Terrorist financing, money laundering, and the Canadian jewellery industry (Part 7)

Posted on February 24, 2015


How’s your compliance regime?

Part 7 of 9

Among other functions, FATF conducts mutual evaluation reports (MERs) of member states to determine the degree to which they have incorporated the 40 recommendations into domestic law, as well as their compliance. Canada has had two evaluations, the first of which was in 2008. At the time, Canada was found to be non-compliant in a number of areas, specifically regarding beneficial ownership, ongoing due diligence, and enhanced measures for high-risk customers. Having addressed the issues from the first MER, Canada was determined to be fully compliant with FATF’s recommendations during the follow-up evaluation that took place this year. All this goes to demonstrate that Canada considers FATF compliance to be very important. When FATF talks, Canada listens.

As a dealer in precious metals and stones (DPMS) reporting entity, you should be very concerned about another FATF report released earlier this year entitled, “Money Laundering and Terrorist Financing Through Trade in Diamonds.” This document was very comprehensive and examined money laundering typologies at all stages of the diamond pipeline.

It revealed that Canada assesses the level of its own DPMS reporting entities’ AML/TF compliance as a lackluster ‘medium.’ Globally speaking, FATF found that international FIUs are not receiving many reports from Canada’s diamond dealers. The authors noted, “This may be an indication there is not enough awareness in the sector of the importance of combating ML and TF within the diamond sector and that diamond dealers are not sufficiently aware their sector is being misused by criminal organizations to launder their proceeds.”

This FATF assessment is supported by FINTRAC’s own estimation. Earlier this year, I submitted a request under the Access to Information Act and gained valuable insight into how FINTRAC grades DPMS compliance. In a word: dismal. The internal correspondence I received as part of my request judged DPMS compliance in the areas of policy and procedure, risk assessment, ongoing compliance training, and the two-year review. Consider these appraisals from a FINTRAC insider:

  • “The majority of the reviews conducted by the reporting entity were complete deficiencies, since no documentation was provided to support a review of the compliance regime.”
  • “A minority of the [reporting entities] develop just-in-time policy and procedures, however, in those cases where they are developed, the policies and procedures do not address some or all of their obligations under the PCMLTFA.”
  • “The smaller entities primarily are not aware of the requirement to conduct training due to the size of their organization.” These types of comments go on for two pages.

As we observed earlier with Canada’s response to FATF’s evaluation, what this group says matters and Canada will legislate change across all business sectors to get its national AML/TF regime up to international standards. FATF’s typology report on money laundering through diamond trade also matters and you can rest assured FINTRAC has read it and will formulate a strategic response. FINTRAC itself recognizes sector-wide systemic deficiencies across virtually every DPMS AML/TF obligation. The Canadian jewellery industry is facing a failing grade in this regard and should, therefore, expect increasing regulatory attention from FINTRAC.

More to come of this story in Part 8.

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