Cleaner money laundering rules

By Mark Brown | November 3, 2006 | Last updated on November 3, 2006
5 min read

Advisors may soon face increased reporting regulations if a new bill regarding money laundering, currently working its way through Ottawa, is passed. Bill C-25 is the first step to reform the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

The implications of the planned changes are far reaching. In an anti-money laundering panel hosted by IFIC earlier this week, Prema Thiele, a partner at Borden Ladner Gervais LLP and a frequent speaker on securities law, pointed out: “If you are a licensed securities registrant, you are under many obligations under the money laundering regime.”

But while the current legislation is limited to persons or entities dealing in securities, Bill C-25 would broaden that to include “any other financial instruments,” as well as making a specific reference to “advising” services.

Mutual fund manufactures will also want to take note of the proposed provisions of the bill since they too will fall under the legislation since the Canadian Securities Administrators passed National Instrument 81-107, which, among other things, aims to register all mutual fund managers.

While some might question the logic of this given that fund managers don’t deal directly with the client, Derek Ramm, an officer with the Financial Transactions and Reports Analysis Centre of Canada sees this as a useful provision.

“What I would say to the fund manufactures is that you are actually in a very unique position — that the independent advisors aren’t — to see suspicious activity,” he says. “You can take a global snapshot of what is going on where the independent advisor can’t.” As an example, Ramm points out that fund manufactures can tell if multiple clients are using the same mail-drop access.

Under the current draft of the legislation, Bill C-25 will also change when suspicious activity is reported. Currently, a suspicious transaction has to be reported only after it has been completed; the proposed bill adds if someone attempts to conduct a transaction that is suspected to be related to a money-laundering offence, then the transaction is reportable.

The industry has concerns about this provision. “We have to define what an attempted transaction is,” says Stephen Harvey, the chief anti-money laundering officer at CIBC. While Harvey plans to reserve judgment until he sees the final version of the bill, his initial thoughts are that this part of the bill is ill-advised.

“I think it’s going down the wrong path,” he says. “We are trying to define too closely what is suspicious.” Harvey thinks what is normal or abnormal should be left to the industry. “The more defined you try to make your regulatory regime, the further from the money you actually end up.”

Another proposed change is that firms that conduct business outside of Canada will not be exempt under this legislation. This will put an increased onus on firms to understand who their clients are and to determine if any of them can be considered politically exposed persons.

The IFIC panelists believe a risk-based approach would be the most effective way to approach this inter-jurisdictional issue. As Thiele says, firms have to assess which countries you have relations with that are most vulnerable to corruption. “There are businesses out there that appear to be more vulnerable to corruption in a global prospective.”

Oil is one of the examples Thiele singled out. If you’re dealing with any of those, she says you have to add them to the “politically exposed person” file. “You have to go to start looking for these sorts of things,” she says.

The emphasis Bill C-25 puts on politically exposed persons is meant to highlight the importance of getting the industry to understand who their customers are, in order to have a clear idea of what the ownership is and who are the beneficial owners, in case people intentionally conceal these.

“The biggest single problem I see on a day-to-day basis is that people don’t really understand the ownership structure of an account,” says Ramm. Detecting whether or not information about ownership is being concealed can be tough, but Ramm says it is possible to spot signs since these accounts tend to operate outside of the norm.

That’s one of the deficiencies Ramm has noticed. He says although the regulators keep ratcheting up the level of knowledge firms are supposed to have about their customers, firms haven’t been keeping up.

At another conference in Toronto this week hosted by the Investment Industry Association of Canada, Derek Pattison, director of regulator affairs at Scotiabank Wealth Management outlined some of the expected changes firms need to be aware of to keep in line with the anti-money laundering requirements.

One of the anticipated changes relates to the use of provincial identification cards and “client evidence” firms need to meet, as well as making sure client documentation satisfies all requirements.

For instance, while FINTRAC allows about seven forms of ID, including birth certificates, driver’s licenses, passports and old age security cards, only passports and driver’s licenses match requirements under the IRS qualified intermediary program in the U.S. This program does allow birth certificates, but only for individuals under the age of 21.

If you can’t get this, you need to go back to the U.S. client for more information, says Pattison, such as a personal cheque from the client’s Canadian bank account.

Pattison also warned of some potential risks with the U.S. qualified intermediary program. His main concern is with audits. Under the program, a small sample of accounts will be audited and the findings will be compared to other accounts at the firm.

As explained in the presentation, “This extrapolation has the potential to result in enormous penalties, as the audit only looks at a small number of accounts with U.S. income and assumes the result from the sample account is representative of the remainder at the firm.”

In Canada, The IIAC is pushing the provinces to allow firms to accept more forms of client ID including provincial ID cards, although there’s been no indication if or when that change might happen.

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Mark Brown