The Bay Street Financial District in Toronto on Aug. 5, 2022.Nathan Denette/The Canadian Press
Let’s hope the Trudeau government doesn’t lose its nerve.
The Department of Finance is signaling that it plans to increase permissible information sharing among banks – while also allowing for bona fide two-way communication between lenders and the anti-money laundering watchdog – to better detect and disrupt financial crime.
At present, federal privacy legislation prohibits banks from sharing information with each other about dubious clients who use their accounts to launder the proceeds of crime. As a result, illicit funds often flow from lender to lender even if some financial institutions shut down accounts.
The Financial Transactions and Reports Analysis Centre of Canada, meanwhile, is restricted on the information that it can legally share with banks and other businesses, compounding regulatory blind spots.
If implemented, the government’s proposals, which are contained in a new consultation document, would finally drag Canada’s anti-money laundering law into the 21st century by replicating measures that have been in place for more than two decades in the United States.
But Ottawa’s plans are not set in stone, so it remains to be seen whether this truly marks a turning point in the way our country combats money laundering and terrorist financing.
There’s no precise estimate of how much money is laundered in this country, but the Criminal Intelligence Service Canada says it’s a $45-billion to $113-billion problem. Perhaps that is why FinTRAC is urging businesses, including banks and fintechs, to provide their feedback to the government tout de suite.
“Sharing of information … to me, that’s the one that’s going to be a game changer,” said Sarah Paquet, director and chief executive officer of FinTRAC, at the 22nd Annual Canadian Forum on Anti-Money Laundering and Financial Crime in Toronto.
“We all need to provide our comments to Finance about that and share our views because it is going to make a huge difference if we can raise the bar on that,” she added.
The proposals are welcome news for the banking industry, which has spent years urging the government to amend provisions of the Personal Information Protection and Electronic Documents Act to allow for more protected information sharing.
PIPEDA, as it is known for short, restricts how businesses, including banks, collect and use personal information about their customers. Its safeguards are meant to protect consumers from unreasonable privacy intrusions. But unfortunately, the rules also allow money launderers to switch banks without detection because lenders are barred from warning each other about suspicious activity.
As I’ve previously argued in this column, that restriction is illogical because PIPEDA already allows for information sharing in cases of fraud.
It seems the government is finally seeing the light. Its consultation paper notes that “criminals can take advantage of a lack of information sharing between” banks and “may attempt to engage with multiple institutions to facilitate illicit activities.”
American banks, meanwhile, have been allowed to engage in protected information sharing for 22 years. Provisions of the 2001 Patriot Act, passed after the 9/11 terrorist attacks, offered banks a “safe harbour” – a provision that shields them from legal liability if they participate in data-sharing partnerships to catch criminals.
Ottawa’s consultation document points to the U.S. experience and that of Britain, which allows banks to share information on a voluntary basis if a client is suspected to be laundering illicit funds or conducting terrorist financing.
“Both jurisdictions have implemented regulatory parameters to safeguard personal information,” states the document.
Information sharing would also help banks get more bang for their buck on their compliance programs, which have become more costly since the onset of the COVID-19 pandemic.
Last year, Canadian financial institutions spent US$10.8-billion on financial crime compliance compared with US$9.2-billion in 2021, according to a study by LexisNexis Risk Solutions. Those costs totalled US$6.8-billion and US$5.1-billion in 2020 and 2019, respectively.
“We would like to run industry utilities, for example, to give a look for sanctions risks and financial crime, but right now we’re held back from doing that,” Stuart Davis, executive vice-president, financial-crimes risk management and group chief anti-money laundering officer at the Bank of Nova Scotia, told delegates at that same conference.
In addition to the restrictions imposed by PIPEDA, there is also confusion about what constitutes permissible information sharing under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
“More explicit direction, I think, is certainly called for,” Brendan Brothers, co-founder of Verafin, a subsidiary of Nasdaq Inc., and head of anti-financial crime at Nasdaq, said in a recent interview.
The company uses technology to detect fraud, money laundering and other financial crimes and sells those solutions to financial institutions.
“There is no lack of appetite from the banks to be able to do that [protected information sharing],” Mr. Brothers said. “I think it is the guidance and the clarity that they are hoping to see in terms of legislation that would allow them to do that.”
If Canada created a safe harbour provision for banks, it would increase the visibility of illicit financial flows.
Case in point: U.S. consortiums on payments fraud track where the money ends up and if there are risks associated with the receiving customer, Mr. Brothers said.
That’s why he and so many others argue that Canada’s legislative amendments should be focused on achieving outcomes – in other words, rooting out dirty money.
One would hope.