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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.

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.

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 & ATF 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.

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 & ATF 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).

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Micro Deposits & Micro Withdrawals

The Big Disclaimer

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.

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?
Is our system set up to keep a record that demonstrates that the name was matched?
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?
Is our system set up to keep a record of the type of account or confirmation that the account is a deposit account?
Is our system set up to keep a record of the name of the financial entity where the account is held?
Is our system set up to keep a record of the account number?
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

From 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

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.

EFT Reporting Clarification – Field Limitations

Guest Blog

Our guest blogger this week 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

Over the past year, we have a noticed a change in how Electronic Fund Transfer Reports (EFTRs) are interpreted by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). For entities that are required to report EFTs, any amount valued at CAD 10,000 or more that is sent out of Canada or received from outside of Canada on behalf of a customer is reportable to FINTRAC within 5 business days. During recent exams, FINTRAC has been paying much closer attention to the details of each report, reviewing each field for missing or invalid information. Due to restrictions in how much information can be included in a report, an EFTR can be considered incomplete by FINTRAC, even if all information has been entered by the reporting entity.

Reports that are filed to FINTRAC electronically must meet FINTRAC’s batch reporting specifications, which includes character limits for each field in the report. For example, fields such as “Individual’s Occupation” or “Street Address” are limited to 30 characters. This presents two risks for reporting entities:

Descriptions that are longer than the field character limits, and
Limitations of third party software.

We have sought additional clarification about these scenarios, and how they may affect your FINTRAC reporting.

Information Longer than the Field Character Limit

Certain information, such as a foreign bank’s street address, can easily be longer than the 30 character limit. We recommend shortening the address as much as possible by using abbreviations, and by trying to ensure that only the bank’s civic address is included in the report.

For example:

If the complete address is: The Example Bank Building, 123 George Washington Street, P.O. Box 456 (69 characters with spaces), the address must be shortened to meet the field limits.

One option for shortening the address is: 123 George Washington St.

Limitations in Third Party Reporting Software

Some third party FINTRAC reporting software does not enforce a field cut off (and the end user may not be notified that some information was cut off). This can result in information that appears to be present in a report, but is actually cut off as it is sent to FINTRAC.

Using the same example, if only the first 30 characters are sent to FINTRAC, the address in the report would read: The Example Bank Building, 123.

Some third party reporting software provides a report “Preview” function, which can show you how the report will actually appear to FINTRAC. If this option is available, be sure to review the “Previewed” report to ensure that all necessary information is contained in the report, and that nothing is cut off.

If your third party reporting software has this limitation, we would recommend contacting the software provider to request that field limits be put in place to match FINTRAC’s reporting specifications.

Need a Hand?

vCAMLO: If you are a credit union or MSB, and have any questions related to EFTR, LCTR or STR reporting, 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.

Full Text Response

Good afternoon Mr. Krumins,

Thank you for your follow-up inquiry.

As previously stated, the reporting entity is required to include the relevant information to identify the destination or sending institution. It is for the reporting entity to determine the relevant information as this is a question of fact.

For an international or foreign address, there is no specific formula since every country has its own conventions. If no numerical address exists, the reporting entity should take reasonable measures to include the relevant information to help identify the destination or sending institution. When the reporting entity is reporting non-SWIFT Electronic Funds Transfers, and the institution’s information exceeds the character capacity in the given address field, then the reporting entity should consider ways to abbreviate names or words, without deteriorating the quality of the information, as necessary.

Best Regards,

Implementing 2014 AML & ATF Regulatory Changes

We’ve done many AML Compliance Effectiveness Reviews of late, and my first question to clients is always the same: have you implemented the changes that came into effect in February of this year? The answers have varied from a confident “Yes, of course!” to “What changes?” We have a simple guideline for blogs at Outlier. If we receive a question more than three times, we write about it, and we make as much useful information as possible free. We do this because we believe that knowledge is power – and that everyone should have access to it. In the spirit of making knowledge free and available, we’ve decided to share the most significant changes related to updates to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR) that came into effect earlier this year, and the solutions that we’ve implemented with our clients.

The Big Disclaimer

This blog was not written by a lawyer and shouldn’t be considered legal advice.

While our solutions have been reviewed by:

Outlier;
Our clients who have implemented these solutions; and
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) (in the form of examinations conducted with our clients who have implemented these solutions),

this doesn’t guarantee that these solutions will be a perfect fit for your business. They will need to be edited and customized to suit your business model – but we think that they will point you in the right direction.

2014 PCMLTFR Changes In Brief

The most recent changes to the PCMLTFR came into effect in February of this year. Among the most significant changes were:

The addition of business relationships;
The addition of customer information updates (with more frequent updates for higher risk customers);
The addition of delivery channels to the risk assessment (bundled with products and services); and
The addition of enhanced transaction monitoring for higher risk customers.

Each of these changes has an impact on your anti-money laundering (AML) and anti-terrorist financing (ATF) program. They should be incorporated into your program documents (your policies, procedures and training) and have an impact on your operations (what you’re doing to meet these obligations).

Business Relationships

Reporting entities have a business relationship when a customer has performed any combination of transactions that requires identification and/or confirming the existence of an entity more than twice. This includes suspicious transactions and attempted suspicious transactions. When you have a business relationship with your customer, you must keep a record of the “purpose and intended nature of the business relationship.” In its simplest form, this means asking the customer the purpose of their business with you, and keeping a record of the response. This information is also useful in transaction monitoring, as it allows you to look for activity that isn’t consistent with the answer that the customer has provided.

This is something that you can ask your customer verbally (by phone is fine), by email, via a web form, by fax, or in any other way that makes sense for your business. You don’t need the customer to sign anything, but you do need to document the response. There is also flexibility in how you keep a record of the customer’s response.

If you have flexible information technology (IT) development, you can add a business relationship indicator to your system, as well as a field for the purpose and intended nature of the business relationship. Ideally, the system would detect business relationships automatically, and prompt your staff to collect information about the purpose and intended nature of the business relationship. If your business is relatively straightforward, you may even be able to develop a dropdown menu.

If your IT systems are less flexible, you’ll need to find another way to record this information. This can range from notes in the customer profile section of your client management system to an excel spreadsheet. Whichever method you use, you’ll need to think of a way to make sure that you know about all of the business relationships that exist.

You’ll also need to add a section to your program documentation that explains:

What a business relationship is;
How you know when you have a business relationship with your customer; and
What you do when there is a business relationship.

Your staff and agent training should also be updated to include a definition of business relationships, and your processes where you have a business relationship with your customer.

Here’s some sample language:

Business Relationships

We have a business relationship with anyone that has conducted two or more transactions that require identification (for individuals) or confirmation of the existence of an entity (for organizations). When we have a business relationship with our customer, we need to keep a record of the purpose and intended nature of their business relationship with us. Although this may seem self-evident, it is something that needs to be recorded.

Our system has been updated to prompt all staff to enter the purpose and intended nature of business relationships. This field is not optional; it must be completed whenever we have a business relationship with our customers.

We must also monitor business relationships that and keep information up to date (including customer identification, if the customer is active with us). The Compliance Officer will determine whether or not information about our customers and/or businesses relationships is up to date may contact staff for additional information.

Information Updates

Reporting entities must also keep customer information up to date. Updates should be more frequent for high-risk customers, although the PCMLTFR does not specifically prescribe how often these updates should take place. Depending on your business model and how frequently you interact with your customers, there may be significant differences in how often you perform updates.

Customer information updates refer to the customer’s name, address, email address, telephone number and occupation or principal business. Customers that are organizations are also required to confirm the organization’s beneficial ownership and director information. This doesn’t mean that you need to collect the articles of incorporation (or other documentation that you’ve already got on file) a second time, but rather than you’re confirming with the customer that this information has not changed, or updating your records if there were any changes.

Once again, if your IT systems are flexible, you can add automatic prompts to ensure that this is completed. Anyone that uses online banking will be familiar with this the type of updates that have occurred this year. When you log into your account, you’re asked to confirm your personal details before proceeding to the banking site.

You’ll also need to add a section to your program documentation that explains:

What information must be updated;
How frequently this information is updated; and
How you update this information;

Your staff and agent training should also be updated to include information updates as well.

Here’s some sample language:

Customer Information Updates

Customer information updates refer to the customer’s name, address, email address, telephone number and occupation or principal business.

Customers that are organizations are also required to confirm the organization’s beneficial ownership and director information.

Inactive Customers

Inactive customers are re-identified in order to re-activate an account and conduct transactions that require identification.

Inactive customers that are required to be re-identified are also required to update their customer information.

Low & Medium-Risk Customers

Low and medium-risk customers that were identified face to face are required to update their customer information at the point that the identification document has expired.

In the case that there is no expiry date for the identification document initially provided, customer information is updated every five years.

In the case that the customer has been identified using non-face-to-face methods, customer information is updated every five years.

Low and medium-risk customers that are not recognized visually or by voice must be re-identified using either face to face or non face to face methods when they request transactions that require identification.

High-Risk Customers

High-risk customers are required to update their customer information every two years.

High-risk customers that are not recognized visually or by voice must be re-identified using either face-to-face or non face-to-face methods when they request transactions that require identification.

If the reason that a customer has been considered high-risk relates to doubts about the veracity of any of the information or identification provided, additional identification or confirmation of customer identification may be required at the Compliance Officer’s discretion.

Risk Assessment: Delivery Channels

Your Risk Assessment (that document that describes the risk that your business could be used to launder money or finance terrorism) already describes the risk related to your products and services (what you sell). This has been updated to include delivery channels (how you deliver your products and services to your customers). This should include all of the methods that you use to interact with your customers (whether they’re sales and service or service only), and a description of the risk associated with those methods. Generally speaking, high-touch delivery methods (anything that allows you to interact directly with the customer) provide more opportunities to detect potential money laundering or terrorist financing activities. This doesn’t mean that low-touch options like online ordering are bad, but it does mean that you need to have good controls in place to prevent money laundering and terrorist financing.

Your Risk Assessment should be updated to describe your “Products, Services and Delivery Channels” (rather than simply “Products and Services”). It should clearly explain how your products and services are delivered, and the risks associated with your delivery methods. The delivery methods should include all of your touch points with your customers (including things that may not be advertised, that you only do for existing customers).

Here’s some sample language:

Delivery Channels

We complete the sales process with our customers:

In person (at our retail/commercial locations);
In person (at locations other than our own premises);
Via mail;
Via phone;
Via fax;
Via internet.

In addition, we provide servicing to our customers:

In person
Via social media sites;
Via email; and
Via phone.

Our delivery channels include a mix of “high-touch” and “low-touch” options. High touch options provide us with greater opportunities to interact with our customers, observe customer behavior and ask questions. Low-touch options do not afford the same opportunities to observe behaviours. In these cases, we are more reliant on transaction monitoring and transaction review to detect unusual activity. In the case of low-touch options, we are generally able to contact the customer via our servicing channels to request additional details where the transaction is not consistent with what we know about the customer.

Enhanced Transaction Monitoring

Reporting entities are required to monitor transactions in order to identify patterns that may indicate that money laundering or terrorist financing is taking place. For higher risk customers, there must be some form of enhanced transaction monitoring. Enhanced means that it is different from the transaction monitoring that takes place for all customers. It can be different either in quality (what you do to monitor transactions) or quantity (how frequently monitoring takes place, or how unusual a transaction must be in order to generate an alert).

If you have an IT system that automatically monitors transactions and generates alerts, and there is flexibility in programming this system, you can make changes to the monitoring activities that take place based on customer risk level. If you’re monitoring transactions manually, you can incorporate enhanced transaction monitoring into the enhanced due diligence that you conduct for your high-risk customers. This can be as simple as reviewing the last two years of high-risk customer activity. Regardless of the method that you use to conduct enhanced transaction monitoring, you’ll need to update your program documentation to describe what you’re doing and what records you’re keeping.

Where transactions are monitored by an IT system, the language in your program documents should reflect the parameters set in your system. If you are monitoring transactions manually, here’s some sample language:

Enhanced Transaction Monitoring

For high-risk customers, enhanced transaction monitoring is conducted. The Compliance Officer (or a delegate) reviews the information that is on file about the customer, as well as records of the customer’s activity for the past two years. If there is activity that appears to be related to money laundering or terrorist financing, appropriate reports are filed with FINTRAC (and in the case of terrorist property, with CSIS and the RCMP).

High-risk customer accounts are reviewed at least annually, and more frequently where triggered by customer activity (for example where there is an internal report submitted to the Compliance Officer). The Compliance Officer will maintain complete records of the reviews and maintain these records for at least five years

Keeping Up To Date

Remember to document the fact that you’ve reviewed and updated your program. This can be done in a simple spreadsheet, or within the program documents. The record should include what updates were completed, when the updates were completed, and by whom the updates were approved.

Need A Hand?

If you need assistance reviewing your program, implementing the updates described in this blog, or just someone to chat with to make sure that you’re on the right track please contact us.

FINTRAC EFT Reporting Clarification

We’ve recently had quite a few conversations with our clients and friends about electronic fund transfer (EFT) reporting.

For entities that are required to report EFTs, any amount valued at CAD 10,000 or more that is sent out of Canada or received from outside of Canada on behalf of a customer is reportable to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) within 5 business days. The question that keeps coming up relates to situations that have multiple senders or beneficiaries.

For example:

When Jaques (your customer in Canada) sends the equivalent of CAD 12,000 to his aunt Sally in Europe, this is clearly reportable as an EFT.

But

What if instead of sending the whole amount to his aunt Sally, Jacques instead send three transactions, each equivalent to CAD 4,000 to each of his nephews, Ralph, Jean and Morty?

After hearing different answers from different people, we thought it best to get a policy clarification from FINTRAC. You can see the full text of that question, and FINTRAC’s answer below.

Outgoing EFTs With Multiple Beneficiaries Are Reportable

In the case that we mentioned above, Jacques’ transactions would be reportable EFTs, provided that all of the transactions happened within the same 24 hour period. In this case, 3 reports would be sent, adding up to the total amount (which is over CAD 10,000).

Incoming EFTs From Multiple Senders Are Reportable

It stands to reason that if you receive multiple EFTs of behalf of the same beneficiary, the same rules would apply.

In the example above, for instance, let’s say that the money sent to Jacques’ nephews was a loan. All of the nephews pay pack the loan at the same time, and you receive 3 EFTs for Jacques, each from a different sender, with a value of CAD 4,000 each (CAD 12,000 in total for the three EFTs). These are also reportable, provided that the transactions all occurred within the same 24-hour period.

What Does It Mean If You’ve Interpreted the Reporting Requirements Differently?

In some cases, this may mean updates to your IT systems, to allow you to detect transactions that are received on behalf of the same beneficiary, or sent on behalf of the same sender.

It may also mean looking back at your transaction data, in order to figure out whether or not there are any EFTs that should have been reported to FINTRAC that were missed. If this is the case, we recommend that you consider filing a voluntary disclosure with FINTRAC to proactively let them know about the issue, and what you’re doing to fix it. If this is the case, we’ve created some free resources to help make this process as simple as possible.

Need a Hand?

If you’re not sure what to do next or you need extra hands to review your IT system updates or a package that you’re submitting to FINTRAC, please contact us.

Full Text of FINTRAC’s Response

Amber,

I am writing further to your e-mail of May 13, 2014, concerning how to report an electronic funds transfer sent by one client but to

multiple beneficiaries.

As you know, pursuant to the /Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations/ (PCMLTFR), reporting entities are required to report to FINTRAC electronic funds transfers valued at $10,000 or more (in the course of a single transaction) at the request of a client, along with the information referred to in Schedule 2 or 5, as the case may be; and the receipt from outside Canada of electronic funds transfers, sent at the request of a client, of $10,000 or more in the course of a single transaction, along with the information referred to in Schedule 3 or 6, as the case may be.

When a client requesting an EFT conducts a transaction with the initial amount of $10,000 or more and instructs that it be divided between multiple beneficiaries, the EFT is still being carried out by one client, and the EFT must be reported using multiple reports (one per beneficiary). The key to determining the reporting requirement is the instruction given by the client. To better explain this, I have provided two examples below:

1) A client instructs that $15,000 be sent via EFT to different beneficiaries, $5000 each. In this instance, the reporting entity would be required to send three different reports, one for each beneficiary, for a total of the $15,000 that the client requested be sent via EFT. When submitting the reports, the 24-hour-rule indicator must be selected, although this is not considered to be a single transaction of $10,000 or more as defined under section 3 of the PCMLTFR.

2) A client instructs that $5000 be sent to beneficiary subsequent $5000 be sent to beneficiary B and a third $5000 be sent to beneficiary C. In this instance, the 24- hour rule must be considered.

The 24-hour rule applies if the reporting entity knows, or an employee or senior officer knows, that the transactions were made within 24 consecutive hours of each other, by or on behalf of the same individual or entity. It applies only to transactions that are under $10,000. If a transaction is for $10,000 or more, it is reportable as one transaction. As such, if the reporting entity knows that the first two EFTs of $5000 each were made by, or on behalf of, the same person, then the reporting entity would be required to submit two reports under the 24-hour rule, as these two EFTs total $10,000.

I trust this information will be of assistance.

Best regards

Canadian Digital Currency Regulation

Late last week, Canadian Bill C-31 received royal assent (meaning that it has been approved and will become Canadian law). The bill covered many areas, one of which was anti money laundering (AML) and anti-terrorist financing (ATF) requirements for Canadian businesses. This included adding “dealers in digital currency” to the definition of money services businesses (MSBs).

It’s not yet clear when these changes will come into force, but we expect that there will be a period of at least six months before businesses need to be compliant. You can read the final version of the bill here. In the mean time, we expect to see a consultation paper and draft regulations before final regulations are released. The law will not come into effect until final regulations are released, and the regulations will clarify exactly what dealers in digital currency need to do to comply.

For businesses that operate in Canada or have Canadian customers (customers that are served in Canada – including via the web), this will mean registering with government agencies as an MSB, maintaining an AML and ATF compliance program, being compliant with the laws (which includes keeping records and identifying customers and reporting certain types of transactions), answering to the regulators and disclosing certain information to financial service providers.

Who Is a Dealer In Digital Currency?

Bill C-31 did not define dealers in digital currency. Instead, the bill states that the definition will be included in the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (Regulations). Generally speaking, being a dealer in any type of good or service implies that you are selling something for profit. The proposed definition is likely to appear in the initial consultation paper (expected this summer) as well as the draft version of the regulations.

It’s important to note that if you are dealing in digital currency today, but not engaging in any other MSB activities, you’re still not considered an MSB and you don’t have compliance obligations (yet).

MSB Registration

Dealers in digital currency will need to register as MSBs. Anyone dealing with customers in Canada will need to register as an MSB with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The process involves contacting FINTRAC to provide initial information and gaining access to the MSB registration site. There will be a number of questions about the owners of the business, senior officers, banking relationships and projected revenues. While the process is not costly, it can take time (in particular if the regulator requires clarification).

MSBs serving customers in the province of Quebec are also required to be licensed with the Authorite des Marches Financiers (AMF). Licensing related fees range from about CAD 607 to CAD 2428, excluding additional fees of CAD 202 per automated teller machine (ATM) operated in Quebec. You can learn more about the Quebec licensing process here.

Dealers in digital currency will not be able to register as MSBs at this time, but should expect to do so once the final regulations have been issued. The registration processes can take time, and it’s useful for businesses to start the process as early as possible in order to avoid being off side with the law.

Compliance Programs

AML and ATF Compliance Programs generally have five elements:

A Compliance Officer (the person who oversees compliance for the organization),
Policies and Procedures (documents that describe what you’re doing to comply),
A Risk Assessment (a document that describes the risk that your business could be used to launder money or finance terrorism, and the controls that you have in place to prevent this from happening),
Training (this is delivered at least annually to all staff that deal with customers or transactions), and
Effectiveness Reviews (like an audit for compliance, these are completed at least every two years).

Some dealers in digital currency may already have voluntary compliance programs in place. These programs will most likely need to be updated when the final regulations are published.

Operational Compliance

In addition to having a documented AML & ATF compliance program, there are certain things that MSBs need to do in order to comply with the law. Currently, these include identifying customers when the MSB:

receives the equivalent of CAD 10,000 or more in cash,
sells or cashes $3,000 or more of traveller’s cheques, money orders, or anything similar instruments,
exchanges currency of $3,000 or more for another currency,
sends or receives international money transfers of $1,000 or more, and/or
suspects that a transaction, or an attempted transaction, of any amount, is related to a money laundering offence or a terrorist financing offence.

Identification in this case is tightly defined as either the MSB or it’s representative looking at an original, valid (not expired) piece of government issued identification in person (via Skype or webcam doesn’t count) or using specific methods described in the Regulations.

MSBs are also required to keep specific types of records for at least five years, including customer and transactions records. All records must be stored in such a way that they can be quickly retrieved if the regulator requires them (generally within 30 days of the date that the regulator makes the request). In addition, MSBs are required to report certain transactions to FINTRAC and other agencies within set timeframes.

Like having a compliance program in place, these requirements don’t apply to dealers in digital currency yet, but it’s helpful for business owners to start thinking about the types of changes that may need to be made to IT systems and processes once regulations are released.

Penalties

The penalties for non-compliance can be significant, and may include either civil penalties, criminal penalties or both. For instance, failure to report suspicious transactions can result in penalties up to CAD 2 million and/or 5 years imprisonment.

In addition, FINTRAC may publish penalties on its website. While monetary penalties can be substantial, it is the publication of these penalties that can ultimately be more damaging to businesses. Few banks or other financial service providers are willing to work with organizations that have published violations for non-compliance.

What’s Next For You?

If your business is likely to be considered a dealer in digital currencies, you will have an opportunity later this year to comment on the consultation papers and draft regulations. It is unlikely that the sector will remain unregulated in Canada for long, but you will have an opportunity to voice your opinion about the proposed changes.

In the mean time, it’s time to start thinking about what you’ll need to do in order to be compliant. Who will your Compliance Officer be? What changes will you need to make to your documents, systems and processes? Although there are certain things that you won’t be able to do quite yet, you can organize your resources to be ready later this year.

If you’re concerned about the next steps and need a hand, please feel free to contact us anytime. Conversation are always free, and if you choose to hire us for a project, we do accept payment in bitcoin.

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An Unwitting Accomplice to Money Laundering

When many of us think of money laundering, it involves large well organised criminal organizations, like the mafia or large drug cartels. We think of elaborate schemes, with money funnelled through many layers and across international borders, numbered bank accounts off shore accounts hiding millions. While these things do happen, money laundering also happens on a much smaller scale with much less elaborate plots. Since money laundering is something that is done to hide the proceeds of crime, it can relate to any amount of money that someone do not want to be traceable back to them (because that money was obtained through illegal means). The more easily something is passed from person to person anonymously, the more easily it can be used for money laundering. High value items can be used to launder money, as they can be bought or sold on secondary markets. Because jewellery can have a high value and be passed from person, it is a potential vehicle for money laundering. Jewellers in Canada and in the USA are required to report certain transactions, and the consequences for failing to do so can be severe.

The Case

On January 14, 2014, Alan Kashi of Pittsburg, PA (USA) plead guilty to failing to file a report of currency received by non financial business. In the USA, this report is called ‘IRS form 8300 Report of Cash Payments over 10,000,’ is similar to the report that Canadian Dealers in Precious Metals and Stones (DPMSs) are required to file with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). In the Kashi case, an undercover agent purchased an expensive watch, claiming during his conversation with Alan Kashi that the money that he was using came from cocaine distribution. In addition to the charges and related press, Mr. Kashi was required to forfeit $933,075. Sentencing in the criminal case is still pending.¹

Alan Kashi maintains that he was ignorant of the law and didn’t realize that he had to report large cash transactions. In order to educate others that may face the same situation, he made a YouTube video explaining what happened and as a warning to other jewellers. It can be viewed here: Filing Form 8300 Part 1 and Part 2.

An Ounce Of Prevention

Perhaps you may think that criminals would be more likely to use a large jeweller, maybe because they have such a high volume of sales going on, they might be less likely to notice something suspicious happening. However, many larger companies have high tech systems in place such as cash registers that automatically request certain information on specific types of transactions (such as large cash transactions) before the transaction can be completed. These systems are in place to make sure that they are following the law. They have many more employees and therefore likely have a well trained Compliance Officer on their staff whose specific duties are to implement and maintain compliance policies and procedures. Smaller companies may not have the money or ability to implement such technologies, making them easier targets for criminals. In the Kashi case, the owner was operating a single store; with no one working there (including him) that knew the law. Unfortunately for Mr. Kashi, being ignorant of the law is not an excuse for breaking it. Anyone running a business is responsible for knowing and abiding by any laws and regulations that apply to it. In Canada, the rules that apply to DPMSs are the same, regardless of a company’s size or sophistication. It is imperative that you know the rules that apply to you and your business.

While the example of Kashi may have happened in the USA, it is still pertinent to companies in Canada. The forms and regulators are different, but the underlying obligations are similar. . In Canada, FINTRAC requires that reporting entities such as DPMSs submit reports about any cash transactions valued at CAD 10,000 or more (within a 24-hour period) and any suspicious transactions, even if they are not over the $10,000 threshold (and whether or not the transaction was completed They require that every reporting entity has a program in place to ensure that they are in compliance. FINTRAC can also request a review of your compliance program at any time, which must be submitted within 30 days of the request. All of this may seem a bit overwhelming, especially when the financial and legal risks are so great. Fortunately, there are very basic and easy to follow steps listed below that will help you to protect your business.

What You Need To Know

All DPMSs in Canada need to have an up to date compliance program that includes:

A Compliance Officer,
Documented Policies & Procedures,
A Risk Assessments,
Training and
AML Compliance Effectiveness Reviews (every two years).

Your AML Program should describe the things that you are doing in order to prevent, detect and deter money laundering and terrorist financing including:

Identifying your customers under certain conditions and keeping customer information up to date,
Reporting certain transactions to FINTRAC,
Monitoring the transactions that take place to determine whether or not there are reportable suspicious transactions, and
Keeping your records (including your program documents) up to date.

Red Flags

In the Kashi case, there were many red flags that should have warned him that something was amiss. For those familiar with Canadian legislation, it may be obvious that both a suspicious transactions report and a large cash transaction report should have been filed. Would it have been obvious to the members of your staff that deal with your customers every day? It’s important to keep your training program up to date and include examples of reportable transactions, including suspicious transactions. Here are some of the red flags that you should be aware of:

A customer that mentions involvement in criminal activities;
A customer that pays a large sum in cash in a way that is unusual;
A customer that asks about identification requirements and changes the transaction or payment method to avoid being identified;
A customer that refuses to be identified and refuses to complete a transaction rather than allowing you to see their identification documents;
A customer that pays for a high value item in cash, then returns the item and asks for a cheque or draft.

There are many more indicators in FINTRAC’s Guideline 2: Suspicious Transactions. If you are a Compliance Officer or business owner, you should read these indicators and train your staff to be aware of the indicators that apply to your business model.

Outlier has developed compliance resources for DPMSs. You can buy and customize program components online through our website or contact us if you need immediate assistance. If you are a member of the Canadian Jeweller’s Association or Jewellers Vigilance Canada, discounts apply to you, including free resources.

¹ The United States Attorney’s Office, Western District of Pennsylvania, 01/15/14. http://www.justice.gov/usao/paw/news/2014/2014_january/2014_01_15_03.html