Advisors are incorporating into their practices tougher standards for identifying potential money-laundering activity as a result of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, the final stages of which took effect this past June.

Under the federal act, you can be penalized for overlooking unusual activity in your clients’ accounts. That unusual activity could be perfectly innocent — triggered by a major life event such as a wedding, a death, a job layoff or even a home renovation. But you must take steps to screen for the possibility that an unusually large deposit or withdrawal could be a sign of illegal activity.

Money laundering begins with “dirty” money — money that is obtained by illegal means such as theft, drug trafficking, organized crime, extortion, human smuggling, contraband products, fraud, false accounting, kickbacks or bribes. It involves hiding or disguising the money’s source by using legitimate financial transactions.

Cash can be funnelled through legitimate businesses (for example, by integrating dirty cash with revenue from a nightclub) or by buying and transferring assets. Other methods include funnelling money through individuals or using entities such as holding companies, shell companies or offshore accounts to make the cash appear to be from a legitimate or “clean” origin. The dirty money is then reintegrated into the economy, either through investment or spending.

In Canada, money laundering is a multibillion-dollar problem, according to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the Ottawa-based agency that collects and analyses data on money laundering and terrorist financing. But there are steps you can take to identify and report suspected money-laundering activity.

The RCMP suggests you watch for these red flags:

> Clients Frequenting Money Services And Currency Exchanges. A client could use these services to transport cash out of the country or to wire money overseas. Postal money orders may be sent out of the country for deposit into a foreign account and then transferred back to Canada through other means.

> Depositing Cheques Generated From Credit Cards. The client may be overpaying his credit card with cash and maintaining a high credit balance and then requesting a cheque as a refund of the credit card account balance.

> Depositing Cheques From
Casinos. Casino chips can be bought with cash and then redeemed for a casino cheque.

> Purchasing Property For Much Less Than Its Apparent Value. The client may have paid the difference to the seller in cash. After holding the property for some time, the launderer might then sell it for its true value. The cheque from the buyer is the “clean” result.

If you suspect unusual activity, you are legally bound to report all suspicious transactions — or attempted suspicious transactions — to FINTRAC. But how do you know if a client is truly engaging in a suspicious activity?

First you must know your client, says Alex Popovic, vice president of enforcement with the Investment Industry Regulatory Organization of Canada in Toronto and a former RCMP investigator. He tells of a student with $3,000 in assets who attempted to deposit $50,000. Such an event would trigger alarm bells with advi-sors who know their clients.

Those advisors who are lax or who can be compromised become known quickly within the criminal world. Some advisors might even be targeted by organized crime.

“Money launderers and other criminals will try to find the weakest link, wherever that might be,” Popovic says. “Word gets around.”

Peter Fitzgerald, a money-laundering expert and principal with Deloitte & Touche LLP in New York, suggests you watch for clients who frequently send money to third parties and clients who don’t seem to understand the purpose of a transaction or the nature of their businesses. This is a sign they could be acting as an agent for someone else.

A common method of money laundering is known as “smurfing,” says Popovic. Smurfing involves using a number of people to make numerous bank deposits or buy bank drafts under the $10,000 reporting threshold. So, he recommends keeping an eye out for clients who deposit several amounts close to, but less than $10,000.

Another common practice involves scammers who set up charitable foundations, solicit money, use some of the money to give to the charity they’re fronting for and then send the rest overseas to fund terrorist activity through cash smuggling or wire transfers, Fitzgerald says. So, you should be on the lookout for clients who make constant deposits and then immediately withdraw the money and wire it to different cities or countries.

@page_break@The key to detecting any of this activity, Fitzgerald says, is to have well-trained front-line staff, as most leads on criminal activity are picked up during the normal course of business.

As a result, says FINTRAC, a red flag should be raised for you and your staff if a client:

> uses a post office box, aliases or several addresses or changes the spelling of his or her name;

> has a disconnected phone and your efforts to check his or her identification prove to be difficult;

> has accounts with several financial institutions or conducts transactions at different locations in an apparent attempt to avoid detection;

> appears to record large-volume transactions informally, uses unconventional bookkeeping methods, overjustifies or explains a transaction or appears nervous;

> shows uncommon curiosity about internal systems and controls;

> deposits funds in brokerage accounts that are not invested;

> maintains bank accounts or brokerage accounts at offshore banking centres with no explanation.

There are more than 100 red flags on the FINTRAC Web site (www.fintrac-canafe.gc.ca) with which advisors should be familiar, says Kim Maggiacomo, the chairwoman of the Association of Canadian Compliance Professionals in Toronto. This Web site also tells you how to file reports on suspicious transactions: look for “publications” and select “reporting forms.”

Even if you just have a hunch that a transaction is suspicious, says Peter Tzanetakis, senior director of regulatory affairs with Advocis in Toronto, you should err on the side of caution and report it to FINTRAC.

“FINTRAC leaves it up to the individual advisor to determine what is out of the ordinary,” Tzanetakis says. “At the end of the day, if you want to protect yourself and your business, given the punitive compliance regime, you probably want to play it safe.”

“There are all kinds of things that should make an advisor’s ‘Spidey sense’ go off,” says Maggiacomo. “By providing guidelines, FINTRAC is also saying, ‘These are the standards to which we are going to hold you.’ This is a regulator with teeth. It can impose huge fines and penalties.”

Some penalties include:

> up to five years imprisonment or a fine of up to $2 million, or both, for failure to report a suspicious transaction;

> a fine of up to $500,000 for the first offence and $1 million for subsequent offences for failure to report a large cash transaction;

> five years’ imprisonment or a fine of up to $500,000, or both, for failure to retain records.

Those required to report suspicious or attempted suspicious transactions include all employees of deposit-taking institutions (banks, credit unions, caisses populaires, trust and loan companies, and agents of the Crown that accept deposits) and life insurance companies, as well brokers and agents, securities dealers, portfolio managers and investment counsellors.

As an advisor, you also have more onerous ID checks to conduct now, including verification of ID in person within 14 days of an account being opened.

The identities of any director or shareholder with a 25% or greater interest in a corporation that is a client must also be verified in person. This also applies to all third parties involved in any account, even those simply making deposits. Examples include accounts involving relatives, estates, trusts, guardians and those with power of attorney.

“These anti-money laundering requirements,” Maggiacomo says, “really do place a new requirement on the advisor.”

Another new measure introduced in June is the requirement to screen new clients to see if they are “politically exposed.” This must occur within 14 days of an account being opened. Examples include foreign politicians, diplomats or heads of foreign government agencies.

You must also review existing clients. You may find that it is easier just to eliminate some clients from your book if those clients turn out to be too high-maintenance from a compliance perspective.

Agencies that can help identify high-risk individuals around the world include Dow Jones & Co. in New York; World-Check, which is run by Global World-Check Holdings Ltd. in London, and FinScan, the service administered by Pittsburgh-based Innovative Systems, Inc., according to Maggiacomo.

Names of known money launderers and criminals are also available on a public list compiled by the Office of the Superintendent of Financial Institutions.
“There’s a lot of responsibility to being a gatekeeper for the securities industry,” Popovic says. “If you’re not going to stand at the gate, stand aside and let someone else do it.” IE