Canada’s revised anti-money-laundering regulations may be aimed at reducing sophisticated criminal behaviour, from financing terrorism to evading taxes, but advisors and their firms could well be on the hook for the costs of applying the new rules.

Those costs will probably range from the cost of new training programs to the pain of declining a client whose affairs require extensive background checks.

The implementation of the final stage of the federal Proceeds of Crime and Terrorist Financing Act on June 23 will result in major shifts in the way the financial services industry handles compliance. Implementing the new rules — which include identifying, evaluating and monitoring higher-risk clients, as well as more paperwork — may well have a negative impact on advisors’ profits.

Advisors, for example, may find that certain clients — such as off-shore investors, those with certain political ties or charitable foundations with operations in countries plagued by terrorism — could generate more compliance costs than revenue. In such cases, says Michael Andrews, principal of A. Michael Andrews and Associates Ltd. in Ottawa, it might not be worth the extra work involved to ensure that no illegal activity is taking place.

The question of whether to take on such clients will, therefore, require more consideration.

“It’s a decision individual firms are going to have to make,” Andrews says. “They may look a lot harder at whether or not dealing with someone who is domiciled in an offshore centre is really something they want to do.”

The onus will be on industry members to undertake a formal review of their operations to determine whether their practices can be exposed to money laundering and terrorist financing activities. Those who fail to do so could find themselves slapped with penalties, including large fines and jail time.

But whatever the downside, Andrews warns dealers, advisors and others in the industry not to wait until the last minute to implement a new compliance regime. Advisors who need help can get some resources from Advocis, which is offering an online course on the topic. It has also updated its best practices manual on the subject.

Chris Mathers, a former undercover RCMP agent and a leading expert on money laundering who has also taught a course on the subject for Advocis, says advisors will need to be more vigilant than ever, especially with overly friendly clients who curry favour with advisors and then later attempt to make unusual transactions, such as a request to deposit a third-party cheque. When a relationship is already established, it makes it harder for an advisor to refuse such a request.

“What advisors should be looking for is someone who is trying to be their friend,” Mathers says. “Why is he taking me to lunch? Why is he throwing hockey tickets at me?”

Also, advisors should be careful not to be taken in by appearances and get lulled into a false sense of security, says Mathers, the founder of chrismathers.inc, a Toronto-based crime and risk-consulting firm.

“People are looking for Don Corleone when they should be looking for Don Knotts,” Mathers says. “Crime has a bland face. Criminals don’t always wear flashy suits. They often have good jobs with big organizations whose names you’d recognize. They trade on relationships to perpetrate their crimes. So, you have to be prepared to deal with that reality, that someone may be lying to you.”

Charitable foundations, for instance, can be fronts for groups funnelling money to terrorists or other illegal activities. “As with all these things,” Andrews says, “most of them are above-board. But there are instances in which criminal elements have set up phony charities as fronts for money laundering.”

But steering clear of the whole issue won’t be the end of the matter. Some of the new regulations must be addressed by all firms. The rules relating to foreign political connections, for instance, apply to all companies. Under those regulations, all firms must have specific policies and procedures in place to screen all clients for foreign political connections — what the legislation refers to as a “politically exposed” person. This assessment will have to take place within 14 days of opening an account. Existing clients also have to be reviewed. Examples include foreign politicians, diplomats, or heads of foreign government agencies.

@page_break@The new legislation is aimed at bringing Canadian financial serv-ices practices in line with the recently revised standards of the Paris-based Financial Action Task Force. The FATF, first established in 1989, extended its temporary mandate in 2004 until at least 2012. Its strengthened policy recommendations include reviews of attempted suspicious transactions, even if they are not completed.

“This is certainly one of the key differences in the new rules vs the existing rules,” says Peter Tzanketakis, senior director of regulatory affairs at Advocis in Toronto. “As a matter of law, you should err on the side of caution in this case, and file a report with whatever information you have.”

Financial services firms must also ensure that their own operations outside of Canada comply with domestic standards.

All financial services firms also will have to report on their compliance regimes, which now must include a training program. The new rules involve collecting more data from both new and existing clients, Andrews says. And if it seems that administrative requirements in general are on the increase, that is very much the case. Advocis says studies show that advisors are already devoting about 30% of their time to a broad range of compliance requirements.

Those looking for relief based on their size will be disappointed. There will be no exceptions for smaller firms, which will have the same responsibilities as larger shops.

“This poses a bit of a challenge for some of the smaller players, such as our members who are typically independent owner-operators and often single- or two-person shops,” Tzanketakis says. “The type of compliance regime [that is required] for a large financial institution is equally applicable to a financial advisor. So, you’ll still have to initiate a compliance regime, policy and procedures. You’ll have to develop, as a financial advisor, a training program for your staff.”

And for very small firms, in which one or two individuals typically perform several functions, the burden of multi-tasking is going to increase.

“A one-person shop is the compliance officer and the financial advisor and the administrator all in one,” he says. “So, that person is on the hook.”

And while costs are expected to increase for firms, the costs of not complying could be much higher. Some penalties include:

> failure to report a suspicious transaction: Conviction could lead to five years’ imprisonment and/or a fine of up to $2,000,000;

> Failure To Report A Large Cash Transaction: Conviction could lead to a fine of up to $500,000 for a first offence and $1,000,000 for subsequent offences;

> Failure To Retain Records: Conviction could lead to five years’ imprisonment and/or a fine of up to $500,000.

For more information, contact Advocis or the Investment Funds Institute of Canada, which has compiled a checklist, available on www.ific.ca under “hot topics.” IE