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The Investment Funds Institute of Canada's Submission in Response to Finance Canada's Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime consultation:
BY MAIL & E-MAIL:
September 23, 2005
Department of Finance
140 O'Connor Street
Attn: Diane Lafleur - Director, Financial Sector Division
Re: Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime - Comments of The Investment Funds Institute of Canada
We are pleased to provide the comments of The Investment Funds Institute of Canada ("IFIC") and its Members with respect to the Consultation Paper "Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime" (the "Consultation Paper") published for comment by the Department of Finance ("Finance"), on June 30, 2005.
Founded in 1962, IFIC is the industry association of the Canadian investment funds industry. IFIC membership is restricted to investment fund managers and dealers managing over $500 billion in assets on behalf of Canadian investors, and service providers to such firms.
The proposals set out in the Consultation Paper seek to strengthen know your client ("KYC") standards; close gaps in Canada's Anti-Money Laundering ("AML")/Anti-Terrorist Financing ("ATF") regime; increase compliance, monitoring and enforcement; strengthen the intelligence function of the Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC"); and coordinate and assess overall AML/ATF efforts.
While our Members support these objectives, we believe that it is important to pursue them in a manner that adequately respects the privacy of Canadian mutual fund investors and that does not place an undue burden on reporting entities.
We are grateful to Finance for acknowledging, in the Introduction to its Consultation Paper, the need to remain sensitive to these important considerations.
The specific comments of our Members on the Consultation Paper are set out below. Please note that we have no objection to these comments being posted to the Finance Canada website.
2. Specific Comments
Proposal 1.4 - Suspicious Transactions and Doubtful Client Information
This Proposal would amend the Proceeds of Crime (Money Laundering) and Terrorist Financing ("PCMLTF") Regulations to require reporting entities subject to Part 1 of the PCMLTF Act to take certain measures when there is a suspicion of money laundering or terrorist financing and the identity of the client has not previously been ascertained.
These measures would include:
- Identifying and verifying a client's information (only, however, to the extent that such identification could be accomplished without tipping off the client) and
- When there is a suspicion of money laundering or terrorist financing, and there are doubts about the veracity or adequacy of previously obtained client information, the reporting entity should repeat the process of identifying and verifying the client's information (again, verification would only be required to the extent that it could be accomplished without tipping off the client).
We note, with respect to this Proposal, that it would be difficult to identify and verify customer information for individual clients after a sale has been completed. Moreover, as no obvious purpose would be served by going back to a client and asking them to re-verify information that has just been collected (and as it is not part of the regular practice of our industry to do so) the risk of tipping off a client would, in the view of our Members, be very high.
We therefore ask that Finance remove this requirement or, in the alternative, include language that explicitly states that a reporting entity will have no obligation under this Proposal if the reporting entity determines that it cannot complete the verification or re-verification of a client's information without tipping off the client.
We also ask that Finance clarify what, at a minimum, would be expected from our Members in terms of verifying a client's information.
Proposal 1.5 - Politically Exposed Persons ("PEPs")
The Consultation Paper notes that the FATF defines PEPs 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."
In the view of our Members, the definition of PEPs is not sufficiently clear and will lead to any requirements around PEPs being difficult to implement. We ask Finance for clarification with respect to the following issues.
Will consideration be given to the publication of an international list of PEP's that organizations can rely on? If not, what criteria will organizations be expected to use in defining who is or is not a senior politician, senior government official or important political party official? As determining an individual's occupation might not be sufficiently precise and as it is not useful to ask the question "Are you a PEP?" (or permissible to do so, given the obligation to avoid tipping off a potential customer about a reporting entity's suspicions), what question or questions would organizations be expected to ask at the time of account opening to determine if a potential client was a PEP? Would senior management approval be required to deal with PEPs on a case by case basis or would standing approval by way of a blanket policy be sufficient?
In addition, FATF recommendation 6 states that "Financial institutions should have appropriate risk management systems to determine whether the customer is a politically exposed person." We ask that Finance clarify what the minimum requirements for such a risk management system would be.
In the view of our Members, it would be impractical and result in an inconsistent level of scrutiny to allow individual reporting entities to determine what persons qualify as PEPs. While we are sensitive to the fact that it may be difficult to develop a comprehensive list of PEPs (i.e. that contains both heads of state and lower level officials), we believe this to be the most reasonable way to fulfill this requirement.
Accordingly, we recommend that such a list be published for use by organizations and updated on an ongoing basis and that the requirement to identify PEPs be confined to the names of PEPs published on this list.
Proposal 1.8 - Agents or Introducers
Currently, a securities dealer is not required to ascertain the identity of a person who is authorized to give instructions in respect of an account that is opened for the sale of mutual funds where there are reasonable grounds to believe that the person's identity has been ascertained by another securities dealer in accordance with paragraph 64(1)(c) of the PCMLTF Regulations.
Proposal 1.8 would modify the current requirement and only allow a reporting entity to rely on another person or entity to ascertain the identity of their customer if the reporting entity has a contractual arrangement with the person or entity for the purpose of ascertaining customer identity.
Thus "having reasonable grounds" to believe that the person's identity has been ascertained by another securities dealer in accordance with section 64(1)(c) of the PCMLTF Regulations would no longer suffice.
While we understand that Finance is simply seeking to formalize the process of reliance that is currently available to securities dealers pursuant to subsection 57(5) of the PCMLTF Regulations, this Proposal would significantly impact our Members and reflects a lack of understanding of how the relationships between fund managers and dealers operate. We urge Finance to meet with our Members to discuss this aspect of Proposal 1.8 in greater detail.
We strongly recommend that Finance not proceed with the proposed requirement for a contractual arrangement for the purposes of ascertaining identity and ask that Finance preserve the ability of a securities dealer to rely on another securities dealer to ascertain identity pursuant to subsection 57(5) of the PCMLTF Regulations as currently drafted.
Proposal 1.8 would require an agent of a reporting entity to ascertain client identity in person by referring to a government-issued identity document.
As opposed to requiring an agent of a reporting entity to ascertain client identity in person, we ask that Finance consider allowing an agent of a reporting entity to confirm that a cheque drawn by the client on an account of a financial entity subject to the PCMLTF Act has been cleared.
Proposal 1.8 also states that the reporting entity (while using an agent to identify a client) would be required to keep records specified under the Regulations. We ask that Finance allow the agent of the reporting entity to keep the required records at its office provided that the agent agrees to make these records available to the reporting entity upon request.
Proposal 1.9 - Non-Face-to-Face Customer Identification Measures
In our view, confirming the clearing of a cheque that has been drawn by the person on an account of a financial entity subject to the PCMLTF Act would be the most practical method of confirming client identity in non-face-to-face situations as it avoids unnecessary duplication in the verification process.
Proposal 1.10 - Identification of Third Parties and Beneficial Owners
This Proposal would amend the PCMLTF Regulations to require, in every situation where client identification requirements are triggered, that reporting entities also obtain third party and beneficial owner information and take reasonable measures to verify this information.
We ask that Finance set out what, at a minimum, would constitute reasonable measures pursuant to the requirements of this Proposal. We suggest that making a formal request for this information (along with explaining to the client why this information was being requested) would suffice.
Obtaining information for private corporations will likely require subscription to an external service like Equifax or D&B and subscribing to such services will add costs to the operations of our Members. Corporate searches, for example, do not provide the information on shareholders that is contemplated by this Proposal and verifying the occupations of the shareholders of any corporation cannot be done through any public channels. The same is generally true for partnerships and Non-Profit Organizations ("NPOs"). The only public information source for registered charities is the Canada Revenue Agency ("CRA") website.
Accordingly, we recommend that the verification of third party information be limited to information that is publicly available. Otherwise, significant expense will be incurred by reporting entities in searching and documenting information that is only available from private service providers. We also believe that large, well-known public companies should be excluded from the requirements of this Proposal.
We ask Finance to remain aware of the possibility that, depending on the nature of the relationship between the third-party and the client, there may be confidentiality and privacy issues that prevent the verification of such information.
We also ask that this Proposal include language that explicitly sets out all exemptions from the third party/beneficial owner determination.
With respect to trusts, reporting entities would be required to obtain, verify and keep records of the name, address and occupation of all settlers and all living beneficiaries of the trust and also take reasonable measures to establish the source of funds.
Trustees and beneficiaries consider this information to be confidential and, in our view, would be very opposed to providing it. We recommend that this Proposal be amended to require reporting entities to take reasonable measures to obtain the names of beneficiaries. If the names of beneficiaries cannot be obtained after the reporting entity has taken reasonable measures, the reporting entity should be able to either proceed with the transaction or file an attempted suspicious transaction report, if the reporting entity deems it reasonable to do so in the specific circumstance, having regard to the information available to it at the time and any other considerations that it deems to be relevant.
The requirement to determine the name and occupation of all living beneficiaries would be very difficult to comply with. Our Members deal with trustees and do not know or interact with the beneficiaries of the trust. Trustees may not know the occupation of all beneficiaries and are not required to know this information to act in the capacity of trustee. Moreover, the name and occupation of the beneficiaries is not information that is necessary to manage and provide services to the trust (i.e. in order to comply with KYC obligations or to make trades in the account).
The difficulties in obtaining this information would be compounded by having to update it on an ongoing basis. We ask Finance to clarify how often a reporting entity would be expected to approach trustees to try to obtain updated information for all beneficiaries. We recommend that updates to this information be required annually so as to coincide with the frequency with which KYC requirements must be updated.
Corporations and Business Customers - Beneficial Owners
When the customer is a business, reporting entities would be required to obtain, verify and keep records of the name, address and occupation of all natural persons who own or control, directly or indirectly (for example through the ownership of a legal entity), more than 10 per cent of a corporation or partnership.
With respect to complex ownership/holding structures where a corporation is partly owned by a trust, a private company may be the customer of a dealer with a trust owning 10 per cent (or more) of the shares in the private company. Would the requirement in this situation be to simply identify the trustee or to determine who all of the beneficiaries of the trust are? As noted earlier, this information will be very difficult to obtain and track as trustees may not know the occupation of all beneficiaries and are not required to know this information to act in the capacity of trustee.
Proposal 1.11 - Ongoing Due Diligence
This Proposal would require reporting entities to implement procedures to ensure that customer information remains up-to-date.
We ask Finance to specify, at a minimum, how often client information would need to be updated. In addition, some firms employ a negative option method to confirm KYC information. Would this be considered an appropriate procedure?
Proposal 1.13 - Client Information Transmission
Pursuant to this Proposal, when the reporting entity is the recipient of an international electronic funds transfer ("EFT"), it should take reasonable measures to ensure that the EFT that it receives includes the originator information required in Proposal 1.12.
What will be expected of reporting entities if, after taking reasonable measures, originator information cannot be obtained with respect to international EFTs that they have received?
Proposal 2.1 - Suspicious Attempted Transactions
We strongly encourage Finance to seek further input from our Members with respect to defining and reporting suspicious attempted transactions in our industry as what constitutes an attempt is likely to vary significantly between industries.
Proposal 3.2 - Dealing with Individuals or Entities that do not Comply with the PCMLTF Act
The Government proposes to create an Administrative and Monetary Penalties ("AMP") regime to deal with individuals and entities that do not comply with the requirements of the PCMLTF Act. One of the key features of this regime would include making the name of the offender and details of the violation available on FINTRAC's website.
Our Members are of the view that this Proposal is inappropriate, particularly as it does not include a de minimis / materiality test. We strongly encourage Finance to remove this proposed requirement.
In the alternative, our Members believe that a materiality test should be added to this Proposal so that the names of organizations are only subject to publication on FINTRAC's website for material violations. In addition, as listing an organization as an offender on FINTRAC's website could significantly impact the reputation of the listed organization, we ask for clarification with respect to the party or parties that would be responsible for making the decision to list an offender (an individual or a tribunal), how the appeal process would operate and how a reporting entity would be required to proceed to have its name removed from FINTRAC's website.
This Proposal must, in our view, include an appeal process that affords a reporting entity the opportunity to explain and address any potential problem and exhaust all rights of appeal and recourse prior to its name being posted to FINTRAC's website.
Proposal 3.3 - Sharing Compliance-Related Information with Foreign Partners
The Consultation Paper notes that "the Government proposes to establish legislative authority to allow FINTRAC to share compliance-related information with foreign entities that have similar compliance functions. Examples of the type of compliance information which would be eligible for sharing include: case-specific information on compliance deficiencies; examination results; and risk assessment information."
We seek clarification as to whether the information sharing contemplated by this Proposal would include naming individual organizations and sharing the results of compliance examinations for those named firms. If so, we believe that this level of disclosure is too detailed and would only result in the sharing of information that is highly sensitive but not otherwise meaningful or material.
Proposal 5.1 - Creating a New AML/ATF Advisory Committee
We strongly support the creation of an advisory committee that would include private sector stakeholders. We believe that this advisory committee should be used as a mechanism to (a) escalate general concerns about the legislative regime, the cost/benefit impact of current and proposed rules and specific areas of regulation in need of timely/immediate improvement, and (b) to recommend alternative means to achieve objectives when increased regulation is being contemplated. We ask that these functions be specifically included as part of the advisory committee's mandate.
We also ask that Finance, when seeking advisory committee representatives from our industry, ensure that both our mutual fund dealer and mutual fund manager Members are adequately represented. We would be pleased to help you identify suitable industry representatives, should you wish our assistance.
We note that Proposal 5.1 does not identify the public sector representatives that would be on the advisory committee.
We believe that a representative from the Office of the Privacy Commissioner of Canada must be included on this advisory committee as our Members have significant concerns with respect to the potential for conflict between the disclosure requirements of AML/ATF legislation and the current requirements of Canadian privacy laws.
In our view, to ensure that Canada's AML/ATF legislation and Canadian privacy laws do not subject our Members to conflicting requirements, both Finance and the Office of the Privacy Commissioner of Canada must have a practical understanding of the business of our Members and how AML/ATF proposals and current privacy legislation would apply and interact in our industry. Again, we would be pleased to host/coordinate informational meetings with our Members, should you wish.
Proposal 6.5 - CRA - Issued Business Numbers
This proposed amendment to the PCMLTF Regulations would require a reporting entity to obtain the CRA-issued business number when ascertaining the identity of a client that is a business. It would also require the business number to be reported to FINTRAC on a suspicious or prescribed transaction report.
We ask that Finance clarify this Proposal by adding language to state that obtaining the CRA-issued business number will only be required where such a number has been issued.
Where a CRA-issued business number is available, we believe that it would be sufficient to identify/verify the identity of a business by using this number alone. Accordingly, we ask that Finance only require the CRA-issued business number, where one has been issued, to identify/verify the identity of a business and not also require that the legal corporate name or incorporation number be obtained.
Proposal 6.13 - Providing Documents to Compliance Officers
This proposed amendment to the PCMLTF Act would require that documents requested by a FINTRAC compliance officer be produced at a site determined by FINTRAC. The purpose of the amendment is to allow FINTRAC to conduct examinations in its own offices and avoid having to request a search warrant for reporting entities that operate in dwelling houses that deny FINTRAC access to their premises.
In our view this Proposal is overbroad. We recommend that Finance amend this Proposal to state that the requirement to produce documents at a site determined by FINTRAC will only apply to reporting entities that operate in a dwelling house.
Proposal 6.14 - Compliance Questionnaires
This proposed amendment to the PCMLTF Act would require reporting entities to complete and return compliance questionnaires sent by FINTRAC. These questionnaires would then be used for risk-assessment purposes.
Responding to compliance questionnaires, depending on the level of detail requested in the questionnaire, could require our Members to divulge highly sensitive information about their operations. Finance must ensure that the privacy of any information collected from our Members is safeguarded and disclosed/made available for disclosure only to the extent that it is directly relevant to a matter currently under investigation and only to the party/parties that are empowered and required by legislation to investigate the matter.
Finance must also ensure that its requests for information are commensurate to the present need for that information (i.e. a general questionnaire that all reporting entities must complete, without any suspicion of questionable practices on their part, should not, at first instance, require those reporting entities to divulge detailed compliance-related information).
We understand, from the question/answer session that followed your August 22, 2005 presentation to our Members that the Proposals set out in the Consultation Paper are meant to apply to both new and existing accounts.
Any Proposals that require our Members to collect and track new information will, for new accounts, necessitate that our Members devote significant time and resources to the review and revision of existing policies/procedures and client forms. Our Members will also have to determine how to operationally express new requirements so that they can be translated into appropriate system builds. In addition, for existing accounts, our Members will have to manually collect and document new information for many clients. This will be an expensive and time consuming process. We urge Finance to apply new requirements on a go-forward basis only (i.e. only to new accounts) and to avoid requiring that new requirements apply to existing accounts.
For the reasons noted above, our Members will require a significant transition period to comply with any new requirements. We recommend that Finance engage in further consultations with our Members to determine in greater detail what the various implementation issues are and what a reasonable transition period would be, or whether a staggered implementation of new requirements would be more appropriate. We would be pleased to assist you in this respect by arranging a meeting with a group of our Members at a mutually convenient time.
3. In Closing
We thank Finance for its ongoing efforts to strengthen Canada's AML/ATF framework and hope that you find out comments helpful. We look forward to the outcome of the legislative review of the PCMLTF Act.
Please contact John W. Murray, Vice President, Regulation & Corporate Affairs at (416) 363-2150 x 225 /ï¿½ firstname.lastname@example.org or Aamir Mirza, Legal Counsel, Regulation at (416) 363-2150 x 295 / email@example.com should you have any questions.
The Investment Funds Institute of Canada
By: Original signed by Thomas A. Hockin
Hon. Thomas A. Hockin
President & Chief Executive Officer
1 Subsection 57(5) PCMLTF Regulations. [return]
2 As is currently permitted, pursuant to subsection 64(1)(c)(ii)(A) of the PCMLTF Regulations, in circumstances where the person is not physically present when the account is opened. [return]