The Financial Action Task Force (FATF) is an inter-governmental body which sets standards for combating money laundering and terrorist financing.  Although it is not widely known it has tremendous power to affect legislation and enforcement in the area of money laundering and terrorist financing on a national and international level.   It has 35 member states, including Canada, and occasionally those states are evaluated on their efforts to prevent money laundering and terrorist financing.  The evaluation of Canada took place recently and the over 200-page report has now been made available. I presented to a panel of FATF evaluators when they were in Canada to prepare the report.  I was asked by them to speak about the regulation of non-profits and the regulation of lawyers.  

The FATF concluded that the monitoring of non-profits and charities was adequate under Recommendation 8 but that the regulation of lawyers was a gaping hole in the anti-money laundering effort. Although I very much agree with the assessment relating to lawyers, I have some thoughts on the issue of non-profits which I will discuss elsewhere.   That being said concerns about money laundering have very much surfaced in the last few months and the report offers a rare glimpse into some very important issues affecting the Canadian economy as well as non-profits and charities.  

Here is the summary statement on the FATF website:

Canada's measures to combat money laundering and terrorist financing
 

15 September 2016 – Canada has a strong anti-money laundering and combating the financing of terrorism (AML/CFT) regime which achieves good results in some areas but requires further improvements to be fully effective.

The International Monetary Fund conducted a detailed assessment of Canada’s AML/CFT framework, and the resulting report was adopted by the FATF as Canada’s 4th mutual evaluation report. The assessment found that the Canadian AML/CFT regime is comprehensive and presents several characteristics of an effective system, but improvements in the legal framework and its implementation are nevertheless necessary.

Canada faces important money laundering and, to a lesser extent, terrorist financing risks. The authorities have a good understanding of these risks and have put a number of mitigating measures in place. The AML/CFT regime covers all high-risk areas, except legal counsels, legal firms and Quebec notaries; the Supreme Court declared AML/CFT measures inoperative in their respect. The lack of coverage of these professions is a significant loophole in Canada’s AML/CFT framework and raises serious concerns. Legal persons and arrangements are at high risk of misuse for money laundering or terrorist financing purposes, and that risk is not satisfactorily mitigated.

Constitutional constraints limit the analysis that Canada’s financial intelligence unit, FINTRAC, can conduct. The fact that FINTRAC is not authorized to request information from any reporting entity creates a gap, however, FINTRAC does cooperate effectively with law enforcement agencies.

The Canadian authorities have achieved some success in combating money laundering, notably when conducting law enforcement efforts with the support of FINTRAC’s analysis. However, these efforts are not entirely in line with the money laundering risks that Canada faces, and overall, the recovery of proceeds of crime appears to be relatively low. Counter-terrorist financing efforts are more in line with Canada’s risk profile. There is effective cooperation of government bodies, good supervision of reporting entities and effective measures are in place to prevent terrorists from raising, using and moving funds. Canada accords priority to pursuing terrorism, with terrorist financing being one of the key components of its counter-terrorism strategy.

Financial institutions, including Canada’s six domestic systemically important banks, generally apply adequate measures to mitigate the money laundering and terrorist financing risks that they face. Designated non-financial businesses and professions, however, are not as effective in their implementation of AML/CFT measures. The financial and non-financial sectors are subject to appropriate risk-sensitive AML/CFT supervision, but further supervisory efforts are necessary with respect to the real estate and dealers in precious metals and stones sectors.

The Canadian authorities cooperate effectively and frequently with their foreign counterparts. Canada has a strong framework for mutual legal assistance and extradition which it adequately uses in the fight against terrorist financing and, albeit to a somewhat lesser extent, money laundering.

This report was adopted by the FATF at its Plenary meeting in June 2016.

Some acronyms/definitions that you might find helpful:

AML/CFT – Anti-money laundering and combating the financing of terrorism

CRA – Canada Revenue Agency

CRA-CID – Canada Revenue Agency—Criminal Investigations Directorate 

CSIS – Canadian Security Intelligence Service

FATF – Financial Action Task Force

FINTRAC – Financial Transactions and Reports Analysis Centre of Canada

LEA – Law Enforcement Agency

NPO – Non-profit organisation

NRA – National risk assessment

PCMLTFA – Proceeds of Crime (Money Laundering) and Terrorist Financing Act

PCMLTFR – Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations

PEFP – Politically exposed foreign persons

PEP – Politically exposed person PF Proliferation financing

TF – Terrorist financing 

Also here is the rating terminology used:

C = Compliant,  LC = Largely compliant,  PC = Partially compliant,  NC = Non-compliant

Here are some excerpts from the FATF report on non-profits and charities: 

Chapter 4

Targeted approach, outreach and oversight of at-risk non-profit organisations

182. The Canadian NRA concluded that registered charities present a high risk of TF, due to the fact that a large number of the financial transactions that charities conduct may be performed via delivery channels with a high degree of anonymity and some level of complexity (i.e. multiple intermediaries are involved). The NRA also highlights that the significant use of cash may make it difficult for the authorities to establish the original source of funds, and that it may be difficult to know how the funds or resources will be used once transferred to partner organizations or third parties.

183. Canada has implemented a targeted approach regarding the NPO sector vulnerability to TF.  In 2015, the CRA, which regulates charities under the Income Tax Act, conducted a review in addition to the NRA, to examine the size, scope and composition of the NPO sector in Canada and to determine which organizations, by virtue of their activities and characteristics, were at greater risk of being abused for terrorist support purposes.  The CRA found that, in Canada, the organizations at greatest risk of terrorist abuse because of the nature of their activities and characteristics are charities. As a result, the authorities concluded that, in the Canadian context, NPOs that fall within the FATF definition are charities. Four reports had previously been published regarding the sector, notably a “Non-profit Organisation Risk identification project” in 2009. Canada has a large NPO sector, comprising of approximately 180 000 organizations. The sector can be divided into two groups: charities and NPOs, depending on their legal structures. While both are exempt from paying taxes, federally registered charities (of which there are approximately 86 000) receive additional fiscal privileges and submit annual information returns, which include notably the names of the directors or trustee, a description of its activity and financial information, including sources of funding. Non-charity NPOs (of which there are approximately 94 000) having assets in excess of CAD 200 000 or annual investment income exceeding CAD 10 000 are not required to register, but must file an annual NPO Information Return with the CRA. [FN68 –  The annual NPO Information Return includes information about their activities, assets and liabilities.]  In addition, non-charity NPOs incorporated provincially or federally would be required to file certain information with the provincial or federal governments on an annual basis depending on the statute under which the organization is formed. This typically includes information related to address, directors, and the date of the last general meeting. In certain cases, organizations may have to provide detailed financial information depending on value of assets or fund received.

184.  CRA-Charities reviews all applications for charitable registration and conducts audits of registered charities. From 2008 –2014, CRA-Charities completed approximately 5 000 audits in total; 16 these audits comprised a national security concern, eight of which resulted in revocation of registration. [FN69 Two led to penalties totalling CAD 440 000; four led to compliance agreements with the charity involved and two resulted in education letters.]  If an applicant charity does not meet the requirements of registration, e.g. due to terrorism concerns, the CRA denies its application. [FN70- The Income Tax Act requires that charities devote their resources to charitable purposes and activities. An organization that supports terrorism would be denied registration for carrying on activities contrary to public policy, which would not qualify as charitable. Additionally, the Charities Registration (Security Information) Act provides a prudent reserve power to deny or revoke registration when terrorist connections are suspected.] Through its work, CRA-Charities may take administrative action to disrupt an organization’s activities where it has identified a risk of terrorist abuse, and/or relay the information to LEAs. If a registered charity no longer complies with the requirements of registration, for any reason including connections to terrorism, the division can apply a range of regulatory interventions and, in the most the serious cases, may revoke the registration.

185. CRA-Charities conducts outreach to advise charities of their legislative requirements and how to protect themselves from terrorist abuse. This includes general guidance on topics related to sound internal governance, accountability procedures, and transparent reporting, as well as specific tools such as a checklist on avoiding terrorism abuse and a web page on operating in the international context. CRA-Charities will build on this existing outreach through its enhanced outreach plan. CRA-Charities has begun consultations with the sector to educate them on the risk of terrorist abuse and to gain a better understanding of their needs in terms of outreach and guidance.

186. National coordination has been enhanced. The CRA shares information with relevant partners where there are concerns that a charity is engaged in providing support to terrorism. If the division encounters information that is relevant to a terrorism investigation when carrying out its regulatory duties, it shares that information with national security partners and LEAs. The division shared information with domestic national security partners in support of their mandate in 47 cases.  Similarly, the division received information from partners in 51 cases to assist with its analysis, in 2014/2015. In addition, to facilitate the sharing of information, a secondment program between the CRA and its partners has been instituted: CRA employees are seconded to the partner agencies and employees from the partner agencies are seconded to the CRA.

187. According to the CRA’s NPO Sector Review of 2015 the 86 000 registered charities represent 68% of all revenues of the NPO sector and nearly 96% of all donations (see R.8). CRA registered charities also account for a substantial share of the sector’s foreign activities as about 75% of internationally operating NPOs are registered as charities. In addition, as detailed above, all registered charities, regardless of the value of their assets, and all NPOs with assets in excess of CAD 200 000 or annual investment income exceeding CAD 10 000 must file an annual information return with the CRA, which includes the provision of financial information. In addition, registered charities with revenue in excess of CAD 100 000, and/or property used for charitable activities over CAD 25 000, and/or that have sought permission to accumulate funds, must provide more detailed financial information. The authorities identify charities as being the organizations falling under the FATF definition of NPOs and reviewed the NPO’s sector (see Box 12).

Box 12.  Canadian NPO’s Sector Review

The national regulator of registered charities, i.e. the CRA, conducted a domestic review of the entire NPO sector in Canada in order to identify which organizations, by virtue of their activities and characteristics, were at greater risk of being abused for terrorist support purposes. The review aimed to ensure that Canada (i) is not taking an overly broad interpretation of the FATF definition of NPO, (ii) focuses on those organizations that are at greatest risk, and (iii) does not burden organizations that not at risk with onerous reporting requirements for TF purposes.   

The CRA reviewed existing publications and research by governmental, academic, and non-profit organizations related to the non-profit sector, including reports by Statistics Canada on non-profit institutes, consultations on regulations affecting the sector, and studies on trends in charitable giving and volunteering. In addition, it looked at existing laws and reporting requirements affecting NPOs. To determine where there is risk, NPOs were categorized based on shared characteristics such as purpose, activities, size and location of operation. The CRA compared those characteristics with the elements of the FATF definition of NPO. It also took into consideration the findings of the FATF typologies report Risk of Terrorist Abuse in NPOs to identify features that put organizations a greater risk.

The CRA found that, in Canada, the organizations at greatest risk of terrorist abuse are charities. As a result, the authorities concluded that, in the Canadian context, only charities fall within the FATF definition of NPO. While organizations at greatest risk are charities, not all charities are at risk. The insight obtained from the sector review allowed Canada to focus on charities as the starting point for its NRA.
Source: FATF (2015), Best practices paper on combating the abuse of NPOs – October 2015
.

188. The registered charity met during the assessment is large and has a number of international connections. It has a good understanding of its vulnerability to TF and has implemented adequate measures to mitigate that risk, without disrupting legitimate NPO activities. 
 

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Recommendation 8 – Non -profit organisations

Canada was rated LC with former SR. VIII, with only one deficiency having been identified regarding coordination amongst competent domestic authorities.

Criterion 8.1 – Sub-criterion 8.1.a – The adequacy of laws and regulations relating to NPOs is reviewed on an ongoing basis and has recently resulted in amendments of various laws and regulations.

Sub-criterion 8.1.b – Canada has carried out a risk assessment of its NPO sector and determined that registered charities pose the greatest risk of TF in Canada and, thus, shall fall within the functional definition of “non-profit organization” as defined under the FATF standard. Canada’s risk mitigation efforts are primarily focused on registered charities.

The NRA, which focuses on inherent risk, indicates that both for domestically and internationally operating charities, it may be difficult in practice to determine the origin or ultimate use of funds. In addition to the NRA, the CRA in 2015 conducted a comprehensive review of the entire NPO sector.  Other relevant studies and reviews include the Canadian Non-Profit and Voluntary Sector in Comparative Perspective in March 2005; the Canada Survey on Giving, Volunteering and Participating in 2010; and the CRA’s Non-Profit Organization Risk Identification Project, all of which provide insight into the way NPOs are organized and operate in Canada. All registered charities, regardless of the value of their assets, as well as non-charitable NPOs with assets in excess of CAD 200 000 or annual investment income exceeding CAD 10 000, must file an annual Information Return with the CRA, which includes information about their activities, assets and liabilities, and the amount of money received during the fiscal period in question. Incorporated NPOs are subject to additional filing obligations pursuant to the relevant statutes. NPOs must indicate whether they carry out activities outside of Canada (and specify where) and disclose the physical location of their books an d records. Through information provided in these returns, the CRA has the capacity to obtain timely information on the activities, size and relevant features of the NPO sector and to identify those NPOs that are particularly at risk of abuse by virtue of their activities or characteristics.

Sub-criterion 8.1.c – The efforts described under the previous sub-criteria are ongoing and continuously integrate new information on the sector’s potential vulnerabilities.

Criterion 8.2 – Awareness raising events are focused on registered charities as those are the organizations that fall within the FATF definition of NPOs. The CRA is undertaking efforts to increase awareness amongst registered charities of terrorism financing risks and vulnerabilities, including on international best practices for mitigating terrorism financing risks in the charities sector, sound governance, accountability procedures, transparency reporting, as well as consultative processes and presentations by senior management. The CRA also maintains a grants program to motivate and reward the development and application of innovative compliance programs amongst charities. Many of these activities include a TF component.

Criterion 8.3 – Canada imposes comprehensive registration and regulatory requirements on charities under the Income Tax Act (ITA). Other NPOs may operate without being subject to any registration requirements, but are subject to record-keeping obligations on their stated purpose, administration , and management pursuant to the federal or provincial legislation under which they were established. In addition, all registered charities, regardless of the value of their assets, and all NPOs with assets in excess of CAD 200 000 or annual investment income exceeding CAD 10 000 must file an annual information return with the CRA. Based on the information provided by the authorities, it is estimated that as of December 2014, a total of 180 000 NPOs existed in Canada of which 86 000 or about 50 %, were registered under the ITA. Under the ITA, a failure by a registered charity to comply with the registration requirements, including links to terrorism, may result in denial or revocation of registration. Under the Charities Registration (Security Information) Act the CRA may utilize all information available to determine the existence of terrorism links for new applications or existing registrations, including security or criminal intelligence and otherwise confidential information. Once registered, charities are required to file annual information returns and financial statements, including information on the directors and trustees, the location of activities, the charity’s affiliation and the organization’s name. Much of the information is made publicly accessible on the CRA’s homepage. Donations, spending and record keeping are regulated under the ITA. The CRA is granted wide powers under Part XV of the ITA to administer and enforce the provisions of the law. The CRA is responsible for ensuring compliance by registered charities with the requirements under the ITA and to sanction non-compliance. In addition, law enforcement and intelligence authorities monitor NPOs and investigate those suspected of having links to terrorism.

Criterion 8.4 –  Based on the information provided by the authorities, it is estimated that as of December 2014 a total of 180 000 NPOs existed in Canada of which 86 000 or about 50%, were registered under the ITA. According to the CRA’s NPO Sector Review of 2015, the 86 000 registered charities represent 68% of all revenues of the NPO sector and nearly 96% of all donations. CRA registered charities also account for a substantial share of the sector’s foreign activities as about 75% of internationally operating NPOs are registered as charities.

Sub-criteria 8.4.a and b -Charities registered under the ITA have comprehensive annual filing obligations, including on their directors and trustees, and financial statements including balance sheets and income statements. All this information is publicly available at the CRA’s webpage.

Sub-criterion 8.4.c – All registered charities, regardless of their assets, and all other types of NPOs with revenue in excess of CAD 200 000, and/or annual investment income exceeding CAD 10, 000, must file an annual information return with the CRA, including financial information. In addition, registered charities with revenue in excess of CAD 100 000 and/or property used for charitable activities over CAD 25 000 and/or that have sought permission to accumulate funds, must provide financial information. CRA-Charities must ensure that charities’ funds are fully accounted for by reviewing and conducting analysis of information submitted in the annual information return. Where there are irregularities or concerns CRA -Charities may conduct an audit to review charity’s finances and activities in detail.

Sub-criterion 8.4.d – Registration with the CRA is optional, not mandatory.  

Sub-criterion 8.4.e – ITA registered charities are required to know intermediaries that provide services on its behalf, and to ensure that charity funds are used only for charitable activities. As such, there is an obligation to know enough about beneficiaries to meet this obligation. NPOs can be held liable for acts by associated NPOs if the court finds that there is an agency relationship between the two, which provides an additional incentive for NPOs to know associate NPOs. Records of registered charities must be sufficient for the CRA to verify that the charity’s resources have been used in accordance with its activities.

Sub-criterion 8.4.f – Comprehensive record-keeping obligations apply both for ITA registered charities and other types of NPOs based on the provisions of provincial or federal legislation.

Criterion 8.5 – As part of their annual information return charities must provide a breakdown of financial information related to revenue and expenditures. This includes information on the total expenditures for charitable activities, management and administration, and gift to qualified donees. Charities must also report ongoing and new charitable programs. Where audits reveal financial irregularities, the CRA may apply a range of sanctions set out in the ITA. The CRA is granted a wide range of powers to monitor registered charities for compliance with the filing obligations under the ITA and to apply sanctions, including financial penalties and suspensions, or revocation of registration.

Criterion 8.6 – Sub-criterion 8.6.a

For registered charities, the registration system under the ITA is supported by the Charities Registration (Security Information) Act which allows the Minister of Public Safety and Emergency Preparedness to take into account criminal and security intelligence reports on registered charities or those applying for registration. The CSIS and also the RCMP and CBSA contribute information to these criminal and security intelligence report. The CRA has entered into MOUs with the CSIS and RCMP to facilitate the process. Any suspicion that a specific charity is linked to terrorism may result in registration being denied or revoked.

Sub-criterion 8.6.b – For ITA registered charities, the CRA may share certain information about registered charities with the public, including foreign counterparts, online through the CRA’s website, or upon request. Information that is publicly accessible, includes governing documents, the name of directors or trustees, annual information returns and financial statements.

Sub-criterion 8.6.c – For non-publicly available information, the ITA allows but does not oblige the CRA to disclose to FINTRAC as well as the RCMP and CSIS information about charities suspected of being involved in FT. Equally, the Security of Canada Information Sharing Act (SCISA) permits the CRA to share any taxpayer information relevant to a terrorism offense (under part II of the CC) or threats to the security of Canada (under the CSIS Act) with competent authorities, including any information that the CRA may have on the broader sector of NPOs. FINTRAC is required under the PCMLTFA to disclose information to the CRA with regards to registered charities. Additional information sharing powers are available under the Security of Canada Information Sharing Act whenever there is a threat to Canada’s national security. For NPOs other than registered charities regular investigative and information -gathering powers under the criminal procedure code are available to obtain records and information, they are required to maintain under provincial or federal NPO legislation.

Criterion 8.7 – The CRA may share certain information about registered charities with foreign counterparts, including governing documents, the names of directors or trustees, annual information returns, and financial statements. Additional information may be shared by the CRA with foreign tax authorities. If required, information on registered charities or NPOs may also be shared by FINTRAC and the RCMP as described under R.40 or based on formal MLA. In sum, Canada is found to have appropriate points of contact and procedures in place to respond to international request for information sharing regarding particular NPOs.

Weighting and Conclusion:  Canada is compliant with R.8.

 

Here is a copy of full report FATF (2016), Anti-money laundering and counter-terrorist financing measures – Canada, Fourth Round Mutual Evaluation Report, FATF, Paris