Money Laundering - A Preventive Guide

A Preventive Guide for Small Business & Currency Exchanges in Canada

FINTRAC The Financial Transactions and Reports Analysis Centre of Canada

One of the RCMP's roles within Canada's Initiative to Combat Money Laundering is to inform the public. To most businesses, money laundering is something that happens somewhere else, involving only criminals. The truth is, it can happen anywhere, anytime, and you may not even be aware that you have been involved.

Money laundering is the process whereby criminals conceal illicit funds by converting them into seemingly legitimate income. While the term refers to the monetary proceeds of all criminal activity it is most often associated with the financial activities of drug traffickers who seek to launder large amounts of cash generated from the sale of narcotics.

The RCMP Proceeds of Crime (POC) program's mandate is to identify, assess, restrain and forfeit illicit and/or unreported wealth accumulated through criminal activities. Most of the POC sections work under an integrated model. These Integrated Proceeds of Crime (IPOC) Units bring together the skills, knowledge, and abilities of a diverse group of experts, including RCMP, provincial and municipal police investigators, lawyers from the Department of Justice, forensic accountants, representatives from Canada Revenue Agency, and customs officers from the Canada Border Services Agency (CBSA).

It is important for businesses of every kind to be informed about how they can be used to launder money, and how they can help to make it more difficult for criminals to prosper. We recommend you review this booklet to ensure that you are aware of the problem.

Index

• Foreword
• Why criminals want to "launder" money?
• Money Laundering Methods
• What is "wilful blindness"
• Preventive strategies for small and medium businesses
• Record keeping requirements for small and medium businesses
• Impact of money laundering on society
• If you suspect money laundering
• What we need from you
• Partners in identifying the proceeds of crime
• RCMP Proceeds of Crime Units

Foreword

This booklet gives members of the business community an overview of money laundering in Canada, and information on how to avoid becoming unknowingly involved in this activity. In the pages ahead, you will read about some of the methods used by money launderers, and how you and your business can unwittingly become a part of this illegal activity.

Organized criminals, in particular drug traffickers, generate large amounts of cash which they must convert and legitimize in order to benefit from, and further finance their illegal activity. This is called money laundering. One method is to place illegal cash into the financial system through the business community.

Money launderers and criminal organizations are not concerned with the regulatory and competitive environment in which Canadian businesses function and will exploit this system for their own criminal purposes.

Cooperation from the business community goes a long way to ensure law enforcement agencies are successful in the fight against money laundering. I hope you will read this booklet with great interest and remember to communicate with the nearest Integrated Proceeds of Crime Unit when you are suspicious of a financial business transaction.

Supt. Jacques Désilets
Director Proceeds of Crime Branch
Royal Canadian Mounted Police

Why criminals want to "launder" proceeds?

1) to increase profits
2) to appear legitimate
3) to evade taxes
4) to avoid prosecution
5) to avoid seizure of accumulated wealth

The principal objective of money laundering is to convert cash into some other form of asset in order to conceal its illegal origins. A criminal group's efforts to launder the proceeds from their crimes may come to your attention at any stage of its placement, layering or integration into the financial system.

• Placement: The launderer introduces the illegal profits into the financial system. This may be done by breaking up large amounts of cash into less conspicuous, smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (like cashier's cheques and money orders) that are then collected and deposited into accounts at other locations.
• Layering: The launderer engages in a series of conversions or movements of funds to distance them from their source. The funds may be channeled through the purchase and sale of investment products, or the launderer may simply wire the funds through a series of accounts at a number of different banks. In some instances, the launderer may disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.
• Integration: The illicit funds re-enter the legitimate economy. The launderer may choose to invest the funds into real estate, luxury assets, or business ventures.

Money Laundering Methods

• Structuring ("smurfing"): Smurfing is possibly the most commonly used money laundering method. It involves many individuals who deposit cash into bank accounts or buy bankdrafts in amounts under $10,000 to avoid the reporting threshold.
• Bank Complicity: Bank complicity occurs when a bank employee is involved in facilitating part of the money laundering process. Bank complicity is becoming increasingly difficult for criminals to use following the introduction of the Canadian Bankers Association's policy, procedures and training (see Canadian Bankers Association ).
• Money Services and Currency Exchanges: Money services and currency exchanges provide a service that enables individuals to exchange foreign currency that can then be transported out of the country. Money can also be wired to accounts in other countries. Other services offered by these businesses include the sale of money orders, cashiers cheques, and travellers cheques.
• Asset Purchases with Bulk Cash: Money launderers may purchase high value items such as cars, boats or luxury items such as jewelry and electronics. Money launderers will use these items but will distance themselves by having them registered or purchased in an associate's name.
• Electronic Funds Transfer: Also referred to as a telegraphic transfer or wire transfer, this money laundering method consists of sending funds electronically from one city or country to another to avoid the need to physically transport the currency.
• Postal Money Orders: The purchase of money orders for cash allows money launderers to send these financial instruments out of the country for deposit into a foreign or offshore account.
• Credit Cards: Overpaying credit cards and keeping a high credit balance gives money launderers access to these funds to purchase high value items or to convert the credit balance into cheques.
• Casinos: Cash may be taken to a casino to purchase chips which can then be redeemed for a casino cheque.
• Refining: This money laundering method involves the exchange of small denomination bills for larger ones and can be carried out by an individual who converts the bills at a number of different banks in order not to raise suspicion. This  serves to decrease the bulk of large quantities of cash.
• Legitimate Business / Co-mingling of Funds: Criminal groups or individuals may take over or invest in businesses that customarily handle a high cash transaction volume in order to mix the illicit proceeds with those of the legitimate business. Criminals may also purchase businesses that commonly receive cash payments, including restaurants, bars, night clubs, hotels, currency exchange shops, and vending machine companies.  They will then insert criminal funds as false revenue mixed with income that would not otherwise be sufficient to sustain a legitimate business.
• Value Tampering: Money launderers may look for property owners who agree to sell their property, on paper, at a price below its actual value and then accept the difference of the purchase price "under the table". In this way, the launderer can, for example, purchase a $2 million dollar property for $1 million, while secretly passing the balance to the seller. After holding the property for a period of time, the launderer then sells it for its true value of $2 million.
• Loan Back: Using this method, a criminal provides an associate with a sum of illegitimate money and the associate creates the paperwork for a loan or mortgage back to the criminal for the same amount, including all of the necessary documentation.  This creates an illusion that the criminal's funds are legitimate. The scheme's legitimacy is further reinforced through regularly scheduled loan payments made by the criminal, and providing another means to transfer money.
  

What is "willful blindness"?

"… wilful blindness arises where a person who has become aware of the need for some inquiry declines to make the inquiry because he does not wish to know the truth. He would prefer to remain ignorant. The culpability [in wilful blindness]… is justified by the accused's fault in deliberately failing to inquire when he knows that there is reason for an inquiry." R. v. Sansregret (1985) 45 CR (3d) 193

Example of wilful blindness: A salesperson encounters a customer who wants to buy a consumer good or service with $25,000 cash. The customer produces a gym bag containing $25,000 in $20 and $50 bills. In the vast majority of modern Canadian commerce, this is not a normal business transaction, and this method of payment is highly unusual. Though the salesperson instantly suspects something is out of the ordinary, they chose to ignore their suspicion so as not to jeopardize an easy sale.

By ignoring such key money laundering indicators, an individual may have directly participated in an illegal process.

Preventive strategies for small and medium businesses

When dealing with your customers, ask yourself these questions:

• How well do I know this customer?
• Does the transaction make sense considering the customer's profile?
• Do I fully understand the transaction the customer wishes to complete?
• Am I comfortable with this transaction?
• Is this the usual method for conducting this type of business transaction?

If in doubt, there may be a possibility that your customer is using your business to launder money.

Record keeping requirements for small and medium businesses

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act requires that a report be filed with the Financial Transactions and Reports Analysis Centre (FINTRAC). FINTRAC receives, analyzes, assesses and discloses financial intelligence on suspected money laundering, terrorist financing, and threats to the security of Canada.

Who must report to FINTRAC?
All financial entities, life insurance companies, securities dealers, foreign exchange outlets and money services businesses, which have detected a suspicious transaction, or conducted cash transactions or wire transfers in/out of Canada worth $10,000 and over. Records related to these transactions must be kept for a period of five years.

What information should be reported?
Information about the reporting entity as well as details about the person conducting the transaction.

When to file a report:
The deadline for reporting a suspicious transaction is 30 days after the transaction occurred. The deadline for reporting a cash transaction of over $10,000 is 15 calendar days after the transaction occurred.

Why report to FINTRAC?
If there are reasonable grounds to suspect that a transaction is related to a money laundering or terrorist financing offence, the law requires that a report be filed with FINTRAC.

How to file a report:
Information on how to report to FINTRAC can be found online at
http://www.fintrac.gc.ca

Impact of money laundering on society

The proceeds from crime that creep into the Canadian economy are staggering and affect all levels of society.

Money laundering can have devastating social consequences. Laundered funds provide financial support for drug traffickers, terrorists, arms dealers, and other criminals to operate and expand their operations. Investigations reveal that criminals manipulate financial systems in Canada and abroad to support a wide range of illicit activities.

For example, drug trafficking alone generates billions of dollars in illicit funds for criminal organizations every year. Businesses supported by the proceeds from crime create unfair competition and can bankrupt legitimate competition in the market.

If you suspect money laundering, Report it.

Disclosure provisions under Section 462.47 of the Criminal Code of Canada justify you to do this. This section ensures that when you file a report you will be protected from any civil or criminal liability, even if your suspicions prove to be wrong.

Call your nearest RCMP Proceeds of Crime Unit if you suspect illegal money transactions.

What we need from you

When contacting a Proceeds of Crime Unit concerning a suspicious transaction, you may be asked to provide specific information, such as:

1. Date, time, and location of the transaction.
2. Name, age, address, telephone number, description of the person(s) involved in the suspicious transaction and their associates.
3. The amount of the suspicious transaction.
4. Bank, credit card, or other personal information about the subject that might be available.
5. Description of vehicle and licence plate number associated with the suspicious transaction/activity.
6. The circumstances, details, and events that raised your suspicion.
7. The type of activity associated with the suspicious transactions (payment made by an unusually large volume of cash, use of nominees (associates), currency exchanged, smurfing, refining, undervaluing goods, loan backs).
   

Partners in identifying the proceeds of crime

Every year police investigations are launched as a result of information provided by members of the community. Law enforcement personnel consider this information vital to identify suspected money launderers.

One single indicator does not prove that a suspicious transaction is money laundering. A criminal or money launderer is typically identified from a combination of facts and events.

When you are suspicious of activities that may be connected to money laundering, you should inform your management and/or a law enforcement agency. Getting a second opinion can help you decide whether the activity is in fact money laundering.

Please report any suspicious business transactions, people, or organizations to your local RCMP detachment or any other local policing agency.

This booklet is available from the Royal Canadian Mounted Police Proceeds of Crime Unit nearest you.

Published by the Royal Canadian Mounted Police, Proceeds of Crime Branch (2006).

See also: Proceeds of Crime