From the Macdonald Laurier Institute

By Jamie Ferrill for Inside Policy

Neglecting to take decisive action enables organized criminal networks whose activities cause significant harm on our streets and those of our international partners.

Financial crime bears considerable political and economic risk. For the incoming Trump administration, the threat that transnational organized crime and the illicit financial flows pose to global financial stability is a top priority. The threat of tariffs by the Trump administration makes the costs to Canada in enabling global financial crime all too apparent. In addition to the cost of tariffs themselves, the associated reputational risk and loss of confidence in Canada’s financial system has implications for investments, credit, supply chains, and bilateral co-operation and agreements.

Canada’s proximity to major international markets, stable economy, high standard of living, and strong institutions and frameworks make it an attractive place to do business: for both legitimate and criminal enterprises.

Trade is a key contributing sector for Canada’s economic security. It represents two-thirds of Canada’s GDP, and exports alone support nearly 3.3 million Canadian jobs. Trade is also highly vulnerable to criminal exploitation. Ineffective oversight, regulatory complexity, and lagging technology adoption, coupled with a lack of export controls, make it possible to move vast proceeds of crimes, such as those from drug trafficking, human trafficking, corruption, and tax evasion through the global trade system.

These vulnerabilities are well-known by transnational organized crime groups. They are able to effectively move billions of dollars of dirty money through the global trade system every year, a method commonly referred to as Trade-Based Money Laundering (TBML).

While any statistics must be interpreted with caution, evidence shows that TBML is a prevalent method of money laundering.

What is it?

There are several types of Trade-Based Financial Crimes such as terrorism financing through trade, sanctions evasion, and simply trade fraud. However, the TBML definition is necessarily specific. Essentially here, TBML is a money laundering method: the processing of criminal proceeds to disguise their illegal origin. TBML involves the movement of value through the global trade system to obfuscate the illicit origin. This is usually done through document fraud: undervaluing, overvaluing, phantom shipping, or multiple invoicing. Different techniques employ different aspects of the supply chain. And TBML may be just one method used within larger money laundering operations.

By way of example, US authorities allege that two Chinese nationals living in Chicago laundered tens of millions of dollars for the Sinaloa and Jalisco Cartels. Drugs were smuggled into the United States and sold throughout the country. The proceeds from these sales were collected by the Chinese nationals. Those proceeds were used to purchase bulk electronics in the United States, which were then shipped – with a falsified value – to co-conspirators in China, who sold them locally. The legitimacy provided by the electronics sales and the trade transaction provide cover to “clean” proceeds from precursor crime.

Either the importer and/or the exporter of the goods can shift value. Chances here are the electronics shipped were undervalued: on leaving the country, they are declared at a (much) lower value than they are actually worth. The importer in China pays the undervalued invoice, then sells the goods for what they are worth. The profit from those electronics now appears clean, since it was used for a “legitimate” sale. The ensuing value gap can be transferred informally or stored as illicit wealth. The value has now shifted, without fiat currency leaving the country of origin.

But the cycle does not stop there. The value and money itself continue to traverse around the world, through various intermediaries such as financial institutions or cryptocurrency exchanges. It then goes right back into the system and enables the very crimes and organized crime groups that generated it in the first place. It is, in short, the business model of organized crime.

The Canadian problem

Ultimately, the proceeds of crime that have been legitimised through TBML (and other money laundering methods) supports the criminal enterprises that generated the value in the first place. In the example, these are prolific cartels who have been behind the fentanyl crisis, migrant trafficking and abuse, corruption, and widespread violence that destabilizes communities and undermines governments across North America and beyond.

With new actors, drug routes, and ways of doing business, the cartels are very much active in Canada. The Sinaloa cartel in particular has established a significant presence in Canada where it controls the cocaine market, manufactures and distributes fentanyl, and is embedded in local criminal networks. This increases Canada’s role as a strategic location for drug trafficking and a base to export abroad, notably to Europe, the US, and Australia.

Hells Angels, Red Scorpions, ’Ndrangheta, and other organized crime groups are also exploiting Canada’s strategic location using their transnational links. These groups are active in criminal activities that generate proceeds of crime, which they launder through Canadian institutions. From drug trafficking to extortion to human and sex trafficking, the foundation of organized crime relies on generating and maximizing profits. The proceeds generally need to be laundered; otherwise, there are direct lines back to the criminal organizations. They are, without a doubt, exploiting the trade sector; the very sector that provides so much economic security for Canada.

Canada’s regulation, reporting, and prosecution record for money laundering is notoriously weak. Its record for regulation, reporting, and prosecution for trade-based financial crimes, namely here TBML, is even weaker.

As financial institutions and other regulated entities face increased scrutiny following the TD Bank scandal and the Cullen Commission’s inquiry into money laundering in BC, more criminal activity is likely to be displaced into the trade sector and the institutions it comprises.

TBML is difficult for financial institutions to detect, especially given that 80 per cent of trade is done through open accounts. It exploits established trade structures that are meant to protect the system –like documentation and invoicing processes – by manipulating transactions outside traditional payment systems, which requires more sophisticated anti-money laundering strategies to address these hidden vulnerabilities.

Addressing the problem

Trade is a gaping vulnerability. Yet, it attracts minimal attention in countering transnational financial crime. Containing the fentanyl crisis for one requires a collaborative effort to bolster supply chains and the trade sector against financial crime. This means global cooperation, technological advances (such as blockchain technology), appropriate resourcing, more scrutiny on high-risk countries and shippers, and regulatory innovation.

But political will is in short supply. The federal government’s Budget 2024 and the resulting proposed Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorism Financing Act will grant CBSA new authorities to counter TBML, but limited resources to make good on them. And CBSA cannot do it alone.

Transnational organized crime and the illicit financial flows that support it poses a threat to global financial stability. The enabling of financial crime hurts Canada’s reputation abroad. With a new political regime emerging in the US, Canada cannot afford to be seen as a weak link. Loss of confidence in a country and its financial system has implications for investments, credit, supply chains, and bilateral cooperation and agreements.

By neglecting to take decisive action, we inadvertently enable organized criminal networks whose activities cause significant harm on our streets and those of our international partners. With profits as their primary driver, it is imperative that we scrutinize financial pathways to disrupt these illicit operations effectively.

Organized crime groups are not bound by privacy laws, bureaucracy, political agendas, and government budgets. They are continually evolving and staying many steps ahead of what Canada is equipped to control: technologically, geographically, strategically, logistically, and tactically. Without appropriate regulations, technological advances, and resources in place, we will continue to be a laggard in countering financial crime.

More systematic change is needed across regulatory frameworks, law enforcement coordination and resourcing, and international partnerships to strengthen oversight, close loopholes, and enhance detection and disruption.  It would be a low-cost signal to the Trump administration that Canada is committed to upping its game.

Jamie Ferrill is senior lecturer in Financial Crime at Charles Sturt University and co-editor of Dirty Money: Financial Crime in Canada.

From the Frontier Centre for Public Policy

By Joseph Quesnel

Winnipeg City Council’s War on Natural Gas Shows the Need to Counter Special Interests

Some members of the Winnipeg City Council are determined to continue their reckless war on natural gas in buildings in Canada’s coldest city.

The latest move occurred at City Council when the City’s Standing Policy Committee on Water, Waste and Environment considered a motion to discuss options for moving away from not using natural gas heating in existing and new residential, commercial and industrial buildings. The lack of action placed the motion in limbo.

It ought to remain in limbo forever. Winnipeg City Council should instead enshrine energy choice. Winnipeggers who favour energy choice and sensible policy can take heart from the experience of other Canadian cities. More cities are fighting these natural gas bans. Vancouver City Council ended a natural gas ban in new buildings this summer after a group of councillors pushed back. They raised housing affordability concerns because homeowners and landlords are subject to costly retrofits with a ban on natural gas heaters, gas furnaces and gas boilers.

Unfortunately, a recent tied vote defeated the policy reversal. This organized opposition, however, shows what is happening at ground level: Average people pummeled by inflation and higher energy costs are finally fighting back.

Opponents of energy choice make exaggerated claims regarding the influence of the energy lobby in these debates, while they are tone-deaf about the actual organized interests at play. Environmental organizations such as the Pembina Institute are well-funded and always present at protests. They also funnel misleading information to local activists and politicians.

Manitoba Hydro has spoken out against natural gas bans for years. In 2021, the Crown electric utility said moving the province from natural gas to electricity as a home-heating source was unrealistic. Despite abundant hydropower, Manitoba does not have the generating capacity to support this switch. Manitoba Hydro said the grid cannot serve peak demand without natural gas. Meeting our energy needs without natural gas would require doubling the province’s generating capacity. This is the province’s utility saying this based on a simple analysis of the evidence, not a ‘right-wing’ economist.

The problem with these debates is that ideologically driven environmental organizations drown out reasonable voices. These groups are often behind local campaigns to deny energy choice. They are well-funded special interests ‒ often using foreign funding or even funding from our governments.

Individuals and organizations committed to energy choice must become active and counter these well-funded voices. Pro-energy choice voices must refute the misinformation spread by environmentalist interests. In municipal elections, they should promote candidates and even electoral slates that respect energy choice and sensible policy.

In the United States, some Republican-led states have successfully prevented localities from banning certain hydrocarbon-based heating infrastructure. However, their efforts are limited because a change in state-level politics could reverse the move to limit local governments.

Strong citizen-led local movements are the answer. They should always watch for policies that oppose energy choice. Such movements must be active in local politics, opposing these elitist environmental special interests. Reasonable Winnipeggers ‒ right and left ‒ must defend reasonable energy policies. This is not a partisan issue. It is never too late to stand up for sanity in the local fight for energy abundance and freedom for all.

Joseph Quesnel is a Senior Research Fellow with the Frontier Centre for Public Policy.