The Canadian Review of Policing Research (2004)
ISSN: 1710 6915
EXPLORING THE ROLE OF PRIVATE-SECTOR, FINANCIAL INVESTIGATIVE AGENCIES IN COMBATING MONEY LAUNDERING IN CANADA
The purpose of this research is to explore the role played by private sector financial investigative agencies (FIA) in combating money laundering in Canada and abroad. For the purposes of this study, a FIA encompasses forensic accounting-based, private sector organizations that provide investigative, risk management, consulting, and litigation support services addressing financial, economic, and computer crime issues. Particular emphasis has been placed on examining the overlap, as well as the cooperation and coordination that exists between private sector FIAs and public law-enforcement agencies in proceeds of crime and terrorist financing prevention and enforcement.
In recent years, money-laundering enforcement has emerged as a common approach to combating organized crime and terrorist financing. In Canada, the federal government has introduced a number of policies and programs targeting money and assets associated with entrepreneurial and terrorist-related crimes. Legislation has been introduced that criminalizes the possession of proceeds of crime, money laundering, and terrorist financing. This had been coupled with providing law-enforcement agencies with the powers to confiscate cash and other assets derived from entrepreneurial crimes and extremist groups, and with special program funding for the multi-agency Integrated Proceeds of Crime (IPOC) units. More recently legislation has been passed that mandates certain entities and individuals in the private sector to report large cash and suspicious transactions.
The private sector has also been increasingly engaged in combating money laundering. For years, private-sector forensic accountants were regularly contracted by the IPOC units. The introduction of mandatory transaction reporting laws in Canada has nurtured a bourgeoning cottage industry in anti-money laundering (AML) services marketed to companies vulnerable to money laundering. The services include risk assessments, the development of AML policies and procedures, legislative-compliance consulting, money-laundering investigations, asset tracing and recovery, corporate due diligence, suspicious transaction detection and monitoring, and litigation support for corporate and law enforcement clients.
Many of these AML services are provided through the forensic practices of accounting firms. Similar to other sectors of the “private policing industry”, forensic accounting and FIAs in general have experienced a rapid growth in recent years. The growth is a result of a number of factors, including an increase in fraud and other forms of white-collar crime, the inability of law enforcement agencies to adequately respond to the growing number of white-collar crime reports, the reluctance of corporate crime victims to turn to public police (with a preference for in-house or private sector professionals), and the need for specific areas of accounting expertise and skills. In contrast to the private sector, law enforcement agencies in Canada have experienced stagnation or decline in the resources dedicated to economic crime, owing in part the priority placed on targeting violent crime and, concomitantly, the low priority that non-violent, white-collar crime has been accorded by public law enforcement agencies.
These divergent developments between the private and public policing sectors reflect a significant new reality for crime control in advanced Western societies: the state no longer assumes sole responsibility for crime control or public safety, nor can public law enforcement agencies claim they are the exclusive source of policing services. The wide acceptance of community crime prevention, restorative justice, and community policing has helped carve out a pronounced role for the public in crime prevention, while the private-security sector has grown so dramatically in recent years that it is now considered the principal tool of security, crime prevention, and order maintenance in private spaces. Two significant implications of the newly acquired roles of private policing and the community are: (1) both have assumed a primarily proactive and preventive role, and (2) both require a strong partnership with public law-enforcement agencies to maximize their respective value in crime control. These implications are highly relevant when defining a more formal role for FIAs in combating money laundering and other financial crimes.
Given that most advanced western societies now have public and private police working towards the same goal, it seems reasonable that some semblance of cooperation and coordination should exist. There is now near-universal agreement that combating organized, economic, and politically extremist crimes demand a harmonized effort among a number of different organizations, both inside and outside the criminal justice sector. Inherent in this multi-sectoral approach to crime is the need for a diverse but compatible array of disciplines, professions, expertise, and skills and a combination of prevention, deterrence, and enforcement.
Much of the innovation in promoting a more cooperative and coordinated partnership between the private and public policing sectors has taken place in the United States. Numerous projects have been pursued at the municipal, state and federal levels to promote greater coordination between private security firms and public police services. One example of an innovative partnership implemented to address economic crimes is the Internet Fraud Complaint Center, a joint initiative between the Federal Bureau of Investigation and the National White-Collar Crime Center, a private, non-profit organization. Another example of innovation is the Financial Investigation Division of the United States Bureau of Immigration and Customs Enforcement, which contracts out work to experienced private sector investigators (often former law enforcement officers) to assist in preparing investigative reports for tactical money-laundering enforcement operations.
Within Canada, the Integrated Proceeds of Crime Program should be considered a trail-blazer in that it was one of the first investigative programs in Canada to outsource forensic accounting services to the private sector on a regular basis. In its operational plans for complex organized-crime and money-laundering investigations, the Organized Crime Agency of British Columbia identifies the most appropriate resources required, regardless of whether they are from the private or public sector.
The nature and scope of partnerships between public police and private-sector forensic accounting practices is generally more formal and frequent in comparison to the coordination between public police and private security firms. However, in recent years there is evidence that in terms of formal partnerships with government agencies, the private security and forensic accounting sectors are moving in opposite directions.
In some western societies there appears to be increased momentum towards establishing formal cooperation between private security companies and public police. Government policy makers in countries such as the United States and Great Britain are now exploring and implementing policies that encourage and empower public law-enforcement agencies to work in partnership with private security firms. In the United Kingdom, for example, the government will experiment with a plan to allow police to accredit private security companies to carry out some patrol services.
In contrast, in some western countries there is a trend toward the consolidation of forensic accounting resources, as well as money laundering, regulatory, and investigative powers and expertise within government agencies. In the United States, the hundreds of forensic accountants on staff at the IRS and FBI ensure that there will be minimal need to outsource these services to the private sector. In Canada, the creation of the Forensic Accounting Management Directorate in the Federal Department of Supply and Services substantially need for cooperation between private-sector forensic accounting practices and the financial crimes investigative units of federal law-enforcement agencies. In the United Kingdom, legislation has been introduced to empower and accredit a wide range of government agencies to investigate money laundering, with no plans to provide accreditation to private sector investigative organizations.
There are three divergent policy directions that governments in Canada can pursue regarding the future role that the private-sector FIAs can play in combating money laundering and financial crimes in general. These policy options are:
- Discourage and even prohibit FIAs from providing both proactive and reactive AML services to corporate clients and to law enforcement agencies;
- Maintain the current “policy,” which restricts all proceeds of crime investigations to public police and continues to centralize forensic accounting expertise within government agencies, but tacitly condones a role for FIAs in providing AML consulting and investigative services to the private sector;
- Promote a greater role for FIAs in combating money laundering by encouraging, sanctioning, and accrediting FIAs to provide AML services to corporate clients and to law enforcement, including allowing federal law-enforcement agencies to outsource limited intelligence gathering and investigative functions to FIAs and qualified, licensed, and accredited accountants and investigators.
This report recommends the third policy option. The real and perceived organized, economic, and terrorist threats in Canada and globally, combined with the limited resources of the state to address these problems, highlights the need for a new vision of how security and public safety within society is to be maximized. This new vision must incorporate a multi-sectoral and multi-disciplinary approach that takes advantage of all of the relevant resources within society. This includes a greater role for all levels of the private policing sector. Federal, provincial, and municipal governments must work toward developing policies and programs that nurture a more formal role for FIAs, within a framework of partnership and division of labour with state agencies that complements the role of public law enforcement agencies. The walls that obstruct communication and cooperation between law enforcement and the private sector must be torn down in order to better serve the greater public good.
The use of private-sector forensic accounting, investigative and consulting expertise very much satisfies the criteria required to most effectively battle financial crimes, including the laundering of funds associated with entrepreneurial and terrorist criminal activities. Through partnerships forged with public law enforcement, limited resources from different organizations and sectors can be pooled. The level of experience and expertise within private sector FIAs – in particular former police investigators and forensic accountants – is often unmatched by the public sector and can contribute to more cost-effective investigations. The FIAs also have the resources, expertise, and service lines that cater specifically to a proactive, prevention- and detection-based approach that is so integral to combating financial crimes, and which is generally unfulfilled by public police owing to their largely reactive approach to crime. Many FIAs are also international in their operations, which is a particular void in public law-enforcement agencies.
The federal government should take the lead in developing formal policies and programs that promote a greater role for private-sector FIAs in combating money laundering and other financial crimes. To this end, the federal government, in conjunction with the Canadian Association of Chiefs of Police, is encouraged to form a bi-partisan committee, with representatives from the public sector and the private policing sector to explore mechanisms for greater cooperation and coordination between public and private police in Canada.
This cooperative and coordinated approach in combating money laundering and terrorist financing should entail a formal division of labour whereby the principal role of private sector FIAs in AML service provision is preventive in nature (i.e., ensuring that corporate clients are in compliance with federal transaction reporting legislation), while the principal role of public law enforcement agencies would be reactive (i.e., criminal investigations). With this division of labour, some of the key, proactive AML services that would fall under the mandate of the private sector are: risk assessments, AML policy and program development, education and training, compliance audits and testing, and suspicious transaction detection and reporting support. As part of their proactive, preventive role, accounting-based FIAs should be contracted to conduct compliance audits of companies required by law to report cash and suspicious transactions. Some consideration should also be given to integrating this compliance audit into external audits that all public companies must undergo. Other AML compliance responsibilities that could be outsourced to FIAs include policy and program development, education and training, and suspicious transaction detection and monitoring.
Law enforcement agencies should have the powers to outsource specific AML functions, including investigative functions, to accredited private sector AML service providers. Any decision as to the outsourcing of AML services by government agencies should be determined on a case-by-case basis. For law enforcement specifically, operational plans should factor in variables that can be used to determine if contracting out AML work to the private sector would maximize: (1) the effectiveness and success of the specific project, and (2) the cost-effectiveness and efficiency in addressing the objectives of the project. Government policies that formalize a greater role for FIAs in combating money laundering should incorporate regulations, standards, and an accreditation process that establishes high standards and accountability for AML service providers. The regulations, standards and accreditation process should be specific to those offering AML services to third parties (whether the clients are in the public or private sector) and should be developed above and beyond current provincial licensing provisions for security guards, private investigators, and forensic accountants. The regulations, standards and accreditation processes would cover all private sector entities that offer AML services to third parties.
The AML industry should be self-regulated, although government and law enforcement officials should be involved in drafting standards, regulations, and the accreditation requirements. The regulating body should be tasked with developing, administering and enforcing AML industry regulations, minimum standards, and the accreditation program for AML service providers.
Private sector companies providing AML services should be held accountable under the Charter of Rights and Freedoms. To do so, all individuals and companies accredited as licensed AML providers should be deemed to be state agents when providing such services. By working as state agents, these individuals and companies would be accountable to Charter provisions. The FIAs and certified AML service providers working on contract for police or other competent government agencies should also be subject to the same complaint process as the police force or government agency which issued the contract. Exemptions from the federal Personal Information Protection and Electronics Documents Act should be extended to individuals and entities who have been accredited as certified AML service providers by granting this group of licensees status as an investigative body under this legislation.
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