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Sanctions This Week: July 18th – 22nd, 2016

OSFIOutlier3_032

On July 18th and 22nd, 2016, the Office of the Superintendent of Financial Institutions (OSFI) released the United Nations Security Council’s (UNSC’s) Al’Qaida and Taliban regulations updates to the sanctions list, deleting one individual and amending another.

The individuals are subject to the assets freeze, travel ban and arms embargo set out in paragraph 2 of Security Council resolution 2253 (2015) adopted under Chapter VII of the Charter of the United Nations.

The review of the individual who was deleted from the list was triggered by regularly scheduled updates.  However, no additional information was available regarding the justification.

The amendment of one individual’s information included the following:

  • A physical description;
  • The confirmation of the most recent position held within the Taliban, as of April 2015; and
  • That they are currently involved in drug trafficking and operate a heroin laboratory in Afghanistan.

See the July 18th update on the United Nations (UN) website.

See the July 22nd update on the United Nations (UN) website.

Go to the OSFI lists page.

OFAC

The U.S. Department of Treasury’s Branch, The Office of Foreign Asset Control (OFAC), released three updates last week.  One update was related to the addition of three individuals to the Counter Terrorism Designations list.  The second update was related to the addition of multiple individuals and entities to the Syria and Non-proliferation Designations lists.  The final update last week was to the Kingpin Act and Panama-related Frequently Asked Questions (FAQs) regarding General Licenses.

OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals.  The sanctions target countries, regimes, terrorists, international narcotics traffickers, the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the U.S.

The changes to the Counter Terrorism Designations list included three individuals of different nationalities, Saudi Arabia, Egypt and Algeria, though all have been linked to Al Qa’ida.

The update to the Syria Sanctions list included eight individuals, all of whom are Syrian.  The seven entities, which range from construction, to finance to manufacturing industries and vary in location, which include:

  • Syria;
  • Saint Kitts and Nevis;
  • Cyprus;
  • UAE; and

The update to the Kingpin Act and Panama-related FAQs are specific General License 5B and 6B

See the Counter Terrorism Designations list update on OFAC’s website.

See the Syrian and Non-proliferation Designations lists update on OFAC’s website.

See the Kingpin Act and Panama-related General License FAQs update on OFAC’s website.

See OFAC’s recent actions page.

Need A Hand?

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

Sanctions This Week: July 11th – 15th, 2016

OSFIOutlier3_036

There were no updates released from OSFI this week.

Go to the OSFI lists page.

OFAC

The U.S. Department of Treasury’s Branch, The Office of Foreign Asset Control (OFAC), released one update last week.  The update was related to the addition of two Russian individuals who were added to the Counter Terrorism Designations list.

OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals.  The sanctions target countries, regimes, terrorists, international narcotics traffickers, the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the U.S.

No other information was available on the individuals who were added.

See the Counter Terrorism Designations list update on OFAC’s website.

See OFAC’s Recent Actions page.

Need A Hand?

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

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.

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 counter terrorist financing (CTF) 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?

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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.

FINTRAC Examination Results for MSBs

The Canadian Money Services Business Association (CMSBA) recently held their Spring Training events in Montreal, Vancouver and Toronto.  The list of speakers included MSB industry professionals, as well as representatives from regulators including the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).  For a full synopsis of the Montreal and Toronto events, click here.  FINTRAC presented excellent statistical data about how MSBs have fared in examinations conducted between April 2011 and July 2014.  So how are MSBs faring?  Very well overall. 

ZDE FINTRAC 2008-2013

Data obtained through a freedom of information request indicates that almost 25% of MSBs examined between 2008 and 2013 have not had any deficiencies.

How Does FINTRAC Decide Who Is Examined?

FINTRAC considers several factors when deciding which reporting entities (REs) will be examined.

  • Concurrent Examinations: examinations conducted in tandem with the Office of the Superintendent of Financial Institutions (OSFI). This is applicable to federally regulated financial entities (FRFEs) like banks.
  • Market Share: The largest reporting entities in Canada (because the larger an organization is, the more critical the risk of non-compliance will be);
  • Cyclical: Coverage of a whole industry (this seemed to apply most to Casinos).
  • Follow-Up: Subsequent examinations based, with an emphasis on the resolution of deficiencies found in previous examination(s) to ensure remediation. FINTRAC noted that although it is no longer a requirement to submit a formal action plan to FINTRAC, it is a best practice for REs to document (and update) an action plan internally.
  • Risk: FINTRAC’s evaluation of the RE’s risk, based on a broad selection criteria, such as money laundering and terrorist financing vulnerabilities, the likelihood of non-compliance and industry trends.
  • Theme-Based: Related to specific intelligence about a RE or type of business that indicates there may be an elevated risk of non-compliance, money laundering vulnerability or terrorist financing vulnerability.

Methodology & Analysis

FINTRAC’s statistical analysis of MSB adherence to the requirements laid out in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its regulations is broken down by percentage, the results of the exams conducted that were fully compliant, partially compliant and non-compliant.  These are colour coded:

  • Green: fully compliant (no deficiencies were observed),
  • Yellow: partially compliant (there was something in place, but the MSB missed something), and
  • Red: non-compliant (in most cases, there was nothing in place or a reporting timeframe was missed).

Overall examination results have been positive.

Overview

It’s noteworthy that if FINTRAC has, as of 2014, found something during an examination that is considered ‘immaterial’, it’s not cited.  For example, in a large sample, if there are two client addresses that appear to be PO boxes, but all other client addresses were complete and in acceptable formats, there may not be a citation.  In these cases, FINTRAC may inform the RE verbally, but it will not be part of the formal ‘findings’ letter.

Compliance Officer

MSBs are required to have a Compliance Officer (a person that is responsible for overseeing the AML & CTF compliance program).  The appointment of the Compliance Officer must be documented in writing.  FINTRAC staff chided that this is likely the easiest area to achieve a fully compliant result in examinations.  MSB examination results certainly reflected this.

CO Chart

From a total of 612 MSB examinations considered, 608 MSBs were fully compliant.

Only four MSBs were deemed to be non-compliant.  It was noted that these were generally new market entrants that did not appear to understand Canadian AML & CTF compliance requirements.

Policies and Procedures

MSBs are required to have policies and procedures.  Policies describe the MSB’s regulatory obligations, while procedures describe what the MSB is doing to meet those requirements.  These must be documented, in writing, and the procedures must cover both staff and agents (if the MSB has agents).

PP Chart

From a total of 765 MSB examinations considered, 477 MSBs were fully compliant.

In 230 examinations, MSBs were deemed to be partially compliant.  Common errors included:

  • The omission of the 24-hour rule (specific descriptions of how the MSB determined whether or not reportable transactions had occurred over a 24 hour period),
  • Third party determinations (specific descriptions of when an MSB must determine if there is a third party involved, as well as what information needs to be collected and recorded), and
  • Politically exposed foreign person (PEFP) determinations (specific descriptions of when an MSB must determine if their client is a PEFP, and if so, what information needs to be collected/recorded. There is also a requirement that senior management signoff on the account within 30 days of the determination).

A total of 55 MSBs did not have any documented policies or procedures. In some cases, FINTRAC noted that there appeared to be processes in place, but that these were not documented in writing.

Training

MSBs are required to have an ongoing training program. The training program must be documented (who, what, where, when and how) and delivered to all staff and agents on an annual basis, at minimum.

Training Chart

From a total of 487 MSB examinations considered, 346 were fully compliant.

In 63 examinations, MSBs were deemed to be partially compliant.  Common errors included:

  • Interviews conducted with staff during an examination that evidenced a misunderstanding of the requirements (during an exam, FINTRAC will interview random staff members related to regulatory requirements to ensure training effectiveness)

In 78 examinations, MSBs did not have any training in place, or if they did, it was not documented.

Among the training options available to MSBs, we’re most excited about a relatively new offering from TAMLO that includes fast paced and visually stunning video content, as well as testing and tracking tools for Compliance Officers.

AML Compliance Effectiveness Review

MSBs are required to complete an AML Compliance Effectiveness Review once every two years.  The review must cover all policy and procedure documentation, as well as operational testing to ensure procedures are being properly followed.

2YR Chart

From a total of 722 MSB examinations considered, 412 were fully compliant.

In 101 examinations, MSBs were deemed to be partially compliant.  Where MSBs missed the mark was typically because they did not respect the two year cycle.  Other common errors included:

  • Only reviewing the policy documents with no operational testing of whether they are being followed (the policy document tells staff and agents what to do. Procedures tell them how to do it.  MSBs must be sure they are testing whether staff and agents are adhering to the procedures).

In 209 examinations, MSBs had not conducted an effectiveness review or could not provide evidence of one taking place.

Risk Assessment

MSBs are required to assess the risk that their business could be used for money laundering or terrorist financing.  The risk assessment must include four key components:

  • Products, services and delivery channels;
  • Geography;
  • Customers; and
  • Any other relevant factors.

Risk must be assessed and scored, and mitigated by appropriate controls.

RA Chart

From a total of 720 MSB examinations considered, 432 were fully compliant.

In 158 examinations, MSBs were deemed to be partially compliant.  The main issue was failing to include one of the four required elements. In some cases, a risk assessment was in place, but the documentation was not sufficient in assessing the MSB’s risk and controls.

In 129 examinations, MSBs had no evidence of a risk assessment.

FINTRAC noted that additional industry-specific risk assessment guidance is expected to be published later this year.

MSB Registration

MSBs are required to register with FINTRAC, as well as update their information within 30 days if there are any changes to business activities, banking or agent information.

MSB Reg Chart

From a total of 591 MSB examinations considered, 230 were fully compliant.

In this category, no partially compliant ratings were provided (the MSB registration was either complete, accurate and up to date, or it was deemed to be non-compliant).

In 361 examinations, MSBs were deemed to be non-compliant.  Most issues were due to a failure to update information when something within the business had changed or a failure to list all business activities. For example, the MSB registration may indicate that an MSB only performed foreign exchange in a case where remittance services were also provided.

Client Identification

MSBs are required to identify their clients in certain situations.  There are prescribed methods for completing this both in person and non-face-to-face (NF2F), and the identification document (ID) information must be recorded.

Client ID Chart

From a total of 796 MSB examinations considered, 621 were fully compliant.

In 64 examinations, MSBs were deemed to be partially compliant.  Common errors included:

  • Unacceptable ID (such as health card in Ontario);
  • Accepting ID that was expired at the time of the transaction (identification documents must be valid, or not expired, at the time they are reviewed);
  • Failing to record the prescribed details of the ID used (when reviewing a client’s ID, MSBs must keep a record of certain prescribed information); and
  • In Non-Face-To-Face Identification situations, only using one method, or using an unacceptable combination of methods (when identifying a customer who is not physically present, there are prescribed methods of how this is to be accomplished).

In 111 examinations, MSBs were non-compliant with client identification requirements.

Record Keeping

MSBs are required to keep certain records related to transactions and client identification.  These records must be stored in a manner that they can be accessed in the event they are requested, and must be maintained for at least five years.

RK Chart

From a total of 811 MSB examinations considered, 470 were fully compliant.

In 300 examinations MSBs were deemed to be partially compliant.  In these cases, record keeping was taking place but elements of the record keeping requirements were being overlooked.  Common issues included:

  • Missing telephone numbers;
  • Vague occupation information (for example “manager” or “worker”);
  • PO boxes recorded as customer addresses;
  • Missing postal codes;
  • Third party determinations that were incomplete; and
  • Payment methods for incoming and outgoing payments.

In 41 examinations, MSBs were non-compliant with record keeping requirements.

Third Party Determinations

MSBs are required to make a third party determination in certain prescribed circumstances, as well as collect and record certain information (name, address, date of birth, occupation and relationship to your client) about the third party.

TPD Chart

The total number of MSBs included in the review was not provided, with the statement: “there was not enough information available to conduct reasonable analysis”.  However, the total number of non-compliant MSBs was 6, indicating that approximately 600 MSB examinations were considered in this sample.

FINTRAC Reporting

When FINTRAC assesses reporting obligations, it uses the internal acronym “QTV”, which stands for quality, timing and volume.  Quality refers to the information in the report, specifically, if the report has all the required information.  Timing simply means, was the report filed within the designated timeframe.  Volume is slightly more complicated, but mainly refers to the amount of reports you have filed compared to your previous submissions.  It was noted that typically, where MSBs were deemed partially compliant, it was due to the quality.  Where non-compliance was related to the timing.

Electronic Fund Transfers Reports

MSBs are required to submit electronic funds transfer (EFT) reports to FINTRAC within 5 business days from the date the transaction took place.  An EFT includes the international transfer of CAD 10,000 or more, either in a single transaction, or multiple transactions within a 24-hour period.

EFT Chart

From a total of 434 MSB examinations considered, 165 were fully compliant.

In 87 examinations, MSBs were deemed to be partially compliant. MSBs were typically failing to include all required information, such as:

  • Phone number;
  • Date of birth; or
  • Postal code.

It is noteworthy that while not all fields are marked as required in F2R, all fields must be filled in if the MSB has recorded the information.

In 182 examinations, MSBs were deemed non-compliant, with most not reporting the EFTs within the specified time frame, and a small portion missing EFT reports.

Large Cash Transaction Reports

MSBs are required to submit large cash transaction (LCT) reports to FINTRAC within 15 calendar days from the date of the transaction, if the transaction was CAD 10,000 or more in cash, either in a single transaction, or multiple transactions within a 24-hour period.

LCTR Chart

From a total of 428 MSB examinations considered, 232 were fully compliant.

In 104 examinations, MSBs were deemed to be partially compliant.  MSBs were typically failing to include all required information, such as:

  • Occupation;
  • Date of birth;
  • Postal code; or
  • Type of ID used to identify the client.

In 92 examinations, MSBs were non-compliant, with most not reporting the LCTs within the specified time frame, and a small portion missing LCT reports.

Suspicious Transaction Reports

MSBs are required to submit suspicious transaction reports (STRs) and attempted suspicious transaction reports (ASTRs) to FINTRAC within 30 calendar days from the date the transaction is deemed suspicious by the Compliance Officer.

STR Chart

From a total of 285 MSB examinations considered, 262 were fully compliant.

In 14 examinations, MSBs were deemed to be partially compliant.  In these cases, MSBs were typically failing to include all required information.

In 9 examinations, MSBs were non-compliant.  Failing to file STRs carries relatively sever penalties, as the Canadian intelligence community relies on this type of reporting to build cases.  Where items are escalated as being potentially suspicious (either by staff or a transaction monitoring system), MSBs should always document the reason that these items are deemed not to be suspicious if no STR or ASTR reporting is completed.

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.

 

 

 

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.

 

Highlights from the 2015 AML Forum

This year I had the honour of co-chairing the Canadian Institute’s 14th Annual AML Forum, along with Ron King of Scotiabank. The event brought together a diverse group of stakeholders and speakers including regulators, law enforcement, bankers, money service businesses (MSBs), technology experts and government. Over two days, we enjoyed many lively discussions, and while I can’t cover all of the content here, I want to provide some insight for colleagues that weren’t able to attend the event.

Key Messages from Regulators & The Department of Finance

Representatives from the Department of Finance, the Office of the Superintendent of Financial Institutions (OSFI) and the Financial Transactions Reports Analysis Centre of Canada (FINTRAC) were present throughout the conference, and fielded questions from the audience throughout the event. Among the most exciting announcement was the Department of Finance’s assertion that we should expect a new AML regulations package to be released in draft for public comment later this year. Though the target date is set for June or July, anything can happen in an election year and there may be delays.

The Department of Finance, OSFI and FINTRAC also discussed Canada’s upcoming mutual evaluation by the Financial Action Task Force (FATF) and Canada’s countrywide risk assessment. The risk assessment is underway and expected to be shared later this year, in advance of the FATF’s visit this fall (with results expected to be published next summer). The risk assessment will likely prove to be a useful tool for regulated entities struggling to qualify Canadian money laundering and terrorist financing risk.

OSFI emphasized the importance of considering the AML program as part of the overall prudential compliance management strategy for federally regulated financial entities (FRFEs). It is expected that OSFI’s guideline B-8 will be revised in the near term. To avoid rework, OSFI is waiting for several key inputs including the updated AML regulations package, FINTRAC’s updated risk assessment guidance and the countrywide risk assessment. OSFI will also continue to work with FINTRAC on streamlining examination processes, citing the need to create a common framework and approach to examinations.

FINTRAC reviewed its recent statistics and emphasized the importance of the agency’s role as a financial intelligence unit (FIU). Key to this role are suspicious transaction reports (STRs), which will play a key role in upcoming examinations for regulated entities. FINTRAC will be applying several tests to STR data, including:

  • Entity Practitioner: similar transactions within an entity that were not reported to FINTRAC;
  • Sector Practitioner: a comparison of the number and type of STRs submitted by similar entities (the size and type of business are taken into consideration); and
  • Reasonable Practitioner: a comparison of the reported and unreported transactions against relevant guidance on reasonable grounds to suspect that money laundering or terrorist financing activity may be taking place.

This echoes FINTRAC’s comments throughout 2014 on the importance of suspicious activity reporting, a sentiment that was echoed by law enforcement.

Law Enforcement Focus

Speakers representing the Royal Canadian Mounted Police (RCMP) and US Federal Bureau of Investigation (FBI) discussed the strategic value of intelligence obtained through FIUs and directly from the financial services community. While the specifics of ongoing cases cannot be discussed publicly, both speakers emphasized the importance of providing complete and concise information, and excellent examples of how this type of intelligence is used by law enforcement.

The speakers confirmed that the dollar values for terrorism related transactions seen in Canada are consistently low. The RCMP discussed a transaction pattern relevant to individuals planning to attend radical training camps wherein an individual saves a relatively small sum via legitimate work (often at low wage jobs), then purchases a plane ticket and camping gear (which may account for all or almost all of the funds saved). Patterns such as these are useful for institutions seeking to understand and identify patterns of activity that may be indicative of potential terrorism.

The De-Risking Debate Continues

One of the most lively discussions of the event surrounded “de-risking” (refusing to provide service to a customer that is outside of the institution’s risk tolerance). While banks in Canada are private, for profit enterprises, access to banking facilities remains a vital component for business success. The money service business (MSB) sector has struggled with banking relationships both in Canada and abroad. Best-practices discussed included independent third party compliance reviews conducted by qualified practitioners as a valuable tool in assisting banks to assess the state of an MSB’s compliance. It was noted that while the MSB sector is certainly vulnerable to money laundering and terrorist financing, it is not the only vulnerable sector in Canada. While Canadian MSBs are regulated by FINTRAC, other sectors that are both vulnerable and unregulated have not experienced the same degree of de-risking.

Banks emphasized the risks for financial institutions in dealing with certain types of business as being broader than AML compliance. Chief among these risks was reputational risk. As one banker noted, when a bank’s larger clients are offside with requirements, the client, not the bank, is publicly held accountable. When the bank’s client is of a smaller size however, banks are being considered more responsible in the eyes of the media and the public. This, coupled with the profitability of accounts held for smaller entities considered by banks to be high risk, may be at the root of some of the banking woes experienced in the MSB sector, in particular by smaller MSBs.

Sanctions, PEPs and Analytics

Several speakers emphasized the importance of implementing and tuning technology solutions to detect persons and entities subject to sanctions, politically exposed persons and potentially suspicious transactions. Sanctions in particular appeared to be an emerging concern, with list screening alone viewed as being insufficient in terms of banking controls. The increased complexity of sanctions includes not only specific individuals and entities but their affiliates, including subsidiaries (which may not be easy to detect in many cases) and sanctions applied to specific types of transactions. For multinational financial service providers, there is additional complexity in managing sanctions related to doing business in several jurisdictions with different requirements. In order to comply effectively, information sharing across jurisdictions (including information about customer activity and risk) is likely to be required. For many entities, this will mean revising privacy related policies and disclosures to enable information sharing across a network of affiliated entities.

In addition to privacy considerations, the integration of systems and processes across affiliated entities and lines of business was a key consideration. One Canadian bank noted that they are in the process of synchronizing know your client (KYC) requirements across all lines of business, a process that involves the integration of data from over 35 separate IT systems and databases. Such synchronization is necessary to ensure that customer risk is considered consistently across all lines of business.

A Key Question on Emerging Technology

My co-chair raised an insightful point with the emerging payments panel in regards to Bitcoin and other emerging payment technologies. While banks have heard loud and clear that these technologies are not as anonymous as they were initially believed to be, there is a sense within the banking community that there has not, to date, been a solid assessment of the risk (or subsequently established best practices in mitigating these risks). Some of the risks raised by panelists included consumer protection (the risk that funds may be lost through negligence or bad actors) and the risks related to effective controls (which are similar to the types of risk that exist in other vulnerable sectors).

While it’s clear that emerging payment technology companies are working to demonstrate compliance in a changing regulatory landscape, there is clearly a gap between these companies and traditional financial institutions, in terms of messaging and expectations. We expect that this will be an ongoing conversation as the industry, regulations and technology continue to evolve.

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.

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.

Charles Tibshirani, Principal, Tibshirani Lawyers

Phone: (514) 285-9285

Email: charles@tibshirani.ca

Website: www.tibshirani.ca

Relevant specializations and experience: Charles has extensive experience dealing with cross-border MSB issues, dealing with the AMF and litigation.

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.

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