Money laundering (Bill-C25) update - Advisor.ca · Money laundering (Bill-C25) update . ......

Money laundering (Bill-C25) update Advisor.ca, October 2008 Original and large print editions of this supplement are available online to download at www.advisor.ca/money_laundering.

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Money laundering, Bill C-25 Compliance roundup - Advisor.ca October 2008

LARGE PRINT EDITION www.advisor.ca/money_laundering

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Contents Introduction ...................................................... 4

Money laundering and coping with compliance ........................................................ 6

Go to jail?........................................................ 17 Red flags .......................................................... 18

Revised anti-money-laundering regulations ....................................................... 20 Inherent weaknesses...................................... 26 Legislation creation: The timeline ............... 27



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New (anti) money-laundering rules (a client template letter) ................................... 32 From the archives.......................................... 37 Past money laundering developments in the news ................................................................. 38



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Introduction ADVISOR Staff (October 2008) Money-laundering legislation passed this summer adds a whole new layer of compliance-related items to consider when opening new accounts, handling large-sum transactions or dealing with certain people, those the Financial Transactions Reports Analysis Centre of Canada (FINTRAC) calls "politically involved foreign persons." Bill C-25, in effect since June 23, 2008, introduced significant regulatory revisions to Canada's proceeds of crime (money laundering) and terrorist financing legislation. The changes give new powers to FINTRAC to share compliance information with domestic and international agencies, and to impose civil penalties — maximum penalties include five years in jail, $5 million in fines or



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both — for non-compliance with the new risk assessment and reporting requirements. Moreover, advisors might need to ask for identification from clients, even those they've known for years, and they can't open accounts for clients they haven't met face-to-face. To help explain the developments, what steps some firms are implementing to comply and other details (like what, exactly, FINTRAC means by "politically involved foreign persons"), we've compiled our list of news coverage from the summer to bring you and your staff up to speed. We've also created a customizable template letter you can send to clients to help you explain the changes they might see.



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Money laundering and coping with compliance Kanupriya Vashisht (July 2008) If a scruffy guy named Anthony staggered into your office and plunked a duffel bag full of cash on your desk demanding to buy life insurance, you'd quietly excuse yourself and go looking for the manager. Unfortunately, today's white-collar criminals aren't so easy to spot. To bring the financial sector more in line with the Financial Action Task Force's (FATF) international anti-money-laundering standards though, the Canadian government has recently enacted new legislation. Bill C-25, in effect since June 23, 2008, introduced significant regulatory revisions to Canada's proceeds of crime (money



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laundering) and terrorist financing legislation. The changes give new powers to the Financial Transactions Reports Analysis Centre of Canada (FINTRAC) to share compliance information with domestic and international agencies, and to impose civil penalties for non-compliance with a number of new risk assessment and reporting requirements. Advisors and their managers will likely see firms modifying their risk assessment, record-keeping and customer-identification practices. While the revised regulations will ensure drug dealers and other criminals have a tougher time disposing off their ill-gotten gains on Canadian soil, Peter Lamarche, president of Blonde & Little Financial, says racial profiling could be an unfortunate byproduct of the heightened surveillance.



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Lamarche points out that clients most affected by these regulations will be the ones belonging to minority groups and ethnicities. "On terrorist lists, you won't see names like Bob Brown. They'll mostly belong to people of Indian or Arab descent." While advisors belonging to the same racial group as their clients might be better equipped to handle delicate situations, Lamarche worries conflict could erupt in cases of racial or religious crossover, such as an Anglo-Saxon advisor questioning an Arab client. In such situations, he says, it will be imperative to explain where the questions come from and reiterate that they are asked of every client, regardless of race or religion. Richard Binnendyk, executive vice-president of Univeris Corporation, the enterprise wealth management provider, says whether these



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revised regulations are successful will depend largely on how financial institutions incorporate them into their overall compliance regime. "It could end up being a pain in the butt," he warns. "The 'Well, you know they're forcing me to ask these questions' approach won't work." He says being upfront with clients is best. One solution, says Mark Halpern, CFP and founder of illnessPROTECTION.com, is to stress a clear level of engagement from the very first meeting and make clients sign privacy statements. When he meets new clients, Halpern likes to draw a parallel with the medical profession. "I spend 90% of my time on diagnostics. The other 10% — what regimen to follow — is simple." A similar analogy, he says, can help when preparing clients for increased regulations:



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"It's like going to a doctor — if you hold back symptoms or problems, you only hurt yourself." Binnendyk says advisors will be all right, so long as they talk about the regulations in such a way that they seem beneficial to everyone. Binnendyk's firm has already incorporated the FINTRAC requirements into its management platform. If a suspicious activity is identified, advisors are now able to flag it in their systems, and a specific set of rules, created to comply with those laid down by FINTRAC, are automatically applied. While the regime could seem unfairly skewed against clients who fit certain racial stereotypes, ignoring or avoiding the rules will create trouble for advisors who don't report suspicious transactions.



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Revisions to the federal mandate make those who don't, or won't, comply much more susceptible to penalties. The punishment for non-compliance could be severe — maximum penalties include five years in jail, $5 million in fines or both. Halpern says in this age of white-collar crime, advisors likely know that it's necessary to keep eyes and ears open, and to understand where each client is coming from, but he points out that many likely fear reporting suspicious transactions, as the action could come back to bite them. FINTRAC assures advisors on its website that all personal information under its control is protected from unauthorized use and is subject to the Privacy Act. But Halpern argues, "What if I am the only advisor this person



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talked to before getting reported? It wouldn't take much to figure that one out." He does, however, concede that the additional regulations aren't all that invasive, especially when compared to compliance regimes in countries like England and Australia, which require full disclosure of commissions. Preet Banerjee, wealth manager for ScotiaMcLeod, endorses the heightened regulations. "For decisions that could affect your financial life for decades and decades to come, an ounce of prevention is much better than pounds of cure," he says. There has, however, been such a constant barrage of regulations created since September 11, 2001, that Lamarche says advisors have become almost numb to the developments. Today, he says, "they wait until



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it gets to them, until they are forced to comply." Getting the word out to all advisors, Halpern agrees, is a big challenge. "It won't hit home till someone we know gets prosecuted for non-compliance." Under the new regime, all financial institutions are required to hold training programs for staff members every two years. These programs will be customized according to job responsibilities, lines of business and legal jurisdiction. It will be an adjustment, to say the least. The Canfin Financial Group has already revamped its back office to adhere to the additional requirements, adding identifiers that allow advisors to flag politically involved foreign persons — those with significant political



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involvement or position in other countries (including politicians, judges, government corporation managers and others), along with their close associates, business or personal, and their immediate family members. When advisors do accept these clients, they are required to identify the source of money for every transaction made, irrespective of amount. In order to bring its mutual fund dealers up to speed, Blonde & Little is organizing a Webex (an interactive videoconference) in August. The dealers will be required to take a follow-up test to make sure they understand the policies and regulations. Most life insurance providers are already revising questions on their KYC forms to include identifiers that will flag prospective



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clients with significant political involvement in other countries. On a lump sum payment of $100,000 or more for an immediate or deferred annuity or life insurance policy, insurance providers are now required to determine, within 14 days, if the client has any foreign political involvement. Additionally, agents have been instructed to keep large-cash transaction records for clients who make cash deposits of $10,000 or more in a single transaction. Large-cash transaction records are also needed when two or more cash transactions made by the same client within a 24-hour period add up to $10,000. In keeping with stricter identification requirements, it has also become mandatory to revise existing client lists for non-exempt products — large-cash deposits into universal life policies or annuity products. Agents, who



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could previously withhold policies until all the requisite information was supplied, now must altogether refuse the policy if information is missing. Furthermore, advisors can no longer accept new clients over the phone or through video-conferencing. They are obligated to meet them face-to-face before accepting them as clients. All these changes are likely to increase the cost and back-office workload. Despite the inconvenience, Manny De Silva, compliance officer for the Canfin Financial Group, doesn't anticipate much resistance from advisors or clients. "Do I like the extra workload? No. Do I like the extra cost involved? No. Do I understand why it needs to be done? Absolutely."



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Go to jail? New FINTRAC regulations include a series of penalties for non-compliance. They include the following:

1. Failure to report a suspicious transaction or failure to make a terrorist property report: up to five years' imprisonment, $2 million fine or both.

2. Failure to report a large cash transaction or an electronic funds transfer: $500,000 fine for a first offence; $1,000,000 fine for each subsequent offence.

3. Failure to retain records: up to five years' imprisonment, $500,000 fine or both.

4. Failure to implement a compliance regime: up to five years' imprisonment, $500,000 fine or both.



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Red flags An advisor should become suspicious when:

1. a client shows uncommon curiosity about internal systems, controls and policies;

2. a client offers money, gratuities or unusual favours for the provision of services that appear odd or suspicious;

3. a client makes inquiries that would indicate a desire to avoid reporting;

4. a client produces seemingly false identification or identification that appears to be counterfeited, altered or inaccurate;

5. a client starts conducting frequent cash transactions in large amounts when this has not been a normal activity for the client in the past;

6. a client opens an account with a large number of small cash deposits, and then executes a small number of large cash withdrawals;



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7. a client consistently makes cash transactions that are just under the reporting threshold amount ($10,000) in an apparent attempt to avoid the reporting threshold;

8. transactions involve non-profit or charitable organizations for which there appears to be no logical economic purpose, or where there appears to be no link between the stated activity of the organization and other parties in the transaction; and

9. a client attempts to open or operate accounts under a false name.

Source: FINTRAC

Filed by Kanupriya Vashisht, Advisor's Edge

[email protected]

(07/24/08)

mailto:[email protected]



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Revised anti-money-laundering regulations Kanupriya Vashisht (June 2008) Advisors could already be feeling additional compliance pressures — the effect of new legislation designed to bring Canada's regulatory regime in line with international anti–money-laundering standards. If not yet, the effects will likely be felt very soon. Bill C-25, which introduces significant regulatory revisions to Canada's proceeds of crime (money laundering) and terrorist financing legislation, comes into effect on June 23, 2008. The new bill is written to enhance the reach of law to new reporting entities and bring Canada's regulatory regime in line with the Financial Action Task Force (FATF) international standards.



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The changes give new powers to the Financial Transactions Reports Analysis Centre of Canada (FINTRAC) to share compliance information with domestic and international agencies, and to impose civil penalties for non-compliance with a number of new risk assessment and reporting requirements. All of this will likely cause firms to modify many record-keeping and customer-identification practices. It will also add a layer of customer due diligence, risk assessment and the need to monitor for "politically exposed" foreign persons — those with significant political involvement or position in other countries (including politicians, judges, government corporation managers and others), along with their close associates, business or personal, and their immediate family members.



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Jodi Angevine, a FINTRAC regional officer, says, "advisors will need to adjust to the shift in thought, how they think about [money-laundering-related compliance]." Once the regulations come into play, she says advisors will likely see a rash of application form changes. Life insurance providers are already integrating supplementary forms to help identify politically exposed foreign persons and their families. Life insurance agents will also be required to revise existing client lists for non-exempt products. One of the most significant changes, according to Larry Boyce, the IDA's vice-president of sales compliance and registrations, will be the huge reduction in the amount of time advisors have to verify a customer's identity. "Dealers traditionally had up to six months after opening the account to



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verify the identity of the customer. Now they will be required to do so before opening the account." What's more, if a client's identity is in question at all, advisors will need to re-identify the client at each meeting. At present, if a client has already been identified, there is no need to repeat the process if the advisor recognizes him or her. Advisors will also be required to report any suspicious transactions attempted, as opposed to reporting a suspicious deal after the financial transaction is completed. The bill, meanwhile, will further strengthen FINTRAC's enforcement capability — whereas the centre previously focused primarily on serious criminal penalties, levied for a breach of the regulations, the new regulations allow the centre to levy civil penalties for non-compliance.



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The rules also allow FINTRAC to disclose additional information to law enforcement and intelligence agencies, or to exchange compliance-related information with its foreign counterparts. Bill C-25 amendments to the Income Tax Act, meanwhile, allow the Canadian Revenue Agency (CRA) to share information with FINTRAC, the Royal Canadian Mounted Police (RCMP) and the Canadian Security Intelligence Service when charities are suspected of being involved in terrorist-financing activities. According to FATF, illicit proceeds from drug trafficking are one of the major sources of money laundering in Canada. Other sources include prostitution rings, contraband smuggling, illegal arms sales, migrant



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smuggling and white-collar crime — securities offences, real estate fraud, credit card fraud and telemarketing fraud. Credit cards, casinos, the purchase of real estate, wire transfers, establishment of offshore corporations, the use of nominees, foreign bank accounts, the use of professional services (lawyers, accountants, etc.), reinvestment and illicit drug distribution are some common vehicles used for making illegal money transactions. Currently, only designated non-financial businesses and professions — casinos, real estate agents and accountants — are regulated by money-laundering legislation. As of December 2008, Bill C-25 will introduce compliance requirements for non-reporting entities as well, including legal counsel,



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precious metals dealers, stones dealers, and real estate developers.

Inherent weaknesses According to the FAFT Mutual Evaluation Report, published in February 2008, only three people in Canada have been charged with criminal offences related to terrorist financing, despite the fact such offences have been prosecutable for many years now. Although there have been a large number of investigations, no charges have been heard by the courts. There have therefore been no convictions. Boyce believes one of the problems internationally is the lack of strong coordination between privacy laws and anti–money-laundering laws. "There is a tendency for privacy concerns to trump money-

laundering concerns, to the great detriment of anti–money laundering. "The revised regulations will, hopefully, reduce the privacy expectations of highly regulated financial clients," he says. FINTRAC is currently developing a pamphlet for advisors to help them deal with clients if a tricky situation arises. It will be made available before June 23 and can be ordered free of cost.

Legislation creation: The timeline



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1989: The Proceeds of Crime Act (Bill C-61) comes into force. For the first time, it is a criminal offence to participate or knowingly assist in money-laundering activities. The act establishes procedures for seizing, freezing



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and forfeiting proceeds obtained from criminal activities. Focus at the time, however, is limited to assets gained from drug trafficking. The act enjoyed very limited success. 1990: The federal government establishes an advisory committee on money laundering, composed of senior government and private-sector officials, mandated to identify weaknesses in the existing legislation and to recommend solutions. 1991: Bill C-9 becomes law, introducing the "Know Your Client" (KYC) clause into Canadian law. It also requires individuals or organizations receiving $10,000 or more in cash to complete and retain a "large cash transaction record," which provides specific details on the transaction. The records must be maintained for a minimum of five years in



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order to assist police in their investigations, if needed. Penalties for failing to comply include imprisonment of up to five years and/or a fine of $500,000. 1993: Bill C-9 regulations come into effect. 1999: Bill C-81 is introduced to help combat money laundering, establish FINTRAC and give new rules related to the proceeds of crime. Parliament recesses on September 18, 1999, without passing the bill. The legislation is reintroduced as Bill C-22 on December 15, 1999. 2000: Bill C-22, the Proceeds of Crime (Money Laundering Act), is proclaimed into law, replacing the earlier Proceeds of Crime Act. Bill C-22 introduces three distinct improvements into Canada's anti–money-laundering regime, including



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1. enhanced client identification, record keeping and reporting requirements; 2. new cross-border currency reporting; and 3. the creation of FINTRAC. 2006: Changes are proposed to Bill C-22 to bring Canada's regulatory regime in line with new international standards. Bill C-25, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, is drafted and enhanced with stricter regulations. 2007: The Government of Canada releases its final Proceeds of Crime (Money Laundering) and Terrorist Financing Act and suspicious transaction reporting regulations. June 23, 2008: The revised regulations go into force. The enactment will make client identification, record keeping and reporting measures more stringent.



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For a detailed report on anti–money-laundering regulations and Bill C-25, visit www.fintrac.gc.ca.

Filed by Kanupriya Vashisht, Advisor's Edge [email protected]

(06/17/08)

http://www.fintrac.gc.ca/




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New (anti) money-laundering rules (a client template letter) ADVISOR Staff (August 2008) New anti-money-laundering legislation enacted in June adds a new layer of due diligence to client intake, monitoring and KYC obligations. If this weren't enough, the rules, intended to bring Canada in-line with international standards, could push some very sensitive buttons by introducing elements that seem in conflict with privacy standards or that could be seen as a new move toward racial profiling by the industry. Inform your clients — let them know about the changes, tell them how they might affect your meetings going forward and give them some background to put things into context.



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Dear [Client's name], It's a sensitive subject, but I wanted to take this opportunity to let you know about recent legislative changes that could affect our planning relationship. For most of you, it might seem like we're being more nosy than usual about your background. Others might wonder why we're suddenly asking to see your driver's licence or other documentation to verify your identity at every meeting, even though we've known each other for years. Please don't take these changes personally. In June, the government of Canada enacted new legislation to combat money laundering. Until recently, this country was apparently out of step with international standards.



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Casinos, real estate agents and accountants have needed to comply with money-laundering rules for years now – compliance standards that are now being extended to financial services relationships as well. For those of us at [firm's name] to comply, it means we must report transactions deemed "suspicious" by the Financial Transactions Reports Analysis Centre of Canada (FINTRAC), identify "politically involved foreign persons," their families and close associates – those with significant political involvement or position in other countries – and keep track of money sources for transactions made by clients who fit this profile. Certain transactions, large cash transactions in particular, will also be more closely scrutinized in the future. We also must



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meet all prospective clients face-to-face before opening new accounts for them. All of this means we'll be asking more questions than we have in the past. Please be assured that this message is not intended to cause alarm, merely to inform you about the changes made this summer. In all likelihood, the changes will not even apply to most client situations. If the investment and planning we do for you and your family does fall into the realm of activities FINTRAC is interested in, however, you can be assured that we will do our best to answer your questions and file the appropriate paperwork needed for you. If you have any questions at all, feel free to contact my office. I would be happy to hear from you.



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Sincerely, [Your name] [Your signature]

Filed by Kate McCaffery, Advisor.ca [email protected]

(08/21/08)




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From the archives (Editor's note: If you are unable to click on the following links, access this material by visiting www.advisor.ca/money_laundering.) Tainted funds (Advisor's Edge, February 2003) Could some of your clients be using you to launder their money? Read more. Eyes on you (Advisor's Edge, July 2006) Your compliance officer is lurking, asking you tough questions and quadrupling your paperwork. Consider yourself lucky. Read more. Ignorance isn't bliss (Advisor's Edge, July 2007) It doesn't take a hot-shot advisor to know that if a client commits fraud, you'll be in hot water. But what if you have no clue that a client is manipulating the market? Turns out

http://www.advisor.ca/images/other/ae/ae_0203_taintedfunds.pdf

http://www.advisor.ca/images/other/ae/ae_0203_taintedfunds.pdf

http://www.advisor.ca/images/other/ae/ae_0706_eyesonyou.pdf



http://www.advisor.ca/practice/running_your_business/article.jsp?content=20070709_163450_5028



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you can still kiss your job goodbye. Read more.

Past money laundering developments in the news: Money laundering laws create new KYC obligations for advisors (April 29, 2003) IDA conference update: Offshore account ownership must be disclosed, IDA says (June 23, 2003) Regulators approve IDA anti-money-laundering measures (May 17, 2004) Reports of laundering on the rise (November 04, 2004) New anti-money-laundering rules "onerous" for advisors, Advocis says (October 14, 2005)



http://www.advisor.ca/news/article.jsp?content=20030429_143555_1092











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Crime poses threat to reputation: OSFI (November 10, 2005) Has regulation gone too far? (October 20, 2006) Cleaner money-laundering rules (November 03, 2006)

What do you think? Let us know. Send your letters to [email protected].

(10/07/08)


http://www.advisor.ca/news/features/article.jsp?content=20061020_140449_5460



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