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The Canadian Institute of Chartered Accountants Submission in Response to Finance Canada's Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime consultation:

Appendix to The Canadian Institute of Chartered Accountants (CICA) comment letter on June 2005 Consultation Paper

Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime

Overall Comments

1. Making significant changes to the current regime

Although the Proceeds of Crime (Money Laundering) Act initially came into force five years ago, amendments to the legislation and many of the regulations supporting the legislation were not enacted until some time later. As well, many of the guidelines supporting the regulations were not published until 2003. Accordingly, the current regime is very new, particularly for accountants. For example, FINTRAC has only recently begun to identify what accountants are covered by the legislation and the extent of their compliance with it. Given the early stages, there is limited data available with respect to whether the current regime is working as planned, whether the regime is responding to developments in money laundering and terrorist financing, and whether there are areas in the regime that need to be addressed to respond to the current environment. In the absence of appropriate data about how the current regime is working in practice, it may be premature to make significant changes to it.

We have concerns about the ability of reporting entities, including accountants and accounting firms, and other participants including FINTRAC, to cope with significant changes to the regime when they are only now beginning to come to grips with it. In addition, the Consultation Paper does not indicate the expected implementation timetable for the changes being proposed. Therefore, it is not clear whether there will be adequate time for reporting entities to adapt their systems and procedures, or for bodies such as the CICA to develop guidance for their members in advance of the proposals coming into force.

2. Assessing the implications of proposals

We are concerned about the approach to developing the proposals. The main objective of many of the proposals is to achieve compliance with the Financial Action Task Force (FATF) Recommendations. Although it is important to measure Canada's Anti-Money Laundering/Anti-Terrorist Financing (AML/ATF) regime against international frameworks, we maintain that the implementation of the FATF Recommendations should be considered in relation to the Canadian environment. As discussed in overall comment 1 above, the current regime is still new. Presumably, that is why there is no assessment in the Consultation Paper indicating how the proposals address concerns with the current regime, the relative importance of individual proposals or the impact of each proposal on reporting entities.

In addition, it would be useful to understand how the proposals compare with the requirements in other jurisdictions, such as the US and the UK, that are facing greater issues with respect to money laundering and terrorist financing than is Canada, in order to assess whether the proposals are reasonable in relation to these other jurisdictions.

The proposals refer, in many cases, to the fact that more specific details on their scope and application will be developed through regulations and/or guidelines. It is difficult to assess the implications of proposals in these circumstances, particularly with respect to whether the proposals are operational (for example, the nature of systems and procedures reporting entities will require, and the guidance that the CICA will need to develop for chartered accountants). Given the general nature of some of the proposals, we have assumed that they will have broad scope and application which, in fact, may not be the case.

The overall result of the proposals appears to benefit law enforcement and intelligence agencies. It appears that many of the proposals will significantly increase the burden on reporting entities, but none of the proposals appear designed to reduce the burden. We recommend that consideration be given to identifying areas where the compliance burden might be reduced in accordance with one of the objectives in the Consultation Paper "to minimize the compliance burden on reporting entities."

3. Changing the current regime from a risk-based approach

With respect to accountants and accounting firms in particular, we note a significant change in approach. Under the current regime, accountants and accounting firms have reporting and client identification responsibilities geared to high risk transactions ”€ large cash transactions and suspicious transactions. We are satisfied that these responsibilities are reasonable when accountants and accounting firms serve as financial intermediaries.

We are concerned, however, that the proposals would require accountants and accounting firms to perform client identification and record-keeping procedures irrespective of the nature of the transactions being undertaken with clients. The proposals would change the regime from a risk-based approach focused on financial transactions to a shotgun approach focused on subjective judgments based on circumstantial evidence and client behaviour. The need for this change is not explained in the Consultation Paper and, when layered on top of other expanded requirements for client identification and record-keeping, would likely result in an exponential increase in the compliance burden on accountants and accounting firms. The effect of the proposals is for accountants and accounting firms, the majority of whom are small firms or sole practitioners, to be facing requirements that are much the same as large reporting entities, such as financial institutions, who are more directly affected by money laundering. We are not convinced that this change is justified.

We also wonder about the possible economic impact of the proposed change in approach. For example, accountants who currently provide financial intermediary services to clients for perfectly bona fide reasons may decide to withdraw such services because they are not economical given the additional compliance requirements that go along with providing them. Therefore, we suggest that a more measured approach should be taken with respect to changing the compliance requirements for accountants and accounting firms.

Specific Points on Proposals
Affecting Accountants and Accounting Firms

Proposal 1.1
Accountants and Accounting Firms

The Government proposes to amend the PCMLTF Regulations to expand the client identification and record-keeping requirements applicable to accountants or accounting firms beyond large cash transactions. The requirement would also apply to any of the following activities on behalf of a client:

  • receiving or paying funds;
  • purchasing or selling securities, real properties or business assets or entities; or
  • transferring funds or securities by any means.

Points on Proposal 1.1

1. Our understanding of the current legislation is that accountants and accounting firms are required to identify clients and keep records only when they are acting as financial intermediaries and the client undertakes a large cash transaction. The first sentence of the proposal seems to suggest that the current legislation would be amended so that accountants and accounting firms serving as financial intermediaries would have additional client identification and record-keeping responsibilities beyond large cash transactions. However, the second sentence of the proposal contains the phrase "would also apply to" and then lists the financial intermediary situations already covered by the current legislation. It is not clear whether the second sentence is simply a clarification of the first sentence or whether the proposal applies to all accountants and accounting firms whether or not they are serving as financial intermediaries. Our assumption is that the proposal is intended to apply in the narrow case of financial intermediaries. If this is not the case, we would have significant concerns about the possible implications of this proposal.

2. FINTRAC has only recently begun to identify which accountants and accounting firms are covered by the legislation and the extent of their compliance with it. In addition, accountants and accounting firms have had very little time to become familiar with their client identification and record-keeping responsibilities under the current regime. We assume, therefore, that there is minimal available data regarding how the current regime is working in practice. In the absence of available data we seriously question this proposal for the following reasons:

  • There is no evidence that the current regime is not working. If it isn't broken, why fix it?
  • Without an understanding of any significant problems with the current regime, there is no assurance that the proposal will actually improve the regime.
  • Affected parties, such as FINTRAC and accountants and accounting firms, are still struggling with the current regime. It is questionable whether they will be able to cope with the significant changes being proposed (see overall comment 1).

3. Without more specific details on its scope and application, it is difficult to assess whether the proposal is operational; for example, the nature of systems and procedures accountants and accounting firms will require, and the guidance that the CICA will need to develop for chartered accountants (see overall comment 2).

4. Whereas, under the current regime, accountants and accounting firms are only required to perform client identification and record-keeping procedures when a client engages in suspicious transactions or large cash transactions, this proposal would require accountants and accounting firms to perform client identification and record-keeping procedures for all clients, irrespective of the nature or size of the client transactions. In other words, the compliance regime would move from a risk-based approach focused on key transactions (suspicious transactions and large cash transactions) to a shotgun approach covering all client transactions. We see this as a significant increase in the scope of client identification and record-keeping requirements for accountants and accounting firms. Given that the requirements for client identification and record-keeping (including proposals 1.5 and 2.1) are themselves apparently being significantly strengthened (see point 6 below), this proposal would likely result in an exponential increase in the compliance burden on accountants and accounting firms. We are not convinced that this change is justified (see overall comment 3).

5. It is essential to assess the potential economic impact of the proposed change in approach. For example, accountants (the majority of whom are small firms or sole practitioners) who currently provide financial intermediary services to clients for perfectly bona fide reasons may decide to withdraw such services because they are not economical given the additional compliance requirements that go along with providing them (see overall comment 3).

6. This proposal deals with expanded client identification requirements. Such requirements seem to be explicitly addressed in proposals 1.3, 1.4, 1.5, 1.10, 1.11 and 2.1. It also deals with expanded record-keeping requirements that are explicitly addressed in proposals 1.4, 1.8 and 1.10 but only implicitly addressed in proposals 1.11 and 2.1. A clear linkage among the proposals would facilitate assessment of the full implications to accountants and accounting firms. The combination of all of the requirements appears to us to be a significant additional compliance burden for accountants and accounting firms (see overall comment 3).

7. The relevance of this proposal to British Columbia notaries (see page 4 of the Consultation Paper) needs to be explained, especially since the proposal is titled "accountants and accounting firms."

Proposal 1.5

The Government proposes to amend the PCMLTFA and regulations to require that for transactions above a certain threshold, when there are reasonable grounds to suspect that a new or existing customer is a foreign or domestic PEP, as defined under the regulations, reporting entities would have additional responsibilities. These entities would need to:

  • have appropriate risk management systems in place to determine whether a customer is a politically exposed person;
  • take reasonable measures to establish the source of funds;
  • conduct enhanced ongoing monitoring of the business relationship; and
  • obtain senior management approval to enact the transaction, open the account or continue the business relationship.

Points on Proposal 1.5

1. The wording of this proposal is not clear. One interpretation of it is that the entity would only be required to meet the additional responsibilities (for example, have appropriate risk management systems in place to determine whether a customer is a PEP) when there is a transaction above a certain threshold. This does not make sense. A more logical flow for the proposal would appear to be along the following lines:

  • Entities need to have appropriate risk management systems in place to determine whether a potential or existing customer is a PEP.
  • After a customer is identified as a PEP, entities need to obtain senior management approval to open the account, enact transactions or continue the business relationship and need to conduct enhanced ongoing monitoring of the business relationship.
  • With respect to PEP transactions above a certain threshold, entities would need to take reasonable measures to establish the source of funds.

2. Although, in principle, we agree that there should be additional responsibilities when a new or existing customer is a foreign or domestic PEP, the proposal is extremely vague and therefore difficult to assess. For example, the proposal does not specify what the threshold under this proposal will be. In addition, several of the terms used in the proposal are not defined (points 3 and 4 below). Therefore, it is difficult to assess how burdensome the requirements will be.

3. It is not clear what "take reasonable measures to establish the source of funds" (bullet 2 of this proposal) might encompass. The proposal should refer to the fact that more specific guidance will be developed through regulations and/or guidelines. It is not possible to assess the full implications of such a proposal without more specific guidance (for example, the nature of systems and procedures accountants and accounting firms will require, and the guidance that CICA will need to develop for chartered accountants) (see overall comment 2).

4. It is not clear what "conduct enhanced ongoing monitoring of the business relationship" (bullet 3 of this proposal) might encompass. It is not possible to assess the full implications of such a proposal without more specific guidance; for example, the nature of systems and procedures accountants and accounting firms will require, and the guidance that CICA will need to develop for chartered accountants (see overall comment 2).

Proposal 2.1

The Government proposes to amend the PCMLTFA and its regulations to explicitly include the reporting of suspicious attempted transactions.

  • All reporting entities that are currently obligated to report suspicious transactions under Part 1 of Act would be required to report suspicious attempted transactions.
  • Guidance would be provided to reporting entities to assist them in determining when to report.
  • The current form and manner of suspicious transaction reporting would remain unchanged except for the addition of information indicating that the transaction was not completed.
  • At a minimum, reasonable efforts should be made to obtain the name and address of the individual undertaking the transaction and the amount of the transaction.
  • The same record-keeping requirements in place for suspicious transactions would also apply to attempted suspicious transactions.

By requiring the mandatory reporting of such transactions, FINTRAC will be better able to comprehensively integrate this information into its analysis and improve the quality of its disclosures.

Points on Proposal 2.1

1. FINTRAC has only recently begun to identify which accountants and accounting firms are covered by the legislation and the extent of their compliance with it. In the absence of appropriate data about the incidence of reporting suspicious transactions by accountants and accounting firms, and other related data on how the current regime is working in practice, it may be premature to make such a significant change to it (see overall comment 1).

2. This proposal raises serious concerns about the ability of accountants (many of whom are sole practitioners) to cope with significant changes to the suspicious transaction reporting requirements when they are only now coming to grips with it (see overall comment 1).

3. Our limited research indicates that accountants in the US and the UK are not required to report suspicious attempted transactions. Therefore, we question why Canada would consider it necessary to implement the proposal for Canadian accountants without further information about concerns with the current suspicious transaction reporting regime, and how the proposals will address these concerns. Furthermore, we maintain that one of the reasons these jurisdictions have not implemented this FATF Recommendation is because it will not improve the quality of information provided to FINTRAC (see overall comment 2).

4. This proposal refers to the fact that more specific guidance will be developed through regulations and/or guidelines. It is not possible to assess the full implications of such a proposal in these circumstances, without more specific guidance. In particular, the application of this proposal may be relatively straight forward to implement for certain entities, such as financial institutions, because they are acting directly with a client. However, the concept of "attempted" transactions is more problematic for accountants and accounting firms that are acting on behalf of a third party. For example, many accountants act in an advisory role that will often make it difficult to identify whether there is, in fact, a "transaction" and when it is being "attempted." The current regime, which deals with actual completed financial transactions, provides greater clarity concerning these issues. Under Proposal 2.1, the current risk-based transaction approach would shift to an approach founded on subjective judgments based on circumstantial evidence and client behaviour. We doubt that reporting based on subjective speculation will result in improvements in the current regime (see overall comments 2 and 3).

5. The need for this proposed change is not explained in the Consultation Paper and, when layered on top of other expanded requirements for client identification and record-keeping (see proposals 1.1 and 1.5) would likely result in an exponential increase in the compliance burden on accountants and accounting firms. We are not convinced that this is justified (see overall comment 3).

6. It is essential to assess the potential economic impact of the proposed change in approach. For example, accountants (the majority of whom are small firms or sole practitioners) who currently provide financial intermediary services to clients for perfectly bona fide reasons may decide to withdraw such services because they are not economical given the additional compliance requirements that go along with providing them (see overall comment 3).

7. This proposal states (see bullet 5) that "The same record-keeping requirements in place for suspicious transactions would also apply to attempted suspicious transactions." The intent of this proposal is not clear given that, under the current regime, neither the legislation nor the regulations require that records be kept for suspicious transactions.

Specific Points on Other Proposals

Proposal 1.3

1. The relevance of this proposal to British Columbia notaries (see page 4 of the Consultation Paper) needs to be explained, especially since the proposal specifically refers to "accountants, accounting firms and real estate brokers or sales representatives."

2. The second bullet of the proposal makes reference to proposal 1.9. Our understanding is that proposal 1.9 is not meant to apply to accountants and accounting firms.

Proposal 1.4

1. This proposal would require accountants and accounting firms to identify and verify the client's information, record the source of that information and record the method of identification, all without "tipping off the client" about the suspicious transaction. Without more specific details on its scope and application, it is difficult to assess whether the proposal is operational; for example, the nature of systems and procedures accountants and accounting firms will require, and the guidance that the CICA will need to develop for chartered accountants (see overall comment 2).

Proposal 1.10

1. We support the overall intent of this proposal to improve the collection of information about third parties and beneficial owners. However, the proposal requires that the reporting entity obtain, verify and keep records of all third parties or beneficial owners. We maintain that these requirements are extremely onerous and, in fact, go beyond FATF Recommendation 5(b). In addition, when considered in relation to the proposed AMP regime in proposal 3.2, this proposal could give rise to a significant increase in compliance violations.

2. It appears that this proposal, when combined with proposal 1.1, will contribute to a significant increase in the compliance burden for accountants and accounting firms (see overall comments 1 and 2).

Proposal 1.11

1. It is not clear what "monitor their business relationships" (in bullet 1 of this proposal) might encompass or how it compares with "enhanced ongoing monitoring" as discussed in proposal 1.5. This proposal should refer to the fact that more specific guidance will be developed through regulations and/or guidelines. It is not possible to assess the full implications of such a proposal without more specific guidance; for example, the nature of systems and procedures accountants and accounting firms will require, and the guidance that the CICA will need to develop for chartered accountants (see overall comment 2).

Proposal 3.2

1. This proposal refers to the creation of an AMP regime, including the issuance of a Notice to reporting entities that do not comply. It is not clear whether the name of the violator and any details of the violations would be posted on FINTRAC's website only after the reporting entity had exercised the right of appeal and recourse to a defence of due diligence.

2. We maintain that the proposal to "name and shame" violators on the FINTRAC website runs counter to the cooperative efforts FINTRAC has made up to now to work closely with reporting entities as they implement the current regime. Obviously, reporting entities will be much more reluctant to cooperate with FINTRAC, if they know that any violations will be made public. We also question whether putting the names of violators on FINTRAC's website is really necessary for relatively minor violations.

Proposal 5.1

1. This proposal refers to the creation of an AML/ATF advisory committee. We support the creation of this committee as it will serve to foster an environment of cooperation and coordination that will benefit the regime as a whole. However, consideration should be given to reducing the size of the proposed committee to 15 members, rather than 20-25 to ensure that the committee operates efficiently and effectively. This could be achieved by having only one representative from each stakeholder group (such members could be changed on a rotational basis according to different constituents within each stakeholder group).

2. The CICA would be pleased to serve as a member of the advisory committee representing the "accountants and accounting firms" stakeholder group.