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Ad Hoc Group Submission in Response to Finance Canada's Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime consultation:

Ad Hoc Group on Anti-Money Laundering and Anti-Terrorist Financing
Submission on the Department of Finance Consultation Paper

"Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime" (June 2005)

September 2005

Table of Contents

Introduction Comments on Specific Proposals

Additional Issues for Consideration


This document contains proposals of the Ad Hoc Group on Anti-Money Laundering and Anti-Terrorist Financing[1]  (the "Ad Hoc Group") on Proposals set out in the Department of Finance's Consultation Paper issued in June 2005 entitled "Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime" (the "Consultation Paper"). We are members of the Canadian Bankers Association (the "CBA") and our proposals are aligned with the CBA's submissions. This document identifies proposals on which we have specific submissions as they relate to credit products.

The Ad Hoc Group is thankful for the opportunity to provide our comments on the Consultation Paper and we look forward to meeting with you regularly over the next few months. Our institutions are committed to ensuring that our products are not used to facilitate money laundering and terrorist financing activities. Recognizing that Canadian legislation must be aligned with the Financial Action Task Force ("FATF") on Money Laundering's "The Forty Recommendations" (June 20, 2003) (the "FATF Recommendations"), all submissions in this document are consistent with the FATF Recommendations.

Risk-Based Approach and Credit Products.

We advocate a risk-based approach to customer identification verification in this age of rapid advances in new technologies and business models. The requirements of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the "Regulations") make no distinction between deposit accounts and credit products, each of which may present different types of risk as it relates to money laundering and terrorist financing. In enhancing the Regulations consideration should be given to the specific features unique to credit products. For example, the current Regulations contain record keeping requirements that cannot be applied to credit products like the requirements to keep signature cards and deposit slips. Neither exists for credit products; they are for deposit accounts (please see Additional Issues for Consideration stated on Page 10 of this document). A further distinction should be made between consumer and corporate credit products, with corporate credit products posing different risks and operating under different business models. The amended Regulations should set out provisions specific to each of consumer and corporate credit products that are commensurate with the risks they present.

Expanded Options For Customer Identification.

We are very pleased with the government's recognition of the need for changes and support Proposals for expanded options for customer identification. The Consultation Paper acknowledges the increasing use of non-face-to-face channels, allowing consumers more flexibility in fulfilling their financial needs. Credit product issuers have been accepting credit applications via these non-traditional channels for several years and have developed extremely robust non-documentary customer identification procedures. Prudential risk management already requires us to perform sufficient due diligence prior to establishing relationships with borrowers.

Corporate credit products operate under a unique business model and appropriate client identification options should be permitted. We understand that we will work with the Department of Finance to establish suitable due diligence procedures.

When non-documentary baseline customer identification procedures are developed and incorporated into the Regulations, they should be regarded as a true alternative for customer identification in both face-to-face and non-face-to-face customer interactions. This will ensure a level playing field, which will promote choice, convenience, and competition in the market place for consumers.

Significant Lead Time Needed.

We are committed to world class anti-money laundering and anti-terrorist financing practices. In order to address many of the new requirements that may result from this process, reporting entities will need considerable time to implement changes to systems, practices, and training programs.

Comments on Specific Proposals

Set out below are our comments on the specific Proposals in the Consultation Paper. We provide our comments in the same order as the Proposals are addressed in the Consultation Paper for convenient reference. This should not be taken as prioritization of the issues from our perspective.

Proposal 1.4 Suspicious Transactions and Doubtful Client Information

We support this recommendation. However, we submit that the Regulations should clearly state that the method of ascertaining identity of the customer under this condition need not replicate the method used at account opening, and may differ from the customer identification measures provisioned in the Regulations for account opening. The guidelines should clarify that non-documentary verification procedures may be utilized under this condition to avoid 'tipping off' the customer. See our submission on Proposal 1.9.

Proposal 1.5 Politically Exposed Persons

The definition of Politically Exposed Persons ("PEPs")as drafted is too broad. A list of PEPs should be provided to reporting entities by government, similar to the current lists provided by the Office of the Superintendent of Financial Institutions ("OSFI"). This would eliminate discrepancies between entities caused by interpretation and procedural variances that would occur if entities were expected to create and maintain PEP lists individually.

A risk management approach should be taken, as appropriate, for individual reporting entities and their products in establishing the threshold at which transactions will require enhanced monitoring and senior management approval in order to avoid unnecessary, non-value added work for reporting entities.

A distinction between corporate and consumer cards is necessary to remove the burden on banks to have to monitor PEPs who are customers under a corporate credit program. As such, an exemption should be made for corporate credit programs established for government organizations (federal, provincial, municipal, crown corporations and agencies).

Proposal 1.7 Lower Risk Situations

We recommend one additional exemption be made for corporate credit programs established for government organizations (federal, provincial, municipal, crown corporations and agencies) as well as public sector companies.

Proposals 1.8 and 1.9 Non-Face-to-Face Situations

A non-documentary method is more responsive than a documentary method to emerging technologies both in terms of new money laundering and terrorist financing methods and trends as well as leveraging technological innovations and information for timely and effective counter measures. This is consistent with the government's stated goal of having an anti-money laundering and anti-terrorist financing regime that is effective and responsive to change, without placing an undue burden on reporting entities.

The FATF Recommendations do not focus on the use of government issued documents exclusively for client identification. The previous FATF Recommendations required entities to identify customers "on the basis of an official or other reliable identifying document" (1996). However, FATF expanded this principle in its Recommendation 5(a) made in 2003 to, "The customer due diligence measures to be taken are as follows...identifying the customer and verifying that customer's identity using reliable, independent source documents, data or information". [Emphasis added.]

Consistent with our previous submissions to government, once baseline client identification measures that use reliable third party data for verification are defined, the "know-your-client" objectives for credit products will be achieved regardless of channel of distribution.

Proposal 1.8 Agents or Introducers

The use of agents or introducers to ascertain the identity of a customer should be an alternative available for reporting entities and should not preclude reporting entities from verifying identity by a non-documentary method that is accepted as equally effective. Further, consumers may not be comfortable providing government issued documents such as a passport or driver's licence for identification in a non-bank environment like a retail outlet or an airport.

Proposal 1.9 Non-Face-to-Face Customer Identification Measures

We strongly support the Proposal for consultation with reporting entities to establish appropriate non-documentary client identification requirements. We look forward to establishing baseline customer due diligence for credit products.

Proposal 1.10 Identification of Third Parties and Beneficial Owners

There are significant issues with the application of this Proposal to credit products.

Including a third party determination question on applications for credit products will not achieve the objective of detecting and deterring money laundering. Those intending to commit crimes will not answer the question honestly. Monitoring account activity during the life cycle of the product is more likely to reveal suspicious activity.

With respect to beneficial owners, there is no public or government registry that allows for the independent verification of non-public companies.

For non-profit organizations, there is no source information to assess whether they are soliciting.

FATF Recommendation 5 and its interpretive note on due diligence identifies persons who control access to an account as the primary source of money laundering risk. We support a similar approach in Canada with respect to credit products.

With this in mind, we offer the following by way of example:

Consumer and Small Business Credit Cards: We consider the primary cardholder(s) as the customer since the primary cardholder(s) opens and controls access to the account. The primary cardholder(s), only, should be subject to customer identification requirements. For small business credit cards, the business owner or principal(s) as the primary cardholder(s) would be subject to customer identification, only. There should be no requirement to obtain any additional information about the company.

Corporate Credit Programs: We consider the company (government, public, private) to be the customer because the company controls who can have a card issued under the company's program. The company would be subject to customer identification. We verify the identity of the person(s) who controls access to the account and expect the company to verify the identity of the persons to whom it allows cards.

The scope of the "reasonable measures to verify" third party and beneficial owner information needs to be clarified to be consistent with a risk-based approach. For credit products, only the person(s) who controls access to the credit product should be the one(s) subject to identity verification.

Proposal 1.11 Ongoing Due Diligence

Ongoing customer due diligence requirements for existing primary customers should be conducted based on materiality and risk. Specifically, requirements to update core customer information should be limited to times that are appropriate such as: (a) where a transaction of significance takes place; (b) customer documentation standards change substantially; (c) there is a material change in the way the account is operated; or (d) the institution becomes aware that it lacks sufficient information about an existing customer.[2]

Proposal 1.12 EFT Customer Due Diligence and Record-Keeping Requirements

This Proposal should not be interpreted to cover conventional credit product features such as balance transfers and convenience cheques. Additionally, the Canadian Payment Association does not capture the requisite information for these conventional credit products.

Proposal 2.1 Reporting of Suspicious Attempted Transactions

We recognize the value in reporting attempted suspicious transactions; however, this should remain at the discretion of reporting entities. Clarity related to these requirements is needed, and the guidance to be provided should also include typologies to guide the credit industry on what constitutes a suspicious attempted transaction.

Amendments to existing Financial Transaction Reporting and Analysis Centre ("FINTRAC") reports and mandatory fields would be necessary to allow for the reporting of suspicious attempted transactions given the potential that information surrounding the transaction would be more limited than in instances of completed financial transactions.

Proposal 3.2 Creating an Administrative and Monetary Penalties Regime

We see the benefit of publishing the details of violations anonymously. The objective of deterrence will be sufficiently achieved, as well as industry learning, without naming a reporting entity. Any Administrative and Monetary Penalty ("AMP") regime introduced should include appropriate appeal processes and mechanisms for escalation should there be differing interpretations between the government and industry prior to any publication.

We look forward to a further opportunity to provide submissions on the details of the AMP regime as they are developed.

Proposal 5.1 Creating a New AML / ATF Advisory Committee

We strongly support this Proposal. We also submit that key to the success and effectiveness of this Advisory Committee is broad representation from the financial services providers that exist in the marketplace. In particular, we submit that representation on this Committee must include reporting entities which utilize non-traditional distribution channels.

Proposal 6.5 Canada Revenue Agency - Issued Business Numbers

Currently Canada Revenue Agency ("CRA") issued business numbers are not collected in the client identification process and would require significant systems changes to capture such information. A substantial amount of identifying information is already collected on these customers and this information is provided to FINTRAC when a report is filed. There is no additional value to customer identification processes in obtaining a CRA-issued business number when there is no independent source that can be used for verification and accordingly, there should be no requirement to collect it.

Proposal 6.14 Compliance Questionnaires

While in principle we support this Proposal, our primary concern is the potential for supervisory overlap between OSFI and FINTRAC. We would expect that continued co-ordination between these two agencies would ensure that duplication would be minimized.

Proposal 6.23 Providing Feedback to Foreign Financial Intelligence Units

This Proposal should be extended to providing information to domestic reporting entities.

Additional Issues for Consideration

Record Keeping

Applying s. 14 of the Regulations to credit products is problematic. Several documents are required to be kept under s. 14 that are not created for credit products. Credit products should be exempted from these requirements or the regulations should be amended to identify the required documents for credit products. A specific submission is made for each document below.

  • Signature Cards: A signature card must be collected and retained in respect of each account holder under s. 14(a) of the Regulations. A comparable document to a deposit account's signature card for a credit card is a credit application form. However, credit products are offered through non-traditional channels in which obtaining a physical signature is not possible, for example, by telephone and Internet.
  • Deposit Slips: A deposit slip in respect of every deposit made to an account must be retained under s. 14(e) of the Regulations. Deposits cannot be made to credit products. Payments on credit products are not deposits.
  • Credit and Debit Memos: Every credit and debit memo received or created in the normal course of business must be retained under s. 14(g) of the Regulations. Credit and debit memos are not created for credit products.
  • Cheques: Every cleared cheque that is drawn on and a copy of every cleared cheque that is deposited to an account must be retained under s. 14(h) of the Regulations. This requirement cannot be applied to credit products. Cheques cannot be "deposited" to credit products. For credit cards, balance transfer and convenience cheques can be issued as a way to access the credit facility, but they are distinct from the types of cheques that are drawn on deposit accounts.
  • Client Credit Files: Every client credit file that is created in the normal course of business must be kept under s. 14(i) of the Regulations. By definition under s. 1 of the Regulations, a client credit file includes, among other things, the address of the place of work. Employment address should not be mandatory. We know our clients sufficiently through other customer details in external and internal databases and so more flexibility should be permitted.
  • Transaction Tickets: A transaction ticket in respect of every foreign exchange currency transaction must be retained under s. 14(j) of the Regulations. Foreign exchange currency transactions are not made with credit products. A credit card can be used to make purchases in foreign countries, but this is distinct from exchanging money. Transaction tickets do not apply to credit products.

1. Amex Bank of Canada; Canadian Tire Bank; Capital One Bank (Canada Branch); Citi Cards Canada Inc.; MBNA Canada Bank; and Sears Canada Bank.   [Return]

2. See FATF "Methodology for Assessing Compliance with the FATF 40 Recommendations and the FATF 8 Special Recommendations" (February 27, 2004) at Recommendation 5.17.   [Return]