CANADA: 2005-2006 INTERNATIONAL NARCOTICS CONTROL

UNCLAS SECTION 01 OF 05 OTTAWA 003671

SIPDIS

STATE FOR INL, EB/ESC/TFS AND WHA/CAN
JUSTICE FOR OIA AND AFMLS
TREASURY FOR FINCEN

E.O. 12958: N/A
TAGS: EFIN KCRM KTFN PTER SNAR CA
SUBJECT: CANADA: 2005-2006 INTERNATIONAL NARCOTICS CONTROL
STRAGY REPORT (INCSR) PART II: FINANCIAL CRIMES AND MONEY
LAUNDERING

REF: (A) OTTAWA 3636 (INCSR PART I)

(B) STATE 210324


1. Canada is strengthening measures to reduce its
vulnerability to money laundering and terrorist financing.
Financial institutions remain susceptible to transactions
involving international narcotics proceeds, including
significant amounts of funds in U.S. currency derived from
illegal drug sales in the United States. The long U.S.-
Canada border and closely integrated financial sector make
Canada attractive to criminals interested in cross-border
crime. With over $1 billion a day in legitimate bilateral
trade, both the U.S. and Canadian governments are
particularly concerned about the criminal abuse of cross-
border movements of currency. Canada has no offshore
financial centers or free trade zones.

Laws and Regulation to Prevent Money Laundering


2. Canada's financial intelligence unit (FIU),the
Financial Transactions and Reports Analysis Centre of Canada
(FINTRAC),was created under the Proceeds of Crime (Money
Laundering) Act in 2000 and started accepting Suspicious
Transaction Reports (STRs) in November, 2001. The Act was
amended in December 2001 to become the Proceeds of Crime
(Money Laundering) and Terrorist Financing Act (PCMLTF Act).
FINTRAC is an independent agency under the authority of the
Minister of Finance and acts at arm's length from the law
enforcement and other agencies that receive its disclosures.
FINTRAC and regulators such as the Office of the Supervisor
of Financial Institutions (OSFI) oversee compliance with
anti-money laundering and anti-terrorist finance regimes.


3. The PCMLTF Act creates a mandatory reporting system for
suspicious financial transactions, large cash transactions,
large international electronic funds transfers and cross-
border movements of currency and monetary instruments of
C$10,000 (about US$8,500) or greater. Failure to report
cross-border movements of currency and monetary instruments
could result in seizure of funds or penalties ranging from
C$250 to C$5,000 (about US$200 to US$4,000). In addition to
receiving suspicious transaction reports, FINTRAC collects
financial intelligence from other sources on suspected cases
of money laundering, terrorist financing or threats to the
security of Canada. The list of predicate money laundering
offenses was expanded and now covers all indictable
offenses, including terrorism and the trafficking of
persons.


4. Detection of financial crime is improving as FINTRAC
gains experience and compiles data. FINTRAC does not
perform criminal investigations, but analyzes data and
discloses suspicious cases to Canadian law enforcement,
intelligence, other regulators and foreign FIUs. FINTRAC
has signed 20 memoranda of understanding with foreign FIUs
(including FINCEN),13 of them in the past year. Others are
being negotiated.

Financial Intelligence Unit/Investigations


5. In 2004-05, FINTRAC made 142 case disclosures, of which
110 were for suspected money laundering, 24 were for
suspected terrorist financing and/or threats to the security
of Canada, and 8 involved both. Of the total disclosed, 115
were new cases while 27 were follow-ups to disclosures made
previously. The total dollar value of the disclosures was
just over C$2 billion (about US$1.7 billion),almost triple
the value last year. FINTRAC has not disclosed the number
of STRs that were filed in 2003-04, but has compiled data on
over 23 million transaction records since commencing
business in 2001. FINTRAC's case disclosures have not yet
resulted in prosecutions.


6. Most financial crime investigations in Canada involve
narcotics proceeds, although other crimes, such as tobacco
smuggling and prostitution, are associated with the unlawful
movement of financial instruments. A Canadian law
enforcement official notes that the prevalence of narcotics-
related cases is due in part to the fact that investigations
focus on narcotics. The growth in Chinese and Colombian
criminal organizations is being reflected in increased
narcotics-related crime and higher levels of seizures.

Financial Sector


7. The banking and financial community cooperates with
enforcement efforts to trace funds and freeze bank accounts
and supports efforts to strengthen anti-money laundering and
anti-terrorist financing regimes. Charities are regulated
by Revenue Canada under the Income Tax Act. Financial
transactions involving charities are subject to the same
reporting requirements as other financial transactions.



8. Money laundering is a criminal offense, regardless of
the source of the funds or size of the transaction.
Financial institutions are required to know, record, and
report the identity of customers engaging in significant
transactions, including all cash transactions over C$10,000
(about US$8,500). Financial institutions must file STRs
and/or be able to produce other records for FINTRAC within
30 days of request. Financial institutions must maintain
account records for five years starting from the closing of
the account; the last transaction; or the date of creation
of the document (depending on the type of record). FINTRAC
must maintain records of STRs for at least five years, with
an eight-year minimum in some cases.


9. Reporting requirements apply to a wide range of entities
including banks and credit unions; life insurance companies;
brokers and agents; securities dealers; portfolio managers;
provincially-authorized investment counsellors; foreign
exchange dealers; money services businesses (including
alternative remittance systems such as Hawala); crown agents
accepting deposit liabilities and/or selling money orders;
accountants and accounting firms; real estate brokers or
sales representatives in certain client-related activities;
casinos (except for some temporary charity casinos); and
individuals transporting large sums across borders.


10. Reporting entities must also report the existence of
terrorist property in their possession or control, or
information about a transaction or proposed transaction in
respect to such property. All cash transactions over
C$10,000 (about US$8,500),as well as international
electronic funds transfers and cross-border movement of
currency or monetary instruments must also be reported.
Failure to file a suspicious transaction report could lead
to up to five years' imprisonment, a fine of C$2,000,000, or
both.


11. The Canadian government is negotiating with the
Canadian bar association on ways to include lawyers under
the reporting regime, and is exploring a regulatory
oversight system for money services businesses (MSBs).
Although MSBs legally must report suspicious or large-value
transactions to FINTRAC, there is currently no regulatory
system to ensure that they comply. Reporting individuals
have immunity from civil or criminal prosecution for reports
filed in good faith. Information that identifies reporting
individuals cannot be disclosed except as specified in
legislation. Information can, however, be released in
limited circumstances such as parliamentary or legal
proceedings. FINTRAC is not subject to search warrants.


12. In a November 2004 report to Parliament, Canada's
Auditor General stated that "privacy concerns restrict
FINTRAC's ability to disclose intelligence to the Police,
and as a result, law enforcement and security agencies
usually find that the information they receive is too
limited to justify launching investigations." Parliamentary
reviews of the Proceeds of Crime (Money Laundering) and
Terrorist Financing Act and the Anti-Terrorism Act scheduled
for 2006 should address these issues.

Cash Smuggling


13. U.S. law enforcement officials have echoed concerns
that strict Canadian privacy laws and the high standard of
proof required by Canadian courts inhibit the full sharing
of timely and meaningful intelligence on suspicious
financial transactions. Such intelligence may be critical to
investigating and prosecuting international terrorist
financing or major money laundering investigations.


14. International transport of large values of currency or
monetary instruments must be reported. In the case of
currency or monetary instruments transported by courier or
mail, the exporter or importer in Canada is responsible for
filing the report. Currency and monetary instruments that
are not reported appropriately are subject to forfeiture.



15. Cash smuggling reports are sent to FINTRAC, law
enforcement, intelligence, customs, tax, and immigration
officials as appropriate. Records for all cash transactions
amounting to $3000 or more must be kept for five years.
Last year's concern about the inability of U.S. and Canadian
law enforcement officers to exchange promptly information
concerning suspect funds found in the possession of
individuals attempting to cross the U.S.-Canadian border has
been addressed by a 2005 Memorandum of Understanding on
exchange of Currency and Monetary Instrument Report data.
Although this should expand the extremely narrow disclosure
policy and provide a provision for sharing financial
information akin to the Customs Mutual Assistance Agreement,
more work needs to be done.


16. The Royal Canadian Mounted Police (RCMP) and Canadian
Security Intelligence Service (CSIS) are responsible for
investigating cases of money laundering and financial crime.
Canada has the police powers and resources to trace, freeze
and require the forfeit of assets.


17. All asset forfeiture proceedings in Canada are overseen
by the Department of Justice Canada, with seized assets
going to the General Fund. Canada has provisions for asset
sharing with other governments involved in joint
investigations, and exercises them regularly. However,
there is no provision that allows for the placement of
seized assets into specific law enforcement channels (such
as the Treasury forfeiture fund in the U.S.).


18. Until November 2005, the Canadian Criminal Code
provided for the forfeiture of proceeds of crime only upon
application by the Crown after a conviction for an
indictable offense. A new "Proceeds of Crime" program (not
to be confused with the Proceeds of Crime (Money Laundering)
and Terrorist Financing Act) amends the Criminal Code, the
Controlled Drugs and Substances Act, the Customs Act, the
Excise Act, the Proceeds of Crime (Money Laundering) and
Terrorist Financing Act, and the Seized Property Management
Act. The new amendments make the following changes to
facilitate asset forfeiture:

-- once an offender has been convicted of either a
criminal organization offense, or certain offenses under the
Controlled Drugs and Substances Act, the court is directed
to order the forfeiture of property of the offender
identified by the Crown unless the offender proves (reverse
onus) on a balance of probabilities, that the property is
not the proceeds of crime;

-- in order for the reverse onus to apply, the Crown would
first be required to prove, on a balance of probabilities,
either that the offender engaged in a pattern of criminal
activity for the purpose of receiving material benefit or
that the legitimate income of the offender cannot reasonably
account for all of the offender's property;


19. The new amendments apply to all criminal organization
offenses where the offense is punishable by five or more
years of imprisonment or after conviction, on indictment,
for offenses under the Controlled Drugs and Substances Act
(trafficking, importing, exporting, and production of
drugs).


20. However, the legislative amendments do not contain
"structuring" provisions. Therefore, although criminal
proceeds can be seized, the structured deposit of funds in
amounts just below the reporting requirement is not subject
to prosecution under current money laundering provisions.

Terrorist Financing


21. The 2001 Anti-Terrorism Act created measures to
identify, deter, disable and prosecute those engaged in
terrorist activities or those who support these activities.
The legislation makes it an offense to knowingly support
terrorist organizations, whether through overt violence or
through material support. The Anti-Terrorism Act requires
the publication of a list of groups deemed to constitute a
threat to the security of Canada and to Canadians.


22. Names of designated individuals and entities are
circulated by the Office of the Supervisor of Financial
Institutions to all regulated financial institutions.
Assets of designated entities or individuals that are frozen
under provisions of the Anti-Terrorism Act or UN resolutions
cannot be seized by the Canadian government. The Anti-
Terrorism Act is scheduled for review in 2006 to ensure
consistent compliance with international standards and
proposals in the Auditor General's report mentioned above.
International Cooperation


23. There is a web of longstanding agreements with the
United States on law enforcement cooperation, including
treaties on extradition and mutual legal assistance (MLAT);
MOUs such as those with customs and FIUs described above;
and Ministerial Directives. Canada has provisions for asset
sharing, and exercises them regularly.


24. The U.S. and Canada work together closely in fighting
narcotics and financial crime. Following are a sample of
successful cases in 2005:

Case A: In July 2005, U.S. and Canadian officials shut down
a 120-yard tunnel from British Columbia to Washington state
that was intended to transport marijuana into the U.S.
Three Canadians were arrested, and the tunnel was destroyed
to prevent its use for other crime.

Case B: In August, 2005, police in Alberta made the largest
Ecstasy bust in the province's history and seized US$3.7
million worth of street drugs including 213,000 tablets of
MDMA/Ecstasy laced with methamphetamine. This followed a
seven-month RCMP drug and organized crime investigation that
saw 35 people arrested in February in Edmonton for
trafficking in a controlled substance, possession of a
controlled substance, possession of the proceeds of crime,
and firearms offenses.

Case C: Operation Sweet Tooth, a 24-month investigation
that targeted international MDMA/Ecstasy and marijuana
trafficking rings whose drug smuggling and money laundering
operations ranged from the Far East to Canada and the U.S.,
resulted in the arrest of 291 individuals and the execution
of 98 search warrants in both the U.S. and Canada. The
seizures totaled 931,300 MDMA tablets; 1,777 pounds of
marijuana; and $7.75 million in U.S. assets. DEA, with
assistance from the RCMP and the Canada Border Services
Agency, dismantled two major drug transportation rings with
ties to 61 separate domestic investigations. The Operation
Sweet Tooth organizations were responsible for distributing
1.5 million tablets of MDMA per month. The drug trafficking
syndicates laundered millions of dollars in drug proceeds
through the use of bulk courier transport, money remitters
and the Vietnamese underground banking system.


25. Canada is a leader in international efforts to combat
financial crime, adheres to international money laundering
standards, and was instrumental in drafting the FATF
(Financial Action Task Force's) 40 points on money
laundering. In July 2006, Canada assumes the chair of the
Financial Action Task Force (FATF).



26. It is a member of the Egmont Group and the OAS Inter-
American Drug Abuse Control Commission Experts Group to
Control Money Laundering (OAS/CICAD). Canada also
participates with the Caribbean Financial Action Task Force
(CFATF) as a Cooperating and Supporting Nation, and as an
observer jurisdiction to the Asia/Pacific Group on Money
Laundering (APG). Canada is a party to the OAS Inter-
American Convention on Mutual Assistance in Criminal
Matters.


27. Canada has signed and ratified all 12 United Nations
Conventions pertaining to terrorism and has listed all
terrorist entities designated by the UN. Canada is a party
to the UN International Convention against Illicit Traffic
in Narcotic Drugs and Psychotropic Substances (Vienna
Convention),the 1988 UN Drug Convention, the UN
International Convention for the Suppression of the
Financing of Terrorism, and the UN Convention Against
Transnational Organized Crime. It signed the UN Convention
Against Corruption in May, 2004, but has not yet ratified
it.


28. The Canadian government is constantly evaluating ways
in which to strengthen its anti-money laundering and anti-
terrorist financing regime, working with the Egmont Group,
the Financial Action Task Force and in other international
fora to develop best practices. As part of this process the
government is evaluating the need to expand the reach of
anti-money laundering and anti-terrorist financing reporting
requirements (to include, for example, the legal profession
and prohibitions on "structured" deposits). Parliamentary
review in 2006 of the Proceeds of Crime (Money Laundering)
and Terrorist Financing Act and of the Anti-Terrorism Act
should further improve the Canadian government's ability to
fight financial crime.

Links to legislation and regulations
--------------

November, 2005 amendments to the Criminal Code and the
Controlled Drugs and Substances Act
http://www.parl.gc.ca/LEGISINFO/index.asp?Lan g=E&Chamber=C&S
tartList=2&EndList=200&Session=13&Type=0&Scop e=I&query=4506&
List=toc-1

Highlights of the November, 2005 amendments:

http://canada.justice.gc.ca/en/news/nr/2005/d oc_31540.html

2001 Anti-Terrorism Act
http://laws.justice.gc.ca/en/A-11.7/index.htm l

2001 UN Suppression of Terrorism Regulations
http://laws.justice.gc.ca/en/u-2/sor-2001-360 /186571.html

2000 Proceeds of Crime (Money Laundering) and Terrorist
Financing Act
http://laws.justice.gc.ca/en/P-24.501/index.h tml

OSFI list of designated entities and individuals (terrorist
financing)
http://www.osfi-bsif.gc.ca/osfi/index_e.aspx? DetailID=525

1985 Criminal Code
http://laws.justice.gc.ca/en/C-46/index.html

1985 Income Tax Act
http://laws.justice.gc.ca/en/I-3.3/index.html

1982 Charter of Rights and Freedoms
http://laws.justice.gc.ca/en/charter/index.ht ml#libertes




WILKINS