Proceeds of Crime

BY STEVEN HUTCHINSON

Jul 15, 2010

A Look at the Legal Landscape

“Financial and material gains from criminal activity should not be enjoyed by criminals. Not even after they have served prison terms.”

This is the foundational premise of ‘proceeds of crime’ laws in Canada, the United States, and the UK. In general, any proceed or material benefit derived from most criminal offences listed in the Criminal Code of Canada can be deemed a ‘proceed of crime’ and be subject to forfeiture or seizure by the Courts. ’Proceeds of crime’ laws have been devised in many Western democracies to provide a legal mechanism through which the government, on behalf of the citizenry, can recoup or ‘seize’ material proceeds acquired through criminal activity, and return them to the state and society as a whole (from whom, it is argued, they were stolen in the first place).

Money Laundering is the most common method used by criminal groups and individuals to ‘hide’ illicit proceeds. Following 9/11, the specter of international terrorism brought these laws into sharp focus. The potential for organized criminal groups and regimes (such as the Taliban in Afghanistan whose opium trade financed their rule ) to fund international terrorist attacks linked ‘proceeds of crime’ and ‘money laundering’ with terrorism. Combating international terrorism and money laundering has thus evolved into an international - perhaps global - enforcement and regulatory enterprise.

Most modern ‘proceeds of crime’ laws emerged in the late 1980s and early 1990s. Originally they focused on seizing the profits acquired by ‘Mafia’ type organized crime groups, such as drug cartels and criminal biker gangs like the Hell’s Angels. The theory was to attack directly the primary motivation for organized criminal activity – i.e. profit. Seizing large amounts of criminal proceeds, the theory went, disrupted criminal groups and caused them ultimately to dismantle. Experience with organized crime had taught law enforcement, intelligence agencies, and the Courts that such large, well organized groups depended upon large and regular income streams to make the risk of crime worthwhile, and to ensure the longevity of the organization (using profits for bribery, paying collaboratives such as lawyers, and for ensuring the ‘trust’ and ‘loyalty’ of their members).

The Four Uses of ‘Proceeds of Crime’ Laws
‘Proceeds of Crime’ Laws now tend to have four main uses. In legal terms they are used by governments to seize funds obtained through criminal activity, though in practice this has happened in a small number of cases since the onus has been on prosecutors to prove the illicit source of funds ‘beyond a reasonable doubt. They are also used for prosecuting ‘money laundering’, which is itself a crime. In practice, ‘proceeds of crime’ laws can also be used to help police and security agencies uncover criminal groups themselves (through forensic financial investigation of ‘suspicious transactions’, for instance), and any other crimes in which they may be engaging. Finally, and more recently, such laws also serve to regulate the financial sector by ensuring that private institutions such as banks are complying with the legal directives that require them to flag and report ‘suspicious’ transactions to police and security agencies. If a financial institution fails to follow these guidelines, they can and have been fined by Canadian and/or international regulators. This aspect of ‘proceeds of crime’ laws has become particularly important since the terrorist attacks of September 11th, 2001, which shed light on the potentially devastating consequences of financial transfers to terrorist-oriented individuals and groups (both domestically and internationally).

The Laws in Canada
‘Proceeds of Crime’ provisions have been part of the Criminal Code of Canada since 1989 (Part XII.2). These sections allow for the seizure, restraint, and forfeiture of proceeds of crime. They also made ‘money laundering’ a punishable crime in itself, which refers to the handling the proceeds of crime in such a way so to mask or hide their criminal source. While originally developed as a measure to target and dismantle ‘organized crime’ (as defined in the Criminal Code), the proceeds of crime provisions were broadened by amendment in 2002 so that application for forfeiture of proceeds could be made for almost any ‘indictable’ offense under federal legislation, with only a few exemptions. After a conviction for an indictable offence, the Crown could therefore apply to the Court for forfeiture of the proceeds of the specific crime for which the individual or group was convicted. In order to obtain an ‘Order of Forfeiture’ however, the Crown had to prove that: (1) the property is the ‘proceeds of crime’; and (2) that the property is connected to the crime for which the individual or group has been convicted.

If no connection can be made by the Crown, the Court has to decide whether the proceeds were the result of the crime ‘beyond a reasonable doubt.’ As a result, forfeitures after application by the Crown are rarely successful. Most commonly, the Crown had to rely on the Court’s determination of proof ‘beyond a reasonable doubt’ that the property was the proceeds of crime. The most significant and consistent problem with this legal scheme was that even after conviction of an indictable offence under federal legislation, forfeiture of the proceeds of that crime was rare.

The Anti-terrorism Act (2001) and Fintrac
In 2001, following the terrorist attacks of September 11th, Part 4 of Canada’s Anti-Terrorism Act created the new Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This Act linked the previous sections of the Criminal Code relating to ‘proceeds of crime’ and ‘money laundering’ with ‘terrorist financing’ by making any financing of any terrorist group (as defined by the Criminal Code) an offence under federal legislation. This Act also created FINTRAC – the Financial Transactions and Reports Analysis Centre of Canada –responsible for collecting, analyzing, assessing and disclosing financial information to assist in the detection and prevention of money laundering and terrorist financing. FINTRAC, based on similar ‘financial intelligence agencies’ in the United States and Europe, was thereby made responsible for implementing specific programs and measures to investigate and prosecute money laundering and terrorist financing. They did this in part by creating ‘client identification’ and ‘record keeping’ regulations for financial services providers (such as banks) and any other entities or persons that could be used for money laundering or financing terrorism.

The emergence of FINTRAC also served to consolidate what had been rather dispersed and relatively autonomous financial intelligence and policing units into a federally authorized, national financial intelligence agency. It did not take long for FINTRAC to prove its worth. In early 2002, shortly after its creation, FINTRAC passed on to the RCMP’s ‘Proceeds of Crime Unit’ a series of ‘suspicious transaction reports’ on a resident of Vancouver, British Columbia. Dat Dac Tien (Frank) Tran had been handling cash transactions of more than $50 million annually. Tran was the mastermind behind a massive drug-money laundering operation for Latino and Asian gangs, who imported cocaine and exported B.C. marijuana. Tran laundered over $201 million over a 3 year period for these groups, Canada’s largest money laundering case to date.

The Proceeds of crime (Money Laundering) and Terrorist Financing Act (2006)
In 2006, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PCMLTF Act) was further amended to reverse the onus on the Crown in the existing ‘proceeds of crime’ sections of the Criminal Code. In other words, once an offender has been convicted of a ‘criminal organization’ offence under the Criminal Code or under certain offences under the Controlled Drug and Substances Act (specifically Sections 5, 6, and 7 which relate to ‘Trafficking’, ‘Importing/Exporting’, and the ‘Production’ of drugs), the Court is now directed to Order the forfeiture of ‘proceeds’ identified by the Crown, unless the offender can prove that the property is not the proceeds of crime. This now placed the burden of proof on the convicted offender. The importance of this seemingly subtle change was clearly demonstrated at the 2006 sentencing of Frank Tran: rather than the Crown having to file an application for forfeiture of the proceeds from Tran’s massive money laundering scheme, Chief Justice Patrick Dohm of the B.C. Supreme Court was able to Order $3 million of Tran’s assets immediately forfeited to the Crown. He also ordered Tran to pay a fine of $423,462.96, and sentenced him to a 10-year prison term - the maximum penalty for money laundering under the Criminal Code.

Other amendments to the PCMLTF Act in 2006 enhanced information sharing between FINTRAC, law enforcement bodies, and other national security agencies. They also provided for a new ‘registration’ regime for money service businesses in Canada, and enhanced ‘client identification’ measures across the financial sector. The amendments also created an administrative and financial penalties scheme for enforcing compliance with the Act, and allowed FINTRAC to seek criminal penalties for extensive and repetitive non-compliance (repeated failure can lead to a $2 million fine and/or up to 5 years in prison). FINTRAC releases ‘sanitized’ annual Reports of some of the cases and trends they have identified from the previous year. In May of 2009 they disclosed 210 total cases of which 171 were associated with money laundering, 10 with money laundering and terrorist financing, and 29 involved terrorist financing and threats to national security. Of these cases, ‘fraud’ and ‘drug trafficking’ were the most common, with investment/securities, telemarketing fraud, marijuana production and cocaine trafficking being the most prevalent.

The International System
The past decade of potentially devastating consequences of terrorist attacks has brought anti- and counter-terrorism to the front of the policing and security community’s agenda. The post-9/11 Anti-Terrorism Act in Canada brought together ‘proceeds of crime’ and ‘money laundering’ provisions with ‘terrorist financing’ laws, acknowledging the potential link between organized criminal groups, their illicit finances, and terrorist attacks. Identifying the increasingly international character of terrorism and organized crime, the Act also affirmed Canada’s commitment to participating in the global fight against ‘transnational crime’ and to sharing information with international security agencies from allied countries. A notable example of information sharing among allied nations was the 2007 indictment of 39 individuals in Baltimore for running an international money laundering scheme. In this case the individuals operated an informal money transfer system (called a ‘hawala’ in Pakistan and the Middle East) between Spain, Canada, Belgium, and the United States.

The Financial Action task Force (FATF)
In 2006, the Government of Canada announced Toronto as the site of the permanent Headquarters of the Egmont Group, a collection of 101 of the world’s financial intelligence agencies, including FINTRAC. That same year, Canada also became the President Country of the FATF, the Financial Action Task Force, an international body of 34 Member Countries which develops and promotes national and international policies to combat money laundering and terrorist financing. The FATF came into existence in 1989 at the G-7 Summit in Paris out of concerns over the increasingly international scope of money laundering schemes. Their original function was to monitor and ensure member countries’ implementation of 40 Universal Recommendations they devised for dealing with money laundering.

After 9/11, the development of universal standards for combating terrorist financing was added to the FATF’s Mission. Since then, the agency has outlined 9 Special Recommendations for fighting terrorist financing, and has been overseeing implementation everywhere. The intent of this international collaborative strategy is two-fold: (1) to create a universal and seamless international system for combating terrorist financing and money laundering; and (2) to establish and implement universal regulation of the financial services sector and any other private sector institutions or businesses which might be used in either money laundering or terrorist finance. The last objective is based on the clear recognition that addressing money laundering and terrorist financing necessarily requires the cooperation of the private financial sector, those responsible for the majority of money changing in free-market societies.

Money Laundering & Terrorist Financing: Emerging Challenges
Though still imperfect, the international system for regulating financial crimes has constricted the flow of terrorist financing and international money laundering. Yet, just as the vacuum created by the dismantling of the major Columbian drug cartels led to an explosion and proliferation of arguably more violent Mexican street gangs, the national and international pressure on terrorist financing, organized crime, and money laundering has had some similar unintended consequences. Domestic and international terrorist groups can no longer be funded so easily by organized criminal regimes such as the Taliban and al Qaeda, and have been pressed to engage in ‘low-level’ crime and fraud to fund their terrorist actions. Increased criminal activity of terrorist individuals and groups is certainly an unforeseen and unintended consequence of restricting global terrorist financing which all policing agencies must now address.

Informal Money Transfer Systems
Likewise, informal money transfer schemes are constantly being invented, for the precise purpose of bypassing ‘official’ financial institutions thereby avoiding detection by FINTRAC and related agencies. On top of the so-called ‘hawala’ system for informal money transfers between individuals (through a handshake, a piece of paper or on trust alone), in 2009 FINTRAC also identified 2 other emerging illicit money systems: (1) the use of prepaid phone cards; and (2) digital precious metals. Prepaid cards provide access to funds that are put on the card in advance or in another location, by the cardholder or a third party. The cards – like cash - are portable, valuable, exchangeable and largely anonymous. They are not yet subject to cross-border reporting since they are not considered ‘monetary instruments’, which makes it much easier to transfer wealth from one jurisdiction to another. The origin of the money on the cards is also extremely difficult to trace, and hence no way to ascertain whether or not the money is from a legitimate source. They can therefore be anonymously loaded with funds, and moved across the country and the world.

As the internet takes a more central role in banking worldwide, a variety of new internet payment systems (IPS) are continuously being developed. One of these is based on what are called ‘digital precious metals’ (DPMs). Digital precious metals operators (DPMOs) are IPS service providers that use ‘digital currencies’ (purportedly backed by real precious metals) for online e-commerce, bill payments, person-to-¬person payments and other typical transactions. These systems allow a higher degree of anonymity than other IPS systems which are often monitored by banks, and, as a result, offer greater disguising of the origin and destination of the funds.

‘Lone Wolf’ and ‘Home Grown’ Terrorism
The increasingly high level of risk associated with organizing a large terrorist or organized crime group seems to have led to criminals and terrorists operating on their own, or in small groups of 2 or 3. In general, the more members an illicit group has, the higher it risks being detected or penetrated by law enforcement and intelligence operatives. What is referred to as ‘lone wolf’ terrorism seems to be increasing, though how directly this is linked to pressure on organized groups is unclear. The Times Square car bomber from last May, the ‘shoe bomber’ (Richard Reid), and the ‘underwear bomber’ (Farouk Abdul Mutallab), all appear to have planned, organized, and perpetrated their attacks largely on their own. While security agencies were able to link some of these individuals with international terrorist organizations (such as the Pakistani Taliban) after the fact, the connection was largely through loose internet affiliation and chat room discussions. Al-Quaeda spokesman Adam Yahiye Gadahn praised such individuals as ‘pioneers, trailblazers and role models who have opened a door, lit a path and shown the way forward for every Muslim who finds himself among the unbelievers’.

Efforts to constrict the international flow of illicit monies to terrorist groups may also be of little help with what is called ‘Home Grown Terrorism’. In such cases, residents of western democratic countries are ‘radicalized’ before finally deciding to plot and carry out an attack on their own country. Having regular revenue from work and family, such individuals are able to ‘hide in the open’, and need not rely on illicit financing, crime, or any other ‘detectable’ income source. It also costs very little to plan and carry out a devastating terrorist attack. Reports of the Times Square car bomb suggest it could have killed dozens of people and caused millions in damage – and the bomb cost less than $5,000 to construct.

Non-cooperative Countries and territories (NCCT)
The bane of the international effort to regulate and police money laundering and terrorist financing is what are referred to as ‘non-cooperative countries and territories’. While the Financial Action Task Force is composed of 34 member countries, there are many more states and territories – particularly in the Middle East and Asia – who are not party to any universal regulatory regimes. Unsurprisingly, money laundering indeed seems to prevail wherever there are corrupt, negligent, or unaccountable governments, and particularly so in ‘weak’ or ‘failed’ states. Policing money laundering and terrorist financing at an international level must first in identify non-cooperative countries, and then convince them that it is in their interests to join the fight. There can be many benefits to operating state-level money laundering schemes, and, indeed, to financing terrorist attacks in ‘enemy’ democratic countries. ‘False friends’ in the international system are those who are official signatories to international regulatory regimes, but abstain from effectively policing money laundering and terrorist financing in their own states. Countries with favorable tax regimes tend to attract ‘dirty money’, and many financial institutions in these states pay only lip service to the law, being subject to little government oversight or pressure. Illicit capital accumulation can be well entrenched, and the profits that can be accumulated from financial crimes can be deeply rooted in national economies themselves. International regulatory and policing initiatives will need to come to grips with these persistent problems, and the risks they will continue to pose to the balance of the international community.