Canada’s tough stance on dirty money

“It would probably embarrass our government if we did not comply with FATF because we have a government that certainly holds itself out as a country with a modern AML and ATF legislative regime that is at the forefront so our government would not want to be seen as having deficiencies – it could hurt Canada’s reputation,” noted Peter Aziz, an expert in regulatory compliance in the financial services and payments industry with Torys LLP.

Under Canadian anti-money laundering legislation reporting entities have a series of obligations they must fulfil: they must identify customers, keep records of their customers and their transactions, ensure they have internal compliance procedures in place, and report transactions that are suspicious or transactions that meet certain conditions even though there is no express obligation to monitor accounts for suspicious activities. “Because it was always sort of implicitly in the legislation that you have to report suspicious transactions, you have to monitor to determine what is and what is not suspicious even there was never an express legislation to monitor,” explained Jacqueline Shinfield, a lawyer with Blake, Cassels & Graydon LLP specializing in regulatory compliance in the retail financial services and payments industry.

But as of next year, once the amendments come into force, that will change. The new regulations introduce the concept of a “business relationship,” and provide that once a business relationship is established regulated entities will be required to conduct on-going monitoring of business relationships with clients, using a risk-based approach. The new regulations define what it is that they want reporting entities to monitor, and for large institutions they expect monitoring to be done on a consolidated basis across all products, notes Shinfield.

For many reporting entities that will prove to be an onerous requirement, says Matthew McGuire, an anti-money laundering expert. There are an estimated 300,000 reporting entities in Canada, ranging from financial institutions to life insurance companies to real estate agents brokers and developers to casinos. Even accountants and accounting firms as well as lawyers are captured by the legislation.

“Most large financial institutions will have the capability to look across an entire client relationship at a glance but in less sophisticated environments – a real estate dealer or for money services business – trying to consolidate across activity by clients becomes more difficult,” explained McGuire. “And much more difficult becomes on-going monitoring of all clients regardless of risk – that is probably the most significant thing about this legislative change. That’s a huge obligation.”

Since not all reporting entities have sophisticated monitoring systems in place, it will oblige many to invest money and time to acquire and implement automated transaction monitoring systems, says McGuire. “Let’s think about it – do all reporting entities all have the tools in hand to be able to program and understand what rules they should be running in terms of ongoing monitoring?” asks McGuire rhetorically.

Besides compelling regulated entities to now keep up-do-date records with respect to the purpose and nature of the business relationship of their clients, the new regulations will also require reporting entities to obtain identification information under certain circumstances from all persons who own 25 per cent or more of a corporation or entity. Under legislation currently in force financial entities have an obligation to obtain so-called “beneficial ownership,” that is, collect information about all directors and natural persons owning or controlling — according to prescribed percentages — the corporation and entity. The amendments specifically clarify that those reporting entities should also obtain documentary evidence from the client that confirms the beneficial information that they have obtained.

“These amendments actually do add additional obligations that are a bit different from before,” says Kashif Zaman, a partner with Osler, Hoskin & Harcourt LLP. “”Before the customer identification requirements and the customer due diligence was conducted typically at the front end, when the business relationship was established. These new obligations will require reporting entities to actually take a more serious look at the documents and client information to make sure they can assess them properly” instead of simply checking off boxes in intake forms.

Questions still linger over the reach of the new amendments. Many experts in the field are counting on the Financial Transactions and Reports Analysis Centre (FINTRAC), Canada’s financial intelligence unit created in 2000 that operates within the ambit of the Act, and the Office of the Superintendent of Financial Institutions to provide updated guidance before end of year.

“Guidance is needed because the wording of the legislation is drafted broadly,” said Zaman. “Ongoing monitoring is defined very broadly. What are their expectations? So different stakeholders will have different concerns depending on their business. The guidelines will provide their expectations as to what they want industry players to be thinking about.”

McGuire has a harsher assessment. “We have woefully inadequate risk-based guidance,” said McGuire. “Like FATF points out, we should put out a threat assessment so that the players understand the money laundering environment they operate in. That should be the cornerstone of program in the country, and it doesn’t exist. Then the guidance on how to tactically implement risk-based approach under these new standards.”

Reporting entities, however, are bracing for more changes. A consultation paper entitled “Strengthening Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime” drafted on December 2011 by the Department of Finance is currently being reviewed by the Senate. “What I think may be challenging is implementing these new changes which will take systems and resources, and then in a likely very short period thereafter having a complete second set of amendments as well,” said Shinfield.

In the meantime Shinfield recommends that reporting entities amend and update their anti-money laundering policies, change and update their intake forms to ensure that proper information is requested of clients, update their systems, and ensure that ongoing monitoring is performed that addresses the provisions of the Act.