC's analysis to gain information beyond what was included in a disclosure.

Table 2.5: Results of FINTRAC Disclosures to RCMP, 2002/03 and 2003/04

Result of Disclosure	Number	Per Cent
ML Disclosures
Identification of new or unknown targets	62	33
Added value to already open investigations	43	23
High Potential: Not pursued owing to lack of resources	3	2
Low Potential: Not pursued as it did not meet national/regional priorities	52	28
Dual Purpose*	27	14
Total ML	187	100
TF Disclosures
New investigation started	4	6
Contribution to existing investigations	36	88
Contributing intelligence only	9	6
Total TF	49	100
* Dual purpose disclosures represent duplicate disclosures that have been sent to other RCMP units, as well as those linked to new/unknown targets or ongoing investigations. Source: RCMP (April 15,2004). Canada's National Initiative to Combat Money Laundering and the Royal Canadian Mounted Police. Update and Objectives. Information provided to EKOS for purposes of this evaluation.

As for TF disclosures, a large majority (36 of 49 received) contributed to existing investigations, while four contributed to a new investigation and nine contributed intelligence only (Table 2.5).

Furthermore, FINTRAC-related information can be an element of successful investigations, as the following indicates:

• For law enforcement, in one case, the target identified in the disclosure pleaded guilty to fraud, while in another, suspects were arrested for drug trafficking. A third case resulted in the seizure of cash and goods worth in excess of $4 million, excluding the value of the marijuana seized.^[36]
• CSIS reported that about one-half of FINTRAC disclosures to them were valuable in advancing their TF program.
• Of the three FINTRAC disclosures CRA received by March 31, 2004, two pertained to the same target and the total approximate value of these disclosures was estimated at $8.1 million.^[37] CRA indicates that the disclosures were helpful, as the information provided was used to finalize an audit under their Special Enforcement Program (SEP), resulting in the collection of $165,000 in back-taxes, interest and penalties.
• CRA also reported receiving 34 FINTRAC-related referrals (i.e., FINTRAC disclosures) from other law enforcement agencies. These disclosures of transactions, valued at $242.2 million, resulted in 16 files being assigned for SEP audits. It should be noted that CRA cannot fully evaluate a disclosure until tax returns are due for filing or have been filed, resulting in potential delays in pursuing tax enforcement measures/activities.
• Although none of the three disclosures that CBSA-Immigration received had resulted in any one being turned away at the border, it was noted that suspicions of ML/TF have prompted investigations that have ultimately resulted in the generation of evidence enabling immigration officials to refuse entry to prospective entrants. Investigations that have begun because of ML/TF suspicions have eventually identified other reasons for barring entry (such as lying about identity or a source of funds or the reasons why they were being declared in the first place). Thus, in this respect, the Initiative is seen as having an indirect impact on ML/TF.

The CBCR Program has also led to a large number of seizures at the border. Up to March 31, 2004, customs officials had made 1,471 seizures of currency and monetary instruments.^[38] The value of these seizures was estimated as being $44.8 million, 84 per cent of which was accounted for by currency seizures, and the remainder, cheques, bankers' drafts, and travellers' cheques, among other instruments. Further, about 212 of the 1,471 seizures resulted in the forfeiture of $17 million based on suspicion that these were proceeds of crime, or due to ML or TF activities. RCMP ML units played a major role in these seizures, with seizures that the RCMP was involved in being valued at $12 million. The remaining seizures (worth $28 million) were released after punitive damages were paid (about $592,000). Note that almost all the of the forfeitures have been appealed, and CBSA Adjudication Division is responsible for conducting a fair and impartial review of the decision.

In addition to these more immediate monetary gains, the CBCR Program has generated much intelligence that will contribute to investigations. Over 58,000 cross-border currency reports have been made by individuals at the border since implementation, providing FINTRAC with data on the cross-border movement of "hard" or non-electronic movements of funds. As well, information collected on seizures is shared with FINTRAC and the RCMP ML units, which will lead to an increase in the identification and investigation of suspected money laundering and terrorist financing groups. It should also be noted that Initiative funds have enabled CBSA-Customs to acquire sophisticated technology (X-Ray and fiberscope) as well as implement Currency Examination Teams and Currency Detector Dog Teams which will continue to assist the organization to identify and interdict money or monetary instruments.

In conclusion, the evidence indicates that the Initiative's measures are having some impact. Most disclosures provided by FINTRAC have been useful in either contributing to existing investigations on ML/TF in Canada, identifying new/unknown targets or leads, or serving as intelligence to be used in future cases. In addition, anecdotal evidence (gathered in interviews) disclosures have been helpful in assisting law enforcement obtain warrants and wire taps. The evidence also suggests a link between certain FINTRAC disclosures and successful investigations and prosecutions, with a number of cases resulting in asset seizures, charges and a guilty plea. As well, a large number of currency seizures have been made at the border, many ending up in forfeitures, indicating that the implementation of the Cross-Border Currency Reporting Program under the Initiative has been successful.

c) Contribution to Reduced Profitability and Incidence of ML and TF

A key objective of the Initiative is to detect and deter money laundering and terrorist financing with a long-term view to reducing the incidence of these activities. This study analyzed the issue based on the extent to which the Initiative has created a hostile environment for money laundering and terrorist financing, and has impacted on the profitability and level of activities in Canada.

i) Hostile Environment

As a result of the Initiative, four key mechanisms have been put in place that have created a hostile environment for money laundering and terrorist financing in Canada.

• Record keeping, client identification and reporting requirements. These legislated requirements under Part I of the Act have ensured detailed tracking of certain transactions. All told, 11.7 million financial transaction reports have been submitted to FINTRAC as of March 2004, including 9.5 million in the last fiscal year, suggesting widespread and increased scrutiny and vigilance on the part of financial institutions, as well as the general public.
• Monitoring and compliance. As stated earlier, levels of compliance with the PCMLTFA and its regulations are broad and expected to increase as FINTRAC's monitoring efforts are enhanced and extended to other sectors. The fact that the quality of reporting by financial and other reporting entities is rising lends further support for the conclusion that an increasingly hostile environment for money launderers and terrorist financiers has been created.
• Other obligations/activities of reporting entities and partners. Reporting entities have other obligations such as training of employees. These activities, coupled with the outreach activities of Initiative partners to businesses and the public, further serve to heighten awareness and vigilance in recognizing and reporting suspect transactions.
• Currency reporting. The fact that, under Part II of the Act, all individuals and entities importing and exporting currency across the border must report cross-border movements of $10,000 or more certainly represents a deterrence to using this means to conduct ML and TF activities. The fact that CBSA now has dog detector teams and sophisticated technology in place, funded under the Initiative, further makes Canada a hostile place for these activities.

Taken together, while these measures make ML/TF more difficult and reduce domestic as well as offshore interest in Canada for ML/TF, particularly within the regulated financial sector, there are challenges that necessitate vigilance on the part of authorities. First, there are known areas of non-compliance with the legislation where there is often no industry regulation and ML and TF can thrive (e.g., the legal profession). Indeed, it is speculated that displacement is taking place, whereby the creation of a hostile environment for ML and TF in major financial institutions has caused criminals to seek less regulated avenues to move their funds. This includes using cash couriers across the border, which may be contributing to the large number of currency seizures now being made under the Cross-Border Currency Reporting Program. Second, the high degree of criminal inventiveness presents a challenge for the Initiative to counter new or innovative ML/TF trends with appropriate proposed regulations, enhanced technological sophistication, and monitoring and outreach. Third, there is a potential for increased pressure on ML/TF schemes brought on by criminals seeking new ways to launder their proceeds of crime through corruption of employees of financial institutions and other legitimate businesses. As well, it must be noted that deterring criminals from using Canada to launder and raise funds means that these individuals will turn to other countries with weaker control mechanisms, which places the onus on Canada to outreach to and provide technical assistance to these countries to strengthen their processes.

ii) Reduced Profitability and Incidence

There is a high degree of likelihood that the Initiative is contributing to its long-term objective of reducing the profitability and incidence of money laundering and terrorist financing in Canada. Clearly, the record keeping, client identification, and reporting obligations that have been instituted under the Initiative impose a burden on criminals to find new avenues to launder and raise funds. Enhanced reporting represents a barrier to criminals who must pursue more circuitous (and therefore more expensive) means to place the proceeds of their crimes and raise and transfer monies for terrorism purposes. As well, seizure and forfeiture of criminal assets directly impinge on profits for those with whom the assets formerly resided. CBSA reported about $17 million in forfeited assets between January 2003 and March 31, 2004. Finally, of course, investigation and prosecution of individuals have further significant impacts on their profits and ability to engage in further ML/TF. Intelligence gathering is crucial to the development of effective tools to combat ML/TF to the extent that it facilitates trend analysis and the development of ML-targeted indicators.

Still, the impacts of the Initiative on the overall profitability of crime and on absolute levels of ML/TF are difficult to assess. The volume of criminal ML and TF activity is difficult to measure and track and there are no baseline measures available to which to compare current levels in order to demonstrate changes over time. There are also difficulties in attributing changes in levels of money laundering and terrorist financing activities to the Initiative and related measures, given the existence of a multitude of factors beyond the control of the Initiative contributing to crime and to successful investigation and prosecution. These factors include the global political and economic climate as well as Canadian laws and initiatives with related expected outcomes. Indeed, it may be impossible to ever fully and quantitatively demonstrate attribution, thus necessitating reliance on more qualitative means to measuring the contribution of the Initiative. Finally, the Initiative has been in full operation for less than two years, yet impacts in terms of prosecutions cannot, in many cases, be realized for a number of years.

d) Unintended Impacts

The Initiative and anti-terrorist financing measures have not had any major unintended impacts. However, some small-scale unexpected impacts were observed. First, there is perceived to be an improved mutual understanding among the formal and informal federal partners on issues beyond money laundering and terrorist financing, as a result of their collaboration and dialogue for the Initiative.

There is some concern over customs information flow. Prior to the implementation of the PCMLTFA, there was no requirement for travellers to declare movements of money or monetary instruments across the border. In the former Canada Customs and Revenue Agency (CCRA), when the customs program intercepted suspected proceeds of crimes, referrals were made to the RCMP IPOC units. Customs could also at that time share this information with its tax and investigation counterparts within the CCRA while respecting the exchange of information provisions applicable to Customs. CRA-Taxation found this shared intelligence to be an excellent source of information for initiating audits and/or investigations.

With the implementation of the PCMLTFA and the Cross-Border Currency Reporting (CBCR) program that supports Part II of the Act, however, CBSA now collects CBCR reports and effects CBCR seizures under the authority of the PCMLTFA, and this information is now governed by this Act. This in effect has made it such that the information collected during the processing of monetary declarations and seizures is subject to the restrictions imposed by the PCMLTFA and cannot be shared directly with the CRA or CBSA Investigations program.

2.4 Cost-Effectiveness and Alternatives

The final evaluation issue concerns the measures to combat money laundering under the Initiative and the implementation by FINTRAC of its TF mandate and considers the extent to which the Initiative has achieved its objectives to date in a cost-effective manner. The perspective of those beyond the government institutions directly implicated must also be considered in an assessment of cost-effectiveness; thus the impact of the Initiative on reporting entities is also discussed.

a) Cost-Effectiveness

Cost-effectiveness analysis examines input costs relative to outcomes in terms of what is achieved by the Initiative. In the context of ML, however, appropriate knowledge, tools and models have not yet been implemented and do not permit a comprehensive assessment of cost-effectiveness. Numerous researchers have written about the difficulties associated with quantifying the expected outcomes of activities such as those under the Initiative.

A notable example is a study by Harvey (2004) who states that "The economic analysis of money laundering is an area fraught with difficulty; by its very nature ML occurs outside the normal range of economic statistics and remains unobservable." Based on a series of interviews with compliance and regulatory officers, he concludes that estimates of the global magnitude of ML are at best informed guesses because of "the considerable difficulties in calculating the size of the money laundering problem, most noticeably due to the absence of a consistent, acceptable and international methodology." Further, in its most recent strategy to combat money laundering, the Auditor General cites the United States Treasury as stating, "We still do not know the full magnitude of the money-laundering problem. The various efforts to attempt to answer this question over the years have not been satisfactory".^[39] The inability to measure the cost of anti-ML/TF measures and their effectiveness and results are also acknowledged in the US with respect to its FIU, FINCEN.

Given these measurement challenges, the evaluation could only assess cost-effectiveness qualitatively. The qualitative analysis indicates the Initiative was delivered cost-efficiently. Aspects of Canada's approach - such as electronic reporting, a risk-based compliance program, a variety of legislative tools, and the involvement of partners each playing a necessary role in addressing criminal activity - certainly enhance the efficiency of the Canadian model.

Broadly speaking, the expenditure of $140 million to date under the Initiative has rendered Canada compliant with international anti-ML standards and the value of this should exceed the cost of being declared non-compliant, alternatively non-compliance with international standards would be harmful to this country's reputation and economy. As discussed earlier, some of these consequences include reduced foreign investment and weakened financial institutions.

The cost side of the equation, from the perspective of the public purse, is relatively clear. Over the last four fiscal years, the total Initiative budget for anti-money laundering activities has been about $140 million. In addition, some partners (both funded and not funded under the Initiative) have identified additional costs to their organizations associated with internal administrative arrangements and extra travel abroad resulting from the Initiative, which have been covered by other sources of funds within the federal government.

With respect to outcomes, the expected chain of results does not lend itself to straightforward conceptualization for use in cost-effectiveness analysis and, furthermore, all outcomes may not be fully realized for some time. At a gross level, up to the end of March 2004, the CBSA has seized over $45 million at the border under Part II of the Act, though not all of this may result in actual forfeitures, pending appeals. Similarly, the total dollar value of financial transactions included in FINTRAC disclosures was $1.1 billion. These are suspected cases, however, and the ultimate value (i.e., in terms of seized/forfeited assets) cannot yet be determined, pending the investigation and prosecution of cases based on the disclosed information. Moreover, it must be re-iterated that a direct line cannot be drawn between disclosures to outcomes, as the former represent just one piece among several that law enforcement agencies use to advance an investigation toward prosecution, which also depends on how well the investigation and prosecution are conducted and how many resources are devoted to these activities.

A thorough analysis of cost-effectiveness should also consider the perspective of reporting entities, the financial institutions. The costs relate to modifications to electronic systems and internal processes needed to address record keeping, client identification and reporting requirements under the Act, as well as the costs of other associated needs (e.g., providing ongoing training and reducing workload and attendant declines in productivity). These compliance costs have been absorbed, for the most part, by reporting entities and their customers (i.e., the general public). However, there is little or no quantitative evidence of the dollar value of those costs (KPMG, 2004 and Harvey, 2004). Threats to business viability and competitiveness are minimized to the extent that obligations under the Act apply to all reporting entities, so that no one organization gains by not having to comply with the regulations.

From the perspective of reporting entities, there are real benefits of compliance. These are manifested in the reduction of the following types of risk, all difficult to quantify (Schott, Paul Allen, Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism, Second Edition, World Bank/IMF (2004)). The risks comprise:

• Reputational Risk is the potential that adverse publicity regarding a financial institution's business practices and associations, whether accurate or not, will cause a loss of confidence in the integrity of the institution.
• Operational Risk is the potential for loss resulting from inadequate or failed internal processes, people and systems or external events (e.g. the attacks of September 11^th).
• Legal Risk is the potential for lawsuits, adverse judgments, unenforceable contracts, fines and penalties generating losses, increased expenses for an institution, or even closure of such an institution. In cases of money laundering, legitimate customers may also be victims of a financial crime, lose money and sue the institution for reimbursement.
• Concentration Risk is the potential for loss resulting from too much credit or loan exposure to one borrower.

Given the inability to assess cost-effectiveness in this evaluation, largely due to measurement difficulties around outcomes, it is clear that much further work needs to occur to fill this gap in determining the value received for expenditures on this Initiative.

RECOMMENDATION 4: Efforts need to be devoted to assessing the capacity of the existing evaluation model in demonstrating the outcomes and cost effectiveness of the Initiatives. These efforts need to occur at several levels:

• a) The existing logic model has not been revisited since its development several years ago. As logic models are not intended to be static, it should be revisited and updated to accurately reflect activities and intended outcomes of the Initiative.
• b) The evaluation framework for the Initiative will need to be updated in order to establish clear expectations around how the future success of the Initiative will be measured.
• c) Special studies to identify appropriate measurement tools and models to further assess current difficulties in determining outcomes or at least to understand the degree to which such tools and models can best be used.
• d) A continued focus on performance measurement is needed across partners to ensure that ongoing data collection tied to the revised evaluation framework occurs.

RECOMMENDATION 5: As the current evaluation occurred when the measures had been implemented for only a short time, and given the measurement difficulties cited above, a full evaluation of the Initiative should be conducted again within five years.

b) Alternatives

In general, the Canadian model of addressing money laundering/terrorist financing is an effective one and compares well internationally. Again, Appendix I presents a comparison of different regimes to highlight differences in approach. Features such as the use of electronic reporting and the rigorous compliance program, based on a risk-management approach, have been lauded or imitated by other countries.

An identified weakness in the Canadian model concerns the sharing of information between Canada's FIU (FINTRAC) and law enforcement and national security agencies receiving disclosures. This issue is related to the amount of information contained in disclosures and law enforcement's relationship with the FIU. In some other countries, such as Australia and the US, privacy restrictions are less rigorous, and law enforcement agencies have greater access to the data of the FIU. While closer ties between the FIU and law enforcement have undoubtedly led to the disclosing of greater amounts of information being passed to the latter in these countries, this is not possible in Canada given current legislation, as has been discussed elsewhere in this report.

A possible option is to return to the situation before the Initiative was implemented, when financial transaction reports were made to law enforcement agencies voluntarily. While this produced useful intelligence to detect money laundering, it was not as effective as the regime currently in place. Furthermore, doing so would return Canada to a position of non-compliance with international standards and therefore leave the country open to potential economic loss. Hence this option is not viable.

RECOMMENDATION 6: Canada should maintain its current strong level of commitment to combat money laundering and terrorist financing through the continued active support of this Initiative.

3. Conclusions

This chapter presents the conclusions of the Year Five Evaluation of the National Initiatives to Combat Money Laundering and the Interim Evaluation of Measures to Combat Terrorist Financing (the Initiative).

3.1 Relevance

The Initiative is both relevant and necessary as Canada moves forward in fighting financial crime (as well as organized crime and terrorism), both domestically and internationally in cooperation with its partners. Money laundering (ML) and terrorist financing (TF) are complex crimes necessitating sustained, concerted action. There are social and economic benefits to the country in reducing crime as well as advantages for financial institutions of anti-ML/TF measures in better managing reputational risk. Further, implementation of the Initiative has enabled Canada to meet its international obligations in the area. Maintaining support for it will enable Canada to continue to meet these obligations and uphold its solid international reputation in the area. Moreover, ML and TF are transnational in nature, necessitating the participation of all countries for their successful detection and deterrence. Finally, the Initiative is well aligned with the federal priorities to provide adequate tools to law enforcement to combat ML/TF, protect public security, safeguard personal privacy, and protect Canada's financial system.

3.2 Design and Implementation

The activities undertaken under the Initiative are comprehensive and appropriate for achieving its expected outcomes. All the necessary elements are in place under the Initiative for combating ML and TF - from the reporting of financial transactions and cross-border currency movements to the eventual prosecution of criminals. All the appropriate stakeholders are involved in the Initiative, and there has been a high degree of cooperation among them in regards to the exchange of information. As the Initiative is only fairly recently in full operation, however, the complete range of activities needed to ensure its success and measure its performance was not fully in place during most of the review period.

The Initiative faces a number of resource pressures, however, that may limit its success. One key pressure concerns technology at FINTRAC, for which there is currently no infrastructure "evergreening" (renewal) or disaster recovery support budget and only limited IT capital investment flexibility. As well, the Cross-Border Currency Reporting program also faces resources pressures as it continues to build on the very successful progress it has made to date. Pressures for increased funding are also currently being experienced to enable federal law enforcement (ML and IPOC Units) to conduct more investigations related to CBSA intelligence, FINTRAC disclosures, and future compliance related investigations, as well as to support its intelligence gathering, performance measurement, and private sector education efforts.

3.3 Success

The Initiative has made good progress toward achieving its formal objectives. In accordance with the Act, measures have been successfully implemented to detect and deter money laundering and the financing of terrorist activities and to facilitate the investigation and prosecution of money laundering and terrorist financing offences. This includes the establishment of FINTRAC as Canada's Financial Intelligence Unit (FIU), the implementation of the Initiative and measures have enabled Canada to meet its international commitments with respect to the fight against money laundering and terrorist financing, and the maintenance of effective legislative balance, carefully struck by Parliament, between anti-money laundering and anti-terrorist financing goals on the one hand and privacy and Charter concerns on the other hand. Nevertheless, there are indications from law enforcement and national security agencies that insufficient information is being provided by FINTRAC in its disclosures, as the provisions of the Act and the Charter appear to limit the amount of information that can be disclosed.

Overall, the Initiative, through the work of various partners, has contributed to enhanced understanding of ML and TF and enhanced investigations, seizures and prosecutions. Moreover, while it is too early in the life of the Initiative to measure its impact on the ultimate expected outcomes of reduced ML and TF (measurement difficulties notwithstanding), it is clear that the Initiative's reporting, client identification, record keeping and compliance regime requirements have resulted in an increasingly hostile environment for ML and TF activities in Canada and should in the long-run lead to reduced incidence of these crimes.

3.4 Cost-Effectiveness and Alternatives

The key elements of Canada's approach - such as electronic reporting, a risk-based compliance program, a variety of legislative tools, and the involvement of partners each playing a necessary role in addressing criminal activity - enhance the efficiency of the Canadian model. Moreover, the expenditure of $140 million up to March 31, 2004 is likely much lower than the reputational and economic costs that would have been incurred if the Initiative was not implemented and Canada was consequently judged to be non-compliant with international anti-ML/TF standards. In general, the Canadian model of addressing money laundering/terrorist financing is an effective one and compares well internationally. Moreover, features such as the use of electronic reporting and the rigorous compliance program, based on a risk-management approach, have been lauded and imitated by other countries.

Although a comprehensive, quantitative approach to an assessment of the cost-effectiveness of the approach would be desirable; this is difficult because of the paucity of data and analytic tools, as well as the lack of information on costs and outcomes of comparative foreign regimes. Some steps could, however, be taken to improve our capacity to assess cost-effectiveness, including the development of an updated logic model and evaluation framework and a performance measurement framework.

3.5 Recommendations

The following are recommendations for improvement of the Initiative.

RECOMMENDATION 1: Continue to conduct consultations with representatives of the financial services sector, including organizations at the national and other jurisdictional levels, to help representatives see the value of their contributions. Before implementing any future changes to regulations or compliance activities, ensure that timely input is obtained from these organizations and that the potential for compliance fatigue in the financial services sector is taken into account.

RECOMMENDATION 2: The Government of Canada should, at a minimum, consider maintaining current funding allocations to the Initiative's partners. In addition, it should consider responding over the short term to certain funding pressures, including funding needed to finance IT renewal needs at FINTRAC; funding increases identified by the CBSA; increased funding identified by the RCMP to enhance its capacity for investigation of money laundering and terrorist financing intelligence, leads and tips provided by all sources; capacity to analyse and measure the impact of intelligence received; and delivery of educational programs for the private sector; and future funding pressures associated with the planning and conduct of the next full evaluation of the Initiative.

RECOMMENDATION 3: It is recommended that the Government of Canada assess the feasibility of increasing the amount of information that may be included in FINTRAC disclosuresin order to improve their value to disclosure recipients.

RECOMMENDATION 4: Efforts need to be devoted to assessing the capacity of the existing evaluation model in demonstrating the outcomes and cost effectiveness of the Initiatives. These efforts need to occur at several levels:

• a) The existing logic model has not been revisited since its development several years ago. As logic models are not intended to be static, it should be revisited and updated to accurately reflect activities and intended outcomes of the Initiative.
• b) The evaluation framework for the Initiative will need to be updated in order to establish clear expectations around how the future success of the Initiative will be measured.
• c) Special studies to identify appropriate measurement tools and models to further assess current difficulties in determining outcomes or at least to understand the degree to which such tools and models can best be used.
• d) A continued focus on performance measurement is needed across partners to ensure that ongoing data collection tied to the revised evaluation framework occurs.

RECOMMENDATION 5: As the current evaluation occurred when the measures had been implemented for only a short time, and given the measurement difficulties cited above, a full evaluation of the Initiative should be conducted again within five years.

RECOMMENDATION 6: Canada should maintain its current strong level of commitment to combat money laundering and terrorist financing through the continued active support of this Initiative.

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[1] Evaluation Terms of Reference. National Initiatives to Combat Money Laundering and Related Anti-Terrorist Financing Measures. [Return]

[2] 1997 FATF Mutual Evaluation Report. [Return]

[3] Office of the Auditor General (2003). Canada’s Strategy to Combat Money Laundering April 2003 Report - Chapter 3. Available at www.oag-bvg.gc.ca/domino/reports.nsf/html/20030403ce.html. Accessed August 2004. [Return]

[4] Working together to Combat Organized Crime: A Public Report on Actions under the National Agenda to Combat Organized Crime, Available at http://www.psepc.gc.ca/publications/policing/combat_org_crime_e.asp#1 [Return]

[5] Information derived from Desjardins, J. (June 18, 2003). Presentation of the Proceeds of Crime (Money Laundering) and Terrorist Financing: The Act, Regulations and Related Issues. [Return]

[6] See FINTRAC’s Guideline 5: http://www.fintrac.gc.ca/publications/guide/Guide5/5_e.asp [Return]

[7] For more details see: http://www.fintrac.gc.ca/publications/guide/Guide1/1_e.asp#335 [Return]

[8] CBSA now includes Canada Customs, formally part of the Canada Customs and Revenue Agency (CCRA) (now called the Canada Revenue Agency (CRA)). It also includes Immigration functions that were formerly part of Citizenship and Immigration Canada (CIC). [Return]

[9] Desjardins, J. (June 18, 2003). Presentation of the Proceeds of Crime (Money Laundering) and Terrorist Financing: The Act, Regulations and Related Issues. [Return]

[10] Desjardins, J. (June 18, 2003). Presentation of the Proceeds of Crime (Money Laundering) and Terrorist Financing: The Act, Regulations and Related Issues. [Return]

[11] Desjardins, J. (June 18, 2003). Presentation of the Proceeds of Crime (Money Laundering) and Terrorist Financing: The Act, Regulations and Related Issues. [Return]

[12] This information provided by FINTRAC to EKOS. [Return]

[13] See FINTRAC website. www.fintrac.gc.ca [Return]

[14] See: ABC Solutions Inc. (February 14, 2003). The National Initiative to Combat Money Laundering: Year Three Evaluation. [Return]

[15] The relevance of the Initiative’s individual activities are considered in the next section on design, delivery and implementation. [Return]

[16] Canadian Association of Chiefs of Police, Resolutions Summaries, p. 62:

http://www.cacp.ca/english/resolutions/summary.pdf. [Return]

[17] Research suggests that the cost of ML to the Canadian economy may be in the $5-17 billion range; source: PSEPC (1998). Organized Crime Impact Study, Highlights. www.psepc-sppcc.gc.ca/publications/Policing/1998orgcrim_e.asp. However, this estimate is the subject of some controversy. See for example, Office of the Auditor General (2003). Canada’s Strategy to Combat Money Laundering, April 2003 Report - Chapter 3. Available at www.oag-bvg.gc.ca/domino/reports.nsf/html/20030403ce.html [Return]

[18] The criteria used by FATF in assessing countries against the 40 recommendations changed at the end of 2003. Any new implications will need to be assessed. [Return]

[19] Canadian Security Intelligence Service (1998), 1997 Public Report, Ottawa, cited in PSEPC, Overview of the Portfolio Environment Scan 2000. http://www.psepc.gc.ca/publications/crim_jus/environment_scan_2000_e.asp#5 [Return]

[20] See FATF website: http://www.fatf-gafi.org/index.htm [Return]

[21] PSEPC (2004). Working Together to Combat Organized Crime: A Public Report on Actions Under the National Agenda to Combat Organized Crime. http://www.psepc-sppcc.gc.ca/publications/policing/combat_org_crime_e.asp#1 [Return]

[22] In fact, the funding for FINTRAC anti-terrorist financing activities is provided under the PSAT initiative. For more information on PSAT, see: http://www.oag-bvg.gc.ca/domino/reports.nsf/html/20040303ce.html and
http://www.pco-bcp.gc.ca/default.asp?Language=E&page=publications&doc=dpr-rrm2002/dpr-rrm2002-chap2_e.htm [Return]

[23] ABC Solutions, Inc. (February 14, 2003). The National Initiative to Combat Money Laundering: Year Three Evaluation. [Return]

[24] The FS an d MIO training was conducted internally by CBSA-Immigration while the TF workshop and CPC training were done externally. [Return]

[25] The NCCOC is a forum in which federal, provincial and territorial officials and representatives from the law enforcement community can identify major issues and determine national policy priorities related to the problem of organized crime. [Return]

[26] FINTRAC data indicate that it has received 864 disclosures from these organizations as well as the general public combined, up to March 31, 2004. [Return]

[27] FINTRAC (2003) Performance Report for the period ending March 2003. This information also obtained through FINTRAC (2004) Communication with EKOS, on a list of documents provided to EKOS for research purposes. [Return]

[28] RCMP (April 15, 2004). Canada’s National Initiative to Combat Money Laundering and the Royal Canadian Mounted Police: Update and Objectives. Note that these activities are funded by both the Initiative and the IPOC initiative. [Return]

[29] CBSA (August 2004). National Initiative to Combat Money Laundering. Report prepared for Finance Canada for purposes of this evaluation. [Return]

[30] It is only recently (July 2004) that amendments were made to the Public Safety Act permitting FINTRAC to enter into information-sharing agreements with provincial/territorial and national regulators. [Return]

[31] Section 72 of the Act: http://www.fintrac.gc.ca/act-loi/PCMLA-BIL-June-2004.doc [Return]

[32] FINTRAC (2004). Presentation to EKOS on Aug. 5, 2004. [Return]

[33] See website: http://www.oag-bvg.gc.ca/domino/reports.nsf/html/20030403c-eng.asp [Return]

[34] The criteria used by FATF in assessing countries against the 40 recommendations changed at the end of 2003. Any new implications will need to be assessed. [Return]

[35] Source: RCMP (April 15, 2004). Canada’s National Initiative to Combat Money Laundering and the Royal Canadian Mounted Police. Update and Objectives. Information provided to EKOS for purposes of this evaluation. As noted, FINTRAC indicates it passed 178 disclosures to the RCMP. The discrepancy between the RCMP and FINTRAC figures could be attributed to the fact that there are some financial entities that choose to report directly to the RCMP (as well as to FINTRAC). [Return]

[36] Sources: Colpinto, R. (May 2004). The Clean-Up Act, available through www.camagazine.com; and Scotiabank (2004). Value Added Quarterly [Return]

[37] CRA Anti-Evasion Division: Investigative Directorate (2004). FINTRAC Disclosures Received by CRA: Summary of Activity to February 4, 2004. Document provided to EKOS for purposes of the evaluation. [Return]

[38] CBSA (February 2004). Cross-Border Currency and Proceeds of Crime Report. Intelligence Analysis Section, Intelligence and Risk Management Division, Customs Contraband, Intelligence and Investigations. Document provided to EKOS for purposes of the evaluation. [Return]

[39] http://www.oag-bvg.gc.ca/domino/reports.nsf/html/20030403ce.html [Return]

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