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Is Your MSB Ready for a FINTRAC Exam?

Rodney_MSB2
We get a lot of questions about examinations conducted by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). While we’re happy to be able to help our customers in their examinations (you can check out our free resources for FINTRAC exams here), the responsibility during the examination will rest with the money services business (MSB), mainly with the MSB’s Compliance Officer.

FINTRAC’s expectations have changed dramatically, since MSB’s were first required to comply with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its enacted regulations. In 2015, we noticed that there was a dramatic shift in focus of MSB examinations. FINTRAC’s examiners were much more interested in detailed procedures (documents that describe how MSBs are complying with the PCMLTFA and regulations), and the Risk Based Approach.

One of the most important things that MSBs can do to ensure that their AML compliance programs are up to date, and at the same time, prepare for FINTRAC examinations, is to read FINTRAC’s published guidance. Two important guidance topics published in 2015 are, the Risk-Based Approach Guide (this guide describes what is the risk-based approach) and the Risk-Based Approach Workbook for MSBs (this workbook is for MSBs looking to implement a risk-based approach). While guidance published by FINTRAC doesn’t carry the weight of law or regulation, it does provide valuable insight about FINTRAC’s expectations.

Another excellent source of information is FINTRAC’s published Policy Interpretations. These are FINTRAC’s official answers to questions asked by MSBs and other reporting entities.

In Person & Desk Examinations

Whether the FINTRAC exam is in person or desk (conducted by phone) examinations, they follow very similar formats. The key difference is the regulator’s ability to request additional operational data during onsite examinations.

It is ok for you to take notes throughout the examination process (and we recommend that you do). You are permitted to have a lawyer, consultant or other representative with you (if you do, FINTRAC will request that you complete the Authorized Representative Form in advance). While your representative cannot generally answer questions on your behalf, they can prompt you if you are nervous or stuck, and help you to understand what is being asked of you, if it is not clear.

If you do not speak English and/or French fluently, we highly recommend that you have a person present who can translate questions and responses for you.

If you are not certain what the examiner is asking for, you should always ask for clarification before answering.

For in person examinations, do not invite the examiner to have a pint, lunch or even a coffee. FINTRAC has very strict policies around bribery, to the extent that if I am out socially with an acquaintance who works for FINTRAC, I cannot pay for their tea. It may feel a little bit “over the top”, not to be able to extend these courtesies, but don’t be offended – it’s not you, it’s policy.

The Introduction

The examiner will provide a brief overview of the examination process as a formal opening to the examination. At the end of this introduction, the examiner will ask if you have any questions. At this point, it can be useful to provide a very brief (five minutes maximum) overview of your business.

Your introduction should reflect the materials that you have already submitted to FINTRAC (which ideally included an opening letter that described anything about the business that would not be readily apparent to the examiner, or anything that you believe could be misunderstood). Key facts about your business include:

  • Your corporate structure and ownership;
  • The types of products and services that are offered / types of transactions that are conducted;
  • Where your offices, agents and customers are located;
  • How you connect with and your customers; and
  • Anything significant that has changed since your last FINTRAC examination.

This synopsis must be very brief. If there is anything that is complex, it should be included as an explanation in your initial package (preferably in a simplified chart form – for example an ownership structure chart).

The examination will then begin. At the end of each section, the examiner will ask if you have any questions and let you know whether there are any deficiencies.

Part 1 – FINTRAC MSB Registration

In this part, FINTRAC will go through your MSB registration field by field and confirm that the information is accurate. The most common errors that we have seen are:

  • Not listing a trade name/operating name;
  • Not listing all relevant locations;
  • Listing bank accounts that are inactive or not listing bank accounts that are active;
  • Not including MSB or agent relationships (either buying from or selling to another MSB);
  • Incomplete ownership information; and
  • Senior Management and/or Compliance Officer information, that is out of date.

Although it is not technically part of the registration, some examiners will ask about the Compliance Officer’s responsibilities/duties at this stage.

Failure to update the MSB registration in the “prescribed form and manner” is the single most common deficiency for MSBs from 2008 to the present, accounting for deficiencies in 61% of examinations (according to FINTRAC data released in 2015).

Part 2 – Compliance Policies & Procedures

In this part, FINTRAC will ask questions about the policy and procedure documents that you have provided in advance of the examination. There are a few standard questions that are generally asked:

  • Who wrote the policies and procedures?
  • Were the versions submitted to FINTRAC the most recent versions?
  • When were they updated?
  • When and how do you identify your customers?
  • How do you ensure that identification is up to date?
  • How do you monitor transactions?
  • How do you recognize, document and monitor “business relationships” (note: this is any time that you have either an ongoing service agreement with a customer and/or your customer has performed two or more transactions that require identification).
  • What are indicators of a suspicious transaction?

The examiner will also ask a number of questions based on the documents that you have submitted, including questions about compliance-related processes.

Part 3 – Risk Assessment

In this part, FINTRAC will focus on your Risk Based Approach, asking specific questions about the Risk Assessment and related documents that you have provided in advance of your examination. Again, there are some common questions that are asked:

  • Do you have any high-risk customers or business relationships?
  • What factors do you consider in determining that a customer or business relationship is high risk?
  • How are customer due diligence and enhanced due diligence different (both generally, and in your processes and documentation)?

Most additional questions will be related to risk management processes. For example, it has been common in the last few months for examiners to ask if a customer or transaction could be rejected (“Yes, if it was outside of our risk tolerance.”)

This may also lead to questions about whether or not an Attempted Suspicious Transaction Report (ASTR) or Suspicious Transaction Report (STR) was filed. If there were reasonable grounds to suspect money laundering or terrorist financing, the answer should be yes, if not, you should explicitly say, “There were not reasonable grounds to believe that this event was related to money laundering or terrorist financing” then provide an explanation.

Part 4 – Operational Compliance & Reporting

In this part, the examiner will ask questions about specific transactions. Some of the cases that you must be ready to explain are:

  • A reportable transaction (generally an electronic funds transfer or EFT) was reported by another reporting entity;
  • A transaction matches an indicator of potentially suspicious activity (if there were reasonable grounds to suspect money laundering or terrorist financing, the answer should be yes, if not, you should explicitly say that “there were not reasonable grounds to believe that this event was related to money laundering or terrorist financing” then provide an explanation); and
  • Business relationships and ongoing monitoring (in particular, if this did not occur earlier in the examination).

During a desk examination, the examiners do not request additional materials.

During onsite examinations, it has become commonplace for examiners to request additional materials. These are generally related to:

  • Business relationships;
  • Ongoing monitoring (including the monitoring of business relationships),
  • High risk customers;
  • Enhanced due diligence; and
  • Other risk-based processes.

Be clear with the examiner about what can be extracted easily from your IT systems, and in the case that data cannot be extracted easily, be prepared to show the examiner an example (or several). If your system has an “auditor access” feature (generally read only access with search capability), it can be useful to set this up in advance of the onsite visit.

Exit Interview

Congratulations – you’ve made it to the finish line!

At this point, the examiner will sum up the findings (if there are any), and read a standard disclosure statement. For most of us, the disclosure statement is terrifying, as it talks about penalties. This is standard process – do not be alarmed. When the examiner has finished, you may ask if a penalty is being recommended (if you’re a worrier, please do this). Not all FINTRAC examiners will provide guidance at this stage, but it doesn’t hurt to ask.

The examiner will let you know when to expect a formal letter (generally within 30 days of the end of an examination).

After the Examination

You will receive a formal letter that details FINTRAC’s findings, as well as whether or not an Administrative Monetary penalty (AMP) is being recommended. In the case that there is a potential penalty, we recommend taking action as soon as possible). In most cases, FINTRAC does not require MSBs to submit an action plan (but your bank might still require that you do this, and it’s a good idea to keep a record of the actions that you’ve taken to correct any deficiencies).

Need a Hand?

If you are an MSB that needs compliance assistance preparing for an FINTRAC exam, remediating findings, or setting up an AML compliance program, please contact us.

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