Canadian banking lobby group calls for total overhauling of financial crime reporting regime

Canada’s banking lobby group is calling on Ottawa to significantly overhaul the framework that lenders use to monitor and report suspicious activity that could be linked to money laundering or terrorist financing.

 

In Canada, financial institutions must file suspicious transaction reports, or STRs, which track individual transactions where there is reasonable grounds to suspect such activities. But advocates of reform say authorities and banks could more effectively identify patterns of suspicious behaviour by switching to a system used in the United States and Britain.

 

The Canadian Bankers Association says that the country’s “high volume, low value” reporting system must shift to focus on better detection and enforcement.

 

“The concern is if you hand over too much information, do you see the needle in the haystack?” said Hartland Elcock, senior legal counsel at the CBA, in an interview.

 

“Instead of detailing lists and lists of transactions, and instead focusing on the risky activity, you get to the core of the matter more easily and help empower investigations and prosecutions.”

 

The country’s largest lenders have faced heightened scrutiny from regulators to crack down on financial crimes, with TD Bank receiving the most recent and severe blow after it pleaded guilty to conspiracy to commit money laundering in the U.S.

Unlike Canada’s STR approach, countries such as the U.S. and Britain require suspicious activity reports, or SARs, which consider a broader range of suspicious behaviour. Some anti-money laundering experts say that SARs are a more effective method for detecting and reporting criminal activity, as the framework looks at the whole picture rather than have financial institutions submit separate reports for individual transactions.

 

By moving Canada’s reporting regime to an SAR system, authorities could acquire more useful information to better focus investigation and enforcement efforts, advocates say.

 

“Looking at the bigger forest would be way more effective, and it’s resource efficient. It’s a more holistic approach,” said Cindy Zhang, a lawyer specializing in financial services regulation at McCarthy Tétrault LLP.

 

Currently, the reports that companies have to submit to the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC), the country’s anti-money-laundering watchdog, are cumbersome to complete, she noted, pointing to the form being more than 40 pages long.

 

The Ministry of Finance did not respond to specific questions from The Globe and Mail. Instead, spokesperson Marie-France Faucher said in an e-mail statement that “the government is continuously working to improve Canada’s ability to combat financial crime, particularly due to the rapidly evolving and complex nature of financial crime.”

 

Companies that are required to report money laundering in Canada submit 12.5 times more reports than similar entities in the U.S., and 96 times more reports than those in Britain, according to the CBA.

 

“Sometimes you could have thousands upon thousands of transactions, and the amount of time that it takes for people to spend to fill out those forms is unbelievable,” said Jacqueline Shinfield, co-lead of the financial services regulatory group at Blake, Cassels & Graydon LLP.

 

“Those resources could be put to much more efficient uses in the fight against financial crime than filling out forms.”

 

Cecilia Samsoondar, vice-president of financial services at consultancy firm Accuracy Canada, said moving to an SAR regime would “broaden the scope” of what Canadian financial institutions are required to report.

 

“It places more emphasis on the banks to make sure they’ve got the programs and the systems in place to identify those patterns and trends across multiple transactions, so that’s a good thing.”

 

Some activity that isn’t currently reportable, such as a client trying to open an account with a fake ID, would be captured under a suspicious activity regime, said Amber Scott, chief executive officer and co-founder of Outlier Solutions Inc., an anti-money-laundering consultancy firm.

 

“In that case, you couldn’t report a suspicious transaction because there is no financial transaction, but you’re still seeing this potential criminality. I think that’s one of those really concrete examples where an [SAR] model actually catches more,” Ms. Scott said.

 

Moving to an SAR model would also make a lot of sense for Canadian banks that have operations south of the border, according to Ms. Samsoondar: “Given that a lot of Canadian financial institutions have U.S. operations, this would allow for better alignment across Canadian operations and U.S. operations.”

 

It’s not the first time the federal government has been asked to consider a regime change to SARs. In 2018, the federal finance committee recommended that Ottawa change FinTRAC’s STR system to resemble SARs “to focus on suspected violations rather than an arbitrary monetary threshold.”

 

The government rejected the recommendation, saying that the broad scope of the SAR regime would compromise Canada’s legal requirements to balance AML reporting with privacy considerations.

 

Jessica Davis, president and principal consultant of advisory firm Insight Threat Intelligence, shares that concern.

 

“Lowering the administrative burden on banks in a highly profitable sector does not justify the privacy implications this would have for Canadians,” she said.

 

Recent changes to the anti-money laundering legal framework and privacy laws allow banks to share information on customers involved in financial crime.

 

The CBA’s proposal comes ahead of a 2026 evaluation by the Financial Action Task Force, a global body that sets standards to combat financial crime. That coming review is likely the impetus for recent Canadian government action, said Cameron Field, a financial crime expert and vice-president at Vidocq, an intelligence, investigation and risk management firm.

 

“There’s a lot of worry about how we’re going to fare,” Mr. Field said.

 

Regulators have been cracking down on enforcement measures ahead of that review.

 

In early October, Toronto-Dominion Bank pleaded guilty to conspiracy to commit money laundering, agreeing to pay a more than US$3-billion penalty.

 

In January, Royal Bank of Canada’s U.S.-based subsidiary City National Bank was ordered to implement reforms and pay a US$65-million fine after a top U.S. banking regulator found failings in many of its internal controls and risk-management processes.

 

The penalties in Canada pale by comparison, and the violation often involve failure to report suspicious transactions.

 

In May, FinTRAC levied its largest-ever monetary penalty on TD – nearly $9.2-million – for faulty anti-money-laundering controls. The watchdog found that the bank committed five administrative violations, one of which involved TD’s failure to submit STRs where there were “reasonable grounds to suspect that transactions were related to a money laundering or terrorist activity financing offence.”

 

Late last year, FinTRAC also imposed penalties on RBC and Canadian Imperial Bank of Commerce of $7.5-million and $1.3-million. In both cases, the administrative issues included failing to submit some STRs.

 

“We need to focus on outlying suspicious activity rather than prioritizing all transactions,” the CBA’s Mr. Elcock said. “A meaningful review of other frameworks and other jurisdictions would be helpful, and considering if it can be tailored to the Canadian context to help us better focus on risk.”

 

 

 

 

 

This article was first reported by The Globe and Mail