Money Laundering and Terrorist Financing Trends in FINTRAC Cases Disclosed Between 2007 and 2011

FINTRAC Typologies and Trends Reports – April 2012

Table of Contents


Money Laundering and Terrorist Financing Trends in FINTRAC Cases Disclosed Between 2007 and 2011 (April 2012) (PDF version, 3,770 KB)

Message from the Director

I am pleased to present the latest in FINTRAC's series of Trends and Typologies Reports, Money Laundering and Terrorist Financing Trends in FINTRAC Cases Disclosed Between 2007 and 2011. Previous reports in this series have addressed specific business sectors that have reporting obligations under Canada's Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This report, however, boasts a greatly expanded scope, studying the 2,122 case disclosures that FINTRAC has provided to assist law enforcement and intelligence agencies in their investigations throughout the last four years. As such, it offers the public an unprecedented survey of FINTRAC's core product: its tactical intelligence. This report provides a bird's-eye view of how this intelligence tracks national and international trends in money laundering and terrorist financing.

FINTRAC's main tactical intelligence product, the case disclosure, is a vital tool to our partners in law enforcement and intelligence. Each case is built from thousands of transaction reports that FINTRAC receives from reporting entities such as banks, credit unions and casinos. These reports are analyzed for suspicious behaviour or patterns, and to identify key links between individuals, accounts and businesses - all of which assist law enforcement and intelligence agencies' investigations.

Case disclosures are instrumental for investigations of money laundering, terrorist financing and security threats in Canada and around the world. Because of the sensitive information they contain, individual case disclosures are only seen by selected members of FINTRAC and our partners. However, in this report, a wider audience can now see for the first time the larger trends that case disclosures reveal.

The cases FINTRAC compiles yield a wealth of details about potential money laundering, terrorist financing and other national security threats. Moreover, they contribute to an ever-more-precise profile of the suspected perpetrators. FINTRAC's intelligence contributes to the safety of Canadians, and this report offers the public greater insight into how this is achieved.

We at FINTRAC are proud of the work we do. I am equally proud to share this work with you.

Jeanne M. Flemming
Director

Introduction

This report is one in a series of FINTRAC publications that are intended to provide strategic financial intelligence and feedback to specific reporting sectors and FINTRAC partners. Unlike previous reports, which focused on suspected money laundering and terrorist financing activities conducted through various sectors, this particular paper is focused on an overview of FINTRAC cases disclosed between April 1, 2007 and March 31, 2011.

While researching this paper, FINTRAC extracted relevant financial intelligence from cases previously disclosed to law enforcement and intelligence agencies. These cases involved money laundering (ML), terrorist financing (TF) and other threats (TH) to the security of Canada. The resulting report presents general observations related to case disclosures, and describes methods and trends in ML and TF Footnote 1 . In doing so, this report seeks not only to demonstrate how FINTRAC contributes to the anti-money laundering/anti-terrorist financing (AML/ATF) regime, but also to illustrate how all the information received by reporting sectors is an essential component of investigations of money laundering and terrorist financing.

Part I of this report offers a general overview of issues related to case disclosures. Part II describes methods and trends in ML and TF, while Part III expands on FINTRAC's role in the international AML/ATF community.

Part I: General Observations

At its most basic level, financial intelligence establishes identity and behaviour in relation to the financial activities of suspected money launderers or terrorist financiers; as such, it is an important source of information in the fight against unlawful activities, organized crime and terrorism. FINTRAC offers a unique contribution to ML and TF investigations by assisting law enforcement and intelligence agencies in tracking and tracing the proceeds of crime across Canada and around the world.

FINTRAC must first ensure that reporting entities (REs) comply with their legislative obligations, which include the submission of the following reports to FINTRAC:

In addition to these, FINTRAC receives cross-border currency reports (CBCRs) and cross-border seizure reports (CBSRs) from the Canada Border Services Agency.

FINTRAC case disclosures can be generated from information provided by numerous sources, such as information provided by domestic law enforcement and intelligence agencies through voluntary information records (VIRs) and by foreign financial intelligence units (FIUs) through queries (FIUQs). STRs submitted by reporting entities, results of data mining techniques (known as pattern detection), and open source information also lead to case disclosures. Once these case instigators have been identified, the tactical analytical process begins.

FINTRAC's tactical analytical process involves the analysis of the reports and VIRs found in its databases in conjunction with information from other sources. These include law enforcement databases, commercially or publicly available databases, open source information and information from foreign financial intelligence units. When FINTRAC has reasonable grounds to suspect that the information provided in these reports would be relevant to an investigation or prosecution of ML or TF, the designated information is shared with relevant recipients in the form of case disclosures. These case disclosures mainly include details about financial transactions, their conductors, the locations and dates where and when they were conducted, the relationships between various individuals and entities, and other information.

A) Types of Cases

Between April 2007 and March 2011, FINTRAC disclosed a total of 2,122 cases to law enforcement, intelligence agencies and foreign financial intelligence units. These cases amounted to 72% of all cases disclosed since FINTRAC's inception in 2000. They can be broken down into three main disclosure type categories, as represented in Table 1. As noted in this table, ML cases continue to be the leading category, followed by TF/TH and the combination of ML/TF/TH. The hybrid nature of the last category highlights the connection between crime and terrorism.

Table 1: Cases disclosed per category
Disclosures by Type 2007-08 2008-09 2009-10 2010-11 Total
ML 171 474 470 626 1741
TF/TH 29 52 73 103 257
ML/TF/TH 10 30 36 48 124
Total 210 556 579 777 2122

B) Disclosure Recipients

FINTRAC discloses cases generated by STRs, open source and pattern detection to relevant law enforcement or intelligence agencies; however, cases generated by VIRs are disclosed to the VIR originator only, unless the originator allows dissemination to other relevant disclosure recipients. FINTRAC's disclosure recipients include ML/TF investigative bodies, as well as foreign FIUs. In addition, FINTRAC can also disclose to the Canada Border Services Agency (CBSA), the Canada Revenue Agency (CRA) and the Communications Security Establishment Canada (CSEC) if the related financial transactions fall within their respective mandates and FINTRAC has already met its disclosure threshold relating to a suspected ML or TF offence. Table 2 and Figures 1 and 2 highlight the main recipients of disclosures, as well as the distribution of disclosure recipients in Canada.

Table 2: Main Disclosure RecipientsFootnote 2
Recipients 2007-08 2008-09 2009-10 2010-11
RCMP 61% 68% 63% 59%
Municipal Police Services 24% 27% 23% 18%
Foreign Financial Intelligence Units 24% 17% 22% 19%
Provincial Police Services 12% 10% 21% 21%

Canadian Security Intelligence Service

12% 10% 13% 15%
Canada Border Services Agency 5% 14% 7% 11%
Canada Revenue Agency 5% 27% 22% 18%

In 2010-11, more than half of FINTRAC's case disclosures were sent to the RCMP, a result similar to what was observed in previous years. Generally, the distribution of disclosure recipients has remained relatively stable over the last four years. As illustrated in Figures 1 and 2, disclosure recipients were concentrated in Canada's metropolitan areas, particularly in Vancouver, Montreal and the Greater Toronto Area. On a provincial scale, there were a higher number of disclosure recipients in British Columbia, Alberta, Ontario and Quebec, as well as in major urban centres across Canada in close proximity to the border. Despite what appears to be a high distribution of disclosures focused in the national capital region, this is mainly attributed to the disclosure recipients' headquarters being located in that region, who often received copies of disclosures sent to provincial branches.

Figure 1: Distribution of Disclosure Recipients in Canada
FIGURE 1

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The map illustrates the distribution of case disclosure recipients across Canada. The map indicates that most disclosure recipients between 2007 and 2011 were located in major Canadian cities, particularly Vancouver, Montreal and the Greater Toronto Area. A high concentration of case disclosure recipients was also noted in the Ottawa area. The provinces where most case disclosures were sent were British Columbia, Alberta, Ontario and Quebec. Several cities which received high numbers of case disclosures were located close to the Canada-U.S. border.


Figure 2: Distribution of Disclosure Recipients in Southern Ontario and Western Quebec
FIGURE 2

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The map shows a detail of southern Ontario and western Quebec. Distribution of case disclosures in this area was mainly concentrated in the Greater Toronto Area (with larger concentrations in Toronto, Orillia and Newmarket in particular), Ottawa, and Montreal, as well as smaller concentrations noted in several other cities, including London (ON), Windsor (ON), Westmount (QC), and Kingston (ON).

C) Predicate Offences Related to Cases

FINTRAC may be informed of a suspected predicate offenceFootnote3 either through information that is volunteered by law enforcement, intelligence agencies or other partners such as CBSA, or through what is included in a suspicious transaction report and open source information. Table 3 highlights the most common types of predicate offences related to cases.

Table 3: Types of predicate offences related to casesFootnote 4
Predicate Offence Category 2007-08 2008-09 2009-10 2010-11
Fraud 35% 27% 29% 33%
Drug 28% 31% 34% 26%
UnknownFootnote 5 16% 18% 13% 14%
Tax Evasion 4% 13% 6% 5%
Customs/ExciseFootnote 6 8% 4% 3% 5%
Corruption 0% 4% 3% 5%
Human Smuggling 0.5% 2% 2% 4%
Theft 2% 4% 4% 3%
Illegal Gambling 1% 2% 2% 1%

Throughout the past four years, the most frequently observed cases were those related to fraud and drugs. In general, the percentages of cases in each category have been relatively stable across offences. It is important to note, however, that since most FINTRAC case disclosures are generated from information received from partners (i.e. VIRs or FIUQs), the case disclosures may for the most part reflect trends in criminal activity, but may also be a reflection of law enforcement and intelligence agencies' investigative priorities.

D) Reporting sectors most commonly “used” in suspected ML and/or TF schemes

During the past three years,Footnote 7 financial institutions (e.g. banks, credit unions, caisses populaires, etc.) were the reporting entity sector whose financial transactions and reports (i.e. STRs, LCTRs, EFTRs, etc.) constituted the majority of those associated with case disclosures. An average of 94% of cases involved the use of financial institutions, a statistic most likely attributable to the size of this sector and the volume of reports it produces. Money services businesses (MSBs) were involved in 36% of case disclosures (making them the second most used sector), while 15% of case disclosures involved the use of the casino sector. Figures 3 to 5 illustrate how the use of various reporting sectors in case disclosures where FINTRAC suspected the transactions were linked to ML and/or TF has changed over time.

Figure 3: Percentage of suspected ML drug-related cases involving main reporting sectors
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Figure 3: Percentage of suspected ML drug-related cases involving main reporting sectors
Percentage DRUGS 2008-09 2009-10 2010-11
Financial Institution 98 90 93
MSB 37 40 33
Casino 23 32 26

Figure 4: Percentage of suspected ML fraud-related cases involving main reporting sectors
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Figure 4: Percentage of suspected ML fraud-related cases involving main reporting sectors
FRAUD 2008-09 2009-10 2010-11
Financial Institution 98 93 96
MSB 36 27 33
Casino 12 8 17

Figure 5: Percentage of suspected cases related to terrorist financing involving main reporting sectors
FIGURE 5

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Figure 5: Percentage of suspected cases related to terrorist financing involving main reporting sectors
TF 2008-09 2009-10 2010-11
Financial Institution 98 95 89
MSB 56 34 37
Casino 6 5 6

As shown in Figure 3, there was a slight increase in the use of casinos in drug-related cases observed from 2008-09 to 2009-10. Secondly, as illustrated in Figure 4, there was a slight increase in the use of casinos in fraud-related cases from 2009-10 to 2010-11. Lastly, the most significant change was the decrease in the use of MSBs for TF cases from 2008-09 to 2009-10, as shown in Figure 5.

E) Financial transaction reports included in case disclosures

STRs, EFTRs, LCTRs, and other reports and information received by FINTRAC are an extremely valuable source of financial intelligence. A total of 407,835 of those reports were included in cases disclosed between 2007 and 2011. Of that number, 60% were EFTRs, followed by LCTRs at 36%, STRs at 33%, CBCRs at 0.6% and CDRs at 0.5%. Figure 6 shows the percentage of money laundering, terrorist financing and a combination of both types of cases disclosed between 2007 and 2011 containing at least one STR, LCTR, EFTR, or other type of report.

Interestingly, the percentage of cases containing at least one STR is similar to the percentage of cases including at least one EFTR or LCTR. This is significant, since STRs are usually human-generated and therefore the volume of these reports submitted to FINTRAC is much lower than that of EFTRs and LCTRs. STRs are particularly useful for providing additional information related to individual behaviour and transactional activity. STRs and other reports are powerful tools in detecting suspected money laundering and terrorist financing activities. In some instances, STRs alone provide the necessary grounds to suspect ML and/or TF. While it is a challenge for compliance professionals and employees within the financial system to remain vigilant and report suspicions through STRs, FINTRAC and disclosure recipients depend on the experience and judgement of those on the front line in their efforts to detect and deter suspected ML and/or TF.

Results shown in Figure 6 further reveal that the percentages of ML cases containing at least one STR, LCTR or EFTR were about the same. However, for TF and ML/TF cases, the percentage of cases including at least one LCTR or EFTR was greater than that for cases with at least one STR. Although the percentages of cases containing at least one CBCR, CBSR or CDR are much lower, it is interesting to note that CDRs have been mostly included in ML cases.

Figure 6: Percentage of ML, TF and ML/TF case disclosures (2007-11) containing at least one of each report type
FIGURE 6

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Figure 6: Percentage of ML, TF and ML/TF case disclosures (2007-11) containing at least one of each report type
  Money Laundering Cases Terrorist Financing Cases Money Laundering / Terrorist Financing Cases
STR 71 58 69
LCTR 72 75 73
EFTR 73 80 87
CBCR 16 12 12
CBSR 6 6 9
CDR 6 1 3

Part II: Role of FINTRAC within Canada

A significant component of FINTRAC's mandate is to assist in the detection, deterrence and prevention of money laundering and terrorist financing. As part of its mandate, FINTRAC produces different types of tactical and strategic financial intelligence that assist investigations or prosecutions by law enforcement and intelligence agencies.

As indicated earlier, FINTRAC provides proactive disclosures (i.e. generated by STRs, pattern detection and/or open source), as well as other disclosures generated following the receipt of VIRs or FIUQs to law enforcement and intelligence agencies. It also provides regular tactical disclosures to specific ongoing investigations, in the form of case updates and/or new but related case disclosures. For example, in 2010, FINTRAC contributed to two related municipal police force investigations. The investigations focused on an organized crime group suspected of drug trafficking and other criminal activities. FINTRAC played an active analytical role in these investigations, and through numerous and ongoing disclosures, helped police target individuals who were later arrested. The financial intelligence produced by FINTRAC revealed to police that the suspects were involved in activity consistent with money laundering, and this information was important in leading to the arrests.

FINTRAC's greatest asset is its database of reports. In the world of analysis, one report is valuable, but thousands are invaluable. The accumulation of these reports (provided primarily by REs), pieced together with other sources of information, can ultimately allow FINTRAC to uncover networks of seemingly unconnected individuals and entities participating together in criminal activity. Case disclosures often identify additional aliases, associates, individuals and entities previously unknown by law enforcement or intelligence agencies, bank accounts, addresses and other identifiers, as well as businesses owned or operated by individuals that are suspected to be involved in ML or TF activities. This additional information can be obtained, for example, through a combination of information reported in STRs, through transactional data linking personal identifiers, and through open source information and commercial databases, to name but a few methods. It identifies individuals or entities involved in possible schemes of collusion or those involved in common ML methods such as the use of nominees or front companies.

FINTRAC's strategic intelligence assessments and reports (such as the present report) are based on the macro analysis of a large number of tactical disclosures combined with other sources of information and attempt to explain trends in money laundering and terrorist financing. The goal of these reports is to assist partners and REs in their front line detection and deterrence. For example, FINTRAC recently produced a classified Financial Intelligence Brief which described and explained suspicious financial activity between a South American country and Canada. This activity was suspected to be linked to drug trafficking. The report identified the methods that individuals and entities used to transport the illicit cash into Canada, to deposit it in the financial system, then – through various layering techniques – to integrate it back into the regular economy. Such strategic intelligence reports can assist law enforcement and intelligence agencies in identifying individuals and entities conducting similar suspicious activities and can lead to new investigative approaches.

Further to the strategic intelligence produced for this report, FINTRAC assessed a number of case disclosures in an attempt to find common characteristics of money laundering and/or terrorist financing cases. For the purpose of this report, FINTRAC identified general characteristics much like the customer risk profile applied by many REs as part of their compliance regime. The common characteristics, which are presented in the following sections of this report, are merely guidelines; they should not be assumed exclusive of other factors, since criminals and terrorists have consistently operated outside of a single profile and are each uniquely resourceful in the methods and techniques they employ.

MONEY LAUNDERING is the process whereby “dirty money” – produced through criminal activity – is transformed into “clean money,” the criminal origin of which is difficult to trace. The money laundering process is continuous, with new dirty money constantly being introduced into the financial system.

There are three widely recognized stages in the money laundering process:

TERRORIST FINANCING refers to direct or indirect financial support to an individual, group, entity, state, or agent thereof, which plans or carries out acts of organized violence against the Government of Canada, Canadians, or Canadian interests or allies, or against other sovereign states, for the purpose of weakening the state, influencing policy, communicating a perceived grievance, and/or to threaten or intimidate the public or portion thereof. Terrorist financing is a defined criminal offence under section 83 of the Criminal Code of Canada. In general terms, the criminal dimension of terrorist financing includes collecting property/money for terrorists, possessing property of or making property available to terrorists, and/or using terrorist property. It also constitutes a threat to the security of Canada as defined under section 2 of the Canadian Security Intelligence Service Act (CSIS Act).

A) Money laundering methods and techniques related to suspected drug offencesFootnote 8

Investigations of drug trafficking and/or production were suspected in 30% (632/2122) of cases involving money laundering or terrorist financing. Of those cases, the most common drug offences were related to marijuana and/or cocaine. Figure 7 provides an additional breakdown of the more commonly observed drug-related offences per year.

Figure 7: Percentage of all cases related to investigations of different drug offencesFootnote 9
FIGURE 7

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Figure 7: Percentageof all cases related to investigations of different drug offences
Drug Sub-Categories 2007-08 2008-09 2009-10 2010-11
Trafficking - Unspecified 41 48 16 46
Trafficking - Cocaine 22 31 31 26
Trafficking - Marijuana 22 18 26 17
Production - Marijuana 27 12 22 20
Trafficking - MDMA(Ecstasy) 5 7 5 4
Trafficking - Heroin 3 3 7 3

It was also found that, during the same period, organized crime groups were involved in at least 28% of drug-related cases.

Common Characteristics of Suspected ML Drug Cases

Case example 1: ML case related to a cocaine trafficking network

FINTRAC received a VIR from the police regarding a shipment of cocaine which originated in Central America and was seized in Canada. Individuals identified in the VIR were suspected to be connected to the shipment. Upon its analysis, FINTRAC quickly uncovered a money laundering network and identified five new individuals who were suspected of facilitating the laundering of funds relating to a cocaine trafficking syndicate.

Analysis of the flow of EFTs and information submitted by reporting entities, especially STRs, led FINTRAC to piece together a smurfing network consisting of EFTs conducted by various individuals under the $10,000 threshold. The following money laundering scheme was identified:

FINTRAC provided all relevant designated information to law enforcement to assist them in their investigation.

This chart outlines the transactions and methods involved in a particular money laundering scheme

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The chart outlines the transactions and methods involved in a particular money laundering scheme.

Several individuals in Canada used various money services businesses to send numerous wire transfers abroad that were under the reporting threshold (a practice known as ‘structuring’). The transfers were sent to several money services businesses in Central America and the Caribbean and were received by three individuals. One individual used the money to buy and ship a large quantity of cocaine to Canada, while the other two individuals were suspected of having connections to organized crime. All three were suspected to have used the funds to buy the cocaine that was being shipped. The drug shipment was seized by police at a Canadian port.

B) Money laundering methods and techniques related to suspected fraud offencesFootnote 10

Fraud was suspected in 30% (644/2122) of all cases disclosed from 2007 to 2011 and 12% of these cases involved organized crime groups. Based on yearly statistics, investment/securities fraud was the most prevalent type of fraud observed in 2010-11, followed by credit/debit card fraud, which surpassed mass marketing fraud in comparison to previous years. Based on information received from law enforcement and intelligence agencies, specific fraud types were observed and are depicted in Figure 8.

Figure 8: Percentage of all cases related to investigations of different fraud offences
Figure 8

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Figure 8: Percentage of all cases related to investigations of different fraud offences
  2007-08 2008-09 2009-10 2010-11
Investment/Securities Fraud 26 26 33 36
Credit/Debit Card Fraud 7 13 9 11
Mass Marketing Fraud 18 17 9 5
Mortgage Fraud 3 5 8 8
Loan Sharking 1 3 2 3
Welfare Fraud 5 2 1 2
Other 50 43 48 45

As shown in Figure 8, mass marketing fraud (including popular schemes such as 419 scams, advanced fee schemes, telemarketing fraud, internet fraud, etc.) has declined significantly since 2007. Meanwhile, investment/securities fraud and mortgage fraud have continued to increase.

Drawing on the most recent data available (from April 2010 to March 2011), a sample of ML case disclosures related to all types of fraud was analyzed, but securities/investment fraud was assessed independently of the other types due to its unique characteristics. The main findings have been summarized in the link below:

Common Characteristics of Suspected ML Fraud Cases

C) Methods and techniques observed cases related to suspected terrorist financing

FINTRAC disclosed 287 cases related to TF throughout the last four years. Of these TF case disclosures, 34% also involved suspected ML predicate offences. FINTRAC observed a higher occurrence of such TF cases when human smuggling, credit/debit card fraud, and visa/passport fraud were investigated. This could possibly relate to an increasing reliance of terrorist organizations on revenue raised through criminal operations, which seems to support the growing concern in the international community regarding the crime-terrorism nexus.

Overall, 17% of TF case disclosures involved fraud offences, while 5% of cases involved drug offences. As observed in Figure 9, between 2007-08 and 2008-09, the percentage of fraud-related cases more than doubled, but was followed by a gradual decline. Figure 10 also illustrates how the percentage of cases involving drug offences has changed over time.

Figure 9: Percentage of TF-related cases involving investigations of fraud
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Figure 9: Percentage of TF-related cases involving investigations of fraud
2007-08 2008-09 2009-10 2010-11
11 22 17 15

Figure 10: Percentage of TF-related cases involving investigations of drugs
Figure 10

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Figure 10: Percentage of TF-related cases involving investigations of drugs
2007-08 2008-09 2009-10 2010-11
7 9 3 4

Drawing on the most recent data available, from April 2010 to March 2011, FINTRAC analyzed a sample of case disclosures related to suspected TF. The main findings have been summarized in the following text box:

Common Characteristics of Suspected Terrorist Financing-Related Cases

Case example 2: Suspected Terrorist Financing

Law enforcement provided information on family members suspected of providing financial support for a terrorist organization (Individuals 1 and 2). Information was also provided on MSB 1 owned by Individual 1. Upon further analysis, FINTRAC identified another MSB (MSB 2) registered to the same address, another company (Entity 1) owned by Individual 2 and another family member (Individual 3). It was suspected that through these businesses, funds were deposited into accounts or moved through multiple MSB agent locations (by cheque and bank draft), then EFTs were ordered to numerous beneficiaries in the country where the terrorist organization was located. Some of the foreign beneficiaries were suspected to be related to the individuals in Canada. MSB 1 sent and received numerous EFTs to and from two MSB agent locations in the United States. The purposes of these transactions were not known, but they could have been a way to potentially receive terrorist financing funds from anonymous individuals/entities in the United States and Canada. Millions of dollars worth of large cash deposits into accounts held at banks by MSB 1 and 2 were reported by financial institutions to FINTRAC.

Currency exchanges were also conducted at MSBs to convert US dollars to Canadian dollars and vice versa, and Individuals 1 and 2 were issued bank drafts and cheques which were then deposited into various accounts, including third party accounts. FINTRAC also received CBCRs relating to travel pertaining to Individuals 1 and 2 and their declarations of currency being imported into the same country where the terrorist organization was located. According to an STR, large cash, cheque and bank drafts were deposited into bank accounts held by Individuals 2 and 3, which were then followed by the purchase of drafts payable to precious metal dealers, where they regularly bought and sold gold. All parties disclosed on also benefited from numerous EFTs ordered by various individuals and entities in the United States. This activity, pertaining to Entity 1, was described by the bank as being unusual for the nature of their business.

According to numerous STRs, the following red flags were identified:

This chart illustrates a particular suspected terrorist financing scheme

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The chart illustrates a particular suspected terrorist financing scheme.

Various individuals and entities in Canada and the United States sent numerous electronic funds transfers to two money services businesses and a particular company, all located in Canada. Multiple money services business agent locations in Canada and the United States were used to send electronic funds transfers and cheques to the two money services businesses and the company; in return, the money services businesses performed currency exchanges for the money services business agent locations and sent back electronic funds transfers and bank drafts, while the company sent back bank drafts and cheques. The company also purchased gold bullion. Three individuals – one involved with one of the Canadian money services businesses, the other two involved with the Canadian company – exported currency and sent electronic funds transfers to seven individuals in a foreign country, all of whom were linked to a terrorist organization. For this reason, law enforcement suspected the three individuals in Canada of terrorist financing.

D) Country distribution of EFTs included in FINTRAC case disclosures

Electronic funds transfers are used after money generated by criminal activities is placed in the financial system, or when terrorist financiers send or receive funds related to terrorism. Individuals use EFTs often to complicate the money trail, to conceal funding of terrorism, or to evade anti-money laundering authorities; they may send or receive EFTs in Canada or in foreign countries, offshore locations and tax haven countries with lax anti-money laundering laws.

Drug trafficking and the demand for drugs are fuelling global criminal operations. Drug traffickers are extremely diversified and their tentacles reach beyond our Canadian borders. In the drug trade, production and trafficking elements may take place in different countries, from the origin of precursor chemicals for production to countries of cultivation or drugs produced in one country, which may then be trafficked into a second country, and supplied to a third country. Similarly, the laundering of illicit drug proceeds can be done through various jurisdictions. FINTRAC is in a unique position to identify unusual patterns and emerging trends in EFT flows and, as a result, to recognize global financial routes related to those ML activities. Individuals involved in the drug trade normally introduce their illicit funds into the financial system through various methods (such as cash deposits and the use of front companies) to conduct financial transactions, which are followed by purchases of EFTs. In contrast to drug-related cases, fraudulent funds are normally already in the financial system, and so the placement stage of money laundering is not required. It is therefore more difficult to detect the layering and integration phases. One way to launder the proceeds of fraud is to send them to a foreign bank account, either in a bank secrecy country or offshore location, where the Canadian authorities cannot look for them. Overall, fraud-related cases have been observed to contain four times the number of EFTs compared to drug-related cases, which indicates that this is a common method employed by these schemes.

Terrorist financing requirements are diverse and vary among groups. Typically, financing is required not only to fund specific terrorist operations, but also to meet the operational demands of the group, from recruitment to planning to training. At times, these groups are local, but most are part of a larger organization with an international footprint. The financial intelligence collected from EFT reports is especially significant when it comes to identifying suspicious transactions related to terrorist financing. Terrorist financing activity is unique in comparison to drugs and fraud cases, as money used to fund terrorist operations is sometimes derived through legitimate means; as such, concealing the source of funds is not required. However, in some terrorist financing cases, a crime may be committed and the proceeds may be sent by EFTs directly or indirectly to a foreign terrorist organization. Terrorist financiers may also attempt to send EFTs to individuals in unexpected locations, or through several countries, to further complicate the money trail.

Lists 1 to 4 list the jurisdictions where EFTs were most commonly sent or received in case disclosures between 2007 to 2011, and refer to specific case types. FINTRAC is not an investigative agency, and therefore cannot confirm the purpose and nature of all financial transactions included in disclosures. Consequently, relevant transactions disclosed in cases could, on further investigation by disclosure recipients, be found legitimate. Similarly, it is impossible for FINTRAC to differentiate between legitimate and illegitimate funds that are commingled by businesses or individual transactions. As a result, the identification of the top 15 countries provided in this section is more a general indication of geographic locations that may be more commonly linked to money laundering or terrorist financing. Regardless of the above caveats, the inclusion of these lists of jurisdictions may contribute to enhancing public awareness and understanding of matters related to money laundering and terrorist financing.

List 1: Top destination or originating jurisdictions of electronic funds transfers related to suspected money laundering cases involving drug offences

  1. United States of America
  2. India
  3. Vietnam
  4. Hong Kong
  5. China
  6. Taiwan
  7. Iran
  8. United Kingdom
  9. Belarus
  10. Latvia
  11. Switzerland
  12. Mexico
  13. Peru
  14. Israel
  15. Thailand

List 2: Top destination or originating jurisdictions of electronic funds transfers related to suspected money laundering cases involving fraud offences (except securities/investment fraud)

  1. United States of America
  2. United Kingdom
  3. Iran
  4. Japan
  5. Hong Kong
  6. Israel
  7. Switzerland
  8. China
  9. Germany
  10. Italy
  11. Austria
  12. France
  13. Cyprus
  14. Guernsey
  15. India

List 3: Top destination or originating jurisdictions of electronic funds transfers related to suspected money laundering cases involving securities/investment fraud offences

  1. United States of America
  2. Netherlands Antilles
  3. United Kingdom
  4. China
  5. Mexico
  6. Bahamas
  7. Antigua and Barbuda
  8. Netherlands
  9. Bermuda
  10. Hong Kong
  11. Panama
  12. Dominican Republic
  13. Turks and Caicos
  14. Barbados
  15. Luxembourg

List 4: Top destination or originating jurisdictions of electronic funds transfers related to suspected terrorist financing cases

  1. United States of America
  2. United Arab Emirates
  3. Lebanon
  4. Pakistan
  5. United Kingdom
  6. India
  7. Austria
  8. Netherlands
  9. Iran
  10. Hong Kong
  11. Sri Lanka
  12. Saudi Arabia
  13. Switzerland
  14. Hungary
  15. Turkey

While many of the countries listed above are large financial hubs and trading partners with Canada, some of these jurisdictions are also known transits or entry points for drug traffickers. Some are also known for being tax havens and offshore financial centres, or locations of terrorist groups. The most frequently represented jurisdictions across the identified predicate offences were the USA, the UK and Hong Kong. Hong Kong is known as an offshore financial centre and for having strong bank secrecy laws. The prevalence of the USA and UK is mainly due to the strong financial ties between these jurisdictions and Canada.

Jurisdictions such as Vietnam, Taiwan, Belarus, Latvia, Peru and Thailand only appeared in the top 15 of drug-related cases (List 1). Both Vietnam and Thailand have been previously identified by the Financial Action Task Force (FATF) as having deficient AML/ATF regimes, which have since improved. The Asia-Pacific region is known for its supply and smuggling routes. Latvia is a regional financial centre and is vulnerable to organized crime activity, which may explain its ranking in this category. Drug trafficking is a primary source of illicit proceeds in Belarus, which is also a drug transshipment point. Peru is known as a top producer of cocaine.

In terms of general fraud-related cases (List 2), Japan, Germany, Italy, France, Cyprus and Guernsey were the jurisdictions identified uniquely. Europe had the greatest representation in this category, which included the UK, Switzerland, Germany, Italy, Austria, France, and Guernsey.

The securities/investment fraud category in List 3 had the highest number of unique jurisdictions not found in other categories. These jurisdictions were the Netherlands Antilles, Bahamas, Antigua and Barbuda, Bermuda, Panama, Dominican Republic, Turks and Caicos Islands, Barbados and Luxembourg. With the exception of the Dominican Republic, all of these jurisdictions have strong bank secrecy laws. Antigua and Barbuda and the northern part of Cyprus were previously identified by the FATF as having deficiencies in their AML/ATF regime; these have since improved.

Analysis of TF cases identified the following unique jurisdictions, not found in the other tables: United Arab Emirates (UAE), Lebanon, Pakistan, Sri Lanka, Saudi Arabia, Hungary and Turkey. Some of the jurisdictions identified in List 4 have direct and indirect associations to terrorism, where they have been either a target of terrorism or a training/organizational base for terrorist activity. These jurisdictions include Lebanon, Pakistan, India, Iran, Sri Lanka, Saudi Arabia, and Turkey. The FATF has singled out Sri Lanka, Pakistan and Turkey as having deficient AML/ATF regimes. Pakistan has since improved, but as of June 2011, Sri Lanka and Turkey have yet to improve their deficiencies. India's geographic location makes it susceptible to drug trafficking via neighbouring countries and it is a significant target for terrorism. The UAE is a major financial centre in the Middle East region, as well as a leading trade and transportation hub. Due to its geographic location, the UAE is vulnerable to money laundering and terrorist financing. As well, many Canadian REs (such as MSBs) use the UAE as a hub for funds which are then distributed to other jurisdictions.

In summary, the main locations from which EFTs were ordered or where they were received, revealed that:

Part III: Role of FINTRAC internationally

FINTRAC strives to be one of the leading financial intelligence units in the world and has endeavoured to take a strong leadership role in the international community. FINTRAC's work with international bodies, such as the FATF and the Egmont Group, contributes to the development of international anti-money laundering/anti-terrorist financing policies and standards. FINTRAC also strives to foster a greater cooperation among FIUs and to contribute to a better understanding of new trends and challenges.

Given that most money laundering activities involve transnational movements of funds, and that terrorist financing tends to transcend national borders, the effectiveness of FINTRAC's financial intelligence is reliant on information sharing, where appropriate, with our international counterparts. FINTRAC currently holds 76 Memoranda of Understanding (MOUs) with other FIUs around the world, and this number is constantly growing.

Case example 3: Assistance in international investigations

In one particular instance, FINTRAC received a query from a partner FIU regarding a criminal investigation of securities fraud relating to a Canadian citizen. As part of its investigation, the FIU was seeking to identify the perpetrators of the fraud and identify suspicious transactions, as this information could help identify where the funds had been placed in the financial system to prevent the further disposition of the proceeds of the fraud. FINTRAC's analysis identified suspicious transactions related to nine individuals/entities mentioned in the FIU query. Moreover, the analysis identified seven additional entities, some of which were affiliated to two previous criminal investigations in Canada relating to a large-scale marijuana grow operation and securities fraud. Many suspicious transactions were identified and a case disclosure was sent to the originating FIU, as well as to national and provincial law enforcement in Canada. Furthermore, FINTRAC granted permission for the FIU to share the information with a third FIU, as suspicious transactions were linked to the third identified jurisdiction. Therefore, although the query originated from one FIU, three countries became involved in a possible money laundering scheme.

Throughout the past four years, foreign FIUs have consistently been within the top four leading recipients of case disclosures. FINTRAC provides case disclosures to FIUs either in response to a query originating from the receiving FIU where transactions are suspected of involving ML or TF, or when FINTRAC identifies suspicious transactions going to or from a FIU partner country. By querying the foreign FIU, FINTRAC is able to obtain foreign transactional data and other information identified as suspicious by the foreign partner. This foreign information builds on the domestic information and can provide further leads in the case. The top 10 FIU country disclosure recipients from 2007 to 2011 are listed in List 5 and the distribution for all FIU disclosures is illustrated in Figure 15.

List 5: Main FIU disclosure recipients

  1. United States of America
  2. United Kingdom
  3. Bahamas
  4. Belgium
  5. Hong Kong
  6. France
  7. Australia
  8. Luxembourg
  9. Singapore
  10. Germany

Figure 11: Distribution of all disclosures provided to foreign FIUs (2007-11)
Figure 11

View the text equivalent

The map indicates that the highest concentration of disclosures sent by FINTRAC to foreign FIUs are received by the United States of America, which was the only country represented in the highest category, receiving 195 disclosures. In the second highest category, the United Kingdom, Bahamas, and Belgium received between 16 to 34 disclosures from FINTRAC throughout the last four years. There were many countries concentrated in the third highest category receiving between eight and 15 disclosures per country, which included: Hong Kong, France, Australia, Luxembourg, Singapore, Germany, Anguilla, and Cyprus. There are also a limited number of disclosures being received by many countries in the Caribbean, Central and South America, Asia, Europe and Eastern Europe. There is no representation on the map from Africa, nor from many countries in Asia, South East Asia, and the Middle East.

Conclusions

As demonstrated in this report, money launderers and terrorist financiers continue to exploit Canada's financial system to launder the proceeds of crime or support terrorism. While some trends, typologies and methods may be new, many described in this report have been observed for several years, and will continue to be employed by criminals and terrorist supporters.

What we have observed over the past four years is that criminals and terrorist supporters are opportunistic; their activities evolve based on the AML/ATF community's pre-emptive response and preventative compliance measures. For example, debit/credit card fraud is gradually overtaking mass marketing fraud. Investment/securities fraud will likely persist due to the current unstable economic climate. It is more common to uncover fraudulent investment schemes in bad economic times. The promise of a huge return on one's investment administered by a trusted individual in the same community is more appealing than keeping money in a stagnant or declining investment fund. Unbeknownst to the investor, these funds will later disappear – along with the trusted friend.

The prevalence of transnational crime and the enhanced sophistication of international criminal and terrorist networks have highlighted the complexities of cross-border transactions. These trends, however, further entrench FINTRAC's role in the global community by highlighting its important responsibility in detecting and deterring money laundering and terrorist financing activities. Financial intelligence is playing a heightened role in law enforcement and intelligence investigations as FINTRAC's analysis continues to provide useful leads and identify new players. The majority of case disclosures include international elements which would normally impede the investigative flow of information, but FINTRAC is uniquely placed at the heart of global financial communications with the international EFT reports it receives and its collaboration with counterparts abroad. Of course, without the valuable reports – particularly the suspicious transaction reports and EFTRs – provided by reporting entities, FINTRAC's analysis would not be as comprehensive. Reporting entities themselves play a pivotal role in the success of the AML/ATF regime, as they represent the first line of defence against financial crime; they question suspicious and unusual activity as it happens, and provide a concise account of their suspicions to FINTRAC.

FINTRAC's financial intelligence owes much to the outstanding effort and work that all reporting entities have made in the fight against money laundering and terrorist financing. Together, we ensure the continued integrity of Canada's financial system and deter individuals and organizations from using Canada as a criminal base.

Glossary

AML
Anti-money laundering
ATF
Anti-terrorist financing
CAD
Canadian dollar
CBCR
Cross-border currency report
CBSA
Canada Border Services Agency
CBSR
Cross-border seizure report
CDR
Casino disbursement report
CRA
Canada Revenue Agency
CSEC
Communications Security Establishment Canada
CSIS
Canadian Security Intelligence Service
EFT
Electronic financial transaction
EFTR
Electronic financial transaction report
FATF
Financial Action Task Force
FINTRAC  
Financial Transactions and Reports Analysis Centre of Canada
FIU
Financial intelligence unit
FIUQ
Financial intelligence unit query
ID
Identification document
LCTR
Large cash transaction report
MDMA
Methylenedioxymethamphetamine (“Ecstasy”)
ML
Money laundering
MOU
Memorandum of understanding
MSB
Money services business
NPO
Non-profit organization
RCMP
Royal Canadian Mounted Police
RE
Reporting entity
STR
Suspicious transaction report
TF
Terrorist financing
TH
Threats (to the security of Canada)
TPR
Terrorist property report
UAE
United Arab Emirates
UK
United Kingdom
USA
United States of America
USD
United States dollar
VIR
Voluntary information record

Return to footnote 1The Proceeds of Crime (Money Laundering) and Terrorist Financing Act does not allow FINTRAC to publish trends related to threats to the security of Canada.

Return to footnote 2The percentages in this report do not add up to 100% because FINTRAC disclosures are often sent to more than one recipient. A few cases were disclosed throughout the years to the CSEC; however, the percentages were not significant enough to be included in the report.

Return to footnote 3The term “predicate offence” is used in this report in the same context as the term “designated offence,” which is defined as an offence under Canada's Criminal Code or any other federal Act.

Return to footnote 4Figures included in the table do not total 100% given that cases can involve multiple predicate offences.

Return to footnote 5This category reflects cases where the pattern of financial activity, or other information available to FINTRAC, suggested money laundering for which the predicate offence was unknown or not identified.

Return to footnote 6The customs/excise category includes cigarette smuggling/contraband and illegal imports/exports.

Return to footnote 7Data for 2007-08 were not available at the time of publication and therefore Figures 3 to 5 only provide results for the last three years.

Return to footnote 8Changes over time in the percentage of cases related to investigations of different drug offences are closely linked to law enforcement priorities.

Return to footnote 9Percentages included in the chart do not total 100% given that cases can involve multiple predicate offences.

Return to footnote 10Changes over time in the percentage of cases related to investigations of different fraud offences are closely linked to law enforcement priorities.

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