The clean-up act

By Robert Colapinto
Illustration: Gérard Dubois

Once Canada was known as the laundromat of the North. No longer. New laws make it easier to track money-washing schemes

Charles Kofi was at his wits end in late 1997. Banished to Ghana from his native Nigeria, the princely West african had had little success in rescuing more than US$500 million in cash, gold and jewels squirreled away in overseas banks by his fiendish relatives. In hiding with a price on his head, he would finally turn to Henry Statz, resident of the $60-a-night Mountain Motel in Hamilton, to set things right. By 2001, Statz had doggedly solicited more than $15 million from "investors" betting he could secure both the loot and a grateful Kofi from the war-torn region. Their promised reward would be a 10-fold return on their largess. Academics, lawyers and businessmen responded to Statz's mass e-mail entreaties. Once hooked, few bridled at the ensuing five years of almost daily pleadings for more cash.

Of course, this rescue from villainy was simply a more modern electronic form of the notorious Nigerian advance-fee letter campaigns of the late 1980s and early 1990s. Indeed, most of the money from what would become the largest advance-fee scam in Canadian history was quietly making its way back across the ocean to representatives of the Nigerian and eastern European underworld. A near impenetrable layering and integration of the funds through legitimate Canadian and foreign banks thoroughly cleansed the donations for Mr. Kofi's supposed rescue. 

For Hamilton police and the RCMP the goal was to prove fraud and confirm the money had been laundered. What was in the 1990s a daunting and time-consuming task is now a mouth-watering challenge for senior officer Peter Lamey and his fellow financial intelligence agents at the Ottawa headquarters of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The regulatory and financial intelligence agency is behind the July 2000 Bill C-22, the Proceeds of Crime (Money Laundering) Act — amended December 2001 to Proceeds of Crime (Money Laundering) and Terrorist Financing Act. "The Statz case was our first success," says Lamey. "The cops did so much of the work, but we were there to disentangle the movement of the victims' cash, to show that money that was supposedly going to a good cause was oddly being laundered and/or diverted to overseas organized crime." In June 2003, Statz pled guilty to fraud. As for the beleaguered Mr. Kofi, he likely never existed.

The act has done much in the past four years to rehabilitate Canada's woeful reputation as the Maytag of the North for organized crime groups and their money launderers. Statz and the Nigerian mob had not simply selected Canada by throwing a dart at a world map, Lamey admits. It would take until 1991 before the first federal legislation exclusively directed at money laundering came into force. Even so, the 1991 act was weak in its most important component: compliance. Financial institutions were required to report irregular transactions only on a voluntary basis. "Clearly that was not good enough," Lamey agrees. "We simply had to catch up to the rest of the developed world." To much embarrassment, Canada neared the top of the US government's 1998 list of most welcoming money laundering countries — joining such havens as Myanmar, the Cook Islands, Guatemala and, of course, Nigeria. At least one of Canada's bedfellows could list one bank for every 48 residents on the island.

Now, under the act, all businesses identified as vulnerable to money laundering — with the potential to handle money or deal in financial instruments and commodities that may have been converted from cash — are legally obliged to file reports on all "suspicious" transactions. In addition any movements of cash worth $10,000-plus must be reported to FINTRAC for analysis. After rigorous scrutiny, FINTRAC may refer its findings back to law enforcement for further investigation. As one might suspect, financial institutions, securities dealers, real estate brokers, life insurance companies and casinos top the list for potential abuse. "What we consider suspicious is the out-of-the-ordinary transaction or purchase that doesn't fit the company's profile or transaction history," says Chris Walker, president of About Business Crime Solutions Inc., an e-based firm that provides money laundering identification and legislative compliance training services to businesses affected by the act. 

"In Canada, with our weak laws, open borders, and a number of banks with a significant presence in known money laundering havens, it simply got too costly and embarrassing not to enact something like the act," says Walker. For Lamey, the new legislation was a necessary response to growing high-tech electronic-commerce challenges, a bevy of new financial products and services, and the global scope from which the modern criminal now employs his strategies for hiding dirty money. "Much of it takes place well beyond national borders," he says, "and we had to have a mechanism with which to both extend our reach as well as communicate and share information with other foreign investigative agencies."

But it is in domestic defence where the new legislation is expected to have its greatest impact. Canada's corner store currency exchanges have long been targeted by the police as key laundering facilities for drug money. Prior to the legislation, the RCMP had few resources and even less intelligence to effectively uncover and offer the Crown irrefutable evidence of shady doings within these conduits for illicit cash.

Under the FINTRAC regime, currency exchanges must join the far more complex and global financial services sector to comply with the act.

Lamey is reluctant to name a figure on the size of money laundering in Canada. "The police have a wide range from $5 billion to $15 billion, but the nature of the beast makes it only guesswork," he concedes. The International Monetary Fund is equally at sea, guessing at 2% to 5% of the world's annual GDP, or $900 billion to $2.25 trillion. Then again, the figure may be half or double this sum.

"No matter what we do, dirty money has to find its way into and through the system," assures Lee Lamothe, organized-crime expert and author. "They sell their drugs, perform their stock frauds and scams; and it's only getting larger in scale with each passing year. No legislation is going to stop such a phenomenon. Criminals will always find a way."

One simple and age-old response to international controls on the movement of capital has been the resurgence of a number of Asian, Middle-Eastern and african-based underground financial systems. Known as "flying money" networks, they completely bypass the world's integrated banking system, says Lamothe. "Basically, they operate through family or ethnic/ tribal networks. The cash, often vast sums, is handed over to trusted persons within the ethnic community in, say, Hong Kong. A call is then made to Vancouver to confirm the deposit and an equal amount in cash, drugs or guns — less a small fee — is remitted." In the end, police have little to go on because the money has never actually moved or taken flight. "The success, though, of this foolproof system depends entirely on equal portions of trust and fear," says Lamothe. "Fear is easy for drug traffickers, but trust is another thing. Luckily, 'mainstream' money laundering offers little of the latter."

For Lamothe, muddying the dirty money trail in the untrusting developed world has become as high a priority as the illicit activity that generates that money. "You sell a thousand pounds of cocaine and in return you have a pile of 20 dollar bills the size of a Buick," he explains. "These pieces of paper are of no use to you if you can't spend or invest it, and worse, it's twice the volume of the original product. The key," he continues, "is to find somewhere quiet and tame to make that final integration of the money into the legit system." What better way than an unsuspecting CA who thinks a money-laundering scenario involves a bent-nosed, pinstriped hoodlum walking into his office with several bales of cash?

Although the Big Four firms have comprehensive compliance procedures under the act to complement the vigilance of their ever-suspicious forensic accounting departments, the larger firms are under constant threat. "We feel in our business that the most likely areas of vulnerability are in our corporate recovery group," says KPMG forensic's James Hunter. "This is an area where we may find ourselves in charge of companies where we don't know very much about the business or the background." Organized criminals, he says, will always look for the weakest link in the seemingly impregnable major companies. "There is no question they are targeting CAs because our enforcement regime [FINTRAC] is new and hardly tested."

According to Walker, it is at the level of the smaller firms and sole proprietors, who cannot afford to create an effective compliance regime or are ignorant of the new legislation, where a concerted effort is being made to conceal proceeds of crime. Walker's ABC Solutions has found that a large percentage of these CAs do not believe the concerns that created the act have any relevance in their work. "Almost more than any sector, these guys are mystified that the services they offer that manipulate the value or nature of a client's assets might be dirty. They don't see any money, so it must be somebody else's problem." In Hunter's opinion, it is the time and expense required for compliance by these smaller firms that makes them not so much ignorant but vulnerable. "Some firms do not have the budget or the people to put in place a comprehensive monitoring regime," he says. "And the criminals know this."

Lamothe has some sympathy for the CA working diligently across his desk from a well-dressed, sophisticated client who has long been eyeing his mark. "To understand the accountant's dilemma, you have to understand the stage he's probably at in the cleansing process," he says. By the time this gentlemanly criminal is fretting about his taxes, property and financial holdings to his accountant, he has more than likely been manipulating his money on the streets for weeks. "Ask an accountant what 'smurfing' is, for example," says Lamothe, "and you begin to understand," he laughs. The smurf (named after a diminutive blue cartoon character) is often at the forefront of the initial stages of dirty-money placement in the financial system. A number of small (often blue-haired) elderly women are hired to make bank deposits or transactions at currency exchanges. These so-called "smurfs" spend their days making innocent deposits just less than the $10,000 threshold.

This low-tech strategy is a simple and effective starting point on the road to creating the illusion of legitimacy. "Smurfing started in the US where regulators have had stringent reporting procedures for years," says Lamothe, "and it's been no surprise that [the act] has resulted in the strategy running rampant in Canada since [it] started being enforced."

Canada even has its own unique variation on the theme. Tele-smurfing is currently all the rage from Vancouver to Halifax. The ploy involves the criminal boss setting up a pay-per-minute 1-900 service and using scores of his own boiler-room callers to purchase thousands of hours of fortune-teller advice or pornographic chat. Along with the illicit proceeds from the mob's meat-and-potato drug trafficking, prostitution, extortion and usury, the proceeds from the $12-billion-a year-white-collar crime industry — securities, insurance and credit card fraud, pump-and-dump stock manipulations, and endless variants of high-level corporate skulduggery — enter the financial system with ease and are almost untraceable.

Layering ensures the cash remains lily white. By transforming cash into securities, business ventures or real estate — often under the umbrella of a shell company that first breaks down the money into increments over scores of accounts in half a dozen countries — the original proceeds of crime can finally be integrated safely into perfectly legal ventures. It is often at the layering and integration stage, after the funds have gone through 20 incarnations, when the unwary accountant is enlisted to perform a final touch of legitimacy.

Some experts believe Canadian legislation should be amended to provide great-er freedom for its police and intelligence agencies to investigate suspicious activities. FinCEN, FINTRAC's US counterpart, allows police to burrow through its ever-expanding databases in search of telltale signs of layering and integration. The act, though, ensures Canadians' privacy rights by remaining at arm's length from law enforcement. Police have access to FINTRAC's records, and it's the agency's decision whether or not to pass on information. "The problem with that," says Walker, "is if the government is going to selectively dole out the goods, the police end up having a hell of a time putting the puzzle pieces together." The movement of large sums of money through flying money underground banking systems, for example, will require far more aggressive and intrusive investigative techniques.

"Although it is difficult, I say the best hedge against being caught up in all this crap is to know your client, know his business, know who he knows," says André Lepage, partner and practice leader for quebec, forensic and investigative services at Samson/Bélair/Deloitte & Touche in montreal. "It's all a case of proper due diligence. Mobsters and their drugs are the most obvious and colourful problem, but these days with the act and its international regulatory counterparts much of the big crime and money laundering is hidden in legitimate companies."

Lepage has just finished working on a cradle-to-grave investigation for a client considering a joint venture with a European company accused of shady dealings and iffy sources of cash. Based on the investigation, the client doesn't want to pursue the venture, says Lepage.

An ever-increasing number of companies, though, choose to use CAs and national and international compliance reg- ulations to fight back. "I'll soon be heading down to Central America to testify in a case where a Canadian firm is battling an accusation that it's deep into money laundering," he explains. "In this case, they want to battle for both the work and their reputation. I dug deep, really deep," he laughs, "and they're clean as a whistle."

Lepage credits his policing background for what he describes as a certain "mind-set simpatico" with those of a criminal bent. "When the Proceeds of Crime [Money Laundering] Act came out," he recalls, "you just knew the criminals saw it as an exciting challenge to overcome. They have been very inventive with their flight capital." Lepage cannot name names, but does confide that banks, brokerages, customhouses and accounting firms should do their utmost to screen new employees. "The corruptible bank manager is less inclined to make a move now that FINTRAC's around," he says. "So it's perhaps the mobster's educated son-in-law or boyhood friend applying for a key position who should be watched," he hints. Lamothe agrees: "Organized crime saw this legislation coming from miles away and has been prepared to work from the inside out in just about any industry sector you can name."

Lamey is laudably tight-lipped when it comes to commenting on these allusions to a wellspring of internal moles. The recent arrest of two key aides in the BC legislature on drug and money laundering charges should be a clear enough example of the RCMP's present focus. At any rate, Lamey confirms that very few FINTRAC white-collar "persons of interest" have reached the arrest stage let alone trial. Indeed, few charges of the spectacular nature of the Statz case have been laid since the agency's inception. 

Indeed, FINTRAC's first major clash with money launderers will take place later this year. As of March 2003, $460 million in suspicious transactions from 103 reporting disclosures have been referred to the RCMP and CSIS. Culled from 2.2 million filings as of March 2003 — up from 3,700 reports to April 2002 — 78 disclosures are related to money laundering and 25 to suspected terrorist activity financing.

Lamey says FINTRAC would likely have gotten off to a faster start were it not for 9/11 and the subsequent revision of the act to deal with terrorist financing.

Terrorist financing using clean and dirty money differs only in its ultimate goal. Most illicit movement of capital is directed at disguise and obfuscation, while terrorist dollars are used exclusively to fund future crimes. "Perhaps the catastrophe of 9/11 will help Joe Public understand the true cruel nature of how flight capital can result in the most tragic of events," says Lamothe. "Money laundering is not a relatively victimless white-collar, bean-counting exercise. More than ever it's the proceeds of death."

Lawrence Richter Quinn is a freelance writer based in Washington, DC