Money laundering related to cannabis legalization on Fintrac’s radar, but no in-depth study yet
Canada’s financial intelligence unit says it has taken a preliminary look at the issue of money laundering in connection to the legalization of recreational marijuana, but that it has yet to conduct an “in-depth” analysis of the subject.
The Financial Transactions and Reports Analysis Centre of Canada “has used trend analysis to make assessments on the laundering of the proceeds of drug trafficking in Canada as a result of the recent legalization of marijuana in Canada,” say documents the Financial Post received following an access-to-information request.
“Once the research is finished, FINTRAC will conduct quantitative analysis on geographies, products and services and clients related to the issue to help our financial institutions mitigate this new threat,” the documents continue.
The statements are made in what appear to be speaking notes — FINTRAC told the Post in an email that the material “was prepared in support of a more general discussion on strategic intelligence” during an international anti-money-laundering forum that was held in Orlando, Fla., in June.
“The research undertaken regarding the legalization of cannabis was preliminary in nature as part of a more general assessment of money laundering related to drug trafficking,” FINTRAC said in its email to the Post. “An in-depth review has not yet been conducted.”
FINTRAC added that the “threat” referred to was “drug trafficking in a changing landscape and how it relates to money laundering.”
The federal Liberal government said at the time that legalization was aimed at snuffing out the black market for weed and cutting off the criminals who benefitted from it. The documents obtained by the Post, however, suggest FINTRAC has at least considered the possibility that legalization could provide an avenue through which ill-gotten gains could be laundered.
“FINTRAC routinely conducts analyses of transaction reports, open source information and other material to assess the impact of both legitimate and illicit activities on money laundering and terrorist activity financing,” the centre said.
So far, legalization has only partially displaced the black market, leaving legal and illegal industries to compete with each other. Statistics Canada said 42 per cent of cannabis consumers in the second quarter reported they bought at least some of their pot from illegal sources.
Money laundering has been on the radar in the current election campaign, but only as it pertains to the real-estate sector, where the phenomenon is believed to have contributed to soaring house prices in major markets in British Columbia and Ontario.
“We have this particularly odd situation where you can set up a corporation in Canada and never know who the shareholders are,” anti-money-laundering lawyer Christine Duhaime told the Post.
The Senate of Canada proposed an amendment to Canada’s marijuana-legalization law that would have publicized people who directly or indirectly own or control cannabis companies, but it was dropped from the final bill after it went back to the House of Commons, said James Cohen, executive director of anti-corruption not-for-profit Transparency International Canada.
“It’s anonymous companies that allow the flow of funds from criminals like drug dealers, kleptocrats overseas and tax dodgers at home and abroad,” Cohen said.
The cannabis industry has unique characteristics that companies trying to stay on the right side of anti-money-laundering rules must consider. Lawyers from McCarthy Tétrault LLP wrote in May, for example, that legal considerations around financing cannabis businesses “include the preference of some cannabis retail customers to using cash as a payment method, concerns around privacy, and the risks associated with the supply of cannabis to ensure its provenance from legal sources.”
FINTRAC has published several explainers on its website of how entities that report to it, such as banks, could navigate the world of legalized cannabis.
In one such policy interpretation, FINTRAC is asked if various entities will be expected to report all transactions conducted by legal cannabis businesses as suspicious.
“If one or more transaction conducted by a legal cannabis business leads a reporting entity to determine that there are reasonable grounds to suspect that the transaction is related to the commission or the attempted commission of a money laundering or terrorist activity financing offence, then an STR (suspicious transaction report) must be submitted to FINTRAC,” says an answer dated the same day as Canada’s legalization of cannabis.
Another question asks about what should be considered when assessing the risk of a cannabis business. FINTRAC suggested considering whether or not a business has the proper licenses and if its transactions are “consistent with what is expected from other retailers or similar types of businesses.”
In another answer with the same date, FINTRAC said there “are no special or additional requirements” under Canada’s anti-money-laundering legislation or its related regulations when it comes to a legal cannabis company.
“However,” it adds, “when a reporting entity considers opening an account for a legal cannabis business, as for any business, they must assess and document the risk(s), taking the above into consideration, as part of their compliance program’s policies and procedures and risk-based approach.”