Michael D. Lipton, Q.C.
Elkind, Lipton & Jacobs LLP
One Queen Street East
Suite 1900
Toronto, Ontario
M5C 2W6
Tel: 416-367-0871
Fax: 416-367-9388
E-mail: mdliptonqc@aol.com

What is Money Laundering

• UN defines money laundering as “any act or attempt to act to disguise the source of money or assets derived from criminal activity”
• Essentially, money laundering is the process whereby “dirty money” produced through criminal activity is transformed into “clean money” the criminal original of which is difficult to trace
• Three recognized stages in money laundering process
  1. placement; placing the proceeds of crime into financial system
  2. layering; converting the proceeds of crime into other forms and creating complex layers of financial transactions to disguise the audit trail and source and ownership of funds
  3. integration; placing the laundered proceeds back into economy to create perception of legitimacy;
  • - note money laundering process is continuous with dirty money constantly being introduced into financial system
  • - under Canadian law, money laundering offence generally involves concealing or converting property or proceeds of property (money) knowing or believing that the property of proceeds were derived from commission of another offence (known as predicate offence – one that is generally motivated by profit)
• Predicate offence includes:
  • - fraud
  • - robbery
  • - secret commissions
  • - fraudulent manipulation of stock exchange transactions
  • - theft, extortion, breach of trust by public officer, corrupting morals, illegal acts (apart from simple possession) in relation to various controlled drugs, etc.
  • - a money laundering offence also extends in some cases to property or proceeds derived from illegal activities that took place outside of Canada

Importance of Combating Money Laundering

• vast majority of criminals would not be in the “business of crime” if it were not for the tremendous profits to be made
• direct relationship between profitability of most types of crime and their prevalence
• major objective of battle against crime in Canada and elsewhere is to deprive criminals of the profits
• only by effectively laundering illegal assets can criminals use them and thereby benefit from their crimes
• shear magnitude of money laundering activities demonstrates importance of implementing strong anti-money laundering regimes in countries throughout the world
• IMF stated that aggregate amount of money being laundered in world could be somewhere between 2% and 5% of world gross domestic product or between approximately $900 billion Canadian and $2.25 trillion Canadian
• in Canada, money laundering is a multi-billion dollar problem
• it is an integral element of organized criminal activity and the proven method by which organized crime groups seek to transfer proceeds of drug trafficking, contraband goods and people smuggling, extortion, fraud and other activities into apparently legitimately earned funds
• investigations have revealed that criminals manipulate financial systems in Canada and abroad to foster wide range of illicit activities
• economic and political influence of criminal organizations can potentially weaken the social fabric, collective ethical standards and ultimately the democratic institutions of society
• money laundering activities have the potential to distort economic data and to cause economic growth to suffer
• IMF studies on the relationship between gross domestic profit growth and money laundering in industrial countries have found evidence that significant reductions in annual gross domestic product growth rates were associated with increases in money laundering activities

International efforts to combat money laundering

• Financial Action Task Force on money laundering (FATF) established by G-7 countries in 1989
• FATF is inter-governmental body comprising 29 countries and 2 international organizations whose purpose is to develop and promote policies to combat money laundering
• FATF has 40 recommendations that outline the basic framework for anti-money laundering efforts
• recommendations define international standards covering criminal justice system and law enforcement, the financial system and its regulations and international co-operation
• other international anti-money laundering initiatives include
  • - Caribbean Financial Action Task Force on money laundering since 1992
  • - Edgemont Group of Financial Intelligence units since 1995
  • - Asia Pacific Group on Money Laundering since 1997
  • - European Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime since 1990
  • - UN Single Convention on Narcotic Drugs since 1961
  • - UN Convention on Psychotropic Substance since 1971
  • - UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances since 1988
  • - UN Convention against Transnational Organized Crimes since 2000

Canada’s Legislation – Proceeds of Crime – (Money Laundering) Act

• received royal accent on June 29, 2000 however, regulations will not become effective until November, 2001
• Act implements specific measures to detect and deter money laundering and to facilitate investigations and prosecutions of money laundering offences
• Act creates a record keeping, client identification and reporting scheme designed to detect and deter money laundering while protecting individual privacy through various safeguards
• specific measures of Act include the following
  • - record keeping and reporting – Act requires persons and entities such as casinos to keep records prescribed in the proposed regulations and to report suspicious transactions to Financial Transaction and Report Analysis Center of Canada (FinTRAC) and to report other financial transactions as prescribed in regulations
  • - cross-border reporting – part II of Act concerns cross-border movement of currency and monetary instruments and requires that the import or export of currency or monetary instruments of a value of greater than $10,000 be declared to Canada Customs and Revenue
  • - creation of FinTRAC – Part III of Act creates an independent agency at arm’s length from law enforcement agency responsible for collecting, analyzing and in appropriate circumstances disclosing certain information to law enforcement agencies

Reporting Requirements under Part I of Act

• under section 7 and the proposed regulations, casinos required to report transactions when there are reasonable grounds to suspect that the transactions are related to the commission of money laundering offence
• there is no monetary threshold for “suspicious transactions” in other words, a suspicious transaction may be less than $10,000 – if there are reasonable grounds to suspect that it is related to the commission of a money laundering offence
• under section 9 of Act as well as proposed regulations, casinos are required to report the following prescribed financial transactions to FinTRAC

Large Cash Transactions

1. Any transaction where $10,000 or more in cash is received (includes two or more transactions during the gaming day amounting to $10,000 or more when aggregated, if casino has knowledge that they are being conducted by or on behalf of the same person). Such transactions include:
   1. sale of chips or tokens;
   2. front money deposits;
   3. safekeeping deposits;
   4. repayment of any form of credit, including markers, and counter cheques;
   5. bets of currency; and
   6. sales of the casino’s cheques.

Cheques Payable to Third Parties or Without Specified Payee

2. Any transaction of $3,000 or more, where a customer receives payment in casino cheques made out to third parties or without a specified payee. (By policy, some casinos strictly prohibits third party cheques.)

Foreign Exchange Transactions – More than Posted Exchange Rate

3. Any foreign exchange transactions, where the casino receives a payment from a customer of more than the posted exchange rate or transaction fees, to facilitate a transaction.

Electronic Funds Transfer

4. The sending or receipt of an electronic funds transfer of $10,000 or more (includes two or more funds transfers amounting to $10,000 or more during the gaming day, if the casino has knowledge that they are being completed by or on behalf of the same person). “Electronic funds transfer” means any transfer or transmission of funds, into or out of Canada, that is initiated by a client through any electronic, magnetic or optical device, telephone instrument or computer, and includes an order or authorization for such a transfer or transmission.

Examples of Suspicious Transactions

1. Customers Structuring Currency Transactions to avoid filing Report:
   • A customer asks about the time of day when the casino’s gaming day is concluded, and subsequently structures currency transactions around this cut-off time to avoid completing a Large Cash Transaction Record.
   • A customer pays off a large credit debt (i.e., $30,000 or more) over a short period of time (e.g., less than 1 week), through a series of currency transactions, none of which exceeds $10,000 in a gaming day.
2. Third Party Cheques
   • Customer requests a winnings cheque in a third party’s name. (Note: in some casinos third party cheques are not permitted).
3. Minimal Gaming where Chips Redeemed for Casino Cheque
   • Any transaction where an employee or manager of the casino knows that a customer has purchased $5,000 or more in chips with cash and, after engaging in minimal betting, cashes the chips for a casino cheque
     • “Minimal betting” is be interpreted as 5% or less of total buy-in.
4. Acquaintances Betting Against Each Other in Even Money Games/Wagers
   • Even money games/wagers currently offered by casinos are:
     • Roulette. Where one person wagers on Red, while his/her acquaintance wagers on Black. [Does not apply where dealer spins a zero].
     • Baccarat/Mini Baccarat/Midi Baccarat. Where one person wagers on Player, while his/her acquaintance bets on the Bank.
     • Craps. Where one person wagers on the Pass or Come Line, while his/her acquaintance bets on the Don’t Pass or Don’t Come Line.
5. Using the Casino Purely for Its Financial Services
   • A customer requests cheques for cash, and cash is not from gaming winners.
   • A customer frequently wires funds in excess of $3,000, from non-gaming proceeds, to financial institutions located in a country which is not his/her residence.
6. Exchanging Large Number of Small Denomination Bank Notes for Large Ones
   • A customer exchanges a large number of small denomination (200 or more bills -- $20 or less) bank notes for large ones or cheques.

Compliance Regime

• Under the Act, every person or entity to which the Act applies (includes casinos) shall implement a compliance regime to ensure compliance with the Act and the regulations
• the compliance regime shall be appropriate to the nature, size and complexities of the person’s or entity’s occupation or business and shall include:
  1. the appointment of an individual who is to be responsible for the implementation of the compliance regime and who is a senior officer of the Corporation;
  2. the development and application of policies and procedures to ensure compliance with the Act and regulations;
  3. a review as often as necessary of the policies and procedures to test their effectiveness to be conducted by an external auditor and ongoing employee training program in respect of compliance with the Act and regulations

Penalties

• failure to retain required records
  • five years and/or $500,000 fine
• failing to report a suspicious transaction
  • five years and/or $2,000,000 fine
• tipping off
  • up to two years in jail
• failure to keep a record of prescribed transaction
• failing to report a prescribed transaction
  • $500,000 for first and $1,000,000 for next
• failing to assist in compliance when an official of FinTRAC attends at the premises and seeks to conduct an audit
  • five years and/or $500,000 fine

Due Diligence and Other Defences

• Under the Act no entity or person shall be convicted of not reporting a prescribed financial transaction or a suspicious transaction if they exercise due diligence to prevent this from happening
  • to establish due diligence, a person must show that he/she acted under an honest belief in a state of facts which, if they had been as he/she believed them to be, would have rendered his/her act innocent or if he/she took all reasonable steps to avoid the particular event
  • this makes due diligence a legal requirement instead of merely a professional standard
• Under the Act, no employee can be convicted of not reporting a suspicious transaction if they had reported to their superior
• Under the Act, those who make suspicious and/or prescribed transaction reports in good faith are protected from criminal and civil liability

Executive Officer/Director Liability

• If a person or entity commits an offence under the Act, any officer, director or agent of the person or entity who directed, authorized, assented to, acquiesced in or participated in its commission is a party to and guilty of the offence and subject to its punishment if convicted regardless if the person has been prosecuted or convicted
  • this pierces the corporate veil and re-enforces the fact that accountability for ensuring organizational compliance rests with senior officials. This is a significant extension of the standard law on who may be a party to a criminal offence
• In a prosecution for failing to report, it is sufficient proof of the offence to establish that it was committed by an employee or agent of the accused, whether or not the employee or agent is identified or prosecuted.