Money Laundering and the War on Drugs

Over the past few years, Canada has come under harsh criticism for not doing enough to thwart money-laundering operations that funnel the proceeds of criminal activity, such as  terrorism and the importation and sale of illicit drugs, through seemingly legitimate business operations. The Paris-based Financial Action Task Force (FATF) has cited Canada’s reporting of illegal financial activity as weak, and its record of prosecutions and convictions as low.

Is Canada’s money laundering enforcement system really deficient?

FINTRAC is the federal government organization set up to identify suspicious financial transactions within Canada. Officially known as a financial intelligence unit (FIU) that reports to the Minister of Finance, FINTRAC was created in 2000 to counter suspected money laundering. After the September 11 terrorist attacks in the United States, the unit’s mandate was expanded, linking it with the Canadian Security Intelligence Service, to search out information on potential terrorist financing. The mandate was expanded yet again in 2006 under Bill C-25 to further increase its scope, with a requirement for more detailed reporting.

Since 2002, FINTRAC has been a member of an informal international network of more than 130 FIUs worldwide known as the Egmont Group of Financial Intelligence Units, which was formed in 1995; its name gleaned from a palace in Brussels where the meeting was held. In early 2008, with the support of Canada’s then-Minister of Finance, Jim Flaherty, the Egmont Group Secretariat headquarters was established permanently in Toronto.

“With the opening of this office, we are entering a new era in the global fight against financial crime,” Minister Flaherty said at the time. “This new permanent home will support the Egmont Group in its work to shut down money-laundering operations and starve criminals of the funds necessary to finance their destructive aims: drug trafficking, organized crime and terrorist activity.”

That sounds impressive, but Daniel Seleanu, a regulatory intelligence correspondent for Thomson Reuters, notes that any national anti-money-laundering regime should be judged in part by the number of prosecutions and convictions it produces. FINTRAC can neither prosecute nor convict. It is mandated only to record and report; and even that power may be rapidly eroding.

The legislation crafted for the government’s financial investigation unit recently received a degree of censure from the Supreme Court of Canada. As originally written, the law would have had lawyers becoming “agents of the state,” subjecting their offices to searches without a warrant. In a 7-0 ruling, the Supreme Court held that sections of the legislation that apply to lawyers violated the Canadian Charter of Rights and Freedoms.

This might be more than a small flaw. As the distinction between what is considered legitimate trade and what is criminal or questionable financial activity becomes increasingly blurred, this crack might well become a serious breach in FINTRAC’s legislative foundation. One only has to look at what is currently happening with the Canada’s law enforcement efforts in the “war on drugs”, to borrow the U.S. term.

There is no denying that drug production and trafficking have scaled up over many decades.

The flow of drugs into North America, controlled mainly by drug cartels in Mexico, has resulted in ruthless turf battles, and this violence has claimed tens of thousands of lives, a great many of them innocents caught in the crossfire. A report released in 2015 by the Mexican government showed 165,000 documented cases of homicide between 2007 and 2014 in Mexico that were linked to the drug cartels.

Considering this level of violence, and the impact of illicit drugs on users, particularly young people, it’s not unreasonable to suggest that all monies derived from or related to the production and sale of illegal drugs should be considered the proceeds of crime.

In 2012, the Canadian government passed the Safe Streets and Communities Act, which increased previously existing mandatory minimum sentences for illegal drugs, and doubled the maximum penalty for manufacturing Schedule II drugs such as marijuana. But in the past six months, Canada’s new Liberal government has brought about a 180° shift in official government thinking on the position of legalizing and decriminalizing marijuana.
 

A year ago, marijuana was something to be feared and reviled, except, of course, when grown and controlled and sold as a medicine through government channels. But soon, the drug may be as widely and legally available as beer and wine.

To further blur the lines between legality and the dark side, we find that Canada is also not alone in this change of tack and revised attitude toward drugs.

Portugal decriminalized drugs of all kinds in 2001, putting that country on the front lines of experimental approaches to drug control. On the question of how government can keep the citizenry from taking dangerous drugs, they looked at choices available to them. One was to crack down on the drug providers – the cartels, the middle-level distributors and the dealers on the streets. An additional approach was to also bear down on the customers and users – with arrests, trials, and imprisonment. Most governments in the past have chosen legal prosecution of this second group – the low-hanging fruit of the drug world – as both an attempted means of drug control and a deterrent. A third option, to decriminalize, was something entirely new.
 

Before decriminalization, the punishment for possession of drugs in Portugal was up to a year in prison. The government, however, took the then unusual position that drug users weren’t criminals, they were sick. They felt that people who are not criminals should not be treated as such and arrested, put on trial, and thrown in jail. Since then, people caught with small amounts of marijuana, cocaine or heroin are no longer indicted, and possession is treated as a misdemeanor similar to illegal parking.  Some 12 years on, the Portuguese government claims this approach is working.  

In recent years, Chili, Columbia, the Netherlands, Spain, Uruguay and several individual American states have also moved to legalize or decriminalize marijuana, and a number of countries are working toward adapting it for medical use in some form or another.

At the same time, Canada is certainly doing its part to support law enforcement to crack down on the big players – the cartels that grow, produce and distribute drugs. Despite the subtle generational shift in mindset toward enforcement for actual users of drugs, the efforts to stop large-scale production and trafficking carry on unabated.

The Canadian Armed Forces has regularly deployed military ships and aircraft since 2006 on joint, combined interagency missions supporting a multinational campaign against illicit drug trafficking by the violent criminal organizations that operate on a transnational scale.

The United States, France, the Netherlands, Spain and the United Kingdom all participate in this enforcement. They work together to locate, track and intercept vessels and aircraft of interest that are suspected of illicit drug trafficking in the Caribbean Sea, the Gulf of Mexico, the eastern Pacific Ocean, and the Central American coastal waters. This is all carried out under several United Nations conventions that have criminalized international trade in illicit drugs and transnational organized crime.
 

So, with attitudes toward drug use softening in many countries, with the move in Canada toward legalization of some drugs such as marijuana, and with the power of our federal financial investigation unit under increasing scrutiny, should Canada be doing more to thwart money laundering?

Estimates vary widely as to how much money is allegedly “laundered” each year in Canada. A 2009 report from Statistics Canada estimated the annual amount to be between $5 and $15 billion. The portion coming from the drug trade is an unknown and continues to become more complex.

In a world where some drugs are legal (or at least decriminalized) and some not, how then does FINTRAC make a distinction between “dirty” drug money, “laundered” drug money and “clean” drug money?
 

Over the last seven years since the Financial Action Task Force made its damning assessment of Canada’s efforts against money laundering, FINTRAC has demonstrated significant improvement. In its 2015 annual report, the organization made 1,260 disclosures of actionable financial intelligence. Of these, 923 were associated solely with money laundering and 228 dealt with cases of terrorist activity financing and “threats to Canada.” The previous year, FINTRAC made 1,143 disclosures, up from 919 in 2012.

But, the solution to better detection, prosecution and conviction of financial crime and money laundering would appear to be not only improved performance of FINTRAC, but also improved capability of law enforcement agencies and the courts to act on the improved performance of, and increased number of disclosures from, our national financial intelligence unit in the face of evolving legislation and the change in attitude toward drugs and other precursors of illegal financial activity.

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Richard E. Gower is a former military officer with an interest in history, philosophy and geopolitics. He may be reached at:  RichGower@primus.ca