Advisors drafted into war on terror

Advisors attending the Independent Financial Brokers Summit in Toronto had a bit of a wrench thrown at them among the standard sessions on new products and business strategies. J-P Bernier, vice-president and general counsel of the Canadian Life and Health Insurance Association, began his seminar with one question: “Are you unknowingly financing terrorism?”

Bernier says that it takes only small amounts of money to finance a terrorist operation; for example, the attacks on 9/11 were estimated to have cost not more than $200,000. For this reason, an independent financial advisor is an ideal port to launder money into a terrorist organization.

“Don’t make the mistake of thinking that terrorism is 10,000 miles away across the Atlantic,” he says.

Like it or not, financial advisors are expected to play an active role in curbing world terrorism by monitoring and reporting suspicious financial transactions of their clients to the Financial Transactions and Reporting Analysis Centre of Canada (FINTRAC). The penalties for not doing this and being found complicit in terrorist financing can be steep. Bernier says advisors face up to a $2 million fine or five years in prison.

FINTRAC doesn’t expect advisors to find out whether a client is a terrorist, only whether their financial transactions fit a certain high-risk pattern. Fortunately, identifying such situations is not that difficult.

Bernier says most terrorist financiers have come to an advisor because they want to launder illegitimate or illegal money. When money is put in an insurance policy or an investment, when the product pays out, the money is considered “clean.” This is because the payee is usually a well-respected financial institution that doesn’t raise the suspicion of authorities.

Typically, the number-one red-flag of money laundering is the use of large numbers of small bills, but Bernier says most financial companies already have protocols to watch for this. Any cash deposit $10,000 or greater will be automatically reported by regulated institutions.

For this reason, Bernier says most terrorist financing is now being done through bogus charitable organizations that will deposit smaller amounts of cash. In addition, people interested in financing terrorism will show signs of cashing in a lot of investment products during the penalty-free cancellation period to “clean” the money. They may also act as a representative of a client in a foreign country or travel from a high-risk country solely for the purpose of investing.

Currently unregulated, wire transfer services are also a common distribution network. Bernier recommends advisors watch for wire transfers to regions of the world or organizations that have a high level of terrorist activity.

The Office of the Superintendent of Financial Institutions (OSFI) has listed the names of individuals and organizations with known ties to terrorism on its website. The federal government has created mandatory registration of wire services that will most likely be in effect by the end of the year so advisors will be able to identify regulated and non-regulated ones.

Bernier says that it’s not the job of the advisor to be an investigator. An advisor’s normal tasks can suffice in most situations because the simple everyday conversations that most advisors have with their clients — where the clients’ money is coming from and where they want it to go — are usually enough to protect against liability.

“You’re not going to be asking, ‘Are you a terrorist?’ You can ask simple questions, such as ‘Where are the funds coming from?’ If they lie to you, they lie to you,” he says. “You don’t have to really know whether it’s money laundering or terrorist financing. 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.”

Advisors are also legally obligated to have a manual of policies and procedures on dealing with money laundering and terrorism financing. Bernier says failure to comply with this is subject to a potential penalty of $500,000.

This fine may seem particularly harsh, but advisors play a critical role in FINTRAC, spokesperson Peter Lamey says.

“Advisors are on the front end. They’re the ones engaged in the transactions; they’re the ones dealing with the clients,” Lamey says. “We don’t have a report of it; we don’t get the details. They become the starting point through which we look at the connections to other criminal activity.”

More information on how to submit reports to FINTRAC can be found here.

The OSFI lists of terrorist organizations and individuals affiliated with financing terrorism can be found here.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(06/05/07)

Mark Noble