Money laundering laws create new KYC obligations for advisors

(April 29, 2003) The recent enactment of new anti-money laundering regulations means financial advisors must step up their “know your client” (KYC) efforts, according to legal experts attending a recent conference in Toronto.

As of March 31, 2003, financial institutions and intermediaries are required to report certain types of international electronic fund transfers of more than $10,000 to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

Marcia Stewart, general counsel for AIC and Berkshire Securities, says advisors’ KYC obligations have expanded beyond the traditional checking of the client’s suitability for various types of investing.

“Keep in mind that before, money laundering was largely done through banks, now they have found access to securities markets, so you should be on guard to make sure that when you have a new client you do understand everything about them, not just their financial net worth,” she warned. Stewart was speaking at the Canadian Institute’s second annual forum on anti-money laundering on April 25 in Toronto.

“You need to fully understand the individual, the business that they are in and source of their funds, not just for suitability but also because this person potentially could be someone the RCMP might end up contacting you about because of money laundering,” she said in an interview with Advisor.ca. Stewart says the greatest danger could be damage to an advisor’s reputation, if they are found to be associated with a known money launderer.

Red flags that should send an advisor’s professional sensors into overdrive include an unclear description by the client of his or her business and lack of information about it, she said. “Maybe it just means that… you check out the phone number and make sure there’s actually a company there.”

Other warning signs might include a new high net worth client’s inability to provide a name of a previous financial advisor or reluctance to provide a bank reference.

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These new obligations suggest a problem that advisors may have in common with law enforcement officials: finding the blurry line between heightened vigilance and paranoia, since an odd-looking situation may simply have an odd explanation, clear of criminal intent and lawbreaking.

“You’re not going to want to turn people away. You’re not going to want to become paranoid,” Stewart says. “But still, your best protection is knowing the client.”

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Curious to find out more about how to spot money laundering in your client base? Read the February cover story “Tainted Funds” on page 18 of Advisor’s Edge.

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Art Melo is a Toronto-based financial writer.

(04/29/03)