‘Major money laundering country:’ Why a hearing into Canada’s ‘snow-washing’ problems must look beyond TD

FinTRAC’s discovery of money laundering at banks, real estate firms, securities dealers, casinos, and other financial enterprises, writes David Olive, confirms the AML laxity that Canada’s international critics have complained of for years.

Updated May 23, 2024 at 5:02 a.m.

May 23, 2024

By David OliveStar Business Columnist

The Parliamentary finance committee will soon consider holding hearings into the money laundering crisis at the Toronto-Dominion Bank.

The hearings should extend far beyond the high-profile TD case to an entire Canadian financial sector plagued by deficient anti-money laundering (AML) practices.

Canada has suffered a worsening reputation as a haven for global financial criminality at least since 2019, when a U.S. State Department report identified Canada as a “major money laundering country.”

Today, AML experts estimate that as much as $130 billion in suspect transactions flow through Canada’s financial system each year.

Much of that dirty money, deemed “snow washing” for Canada’s pristine image, enables fraud schemes worldwide, trafficking in illicit drugs and firearms, and terrorism financing.

Toronto-Dominion is only the most high-profile case of alleged deficiency in AML, with at least two investigations of Canada’s second-largest lender underway by the U.S. Justice Department.

Complacency is widespread in Canada’s financial sector

The company’s large U.S. retail bank is alleged by U.S. regulators and prosecutors to be one of the main financial institutions that Chinese money brokers used to launder an estimated $653 million (U.S.) in proceeds of Mexican drug cartels.

And TD is expected to be hit with U.S. fines of $2 billion (U.S.) or more, and possible growth restrictions on its U.S. operations during a lengthy probation.

But AML complacency is widespread in Canada’s financial sector, as revealed in last month when a November report by Fintrac, Canada’s AML watchdog, first became public.

In its startling report for fiscal 2022-2023, Fintrac found that only 106 of the 237 Canadian financial institutions it examined that year were in compliance with the federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act.   

The Fintrac report discovered not only deficient compliance in AML practices but that most firms in some financial sectors had insufficient AML controls or none at all.

The AML laxity Fintrac found at banks, real estate firms, securities dealers, casinos, and other financial enterprises that Fintrac monitors confirmed the laxity that Canada’s international critics have complained of for years.

Ottawa finally became more forceful in dealing with AML last year by granting expanded enforcement powers to Fintrac (formally the Financial Transactions and Reports Analysis Centre of Canada) and the Office of the Superintendent of Financial Institutions (OSFI). 

Canadian financial sector is effectively reliant on an honour system

Fintrac, for years a justly obscure agency, is now flexing its muscles.

In April, it fined TD almost $9.2 million for failing to report suspicious transactions. 

Last November, Fintrac fined Royal Bank of Canada (RBC) $7.4 million and Canadian Imperial Bank of Commerce (CIBC) $1.3 million for similar infractions.

And in February, the U.S. Office of the Comptroller of the Currency imposed a $65 million (U.S.) fine on RBC’s California-based City National Bank for deficient internal controls and risk-management practices.

You might ask how we got into this sorry mess.

At the risk of simplifying, the U.S. has a more elaborate rule-based system than Canada on AML and a prosecutorial zeal in enforcement.

By contrast, the Canadian financial sector is more reliant on what effectively is an honour system.

Though the bigger Canadian financial institutions have internal rules-compliance regimens that might be unrivalled in business, regulators expect them to use common sense rather than rule adherence alone to protect themselves and society from bad actors.

‘Threat actors’ have increasingly targeted Canada

When government intervention is required, Canadian regulators like OSFI have a private talk with an errant financial institution to correct problems, usually behind closed doors.

That consensual approach has worked well for generations. Problems are fixed without raising unnecessary public doubts about the integrity or stability of the financial system.

But those protections have been breached as “threat actors” have increasingly targeted Canada, and as both the industry and Canadian law have failed to keep pace with new challenges posed by an increasingly interconnected global financial system.

Deficient AML practices impose enormous social costs, some not obvious.

A 2019 report on the B.C. housing market found that money laundered through real estate firms contributed to the housing crisis by inflating house prices by as much as 7.5 per cent.

And AML deficiency can corrupt institutions. U.S. authorities investigating TD allege that some TD employees accepted bribes.

Finally, as governments ramp up their AML enforcement, they are imposing more severe penalties as a geopolitically dangerous world requires.    

For instance, Canadian banks are in the front lines of Western efforts to cut Russia out of the global financial system over its invasion of Ukraine.

Honour system dictates that actors simply do the right thing

The honour system in regulatory oversight can be preferable to a rules-based system.

Rule creation breeds loopholes.

By contrast, the honour system dictates that actors simply do the right thing. They cannot escape responsibility by exploiting loopholes. In violating that honour system with complacency on AML, the Canadian financial sector risks more government-imposed rules.

That could reduce profit opportunities, increase bureaucratic and legal costs, and slow or thwart the growth of enterprises.

So, fighting crime does pay.

And there now can be hellish consequences in not adhering to AML best practices, as TD is learning the hard way.

David Olive is a Toronto-based business columnist for the Star.