Canada's money-laundering laws must respect privacy rights, the country's auditor general said Monday in her annual report.

Canada lagged behind other nations in setting money laundering laws, but moved in 2000 to close the gaps. The federal government passed new anti-laundering legislation and budgeted $139 million over the first four years to identify cases of money laundering.

In 2001, following the Sept. 11 attacks against the United States, the law was amended to include provisions to detect terrorist financing.

With a review of the money-laundering legislation not due until 2004, auditor general Sheila Fraser said civil rights cannot be trampled in a rush to ferret out criminals.

"Not only must the federal government's strategy enforce the law, it must also try to achieve other important objectives, such as protecting personal information, controlling costs, and supporting international efforts," Fraser said.

"Striking a balance among these multiple goals is a difficult challenge. In 2004, members of Parliament will have the opportunity to determine whether the right balance has been struck when they review the legislation that underpins the strategy," she said.

Money laundering involves disguising or concealing the profits or proceeds of crime to make them appear legitimate. "Dirty money" produced through criminal activity is changed into "clean money" making its criminal origins difficult to trace.

The auditor general said money laundering has been described as a problem involving billions of dollars in Canada and many more billions worldwide. Drug trafficking is believed to be the main source of funds laundered in and through Canada, although other crimes such as fraud and smuggling are also thought to be important.