Canada is Raising the Bar on Anti-Money Laundering and Counter-Terrorist Fundraising Compliance

By Yaron Hazan 2 weeks agoNo Comments
Home  /  Blog  /  Canada is Raising the Bar on Anti-Money Laundering and Counter-Terrorist Fundraising Compliance

Scrutiny of the anti-money laundering (AML) and counter-terrorist fundraising (CTF) practices of Canadian banks and institutions has many questioning whether enough is being done to defend against current threats. Recent non-compliance findings by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) imply there is room for the private sector to do better.

In December 2023, FINTRAC levied its biggest penalty to date against the Royal Bank of Canada (RBC), fining RBC C$7.5 million for failing to submit suspicious activity reports (SARs). FINTRAC then issued another fine against the Canadian Imperial Bank of Commerce (CIBC), penalizing them almost C$1 million dollar for non-compliance with AML and CTF measures.

It’s important to note, that these fines are not penalties for actual criminal offenses; they are penalties for failures in the bank’s controls and governance. However, these failures represent potential weaknesses in the defenses of the institutions. These failures indicate that criminal activity could be going undetected and that these institutions are highly susceptible to criminal activity in the future.

AML and CTF non-compliance is not new

These dangerous lapses in compliance, unfortunately, have been part of the Canadian landscape for some time. A follow-up to a 2021 report by the Financial Action Task Force (FATF) found weaknesses in the regulation, enforcement, and effectiveness of Canada’s financial intelligence unit (FIU), FINTRAC. The report assessed FINTRAC as only “partially compliant”, only one step higher than the lowest grade – “non-compliant”.

Some analysts attribute FINTRAC’s recent activity as an indication they have taken these criticisms to heart and are focused on improving the compliance vigilance of the institutions under their watch. As a result, Canadian banks and institutions are, in turn, looking at their programs and taking steps to bolster their AML and CTF compliance to reduce their risks and improve the overall strength of their capabilities.

The time is now for banks to strengthen AML and CTF

The Canadian financial system, due in part to the aforementioned lapses in AML and CTF compliance and its proximity to the U.S. market, is very attractive for bad actors looking for a place to hide their money and fund their criminal activity. As a modern, democratic, open country, Canada consistently ranks high on the index of economic freedom. However, the very institutions and principals that protect the rights of individuals to pursue their own economic interests can also be exploited by criminals for their own ill intent.

These bad actors try to use Canadian banks as a final destination for their illicit funds, as well as for layering. It is advantageous to conceal the origin of their funds through a series of transactions making it seem make it seem as if the money is coming from Canada. According to Global Regulatory Insights (GRI) money laundering offenses in Canada are linked to a wide variety of criminal conduct, including drug trafficking, fraud, corruption, human trafficking, organized crime, and terrorism.  In addition, FINTRAC has uncovered activity related to “homegrown terrorism, the bankrolling of international terrorist groups, and attempts by Canadians to take part in extremism abroad”.  The pernicious scope of this criminal activity highlights just how important it is for Canadian banks and financial institutions to take their AML and CTF compliance seriously.

AML and CTF compliance is tough

Staying on top of all the new and changing regulatory requirements can be extremely complex for institutions.

In addition, the crimes themselves are complex, representing a constantly moving target. These crimes are designed to fly under the radar; they are meant to remain hidden among legitimate activities. Bad actors constantly hone their skills and tactics, often paying career criminals to do whatever they can to avoid detection.

Further inadequate, rules-based legacy tools have made it harder for institutions to adapt, identify, and fight all this criminal activity. Most bad actors know and exploit the rules, finding shelter in the noise of false positives that these solutions create. In addition, these solutions don’t provide sufficient context, making it hard for institutions to accurately detect the scope of financial crimes they are facing.

3 capabilities that help reduce money laundering and terrorist risks

The banks, financial institutions, and FIU of Canada are looking at improving the intelligence, controls, and defensive measures available to catch criminals and terrorists. The following will make it possible.

1. The ability to use all of their financial data

Financial institutions and FIUs are not allowed to ignore data they own, manage, and process. If that data includes indicators for criminal activity, it must be used, reported, and acted upon. As a result, institutions need to adopt a data-driven approach and deploy solutions that will help them leverage all their data, at scale, to identify the potential criminal activity it contains.

2. The ability to detect suspicious activity in a timely manner 

Understanding a crime one year after it was committed is irrelevant, both in terms of being able to protect the society at large from its impact, as well as being able to bring the criminals to justice. Institutions must look to take advantage of new technologies, such as machine learning (ML) and artificial intelligence (AI) that can accelerate data processing and investigations, so they can uncover and potentially address risks in near real-time.

3. The ability to provide meaningful alerts and reports on any unusual behavior and risk indicators

The reports the private sector submits to FINTRAC are the foundation for Canada’s AML and CTF efforts (which could explain why recent penalties were so steep). FINTRAC has indicated that it does not want reports to be limited by the size of the transactions or pre-defined thresholds (according to new guidelines, page 64).

FINTRAC is expected to analyze all the reports coming from the private sector and feed Law Enforcement Agencies with relevant financial data to trigger and support criminal investigations. Timely Suspicious Activity Reports (SARs), Suspicious Transaction Reports (STRs), and Currency Threshold Reports (CTRs) strengthen their ability to quickly uncover criminal activity that requires the attention of LEAs, which could ultimately help FINTRAC better address FATF expectations to drive relevant investigations.

Institutions need to be prepared to cover and report on any behavior that is not aligned with a business profile and deviates from normal business context to give FINTRAC all the information they require to identify trends country-wide and uncover criminal activity that might otherwise go undetected or unprosecuted.

New technologies that put AML and CTF effectiveness within reach

Financial institutions have access to advanced ML and AI solutions at their disposal to help them fight financial crime and strengthen AML and CTF capabilities. New Software-as-a-Service (SaaS), AI-based solutions, eliminate the shortcomings of legacy rule-based solutions to identify significantly more financial crimes faster, smarter, and more efficiently to satisfy regulatory requirements.

These dynamic, automated, real-time AI-based solutions enable institutions to:

  • Identify and investigate financial crimes that rule miss. Transaction Monitoring and Screening solutions that give institutions a full, accurate view of potentially suspicious activity, both known and unknown.
  • Report suspicious activity and suspicious transactions. The single operational view these solutions typically provide makes it easy for institutions to identify and then alert (report) on potential risks to regulators, giving them the insights they need to open cases and pursue bad actors.
  • Continuously assess risk. These SaaS, AI-based solutions can keep up with the pace and scale of all the financial activity of an institution to identify potential financial crimes as they emerge.
  • Increase economic health and grow their business. With a more holistic approach to risk management, these solutions enable institutions to offer fast and regulatory-compliant transactions.

By advancing AML and CTF capabilities with these new solutions, Canada’s banks, fintechs, and FINTRAC will be able to strengthen their ability to detect, analyze, and address money laundering and terrorist financing. As a result, Canada will be able to improve its reputation and increase trust in its financial systems to spur growth.

Yaron Hazan
Written by Yaron Hazan, VP of Regulatory Affairs of ThetaRay
this post was shared 0 times
0 0 votes
Article Rating
Notify of

Inline Feedbacks
View all comments