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Advocis' Submission in Response to Finance Canada's Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime consultation:
350 Bloor Street East, 2nd floor
Toronto, Ontario M4W 3W8
Steve Howard, CA
President and Chief Executive Officer
September 30, 2005
Director, Financial Sector Division
Department of Finance
140 O'Connor Street
Ottawa, Ontario K1A 0G5
Dear Ms. Lafleur:
Re. Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime
Advocis appreciates the opportunity to provide its comments to the Department of Finance on the Federal Government's Consultation Paper on Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime. We commend the Government for its efforts on Canada's anti-money laundering (AML) and anti-terrorist financing (ATF) framework and its goal of being at the forefront in the global fight against these crimes, thereby contributing to public safety in Canada and worldwide.
Advocis is a voluntary professional membership association of financial advisors in Canada, with 12,000 members across Canada. Our members are financial advisors licensed to distribute life and health insurance, mutual funds and other securities. Advocis members provide financial and product advice to millions of Canadians across a variety of distinct areas, including: estate and retirement planning; wealth management; risk management; and tax planning.
Our Association traces its origins to the founding of the Life Underwriters Association of Canada (LUAC) in 1906. Advocis continues an uninterrupted history of serving Canadian financial advisors, their clients, and the nation for nearly a century. Advocis is committed to professionalism among financial advisors.
Anti-money laundering and anti-terrorist financing legislation applies to financial advisors to the extent that they operate as insurance agents and persons authorized to engage in the business of dealing in securities. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "Act") creates a reporting and identification regime to which our members must subscribe that will be modified by proposals contained in the Consultation Paper.
Advocis has an interest in ensuring that the proposed changes to the Act and its Regulations achieve their objectives. To do so effectively in practice, it is important to take into consideration the impact that these proposals may have on independent financial advisors before draft legislation and regulations are developed to amend the Act.
Our submission focuses primarily on proposed changes regarding the obligations of advisors to ascertain identity, particularly in situations where there is doubtful client information, non-face-to-face situations and third party and beneficial ownership information, compliance issues, and their potential impact on financial advisors. The introduction of a new administrative monetary penalty regime also represents an important change affecting financial advisors.
The Consultation Paper proposals will generally impose more onerous obligations to ascertain identity especially in situations where there is doubtful client information, non-face-to-face situations and third party and beneficial ownership information. Other important changes that will impact upon the business of insurance companies and securities dealers include:
- The requirement to ascertain client and beneficiary information when a client requests a domestic or international electronic fund transfer;
- The requirement for securities dealers to report to FINTRAC international electronic fund transfers of $10,000 or more; and
- The requirement to report attempted suspicious transactions.
Of the proposed changes, the introduction of a new administrative monetary penalty regime represents a potentially serious change affecting financial advisors. In addition to criminal sanctions, financial advisors who fail to comply with the Act and the Regulations may be subject to severe, graduated administrative and monetary penalties. The main obligations as provided in the Act will continue to apply as discussed below.
When a life insurance agent is an employee of a life insurance company or broker, compliance with the requirements of the Act and the Regulations are the responsibility of the life insurance company except with respect to reporting suspicious transactions and terrorist property, which is applicable to both. Similarly, securities dealers must report suspicious transactions, possession of terrorist property and large cash transactions. With respect to large transaction records, reasonable measures must be taken to determine whether an individual is acting on behalf of a third party. Where an annuity or life insurance policy is purchased, and the client is required to pay $10,000 or more over the duration of the policy, reasonable measures must be taken to determine whether the client is acting on behalf of a third party.
Specific comments on various proposals presented in the Consultation Paper are discussed below. These comments represent the areas identified that could potential impact financial advisors, to the extent that financial advisors operate as insurance agents and persons authorized to engage in the business of dealing in securities as defined under the Act.
Proposal 1.4: Suspicious Transactions and Doubtful Client Information
The Regulations to the Act would be amended to require reporting entities to identify and verify the customer's information, when there is a suspicion of money laundering or terrorist financing and the identity of the client has not previously been ascertained or where the veracity or adequacy of previously obtained customer information is in doubt.
This proposal does not provide specific details regarding what measures should be taken to verify client information and how far a reporting entity or person must go to obtain such information. This could have implications for compliance and the proposed penalty regime if not clearly defined.
Proposal 1.5 - Politically Exposed Persons (PEPs)
The Government proposes to amend the regulations of the Act to require reporting entities to undertake the following additional responsibilities with respect to or transactions above a certain threshold, where there are reasonable grounds to suspect that a new or existing customer is a foreign or domestic Politically Exposed Person:
- Have appropriate risk management systems in place to determine whether a customer is a PEP;
- 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.
We encourage the Government to provide further guidance on what constitutes "reasonable measures" in attempting to ascertain sources of funds. Moreover, establishing management systems to monitor ongoing business relationships can be onerous for individual financial advisors and smaller financial advisory firms. As with proposal 1.4 above, this could have significant implications for compliance of affected persons and entities. In devising Regulations, it is important to take into account the challenges faced by financial advisors in complying with onerous reporting and monitoring systems, compared to the capacity and wherewithal of larger companies to comply.
1.7 Low Risk Situations
The Government proposes to amend the Regulations to exempt a number of transactions from the client identification and record-keeping requirements and to extend the record-keeping exemptions to the range of transactions that are exempt from the client identification requirements under the current regulations. The Government should, on an on-going basis, review lower risk situations and ensure that they are exempt from the onerous reporting requirements so that compliance costs can be minimized.
For example, financial entities must keep a large cash transaction record in respect of every amount in cash of $10,000 or more that is received from a client in the course of a single transaction, unless the cash is received from another financial entity or a public body. This cash amount should include all types of transfers as well as third party cheques from financial institutions (i.e., endorsed cheques from one financial institution deposited into another).
Under the current legislation, every life insurance company or life insurance broker or agent must keep a client information record for every purchase from it of an immediate or deferred annuity or of a life insurance policy for which the client may pay $10,000 or more over the duration of the annuity or policy, irrespective of the means of payment. While agents and brokers deal directly with clients, and maintain client information, insurance companies approve insurance policy applications and maintain detailed client information as a matter of policyholder approval. Therefore, requiring brokers / agents to maintain the level of detailed client information in the proposals does little to enhance safeguards to the anti-money laundering tracking system. Therefore, this should be characterized as a low risk situation.
1.9 Non-Face-to-Face Customer Identification Measures
The Government proposes to conduct consultations with reporting entities to establish appropriate non-face-to-face client identification requirements. Baseline criteria will be established in respect of client identification measures, whether documentary or not. For example, verifying the customer's identifying information using an independent source such as a business information services company.
We urge the Government to consult directly with the independent financial advisor community to determine the challenges facing small and medium-sized operations to incur costs of verifying client information.
1.10 Identification of Third Parties and Beneficial Owners
The Government proposes to amend Regulations to the Act such that in every situation where customer identification requirements are triggered, reporting entities will be required to obtain third party and beneficial owner information and to take reasonable measures to verify this information. Reporting entities will be required to determine whether the customer is acting on behalf of third parties.
Furthermore, when the customer is a business, reporting entities will be required to obtain, verify and keep records of the name, address and occupation of all persons who own or control, directly or indirectly more than 10% of a corporation or partnership. Similar requirements will be in place in respect of trusts.
Finally, if the customer is a not-for-profit organization (NPO), reporting entities would be required to obtain, verify and keep records of the name, address and occupation of all senior officers and directors. They would also be required to determine whether the NPO is soliciting, as defined under the Canada Not-for-profit Corporations Act, and keep a record of this information.
This proposal makes no reference on the extent of verification measures which reporting entities or persons must take to ascertain this information from their clients. For example, if clients are not forthcoming with specific pieces of information, what obligations does the reporting entity have to further pursue the client to obtain the information? Again, it is important to consider the ability and cost implications of smaller financial advisors under this proposed change.
1.12 Electronic Fund Transfer (EFT) Customer Due Diligence and Record Keeping
The Consultation Paper proposes to amend the Regulations to require that a financial entity initiating a domestic or international EFT at the request of a client, regardless of the amount, ascertain the identity of the client and keep records of the following information:
- Name and address of the client;
- Account number or reference number;
- Telephone number of the client;
- Name and address of the person on whose behalf the EFT is made;
- Type and number of identity document; and
- Name and address of the beneficiary.
While information regarding the client requesting the transfer is readily available and kept up-to-date by financial advisors, information regarding the beneficiary would need to be requested and verified under the proposal. Advocis recommends that this proposal be modified to exclude EFTs to immediate family members. A significant proportion of all EFTs, whether domestic or international, originating from clients of financial advisors is directly to family members. This would reduce the compliance burden of financial advisors significantly, especially given that the proposal is in respect of all transfers irrespective of the amount, with little risk to the tracking system in the proposed anti-money laundering regime. Furthermore, the Government should consider introducing an EFT threshold amount to which these information requirements should apply. This would lessen the record-keeping compliance burden of financial advisors assisting clients with relatively small and routine transfers of funds to family members or otherwise.
2.1 Reporting of Suspicious Attempted Transactions
The Government proposes to amend the Act and Regulations to explicitly include the reporting of suspicious attempted transactions.
We are encouraged that the Government will be providing guidance to reporting entities to assist them in determining when to report attempted transactions. This is important, especially under certain circumstances where little if any client information may be obtainable. For example, advisors often meet clients for the first-time who are seeking some initial financial advice or guidance. This may not result in a transaction. Moreover, the client may not retain the services of the advisor in an official capacity. Would this constitute an attempted transaction under these circumstances? A significant amount of information pertaining to the client is often only obtained when the client approves an initial transaction with the advisor. Therefore, we urge the Government to give this issue serious consideration before proceeding with proposed amendments to the Regulations that will mandate keeping information on potential clients and reporting attempted suspicious transactions.
3.2 Creating an Administrative and Monetary Penalties ("AMP") Regime
The Government Proposes to amend the Act and Regulations to establish an AMP compliance regime with the capacity to impose appropriate penalties and sanctions on individuals and entities that are non-compliant with the Act. Criminal sanctions that already exist to deal with willful non-compliance and other serious violations are effective in dealing with the most severe offenses found in the Act. However, an AMP regime will deal with a much wider range of infractions ranging from failure to keep appropriate records to failure to report suspicious activities. Key features of the regime will include:
- A clear description of the violations (e.g., failure to identify clients and keep appropriate records);
- A clear schedule of graduated penalty amounts;
- Penalties would be established in regulations and would be assessed by FINTRAC;
- A Notice would be issued to entities that do not comply;
- The name of the offender and details of the violation would be made available on the FINTRAC website; and
- AMPs will be used as a complementary compliance tool to criminal sanctions.
While it is the Government's intention to provide clear descriptions of violations and a clear and understandable penalty schedule regarding AMPs, it will be left largely to the discretion of the regulating body, in this case FINTRAC, to decide when to exercise AMPs. This often involves applying some sort of threshold regarding the type of infraction and whether the AMP should apply. Furthermore, penalties and sanctions on individuals and entities, while a means of ensuring compliance with the Act, must be commensurate with the type of infraction under the Act. We urge the Government to consult extensively on this aspect of enhancing the AML and ATF regime to ensure that appropriate and clear rules are established and that the regulatory authority does not apply AMPs on an ad hoc basis.
5.1 Creating a New AML/ ATF Advisory Committee
The Government proposes to establish an AML/ATF advisory committee with the following key characteristics:
- The committee's mandate will be to advise the Government on issues of common interest and develop approaches for dealing with emerging issues;
- The committee will serve as a discussion forum;
- The committee will comprise of representatives from the public and private sectors; and
- The committee will be chaired by the Department of Finance.
Advocis is fully supportive of this approach to develop ongoing dialogue with industry and government stakeholders, and would welcome the opportunity to participate on this advisory committee.
In conclusion, anti-money laundering and anti-terrorist financing proposals in this Consultation Paper will apply to financial advisors to the extent that they operate as insurance agents and persons authorized to engage in the business of dealing in securities. Given the proposals of the Consultation Paper, more onerous obligations to ascertain identity particularly in situations where there is doubtful client information, non-face-to-face situations and third party and beneficial ownership information will be required. The introduction of a new administrative monetary penalty regime also represents an important change impacting financial advisors.
It is important that the impact of these measures on independent financial advisors is taken into consideration when legislation and regulations are being developed. This is particularly important for individual advisors and small and medium-sized financial advisory firms that have resource constraints and face challenges that are quite different from large companies.
We look forward to working with the Department of Finance in developing an appropriate anti-money laundering and anti-terrorist financing framework to assist the Federal Government in meeting its objective of being at the forefront in the global fight against these crimes, and in improving public safety in Canada and worldwide.
1. Politically exposed persons (PEPs) are defined as individuals who are or have been entrusted with prominent public functions such as Heads of State, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations and important political party officials. PEPs constitute higher risk customers for financial institutions and intermediaries as they have potentially greater opportunities to engage in corrupt activities. [Return]