Money laundering might have been a product of 1930′s prohibition era, but present-day criminals are using increasingly sophisticated techniques to hide ill-gotten gains.
Last year the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) reported that there were about $5 billion worth of money laundering transactions — almost double what it found in 2004–2005.
With stats like these, advisors need to be on their toes. But, as the banks have found out, extra due diligence comes with a hefty price tag.
A recent KPMG study of 224 banks in 55 countries found that money laundering and anti-terrorism budgets at banks around the world have increased by an average of 58%.
In North America, spending on anti–money laundering systems and processes jumped by about 70%, a big number considering that in 2004 most banks expected to increase their budgets by only 43%.
KPMG thinks the banks are still underestimating the amount they’ll spend on future anti–money laundering initiatives — most predict an increase of only 34% in the next three years, with the majority of those funds earmarked for transaction and staff training costs.
“The need for more stringent anti–money laundering processes will only continue to grow for Canadian banks, consistent with global expectations of the banking sector,” says James Hunter, head of KPMG’s forensic practice in Canada.
He says stricter legislation is forcing banks to improve due diligence enquiries, which means compliance costs will increase.
KPMG also found that banks have created 70% more Suspicious Activity Reports, with 42% of banks saying that the number of SARs has increased “substantially.”
Banks have also identified more “politically exposed persons,” who could be the conduit for laundered money. More than 70% of banks said they pay extra attention to PEPs, up from 45% three years ago.
One worrying statistic is that less than 25% of international banks say they can properly monitor a customer’s transactions and account status in multiple countries. In North America, only 41% said they could monitor clients across borders.
That’s why advisors need to pay close attention to suspicious activity — they’re the first line of defence against fraud.
“Advisors are the gatekeeper,” says Alex Popovic, the IDA’s director of enforcement. “They’re given a right to provide services to the public to come into the marketplace. Part of that obligation is to ensure the people who they service belong in the marketplace.”
There are a number of red flags that advisors should watch for. Cash transactions, large amounts of OTC Bulletin Board stock being journalled into an account, or a transaction size surpassing the client’s net worth should make you a little suspicious.
Another tip-off is clients using small bills for their transactions. Currently, banks automatically report any cash deposits of $10,000 or greater, so it’s up to the advisor to flag anything less.
Advisors also need to watch out for wire transfers, which are an unregulated — and common — method of distributing money.
Whatever an advisor does, it’s important not to forget two important steps: ask questions and document everything in case you’re hauled into court.
“You’re not going to be asking, ‘Are you a terrorist?’” says J-P Bernier, vice-president and general counsel of the Canadian Life and Health Insurance Association. “[But] you can ask simple questions, such as ‘Where are the funds coming from?’ If they lie to you, they lie to you. What is important for you to do is to fulfill your obligation. It’s the information about your suspicion that is important. FINTRAC has the mandate to do the analysis.”
Filed by Bryan Borzykowski, Advisor.ca, firstname.lastname@example.org