Canada's financial regulators need to reduce money laundering. A task force review might speed that up

Globe and Mail

19 hours ago

Canada's financial regulators are about to find themselves in the hot seat.
The Financial Action Task Force (FATF), a global body that sets standards to combat money laundering and terrorist financing, is conducting a review of Canada's efforts to combat financial crime.
One topic that will figure prominently in that evaluation is the effectiveness of regulators, including the Financial Transactions and Reports Analysis Centre of Canada – the federal financial intelligence unit – and the Office of the Superintendent of Financial Institutions – the country's top banking regulator. Both FinTRAC and OSFI, as they are known for short, are responsible for supervising the anti-money laundering compliance of banks.
The FATF has cited issues with Canada's approach to regulation, supervision and monitoring in past reviews, but this year's evaluation comes in the wake of financial-crime scandals including one involving Toronto-Dominion Bank.
'Supervisors play a crucial role in preventing money laundering and terrorist financing,' states the FATF's guidance.
'Effective supervisors also ensure that these businesses comply with their anti-money laundering and counter-terrorist financing obligations and take appropriate action if they fail to do so.'
The FATF's last review of Canada in 2016 recommended that FinTRAC and OSFI co-ordinate more effectively on the supervision of banks. Specifically, it said FinTRAC had increased its supervisory capacity but still had 'somewhat limited' expertise about banking, adding OSFI was conducting its supervision with limited resources.
Ottawa to overhaul financial-crime laws in new border security bill
Recent money laundering scandals, however, have caused both FinTRAC and OSFI to lose face.
Last fall, TD became the first bank in the United States to plead guilty to conspiracy to commit money laundering and the largest bank in U.S. history to plead guilty to failing to maintain an anti-money laundering (AML) program that complies with federal regulations.
American banking regulators and the U.S. Department of Justice imposed more than US$3-billion in fines and various non-monetary penalties.
The Federal Reserve Board also required the Canadian bank to relocate to the United States the parts of its anti-money laundering compliance program that are responsible for complying with U.S. law.
'This program will be subject to oversight by U.S. regulators,' stated its release.
Months before publicly announcing that requirement, U.S. regulators privately questioned their Canadian counterparts about why they previously failed to spot and remedy problems with TD's anti-money laundering risk controls, The Globe and Mail reported in May 2024.
On Thursday, meanwhile, The Wall Street Journal reported that Norway's US$1.9-trillion sovereign wealth fund was placing TD 'under observation' for four years over financial-crime concerns.
There have also been separate allegations of wrongdoing involving Wealth One Bank of Canada and the Industrial and Commercial Bank of China (Canada).
As a result, OSFI's stop-start approach to supervising financial-crime compliance in recent years will naturally be probed by the FATF. OSFI returned to AML oversight in 2024 after taking a three-year hiatus.
In 2021, OSFI rescinded its guidance on deterring and detecting money laundering and terrorist financing, and handed over its regulatory responsibilities to FinTRAC. At the time, the objective was to make FinTRAC the exclusive overseer of banks' financial-crime compliance obligations.
Task force to evaluate Canada's ability to fight money laundering and terrorist financing
But OSFI did an about-face in 2024. Not only did it issue a new integrity and security guideline, but it stressed that it considers money laundering and the financing of terrorism third-party and foreign-interference risks that could harm the safety or soundness of banks.
Trouble is, banks are once again confused about which federal regulator is in charge. They are also understandably frustrated that their massive spending on compliance programs has failed to yield successful convictions in court.
Total financial-crime compliance costs for financial institutions hit US$2-billion in Canada, according to a 2023 study conducted by Forrester Consulting on behalf of LexisNexis Risk Solutions.
Regulators, meanwhile, are also suffering from a breakdown in trust with the public because they operate behind a veil of secrecy. And, unlike their U.S. counterparts, they are barred from discussing problems at individual banks – even the widely publicized case involving TD.
'I would like to be forthcoming about our involvement in this case because I think that information would contribute to public confidence in the Canadian financial system,' OSFI Superintendent Peter Routledge told a Parliamentary committee in November.
'That said, Canadian law prohibits me or any OSFI official from disclosing confidential information obtained from federally regulated financial institutions in the course of OSFI's regulation and supervision activities.'
Recent money laundering scandals have provided a withering assessment about the effectiveness of Canada's regulators. Maybe the FATF will finally persuade Ottawa to set them up for success.