By Sanaa Ahmed, University of Calgary
TD Bank’s mounting legal troubles in the US have again focused all eyes on money laundering in Canada. TD’s C-suite execs and directors, as well as Canadian anti-money laundering (AML) regulators, are both in the crosshairs –– the former for having participated in the conspiracy to commit laundering and the latter for napping at the wheel.
Singling out the ‘bad apples’ in a single case is to ignore the systemic nature of money laundering
But to buy this moralistic finger-wagging is to ignore how money laundering plugs into the broader Canadian political economy or, indeed, into the role of the Canadian state in actively facilitating and encouraging it.
Contrary to popular perception, the AML system in Canada is not ‘broken’; its systemic, structural weaknesses were baked into the regime at the inception. That Canada, one of the founders of the global AML regime in the late 1980s and a current member of the global AML regulator, has inadequate AML controls beggars belief. So it needs to be said that global AML regulation was never meant to prevent laundering.
The Financial Action Task Force (FATF) was set up in 1989 by the G7 and the European Commission at the behest of the US ––ostensibly, because the US wanted to fix the domestic drugs and organized crime problems and use the drugs war and/or money laundering regulation as a stick against foreign adversaries. Plus, the US government could use the confiscated money, with little oversight, to fund, for example, the Taliban towards the end of the Cold War. But correspondence between state actors in the US and UK in 1987 shows that the current global regime was only devised to protect the banking and finance industries in the US and UK. A global AML regime that purportedly focused on morally righteous goals such as crackdowns on drugs and organized crime would give the US government the moral authority to take action against the tax and secrecy havens abroad. Not only would that halt capital outflows from the US, it would also allow the government to recoup tax revenues.
There were other advantages: once, the biggest impediment to such tax recoveries would have been lack of data and all the headaches that come with extraterritorial application of jurisdiction and Mutual Legal Assistance Treaties. But by co-opting the financial services industry, the US was assured of a steady source of civilian informants and collaborators. And by closing secrecy shops in foreign jurisdictions, the UK and the US would be able to maintain their dominance in the financial services industry by making it harder for everyone else to offer secrecy while strategically exempting themselves from the application of the same rules.
"Contrary to popular perception, the anti-money laundering system in Canada is not ‘broken’; its systemic, structural weaknesses were baked into the regime at the inception."
TD Bank is in good company
Thus to view TD as an aberration is to ignore this nexus between the state and the politically well-connected lobbies in business (such as the banking and finance industries) and their conjoined financial imperatives. The sordidness of the TD saga lies in the fact that the bank had been laundering for 10 years and that it has not been alone. HSBC Canada was discovered to have been laundering, using the ‘Toronto Method’ for about nine years before this. Besides TD, the Big Four banks in Canada (as well as a few smaller ones) have repeatedly been found to either have been laundering or as having flawed AML controls.
As a 2022-2023 Fintrac report shows, most banking and real estate companies do not adhere to AML laws. And as the BC government-led inquiry into money laundering in casinos showed, gaming regulators in the province had known about the ‘Vancouver Model’ of laundering for 7–8 years but decided to remain silent because of the impact on the political economy.
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Having ‘dirty’ money in the system really pays off
As each of these instances show, ‘dirty’ money also creates jobs, can be taxable, shores up real estate, and finances consumption. Banks and casinos make profits off even ‘laundered monies’, pay their employees and use this money to grow their businesses and generate more jobs. The lawyers, accountants, other professionals and government officials who deal with this money – to conduct real estate transactions or set up shell companies – plough this money back into the economy, through both their own consumption and by paying federal and provincial taxes on this income. The governments also reap corporate taxes and fees for many of these transactions. And, since Crown corporations are part owners of all casinos on settled lands, the state also stands to make sizeable profits.
Looking at it through a political economy lens reveals its logic
The political economy approach to laundering recognizes these symbiotic relationships between individuals, governments and public policy. It further sees the occurrence of money laundering as less of a law enforcement failure and more, as a systemic response to the structural and behavioral peculiarities or characteristics of the political economy.
Two ‘peculiarities’ stand out here. First, Canada’s low annual domestic savings rate and revenues render the economy particularly reliant on debt. Second, Canada remains hugely dependent on real estate, rentals and leasing as well as construction for economic growth. Given its savings, investment, debt and economic growth data, Canada can ill-afford to be picky about the money it takes. Since 1996, the fluid requirements of the federal and provincial business immigration programs show that the volume of inflows is more important than its cleanliness.
Meanwhile, media reportage frequently suggests drug traffickers buy fancy mansions worth billions each year. This ‘false’ demand is said to inflate the cost of housing for ‘ordinary hardworking Canadians’ by 5 percent. The only problem with these numbers is that they’re purely speculative. There is not a coherent, consistent number for the volume of laundering for any jurisdiction, anywhere in the world. And the problem with the 5 percent figure is that the authors of the report do not adjust for the fact that Vancouver and Toronto, which are two of the top three Canadian cities to live in, are bounded by water, which always pushes real estate prices up.
On the other hand, even if this demand is ‘fake’ and generated purely by drugs money, is it really so bad? Drugs don’t go away while there’s demand for them. In the meantime, these billion-dollar mansions generate both jobs and output. And the people who benefit are scores of ordinary hardworking Canadians: mortgage brokers, realtors, lawyers, masons, plumbers and carpenters. Those who manufacture paints, bathroom tiles, wooden cabinets, heat insulation systems and door hinges…
Even if one assumes estimates regarding laundering are accurate, who benefits from the crackdown on laundering? In just 2019, GDP growth fell by over 1 percent after the completion of a number of infrastructure projects and the fall off in housing demand due to higher mortgage rules and higher interest rates.
We need to get real
Given how laundering feeds the political economy, is it really a surprise that the US, UK and Canada are currently favorite destinations for illicit funds? Is it truly so odd that there seems to be no political will to arrest the phenomenon?
Sanaa Ahmed is an assistant professor of law at the University of Calgary. She takes an interdisciplinary approach to money laundering to examine the regulatory, constitutional, and governance issues at the heart of global and domestic AML regulation.