Ottawa's secret report on money-laundering points finger at Canada's banks

An internal report by Ottawa's money-laundering watchdog paints a picture of Canada's banks that's far less flattering than the one presented in a sanitized report it issued for Parliament and the public.

The Financial Transactions and Reports Analysis Centre, known as Fintrac, released its 2016-2017 annual report through Parliament last November. In it, the organization praises the banking sector for fighting human trafficking in the sex trade.

"Canada's major banks, led by the Bank of Montreal, invited Fintrac and police to work together to target this heinous and often hidden crime by focusing on the money laundering component of the crime," says the upbeat report in reference to Project Protect, which started in 2016.

"Project Protect has shown that the Canadian banking sector now sees itself as a full contributor to Canada's Anti-Money Laundering and Anti-Terrorist Regime."

A confidential annual report — described as "not meant for public release" — was delivered to Finance Minister Bill Morneau weeks earlier. That report looks at Fintrac's probes of nine banks in 2016-2017.

The Sept. 30 document, obtained by CBC News under the Access to Information Act, found "significant" problems at six of the nine banks — including problems in providing Fintrac with suspicious transaction reports, or STRs.

The law requires financial entities to file an STR to Fintrac when a transaction is suspected of being linked to a money-laundering or terrorist activity financing offence, regardless of the dollar amount.

"In examinations of the banking sector … 67% were found to have significant levels of non-compliance," says the report for Morneau.

"Deficiencies were identified in obligations related to STR reporting, risk assessment, and policies and procedures …"

Parts of the report detailing the banks' failings have been blacked out under sections of the Act that protect advice and law-enforcement investigations.

Poor showing

The banks' poor showing is somewhat better than the "significant" non-compliance Fintrac found in the real-estate sector (75%) and the money-services sector, such as payday loans (69%), though the agency cautions that performance cannot be directly compared across sectors.

Seven casinos selected for inspection did better than the banks, with just 29 per cent showing "significant" non-compliance.

The released report does not name any specific banks or other players examined by Fintrac.

There should be better compliance from all sectors, especially banks.- Alesia Nahirny, executive director, Transparency International Canada

Canada's banks provide almost 45 per cent of the suspicious transactions reports received annually, each of which Fintrac says "can potentially provide tremendous intelligence value." Almost 126,000 such reports were received in 2016-2017 from all sectors.

Fintrac spokesperson Jamela Austria said that in 2016-2017 the agency abandoned its technical audits of banks and others in favour of broader assessments of "overall effectiveness in complying with their legal obligations." The change in approach for these examinations prevents a direct comparison of that 67 per cent performance with previous years.

But Austria also said that the "overall findings in relation to the banks have generally not changed." Fintrac added new reporting requirements in 2016, so "it is not unexpected to find increased deficiencies across all sectors, including banks," Austria said.

Asked to comment on the findings of the internal report, Dave Bauer of the Canadian Bankers Association said banks have "excellent standing with Fintrac" and "take reporting duties seriously."

He cited Project Protect as evidence of the banks' support of the agency. That project led to 2,000 STRs being filed in 2016 related to human trafficking in the sex trade, four times the number in 2015, the year before the project was launched.

The head of a financial transparency group called the results of Fintrac's bank sample "disturbing."

"The numbers don't look good," said Alesia Nahirny, executive director of Transparency International Canada.

"Seventeen years after the Act has been introduced, there should be better compliance from all sectors, especially banks."

One bank was fined — but not identified

Fintrac has come under fire before for protecting a Canadian bank from public scrutiny.

The agency announced in April 2016 that it had fined a Canadian bank $1.15 million for breaking money-laundering rules — a record high for such a fine — but granted the institution anonymity.

CBC News later reported the offending institution was Manulife Bank, and questions were raised about why Gérald Cossette, then Fintrac's director, acted to protect the bank's reputation.

Cossette said he made the anonymity deal with Manulife to dissuade the bank from taking court action, with the aim of sending a strong signal to the banking community about the consequences of failing to follow the rules.

Manulife was the first bank ever fined, and the penalty was the largest such fine ever levied on any firm, bank or otherwise.

Since then, however, Fintrac has suspended all penalties under its so-called AMP — Administrative Penalty Program — while it complies with several court rulings to make its sanctions more transparent. The agency says it expects to release its new AMP regime later this year, after which it can resume imposing penalties.

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