Revised anti-money-laundering regulations

(June 2008) Advisors could already be feeling additional compliance pressures — the effect of new legislation designed to bring Canada’s regulatory regime in line with international anti–money-laundering standards. If not yet, the effects will likely be felt very soon.

Bill C-25, which introduces significant regulatory revisions to Canada’s proceeds of crime (money laundering) and terrorist financing legislation, comes into effect on June 23, 2008. The new bill is written to enhance the reach of law to new reporting entities and bring Canada’s regulatory regime in line with the Financial Action Task Force (FATF) international standards.

Skip to: Legislation creation, the timeline.

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.

All of this will likely cause firms to modify many record-keeping and customer-identification practices. It will also add a layer of customer due diligence, risk assessment and the need to monitor for “politically exposed” 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.

Jodi Angevine, a FINTRAC regional officer, says, “advisors will need to adjust to the shift in thought, how they think about [money-laundering-related compliance].”

Once the regulations come into play, she says advisors will likely see a rash of application form changes. Life insurance providers are already integrating supplementary forms to help identify politically exposed foreign persons and their families. Life insurance agents will also be required to revise existing client lists for non-exempt products.

One of the most significant changes, according to Larry Boyce, the IDA’s vice-president of sales compliance and registrations, will be the huge reduction in the amount of time advisors have to verify a customer’s identity. “Dealers traditionally had up to six months after opening the account to verify the identity of the customer. Now they will be required to do so before opening the account.”

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What’s more, if a client’s identity is in question at all, advisors will need to re-identify the client at each meeting. At present, if a client has already been identified, there is no need to repeat the process if the advisor recognizes him or her. Advisors will also be required to report any suspicious transactions attempted, as opposed to reporting a suspicious deal after the financial transaction is completed.

The bill, meanwhile, will further strengthen FINTRAC’s enforcement capability — whereas the centre previously focused primarily on serious criminal penalties, levied for a breach of the regulations, the new regulations allow the centre to levy civil penalties for non-compliance.

The rules also allow FINTRAC to disclose additional information to law enforcement and intelligence agencies, or to exchange compliance-related information with its foreign counterparts.

Bill C-25 amendments to the Income Tax Act, meanwhile, allow the Canadian Revenue Agency (CRA) to share information with FINTRAC, the Royal Canadian Mounted Police (RCMP) and the Canadian Security Intelligence Service when charities are suspected of being involved in terrorist-financing activities.

According to FATF, illicit proceeds from drug trafficking are one of the major sources of money laundering in Canada. Other sources include prostitution rings, contraband smuggling, illegal arms sales, migrant smuggling and white-collar crime — securities offences, real estate fraud, credit card fraud and telemarketing fraud.

Credit cards, casinos, the purchase of real estate, wire transfers, establishment of offshore corporations, the use of nominees, foreign bank accounts, the use of professional services (lawyers, accountants, etc.), reinvestment and illicit drug distribution are some common vehicles used for making illegal money transactions.

Currently, only designated non-financial businesses and professions — casinos, real estate agents and accountants — are regulated by money-laundering legislation. As of December 2008, Bill C-25 will introduce compliance requirements for non-reporting entities as well, including legal counsel, precious metals dealers, stones dealers, and real estate developers.

Inherent weaknesses

According to the FAFT Mutual Evaluation Report, published in February 2008, only three people in Canada have been charged with criminal offences related to terrorist financing, despite the fact such offences have been prosecutable for many years now. Although there have been a large number of investigations, no charges have been heard by the courts. There have therefore been no convictions.

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Boyce believes one of the problems internationally is the lack of strong coordination between privacy laws and anti–money-laundering laws. “There is a tendency for privacy concerns to trump money-laundering concerns, to the great detriment of anti–money laundering.

“The revised regulations will, hopefully, reduce the privacy expectations of highly regulated financial clients,” he says.

FINTRAC is currently developing a pamphlet for advisors to help them deal with clients if a tricky situation arises. It will be made available before June 23 and can be ordered free of cost.

Legislation creation: The timeline 1989: The Proceeds of Crime Act (Bill C-61) comes into force. For the first time, it is a criminal offence to participate or knowingly assist in money-laundering activities. The act establishes procedures for seizing, freezing and forfeiting proceeds obtained from criminal activities. Focus at the time, however, is limited to assets gained from drug trafficking. The act enjoyed very limited success. 1990: The federal government establishes an advisory committee on money laundering, composed of senior government and private-sector officials, mandated to identify weaknesses in the existing legislation and to recommend solutions. 1991: Bill C-9 becomes law, introducing the “Know Your Client” (KYC) clause into Canadian law. It also requires individuals or organizations receiving $10,000 or more in cash to complete and retain a “large cash transaction record,” which provides specific details on the transaction. The records must be maintained for a minimum of five years in order to assist police in their investigations, if needed. Penalties for failing to comply include imprisonment of up to five years and/or a fine of $500,000. 1993: Bill C-9 regulations come into effect. 1999: Bill C-81 is introduced to help combat money laundering, establish FINTRAC and give new rules related to the proceeds of crime. Parliament recesses on September 18, 1999, without passing the bill. The legislation is reintroduced as Bill C-22 on December 15, 1999. 2000: Bill C-22, the Proceeds of Crime (Money Laundering Act), is proclaimed into law, replacing the earlier Proceeds of Crime Act. Bill C-22 introduces three distinct improvements into Canada’s anti–money-laundering regime, including 1. enhanced client identification, record keeping and reporting requirements; 2. new cross-border currency reporting; and 3. the creation of FINTRAC. 2006: Changes are proposed to Bill C-22 to bring Canada’s regulatory regime in line with new international standards. Bill C-25, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, is drafted and enhanced with stricter regulations. 2007: The Government of Canada releases its final Proceeds of Crime (Money Laundering) and Terrorist Financing Act and suspicious transaction reporting regulations. June 23, 2008: The revised regulations go into force. The enactment will make client identification, record keeping and reporting measures more stringent. For a detailed report on anti–money-laundering regulations and Bill C-25, visit www.fintrac.gc.ca.

Filed by Kanupriya Vashisht, Advisor’s Edge, kanupriya.vashisht@advisor.rogers.com

(06/17/08)