President Donald Trump is wrongly claiming that Canada is a major source of fentanyl exports to the United States.
But Mr. Trump is right about one thing: Criminals are exploiting blind spots in the global trading system.
Trade-based money laundering is a form of financial crime that uses falsified trade transactions to wash illicit proceeds, including those derived from narcotics trafficking.
The trade transactions themselves do not necessarily facilitate the shipment of drugs or other contraband goods across international borders. (Phantom shipments are a common tactic.) Rather, trade transactions serve as a cover to move money and other forms of value, such as cryptocurrencies, to parties in another country.
Worth as much as US$1-trillion a year, trade-based money laundering taints supply chains and compromises the integrity of international trade as cleansed criminal proceeds are reintroduced to the economy.
Trade-based money laundering “could be the world’s largest money laundering methodology,” writes John Cassara, a former U.S. intelligence officer in a book entitled Dirty Money: Financial Crime in Canada.
“It is also the least understood, recognized and enforced.”
Trade-based money laundering affects every country, but Canada has been slower than some others, including the United States, to take action. Ottawa has spent decades ignoring the risk even though the Canadian economy is dependent on two-way trade.
Trade represents two-thirds of Canada’s GDP and supports one in six Canadian jobs. Those are the stakes of leaving this problem unchecked.
Mr. Trump’s tariff tactics are forcing Canada to finally focus on diversifying trade away from the U.S. market.
But Canada’s poor track record on combatting financial crime will make it harder for Ottawa to sign new free-trade deals with other countries. It will also pose a barrier for Canadian companies to increase their utilization of existing trade pacts and find new buyers in foreign markets.
That’s because countries around the world are increasingly using trade and customs agreements to fight bribery, corruption, forced labour and other forms of financial crime.
They are doing so by including transparency, anti-corruption and responsible business conduct clauses in free-trade agreements.
Sometimes, those provisions require trading parties to ratify global anti-corruption conventions. Other clauses, however, involve specific measures that are designed to block trade transactions or other investments that are tainted by financial crime.
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership, for which Canada is a signatory, contains transparency and anti-corruption provisions.
Canada’s Comprehensive Economic and Trade Agreement with the European Union, meanwhile, includes various transparency provisions. It also features a dispute-settlement system that prevents investors from submitting claims if an investment was “made through fraudulent misrepresentation, concealment, corruption or conduct amounting to an abuse of process.”
The United States-Mexico-Canada trade agreement, meanwhile, prohibits forced labour. That requirement prompted Ottawa to create the Fighting Against Forced Labour and Child Labour in Supply Chains Act in 2023.
Indeed, transparency provisions exist in most of Canada’s free-trade agreements.
Any perception that Canada is wavering on those commitments could prevent our exports from being sold in foreign markets. Additionally, it could thwart Canadian businesses from expanding operations overseas and chase away badly needed foreign direct investment.
There are some obvious ways to mitigate such risks. Canada needs to properly fund its trade transparency unit and increase scrutiny of commercial activity inside free-trade zones.
Ottawa must also close a big loophole in our country’s anti-money-laundering regime.
The majority of trade transactions processed by banks involve no direct review by human beings. Known as open-account trade, the practice involves the sale of goods that are shipped before payment is made to the buyer.
Banks do not necessarily provide financing for such transactions, but they process them through their automated payment systems. Payments are often made via wire transfers through correspondent banking relationships, a service that allows a financial institution to facilitate cross-border transactions on behalf of a foreign lender.
Although bank payment systems do include some automatic screening for anti-money-laundering compliance, that technology is far from perfect. Importantly, banks facilitating these payments cannot verify whether any goods are ultimately shipped to the importer.
The Financial Transactions and Reports Analysis Centre of Canada also requires the authority (and proper resources) to collect and analyze all relevant information regarding open-account trade transactions.
What’s more, Canada needs to crack down on the proliferation of alternate remittance systems, such as hawala, that are regularly used by criminals to transfer value.
The Organization for Economic Co-operation and Development has spent years warning that the lack of integrity in supply chains is a significant nontariff barrier to free trade.
Federal party leaders, currently on the hustings, cannot afford to bury their heads in the sand. Canada’s trading relationships with other countries will disintegrate if we are continually perceived as being soft on financial crime.
For many decades, successive federal governments have treated the reputational risk associated with trade-based money laundering as an abstract concept.
But at a time when Canada is desperate to diversify more of our exports away from the United States, being lax on financial crime carries a steep economic price.