Stopping the ‘snow-wash’ cycle

Opinion

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This article was published 09/12/2022 (745 days ago), so information in it may no longer be current.

Canada’s got a lot going for it — from natural beauty to a robust economy and generally good government and rule of law… at least compared with many other nations.

Yet it’s also attractive to organized criminals seeking to launder proceeds of crime in part because of that strong economy and rule of law — which we’ll explain a little later.

It’s become such a destination for illicit money that there’s even a term for laundering dirty funds here: snow-washing.

Coined by a CBC-Toronto Star investigative story a few years ago, snow-washing was a description of how opaque corporate reporting laws in Canada allowed numbered companies of dodgy origins to launder dirty money.

In turn these criminals could make their proceeds as clean as “driven snow in the Great White North,” according to one expert.

It’s big business too. A 2021 report from the Criminal Intelligence Service of Canada estimated about $45 billion to $113 billion is laundered in Canada annually.

“‘Snow-washing’ is a nickname Canada would rather not have,” says Yong Li, anti-money laundering adviser with AML Shop — among a growing number of consulting and technology companies specializing in anti-money laundering (AML).

“There are a lot of reasons for it being a destination, including Canada being highly connected to the global economy with lots of money — legitimate money — flowing in and out.”

The transactions are so abundant it’s easy to hide needles in the haystack, he adds.

Then, there’s the rule of law — generally a good thing — but enforcing these laws involves a high burden of proof, Li adds.

“To prosecute somebody takes a lot of evidence, and it takes a long time to compile money laundering evidence especially across jurisdictions,” he says.

“There is often not enough manpower or the right mechanisms to gather evidence that’s sufficient to prosecute.”

Governments, of course, are taking action — particularly at the urging of the recent Cullen Commission report that investigated laundering in British Columbia. It pointed to gaps in resources, legislation and expertise to track a crime that has become more sophisticated in the age of digital money.

Laundering cash-money from human trafficking, and the sale of illegal drugs and guns is no longer the norm, says Bryan Smith, co-founder of ThinkData Works in Toronto, which provides anti-money laundering software.

Regulations “have helped stamp out a lot of the traditional money laundering with banks and government pretty good at flagging (unusual transactions)” from small businesses, he says referring to federal rules enforced by FINTRAC (Financial Transactions and Reports Analysis Centre of Canada).

The challenge is “as banks shut down loopholes, criminals find others.”

That’s where companies like ThinkData Works and AML Shop ply their services, helping banks detect illegal transactions.

“Bad actors often learn to use new technologies to their advantage,” Li explains.

While the AML Shop helps financial institutions and other organizations determine the technology needed to fight money laundering, ThinkData Works provides machine learning (AI) software to pore over massive amounts of data to connect dots between millions of transactions to uncover potentially suspicious ones.

Smith points to real estate transactions in Vancouver as an example, where ThinkData can access public data for sales to find ones linked to bad actors.

“For example, there could be a home worth $20 million, where criminals use shell companies to buy and sell the home in a short span,” he says.

“They buy a house with a numbered company for a particular dollar amount, and they buy the house again as a person for a profit and then record that.”

It’s not just real estate; it can be money moving between numbered companies. Some illegal deals may even appear as venture-capital investment in startups that aren’t startups at all.

Often involving different jurisdictions and financial institutions, banks have difficulty tracking these activities on their own.

“Consider that real estate data are external data, which banks generally don’t have easy access to, but it is publicly available so we analyze it for them,” Smith says.

Governments also recognize the challenge, including Manitoba’s — which recently announced more resources, including hiring experts to track illicit transactions.

“The hope is to be able to identify money-laundering operations within the province,” the Manitoba government stated in an email to the Free Press. In turn, this may lead to more seizures of ill-gotten assets to help with the cost of crime and enforcement, it adds.

Of course, you might wonder what this has to do with your finances. As the Cullen Commission noted, dirty money has its origins in crimes — like the sale of fentanyl and methamphetamine — that destroy communities.

Additionally it permits criminals “to compete in the marketplace with those who feel constrained to earn their money honestly and pay their fair share of the burden of maintaining the benefits of living in a community,” it added.

Simply put illegal money can distort economic activity.

Indeed, a 2019 report by Canadians for Tax Fairness noted that since 2008 in the Greater Toronto Area, about $28 billion in homes were bought by companies with anonymous ownership, many involving cash deals and financing through unregulated lenders.

While Li notes the vast majority of transactions are legitimate, the challenge is finding the illegal ones “that still happen frequently enough to contribute to the rising price of real estate where the average Canadian has a tough time buying a home.”