OTTAWA — Gaps in Canadian laws that are supposed to combat money laundering and terrorist financing must be filled - and fast, says a federal watchdog.

Canada has fallen behind global standards and must get things cleaned up by next year, says a briefing note to Finance Minister Jim Flaherty from the head of the Office of the Superintendent of Financial Institutions.

"Canada needs to enhance rules to get closer to international standards," Nick Le Pan warns in a briefing note written two months ago to Flaherty, as the new Conservative minister took office.

The briefing note was obtained by The Canadian Press under the Access to Information Act.

Canadian rules on fighting these crimes will come under scrutiny next year from the Paris-based Financial Action Task Force, a global body set up to fight terrorist financing and money laundering.

"In the interim, questions will continue to be raised about the enforcement effectiveness of our regime," wrote Le Pan.

OSFI, which regulates banks, trust companies and other financial institutions, refused to comment further on Le Pan's comments or pinpoint where the problems lie.

But fears about the possible misuse by money launderers of so-called "white label" or privately owned automated cash machines are prominent on a list of concerns raised by the federal Finance department.

It's now floating several proposals for tightening Canadian laws related to terror financing and money laundering before the 2007 visit by the FATF.

Finance officials "will be working with law enforcement and the industry to address the potential money laundering risks associated with 'white label ATMs' (i.e. machines that are not owned or operated by banks)," says a Finance Department paper.

"The concerns with these ATMs arise from the possibility for owners or operators to self-load the machine with cash," possibly from crimes.

That cash could then be easily laundered by distributing the bills to ordinary users of the privately owned cash machines.

The Finance department, which works with OSFI and other agencies in the fight against financial crimes, has asked for industry and public input on other possible changes to its regulations, such as proposals to:

-Include dealers in precious gems, gold, and diamonds under the same strict rules as banks for reporting large or suspicious transactions.

-Develop tougher new penalties for any person or entity that doesn't comply with reporting requirements designed to fight terror financing.

-Loosen privacy laws that some officials complain are barriers to information-sharing about possible criminals between law-enforcement agencies.

That was a problem flagged two years ago by Canada's auditor general, who questioned the effectiveness of a major new crime-fighting agency - the Financial Transactions and Reports Analysis Centre of Canada, known as Fintrac.

It was established in 2000 by Ottawa to combat money laundering but police forces complained to the auditor general that too often, they weren't given enough information by Fintrac to launch proper investigations.

That's because Fintrac is limited by privacy laws to sharing only very narrow information on suspects, such as bank account numbers, names of account holders and dates of suspicious transactions.

Despite those limitations, Fintrac said last November it had unearthed more than $2 billion in suspicious financial transactions - including $180 million linked to the financing of terrorism - over the previous year.

Fintrac was established as part of Canada's efforts to meet the requirements of the global Financial Action Task Force, which over the past decade has been developing international standards for choking off money laundering and funding for terrorists.

At one point in the late 1990s, Canada came close to being included on the FATF international blacklist of jurisdictions that failed to take sufficient steps to stamp out money laundering.

But the pressure for more intensive worldwide efforts jumped dramatically after the Sept. 11, 2001, terrorist attacks on the United States.

After that, countries around the world quickly tightened up their laws for monitoring money transfers through banks, insurance companies - even real estate agents - to crack down on terrorist financing and money laundering.

Finance Department officials couldn't comment on when the proposed changes to regulations might take effect.