Money laundering and coping with compliance

(July 2008) If a scruffy guy named Anthony staggered into your office and plunked a duffel bag full of cash on your desk demanding to buy life insurance, you’d quietly excuse yourself and go looking for the manager. Unfortunately, today’s white-collar criminals aren’t so easy to spot.

To bring the financial sector more in line with the Financial Action Task Force’s (FATF) international anti-money-laundering standards though, the Canadian government has recently enacted new legislation.

Bill C-25, in effect since June 23, 2008, introduced significant regulatory revisions to Canada’s proceeds of crime (money laundering) and terrorist financing legislation. The changes give new powers to the Financial Transactions Reports Analysis Centre of Canada (FINTRAC) to share compliance information with domestic and international agencies, and to impose civil penalties for non-compliance with a number of new risk assessment and reporting requirements.

Advisors and their managers will likely see firms modifying their risk assessment, record-keeping and customer-identification practices.

While the revised regulations will ensure drug dealers and other criminals have a tougher time disposing off their ill-gotten gains on Canadian soil, Peter Lamarche, president of Blonde & Little Financial, says racial profiling could be an unfortunate byproduct of the heightened surveillance.

Lamarche points out that clients most affected by these regulations will be the ones belonging to minority groups and ethnicities. “On terrorist lists, you won’t see names like Bob Brown. They’ll mostly belong to people of Indian or Arab descent.”

While advisors belonging to the same racial group as their clients might be better equipped to handle delicate situations, Lamarche worries conflict could erupt in cases of racial or religious crossover, such as an Anglo-Saxon advisor questioning an Arab client. In such situations, he says, it will be imperative to explain where the questions come from and reiterate that they are asked of every client, regardless of race or religion.

Richard Binnendyk, executive vice-president of Univeris Corporation, the enterprise wealth management provider, says whether these revised regulations are successful will depend largely on how financial institutions incorporate them into their overall compliance regime. “It could end up being a pain in the butt,” he warns. “The ‘Well, you know they’re forcing me to ask these questions’ approach won’t work.” He says being upfront with clients is best.

One solution, says Mark Halpern, CFP and founder of illnessPROTECTION.com, is to stress a clear level of engagement from the very first meeting and make clients sign privacy statements. When he meets new clients, Halpern likes to draw a parallel with the medical profession. “I spend 90% of my time on diagnostics. The other 10% — what regimen to follow — is simple.”

A similar analogy, he says, can help when preparing clients for increased regulations: “It’s like going to a doctor — if you hold back symptoms or problems, you only hurt yourself.”

Binnendyk says advisors will be all right, so long as they talk about the regulations in such a way that they seem beneficial to everyone. Binnendyk’s firm has already incorporated the FINTRAC requirements into its management platform. If a suspicious activity is identified, advisors are now able to flag it in their systems, and a specific set of rules, created to comply with those laid down by FINTRAC, are automatically applied.

While the regime could seem unfairly skewed against clients who fit certain racial stereotypes, ignoring or avoiding the rules will create trouble for advisors who don’t report suspicious transactions.

Revisions to the federal mandate make those who don’t, or won’t, comply much more susceptible to penalties. The punishment for non-compliance could be severe — maximum penalties include five years in jail, $5 million in fines or both.

Halpern says in this age of white-collar crime, advisors likely know that it’s necessary to keep eyes and ears open, and to understand where each client is coming from, but he points out that many likely fear reporting suspicious transactions, as the action could come back to bite them.

FINTRAC assures advisors on its website that all personal information under its control is protected from unauthorized use and is subject to the Privacy Act. But Halpern argues, “What if I am the only advisor this person talked to before getting reported? It wouldn’t take much to figure that one out.”

He does, however, concede that the additional regulations aren’t all that invasive, especially when compared to compliance regimes in countries like England and Australia, which require full disclosure of commissions.

Preet Banerjee, wealth manager for ScotiaMcLeod, endorses the heightened regulations. “For decisions that could affect your financial life for decades and decades to come, an ounce of prevention is much better than pounds of cure,” he says.

There has, however, been such a constant barrage of regulations created since September 11, 2001, that Lamarche says advisors have become almost numb to the developments. Today, he says, “they wait until it gets to them, until they are forced to comply.”

Getting the word out to all advisors, Halpern agrees, is a big challenge. “It won’t hit home till someone we know gets prosecuted for non-compliance.”

Under the new regime, all financial institutions are required to hold training programs for staff members every two years. These programs will be customized according to job responsibilities, lines of business and legal jurisdiction.

It will be an adjustment, to say the least. The Canfin Financial Group has already revamped its back office to adhere to the additional requirements, adding identifiers that allow advisors to flag politically involved foreign persons — those with significant political involvement or position in other countries (including politicians, judges, government corporation managers and others), along with their close associates, business or personal, and their immediate family members.

When advisors do accept these clients, they are required to identify the source of money for every transaction made, irrespective of amount.

In order to bring its mutual fund dealers up to speed, Blonde & Little is organizing a Webex (an interactive videoconference) in August. The dealers will be required to take a follow-up test to make sure they understand the policies and regulations.

Most life insurance providers are already revising questions on their KYC forms to include identifiers that will flag prospective clients with significant political involvement in other countries. On a lump sum payment of $100,000 or more for an immediate or deferred annuity or life insurance policy, insurance providers are now required to determine, within 14 days, if the client has any foreign political involvement.

Additionally, agents have been instructed to keep large-cash transaction records for clients who make cash deposits of $10,000 or more in a single transaction. Large-cash transaction records are also needed when two or more cash transactions made by the same client within a 24-hour period add up to $10,000.

In keeping with stricter identification requirements, it has also become mandatory to revise existing client lists for non-exempt products — large-cash deposits into universal life policies or annuity products. Agents, who could previously withhold policies until all the requisite information was supplied, now must altogether refuse the policy if information is missing.

Furthermore, advisors can no longer accept new clients over the phone or through video-conferencing. They are obligated to meet them face-to-face before accepting them as clients.

All these changes are likely to increase the cost and back-office workload. Despite the inconvenience, Manny De Silva, compliance officer for the Canfin Financial Group, doesn’t anticipate much resistance from advisors or clients.

“Do I like the extra workload? No. Do I like the extra cost involved? No. Do I understand why it needs to be done? Absolutely.”

Go to jail? New FINTRAC regulations include a series of penalties for non-compliance. They include the following: 1. Failure to report a suspicious transaction or failure to make a terrorist property report: up to five years’ imprisonment, $2 million fine or both. 2. Failure to report a large cash transaction or an electronic funds transfer: $500,000 fine for a first offence; $1,000,000 fine for each subsequent offence. 3. Failure to retain records: up to five years’ imprisonment, $500,000 fine or both. 4. Failure to implement a compliance regime: up to five years’ imprisonment, $500,000 fine or both. Red flags An advisor should become suspicious when: 1. a client shows uncommon curiosity about internal systems, controls and policies; 2. a client offers money, gratuities or unusual favours for the provision of services that appear odd or suspicious; 3. a client makes inquiries that would indicate a desire to avoid reporting; 4. a client produces seemingly false identification or identification that appears to be counterfeited, altered or inaccurate; 5. a client starts conducting frequent cash transactions in large amounts when this has not been a normal activity for the client in the past; 6. a client opens an account with a large number of small cash deposits, and then executes a small number of large cash withdrawals; 7. a client consistently makes cash transactions that are just under the reporting threshold amount ($10,000) in an apparent attempt to avoid the reporting threshold; 8. transactions involve non-profit or charitable organizations for which there appears to be no logical economic purpose, or where there appears to be no link between the stated activity of the organization and other parties in the transaction; and 9. a client attempts to open or operate accounts under a false name. Source: FINTRAC

See also: Revised anti-money-laundering regulations. Advisor.ca, June 2008.