Canada: Corporate And Financial Crimes Series, #4: Money Laundering

Introduction

In this six-part series on corporate and financial crimes, the Blakes Business Crimes, Investigations & Compliance group outlines basic principles of criminal and quasi-criminal law that may arise in the running of a business. Armed with insights from years of multidisciplinary knowledge and experience, our lawyers provide brief answers to questions that in-house counsel routinely ask relating to these issues.

Preface

Money laundering and financing of terrorist activities has become a high priority for law and policy makers, regulators and law enforcement worldwide. The events of 9/11 are partly responsible for this heightened attention, but over the last decade there has also been a general recognition of the central role money laundering plays in profit-motivated crimes which include large-scale organized crime, drug trafficking, corruption, fraud and terrorism. With the threat of money laundering and terrorist financing increasing as a result of technological advances in e-commerce and the global diversification of financial markets, anti‑money laundering and anti-terrorist financing laws and policies choke off terrorists and other criminals from their money supply, impeding their activities.

What is Money Laundering and Terrorist Financing?

MONEY-LAUNDERING OFFENCE

Money laundering occurs after a person has accumulated money from the commission of a criminal act. To avoid drawing attention to their crime, a launderer disguises the existence, nature, source, ownership, location and disposition of their proceeds. Typically, proceeds from crime are in cash form, and in order for the launderer to make use of that cash in the broader economy, for example, to pay a Visa bill, the cash must be disguised as legitimate earnings. The process of transforming dirty money (that is produced through criminal activity) into legitimate "clean" currency (whose origin is difficult to trace) is called "money laundering."

While the techniques and methods used to disguise the source of money or assets derived from criminal activity vary considerably, the process unfolds in three distinct stages:

  1. Placement: This stage involves placing the proceeds of crime in the financial system. Money launderers pay particular attention to the requirements of anti-money laundering legislation in order to avoid scrutiny of their activities and so that the illegal funds may be placed into the financial system unnoticed. Structuring, making multiple small deposits to break up large amounts of currency or conducting many small transactions at non-reportable levels are common placement techniques. This avoids triggering reporting or identification requirements.
  2. Layering: This stage involves converting proceeds of crime into complicated layers of financial transactions to distance the funds from the original source and obscure the audit trail. Layering procedures may involve disguising ownership of funds to camouflage the illegal source or transferring funds to offshore accounts.
  3. Integration: At this final stage, the laundered proceeds are reintroduced back into the economy to cultivate the perception of legitimacy. These funds are legitimized using various means such as purchasing investments and other commodities.

Various acts committed with the intention to conceal or convert property or the proceeds of property (such as money) knowing or believing that these were derived from the commission of certain designated offences is considered a money-laundering offence under Canadian law. In this context, a designated offence includes, but is not limited to, those relating to illegal drug trafficking, bribery, fraud, forgery, murder, robbery, counterfeit money, stock manipulation, tax evasion and copyright infringement. A money-laundering offence may also extend to property derived from illegal activities that took place outside Canada.

TERRORIST-FINANCING OFFENCE

Terrorist financing occurs when a person provides funds for terrorist activity. The funds involved in terrorist-financing offences may be raised from legitimate sources, such as personal donations and profits from businesses, or from criminal sources, such as the drug trade, the smuggling of weapons and other goods, fraud, kidnapping and extortion.

Terrorists use similar techniques to money launderers in order to evade authorities' attention and to protect the identity of their sponsors and of the ultimate beneficiaries of the funds. However, financial transactions associated with terrorist financing tend to be in smaller amounts than with money laundering. The detection and tracking of terrorist financing funds become much more difficult when terrorists raise funds from legitimate sources. Terrorists use various methods to move their funds including the banking system, informal value-transfer systems, Hawalas and Hundis, and the physical transportation of cash, gold and other valuables through smuggling routes.

Under Canadian law, terrorist-activity financing offences make it a crime to knowingly collect or provide property, including money, either directly or indirectly, to carry out terrorism-related crimes. This includes inviting someone else to provide property for this purpose. It also includes the use or possession of property to facilitate or carry out terrorist activities.

How has Canada Responded to Money Laundering and Terrorist Financing?

Most developed countries have introduced laws to deal with money laundering and terrorist financing. Canada has implemented the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "Anti-Money Laundering Legislation") to deal specifically with this problem as it relates to certain Regulated Entities (as defined below), each of which are prone to abuse by organized criminals and terrorists. The Regulated Entities covered under the Anti-Money Laundering Legislation include:

  • financial entities (such as banks and credit unions);
  • life insurance companies, brokers and agents;
  • securities dealers, portfolio managers and investment counsellors;
  • money services businesses and foreign exchange dealers;
  • accountants and accounting firms;
  • real estate brokers or sales representatives;
  • casinos;
  • dealers in precious metals and stones;
  • public notaries and notary corporations of British Columbia; and
  • real estate developers (collectively, the "Regulated Entities").

Each of these entities is susceptible to being used for money laundering and the financing of terrorist activities because their operations are conducive to conversion or concealment of funds. Regulated Entities are subject to specific regulatory requirements imposed by Anti-Money Laundering Legislation, which involve, among other things, record-keeping, client identification, risk rating, ongoing monitoring for suspicious transactions and reporting of suspicious and certain other threshold transactions. Regulated Entities can be subject to serious administrative monetary penalties and criminal sanctions if regulatory requirements are not met.

A discussion of the risks and regulatory requirements of Regulated Entities is beyond the scope of this primer, but it is important to understand that even companies that are not regulated under the Anti-Money Laundering Legislation are subject to the general anti-money laundering provisions of the Criminal Code.

This primer discusses the risks posed by the Criminal Code for all companies and cites some general best practices aimed at minimizing this risk.

The risk posed by the Criminal Code is not just legal in nature – there is a reputational component as well. Even if eventually found innocent of wrongdoing, a company publicly accused of participating, aiding or abetting a money laundering scheme can suffer severe negative publicity that can lead to a long-term negative perception in the marketplace. By learning about the anti-money laundering offences under the Criminal Code, companies can minimize both legal and reputational risk.

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© 2018 Blake, Cassels & Graydon LLP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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