Cullen Commission on Money Laundering

The Cullen Commission of Inquiry into Money Laundering in British Columbia has been holding video interviews over the months of May and June, and I was recently asked by a reporter as to what I hope will result from pending report. My government investigative and private sector consulting experience has provided me with a rare opportunity to understand this topic from two very distinct perspectives that I will share with FrontLine readers. 

The purpose of this paper is to provide a critical examination of where I see tremendous gaps and hopefully inspire our political leaders to once and for all take definitive action and not just provide lip service and sound bites.

For over 30 years, I had a law enforcement perspective. In that capacity, my viewpoint was government and investigative driven. For the last 10 years, in my current position as a consultant, my perspective has shifted to one that is industry and compliance driven. This provides me with a unique understanding of the responsibilities, sensitivities, challenges and frustrations experienced by the government and financial sectors in dealing with anti- money laundering (AML) and terrorist financing considerations. 

It is important to recognize that there is a notable difference in those two perspectives – and this highlights one of the many challenges we face in dealing with money laundering and other criminal problems.

Change is clearly necessary, and my first hope for the Cullen Commission Report is that it results in far more than a political exercise where excellent recommendations are received, a report is written and then we go back to the way things are, which is far too often the case. 

In my view, this is an opportunity to seriously examine why Canada has become a haven for trans-national organized crime and money laundering – a reputation we should not be proud of. 

We need to seriously examine the gaps in the Canadian system, inclusive of legislation, law enforcement, prosecution and professions that argue they are immune from AML requirements (i.e. lawyers). 

How did Canada become a money laundering haven?

In 1982, the Royal Canadian Mounted Police (RCMP) created Anti-Drug Profiteering (ADP) Units and commenced lobbying the so-called ‘Big 5’ Canadian banks (Royal Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Commerce, Scotiabank, and TD) to provide voluntary disclosure to the RCMP on suspected drug money laundering cases. This resulted in a federal government panel being created in 1985 to examine legislative requirements needed to enhance existing laws focusing on the proceeds of crime. 

As an intermediary on behalf of the Big 5, the Canadian Banker’s Association (CBA) lobbied against enacting prescriptive reporting requirements and, in return, CBA members agreed on a cooperative basis to provide voluntary disclosure to law enforcement on money laundering. Sadly, this approach only received lip service and there continued to be a systemic failure in Canada’s ability to combat money laundering.

In the early 90s I was assigned as a liaison officer in Hong Kong. As 1997 was looming, many HK Chinese were looking for safe havens, and Canada was one of the countries of choice. Canadian legislation and policies under the Immigration and Refugee Protection Act (IRPA) paved the way for many Chinese Triads to enter Canada (and Vancouver has been a prime area of choice). 

A law enforcement gap developed from the IRPA requirement that Canada have a similar offence for prosecuting criminal offences. When it came to Triads, the Asian-base organized crime group, being charged as having been a member of this group and/or being a member of these criminal organizations was not deemed a prohibited ground and therefore, due to their wealth (much of it from criminal proceeds), many triads entered Canada as entrepreneurs. At that time, based on my working with the HK Triad Bureau, we predicted that Vancouver would displace Hong Kong for drug shipments coming out of China and for money laundering out of Asia. The introduction of casinos in British Columbia provided a further attraction for Asian-based orga­nized criminals.

In Dec 2019, Canada’s federal anti-money laundering agency has notified casinos, including Parq Vancouver shown above, to be wary of customers paying with bank drafts, highlighting this as a new laundering method. The warnings come after the agency analyzed a number of suspicious casino transactions and found that criminals were increasingly favoring this form of payment.

In Dec 2019, Canada’s federal anti-money laundering agency has notified casinos, including Parq Vancouver shown above, to be wary of customers paying with bank drafts, highlighting this as a new laundering method. The warnings come after the agency analyzed a number of suspicious casino transactions and found that criminals were increasingly favoring this form of payment.

My insistence on the need for legislation had been falling on deaf ears in Ottawa until 1992 when a media story focussed on the issue of Triads entering Canada. As a result, an amendment to Bill C-86 was written to enable immigration officers to reject any applicant known to be involved in a criminal organization and/or associated to a criminal organization; Section 37 of the Immigration and Refugee Protection Act came into effect in February 1993.

In 1992, funding was made available through the renewal of Canada’s Drug Strategy to expand the ADP units. A five-year pilot initiative entitled “Integrated Anti-Drug Profiteering Units” was designed to link enforcement related resources, namely: the RCMP, Justice Department (Public Prosecution), forensic accountants, provincial and municipal police, Canada Border Services, and later Canada Revenue. The objective was to test the value of an integrated concept of investigating and prosecuting the upper echelons of money laundering and organized drug trafficking organizations.

At that time, the funding was “fenced” (in as much as an annual evaluation was conducted to determine to overall value for dollars being spent), meaning the RCMP was not able to redirect these funds for other enforcement measures. As someone who lived through this and further expansions of this concept, it can be stated that it was moderately effective and resulted in some success.

The attacks of 9/11 signalled the beginning of the end of the Integrated Proceeds of Crime Units (IPOC) as RCMP resources were quickly hived off to undertake the terrorist files. This was followed by the introduction of Integrated Market Enforcement Teams which again hived off further IPOC resources, leaving units with massive vacancies. 

Successive management endeavoured to hide the embarrassment of the vacancies since successive governments failed to shore up funding by eliminating specialized teams and creating multi-skilled teams. This resulted in generalized units that dealt with all manner of federal crimes and, the reality is, valuable expertise was lost. Specialization started eroding in the mid-2000s, again leading to systemic failure to combat financial crime and money laundering. Canada came to be seen by trans-national criminals as a weak link and a great place to launder funds through real estate, casinos, high value purchases and high-end vehicles. 

As the legal profession won successive arguments against being brought under the money laundering regime, they were and continue to be duped by sophisticated organized criminals for purposes of establishing companies and having their trust accounts manipulated. As a 2019 report in the Edmonton Journal explained: “For reasons of solicitor-client privilege, the accounts aren’t subject to the same reporting requirements as other popular money laundering tools.” A recent example is the transfer of funds to a lawyer’s trust account for purposes of a large real-estate investment and then having the investment allegedly “not proceed” and thus the monies is sent out of a trust account to the criminal account which gives a surface appearance of legitimacy. 

Another huge weakness in the RCMP approach has been the marriage to a rank-based system wherein salary increases are the result of promotions, based on an exam system. Thus, members apply for positions in various disciplines and this creates ongoing expertise vacancies. 

In the 21st Century, where cyber-crime is increasing exponentially, it is time to look at a federal model, possibly similar to either the FBI or DEA. Those systems include probationary agents, agents, and senior field agents. The key is that agents remain in their field of expertise and gain further salary increases through demonstration of further expertise. Although there is no perfect promotional system, success can be clearly linked to the retention and nurturing of experience-based expertise.

The RCMP has continually stated they do not have the resources to be effective in financial and cyber crime, inclusive of money laundering. This has resulted in Canada failing to meet its international obligations, a fact that likely will continue for the next several years. At a recent conference, a senior RCMP officer stated the Force is likely 3 to 5 years away from being able to undertake effective international money laundering investigations.

The recent focus on what is being deemed systemic racism will continue to require senior management to direct their attention to contract policing, thereby impacting the federal requirements. 

Make no mistake, transnational orga­nized crime will be alive to the RCMP’s required focus and no doubt will capitalize on investigative shortfalls.

Legislative Burdens

Canadian investigators have been placed under enormous case law restrictions and investigative requirements that have resulted in the need for far more resources then most units can compile. 

The 2011 Report on Disclosure in Criminal Cases, issued by the Steering Committee on Justice Efficiencies and Access to Justice, clearly articulates the issues facing law enforcement and prosecution: “Effectively and efficiently gathering, managing, digesting and disclosing large quantities of information is an onerous task for the police and prosecution. Receiving, managing and digesting large quantities of information is also an onerous task for defence counsel and judges. Resources committed to disclosure activities cannot be deployed elsewhere to address other pressing needs. Disclosure disagreements between the prosecution and defence frequently arise. The absence of statutory procedure to obtain early judicial resolution of disclosure disputes is particularly problematic. Failure to meet the demands of full disclosure leads to delayed and stayed trials. Irrespective of who is to ‘blame’, public confidence in the administration of justice suffers when serious cases, or a spate of less serious ones, are not determined on their merits.” Such challenges have benefited trans-national organized crime time and time again.

Canada needs to finally adopt legislation similar to the Racketeer Influenced and Corrupt Organizations Act (RICO) statute that was undertaken in the United States. A federal law designed to combat orga­nized crime, it allows prosecution and civil penalties for racketeering activity performed as part of an ongoing criminal enterprise. 

Under RICO, a person who has committed “at least two acts of racketeering activity” drawn from a list of 35 crimes (27 federal and 8 state crimes) within a 10-year period can be charged with racketeering if such acts are related in one of four specified ways to an “enterprise”. Those found guilty of racketeering can be fined up to $25,000 and sentenced to 20 years in prison per racketeering count.

Upon deciding to indict someone under RICO, the U.S. Attorney has the option of seeking a pre-trial restraining order or injunction to temporarily seize a defendant’s assets and prevent the transfer of potentially forfeitable property, as well as require the defendant to put up a performance bond. This provision was placed in the law because the owners of Mafia-related shell corporations often absconded with the assets. An injunction or performance bond ensures there is something left to seize in the event of a guilty verdict.

In many cases, the threat of a RICO indictment can force defendants to plead guilty to lesser charges, in part because the seizure of assets would make it difficult to pay a defense attorney. Despite its harsh provisions, a RICO-related charge is considered easy to prove in court since it focuses on patterns of behaviour as opposed to criminal acts.” 

The issue of beneficial ownership has been well-addressed as of late, but the bottom line is that, unless we create a national beneficial ownership registry, gaps will remain and organized criminal groups will continue to capitalize on these gaps to the detriment of any enforcement efforts.

Best Case Results

Getting back to answering the journalist’s question, I will be watching for the following results to come from the Cullen Commission Report:

  1. Recognition that law money laundering cases require expert investigative resources and an integrated approach in order to be successful. There must be a recognition that financial crime investigators need to remain specialized and attached to their respective units long-term. These Units need to be able to recruit both sworn law enforcement from other departments and civilian members where expertise gaps exist (this was the case with the Integrated Proceeds of Crime model which today has been lost).
  2. Prosecutors need to, like financial crime investigators, be assigned to specialized units for the long term in order to garner the necessary expertise to be able to deal with the complexities of the cases;
  3. Legislatively, it is time to either deal with the issues arising of the disclosure fiasco or create new legislation inclusive of a RICO-type statute;
  4. The Government needs to pull its head out of the sand and recognize it is to blame for the mess Canada finds itself. Money laundering and financial crime cases are expensive and therefore need ongoing funding commensurate with the size of the units, and this funding needs to be solely dedicated to the units and not available for all other policing requirements;
  5. The legal profession needs to be brought, into the PCMLTFA in some way. The profession needs to understand that the amendments now refer to ‘recklessness’ which I would opine could easily be attached to many lawyers in their dealing with the ‘criminal element’
  6. Training needs to be a priority for understanding Asian-based organized crime so that effective enforcement can result;
  7. FINTRAC, the oversight regulator, needs to play a more important role in administering regulation penalties to entities that continue to demonstrate a disregard for thwarting money laundering, including our Big 5 institutions;
  8. That other provinces recognize that B.C. is not alone in being a major conduit for trans-national organized crime and money laundering activities and that they too, look into the gaps that they possess.

The Cullen Commission has the potential to set Canada on the right course to become an effective world player in thwarting trans-national organized crime activity. A failure by Governments to take this seriously will come at a steep future price to all Canadians.

Garry W.G. Clement, CFE, CFCS, CAMS, FIS, CCI is President & CEO of Clement Advisory Group.