The Financial Action Task Force (FATF) conducted a mutual evaluation of Canada's Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regime against its own 40+9 recommendations and special recommendations (SR). The FATF's 2008 report concludes that Canada is fully compliant with only 7 recommendations and SRs, largely compliant with 23, partially compliant with 8, and is non-compliant with 11. The report notes that although Canada's AML/CFT legal framework is generally in line with the FATF standards, its effective implementation needs enhancement. More importantly, the report notes that the preventive system in Canada for financial institutions is generally insufficient to meet FATF Recommendations, and Canada is non-complaint with most of the FATF recommendations relating to Designated Non-Financial Business and Professions. At the time of the mutual evaluation, the Canadian authorities were in the process of amending existing rules and regulations and enacting new ones so as to remedy these shortcomings. Although the FATF report does acknowledge that these new changes aim at implementing the FATF standards, they cannot affect the FATF assessment because the new requirements are not scheduled to be officially launched until June and December, 2008.

General Overview

The Financial Action Task Force (FATF) conducted a mutual evaluation assessing Canada's anti-money laundering (AML) and combating the financing of terrorism (CFT) regime against the FATF's 40+9 recommendations and special recommendations (SR). The findings of this mutual evaluation were released in a 2008 FATF report (hereafter referred to as the 2008 FATF report or the FATF mutual evaluation). According to this report, Canada has made significant improvements in its AML/CFT regime since its last mutual evaluation in 1997 by embarking upon several major statutory amendments and structural changes. In spite of these recent developments, the 2008 FATF report still identifies significant shortcomings in Canada's AML/CFT regime. The report notes that although Canada's legal framework generally meets FATF requirements, the country's "preventive system is generally insufficient to meet the FATF Recommendations" (p. 6).

The report identifies several shortcomings in the preventive measures currently in place in Canada's financial institutions, the most serious of them being non-compliance with FATF recommendations on customer due diligence (CDD). Also, the report assesses Canada as being generally non-compliant with regard to preventive measures in Designated non-Financial Business and Professions (DNFBPs). Canada has recently introduced a series of new rules for financial entities to enable full implementation of FATF recommendations. These will come into force in June 2008, and further amendments applicable to DNFBPs are expected to come into force in December 2008. However, the FATF did not take these new rules and amendments into account during the 2007 mutual evaluation. The FATF mutual evaluation observed that Canada is compliant with only 7 recommendations and SRs; largely compliant with 23; partially compliant with 8, and non-compliant with 11.

Money laundering in Canada is criminalized pursuant to Canada's Criminal Code. Per the 2008 FATF report, "in Canada, the money laundering offense, which can be found under section 462.31 of the Criminal Code (CC), is part of a broad proceeds-of-crime regime designed to cover all obligations in the 1988 Vienna Convention and the 2000 Palermo Convention to criminalize the concealment or laundering of proceeds of crime and the possession of such proceeds or criminal instrumentalities" (p. 39). In 2000, Canada enacted the Proceeds of Crime (Money Laundering) Act and, soon thereafter, the Proceeds of Crime (Money Laundering) Act was amended in 2001 to become the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). The PCMLTFA expanded the list of predicate offenses to encompass all indictable offenses, such as terrorism. Also, the 2001 amendments criminalized (under the Canadian Criminal Code) acts such as knowingly receiving or disseminating funds for terrorism purposes, and they expedited the process of freezing and seizing such assets. The 2008 FATF report also notes that, in 2001, the Anti-terrorism Act (ATA) amended the Criminal Code to create three criminal offenses related to the financing of terrorism. The 2008 FATF report notes that these amendments to the Criminal Code "enabled Canada to implement international obligations under the UN Security Council Resolution 1373 and the UN International Convention for the Suppression of the Financing of Terrorism" (p. 49).

Canada's financial intelligence unit (FIU), the Financial Transactions and Reports Analysis Centre of Canada (Centre d'Analyse des Opérations et Déclarations Financières du Canada, or FINTRAC) was established by provisions in the 2000 Proceeds of Crime (Money Laundering) Act as an independent agency responsible for collecting, analyzing, and disclosing financial information and intelligence on suspected money laundering and terrorist financing. It is a member of the Egmont Group. According to the 2008 U.S. Department of State (DoS) report, between 2006 and 2007, FINTRAC received about 15 million suspicious transactions report (STRs) from reporting bodies. Of the 15 million STRs, FINTRAC produced 193 case disclosures during the same period. Of the 193 case disclosures, only 3 led to a suspect being charged, and as yet there have been no convictions, even though Canada's three terrorist financing offenses have been in existence for several years. Nevertheless, the DoS reports that the government of Canada is devising ways to improve Canada's terrorist financing investigation and prosecution efforts. For instance, in 2005, the Canadian government signed a Memorandum of Understanding (MoU) with the U.S. to address long-time American concerns that Canadian privacy laws and the high standard of proof required by Canadian courts was limiting the information needed by Canadian law enforcement agencies to justify launching terrorist financing investigations. Also in 2006, the Canadian government pumped $56 million into a two-year plan to bolster terrorist financing investigations within FINTRAC, the Royal Canadian Mounted Police (RCMP), the Department of Justice (DoJ), and the Canada Border Services Agency (CBSA).

Law enforcement agencies tasked with supervising and implementing AML/CFT measures in Canada are the Office of the Superintendent of Financial Institutions (OSFI), which regulates federally chartered financial institutions; the RCMP, which operates counter-terrorist financing and anti-money laundering units; the CBSA, which monitors unreported currency at airports and border crossings; the Canadian Security Intelligence Service (CSIS), which investigates money laundering and terrorist financing cases threatening Canadian internal security); and the Investment Dealers Association (IDA), which is the national self-regulatory body for the Canadian securities industry. The Canadian FIU cooperates with numerous domestic and international bodies to bolster Canada's AML/CFT regime. On the domestic side, FINTRAC has MoUs with OSFI (to improve the tools reporting entities use to comply with the PCMLFTA) and with IDA to exchange compliance information. The international alliances range from Mutual Legal Assistance Treaties (MLAs) with numerous Western nations to 45 MoUs with various international counterpart authorities.

The Principles

1. Legal Systems and Related Institutional Measures

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The 2008 FATF report found Canada "largely compliant" with Recommendations R1 and R2, regarding the money laundering offense and mental element and corporate liability. Money laundering is criminalized pursuant to Canada's Criminal Code. The FATF report states that the money laundering offense is designed to cover all obligations in the 1988 Vienna Convention and the 2000 Palermo Convention. The FATF report attributed its R1 rating to three minor deficiencies: the Canadian money laundering offense does not address all designated types of predicate offenses (i.e. copyright-related); Canada's number of convictions and the percentage of convictions compared to charges laid is very low; and Section 462.31 of Canada's money laundering offense is too purposive and not far-reaching enough to fully satisfy R1 requirements. The FATF attributes its R2 rating to the lack of money-laundering sentencing data, which makes it impossible to ascertain whether or not natural and legal persons are subject to effective and proportionate money laundering sanctions.

As the 2008 FATF report indicates, Canada is "largely compliant" with Special Recommendation SR-II on the criminalization of terrorist financing. Even though Canada does broadly criminalize terrorist financing (i.e. it has three criminal offenses related to terrorist financing), the paucity of terrorist-financing convictions and the low number of prosecutions overall indicates that the offense has yet to be fully and effectively employed. As for SR-III relating to the freezing of terrorist financing-related assets, the FATF mutual evaluation assessed Canada as "largely complaint," noting that the listing of persons or entities do not encompass all kinds of financial institutions and are often under-publicized. The evaluation also observes that Canada's ability to freeze terrorist funds is partially undermined by insufficient guidance provided by the Canadian government to financial institutions about their obligations to take action under freezing mechanisms. Also, Canada's current efforts to monitor compliance with legislation covering obligations under SR-III are insufficient.

Concerning confiscation and provisional measures (R3), the FATF's mutual evaluation graded Canada as "largely compliant." Given the lack of quantitative and qualitative information available, it appears that Canada's confiscation and seizure regime is not fully effective, especially its value-based confiscations. However, the evaluation also points out that Canada has extensive means with which to confiscate and freeze proceeds of crime. The Criminal Code and the Controlled Drugs and Substances Act (CDSA) have comprehensive provisions authorizing forfeiture of proceeds of crime, and such forfeiture may be used for all money laundering and terrorist financing offenses and predicate offenses. Also, Canada's United Nations Act permits the government to adopt UN Security Council resolutions on money laundering and terrorist financing, such as the U.N. Al-Qaida and Taliban Regulations (UNAQTR) and the Regulations Implementing the UN Resolutions on the Suppression of Terrorism (RIUNRST), which allow Canada to list a suspected terrorist individual or entity in order to freeze or confiscate assets owned by that individual or entity.

In terms of its FIU and its functions, the 2008 FATF report classified Canada as "partially compliant" on R26; "partially compliant" on R30 about resources, integrity and training; and "largely compliant" with R32 on statistics keeping. The evaluation attributes the R26 assessment to the following weak points: (1) FINTRAC has insufficient access to intelligence from Canadian authorities; (2) FINTRAC is not permitted by PCMLFTA to collect additional financial information from reporting agencies; and (3) a lack of overall effectiveness. For instance, 80% of FINTRAC disclosures result from voluntary information instead of STRs, thus raising concerns about FINTRAC's ability to generate new money laundering/terrorist financing cases different from existing investigations.

The FATF's mutual evaluation observes that Canada is "largely compliant" with R27 on law enforcement authorities and "compliant" with R28 on the powers of competent authorities. On R27, the RCMP was found to lack the resources needed to tackle a larger spectrum of money laundering and terrorist financing cases. Due to such constraints, the RCMP focuses on large and complex organized crime money laundering investigations. This partially explains Canada's low money laundering and terrorist financing prosecution and conviction rates. The evaluation calls for enhanced education and training for judges and courts on money laundering and terrorist financing offenses. Nevertheless, Canada's money laundering/terrorist financing law enforcement capacity is considered strong. As noted by the FATF's mutual evaluation, Canada is "compliant" with SR-IX on cross border declaration and disclosure.

2. Preventive Measures - Financial Institutions

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The 2008 FATF report finds Canada "non-compliant" with R5 relating to customer due diligence (CDD), R6 concerning politically exposed persons, and R8 about new technologies and non face-to-face business. On correspondent banking (R7), Canada ranked "partially compliant." The evaluation attributes its "non-compliant" rating for R5 to numerous failings. The mutual evaluation further states that some entities that engage in financial activities, such as check cashers and financial leasing entities, are not covered by Canada's AML/CFT regime because Canada does not consider them to embody much threat of money laundering and terrorist financing. This approach is contrary to FATF regulations, which requires that such entities be covered by the AML/CFT regime unless proven to be of low risk of money laundering or terrorist financing. The 2008 FATF report states that "Canada has recently introduced a significant set of new requirements for financial institutions that aim at implementing the FATF standards" (p.6), however, these rules will come into effect only in June 2008, and the FATF did not take these new rules into consideration in its evaluation.

Regarding its R6 assessment, the 2008 mutual evaluation found Canada had no specific legislative requirements addressing politically exposed persons (PEPs), even though the evaluation does observe that some new provisions related to PEPs are expected to go into practice in June 2008. In explaining its R7 rating, the FATF cited Canada's limited requirements regarding correspondent banking. According to the 2008 FATF report, Canada is "non-compliant" with R9 regarding third parties and introducers. In justifying the rating, the evaluation states that, even though introduced business arrangements do exist in Canada, the government has yet to implement sufficient measures to meet FATF recommendations. The evaluation also found Canada to be "compliant" with R4 regarding financial institution secrecy or confidentiality because Canada had no secrecy laws undermining adherence to AML/CFT regulations.

The FATF's mutual evaluation assessed Canada "largely compliant" with R10 on record keeping and "non-compliant" with SR-VII on wire transfer rules. The 2008 FATF report appraised Canada "partially compliant" with R11 relating to the monitoring of unusual transactions and "partially compliant" with R21 pertaining to special attention for higher risk countries. On R11, the evaluation cites the main inadequacy as Canada having no specific provision requiring financial institutions to examine complex, unusual transactions and their background or purpose. Also, Canada has no requirement to maintain records of such monitoring. The evaluation attributes its R21 assessment to Canadian law lacking the requirement to scrutinize any country that inadequately adheres to FATF recommendations. Also, Canada has no adequate means to advise financial institutions of other countries that have insufficient AML/CFT regimes.

The FATF's mutual evaluation rated Canada "largely compliant" with R13 relating to suspicious transaction reporting and "compliant" with R14 about protection and no tipping-off. The evaluation cited three main weaknesses regarding STRs: (1) reporting entities are not required to report attempted transactions; (2) low number of STRs sent by certain financial sectors underscores an ineffective reporting system; and (3) some financial entities (i.e. e-money providers) are not required to report STRs. However, the evaluation also states that, beginning in June 2008, Canada will broaden its reporting requirements to include suspicious attempted transactions. On R19 regarding other forms of reporting, the mutual evaluation assessed Canada as "compliant," and as "largely compliant" with R25 on guidelines and feedback. The R25 rating was due to a lack of specific guidelines for certain sectors (i.e. insurance), despite the FINTRAC's published guideline of July 2007, and the paucity of general feedback from outside the large financial institutions sector. The evaluation also assessed Canada as "largely compliant" with SR-IV relating to suspicious transactions reporting, citing the same weak points listed for R13.

The 2008 mutual evaluation found Canada "largely compliant" with R15 relating to internal controls, compliance and audit. The main weaknesses were that not all financial institutions in Canada are required to perform internal control functions (i.e. financial leasing companies), and that Canada does not legally require financial institutions to set-up screening procedures when hiring employees. On R22 addressing foreign branches and subsidiaries, Canada was ranked "non-compliant" largely because Canada lacks explicit requirements for foreign branches and subsidiaries to observe AML/CFT measures commensurate with Canadian requirements and FATF recommendations. Canada was adjudged "largely compliant" with R18 pertaining to shell banks.

According to the 2008 FATF report, Canada was classified "partially compliant" with R17 regarding sanctions and "partially compliant" with R23 relating to regulation, supervision and monitoring. The main factors underlying the R17 rating are: (1) Canada has limited sanctions in place in the AML/CFT context; (2) FINTRAC only has criminal sanctions under the PCMLTFA for all financial institutions, and such sanctions must be proven to the criminal standard; and (3) Canada's sanction regime disproportionally targets minor cases, thus undermining its effectiveness. The evaluation attributes the R23 rating to two key challenges: (1) certain financial sectors (i.e. factoring companies) are not covered by Canada's AML/CFT regime; and (2) Canada has unequal levels of AML/CFT compliance supervision, leading to certain types of financial institutions being inadequately controlled (i.e. credit unions and life insurance) due to limited FINTRAC staff resources for on-site assessments. On R29 about supervisors, Canada was graded "largely compliant," citing as the lone insufficiency that FINTRAC does not have any authority or power to impose administrative sanctions. On SR-VI covering AML requirements for money/value transfer services, the 2008 mutual evaluation rated Canada "non-compliant."

3. Preventive Measures - Designated non-Financial Business and Professions

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The 2008 FATF report found that Canada was "non-compliant" with R12 on CDD and record keeping obligations for DNFBPs. This rating was attributed to the fact that Canada's CDD and record-keeping requirements (as set out in R5, R6, R8, and R11) are not sufficiently applicable to some DNFBPs, such as casinos, lawyers, notaries, real estate brokers, sales representatives, accountants, and dealers in precious metals and stones. The 2008 FATF report states that, as of December 2008, new amendments to rules supervising the DNFBPs will come into effect and the new rules will cover the following DNFBPs: lawyers, notaries and dealers in precious metals and stones. However the FATF evaluation did not consider these new rules in its assessment. Also, the evaluation notes that Canada has yet to implement specific AML/CFT measures addressing PEPs applicable to DNFBPs. On R16 about STRs related to DNFBPs, Canada is also assessed "non-compliant." According to the 2008 FATF report, Canada is "compliant" with R20 concerning other Non-Financial Business and Professions (NFBP) and secure transaction techniques. On R24 about DNFBP regulation, supervision, and monitoring, the 2008 mutual evaluation categorized Canada "non-compliant." The evaluation attributed this R24 rating to FINTRAC's limited staff resources, which prevents the body from adequately monitoring AML/CFT legislation adoption by DNFBPs.

4. Legal Person and Arrangements & Non-Profit Organizations

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The FATF's mutual evaluation reports that Canada is "non-compliant" with R33 relating to legal persons and access to beneficial ownership and control information. In justifying the low rating, the evaluation points out that Canada's corporate registry and information collection system does not sufficiently collect information on the beneficial owner in Canada. It also notes that Canada does not have specific measures in place to prevent bearer shares from being misused for money laundering or terrorist financing. Regarding legal arrangements and beneficial owners (R34), the 2008 FATF report judged Canada to be "partially compliant" due mainly to the fact that, regarding trusts and fiducies, only limited and partial information is available that is accurate, adequate and timely, even to law enforcement authorities. On SR-VIII relating to non-profit organizations (NPOs), the mutual evaluation found Canada "largely compliant," noting that Canada has a well-established registration system for NPOs. However, the evaluation also states that Canada fails to adequately address risk in some parts of the NPO sector, citing insufficient cooperation between the CRA and agencies that oversee listing and freezing.

5. National and International Co-operation

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The 2008 FATF report found that Canada was "largely compliant" with R31 on national cooperation, and "partially compliant" with R32 on statistics. Regarding the rating assigned to R31, the evaluation notes that existing coordination efforts among the main AML/CFT actors (i.e. FINTRAC and law enforcement agencies) are not fully effective. The DoS report indicates that such elevated levels of cooperation might be in the offing, noting that FINTRAC, along with Canada's law enforcement bodies, conducted a record number of compliance examinations across all sectors between 2006 and 2007. The mutual evaluation assessed Canada "largely compliant" with R35 regarding the ratification of international conventions, and "largely compliant" with SR-I on implementing UN instruments. In justifying the R35 rating, the evaluation notes primarily that, while Canada has ratified both the Vienna and Palermo Conventions, its money laundering offense does not address all kinds of predicate offenses, and neither is its purposive element expansive enough to meet all requirements of the Conventions. Regarding SR-I, the terrorist financing Convention (the UN International Convention for the Suppression of the Financing of Terrorism), the evaluation notes that Canada has not sufficiently implemented Article 18(1)(b), which requires countries to identify customers in whose interest accounts are opened. According to the DoS report, Canada has also ratified the Organization of American States (OAS) Inter-American Convention on Mutual Assistance in Criminal Matters, the Inter-American Convention Against Terrorism, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, and, in October 2007, the UN Convention Against Corruption.

According to the 2008 FATF report, Canada is "largely compliant" with R36 concerning Mutual Legal Assistance (MLA), citing reservations about Canada's ability to resolve MLA request in a timely and effective fashion. While Canada's Mutual Legal Assistance in Criminal Matters Act (MLACMA) "enables Canadian courts to issue orders compelling the production or authorizing the seizure of evidence at the request of a treaty partner," (p. 14) the evaluation notes that a lack of adequate data undermines MLACMA effectiveness. The mutual evaluation ranked Canada "compliant" with R37 on dual criminality and "largely compliant" on R38 pertaining to MLA on confiscation and freezing. The evaluation attributes the R38 rating to little proof of effective confiscation assistance since only four cases have been successful in the last 5 years. The evaluation also notes that asset-sharing with foreign nations rarely happens, even though it is possible under MLACMA. With regards to SR-V on international cooperation, the mutual evaluation rated Canada "largely compliant," adding that all elements missing in R38, R39 and R40 are also missing for SR-V. The evaluation also adjudged Canada to be "largely compliant" on R39 relating to extraditions, noting that Canada's Extradition Act makes money laundering and terrorist financing offenses extraditable. However, the evaluation also notes that Canada lacks sufficient extradition request data needed to ensure timely assistance. Finally, on R40 pertaining to other forms of international co-operation, Canada is rated "largely compliant." The main factor underlying the assessment is that, while FINTRAC has the legal ability to co-operate and swap supervisory information with foreign counterparts, it has failed to engage in any MoUs to actually begin such sharing. Nevertheless, Canada's OSFI is capable of sharing compliance information with foreign regulators.