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Canadian authorities, banks are scouring our financial transactions by the millions

Briefing highlights

  • Snooping on a grand scale
  • Markets at a glance
  • The lira’s Turkish bath
  • Canadian dollar at about 76 cents
  • What to watch for in CREA numbers
  • What to expect on manufacturing, inflation
  • What else to watch for this week

We need to ensure that the intelligence we’re generating is actually intelligent

— Dr. Vanessa Iafolla, University of Waterloo

Canadian government and bank officials are snooping on a grand scale, scouring our financial transactions by the millions.

It’s part of the fight against money laundering and financing of terrorist groups, but the magnitude and quality of the process raise questions about whether watchdogs and financial institutions may be going too far.

"It's sort of a widespread development in policing that we don't normally think of as policing," said Dr. Vanessa Iafolla of the University of Waterloo, co-author of a study that documents the effort.

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Canadians think of business dealings as private, she added in an interview, noting that "we are subject to more scrutiny than we thought would ever be the case."

The study by Dr. Iafolla, lecturer in sociology and legal studies, and Dr. Anthony Amicelle, associate professor at the Université de Montréal’s School of Criminology, is fascinating in its own right.

But it takes on added importance given that Ottawa is in the midst of a mandated review of a law aimed at fighting laundering and terrorist financing. It also comes in the wake of a Wall Street Journal report that suggested a low laundering conviction rate in Canada.

Not to mention mounting concerns over privacy given the controversy around Facebook’s data sharing practices and other recent data abuse scandals.

The study by Dr. Iafolla and Dr. Amicelle found this government effort often takes in “activities that do not warrant suspicion.” Banks, in turn, “heavily police” customers - to fight fraud, but also to “generate information” on transactions authorities may deem suspicious.

Bank employees who scour those transactions use their own judgment, along with directives from their institutions, to determine what to flag.

"What you end up getting is people's individual thoughts and ideas around gender, race, age and suspiciousness influencing who ends up getting reported," Dr. Iafolla said in an accompanying U of Waterloo statement.

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The study, published in the British Journal of Criminology, doesn't take a stand as to what's right or wrong.

But Dr. Iafolla said in the interview that security is a "balancing act," and, of course, a certain level is needed.

Obviously we must guard against money laundering and financing of terrorism, she added, but "we need to ensure that the intelligence we're gathering is intelligent."

The research came from interviews with authorities such as the Financial Transactions and Report Analysis Centre of Canada, commonly known as Fintrac, and bank employees.

Reynard Li/bloomberg

Dr. Iafolla and Dr. Amicelle named no banks in particular, but she said they went far beyond the majors to a range of financial institutions.

Some facts and figures from the study, titled “Suspicion-in-the-making: Surveillance and denunciation in financial policing”:

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1: More than 30,000 businesses, from banks, insurers and securities dealers to real estate firms, casinos and precious metals traders, are subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, the law now being reviewed by a Commons committee.

2: The biggie: the number of reports submitted to Fintrac each year top 23 million, based on 2016 numbers. That breaks down into about 110,000 suspicious transaction reports, 9 million related to large cash movement, 14 million for electronic transfers, and 170,000 for casino disbursements.

3: Among institutions that report to Fintrac are the six big banks, 22 other domestic banks, 24 subsidiaries of foreign businesses and 29 branches of foreign operations.

4: The system in Canada “goes beyond suspicious activity reporting,” with banks handing over “suspicious transaction reports,” or STRs, and those related to electronic movement of money, terrorist properties, activities involving the transfer of large amounts of cash and casino disbursements.

5: Apart from Fintrac, the authorities involved include 10 additional groups, among them the Canada Border Services Agency, the Canada Revenue Agency, the Canadian Security Intelligence Service and the Mounties.

Here's what one Fintrac official told Dr. Iafolla and Dr. Amicelle, according to their paper:

"The question is where to look for the needle in a haystack? It is nice to have 20 000 transactions of Mister X in my database but it is the suspicious transaction report that will do ‘bang,' telling me that ‘Mister X is a bad guy."

The banks say they flag between 1 and 25 per cent of alerts, which brings the annual total to between a few hundred to many thousands, the paper said.

"In other words, 75 to 99 per cent of detected abnormalities are either re-normalized because of manifest human or technical errors of assessment or considered as non-problematic or inconclusive. Bigger the bank is, and bigger seems to be the rate of non-reported alerts."

Behind the effort are two things along with surveillance: gauging risk, and resorting to “a theory of (ab)normality,” Dr. Iafolla and Dr. Amicelle said.

The first can involve risk-scoring based on several factors, including a customer's occupation, the types of accounts and where he or she lives.

"Secondly, while the risk element - through risk-scoring - is crucial to choose where (and who) to look more intensively, surveillance also depends on a theory of (ab)normality to choose what to look for," they said.

“For instance, Fintrac provides over 250 official indicators of abnormality to banks, such as ‘client is nervous, not in keeping with the transaction’ and ‘client makes frequent or large payments to online payment services.'”

One bank official, for example, told the researchers the institution deals with 30,000 to 35,000 alerts throughout its global operations every month, with 2,000 to 2,500 potentially resulting in STRs.

"The resolution of enigmas is assigned to analysts who have to consider all internal alerts, from the ‘unusual transaction reports’ from branch employees to the ‘automated alerts’ from transaction monitoring devices," Dr. Iafolla and Dr. Amicelle said.

"Analysts are fully involved in the decision-making process that may ultimately lead to the denunciation of the flagged customer’s behaviour."

Investigations can go several ways.

"The degree of subjectivity associated with suspicion-based models of intervention is not denied within reporting entities," Dr. Iafolla and Dr. Amicelle said.

But it all “raises a whole range of theoretical and political issues, starting with renewed forms of discrimination and exclusion masked by or legitimized through the risk terminology.”

The Canadian Bankers Association, reluctant to talk about the study while the parliamentary review is underway, has said it supports a stronger process. But “it is becoming increasingly complex, with significant regulatory, resource, and operational costs that continue to grow,” Sandy Stephens, the CBA’s assistant general counsel, told the committee earlier.

Those on the front lines reporting to Fintrac should focus on “high-risk transactions and patterns,” which would allow them to put their resources where they can best be used.

“The CBA also recommends that the regime be enhanced through greater collaboration, communication and information sharing between governments, law enforcement, and financial institutions,” Ms. Stephens said.

“This includes, one, using a more aligned and consultative approach to legislation and guidance; two, working jointly to develop typologies and identify high-risk transaction patterns; three, sharing information on individuals or entities under investigation; and four, allowing Fintrac to request additional information once it has reasonable grounds to suspect money-laundering or terrorist-financing activities.”

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Markets at a glance

“Erdogan’s decision to install his son-in-law as the minister of finance and treasury has raised questions over the independence of the Turkish central bank, meaning that to a large extent markets treat any measures to restore calm with disdain,” said IG market analyst Joshua Mahony.

“With banks in Spain (US$82-million) and France (US$38-million) owed millions by Turkish borrowers, the devaluation of the lira will leave people unable to repay any debt that may be euro- or dollar-denominated,” he added.

“The issue is that while Erdogan is accusing foreign powers of waging economic war on Turkey, we have also seen Trump ramping up tariffs as he sees this currency devaluation as a benefit to Turkish exporters. With the lira in decline throughout the past decade, this has simply been a ramp up of the status quo, with the currency unlikely to reverse these losses any time soon.”

This is, of course, playing out through both stock and currency markets, where the Canadian dollar now stands at about 76 US cents.

“While on its own this crisis may well seem contained, and small in nature, there does appear to be a sense that this was yet another reason for investors to take a step back,” said CMC Markets chief analyst Michael Hewson.

“Against an already difficult geopolitical backdrop, coming as it has on the back of rising concerns over an escalation between the U.S. and China on trade, the implementation of new sanctions against Russia last week, this growing crisis in Turkey appears to be giving investors too many balls to juggle, hence this latest bout of risk aversion, which is also having some ripple out effects into other currencies including the South African rand.”

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What to watch for this week

Bank of Montreal projects the report will show national sales down 1 per cent from a year earlier, with average prices up 1 per cent. The MLS home price index, a favoured measure, is expected to show a gain of 2.5 per cent, bouncing "as a heavy drop a year ago falls out of the calculation," BMO said in a lookahead.

"After a very difficult start to the year, the housing market is showing signs that conditions are broadly stabilizing," said Benjamin Reitzes, BMO's Canadian rates and macro strategist.

"Despite the less negative overall picture, the market remains very segmented," he added, noting Vancouver "continues to struggle" in the wake of new federal mortgage rules and the provincial move on foreign buyers.

"The Prairies are also struggling to gain any traction but at least activity is flattening out," Mr. Reitzes said.

"However, if oil prices stay elevated, that should support Alberta and, to a lesser extent, Saskatchewan," he added.

"Toronto activity bounced back in July, but remains well below frothy 2016 levels. And, sales in Montreal and Ottawa pressed higher after taking a breather in the prior month."

As a reference point, note that national sales fell 10.7 per cent in June from a year earlier, with average prices down 1.3 per cent and the MLS index up just 0.9 per cent.

Several local real estate boards have already released their July sales and prices reports.

Toronto, for example, which had been one of the frothy markets, showed a hefty sales gain. Benchmark prices only dipped, while the pace of decline for detached homes slowed noticeably.

Pricey Vancouver, though, showed a marked drop in sales.

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The rest of the calendar:

TUESDAY

Germany's report on second-quarter economic growth should show a bump from the first three months, but it could be a wash for the euro zone.

"We doubt that the second estimate of euro zone GDP growth will be revised from the disappointing 'preliminary flash' estimate of 0.3 per cent quarter over quarter," said Melanie Debono of Capital Economics.

Watch, too, for results from Hydro One Ltd. in the wake of its shakeup, and quarterly earnings from Canopy Growth Corp. in the run-up to legal marijuana.

WEDNESDAY

Besides the CREA housing market report, investors will be watching for the latest numbers on U.S. retail sales, which economists expect will show a July rise of just 0.1 per cent, or possibly no gain.

“A rebound in consumer spending was a key driver of Q2’s strong GDP print, however July’s retail sales figures could be the first signpost of deceleration to a more trend-like pace,” said Andrew Grantham of CIBC World Markets.

“Unit auto sales downshifted again on the month, and slightly lower gasoline prices could also weigh on the nominal headline sales print. Restaurants could also have seen a slight pullback following extremely strong growth in each of the previous two months.”

THURSDAY

Wal-Mart Stores Inc., which reports results, is "one of the few U.S retailers that has been able to take the fight to Amazon in terms of the online shopping experience," said CMC's Mr. Hewson.

"Big box retailers have come under increasing pressure from the low overheads model that Amazon is able to bring to the table, but Wal-Mart is managing to keep up, with its stronger grocery offering."

Also on tap is Statistics Canada's monthly report on manufacturing sales, which analysts expect to show a gain of 1.3 per cent in June.

"The strength in June is expected to mainly reflect a strong double-digit bounce-back in petroleum and coal sales," Royal Bank of Canada economists said in a lookahead.

"Production levels in this sector are expected to return to normal after activity sank in April and remained weak in May due to a refinery outages," they added.

"The June increase is also expected to reflect indications of a modest bounce in motor vehicle sales. The volume of overall manufacturing sales is expected to be similarly strong."

FRIDAY

Observers expect Statistics Canada to report annual inflation held at 2.5 per cent in July, or got even hotter at 2.6 per cent.

“Energy prices provided another lift to the consumer price index, and look to be running almost 14 per cent higher over the past year,” said Royce Mendes of CIBC.

“Similarly, following a month in which food prices showed a surprisingly large increase, grocery stores have been signaling that higher prices should be expected moving forward, with some of that being blamed on the retaliatory tariffs Canada implemented on July 1.”

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