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A. Michael Andrews' Submission in Response to Finance Canada's Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime consultation:

2 August 2005

Ms. Diane Lafleur
Director, Financial Sector Division
Department of Finance
140 O'Connor Street
Ottawa ON K1A 0G5

Dear Ms. Lafleur:

I write as a citizen with considerable interest in and some knowledge of the issues raised by the review of Canada's framework for anti-money laundering and combating the financing of terrorism (AML/CFT). I had the privilege of serving on the staff of the MacKay Task Force on the Future of the Canadian Financial Services Sector, and I have been part of International Monetary Fund-led teams conducting Financial Sector Assessment Programs (FSAPs) in eight countries. As you are aware, FSAPs assess the AML/CFT regime as part of the evaluation of a country's implementation of international standards and codes. Drawing on this background, I raise a number of issues and provide four specific recommendations for your consideration.

A Need to Balance Conflicting Policy Objectives

I am concerned that the narrow definition of "stakeholder" reflected in the June 2005 consultation paper, "Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime," results in insufficient attention to individual rights and the safeguarding of personal information in the context of revisions to the AML/CFT framework.

I am also concerned that the issues of efficiency and effectiveness, measurement of compliance costs, quantification of outcomes, and the practicality of implementing proposals are inadequately addressed in the consultation paper and the supporting research study "Year Five Evaluation of the National Initiatives to Combat Money Laundering and Interim Evaluation of Measures to Combat Terrorist Financing."

In part, these shortcomings arise from a blanket acceptance of Financial Action Task Force (FATF) recommendations without appropriate consideration of all aspects of Canadian public policy. Combating money laundering and the financing of terrorism are important objectives. In pursuit of this narrow mandate, FATF has not hesitated to make recommendations that may infringe on individual rights or national constitutional provisions, and may not be cost effective.

Unlike FATF, sovereign governments do not have the luxury of ignoring the impact of the AML/CFT framework on other policy objectives. Similarly, sovereign governments have an important accountability—the costs of the AML/CFT framework—which FATF lacks.

Individual Canadians are Stakeholders in this Review

Amending the AMF/CFT regime will necessarily affect the way confidential information on individual Canadians and businesses is collected by reporting entities and provided to Canadian and international supervisory and law enforcement agencies. Despite this, the consultation paper does not identify individual Canadians and businesses (other than those currently designated or proposed to be designated as reporting entities) as stakeholders in the review. Neither does the paper identify as one of the objectives of the review the need to maintain a balance between the rights of individual Canadians and possible infringement of rights and freedoms by measures to counter money-laundering and terrorism.

The supporting research study makes an initial reference to the rights of individual Canadians, noting that "measures have to date achieved an 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." (page v) Without passing judgment on whether this debatable declaration is correct, it is disappointing and disconcerting that neither the supporting research study nor the consultation paper refers to the need to maintain this balance in the discussion of any proposal or recommendation.

Recommendation 1:

The review of the AML/CFT framework as well as the subsequent implementation measures should explicitly consider individual Canadians and businesses as stakeholders, and ensure that privacy issues are given due consideration. It is disappointing to note that in completing the supporting research study no meetings were held with consumer groups such as the Consumer Association of Canada, the Privacy Commissioner of Canada or provincial counterparts, or advocacy groups such as the Canadian Civil Liberties Association. This oversight should be addressed as work on the AML/CFT review proceeds.

Recommendation 2:

The proposals to expand the information sharing provisions of the AML/CFT framework should be complemented by explicit personal data safeguard requirements. A good model for these safeguards is the European Union (EU) June 2005 draft third money laundering directive. In addition to strictly limiting disclosure of personal information to specifically enumerated instances, such as for law enforcement purposes, the directive would further require that any such disclosure to an agency in non-EU countries be in accordance with EU rules on transfer of personal data to third countries (Directive 95/46/EC of the European Parliament). This ensures that personal data is not subsequently shared, stored or used in a manner that would not be permitted by the European law under which the personal data was originally obtained. This is a more stringent standard for safeguarding personal data than the current provisions of section 56 and 56.1 of the Proceeds of Crime (Money Laundering) and Terrorism Financing Act.

Recommendation 3:

The advisory committee contemplated pursuant to proposal 5.1 should be constituted prior to the introduction of proposed amendments to the legislation. The proposed membership of this committee should be expanded to ensure that it is able to provide advice appropriately balancing various public policy objectives. The model of the UK Money Laundering Advisory Committee is a better model than the US Bank Secrecy Act Advisory Group. The UK committee includes representatives from the Financial Services Consumer Panel and Law Society rather than just government, law enforcement agencies and reporting entities, and its minutes and papers are publicly available, providing greater transparency than the US model. While there is no body in Canada comparable to the Financial Services Consumer Panel, appointment of representatives drawn from the Financial Services Committee of the Consumers Association and/or independent members with a broad knowledge of public policy, as has been done with the Canadian Payments Association Stakeholder Advisory Council, would ensure wider stakeholder representation. The advisory committee should be consulted on all proposed amendments to the AML/CFT framework prior to introduction.

Costs, Benefits and Practicality

Neither the supporting research report nor the consultation paper appears to have considered the practical implications of the proposals, or the need to assess the efficacy and costs of recommended changes to the AML/CFT regime. A striking example is proposal 1.5, which would require reporting entities to have appropriate risk management systems in place to determine whether a customer is a politically exposed person. No evidence is provided to indicate that politically exposed persons constitute such a large threat in Canada as to warrant imposing a vastly increased compliance burden on reporting entities. There is also a complete lack of evidence to suggest that the proposed measures would be more effective than the current regime in addressing such a problem, if indeed it does exist.

Existing and proposed requirements for "normal" customer due diligence and reporting of suspicious transactions would be as effective in detecting the laundering of proceeds of corruption as they are in detecting the laundering of the proceeds of other crimes. It seems neither feasible nor desirable to require every financial institution (as well as other reporting entities) to determine whether the account holder is or has ever been an elected politician, senior civil servant, judicial officer, executive of a Crown Corporation, official of a political party or senior military officer, or is a relative or close associate of such a person. Even if this determination were made at the time of account opening, could banks (and all other reporting entities) then be expected to periodically conduct follow-up investigations of all customers to determine if they, or a relative, or an associate, had subsequently become one of the millions of Canadians who would be defined as politically exposed if this FATF recommendation is actually adopted? Surely in the absence of evidence to the contrary it can be concluded that Canada's comprehensive AML/CFT framework meets the obligations of the United Nations Convention on Corruption.

More rigorous analysis is required of each proposed change to the AML/CFT framework, notwithstanding the difficulties enumerated in the supporting research study in quantifying compliance costs and measuring outcomes. While total current costs and benefits may not be known with certainty, the current regime provides a benchmark against which it is possible to estimate the incremental impact of the proposed changes on both compliance costs for reporting entities and direct costs born by the public sector.

The terms of reference of the UK Money Laundering Advisory Committee explicitly include reviewing the efficiency and effectiveness of the anti-money laundering strategy, taking into account the potential costs and benefits. This indicates that the challenges in quantifying costs, benefits and outcomes are not universally viewed as insurmountable. As a result of ongoing review, the UK Financial Services Authority released in July 2005 proposals to significantly streamline its prudential guidance on AML/CFT (available at http://www.fsa.gov.uk/pages/Library/Policy/CP/2005/05_10.shtml), which are expected to reduce compliance costs and enhance the effectiveness of implementation by regulated entities. A similar focus on costs and benefits should be part of the review and revision of Canada's AML/CFT regime.

Recommendation 4:

Each proposal in the consultation paper should be subject to a four part test. First, evidence should be presented to substantiate that the proposal addresses a true lacuna in the current Canadian AML/CFT framework. Second, credible analysis is required to indicate that the proposed measures would be effective. Third, there is a need to explicitly consider the potential infringement on individual rights, and critically examine whether less intrusive measures are available. Fourth, each proposal should be subject to a cost-benefit analysis.

I trust that as the review of the AML/CFT regime proceeds the Department of Finance will take steps to ensure the inclusion of a broader stakeholder group, an appropriate balance between combating money laundering and terrorist financing and other important policy concerns, and greater focus on the necessity, effectiveness and costs of proposed changes.

Yours truly,

A. Michael Andrews