Financial advisors and their firms will have to re-examine their anti-money-laundering procedures following the federal government’s recent move to amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations.
Those regulations address deficiencies that were identified in 2008 by the Financial Action Task Force (FATF), the global body that sets standards for battling money-laundering and terrorist-financing activities.
Those affected by the changes include life insurance companies, brokers or agents, financial entities, securities dealers, accountants and accounting firms. With the new rules set to become effective in February 2014, these entities must update their policies and procedures over the next year to “bring them in line with the new requirements, including system changes and documentation changes, which will involve significant resources,” says Jacqueline Shinfield, a lawyer at Blake Cassels & Graydon LLP in Toronto whose practice focuses on regulatory compliance.
The legislation now defines what a “business relationship” is and when customer-related due diligence should be applied. Financial institutions are expected to conduct ongoing monitoring of that business relationship. Notes Shinfield: “For example, detecting suspicious transactions, keeping information up to date, assessing risk level and making sure that a client’s transactions and activities are consistent with the information already collected on that client.”
The original regulations provided certain exemptions from the scope of a business relationship, including circumstances in which a client already had an account, which effectively exempted all existing account holders from ongoing monitoring requirements.
That rule has changed. Whenever a business relationship is in place, there will have to be periodic, ongoing monitoring to detect reportable transactions and keep client records updated. Says Shinfield: “It determines the risk of your client being involved or engaged in any activities that are related to money laundering.”
@page_break@The amount of work required to perform the ongoing monitoring will depend on the institution. “If you had really robust ongoing monitoring systems,” Shinfield says, “and you already did most of this as a matter of course, it wouldn’t be that large [a job].”
Monitoring of all accounts held by a particular customer on an institutionwide basis is required. So, if your firm offers a wide range of products, such as mortgages, credit cards and lines of credit, all of these must now be monitored for each client.
“You can’t monitor your clients in silos,” Shinfield explains. “You have to look at all of the products, all of the accounts that your client has with those, and monitor across all product lines.”
The revised legislation also goes further in terms of the “beneficial ownership” requirement – who actually owns or controls the entity, regardless of the formal ownership. In this area, Shinfield anticipates that firms will have to make significant changes to their policies, procedures and information collection. Currently, reasonable measures must be taken to obtain ownership information but, in some situations, it can’t be obtained because it’s sensitive. “In those circumstances,” Shinfield says, “you have to keep a record that says, ‘I tried to get it, but this is why I couldn’t’.”
As of next February, the information must be asked for and additional information must be obtained that establishes the ownership, control and structure of the entity. In addition, reasonable measures must be taken to confirm the accuracy of this information – which could be challenging, says Shinfield: “When you’re dealing with a private company, there are no public records of who owns and controls [it].”
New FATF regulations, according to a note by Kashif Zaman, a lawyer with Osler Hoskin & Harcourt LLP in Toronto, “require certain reporting entities to obtain identification information, in certain circumstances, from all persons who own 25% or more of a corporation or entity.”
And that’s not all. The federal government released a consultation paper in December 2011 entitled Strengthening Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime. It set out proposals to strengthen Canada’s anti-money-laundering and anti-terrorist-financing legislative framework. It’s anticipated that draft regulations to support Canada’s own rules will be released sometime this year. Institutions that are already undergoing an update and amendment of their policies and procedures following the new Canadian regulations, says Shinfield, are “going to get hit with a completely new whack of regulations in the not too distant future and will have to redo the process.”
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