Case Documents

File No. CT 2005-006 COMPETITION TRIBUNAL IN THE MATTER OF the Competition Act, R.S.C. 1985, c. C-34, as amended;

IN THE MATTER OF an application by B-Filer Inc, B. Filer Inc. doing business as GP A Y GuaranteedPayment and NPay Inc. for an order pursuant to section 103 .1 granting leave to make application under sections 75 and 77 of the Competition Act;

AND IN THE MATTER OF an application by B-Filer Inc., B-Filer Inc. doing business as GPA Y GuaranteedPayment and ,NPay Inc. for an interim order pursuant to section 104 of the Competition Act.

BETWEEN: B-FILER INC., B-FILER INC. doing business as GPAY GUARANTEEDPAYMENT and NPAY INC.

Applicants - and-THE BANK OF NOVA SCOTIA Respondent AFFIDAVIT OF CHRISTOPHER MATHERS (Sworn November 23, 2005)

I, CHRISTOPHER MATHERS, of the City Of Toronto, in the Province of Ontario, MAKE OATH AND SAY: Professional Qualifications and Experience I. I have lectured and provided training in anti-money laundering ("AML") to both private and public sector organizations in more than 15 countries. I have provided advice and assistance on money laundering compliance and organized criminal activities to various foreign public sector organizations, including the Canadian Bar Association, the Investment Dealers

-2-Association, the Ontario Securities Commission, the Toronto Stock Exchange, as well as advice to numerous foreign jurisdictions. 2. For 20 years, between 1975 and 1995, I was a member of the Royal Canadian Mounted Police (the RCMP). During most of my career with the RCMP, I worked undercover with the RCMP, and also with the U.S. Drug Enforcement Administration and the U.S. Customs Service. I was a senior undercover operator with the RCMP Proceeds of Crime Section, where I established and operated a number of "store front" money laundering businesses in Canada and the U.S., targeting Columbian, Russian and Asian organized crime groups. 3. I retired from the RCMP iri 1995 and joined the Forensic Division of the International accounting firm KPMG. In 1999, I was appointed to the position of President ofKPMG Corporate Intelligence Inc. I was responsible for international due diligence, asset recovery operations, and the investigation and prevention of organized crime and money laundering. I reported directly to the Chairman of KPMG. In this position, I provided advice to corporations, governments and individuals in the areas of foreign due diligence and threat assessment, corruption, money laundering compliance, fraud prevention and foreign and domestic information gathering. 4. I have written extensively on issues relating to money laundering. I also authored a non­fiction book in 2004 entitled "Crime School: Money Laundering" which has been published in both the United States and Canada and will be published in China and Estonia in 2006. 5. I have been qualified as an expert witness in money laundering in the Ontario Provincial Superior Courts.

- 3 -6. Attached hereto and marked as Exhibit "A" is a copy of my Curriculum Vitae. Material Reviewed 7. For the purposes of preparing this Affidavit, I have reviewed the following documentation prepared by the Applicants and submitted to the Competition Tribunal:

(a) Notice of Application for Leave pursuant to Section 103.1 of the Competition Act; (b) Notice of Application pursuant to Sections 75 and 77 of the Competition Act; (c) Affidavit of Raymond Grace affirmed June 15, 2005, and the Exhibits attached thereto; (d) Second Affidavit of Raymond Grace affirmed September 1, 2005, and the Exhibits attached thereto; (e) Affidavit of Joseph Iuso, affirmed August 29, 2005, and the Exhibits attached thereto;

I have reviewed the following documents on behalf of the Respondent: (a) Affidavit of Robert Rosatelli, sworn July 12, 2005, and the Exhibits attached thereto; (b) Affidavit of David Metcalfe, sworn July 12, 2005, and the Exhibits attached thereto; (c ) Responding Affidavit of Robert Rosatelli, sworn September 21, 2005, and the Exhibits attached thereto; (d) Representations of the Bank of Nova Scotia in response to the Application for Leave, pursuant to Section 103 .1 of the Competition Act;

-4-8. In addition to the foregoing, I was also provided with the Decision of the Honourable Mr. Justice Lefsrud, dated September 22, 2005 with respect to the Motion by the Applicants for an Injunction in the Alberta Civil ~ourt. Brief Overview of the Facts 9. Based on my review of the above-noted documentation, I believe that the following is a brief summary of the facts that are relevant to my opinion on the issues that I have been asked to consider. The source of my information and belief with respect to the following factual issues is derived from the materials reviewed. 10. The Applicants, together with UseMyBank, operate a joint venture business enterprise which facilitates the transfer of money from banking customers accounts to third parties. 11 . If a banking customer wishes to transfer money to a third party through the services of the Applicants and UseMyBank, the banking customer would click on the UseMyBank icon. The banking customer would be prompted to provide the banking customer's bank card and internet password. The Applicants and UseMyBank would take the customer's bank card number and password and would enter into the customer's bank account and effect a transfer of money from the customer's bank accounts to the Applicants' account at The Bank of Nova Scotia ("Scotiabank") by way of e-mail money transfer. The Applicants could also effect transfers of money from banking customers' accounts by entering into the banking customers' accounts and transferring money to GPay as a Scotiabank bill payee and these funds would later be released from Scotiabank's suspension accounts to the Applicants' accounts at Scotiabank. 12. Based on my review of the materials, it is clear that much of the Applicants' business involves transferring funds from Canadian banking customers' accounts to the Applicants'

- 5 -Scotiabank accounts, and apparently ultimately out to off-shore internet casinos . The Applicants' service in conjunction with UseMyBank: allows Canadian customers to place bets at ,)ff-shore internet casinos. Overview of Money Laundering and Terrorist Financing Regulatory Regime in Canada 13. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "PCMLTF') is legislation to facilitate the combating of laundering proceeds of crime and financing terrorist activities. The purpose of the PCMLFT is described in section 3 of the Act as: • to implement specific measures to detect and deter money laundering and the financing of terrorist activities to facilitate the investigation or prosecution of money laundering and terrorist financing offences, including:

• establishing record.keeping and client identification requirements for financial services providers and other persons that engage in businesses, professions or activities that are susceptible to being used for money laundering and the financing of terrorist activities, requiring the reporting of suspicious financial transactions and of the cross-border movements of currency and monetary instruments; and

• establishing an agency that is responsible for dealing with reported and other information:

• to respond to the threat posed by organized crime by providing law enforcement officials with the information they need to investigate and prosecute money laundering or terrorist financing offences, while ensuring that appropriate safeguards are put in place to protect the privacy of persons with respect to personal information about themselves; and,

• to assist in fulfilling Canada's international commitment to participate in the fight against transnational crime, particularly money laundering and the fight against terrorist activities.

14. In the balance of this Affidavit, I provide my expert opinion with respect to whether the Applicants' business raises money laundering concerns. I will also consider whether providing

- 6 ­banking services to the Applicants would raise money laundering concerns for Scotiabank and whether a Schedule 1 bank such as Scotiabank should be providing banking services to the Applicants from the perspective of risk management in the context of money laundering issues. Are the Applicants Operating a Money Services Business? 15. The PCMLTF defines a Money Services Business as: A person or entity that is engaged in the business ofr emitting funds or transmitting funds by any means or through any person, entity or electronic funds network, or of issuing or redeeming money orders, traveller's cheques or other similar negotiable instruments. It includes the financial entity when it carries out one oft hose activities with a person or entity that is not an account holder.

16. The Applicants, in conjunction with their joint venture partner UseMyBank, are operating a Money Services Business, as defined by the PCMLTF. The Applicants are engaged in the business of remitting funds and transmitting funds using email money transfer and by using the Bank's bill payment system. Are The Applicants Conducting Business By Or On Behalf of Third Parties? 17. Whenever accounts are opened, financial institutions such as Scotiabank are required to undertake certain due diligence mandated by the PCMLTF and the Regulations thereunder. One such requirement is that the individual wishing to open a new account must be asked whether the accounts will be used by or on behalf of a third party. 18. I have had an opportunity to review the Affidavit of Robert Rosatelli sworn July 12, 2005. At Exhibit "M" to that Affidavit, there is a transcript of a telephone conversation between Raymond Grace, who had apparently contacted Scotiabank Telephone Banking in order to open up additional accounts for his business enterprise, and the Scotiabank Telephone Banking

-7-representative. In accordance with Scotiabank's obligations under the legislation, the telephone banker asked: And will this account be used to conduct business on behalf ofs omeone other than the named account holder?

Mr. Grace responded: "No. " 19. Based on my review of the material filed with the Competition Tribunal, this answer is false. The Applicants were using their Scotiabank accounts to conduct business on behalf of others, namely, other banking customers who instruct the Applicants to transfer money from their bank accounts to the Applicants' bank accounts. The Applicants are then responsible for remitting payment on behalf of the banking customer to others, including off-shore Internet casinos. How Do Criminals Use Money Services Business Such as the Applicants' Business to Launder Money or Fund Terrorist Activities?

20. In order to avoid detection by law enforcement, persons involved in international criminal activities such as drug trafficking must inject their illegal profits into the electronic banking system through a process referred to as "Placement" or "Conversion''. 21. The next stage in converting the money is known as "Layering" or "Concealment". This involves creating a series of financial transactions, or layers, to separate the proceeds from their illegal source. 22. The final stage is known as "Integration". This involves co-mingling illegal monies with more legitimate proceeds to create a perception of legitimacy.

- 8 -23. In Canada, criminals have an additional obstacle to overcome. Since they normally deal in Canadian currency, they are obliged to convert their profits into foreign currencies, usually U.S. dollars, if they wish to fulfill their financial obligations to foreign suppliers. 24. Due to the monetary thresholds set by the legislation (in the case of a Bank such as Scotiabank, $10,000 and a Money Services Business such as the Applicants, $3,000), criminals will often move amounts of money that are below the thresholds for transaction reporting. By using smaller amounts per transaction, the criminal is required to conduct multiple concurrent transactions and make use of a variety of money laundering techniques. 25. The products and services Of on-line gaming web sites that offer casino gaming and sports wagering can be and frequently are used by criminals to launder the proceeds of crime. The following scenario illustrates the method by which the Applicants' services can be subverted to launder the proceeds of crime through on-line gaming. By reason of my experience in these matters, I can attest that this scenario represents a shown and used method of laundering money. 26. Third-party payments, such as those facilitated by the Applicants, are a very common method by which criminal proceeds or terrorist financing payments are laundered. It is a simple way in which to transfer wealth from one jurisdiction to another. Money Services Businesses such as the Applicants are a magnet to organized crime groups as they represent a relatively easy means of laundering money. (a) Money Laundering Scenario Using the Applicants' Services 27. Person A and Person Bare members of the same drug trafficking organization. They both have bank accounts at Canadian financial institutions and they have been successfully

- 9 ­depositing cash into the electronic banking system through a variety of methods without detection. 28. Person A and Person B ·also have bank accounts in off-shore jurisdictions. 29. Person A and Person B register independently as "Buyers" with UseMyBank and also independently register as customers with two unrelated on-line gaming websites that provide wagering on sporting events. As Exhibits "D" and "E" to the Affidavit of Robert Rosatelli sworn July 11, 2005 demonstrate, the UseMyBank services for transferring money are available at hundreds of off-shore casinos, many of which offer the ability to place bets on the outcome of sporting events. 30. Through a series of debit transactions with UseMyBank, both Persons successfully transfer the Canadian dollar equivalent of U.S. $25,000 into their respective accounts at the on­line sports books. For calculation purposes in the example that follows, a flat fee of $50 is applied to each winning wager. Person A makes the following wagers on games played in the National Football League at Sports Book #1: Opening balance $25,000. Week 1 Miami v. Buffalo $2500 on Miami Win Balance in account $29,950. Week 2 Kansas City v. Denver $2000 on Kansas City - Win Balance in account $31,900. Week 3 Dallas v. Philadelphia $5000 on Philadelphia - Lose Balance in account . $26,900.

Person B makes the following wagers on games played in the National Football League at Sports Book #2: Opening balance $25,000. Week 1 Miami v. Buffalo $2500 on Buffalo - Lose Balance in account $22,500. Week 2 Kansas City v. Denver $2000 on Denver - Lose Balance in account $20,500 Week 3 Dallas v. Philadelphia $5000 on Washington- Win Balance in account $25,450

- 10 -Week 4 Green Bay v. Minnesota Week 4 Green Bay v. Minnesota $10,000 on Green Bay- Lose $10,000 on Minnesota - Win Balance in account $16,900. Balance in account $35,400. Week 5 Chicago v. Detroit Week 5 Chicago v. Detroit $15,000 on Chicago Lose $15,000 on Detroit- Win Balance in account $1,900. Balance in account $50,350 31. Person B requests a payout of U.S. $50,000 from Sports Book #2. The payout is provided in the form of a U.S. dollars cheque that is made out to Person B. Person B couriers the cheque from the Sports Book to his off-shore bank where it is deposited. 32. The cheque from the on-line casino/Sports Book, once deposited is returned to the on-line casino/Sports Book's bank in a foreign jurisdiction where it is unlikely to be traced by law enforcement. 33. Thus, using a series of opposing wagers, Person A and Person B have successfully transferred U.S. $50,000 in narcotic trafficking proceeds to an account in an off-shore jurisdiction. The only cost would be the fee deducted by the on-line casino/Sports Book. The location of the money is undetectable to domestic law enforcement since the money trail has been layered or concealed by the multiple smaller transactions between the originating bank, UseMyBank, the on-line Sports Book, and other intermediary financial institutions. 34. The same scenario could apply to certain poker products, such as Texan Hold'em if co­conspirators are able to contrive situations where they were only wagering against each other.

- 11 -(b) How Can the Applicants' Service be used by Money Launderers or Terrorist Financers in Foreign Jurisdictions?

35. I am I am advised by Lynne Moran, legal counsel at Scotiabank and verily believe that the following is a real scenario that recently came to the attention of Scotiabank through Scotiabank's compliance officers in New York, as a result of monies received by way of an incoming telephone transfer from Beirut, Lebanon. 36. A Scotiabank customer residing in Ottawa used the sei;vices of the Applicants to transfer money from his Scotiabank account to fund an off-shore on-line casino gambling account. A review of the Ottawa Scotiabank customer's account indicates that money was transferred from the Ottawa customer's account to GPay's account at Scotiabank. On September 2, 2005, GPay alone made five transfers from the customer's account totaling $6,178.85 37. In October 2005, an inbound transfer in the amount of$10,000 in U.S. funds was received by Scotiabank's New York Agency for payment to the account of the Ottawa Scotiabank customer. 38. As part of Scotiabank's due diligence, the payment issued by the Lebanon bank came to the attention of Scotiabank' s compliance officers located in New York. Upon investigating the matter, the compliance officers learned from the Ottawa Scotiabank customer that the money being forwarded to him was the proceeds of his winnings as a result of successful bets placed with the off-shore on-line casino, which had originally been funded through the services of the Applicants. 39. Lebanon is known to be a narcotics source country and also a potential source of terrorist financing. What is most troubling about the above-described transaction is that the payment

- 12 ­from the bank in Beirut, Lebanon appears to have been issued by a party that was completely unrelated to the initial transaction of placing the wager and funding the gambling account of the off-shore on-line casino. 40. The above-described transaction presents a clear risk for the Bank, in that money being issued by a bank in Beirut, Lebanon from a source which appears to have had nothing to do with the original transaction. The monies being transferred to the Ottawa customer could well represent the proceeds of crime or terrorist financing monies. What Risk is Scotia bank Exposed to if They are Forced to Deal with a Money Services Business Such as the Applicants?

41. Financial Institutions typically rely on one another . It is generally understood that the correspondent financial institution is conducting appropriate due diligence and "know-your-customer" procedures on all of their customers. 42. By their very nature, Money Services Businesses are at a higher level of risk of exposure to money laundering activities. See for example the scenarios described in the preceding section. 43. When a bank allows its customers to conduct financial transactions over the Internet, those customers can only transact business with (i.e. send the funds to) entities that the bank can confidently say are bona fide. For a "payee" to be accepted as such, the payee must submit to a standard client acceptance procedure that is consistent with the know-your-customer requirement in the PCMLTF. 44. Without the know-your-customer requirement, the Bank has no way of knowing whether or not a payee is providing real goods and services. The client acceptance procedure assures the Bank that it is not acting as a conduit for the transfer of proceeds of crime from a customer who

- 13 ­may be involved in criminal activity. Allowing such transactions to take place would make the Bank an l.lD,witting accomplice of money launderers. 45. Mr. Grace has asserted on behalf of the Applicants that the Applicants do not even know the goods or services that are being purchased by the banking customers that use their services to transfer funds. The Applicants' business model allows customers to transfer funds to unknown persons and/or corporations and, in particular, entities that have not been vetted by the Bank. This places the Bank in an untenable position. If the Bank allows such transactions to take place, it may be unknowingly allowing inappropriate or illegal transactions in violation of the PCMLTF. 46. Guideline 4 under the POCMLTF requires all financial entities, including banks and Money Services Business such as the Applicants to implement a compliance regime to comply with their reporting, record-keeping, and client identification requirements. 4 7. The Applicants are required to establish a compliance regime as defined in sections 3 and 4 of Guideline 4, and to subscribe to the four generally accepted tenets of money laundering compliance that form the backbone of any effective anti-money laundering program. These four tenets are: (a) the appointment of a compliance officer; (b) the development and application of compliance policies and procedures; ( c) independent testing and review of compliance policies and procedures to test their effectiveness; and

• 14. (d ) an on-going compliance training program. 48. The Applicants are also· bound by Guideline 6 of the POCMLTFthat requires the Applicants to establish and maintain appropriate client and transaction records. 49. The Applicants' joint venture partner, UseMyBank, does not require disclosure of sufficient information from a person signing up to use their service to comply with the requirements under the PCMLTF, nor does it take any steps to verify the accuracy of the information provided by the seller. In particular, UseMyBank does not elicit sufficient information from the person signing up to use its service to be able to reliably state that the Seller is not a risk as a client. As a result, the Applicants and UseMyBank are at risk of unwittingly assisting money launderers in "Placement", "Layering", and "Integration" as described in the preceding section. 50. Moreover, because the Applicants and UseMyBank do not have sufficient safeguards in place, any Bank that provides banking services or is required to provide banking services to the Applicants is at risk of becoming an unwitting accomplice to money launderers. I can provide an actual example of how fundamentally inadequate the Applicants' and UseMyBank's system is for determining whether a customer ofUseMyBank is a risk for money laundering. 51. On Saturday, November 19, 2005, at approximately 10:00 a.m., I logged on to the UseMyBank website using an assumed name of Au Porteur. I registered as a "Seller" on the UseMyBank site. I provided a contrived addr .es s of24 Buada 6, Yaren, Yaren 66, Nauru. I provided a telephone number of 674-444-3181, which happens to be the telephone number of the Nauru Department of Economic Development.

- 15 -52. The Financial Action Task Force (the "FATF") is an inter-governmental body, whose r>urpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing. The FAT F is based in Paris, France, and has 33 member countries including the United States, the United Kingdom, Canada and Australia, among others. 53. A part of the FATF's mandate is to collect information and to identify non-co-operative countries with respect to money laundering. Nauru has been on the FAT F list of non-co-operative countries and territories since the FATF's inception. Specifically, Nauru is known internationally as a money laundering centre, and is frequently used by money launderers. Any entity, including a Money Services Business that has undertaken proper due diligence with respect to its customers, should be extremely wary of any customer connected with Nauru. 54. UseMyBank requested me to provide further information such as company address and website, but I declined to do so. 55. On the Seller - Profile screen of UseMyBank's website, there are three methods of disbursement for a Seller to receive payment from UseMyBank: (a) direct deposit into a Canadian bank account; (b) wire transfer; or (c) cheque. 56. Because I was using an assumed name that does not have a bank account, I selected the "cheque" option. UseMyBank advised me that my information had been updated. UseMyBank responded to my email address with the following message: