Money Laundering Legislation with BITE

Canada is big business — amounting to some $17 billion each year. And, although Canada’s money recycling black market is minor in global terms (which the U.N. estimates to be $1 trillion worldwide), there are weaknesses in the current financial business system which have garnered international attention. As such, Canada’s legislators recently proposed amendments to the enforcement legislation against money laundering which could have a significant impact on the way financial institutions disclose and transact their business.

Money laundering is “…the process by which ‘dirty money’ generated by criminal activities is converted into assets that cannot be easily traced back to their illegal origins,” says the Solicitor General of Canada. Although our money-laundering sum is small compared to the staggering global figure, this country has an added problem: it is currently the only member of the G-7 nations without stringent mandatory suspicious transaction reporting (MSTR) legislation, notes Christopher Walker, a master of criminology at management consultants Grant Thornton.

Even worse, Canada has the dubious distinction of being high on the list of the top 10 havens used to “clean” money from the global proceeds of organized crime. That, however, is about to change. A report recently released by Criminal Intelligence Service Canada, notes that Mafia-based dirty money flows here from Russia and Sicily. Asian-based groups find our shores inviting. In addition to which, Canadian crime syndicates are also involved in cleansing money from prostitution, car theft and shoplifting rings, large-scale theft of consumer goods, staged vehicle accidents, tobacco, liquor, and jewelry smuggling among a host of others activities.

This complex social and economic web, backed by mounting global pressure to remove the “welcome sign” on our lax money laundering doors, has forced the federal government to implement aggressive, tough, anti money-laundering legislation. The question, however, is whether financial institutions impacted by the legislation, including property and casualty insurers, are prepared for the legislative changes in the pipeline.

Legislation with teeth

Officially an amendment to the existing 1991 Proceeds of Crime (Money Laundering) Act (PCMLA), the new legislation (Bill C-81) was introduced into the House last May and is slated for second reading in the Fall session. Its purpose is to add muscle to the current legislation. For the first time in Canada, Bill C-81 introduces a system for MSTR, giving PCMLA more weight and stronger reporting systems. The legislation also introduces additional financial and manpower resources to the battle of stopping illegal money entering the country.

With the bill’s final passage — expected early next year — Canada will add formidable teeth to its previously inadequate legal bite. “The new legislation is going to turn Canada’s business sector on its ear,” Walker predicts. “Fundamentally, what it’s going to do is…make many different areas accountable for knowing, and dealing with, their customer. It’s expansive and will have broad impact. The legislation is designed to do one thing and one thing only — to deter money laundering in Canada.”

Bill C-81 heightens the requirement for various individuals to file a report in every instance where they identify a suspicious transaction. These will include structured transactions (designed by the money launderers to circumvent reporting requirements), deposits or transfers of large amounts of cash and any monetary instrument of a yet to be determined amount which could be as low as $5,000.

Meanwhile, the proposed legislation has strong ramifications for industries it considers at risk — including all financial institutions such as banks, trust companies, life insurers and p&c companies, and the agents of the operators in question. Currently, property and casualty insurers won’t have to comply with the legislation, but as loopholes across all financial services close, money launderers must turn their creative efforts to other ways to obtain legitimate, clean, money. And they are expected to increase their activities in the p&c market. For example:

a new client arrives in your office and says he wants to put his three kids onto his auto insurance. He plunks down one year’s premium — in cash. A month later he returns and says he’s had it with his kids’ erratic driving and revokes the coverage, demanding a refund. Dirty money in, clean money out.

an existing client says he wants to significantly increase the coverage on his house, add insurance on a boat and escalate his listed items because he’s just bought some valuable antiques and paintings. He wants to pay either cash or via a bank draft on a foreign bank. A little while later he returns. He’s lost his job and wants to cancel all that upgraded coverage. Your company issues a cheque — the client receives clean money.

another client comes to you explaining he’s newly immigrated and has bought some prime real estate that he wants to insure. Sorry, his financial affairs are offshore and he hasn’t had time to transfer all his assets to his new Canadian bank account. Could he make a wire payment to pay for the premium? Shortly after he returns. The real estate deal fell through. He’s also thinking of not settling here. Return my money please.

These scenarios are likely among the many that property and casualty insurers should keep an eye out for. According to Walker, the key to recognizing a suspicious transaction is knowing enough about the client’s business and insurance needs to recognize when a transaction, or a series of them, is unusual. In other words, know your client.

Watch the money source

He also warns that a smart agent or broker should keep an eye out when a client wants to pay with funds drawn from areas known to have flexible financial arrangements. The same applies to recognized tax havens like Malta, the Channel Islands, Switzerland, Panama and the Cayman Islands.

Furthermore, insurers would be wise to think about the following when faced with a situation that somehow seems fishy:

Is the transaction in keeping with the applicant’s insurance needs?

Is an intermediary somehow involved?

Is the source of funds unclear or inconsistent with customer’s financial standing?

Does the client want to pay with a money wire or bank transfer?

Is the transaction to be completed in accordance with normal procedures?

Are there any other linked transactions that could be a smokescreen to disguise money or divert it into other forms, destinations, or to third parties?

Walker suggests p&c companies need to heighten their due diligence. Unfortunately, not all companies have the means to train themselves, know what to look for, whether they could be potential victims, and how to generally safeguard themselves against non-compliance. In such circumstances, employing a professional service to implement appropriate internal controls could well prove a worthwhile investment, Walker comments. Ultimately, p&c companies will be included in reporting as the fledgling legislation finds its feet and hones in on reporting requirements for all segments of financial services.