PROCESSING...

Anti-Money Laundering
Consulting Services & Strategies

0 Items - Total: $0.00 CAD

Proposed PCMLTFR Updates

Screen Shot 2015-07-08 at 4.03.31 AM

We’ve created a marked-up version of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR) that reflects the draft amendments posted in the Canada Gazette on July 4th, 2015.

Here’s a printable and downloadable PDF file: PCMLTFR Mark-Up (July 4, 2015 Draft Amendments)

If you would like a copy of the file in Microsoft Word, please contact us.

Need A Hand?

At Outlier, we believe that it is important to participate in decisions that affect you and your business.  If you would like someone to look over your submission before you make comments to the Department of Finance, you can get in touch with us free of charge.  We will look over your submission and make suggestions, without any cost to you.  If you need a hand, please feel free to contact us.

Draft AML Regulations Will Be Released July 4th

Canadian Flag

Where Can You See The Draft Regulations?

Amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR) will be published this Saturday, July 4th, 2015 in the Canada Gazette.  There will be a 60 day comment period, open to all stakeholders.

Who Should Comment & Why Does It Matter?

We expect that the draft amendments will include, among other things, the inclusion of ‘dealers in digital currency’ as money services businesses (MSBs), and updates to the methods that can be used to identify customers in a non-face-to-face environment.

If you are a regulated entity under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), including:

  • Financial entities;
  • Life insurance;
  • Securities dealers;
  • Money services businesses;
  • Accountants;
  • Real estate;
  • Casinos;
  • Dealers in precious metals and stones; and
  • British Columbia notaries,

or if you are a digital currency business, the proposed amendments are likely to have an impact on the way that you do business.

The 60 day comment period is intended for stakeholders to submit meaningful feedback that can shape the law, and provide insight for lawmakers on how the regulations will impact Canadian businesses.

How Do You Comment?

Comments must be submitted in writing (either on paper or electronically).

Snail Mail:

Attention:  Lisa Pezzack

Director, Financial Systems Division

Department of Finance

90 Elgin Street

Ottawa, Ontario, K1A 0G5

Email:

fcs-scf@fin.gc.ca

Make Your Voice Heard

These are the only official means to submit comments.  We highly encourage all stakeholders to participate in this process.

Need A Hand?

At Outlier, we believe that it is important to participate in decisions that affect you and your business.  If you would like someone to look over your submission before you make comments to the Department of Finance, you can get in touch with us free of charge.  We will look over your submission and make suggestions, without any cost to you.  If you need a hand, please feel free to contact us.

Unpublished FINTRAC Penalties

Jonathan Krumins, Vice President, vCAMLO

Today’s guest blogger is Jonathan Krumins, Vice-President, AML Risk & Compliance, at vCAMLO Solutions Inc. vCAMLO provides anti-money laundering (AML) and anti-terrorist financing (ATF) support to Canadian credit unions. You can learn more about vCAMLO at www.vcamlo.ca.

Background

Reporting entities (REs) often ask us about penalties, in particular when they are published publicly. Since 2009, The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) has issued Administrative Monetary Penalties (AMPs) against persons and entities that were found to have violated the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, and its associated Regulations. In many cases up to 2013, FINTRAC has published details on its website about each penalty, including the name of the person or entity, the dollar amount of the AMP, as well as the cited deficiencies. The AMP area of their website has two sections – a list of all published penalties, as well as a running total of AMPs imposed since December 30, 2008, divided by sector.

As of June 26, 2013, FINTRAC changed its policy regarding public notice of AMPs, so that they would be published if one or more of the following criteria are met:

  • The person or entity has committed a very serious violation; or
  • The base penalty amount is equal to or greater than $250,000, before adjustments are made in consideration of the person or entity’s compliance history and ability to pay; or
  • Repeat significant non-compliance on the part of the person or entity.

AMPs can only be published once the appeals process is exhausted, which can take years to complete. This process can include an appeal to FINTRAC’s director, and a subsequent appeal to the Canadian Federal court.

Understanding this context is vital for RE Compliance Officers. While trend information related to published and unpublished penalties is not likely of interest to frontline staff, understanding these patterns is useful in fielding questions from Senior Management and the Board of Directors.

We have conducted an analysis of data published on the FINTRAC’s website which shows a trend of an increasing number of unpublished AMPs since 2013. These unpublished AMPs were primarily imposed on the Credit Union/Caisse Populaire and Money Service Business (MSB) sectors.

Methodology

We have made all calculations using information available as of April 20, 2015. We examined publicly available information on FINTRAC’s webpage, using the running total of AMPs by sector and the list of public AMPs. We also examined a summary of AMPs as of October 2014 obtained by Outlier through an Access to Information request. Our analysis focuses only on the sectors that have received AMPs, either published or unpublished: Credit Unions (including Caisses Populaires), MSBs, Real Estate Brokers, Securities Dealers and Casinos.

In addition, we accessed “cached” versions of FINTRAC’s website to review past versions in order to include six public AMPs that were issued between August 19, 2009 and April 26, 2010. In accordance with FINTRAC policy, these were removed from FINTRAC’s website after the five year public notice period had expired. We have included this historical data in order to provide a full view of the penalties issued. It is noteworthy that there are likely additional penalties in the process of being appealed (this information cannot be made available until the appeals process is complete).

Published AMPs vs. Unpublished AMPs

By analyzing the list of published penalties, compared to the running total of AMPs, it appears that there have been a significant number of unpublished penalties:

FINTRAC AMPs

Credit Unions

Credit Unions have received the largest number of unpublished penalties, both in terms of number and dollar amount. Credit unions have received 3 published AMPs, totalling $246,690. They have also received an additional 11 unpublished AMPs, totalling $405,855.

Trend analysis: This appears to be a significant increase in overall enforcement action by FINTRAC in the Credit Union sector. The total number of penalties against Credit Unions have increased sharply to 14, which means that Credit Unions now have the second largest number of listed AMPs (published and unpublished), behind MSBs. All penalties against Credit Unions since 2013 were unpublished. This data can also be interpreted to mean that FINTRAC’s enforcement efforts against Credit Unions have increased since 2013, however it is important to remember that AMPs are listed on FINTRAC’s website after they are finalized, which can mean a significant gap between when an AMP was issued and when it is listed, especially if there is an appeal involved.

Money Service Businesses (MSBs)

MSBs have received 22 published penalties, totalling $527,510. They also have received eight unpublished penalties, totalling $68,520. Interestingly, a $12,880 penalty that was published against an MSB on July 11, 2013 no longer appears on FINTRAC’s website.

Trend analysis: MSBs continue to be the leading sector in terms of receiving AMPs, although similar to the other sectors examined, the majority of AMPs that were against MSBs from late 2013 through to 2015 were unpublished.

Real Estate Brokers

Real Estate Brokers have received three published penalties totalling $40,520 compared to three unpublished penalties totalling $25,960.

Trend Analysis: Real Estate Brokers have received relatively few published and unpublished penalties in comparison to the Credit Union and MSB sectors. The number of unpublished penalties (compared to the number of published penalties) is consistent with trends across all sectors.

Securities Dealers

Securities Dealers have received four published penalties totalling $565,180 compared to one unpublished penalty of $21,480.

Trend Analysis: Securities Dealers have received relatively few published and unpublished penalties in comparison to the Credit Union and MSB sectors.

Casinos

Casinos have never received a published AMP, however FINTRAC’s website shows an unpublished AMP of $56,700 issued against a casino. This may be surprising to anyone that has read about BC Lottery Corporation, however, AMPs are not part of these records until the appeals process has been exhausted (and there have been successful appeals).

Trend analysis: It is difficult to establish a trend based on a single data point, however this unpublished AMP shows that the Casino sector is no longer unaffected by FINTRAC penalties.

What Does This All Mean?

Screen Shot 2015-05-06 at 11.58.01 AM

Note: The dates on the above graph represent when FINTRAC’s website was analyzed to calculate the total number of penalties, with the exception of October 2014, which is the “as of” date of an AMP listing received in a Freedom of Information request. Data for unpublished AMPs is only available since 2013.

As of June 2013, FINTRAC began to apply the updated standard for publicly listing AMPs. Since this change, unpublished penalties comprise approximately 42% of all issued AMPs by amount and 43% by number. While this is excellent news for REs that are concerned with the negative media and other reputational risk related to published penalties, it will make it more difficult to assess the reasons that REs are receiving penalties. The specific violations that led to a penalty are only made public by FINTRAC when the AMP is published. In order to ensure that our Credit Union clients are well-informed about industry trends related to penalties, vCAMLO will be requesting additional information and performing trend analysis. Stay tuned!

Your Best Defence

To avoid AMPs, it is essential to constantly test for weaknesses in your compliance regime. Conduct rigorous effectiveness testing (this is required at least every two years), and consider more frequent testing. Finally, ensure that immediate steps are taken to remediate deficiencies received in FINTRAC exams. Deficiencies that re-appear in follow-up exams are taken seriously by FINTRAC, and can lead to penalties, published or not.

Need a Hand?

vCAMLO: If you are a credit union or MSB, and have any questions related to financial compliance, or if you are interested in AML Support Services, please contact us for a complimentary 30 minute compliance discussion.

Outlier: If you need assistance reviewing your technology solution or FINTRAC reporting to be certain that you’re meeting the standard described in this blog, or just someone to chat with to make sure that you’re on the right track, please contact us.

 

 

 

Suspicious Transaction Reporting in 2015

Preparing for a FINTRAC examination

At the Canadian Institute’s 14th Annual AML Forum, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) reviewed its expectations for suspicious transaction reporting. FINTRAC emphasized that suspicious transaction reports (STRs) are vital to the agency’s mandate as Canada’s financial intelligence unit (FIU) and ongoing collaboration with law enforcement agencies. While reporting entities (REs) in Canada have been required to report transactions for quite a few years, we’ve had many questions from REs about what FINTRAC expects and looks for in examinations. FINTRAC’s most recent guidance is useful in tuning your technology, enhancing your processes, and asking the right questions at industry association meetings.

What is FINTRAC Looking for in STRs?

When FINTRAC conducts compliance examinations, they will be applying three tests to STR data, including:

  1. Entity Practitioner: FINTRAC will look for transactions that are similar to those involved in STRs that you have reported. If there are similar transactions or transaction patterns that have not been reported to FINTRAC, there should be an explanation for the difference. Where possible, this explanation should be documented.
  2. Sector Practitioner: FINTRAC will compare the number and type of STRs submitted by similar entities. The size and type of business are taken into consideration.
  3. Reasonable Practitioner: FINTRAC will analyze a sample of reported STRs and unreported transactions against relevant guidance. In this case, relevant guidance means the suspicious transaction indicators from FINTRAC’s Guideline 2 that are applicable to your business.

These are terms that we’re likely to hear more about over the coming months, and there are compliance program adjustments (most of them relatively simple) that can be made to ensure that you’re meeting this standard.

Tune Your Technology

Amber looking at laptop FINTRAC screen

Most REs use software solutions to detect potentially suspicious transactions. Almost all transaction monitoring software uses some type of rules-based system to determine when alerts should be generated. These rules should, at minimum, reflect the indicators that are applicable to your business. Not all of the indicators from FINTRAC’s Guideline 2 will be applicable to your business. Where possible, you should document the decisions that you make about your transaction monitoring rules, including the rationale for those decisions.

The most sophisticated software platforms have machine learning functions. These can take the decisions that have been made about previous alerts and use this information to refine how the program works. For example, if a particular pattern of transactions was deemed to be suspicious, the program may look for similar patterns.

If you’re not using software that does this on its own, don’t panic. You can review the STRs that you’ve submitted to FINTRAC to determine whether your transaction monitoring rules are tuned to reflect the types of money laundering and terrorist financing threats that you’ve previously encountered. This should be done on a regular basis (for example, as part of your Risk Assessment updates). If you have an STR that is related to a pattern that you don’t have a rule to cover, you may want to do this sooner, rather than waiting for the next scheduled update.

Train Your Staff

Training

Over the years, I’ve heard many Compliance Officers express frustration about not knowing whether or not STR data has been useful to FINTRAC or law enforcement. To close this gap, I’ve looked for articles and speakers from FINTRAC and law enforcement that could provide meaningful information about the type of information that is most useful. The same principle applies to your staff.

You can use existing cases (you’ll want to remove any personal information for training purposes) to demonstrate the type of transactions that you want your staff to escalate to compliance for review. Existing cases from the media, and end to end cases provided by training companies like TAMLO, are also excellent resources. Keeping your annual training fresh is a challenge, and using your STRs as cases is one way to do that, while also meeting FINTRAC’s expectations.

Refine Your Audits & Effectiveness Reviews

AML Compliance Effectiveness Review

Are your auditors and/or reviewers using the same tests that FINTRAC is using to assess your compliance? If you’re not certain, ask.

If you perform self-assessment testing, you may want to include these tests as well.

As of 2015, all AML Compliance Effectiveness Reviews performed by Outlier will use these three key tests to assess STR data.

Ask Your Industry & Working Groups for More

Hanshake

Most REs have excellent industry associations and working groups such as the Canadian Banker’s Association (CBA), Canadian MSB Association (CMSBA) or the Canadian Jewellers Association (CJA). These groups are excellent resources and can help you understand STR trends across your industry. If you’re not a member, you may still be able to attend regular conferences or events.

Need A Hand?

We would love to hear from you. If there are topics that you would like to know more about, or if you need assistance with your compliance program, please contact us.

Insights From the CMSBA Education Days

We were fortunate enough to be able to attend the Canadian MSB Association (CMSBA)’s Montreal and Toronto spring training days. For Money Services Businesses (and those affiliated with the industry), the CMSBA is an excellent resource for collaboration, information sharing and advocacy. For those that were not able to attend any of the spring training sessions, here’s a roundup of the topics covered.

FINTRAC & MSB Compliance Examinations

Canada’s federal regulator for anti-money laundering (AML), the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), provided in depth statistics related to compliance examinations, as well as common issues for MSBs. Despite what some highly publicized administrative monetary penalties (AMPs) may lead you to believe, MSBs are faring well as a sector in FINTRAC’s compliance examinations. It’s noteworthy that through a freedom of information request, Outlier obtained data on the number of MSBs that did not have any deficiencies in examinations. Between 2008 and the end of 2014, this amounted to approximately 25% of all MSBs examined. In most cases, MSBs were largely compliant, with some partial deficiencies.

Overview Big

For a complete breakdown of common issues noted in examinations, click here.

AMF, Respondents & Digital Currency

Québec’s provincial regulator, the Autorité des Marchés Financiers (AMF), provided clarification on its expectations for MSB respondents. For MSBs dealing with customers in Québec that do not have offices in the province, a respondent must be nominated to deal with the AMF on the MSB’s behalf. Among the requirements are that the respondent must:

  • Be over 18 years old;
  • Have an address in Québec (home address or business address); and
  • Not be under tutorship, curatorship or advisorship.

The AMF also addressed digital currency, noting that not all digital currency business models are covered by the Québec MSB Act, and that there must be an element of fiat currency involved in the transactions. Both the AMF’s press release from February 2015 and the current presentation confirmed that digital currency trading platforms (that include fiat currency transactions) and digital currency ATMs are considered in scope. As there are a myriad of other digital currency related business models, if you are unsure of where you fit, you can contact the AMF and receive a decision (we recommend that you request a decision in writing where possible).

Agency Agreements

I had the honour of speaking about MSB agency agreements (the agreements between MSBs and their agents) with Susan Han (previously of AUM Law). Like most things, agent agreements should be documented in writing and clearly spell out the terms of the agreement. MSBs that take on agents should understand that the MSB would bear most of the risk (financial, compliance and reputational). Agents should be aware that the client (and information about the client) “belongs” to the MSB rather than the agent (and this information should always be provided to the MSB when it is requested).

International Collaboration & De-Risking

The CMSBA has partnered with MSB associations worldwide to increase awareness of the negative ways in which de-risking (which CMSBA Director Ken Saul noted should be called de-banking) affects the financial system. As the de-risking issue has affected MSBs worldwide, and there does not appear to be any effective solutions under consideration, a whitepaper was developed and presented to the Financial Action Task Force (FATF). This whitepaper has received a positive reception. Stay tuned for more on the international efforts in this regard.

One of the few Canadian Financial Institutions that (openly) banks MSBs, Luminus Financial, was on hand to discuss factors that MSBs should consider when dealing with banking relationships. MSBs should be prepared to provide complete and transparent information about their business. In order to achieve success in both obtaining and maintaining banking relationships, MSBs should be able to demonstrate that they are compliant and present information in a way that is well organized and addresses all of the questions and requests that the bank has made. In some cases, this will be a higher standard than simply meeting the minimum compliance requirements set out in law and regulation.

Compliance Maturity Model

In looking proactively at issues related to de-risking and demonstrating compliance, the CMSBA is working to develop a compliance maturity model (CMM). Currently, CMSBA members can complete the first stage of this model by completing an attestation form online. The attestation states that the MSB is compliant with applicable legislation and not subject to administrative or criminal proceedings. Questions, comments or suggestions related to the CMM can be directed to cmsba-cmm@canadianmsb.org.

Need a Hand?

If you are an MSB that needs compliance assistance (or a bank that wants assistance in setting up and maintaining a compliance regime that effectively manages MSB related risk), please contact us.

 

Who Wins The De-Risking Shell Game?

BankRisk_2The volume of evidence, both empirical and anecdotal, grows every day. The story on the surface is simple enough: banks are making the decision to “de-risk” (a polite way to say close the account of) certain types of businesses including money service businesses (MSBs) and digital currency businesses that are considered “too risky” by traditional financial services providers. The unintended consequences have included strained remittance corridors and frustration for businesses struggling to get by without reliable banking services. While these consequences are well documented, there are other unintended consequences of the de-risking phenomenon that have been less widely discussed. These include a growing lack of transparency between some industries and their banking service providers and directly threatens our ability to effectively manage money laundering and terrorist financing risk at both the financial institution and national levels.

It’s a shell game of “hide the risk” – and we’re all losing.

Businesses Are Losing

By now, if you haven’t heard about businesses struggling to survive without access to banking facilities, you would have had to ignore financial media for the past two years. The global effects of de-risking have attracted the attention of the G-20, the Financial Action Task Force (FATF), Financial Crimes Enforcement Network (FinCEN), the World Bank, and many more. While it’s clear that there are issues in terms of access to banking, let’s be honest with one another: while some businesses will close up shop, many others will take a different track.

Whether it’s using alternative financial service providers, payment processors, personal bank accounts or merely opening accounts at other financial institutions without revealing the true nature of the underlying activity, businesses will find a way to carry on. I’ve spoken personally to businesses that have taken these approaches, and it has never been their first or most ideal choice. These aren’t criminals carrying on some nefarious business! They are entrepreneurs who would rather be able to provide their real business plan to their banks and explain their activity honestly, but they do not believe that this option is open to them.

Banks Are Losing

Consequently, a bank with a policy that prohibits these types of businesses from holding accounts will deal with businesses that have gone to great lengths to conceal the true nature of their activity. The banks are unaware of the true nature of the activity passing through their accounts, and therefore ill equipped to manage the risk related to these activities. The strain on banking resources must be phenomenal, as banks must constantly devise new ways to interpret patterns of customer activity to detect undeclared MSB or digital currency activity. While it isn’t easy to quantify these costs, I can only surmise that the cost of this detective work must be high, despite being ineffective.

To further muddy the waters, businesses who fail to provide transparent information to their banks for fear of de-risking may also conduct completely legal activities in a way that starts to look like criminal activity. For example, if you believe that your business banking relationship is not reliable, you may open many accounts (in some combination of personal and business names) and conduct fractions of your banking through each, transferring funds from one account to another as needed to meet your obligations. On the surface, it can seem much like “layering” or “structuring” activity (techniques used by money launderers to make funds more difficult to trace). This further adds to the banks’ burden by creating more activity that must be monitored and investigated.

Entire Nations Are Losing

It has been widely publicized that in some cases like Somalia, entire nations that are dependent on remittance payments from friends and family living and working abroad are experiencing increased difficulty. Reliable and cost-effective remittance payment providers are a shrinking pool. This seems absurd in a time when technology can facilitate a payment in seconds.

National Security Is Losing

It’s not just far-flung places dependent on remittance payments that are losing. Here at home, we have a national security system that is dependent on our financial intelligence units (FIUs) having access to reliable data. The reliability of that data is undermined at every level by the de-risking shell game:

  • Businesses do not declare the true nature of their activity – and there are no incentives for them to do so;
  • Banks do not understand the nature of their customers’ activities, making it difficult detect potentially criminal activity; and
  • There is likely to be an increase in “false positives”, where activity conducted by businesses that do not believe that they can reveal the true nature of their activity to their banks instead conduct business in a manner that resembles criminal money laundering techniques.

Taken together, this results in the likelihood that key information is not being reported to FIUs correctly. Consequently, it becomes more difficult for law enforcement and other national securities to rely on this data to perform their roles effectively.

Who Is Winning?

There are two potential winners in this game and much like the shell games that you see duping tourists on the streets of large cities, neither is without malevolent intent.

The first are unregistered/unlicensed MSB businesses. These are businesses that have ignored regulatory requirements and carried on business without any FIU reporting. In some cases, these businesses will even minimize their interaction with the local financial system by using foreign bank accounts (and point of sale terminals) to collect customer funds. While the risk of penalty is high, the reward for these businesses (in particular where they are able to complete transactions that pose a challenge for their compliant counterparts) can also be high.

The second is criminal organizations. When legitimate businesses are performing transactions that look like money laundering, detecting true criminal activity becomes exponentially more difficult. I can only assume that the criminals are laughing all the way to the bank.

Shutting Down The Shell Game

De-risking is a complex problem with complex outcomes, but the solution need not be complicated. It does, however, involve the cooperation of all levels of the financial services community: regulators, banking service providers and businesses.

The costs and benefits of de-risking need to be reassessed. Where banking service providers are capable of accepting and managing accounts for businesses considered to be “higher risk”, they should do so, with their regulator’s blessing. Rather than perpetuating the shell game, regulators should encourage banking service providers to manage risk (and provide solid guidance with reference to how this should be done). Finally, there should be open communication between banking service providers, regulators and business banking customers. The lines of communication closed by de-risking must be opened, allowing banks to have honest conversations that will provide real insight into their customers’ business and lead to effective long-term risk management.

Quebec MSB Respondents

Since Quebec’s MSB Act came into force in 2012, there have been many questions about whether or not the law applied to entities that don’t have a physical presence in Quebec (the answer is yes, if you’re serving customers located in Quebec at the time of the transaction). Most recently, the Authorité des Marchés Financiers (AMF), Quebec’s provincial regulator, has announced that the law applies to digital currency ATMs and exchanges. One of the challenges for businesses that don’t have a physical presence in Quebec is designating a respondent within the province. While Outlier doesn’t have Quebec offices either, we’ve put together some resources to help you navigate the process.

Hefty Disclaimers

We’re not lawyers, and nothing in this article should be considered legal advice. While we’ve put together some resources that we hope will be helpful, you will need to decide on the right course of action for you and your business.

What Does A Respondent Do?

A respondent is a person or company that acts as your point of contact with the AMF. While this seems relatively simple on the surface, the respondent must pass relevant communications to you and pass information from you to the AMF, the requirements are actually more complex than this (see below for the full text from the MSB Act on respondents). A respondent must have premises in Quebec and be approved by the AMF. The AMF has taken the position that those involved in financial services (including respondents) must demonstrate “integrity and good moral character” (this is broadly defined) and the AMF can reject MSBs, agents and respondents that do not meet this criteria.

The MSB Act goes on to state that a respondent must be “able to properly exercise a respondent’s functions with the Authority.” This means that the respondent will need to understand how to communicate with the AMF (and while French language isn’t a requirement, it is definitely a benefit here). The respondent will also need significant access to information about your business and operations, both to assist in the application process and to communicate with the AMF.

Finally, there is some debate about the liability that the respondent bears in acting in this capacity for an MSB. We’ve reached out to the AMF for their position on respondent liability.  The regulator’s position is that a respondent bears little if any liability, provided that they are acting “in good faith.”  This means that the respondent is expected to have done some degree of due diligence regarding their MSB client, and that the respondent believes that the information that they are providing to the AMF is complete and accurate.

There is also a risk to MSBs. The respondent will act as your point of contact with the AMF. This means that the regulator will most often be communicating with your respondent, rather than with you directly.

What Should I Look For in a Respondent?

As the voice of your business with the AMF, you’ll want a respondent that has certain characteristics:

GOOD COMMUNICATION – Your respondent should be someone that the AMF can reach when they have information requests, and the respondent should be able to quickly pass these requests to you. If your respondent’s contact information changes, they’ll need to update this information with the AMF to avoid missing any information requests or other regulatory communication.

RELIABLE – Like most regulatory requests, when the AMF asks for information or clarification, there are generally strict timelines. Your respondent should be someone who understands this and will ensure that your responses are submitted on time.

INTEGRITY – Your respondent will need to pass a background check (this is required under the MSB Act) and deal with your confidential business information. It is vital that the respondent be someone that you can trust.

EXPERIENCE – The ideal respondent understands their role, your business and has experience dealing with the AMF. The respondent, in some cases, may also act as an advisor, helping you to devise the best strategy for your business.

PRICE TRANSPARENCY – The respondent is likely to be doing much more than passing messages between you and the AMF. You should have a clear understanding of the fees that you will pay and the work that you’ve authorized the respondent to complete on your behalf. Your agreement with your respondent should be spelled out in formal contracts.

What Do I Need to Do for the Respondent?

You should expect to provide the respondent with due diligence information. This will include information about your business and its beneficial owners and directors. This includes information that is required under the MSB Act as well as additional information that the respondent requires based on their own internal processes.

MSBs should be prepared to provide at least the following information early on in discussions with respondents:

  • The name and ID of all those employees involved in the MSB activity;
  • A list containing the name, date of birth, if applicable, domiciliary address and telephone number of each of its mandataries and of each of the officers of its mandataries who are responsible for the money services offered on behalf of the money-services business;
  • A list of the financial institutions with which it deals;
  • The MSB’s business plan; and
  • The MSB’s financial statements for the last fiscal year.

If you are uncomfortable providing this type of information before you have a signed agreement in place, you can always ask the respondent to sign a confidentiality agreement.

Respondent Contacts

The contacts below are people that we know and have spoken to personally about the respondent services that they provide. While we can’t guarantee anything that another person or company does, they’ve got our vote of confidence.

Respondents are listed in alphabetical order by first name.

Jean-François Lefebvre

Phone: (514) 608-0684

Email: jeanfrancoislefebvre9@gmail.com

Relevant specializations and experience: Jean-François has experience in advising MSBs and financial institutions, both as a regulator and as a consultant. He is a former FINTRAC senior representative and has dealt with the AMF in several instances in his career.

Marc Lemieux, Principal, Lemieux Legal Services

Phone: (514)-987-1117

Email: marc@marclemieux.com

Website: marclemieux.com

Relevant specializations and experience: Marc is a bilingual lawyer with experience in banking, payments, and MSBs. He currently serves as a member of the Board of Directors of the Canadian MSB Association.

Michael Garellek, Associate, Gowlings LLP

Phone:   514-392-9421

Email: Michael.Garellek@gowlings.com

Website: www.gowlings.com

Relevant specializations and experience: Michael’s experience includes working directly with the AMF, as well as, dealing with the AMF on behalf of his financial services clients.

Need A Hand

If you’re not sure if the MSB Act applies to you, or need assistance in finding a respondent, please contact us.

The MSB Act on Respondents (Full Text From the MSB Act)

5.  A licence application must be filed together with the fee determined by regulation and filed by a person acting as the business’s respondent for the purposes of this Act.

The respondent must

(0.1) be a director, officer or partner of the money-services business;

(1) be 18 years of age or over;

(2) not be under tutorship, curatorship or advisership;

(3) be domiciled in Québec or have a place of business or a place of work in Québec; and

(4) meet any other condition set by regulation.

The money-services business must give the respondent access, at the business’s head office and in all its establishments, to the information and documents needed to exercise the respondent’s functions.

The respondent for a money-services business that is not constituted under the laws of Québec and does not have its head office or an establishment in Québec need not be a director, officer or partner of the business but must be able to properly exercise a respondent’s functions with the Authority.

Micro Deposits & Micro Withdrawals

The Big DisclaimerAmber looking at laptop blank screen

We’re not lawyers and nothing that we write should be considered a legal opinion. Whether or not a solution will be acceptable to your regulators will always depend on your implementation and documentation – please contact us if you need help with either.

Background

There are a limited number of ways for Canadian reporting entities to identify individuals without meeting face to face. Previously, we have sought opinions from the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) on whether or not micro deposits and micro withdrawals could be used to confirm a customer’s identity. Until recently, the answer had been no. We reached out to FINTRAC again on the issue after learning that technology had evolved in a way that could meet the requirements. We’re pleased to share with you that FINTRAC is of the opinion that – given the right technology conditions – micro deposits and micro withdrawals can indeed be used to confirm a customer’s identity.

Confirmation Of A Deposit Account

The methods that can be used to confirm a customer’s identity are listed in Schedule 7 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR). (Since this post was written, Schedule 7 has been repealed and replaced by FINTRAC’s Methods to Identify Individuals). The “Confirmation of a Deposit Account Method” involves confirming that the person has a deposit account (this means a chequing or savings type of account) with a Canadian financial entity (this means a bank, credit union or caisse populaire). To use this method, reporting entities must keep a record of the name of the financial entity where the account is held, the account number and the date of the confirmation.

The key elements of this method involve determining that the account belongs to the person that you are trying to identify and determining that the account is indeed a chequing or savings type of account.

Micro Deposits and Micro Withdrawals

Previously, micro deposits and micro withdrawals were viewed as failing on both of these key elements. Confirming the amount of a micro transaction proved that a person had access to the account, but not that they owned the account. It was also viewed as impossible to determine the type of account (for instance the account may have been a line of credit that had a similar account number structure).

Fortunately, technology has advanced and some payment processors are able to conduct name matching (in some cases, payments are even stopped if there isn’t a match) as well as the type of account. Not all payment processors may have the capabilities, but if you’re looking for a way to automate some of your non face-to-face customer identification, this could be an option.

Implementation Checklist

We’ve broken down the implementation into seven key questions. If you’re able to answer yes in each case, you’re likely to be ready to implement micro deposits or micro withdrawals as an identification method.

  1. Does my payment processor conduct name matching (our client’s name against the account being debited or credited) and what confirmation do we receive of a match?
  2. Is our system set up to keep a record that demonstrates that the name was matched?
  3. Does my payment processor have access to the account type when an account is being debited or credited and can they pass that information to us and/or confirm for us that the account is a deposit account?
  4. Is our system set up to keep a record of the type of account or confirmation that the account is a deposit account?
  5. Is our system set up to keep a record of the name of the financial entity where the account is held?
  6. Is our system set up to keep a record of the account number?
  7. Is our system set up to keep a record of the date of the confirmation?

In addition to this list, you should also give some thought to what happens when identification fails (for example if the name doesn’t match or the account isn’t the right type). You’ll need to consider an alternative way to identify your client, and you probably don’t want their account stuck in limbo.

Need a Hand?

If you want to be certain that you’re meeting the standard described in this blog, or just someone to chat with to make sure that you’re on the right track please contact us.

Full Text Response

Good afternoon Ms. Scott,

Thank you for contacting the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), Canada’s independent agency responsible for the collection, analysis, assessment and disclosure of information in order to assist in the detection, prevention, and deterrence of money laundering and financing of terrorist activities in Canada and abroad.

You indicated, “some payment providers have the capacity to match the customer’s name to the name on the account (and will not process transactions if there is not a match) and return information about the type of account to which the transaction was pushed.”

In light of this, you have asked whether micro-withdrawals and/or micro-deposits would be acceptable for use as confirmation of a deposit account provided that:

(a) there was a confirmed name match; and

(b) the account type was confirmed as a deposit account.

Subparagraph 64(1)(b)(ii) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR) states that non-face-to-face identification can be done by using a combination of identification methods as set out in Part A of Schedule 7, the confirmation of deposit account method being one. This method of ascertaining a person’s identity consists of confirming that the person has a deposit account with a financial entity, other than an account referred to in section 62 of the PCMLTFR. For the deposit account method, paragraph 67(c) of the PCMLTFR requires that the client name, the deposit account number, the financial entity name, and the date of the confirmation be recorded. Therefore, if the payment provider confirms the client name, the deposit account number, the financial entity name, and the date of the confirmation, then yes, the micro-withdrawals and/or micro-deposits is an acceptable means to confirm a deposit account with a financial entity as per Part A of Schedule 7 of the PCMLTFR, and would satisfy one of the two combination methods required.

Please note that FINTRAC does not endorse nor advertise any products, companies, or providers of consumer information.

I trust this information will be of assistance.

FINTRAC Releases Policy Positions

Amber looking at laptop FINTRAC screenFrom the time that we launched, we at Outlier have believed strongly that information should be free.   When we have received information from regulators or other government agencies that we believe could be useful to our friends and clients, we’ve posted that information on our blog, making the information accessible without cost. This has lead us to make inquiries with agencies including the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Most recently, we’ve requested access to all of the policy positions that FINTRAC has provided from 2008 to the present date. As a consequence of this request, FINTRAC will be releasing this data to the public in the near future.

You can read FINTRAC’s confirmation letter here.

00047 – signed reply letter

The Big Disclaimer

The information that follows is based on our requests and conversations with FINTRAC. We are not lawyers and do not present any of our content as legal advice. If you feel that we’ve missed something vital, or misrepresented an important point, please feel free to contact us and we’ll do our best to correct it.

FINTRAC Has Gone Public

Policy positions are statements that FINTRAC has made about how the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its enacted regulations (Regulations) should be applied. These are the “opinion” or “position” of the regulator (similar to the guidelines released by FINTRAC), intended to assist reporting entities in complying with the law. Like guidelines, they are subject to change and do not carry the force of law – but do have the ability to be powerful tools for reporting entities.

We applaud FINTRAC’s decision to make this information available to the public and look forward to reviewing the publications!

You can see the initial publication here (scroll down to the FINTRAC Policy Interpretations section).

What It Means For Your Business

Reporting entities should review the policy positions when they are released and look for guidance that can be applied in refining their anti money laundering (AML) and anti-terrorist financing (ATF) compliance programs.  FINTRAC has confirmed that “sanitized, non-repetitive, versions” of the policy interpretations positions will be made public on an ongoing basis.  Historical policy interpretations (from 2008 to the present date) are expected to be published via FINTRAC’s website in December this year.

Obsolete Policy Positions

We have received as part of our initial information request a list of policy positions that FINTRAC considers to be obsolete (no longer accurate or relevant). While these are less useful to most reporting entities than current policy positions, it may be useful for reporting entities to review this content to determine whether they are relying on information that FINTRAC no longer holds true. You can access this information using the link below.

Obsolete Policy Positions

Need a Hand?

If you have questions about AML or ATF compliance, including what a policy position might mean for your business, please contact us for more information.

Insights From the 2014 CMSBA Conference

CMSBA

We were honoured to present at this year’s Canadian MSB Association (CMSBA) conference in Toronto. Speakers included representatives from the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the Canadian Federation of Independent Businesses (CFIB), money service businesses (MSBs), consultants, lawyers and technology service providers. Priced between CAD 200 and 250 (depending on membership status and the timing of the registration), the price of this annual event, which includes breakfast, lunch, a post event reception, an annual CMSBA membership and a training certificate is likely one of the most informative and reasonably priced resources for MSBs. We would like to thank the CMSBA for providing a top quality event.

The Big Disclaimer

The information that follows is based on our experience attending the conference, and the information that we feel will help our friends and clients the most. While there were many excellent sessions, we weren’t able to enjoy them all. If you feel that we’ve missed something vital, or misrepresented an important point, please feel free to contact us and we’ll do our best to correct it.

FINTRAC Exams Are Changing

Lisa Douglas of FINTRAC tackled an update on the regulators expectations with candor, diplomacy and even a sense of humour on occasion. Among the most important points for reporting entities was the implementation of the regulatory changes that came into effect in February of 2014, and changes to the types of testing that FINTRAC will be performing in examination:

  • Business Relationships: has the nature and purpose of the business relationship been documented? Has the customer been identified where there is a business relationship (and if not, are efforts to identify the customer documented)? Is ongoing monitoring in place?
  • Suspicious Activity: Do the policies and procedures reflect the right indicators for the business model (see FINTRAC’s Guideline 2 for a full list)? Is there activity that seems to be suspicious that was not reported? If so, are you able to explain objectively why the activity was not considered to be suspicious (and is the explanation backed up by documentation)?
  • Ongoing Monitoring: Are monitoring efforts documented? Is the monitoring for high-risk customers and business relationships different (in nature and frequency)?
  • Beneficial Ownership: Is there documentation that confirms beneficial ownership? If not, has Senior Officer been identified and is the customer classified as high risk?
  • Customer Information Updates: Is customer information being updated on a regular schedule according to the customer’s risk?
  • Quality Reporting: Are the reports that FINTRAC receives complete and accurate? Are all fields (including fields that aren’t mandatory) completed if you have the information on file?

Ms. Douglas received the most questions about applying an ‘objective standard’ to deciding whether or not there are reasonable grounds to suspect money laundering or terrorist financing activity, and stressed that it is not enough to know that the activity is consistent for a customer over time if the activity could be indicative of money laundering or terrorist financing. This theme was echoed by Paul Burak of MNP LLP in his discussion of customer due diligence. In his illustrative example, Mr. Burak described a hotel that made large cash deposits with few credit card or debit card payments, in volumes that were out of synch with local tourist traffic. While the pattern of activity was consistent for the client over time, it did not make sense when an objective standard was applied.

There are Many More MSBs with ‘Zero Deficiencies’ Than MSBs with Penalties

Although there are several published administrative monetary penalties that have been published for MSBs, approximately 25% of MSBs examined between 2008 and 2014 have passed examinations with zero deficiencies.   While this isn’t likely to reduce the stress that comes with preparing for an examination, the information (obtained from a recent access to information request that Outlier filed with FINTRAC) is important in understanding that the MSB industry has historically been more compliant than the headlines would have us believe. That said it’s always vital to take the time to prepare for your examination and ensure that all of the materials requested by FINTRAC are assembled and delivered on time. We’ve put together some free resources to help reporting entities get organized, available here.

We were fortunate enough to co-present on this topic with two very experienced lawyers, J. Bruce McMeekin and Tushar K. Pain. Both emphasized the importance of reaching out to a legal professional early if you may be facing an administrative monetary penalty, as well as the value of regular compliance testing (not just limited to the effectiveness reviews required every two years) to assess compliance and fix anything that may be offside.

Banking Remains an Issue for MSBs

Robert Osbourne of Grant & Thornton provided excellent insights on maintaining banking relationships, including requesting and account manager, and maintaining regular contact (rather than simply responding to issues or information requests). Despite recent public policy positions from the Financial Action Task Force (FATF) and Financial Crimes Enforcement Network (FinCEN) warning against wholesale de-risking, few Canadian banks are currently accepting MSBs. Among those that we are aware are taking on MSB customers:

  • Royal Bank of Canada (RBC)
  • Bank of Montreal (BMO)
  • DirectCash Bank (DC)

There are additional financial institutions, including credit unions that offer accounts to MSBs, however many of these are not currently taking on new MSB customers. Access to banking is one of the issues that we’re likely to hear more about from both the CMSBA and the CFIB in the coming months.

Tools and Technology

The importance of tools and technology for recordkeeping and compliance management cannot be understated. The Canadian market is served by a number of great providers, and more solutions are being added on a regular basis. The solutions that are implemented should be well aligned with your business model and Risk Assessment. They should also be secure, in particular where sensitive or personal information (PI) is stored. Garry Clement of Clement Advisory Group emphasized how vulnerable the industry may be to cyber threats, and steps that MSBs can take to recognize threats and protect their data.

Digital Currency

Jillian Friedman of the Bitcoin Embassy (formerly, now she can be found at montrealtechlawyer.com) and Susan Han of Miller Thompson provided an overview of digital currency. While it was clear that many MSBs are interested in the potential that bitcoin and other digital currencies can offer, the same barriers to banking faced by MSBs are faced by digital currency companies in Canada. MSBs that deal in digital currency may face additional de-risking concerns with their banks. Zach Ramsay of CoinCulture, though not presenting, was on hand to offer clarification about the digital currency related services that may interest MSBs including bitcoin teller machines (BTMs) and bitcoin payment processing.

Need a Hand?

If you would like more information about the CMSA, including information about how to become a member, you can contact them here.

If you have questions about AML or ATF compliance, please contact us for more information.

Return to Blog Listing