Presentation Notes ‐ Derek Ramm, Officer FINTRAC April 20, 2010 About FINTRAC FINTRAC is a regulator ‐ False. We are considered a Financial Intelligence Unit, with a primary mandate to assist in the detection of money laundering and terrorist financing activities in Canada by analyzing financial transactions that are reported to us and providing this information to police and national security agencies. There are 200 ‐ 300 financial intelligence units around the world. Essentially every industrialized nation has one with similar types of mandates. FINTRAC differs where we have been given powers under federal legislation to ensure compliance with the act; The Proceeds of Crime and Money Laundering and Terrorist Financing Act. Other financial intelligence units globally do have the compliance mandate within their legislation. Generally speaking they are purely intelligence agencies, their primary focus is to assist in organized crime and security investigations and leave compliance to other agencies. In Canada, FINTRAC has been granted compliance powers under Part 1 of the Act, because of this, a common misconception is that FINTRAC is a regulator. Although we do at times act as a regulator, understanding that our compliance role is there to feed into the intelligence role. When we exercise our compliance mandate, ultimately FINTRAC is concerned with our abilities to fulfil our intelligence mandate. Tracking money and making connections through financial transactions benefits police investigations where money laundering and crime money are involved. FINTRAC receives questions about convictions regularly, we are however not the right agency to make these inquiries. FINTRAC acts simply as one cog in the wheel of the justice system. FINTRAC is strictly an intelligence agency, as such we do not carry the powers of arrest or prosecution. However, since our inception in 2000, the demand for our services has been exponentially increasing every year. Particularly in the cases of fraud and drug trafficking FINTRAC reports are being used frequently. Sectors of the economy that are subject to the federal proceeds of crime laws are accountants, real estate, money services business, life insurance, dealers in precious metals and stones, financial entities, casinos, and securities dealers. These entities report to FINTRAC. Once received FINTRAC analyzes all documents, and upon reasonable belief, will disclose this information to police or appropriate investigative body. Once in the hands of the authorities, they conduct their own investigation. Often the value of our research comes from opening new avenues for authorities to investigate where they once did not know about. Another myth about FINTRAC is that we are fully compliant with the provincial securities laws – False. There are similarities to some degrees, and by ‐ and ‐ large there are similarities with the provincial
legislation and the federal legislations, there are however very distinct differences. Strict compliance with the provincial legislation does not guarantee compliance within AML compliance (anti money laundering compliance). The federal proceeds of Crime (Money Laundering) and Terrorist Financing Act has obligations and requirements that are distinct from provincial securities legislation and rules. We have heard that the Proceeds of Crime (Money Laundering) and Terrorist Financing Act rules are referred to as the FINTRAC rules; this is false. It does in fact disservice to all other agencies that are involved in proceeds of crime legislation. FINTRAC just happens to be the agency that has been tasked with compliance enforcement. FINTRAC has become the public face of the legislation, there are other agencies that are involved in the legislation; Canada Boarder Services Agency enforces part 2. of the act for cross boarder currency reporting. Regulations & Compliance Last time we spoke with the ICAC was on the topic of new enforcement rules that came into effect on June 23, 2008. The general consensus is that many investment firms have not in fact adjusted their anti ‐ money laundering compliance programs accordingly; with respect to the June 23 amendments. The top three issues we are seeing at the moment are: 1. Ongoing training for staff 2. Risk assessment and mitigation measures 3. Customer due diligence On the training, a number of changes have been implemented since June 23, 2008; there has always been the requirement to train staff in an ongoing approach. With the implemented changes, it is now a requirement to document the training programs. The program has to be in writing and be inclusive of what the training plans are, what it will include, who it will include, and future training plans. The training must be appropriate and specific to the firm. Many firms will have employees complete the CSI AML course, which is fine, but does not comply with AML rules. Employees must understand how firm specific AML policies and procedures work. As for ongoing training measures, FINTRAC recommends a minimum of every two years; which would coincide with the firms AML program review. FINTRAC does not prescribe what form of training should take place, again firm specific. On the risk assessment and mitigation measures FINTRAC is seeing issues across more than half the investment firms. Many firms FINTRAC has examined have done nothing to implement policy by June 23, 2008. Other firms lacked appropriate risk assignments or had inadequate measures in place to mitigate identified high risk areas. The requirement is to assess the risk and document the risks associated with your firm being used to launder money or terrorist financing. The law actually gives you reference as to
what to look at when doing these risk assessments. The firm needs to look at the clients and the types of relationships you have with the clients, the products that the firm offers and delivery channels, look into the geographic location of your activities and that of clients activities. To fulfil this requirement I recommend thinking like a criminal; that is, take a look at your products and services and try to determine how you would launder money through your firm and document your findings. For portfolio managers, there is a lesser risk, however the risk lies in the money entering and leaving the firm. By and large discretionary managers have a very different risk profile than a mutual fund dealer or an investment dealer would. The second requirement is to implement mitigation measures for high risk profiles; again this is part of the law. The firm must take ongoing measures to ensure client information is up ‐ to ‐ date, take reasonable measures to conduct ongoing monitoring with the aim of reporting suspicious transactions, and then taking measures to mitigate the identified risks. These would be above and beyond the firm’s regular measures, to prevent situations of money laundering. Regardless of registration category FINTRAC is seeing an inadequate identification of clients in non face ‐ to ‐ face situations, particularly in non residence, inadequate confirmation of a corporation’s existence and a lack of beneficial ownership information. We do not see this with IIROC firms because they have been required for the longest time to obtain beneficial ownership information, but what is new for portfolio and mutual fund members is you now need to obtain beneficial ownership information for anyone who owns or controls 25% or more of the corporation. If you are however unable to obtain that information, that is acceptable as the law does recognize secrecy jurisdictions, there must be an attempt made to obtain the information with documentation of attempts made. This may be something you may want to consider for your risk model; if you are unable to see who is behind the company that client should be put into a higher risk category. Additionally, there is a similar issue with knowledge of a politically exposed person. Issues arise when the generic question is asked on the KYC form without definition or context. It is imperative that both you and your client understands what this means. We have seen cases where firms have put the lengthy definition directly on the KYC form so it is right there in black and white. Another addition to the compliance regime is to conduct formal reviews of the effectiveness of policies and procedures with regards to the training programs and risk assessments. This has been in ‐ force from day one but was too vague. Since June 23, 2008 Firms must now conduct this review no more than every two years. Reviews must be documented and reported to a senior officer within 30 days of review, including actions taken. There is no requirement for an external auditor, however the more independent the reviewer the better. Penalties have been in place since December 30, 2008, FINTRAC can levy administrative monetary penalties for non ‐ compliance. FINTRAC may also refer non ‐ compliance cases to law enforcement for criminal prosecution, which may get you up to five years in prison for non ‐ compliance. The process is
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