The Liberal government is moving into the 21st century and belatedly giving banks an important tool to foil financial criminals.
As outlined in the federal budget, Ottawa plans to increase permissible information sharing among financial institutions so that they can better detect and deter money laundering, terrorist financing and sanctions evasion.
At present, financial institutions are restricted from warning each other about crooked clients who perpetrate a host of financial crimes. The only exception is fraud prevention. As a result, dirty money often freely flows from bank to bank even if some financial institutions detect illicit activity and shut down accounts.
The proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act will also apply to other businesses – although the government doesn’t specify which ones.
At the very least, Ottawa’s proposals attempt to address a long-standing frustration of the banking industry, regulators and law enforcement: that financial criminals can easily switch lenders without fear of getting caught.
Considering the Big Six collectively hold more than 90 per cent of banking assets across the country, the legislative changes, if properly implemented, could open up a new front in Canada’s fight against financial crime.
It’s about time. Canada is falling further behind other countries on this issue.
Last year, British banks were given the green light to further enhance data sharing through new pilot programs to prevent dirty money, including funds linked to sanctioned Russian oligarchs, from tainting the financial system.
American banks, meanwhile, have been allowed to engage in protected data sharing for more than two decades and are being encouraged to do more of it.
Provisions of the 2001 Patriot Act, passed after the Sept. 11 terrorist attacks, offered U.S. banks a “safe harbour” – a provision that shields them from legal liability if they participate in data-sharing partnerships to catch criminals.
Canadian banks have long lobbied for similar protections so they can participate in industry-wide initiatives that can scan for risks across financial institutions, rule out false positives and provide collaborative disclosures to FinTRAC.
Our current system isn’t working.
Nick Maxwell, one of the world’s top experts in information-sharing partnerships, told the Cullen Commission on money laundering in British Columbia that on a per capita basis, the volume of reporting in Canada is actually 12.5 times that of the United States and 96 times that of Britain.
Even so, Canada’s track record on enforcement and prosecutions lags both.
That means the government’s plans are better late than never.
“Canada needs a robust legal framework that keeps pace with evolving financial crimes threats,” states the federal budget.
Agreed.
That’s why Ottawa must do more than just amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to facilitate more information sharing. It needs to update the Personal Information Protection and Electronic Documents Act, the federal privacy law, too.
PIPEDA, as that law is known for short, restricts how businesses, including banks, collect and use personal information about their customers. If the government fails to make similar changes to PIPEDA, there will be continuing confusion for financial institutions and other businesses about what constitutes permissible information sharing – especially since the government is signalling the Office of the Privacy Commissioner will play an oversight role.
The government also needs to anticipate other potential friction points for banks by learning from the early missteps made in other countries. For instance, during the early days of information sharing in the United States, most financial institutions were only sharing limited information by using secure e-mail and attachments.
“It was a very, very manual, cumbersome process,” Brendan Brothers, co-founder of Verafin, a subsidiary of Nasdaq Inc., and head of anti-financial crime at Nasdaq, said in an interview earlier this year.
As a result, Newfoundland-based Verafin built a platform called FRAMLxchange – the name is a play on the intersection of fraud and anti-money laundering – to create a network of banks authorized to engage in information sharing.
In addition to automating the information-sharing process, FRAMLxchange is capable of running analytics across multiple banks and creates opportunities for those lenders to share data voluntarily about problematic clients.
“We know money launderers and fraudsters will try to break up their activity across multiple financial institutions, hide what they are doing, because they know the siloed nature of the system,” he said.
As Mr. Brothers rightly points out, Canada needs to similarly circumvent the advantage that criminals have by allowing banks to effectively work together.
“I think the ambition in Canada needs to be to create that regulatory clarity to allow private-to-private information sharing within the confines of privacy protection,” he said.
The government is also proposing other new measures to combat financial crimes. Unfortunately, though, Ottawa is still taking an iterative approach.
For instance, there is still no federal entity responsible for sanctions enforcement, no enhanced whistleblower protections and the long-promised Canada Financial Crimes Agency will only receive $1.7-million over two years.
That’s a joke considering an estimated $45-billion to $113-billion is laundered here each year, according to Criminal Intelligence Service Canada.
Legislative tinkering is not enough. What’s needed is wholesale change.
Rita Trichur