With an international review looming, fears are rising that Canada’s poor money-laundering controls could land it on a so-called grey list— triggering severe economic fallout.  

The Financial Action Task Force (FATF) will audit Canada’s effectiveness in tackling money laundering and terrorist financing this year, with officials scheduled to visit in November. Canada will be one of the first countries reviewed under a new, stricter methodology. Compliance professionals have expressed their mounting concern over the potential consequences if Canada falls short.

Nathan Shaheen, a partner at Bennett Jones who specializes in compliance and financial crime, said people in the field are increasingly worried about the outcome of the review, given widespread criticism of Canada’s enforcement regime and recent high-profile scandals. Those include TD Bank’s failure to prevent money laundering by drug cartels in the U.S. last October, which led to a US$3-billion penalty, and a cyberattack that took down Canadian small businesses’ system for reporting suspicious transactions for months.

“In the current environment, the FATF team may be looking at Canada with greater scrutiny or more skepticism than we’ve seen in the past,” Shaheen said. He said there is “a real concern” Canada could be grey listed, “given the current state of our [anti-money-laundering] regime.”

The effects of being grey listed would ripple throughout the economy. It could put a damper on foreign investment, make it harder for banks to maintain international relationships and restrict the government’s ability to borrow. Economic studies have found the amount of money moving into a country declines by an average of 7.6 per cent of GDP per year once it gets added to the grey list, which includes Monaco, Venezuela and Lebanon.

Asked whether Canada will be able to avoid being grey listed, Department of Finance spokesperson Marie-France Faucher said “Canada expects the FATF will recognize the significant progress made” in bolstering its money laundering controls. The Financial Transactions and Reports Analysis Centre of Canada, Canada’s money laundering and financial intelligence unit, did not respond to a request for comment. The FATF declined to comment on the record.

Canada, along with other G7 countries, the European Commission and eight other nations, founded the FATF in 1989. The organization was tasked with creating and upholding a new international consensus for combatting financial crime, which required financial institutions to identify and report transactions suspected of attempting to launder money or fund terrorism.

In its last full evaluation in 2016, Canada received a lukewarm review. The FATF noted that Canada has a poor record of recovering the proceeds of financial crime and found sectors like real estate, law and jewelers needed more supervision.

Since then, the federal government has significantly broadened the type and number of institutions that must report to Fintrac, and the kinds of transactions they must flag. In a November regulatory notice, the Department of Finance made it explicit that it was making these changes in an effort to prepare for the FATF review.

“If Canada does not implement these standards, Canada could be at risk of being grey listed, which could have negative economic consequences as well as reputational damage,” the notice read.

Suzanne Creighton, a compliance consultant, said Canada’s prorogued Parliament and pressure from the U.S. to strengthen the country’s border controls are intensifying the burden.  Measures the federal Liberals announced in December’s fall economic statement meant to prepare the country for the FATF review—including increased fines for offenders—may not get passed into law in time for the review, or at all.

“I think we’ve got big issues here,” she said. “Canada’s in disarray.”

One compliance professional with experience working on international money-laundering standards, who asked not to be identified criticizing Canada’s regulators, said the country’s status as a G7 nation and relationships within the FATF may save it from being grey listed, even though they believe it deserves to be. The FATF reviewers “are just patting each other on the back,” they said. “Nothing changes.”

But Shaheen noted there’s been a sharp shift in Canada’s relationship with its biggest G7 partner since its last evaluation. As Canada spars with the U.S. over fentanyl, tariffs and its very existence as a sovereign nation, it may not be able to count on its southern neighbour to have its back during the FATF review, he said.

“In the past, I suspect the Canadian government would have counted on the U.S. members to be supportive,” he said. “Now, I don’t know that we can say that with such certainty.”

Regardless of the outcome of the review, Shaheen said the uncertainty, turmoil and weak money laundering controls are already having a damaging effect on Canadian businesses and residents. 

“Not having an effective [anti-money-laundering] regime does contribute, in my view, to on-the-ground criminal activity in a very meaningful way,” he said. “You have people who are the victims of those crimes.”