Saturday, March 15, 2008

Anti-money laundering system exposed Spitzer

The downfall of Eliot Spitzer, former governor of New York, was precipitated by a financial information system that has been seen by Canadians as too intrusive to implement in Canada. The system requires financial services companies to report suspicious looking transactions. High profile politicos are tagged for closer scrutiny in an effort to detect blackmail and corruption. (See: How an information system helped nail Eliot Spitzer and a prostitution ring Between the Lines

To me, this is an example of how intrusive legislation designed to go after big crimes (terrorism financing, money laundering, corruption) often will be used to prosecute much more minor ones. In the case of Spitzer, it's a "minor misdemeanor".

While Canada has money laundering laws and requirements to report suspicious transactions, the Canadian government has declined to put additional scrutiny on "politically exposed persons": Ottawa dropped plan for more scrutiny


From Thursday's Globe and Mail

March 12, 2008 at 10:25 PM EDT

Canada quietly dropped an anti-money-laundering proposal for politicians that would have automatically scrutinized the type of financial transaction New York Governor Eliot Spitzer used to hire prostitutes.

In 2005, the Department of Finance recommended including so called “politically exposed persons,” or PEPs, on the list of people whose financial dealings would receive more scrutiny under the anti-money-laundering legislation. That legislation requires banks, casinos, real-estate agents and others to report suspicious financial transactions as well as all transactions of more than $10,000.

At the time, the department defined PEPs as politicians, judges, military leaders, senior bureaucrats or senior executives of Crown corporations. The proposal would have required banks to review large transactions by these people and “conduct enhanced ongoing monitoring of the business relationship” that led to the transaction.

Finance officials said PEPs had become higher-risk customers for financial institutions “as they have potentially greater opportunities to engage in corrupt activities.” They promised that the measure would show that “Canada will do its part in the global fight against corruption.”

However, the proposal was dropped last year after many groups, including the federal Privacy Commissioner, complained that the definition of PEP was too broad and could have included thousands of Canadians. Instead, the government opted to include only foreign PEPs, defined generally as foreign political, military or business figures who hold accounts in Canadian institutions. That change takes effect in June.

The United States has generally stricter reporting rules and it has included foreign PEPs for years. Since the September, 2001, terrorist attacks, federal officials have also pushed U.S. banks to track accounts held by high-profile domestic politicians as well, in order to guard against bribery.

That extra scrutiny appears to have tripped up Mr. Spitzer. According to various news reports, two banks became suspicious last summer about money transfers Mr. Spitzer made from his accounts. Even though the amounts were each less than $10,000, the banks filed Suspicious Activity Reports with the U.S. Treasury Department. Those officials passed on the information to investigators at the Internal Revenue Service who were looking into the prostitution ring.

Canadian officials said yesterday that there are no plans to change our reporting system to specifically include more scrutiny of politicians. They added that our system is in line with many other countries and requires reporting of all suspicious transactions.

“If the financial institution or the casino or the real-estate agent feels there's a potential here that it might be linked to money laundering or criminal activity, there's a legal requirement on them to report it,” said Peter Lamey, a spokesman for the Financial Transactions and Reports Analysis Centre, the federal agency that collects and analyzes Canadian reports.

“We provide guidelines around what might be determined suspicious and how you might come to that determination.”

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