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Originally published in The Globe and Mail.
To most, gift cards are an increasingly common stocking stuffer, on which Canadians spend an estimated $6-billion a year. But to organized crime, they are also an inviting loophole to launder money.
Police and money-laundering experts believe organized crime is using gift cards, along with prepaid credit cards, to launder at least some of their profits from drugs, fraud or other illegal activities in Canada, which various estimates peg at somewhere between $5-billion and $55-billion a year.
The aims of money launderers are simple: to pay suppliers for drugs or other illicit goods without being detected, and to get “dirty” cash gained from criminal activity into the financial system so it can be used in legitimate transactions.
The main attraction of gift cards for money launderers is their anonymity: Cash transactions to load up gift cards or prepaid credit cards do not need to be reported or logged, and the identity of someone stashing money on a gift card does not need to be recorded.
By contrast, anti-money-laundering rules force banks and some other institutions to report suspicious transactions, including any transaction involving more than $10,000 cash. Gift cards are not considered monetary instruments, meaning they do not have to be declared and cannot be seized at the border.
Experts say criminals can buy a stack of gift cards from a retailer or various retailers and transfer them to an associate, who can then redeem for products (such as high-end electronics) that can also later be exchanged for cash.
“If I was a lower-level criminal, I would be paying for everything through gift cards,” said consultant Garry Clement, former national director of the RCMP’s Proceeds of Crime program. “There is absolutely zero paper trail.”
It’s just one of several loopholes identified by critics in Canada’s money-laundering regime. The government has been mulling potential changes to address the issue for at least three years, and new draft rules are expected to be released soon.
In a report last year entitled Follow the Money: Is Canada Making Progress on Money Laundering and Terrorist Financing? Not Really, the standing Senate committee on banking, trade and commerce called for the government to examine whether gift cards and prepaid cards should be more tightly regulated.
The pressure is on, as Canada next year faces another evaluation by the Organization for Economic Co-operation and Development’s Financial Action Task Force, which co-ordinates international efforts against money laundering. It has been critical of gaps in Canada’s anti-money-laundering regime in past.
Documented cases of a prosecution in Canada for gift-card money laundering are hard to find. In one case, according to court documents, police raided the home of a Toronto-area, Russian-born man in 2011 to find not just a forgery lab, but $300,000 worth of gift cards from major retailers. The man in the case was convicted of fraud and forgery offences and deported, and police did not pursue exactly how those gift cards were being used.
Prepaid credit cards are even easier for criminals to use, experts say, as some of them can be bought almost anywhere, loaded with cash anonymously, and then used at any number of retailers or bank machines around the world.
Senior U.S. law enforcement officials have said that prepaid credit cards are being used to move drug profits from the United States back to Mexico and elsewhere.
But MasterCard Canada has said the company’s prepaid credit cards in Canada come with restrictions to make them uninviting to money launderers. For example, for its non-reloadable cards sold by retailers, MasterCard says the amount that can be paid for with cash is capped at $500.
Another problem with gift cards and prepaid cards is that criminals can disguise them by hacking into them or simply by keeping the necessary data completely hidden inside a smartphone, says Toronto forensic accountant Matthew McGuire, who heads the anti-money-laundering department at accounting and consultancy firm MNP LLP.
“You could make it just look like blank card, a hotel card. It doesn’t matter,” he said. “The point is the information on the mag stripe.”
Plus, he added, there is a very active secondary market for gift cards on various websites online, where they can be bought and sold, sometimes at a steep discount.
Stephen O’Keefe, a retail consultant who is vice-president of operations for the Retail Council of Canada, an industry group, said some retailers are already starting to use sophisticated software to watch for suspicious patterns of refunds or gift-card transactions. And federal legislative changes the council has lobbied for are expected next year that would relax privacy rules to allow different retailers to share information among themselves about suspicious activity.
But he argued that imposing sweeping, and expensive new record keeping or reporting systems for gift-card purchases, the vast majority of which are innocent and involve small amounts of cash, may not be the answer: “We’re all trying to do the right thing. Nobody is wanting to be the facilitator of money-laundering, that’s not what retailers are around for.”
Categories:Valuation, Forensics and Litigation Support
Related Topics:Anti-Money Laundering
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