Financial intelligence agency highlights criminal risks of underground banking

OTTAWA — Canada’s financial intelligence agency is warning that unregistered money-transfer services are ripe for abuse by criminals trying to launder cash and fund terrorist activities.

In a new advisory on the risks of underground banking, the Financial Transactions and Reports Analysis Centre of Canada, known as Fintrac, says everyone from students to seniors could be duped into helping disguise shady cash through such services.

Fintrac identifies money linked to illicit activities by electronically sifting millions of pieces of information each year from money-services businesses, banks, insurance companies, securities dealers, real estate brokers, casinos and others. 

In turn, it discloses intelligence to police and other law-enforcement agencies about the suspected cases.

The new advisory cites trends and patterns from Fintrac’s analysis of transactions and disclosures to enforcement agencies related to underground banking. 

It focuses on unregistered money-services businesses primarily in Metro Vancouver and the Greater Toronto Area, and to a lesser extent in the Calgary-Edmonton corridor.

Many people in Canada use money services, which often operate outside the conventional banking system, to send cash abroad. Benefits can include lower fees and exchange rates, quicker transactions and the ability to move funds to places that lack formal banking services.

These businesses might operate within diaspora populations, providing informal transfer services to community members and expatriate workers, the advisory notes. Sometimes no cash is actually transferred, with intermediaries settling accounts through various other means.

Individuals and organizations that offer such money services must register with Fintrac and can face administrative or criminal penalties for not doing so.

“The limited visibility and lack of transparency associated with underground banking transactions pose inherent money laundering and financing of terrorist activities risks,” the advisory says.

Based on its analysis, Fintrac suspects a portion of the funds moved via underground banking and unregistered money-services businesses were proceeds of crime or funds that were illegally transferred, for instance to evade restrictions imposed by international sanctions.

“We recognize that Canada is home to many diaspora communities and people want to maintain their ties with home countries, and part of that involves financial support,” said Annette Ryan, Fintrac’s deputy director of policy and analytics.

At the same time, Ryan said in an interview, Fintrac wants people “to be aware of the risks” and that those operating these types of businesses have a responsibility to register them.

Professional money launderers use a variety of techniques to transfer value and obscure the identity of those controlling the funds, the advisory says.

Money mules — people who transfer shady money or transport proceeds of crime — might knowingly co-operate or unwittingly work on behalf of a money laundering network. 

“Students, homemakers, unemployed persons, seniors and migrant labourers are frequent targets for money mule recruitment,” the advisory says. “Victims of fraud can be exploited or coerced into being money mules. Criminals can use the victim’s bank account for the placement and transfer of illicit funds.”

Suspected money mule accounts received a high volume of third-party cash deposits and email money transfers that did not align with the client’s profile, Fintrac discovered. 

The money was rapidly depleted, primarily via outgoing email money transfers and bank drafts to unrelated third parties, the advisory says. “These funds were also used to purchase investments, real estate and vehicles being shipped to West Africa and Asia.”

A number of suspected money mules were international students receiving wire transfers from individuals and entities in China and Hong Kong, as well as email money transfers and bank drafts from third parties in Canada, the agency found.

“While these transactions do not necessarily demonstrate a direct link to money laundering, the lack of details that would set the transactions out as legitimate is a concern.”

Cuckoo birds lay eggs in the nests of other birds, fooling them into raising their hatchlings. In this vein, money launderers use a technique called cuckoo smurfing to make criminal proceeds appear to have come from legitimate sources and to transfer funds across jurisdictions, the advisory says. 

This technique relies on the bank accounts of unwitting third parties — usually those of people in diaspora communities expecting remittances — to make deposits of illicit cash.

Companies controlled by professional money launderers can issue invoices for real or fictitious trade, misrepresenting the true value of goods crossing borders, Fintrac says. In addition, they might co-mingle proceeds with trade payments and remittances through money-services businesses.

Individuals owned convenience stores, holding companies, construction and general contracting companies, and import-export businesses that shared addresses or telephone numbers with money-services businesses, and appeared to be co-mingling personal and business accounts related to money-services activity. 

Fintrac believes some money-services operators might be misrepresenting the nature of their business to banks in order to access financial services, and the federal agency suspects they are front or shell companies for receiving illicit money.

“A number of these businesses received funds from entities connected to organized crime, drug trafficking or law enforcement investigations into money laundering and sanctions evasion.”

Suspicious transactions highlighted a general flow of funds from Iran and China, primarily through the United Arab Emirates, Hong Kong and Qatar, to Canadian enterprises. “In turn, these entities transferred the funds to multiple individuals and entities in Canada through bank drafts, cheques and account transfers.”

Fintrac says people transferring funds to and from overseas can protect themselves by exercising caution and dealing only with financial institutions and reputable, registered money-services businesses.

“To avoid becoming a money mule, beware of unsolicited phone calls, texts, emails or social media messages requesting personal information, and offers that sound too good to be true,” the advisory says. 

“In addition to direct overtures, fake business advertisements can draw potential money mules into unwitting participation in money laundering schemes. Recruitment via social media tends to place heavy emphasis on the lure of quick and easy money and attractive lifestyles.” 

This report by The Canadian Press was first published May 5, 2022.

Jim Bronskill, The Canadian Press