Hits and misses with the Cullen Commission report on money laundering

The Commission of Inquiry into Money Laundering in British Columbia issued its long-anticipated final report last week. The report has some big hits and some big misses. 

What the report missed

First, what the report missed. 

Generally, there is little in the report on financial crime that isn’t already known by anti-money laundering professionals or law enforcement agencies but it does confirm what we all instinctively know in B.C. – we’re a money laundering hub. Unfortunately, we’re no closer to understanding why. 

Chief among the recommendations is the creation of our own quasi Fintrac, apparently needed because of the inability of Fintrac to produce actionable intelligence. The unit will collect money laundering reports by itself, analyze data and provide intelligence to law enforcement. We don’t know if that means businesses will report to two agencies but it may worsen the quality and breadth of intel if it is B.C.-centric. Bad actors spend ill-gotten gains in B.C. but they transact internationally and we need more – not less – visibility from beyond our borders to investigate and prosecute money laundering. 

A better approach may be to view Fintrac as a trusted partner, and embed a team from B.C. into Fintrac’s analysis centre, with access to its database. In that way, British Columbians have greater, not less, access to crucial data to fight the international nature of money laundering.

The most glaring miss about the report is that it ignored our systemic capital markets fraud (covered in Business in Vancouver here) and the hundreds of millions in proceeds of crime it produces. The US$1 billion Frederick Sharp series of cases in Vancouver continue to make international news as the U.S. government prosecutes a growing number of our alleged securities fraudsters and asset seizes hundreds of millions of dollars from B.C. The report chastises B.C. for low-asset seizures but actually, assets in B.C. are being seized in record numbers. Unfortunately, not by us, but by U.S. agencies. 

Another big miss is in respect to crypto. While the report does address some of the crypto sector, it ignores DeFi. The meltdown this week in real time of Celsius and its loss of US$25 billion in deposits owned by consumers, including from B.C., highlights the dangers of this type of private lending. 

The report also gets many aspects of crypto wrong, especially with respect to digital currency exchanges. So much so that the provincial government ought to consider engaging a fresh new subject matter expert to correct it, lest a judge or policy maker relies upon it, and someone’s rights are adversely affected. 

The report states that stablecoins are backed by fiat or a commodity such as gold and this is what makes them less volatile. That is not accurate. Most stablecoins are not backed by real world assets. This is the precise issue that got Bitfinex-Tether, who testified at the Commission, in trouble with the Attorney General of New York. They made false representations to investors that each stablecoin was backed by one U.S. dollar. Bitfinex-Tether was forced out of New York by the government for what it characterized as its illegal and fraudulent conduct, and dealing in the “darkest corners of the financial system.” 

The recent meltdown of Luna / Terra is another example of how such coins are anything but stable. That stablecoin crashed to zero and the US$60 billion from investors who believed the falsity of representations made to them, is gone. British Columbians are part of this harmed investor group too.

One more example – the Report states that cold wallets are more secure because, if prepared properly, they have never been online and are not at risk of threats. A cold wallet is a Trezor (e.g., a USB stick) which stores crypto. It must connect to an online service provider (such as Metamask to buy an NFT) in order for a person to conduct a financial transaction using the crypto held in that Trezor. The only way in which a Trezor does not “go online” and has no threat risk is if a person never uses it. 

It’s like saying that a car doesn’t go on roadways and has no risk. That is true if you never drive the car but who buys a car and never takes it on the road? 

What the report gets right

Despite some misses, the report gets a lot of things right. 

For example, an undercurrent of the report is the need for cross-sectoral data, intelligence and analytics. British Columbia does need to embrace modern technology and deploy network analysis to move the needle on financial crime. Merging technology, AI and financial crime would put a real dent in money laundering investigations. 

The Report calls for the establishment of an AML commissioner. This is also a worthwhile recommendation, although it ought to be an AML ambassador, and serve a bridge-building role with much more limited powers than contemplated and in a manner that is affordable to British Columbians. 

The report also calls for the creation of a centre of excellence in financial crime. This is not a new idea but it remains a good one. The casino sector and law enforcement took a leadership role and brought this idea as a written proposal to the federal government several years ago, which I wrote about in Business in Vancouver here. Today, we have the political will to make it happen and we ought to do so.  

Will anything happen?

Regardless of the hits and misses, I think not much will happen in respect of implementing the recommendations that relate to the provincial government, simply because I don’t think British Columbians have warmly received the report. And if they have not warmed up to the report, they are not going to warm up to paying for any of its heftily priced recommendations when there is no roadmap to improve outcomes or light at the end of the money laundering tunnel for British Columbia.

Christine Duhaime is a financial crime expert with Fusion Intelligence.