Financial technology companies in Canada may well be used, either knowingly or unwittingly, for facilitating crimes like money laundering.
But the recent designation by the U.S. government of Vancouver’s Pacific Network Services Ltd. (PacNet) and its affiliates as a “significant transnational criminal organization” is “a very dangerous and troubling development,” says Joven Narwal, a criminal lawyer and adjunct law professor at the University of British Columbia.
It amounts to a conviction without a trial, he says.
“There have been no judicial findings against PacNet,” he said. “I think that this is really a dangerous precedent to set because you’ve got the finding of this magnitude, which has a tremendous amount of stigma associated with it … and having the effect of completely obliterating their ability to do business without them being found guilty of anything.”
According to the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), PacNet and its numerous affiliates – primarily operating out of Canada, Ireland and the U.K. – have knowingly facilitated mail fraud in the U.S. and abroad. It plans to seize the company’s assets in the U.S.
Among the 12 people named in OFAC’s transnational criminal organization designation for PacNet is Ottawa Chamber of Commerce chairwoman Marie Boivin.
The designation underscores the concerns that have been raised by international agencies over Canada’s lax approach to combating money laundering. It also raises questions about whether Financial Transactions and Reports Analysis Centre of Canada (Fintrac), which is responsible for overseeing financial institutions in Canada, has been asleep at the switch.
OFAC acknowledges U.K. authorities for their co-operation in its investigations, but makes no mention of Canadian authorities.
If Fintrac was involved in the U.S. investigation – or even aware of it – it’s not saying.
The allegations against PacNet have sent a shock wave through Vancouver’s fintech sector.
Rosanne Phyllis Day, PacNet’s founder, was one of the pioneers of Vancouver’s fintech sector, having founded the company in 1994.
Michael Gokturk, founder and CEO of Payfirma, said Day is well known in the fintech community and was highly regarded.
“They’ve always had a great reputation, so to hear of this was quite shocking,” Gokturk said. “It resonated in the entire payments industry because we all know PacNet. It was around for a very long time and Rosanne had been there since the start.”
Day has not responded to interview requests, but PacNet has denied the allegations in an online post:
“We absolutely and categorically reject the allegations made against us regarding our processing for direct mail campaigns. We will vigorously defend ourselves against these unproven allegations, which we only learned about on September 22, 2016, through media reports.”
The company adds that it will immediately stop processing payments for direct mail companies.
But OFAC claims PacNet has made such promises before. In 2002, as part of a forfeiture action in the U.S., PacNet’s principals – Day and Paul Davis – acknowledged PacNet’s involvement in processing payments for “fraudulent” lottery marketing schemes and promised to stop, according to OFAC.
Despite PacNet saying it would stop using mail to process payments for illegal lottery purchases, OFAC states: “PacNet continues to knowingly process [cheques] on behalf of numerous companies that are actively involved in widespread mail fraud campaigns.”
OFAC alleges that PacNet and its affiliates processed payments for scams that targeted the elderly. Scammers typically would solicit victims with schemes like sweepstakes and arrange to have either cash or cheques sent to PacNet companies.
The victims’ money, plus PacNet fees and commissions, would be sent to the scammers by wire transfer from a PacNet holding account “thereby obscuring the link to the scammers.”
PacNet processed payments for the Maria Duval psychic scam, according to OFAC.
In 2009, after the North Dakota attorney general became involved, PacNet refunded money to some of the victims, but, according to OFAC, PacNet continued to process payments for the Duval psychic scam for more than five years.
Many legitimate companies use third-party payment processors. But there are also shady or illicit businesses that use them because the banks and other financial institutions won’t touch them. They include the adult entertain industry, online gambling and the medical marijuana industry.
Gokturk said his company won’t serve those industries.
“It’s too nascent of an industry to really properly track and understand,” Gokturk said. “Second is the reputational risk associated with it. There are higher incidences of fraud for these kinds of businesses. Adult [entertainment] has high margins, but it has underpinnings to organized crime.”
The PacNet case underscores the concerns that have been raised by the international community that Canada has become a money-laundering hotbed.
In a report in June, Financial Action Task Force (FATF), based in France, highlighted concerns about Canada’s capacity to curb money laundering.
“Canada is exposed to very high ML (money laundering) threats of both local and foreign origin,” the report warns.
It warns that Canada’s real estate sector in particular is “highly vulnerable” to money laundering activities.
In cases that are successfully prosecuted, the FATF said asset recovery is low in Canada and the penalties for money laundering convictions are “not significantly dissuasive.”
Narwal said the PacNet case underscores one of the problems for the fintech sector.
“They’re operating in a space that is, to a large degree, unregulated or where the regulations are uncertain.”
He added that the Canadian regulators have not been moving fast enough to stay ahead of fintech’s innovation and growing international scope.