New AML regime a mixed blessing

These changes are a mixed blessing for firms and their advisors. Although the new laws and guidelines provide more options to verify a client’s identity, they also require that more accounts be monitored on an ongoing basis.

“Overall, these changes represent additional obligations and burdens, with just a few relieving or flexibility measures,” says Peter Aziz, counsel with Torys LLP in Toronto who specializes in compliance matters within the financial services sector. “So, the net position is a greater compliance burden.”

As part of the new requirements, reporting entities such as securities dealers must identify domestic politically exposed persons (PEPs) and their close associates; the firm’s compliance department also must monitor these accounts on an ongoing basis. Under the previous rules, only foreign PEPs had to be flagged.

PEPs are individuals who hold positions of influence, such as a head of state or government, a military general (or higher rank) or a court judge. Family members of such individuals also are considered PEPs, as are close associates.

Flagging these individuals could be fairly straightforward if their business card happens to say “mayor”; however, the information isn’t always that apparent.

“The investment advisor is on the hook for determining whether the person he or she is dealing with [has even a] remote connection to a politically exposed person,” says Matthew McGuire, an AML consultant and founder of Toronto-based The AML Shop.

To complicate matters further, there are no clear guidelines that define who is a close associate of a PEP. There are, however, international and U.S. examples that securities dealers and advisors can look to before FINTRAC releases its guidance – likely to happen closer to the June 2017 deadline.

One way for advisors to identify PEPs is to ask questions during the “on-boarding” process. More often, however, dealers depend on third parties that can keep track of and identify PEPs on a global scale. At the moment, only larger dealers typically use such services because of the expense involved; however, the enhanced requirements mean that small dealers are likely to need those services as well.

Advisors and dealers also must consider taking on the additional compliance of dealing with PEPs or risk losing business. For example, in the past, some dealers may have decided to not deal with foreign PEPs because of the compliance burden. However, such an option may no longer be feasible now that domestic PEPs and their close associates must be flagged.

“If [securities firms] decide to not offer services to domestic PEPs, [those firms] potentially could be unduly limiting their client base,” says Aziz, “which could put them at a competitive disadvantage if their competitors are quite happy to provide services to domestic PEPs.”

Domestic PEPs expand the list of individuals whom advisors must identify to meet AML requirements. However, other changes to the legislation bring flexibility in how to identify those individuals and other clients.

Face-to-face identification remains much the same, although FINTRAC guidelines now emphasizes photo identification. If a client does not have photo ID (such as a senior citizen without a passport or a driver’s licence), however, FINTRAC allows for two alternative identification methods: single and dual process.

Advisors now can use the single process to verify a client’s name, address and date of birth through a credit bureau, so long as the person has a Canadian credit history of at least three years.

“That definitely makes life much easier,” says Jacqueline Shinfield, partner and lawyer with Blake Cassels & Graydon LLP in Toronto who specializes in financial services compliance matters.

Another option is to use the dual process method, which means a client can present two approved original documents, such as a utility bill or bank statement, to prove identity. (These methods also can be used for digital rather than face-to-face identification, such as when a client signs up for an online service.)

Although these options offer greater flexibility for advisors, the legislation on this topic doesn’t go far enough, Shinfield says.

For example, advisors cannot verify these documents in electronic format unless the original is electronic, meaning that a client can forward a bank e-statement, but a scanned, PDF copy of the paper statement isn’t acceptable.

Furthermore, advisors can’t use electronic communications, such as Skype, to verify documents.

Although these restrictions may not be of immediate concern, as most advisors meet clients in person, problems may arise in the future as more people look to communicate with their advisors via digital technology and as the investment industry becomes even more reliant on technology. Case in point: consider the growing adoption of robo-advisors.

“[The revised guidelines are] very prescriptive,” says Shinfield. “[FINTRAC is] trying to be more current with what’s going on in the world in the digital economy in which we operate. But, unfortunately, the way [the legislation] is drafted, the guidelines just don’t go far enough. And I’m finding there are problems already.”

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