Canadian casino money laundering exposes greater fraud problems

A report on money laundering in Canadian casinos by drug-trafficking gangs exposes more than just gamblers showing up with bundles of $20 bills. Here’s a lesson for fraud examiners whose blinders might force them to focus on just one type of fraud.

Fraud schemes seldom are geographically localized, but here’s an exception: transnational drug-trafficking gangs laundering cash through casinos in British Columbia, Canada. The so-called “Vancouver model” operation — primarily involving the River Rock Casino in Vancouver’s suburb of Richmond — exposed Canadian fraud vulnerabilities and potentially worsened drug abuse and housing affordability in the region.

In September 2017, British Columbia Attorney General David Eby appointed Peter M. German, QC, a former Royal Canadian Mounted Police (RCMP) deputy commissioner for western and northern Canada, and principal of his consulting firm, to conduct an independent review of the Vancouver model. The report, released to the public on June 27, 2018, prompted regulatory reforms and a further inquiry into the purchase of Vancouver-area real estate with laundered money. (See German’s commissioned report, “Dirty Money: An Independent Review of Money Laundering in Lower Mainland Casinos conducted for the Attorney General of British Columbia,” March 31, 2018.)

German, a lawyer and the author of the textbook, “Proceeds of Crime and Money Laundering,” says during a recent Fraud Magazine interview that his review follows a string of previous reports and investigations into casino money laundering dating back to 2011 that failed to end the growing problem.

“By about 2015, everybody gets concerned because there is so much money coming in, and that is when the RCMP investigations start again,” German says. “After 2015, the alarm bells have gone off, the RCMP is investigating and then the provincial government commissions a report from MNP, a forensic accounting firm.

“The MNP report essentially confirmed that there were a lot of problems, but the report was never released publicly until we had a new government. When the new government came into power in the summer of 2017, they found out about this report that had not been released publicly, they released it publicly and that’s when I was asked to look into this matter,” German says.

The scheme, which an Australian professor dubbed the Vancouver model, involved gamblers — Chinese citizens — who transferred their own wealth from China to Canada through an informal, underground banking system, thereby avoiding Chinese currency controls. The participants received their money in Vancouver in the form of hundreds of thousands of Canadian dollars in $20 increments — mostly drug traffickers’ proceeds — for a fee. The gamblers would first exchange the cash for chips at the River Rock Casino and then cash out for either $100 bills or casino checks after they finished gambling..

The gangs in China reinvested the Chinese currency initially received by the underground banker back into the production of illegal products such as methamphetamines, drug precursor chemicals and counterfeit goods. Some of the Chinese gamblers in Canada took the money from their casino cash out and invested in valuable Vancouver real estate assets through layers of concealed ownership, which significantly increased housing costs in the region. The scandal exposed deeper issues and vulnerabilities than just gamblers showing up with bundles of $20 bills at casinos in British Columbia.

“I think the report shows a huge vulnerability in Canada and [British Columbia] to money laundering — and casinos is the example that’s in our face — but it does demonstrate a vulnerability,” says German. “The alarm bells should be on for Canada to realize that it has to strengthen its regulatory and enforcement regimes to deal with the threat of money laundering.”

Learn from successful governments

Numerous elements of the Vancouver model represent money-laundering risks in Canada that aren’t limited to British Columbia. Canada permits gambling throughout the country — from horse racing to online betting and casinos. Each province or territory is responsible for regulating gambling.

German says Canada has differing standards and vulnerabilities because of the lack of uniformity in gaming industry regulations across provinces.

“To say all the provinces should have a similar system, it just wouldn’t happen in the Canadian context with our constitution and so forth,” he says. “I think the best we can hope for is we learn from the provinces that are doing things right.”

In his report, German writes that the Canadian province of Ontario and the U.S. state of Nevada use best practices such as employing regulators independent from government and involving the police as enforcement arms, which he’s recommended that British Columbia should follow.

Even with better controls, Ontario was so concerned with money laundering in its casinos that its Alcohol and Gaming Commission launched a regulatory review of the Great Canadian Gaming Corporation, which is the operator of the River Rock Casino. However, despite the review and allegations of money laundering in the corporation’s facilities, Ontario granted a contract to the firm to operate four additional gambling establishments in the province. (See B.C. casino operator wins Ontario contract amid money-laundering probe, by Justin Giovannetti and Karen Howlett, The Globe and Mail, Dec. 19, 2017.)

Criminals will always pivot

Although Ontario hasn’t seen any high-profile casino money-laundering scandals lately, it’s still an issue for the province, according to Ryan Duquette, CFE, the founder and principal of Hexigent Consulting Inc., a digital forensics firm. (Duquette is on the board of the ACFE Toronto Chapter.)

... fraud examiners can benefit from not only staying abreast of vulnerabilities and methods in cases like the Vancouver model but also keeping an eye on emerging fraud trends.

“I would be naïve if I thought it wasn’t happening in Ontario,” Duquette says. He’s concerned that criminal organizations might turn to other avenues of money laundering because of the attention to the Vancouver model. “That’s what criminals do; they pivot,” he says.

Other criminal organizations active in Canada include Vietnamese and Eastern European gangs, outlaw motorcycle clubs and traditional organized crime groups. (See Money Laundering in the 4th Industrial Revolution, by Garry W.G. Clement, FrontLine, Oct. 1, 2018.)

These organizations aren’t just dealing drugs and laundering cash through casinos. One recent notable case featured elements reminiscent of the Vancouver model and a business email compromise scheme. In the summer of 2017, a spear-phishing scheme conned MacEwan University in Edmonton, Alberta, out of more than $10 million. The money went through a series of shell companies — including at least one based in Hong Kong — and then a number of transactions involving Chinese and Canadian companies until $1 million of it ended up involved in a Richmond, B.C., real estate deal. (See How a fraudster got $12 million out of a Canadian university: They just asked for it, by Claire Theobald, StarMetro Edmonton, Oct. 10, 2018.)

Deficiencies contribute to vulnerabilities

Deficiencies in regulatory and enforcement regimes in Canada that German identified also contribute to an environment of vulnerability to fraud. Two separate reports from Statistics Canada indicate that police-reported incidents of fraud, including cybercrime, are increasing, while the number of charges, guilty findings and long sentences are declining. (See Neil Mohindra: Cyber fraud is only getting worse in Canada – but the punishments are getting lighter, by Neil Mohindra, Financial Post, June 26, 3017)

Duquette says these conditions can be challenging for fraud examiners because they force a focus on protection from fraud rather than prosecution. “One of the biggest issues we find, is telling clients, ‘at the end of the day, don’t expect someone to end up in handcuffs,’ ” he says.

Carmen Wiechers, CFE, regional loss prevention manager for the Value Village Stores retail chain, shared similar concerns. “Resources with police for white-collar crime are limited, and the loss amount would have to be huge before police would commit investigative resources,” says Wiechers. (She’s a past president of the ACFE Vancouver Chapter.)

Rather than relying on police response to every incident, Wiechers says Value Village Stores tries to mitigate internal fraud risks through awareness trainings and auditing functions, creative pilot programs to mitigate external risks in high-loss locations and creating a Crown report template that enables police to submit charges without additional investigational time needed on their end. “We have to take care of things internally,” she says.

Reasons for optimism

Canadian fraud concerns are increasing, but federal and provincial governments might do more than pay lip service.

The British Columbia attorney general accepted all 48 of German’s recommendations in his report. “They implemented a couple interim recommendations right away, and that was in the fall of last year,” German says. “There is an implementation committee within government that is apparently working away on them all.”

On the federal level, in July 2018, Prime Minister Justin Trudeau appointed former Toronto chief of police Bill Blair as minister of border security and organized crime reduction — a new cabinet post — in a mandate letter that specifically targets money laundering, guns, gangs and opioid distribution. (See Trudeau asks Blair to fight money laundering in B.C. in bid to stop organized crime, Sam Cooper, Global News, Aug. 28, 2018.)

Regulatory reform is also on the way. Mark McManus, CFE, chief solutions officer at GHLC Inc., highlighted some expected changes in his presentation at the 2018 ACFE Fraud Conference Canada, “The State of Money Laundering in Canada.” (McManus is on the board of the ACFE Toronto Chapter.)

According to McManus, amendments to Canada’s “Proceeds of Crime (Money Laundering) and Terrorist Financing Act” (PCMLTFA) should go into effect in the fall of 2019 and include these notable measures, among others:

• Persons and entities dealing in virtual currency regulated as money services businesses (MSBs).
• Deadlines for filing suspicious transactions reports shortened from 30 days to three days.
• Foreign MSBs’ activities directed toward Canadian customers subject to the PCMLTFA.

Takeaways for fraud examiners

Until these changes take effect and begin to impact fraud in Canada, fraud examiners can benefit from not only staying abreast of vulnerabilities and methods in cases like the Vancouver model but also keeping an eye on emerging fraud trends.

“What I think CFEs have to do is not put the blinders on, and get too focused on one method being covered, now, but look at the next five years and the schemes that they will be dealing with,” Duquette says.

Mason Wilder, CFE, is the research director with the ACFE. Contact him at mwilder@ACFE.com.