Canada has effective and robust financial regulations and institutions. It could be a leader in global anti-money-laundering and counterterrorism financing.
The stability and efficiency of the international financial system are important concerns of the international community. Money laundering is a key transnational challenge facing international financial institutions and individual states, with illicit funds regularly entering and exiting financial markets. Money laundering also plays an integral role in terrorist financing and organized crime. While the Financial Action Task Force on Money Laundering (FATF) is the leading international organization in anti-money-laundering (AML) efforts, Canada, with its robust financial regulations, infrastructure and international reputation, is in a prime position to take leadership, in close cooperation with the FATF.
The scale of international money laundering has been difficult to track. The FATF, citing the United Nations Office on Drugs and Crime (UNODC), estimated that in 2009 criminal proceeds amounted to 3.6 percent of global GDP, with 2.7 percent (or US$1.6 trillion) being laundered. In a separate report, the UNODC indicates that the total amount of money laundered is between 2 percent and 5 percent of global GDP each year, which translates to approximately $800 billion to $2 trillion. International money laundering causes global economic problems. In a 2003 article, the economist Bonnie Buchanan explains that it “imposes significant costs on the world economy by damaging the effective operations of national economies and by promoting poorer economic policies.”
Money laundering can also cause a shift in the money demand from one country to another, thereby creating misleading monetary data. These false data subsequently affect interest rates, asset prices in economies and exchange rates. Effective national economic policies are damaged by this false information, leading to poor economic policies. As domestic and international financial markets become more corrupt and poor economic policies continue to be implemented, public confidence in financial systems and institutions decreases, resulting in financial markets becoming risky and unstable. Consequently, global economic growth is slowed and reduced. According to Transparency International, the main challenges with international AML efforts are noncompliance with, and a gap in the implementation of, FATF recommendations.
Simply put, global money laundering damages Canadian interests. Canada wants not only to ensure stability and confidence in its domestic financial sector — for instance, the stock market is heavily contingent on the confidence of the market — but also to protect international financial institutions and avoid global instability. As an International Monetary Fund fact sheet astutely notes, “In an increasingly interconnected world, the harm done by these activities [money laundering and terrorist financing] is global.”
While international organizations and states do cooperate in anti-money-laundering efforts, major gaps and loopholes exist. These gaps offer Canada an excellent opportunity to lead on this key economic issue at the international level.
While international organizations and states do cooperate in AML efforts, major gaps and loopholes exist. These gaps offer Canada an excellent opportunity to lead on this key economic issue at the international level. Taking the lead here also aligns with current Canadian foreign policy and stays true to our global identity of finding international consensus on challenging issues. According to a June 2017 address by Minister of Foreign Affairs Chrystia Freeland, one of Canada’s primary foreign policy priorities is playing “an active role in the preservation and strengthening of the global order from which we have benefited so greatly.” This position signals exactly the reason why Canada should not merely participate, but rather should take an active leadership role in global AML and counterterrorism financing (CTF) efforts. Money laundering contributes to sluggish economic growth and weak economic resilience, placing major stressors on the global order. By taking a leading role, Canada can more effectively help strengthen and maintain the global order.
In her address Minister Freeland also placed a major emphasis on an “international order based on rules” and stated that Canada will “robustly support the rules-based international order, and all its institutions, and seek ways to strengthen and improve them.” Through active coordination of AML efforts with international governmental organizations and individual states — and particularly with developing markets that have weak financial institutions — Canada can take a major step toward strengthening the current international rules and order, while simultaneously fulfilling our own foreign policy goals.
Canada needs to engage in two important leadership actions: 1) increase the rate of compliance with FATF recommendations, such as halting the abuse of shell companies; and 2) close the international implementation gap on FATF recommendations and increase the effectiveness of the implemented policies. These actions will significantly contribute to lowering the annual sum of laundered money and to strengthening international financial institutions.
Current money laundering activities often occur in, or pass through, developing countries with weak regulations and financial institutions. Canada’s financial institutions could cooperate with private sector institutions in countries that lack strong capacity to investigate and report on money-laundering activities. Canada could also send financial regulation and capacity-building specialists to countries with weak AML capacities, to assist in the development and facilitation of AML strategies and in associated training. Canadian banks currently work closely, and in full compliance, with Canadian law enforcement and the Financial Transactions and Reports Analysis Centre (FINTRAC) in AML efforts, especially in communicating suspicious transactions or money transfers. This public-private cooperation has been critical to Canada’s success in AML and should be encouraged in states with weak AML capacities. As we promote our financial regulation model in other countries, we must, however, remain mindful of the local capacity and context, in order to develop effective AML regimes that can become self-sufficient.
The 53-member Commonwealth is another international body where Canada could take the lead. Most Commonwealth countries are in Africa or the global South, and although they may not be members of the FATF, they do belong to other regional organizations that serve as associate members: for example, the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG). Cooperating closely with such countries presents another opportunity for Canada to show initiative.
Canada should actively encourage all the Commonwealth countries to further comply with and implement the FATF recommendations. It should also call upon other developed countries in the Commonwealth to assist with the capacity-building initiatives. This is important for two reasons. First, by following and implementing the FATF’s financial regulation standards, Commonwealth countries with developing economies will benefit from robust financial institutions with strong regulations. Second, by collaborating with the countries that belong to regional organizations, such as the ESAAMLG, Canada will have the opportunity to work with some non-Commonwealth countries on compliance and implementation of the recommendations. From an international perspective, having more states with robust and effective AML infrastructures will reduce the number of weak jurisdictions. As well, cooperation and communication among more states and institutions will increase the efficiency of efforts that track suspicious financial transactions.
Canada is uniquely positioned to become a leader in global anti-money-laundering and counterterrorism financing initiatives. Our country has strong financial regulations and institutions that can not only combat money laundering but also assist other states. Helping developing countries to comply with FATF recommendations aligns with Canadian foreign policy priorities, and building effective AML/CTF regimes in other jurisdictions is in Canada’s economic interest.
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