New money-laundering rules coming

The proposals are the result of a 2008 review by the Financial Action Task Force (FATF), an intergovernmental body that sets international anti-money laundering standards, as well as other financial discussions and consultations.

The 2008 review revealed deficiencies in Canada’s AML procedures, says Matthew McGuire, national AML practice leader with accounting and consulting firm MNP LLP in Toronto. The changes will help to close many of those gaps before the FATF conducts another review in November, he says. “This is a lot of flossing before the dentist,” says McGuire of the proposed amendments, which are out for a 60-day comment period.

One change for advisors is clarification of what constitutes a “reporting entity.” These entities, which include securities dealers, banks and credit unions, must report suspicious financial transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and are required to identify clients, keep records and implement a compliance regime associated with these transactions. (FINTRAC is the regulator responsible for administrating and enforcing the PCMLTFA.)

Currently, whether or not independent advisors are reporting entities in their own right is unclear. In the proposed amendments, only securities dealers are considered to be reporting entities. Thus, advisors, as agents of a dealer, are likely to be required to sign a contract committing them to abide by their dealer’s AML compliance regime, says Jennifer Fiddian-Green, partner with Grant Thornton LLP in Toronto and leader of that firm’s national forensic and dispute resolution advisory practice.

The proposed amendments also would allow more flexibility in proving identity by expanding the list of acceptable stand-alone and dual-source documents. For example, besides using government-issued photo ID, such as a driver’s licence, as a stand-alone method of identification, advisors could use a three-year credit file. Similarly, advisors would have more options when using two documents together (dual-source) to identify a client. For example, advisors might use a Canada Revenue Agency notice of assessment and a utility bill.

Michelle Alexander, the IIAC’s vice president and corporate secretary, says this proposal is a positive change for the investment industry in light of the growing number of elderly Canadians lacking photo identification.

The proposals also expand the category of individuals whom reporting entities must identify as “politically exposed persons” (PEPs). This group includes heads of state or governments, members of legislatures, ambassadors, judges, military generals (or higher rank), presidents of state-owned companies or banks, or political party leaders. PEPs are potentially high-risk accountholders who might use their positions of power to enrich themselves. Securities dealers must assess the risks associated with such individuals and identify the source of funds for all their transactions.

For now, securities dealers have to flag and continuously monitor the account of only foreign PEPs. The amendments broaden that definition to include domestic PEPs. Says McGuire: “Everybody from the prime minister down to the mayor of a small city is included in this [proposed] analysis.”

In the past, some securities dealers have tried to ease their compliance burden by not working with foreign PEPs. However, such a tactic may no longer be feasible in relation to domestic PEPs, presenting a range of practical problems.

“It doesn’t make sense any more,” says Fiddian-Green. “If the mayor of a city walks in and wants to use your bank or broker, [are you] going to say, ‘No, I won’t deal with you’?”

Further complicating matters, the proposals call for the heads of international organizations, as well as close associates and family members of domestic PEPs, to be monitored.

However, the proposals do not define who fits within those categories. Although FINTRAC is expected to provide guidance on this matter, Alexander is concerned that the regulator will not be able to clarify the definitions fast enough for firms to make the appropriate adjustments to their systems before the amendments come into force.

As a result, firms aren’t likely to wait for FINTRAC to release its guidelines, given the amount of work required to update the firms’ AML compliance regimes, she says: “There will be huge system changes [and] training that will need to occur before firms can adequately capture these people.”

One clear benefit offered by the proposed amendments is a deadline extension. If the amendments pass, securities dealers will have 30 days rather than 14 days to identify domestic or foreign PEPs.

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