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Your Real Estate Business Can’t Afford ‘Just-in-Time Compliance’

Written with Heidi Unrau

 

In the past two years, 13 real estate brokerages faced a total of $1,041,936 in administrative monetary penalties (AMP) from FINTRAC, the federal agency that regulates anti-financial crime compliance and analyzes financial intelligence in Canada. That works out to an average fine of $80,148 per brokerage, with the single largest AMP reaching approximately $150,000. 

Real estate brokers, sales representatives, and developers have legal responsibilities under Canada’s anti-money laundering rules prescribed by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). These rules are designed to prevent, detect and deter real estate transactions from being used to hide proceeds of crime, to fund terrorist activity, or evade sanctions. 

Yet too many brokerages still treat anti-money laundering (AML) compliance as a cost centre instead of a core risk management function. And what we’re seeing is a lot of “just-in-time compliance” behaviour, resulting in major deficiencies with up to six-figure penalties.

Compliance within the real estate industry has never been as important as it is right now. Not only is the regulator penalizing companies for compliance failures, but the monetary penalties are now 40 times higher than they were before. That emphasizes the level of effort that needs to be paid to your compliance program before FINTRAC calls.

Why is FINTRAC Cracking Down on Real Estate?

Real estate is an attractive target for money laundering because one deal can move a significant amount of illicit funds. Real estate transactions are especially vulnerable because they are used at the integration stage of money laundering, after the funds have already moved through accounts, businesses, third parties, family members, or international transfers to obscure the origin. 

By the time those funds reach real estate, the warning signs are much harder to identify, but the compliance expectations do not change. Given the size, complexity, and risk profile of real estate transactions, you need to apply greater scrutiny to the people, funds, and circumstances behind each deal. 

Weak controls around identification, record keeping, training, and suspicious transaction reporting expose your business to unnecessary financial and reputational risk.

The Problem With ‘Just-in-Time Compliance’

Just-in-time compliance happens when you ignore your AML compliance obligations throughout the year, or worse, a longer period of time, then scramble to fix everything after FINTRAC makes contact. By then, it’s too late. 

Once FINTRAC calls, the exam has already started. Everything done after that point becomes last-minute compliance. It’s better than doing nothing, but it doesn’t prove you had those controls in place during the period FINTRAC is reviewing. 

The regulator is looking at whether you had a functioning program in place during the period under review. If your procedures, training, records, and review processes were missing or outdated during that period, fixing them after FINTRAC contacts you will not undo the deficiency.

A FINTRAC examination can disrupt regular business operations if you’re scrambling to track down missing records, update stale policies, complete overdue training, or fix program gaps while still trying to serve clients and close deals. 

FINTRAC publishes all administrative monetary penalties on its website. A public enforcement action can damage trust with clients, lenders, referral partners and other stakeholders, causing serious reputational harm that can negatively affect your bottom line. 

That’s exactly why AML compliance has to be treated as an ongoing business function. You already understand this concept in other areas of your business. You do not wait until tax season to create a full year of bookkeeping from scratch. You do not wait until a lawsuit to decide if your contracts were properly drafted. AML compliance works the same way. The work needs to be done before the regulator asks for proof. 

Start With Your Baseline AML Obligations

Trying to build a perfect AML program right out of the gate can be overwhelming. In reality, you should start by meeting the baseline requirements. That means ensuring your real estate business has the fundamentals in place, such as written policies and procedures, a designated Compliance Officer, training, risk assessment, record keeping, suspicious transaction escalation and reporting processes, and the required two-year compliance effectiveness review. 

Beyond these baseline requirements, FINTRAC states you must implement a compliance program that can effectively verify the identity of the persons and entities involved in transactions, conduct ongoing monitoring when a business relationship is formed, obtain and take reasonable measures to confirm beneficial ownership information for entities, make third-party determinations when required, and take reasonable measures to determine whether clients are politically exposed persons or heads of international organizations.

Your policies and procedures should clearly explain what your business is supposed to do. Risk assessments identify where your business is most exposed. Your training ensures staff and agents understand their obligations. Your records prove what happened. And your suspicious transactions process shows how concerns are escalated, reviewed, documented, and reported. 

Why The Two-Year Effectiveness Review Is Critical

The two-year effectiveness review is especially important because it reveals where your program is working and where it’s weak. We recommend starting here because it provides a look at your AML compliance program as a whole, identifies the biggest problem areas, and prioritizes the highest risk gaps. It is very important that the person completing your review has adequate experience and understands the industry, as well as your business. This should not be a “check the box” compliance exercise. 

If you have not yet completed an effectiveness review, that should be the top priority. 

Where Real Estate Entities Commonly Fail 

Many real estate compliance failures are basic program deficiencies that are entirely preventable. The most serious gaps usually fall into three main areas: not having an AML program at all, failing to complete the required two-year effectiveness review, and unreported suspicious transactions. The regulator can, and does, penalize failures in the compliance process itself, including missed reporting, poor documentation, and weak program controls.

It is complex, but it is not impossible. If your written program does not reflect how your brokerage actually operates, fix it. If your training is outdated, that needs attention. If your team is unsure what to collect, when to escalate concerns, or when a report may be required, those deficiencies should be fixed before FINTRAC identifies them for you.

No AML Program At All

The most common failure is having nothing in place. That means no written policies and procedures, no designated compliance officer, no training, and no clear internal process for meeting AML obligations. 

These are the foundation of a compliance program. Without them, your business has no consistent way to identify risk, collect required information, train agents, escalate concerns, keep records, or prove to the regulator that the business is taking its obligations seriously. 

The Two-Year Effectiveness Review Not Done

Another major gap is the two-year effectiveness review. It’s often skipped entirely, even though it is one of the most important tools you have to determine if your compliance program is actually working. Without it, you may not know where your business is exposed until FINTRAC identifies the problem first. 

Missed Suspicious Transaction Reporting

A single unreported suspicious transaction can result in a financial penalty well over $100,000. Yet, this remains one of the most common compliance failures. 

FINTRAC has given reporting entities a laundry list of suspicious indicators. And that laundry list is what they’re using to assess your transactions. If a transaction presents red flags, it needs to move through a clear internal process so you can show the regulator what the final decision was. Specifically, that there were reasonable grounds to suspect (RGS) the transaction was related to financial crime and reported as a suspicious transaction to FINTRAC, or there was not RGS and the rationale is clearly documented.  

‘Suspicious’ Does Not Automatically Mean a Dead Deal

A common point of confusion is the distinction between a high-risk transaction, a suspicious transaction, and a transaction you cannot legally participate in. 

A transaction can be high risk without being illegal. A client might have foreign funds, a complex ownership structure, have a holding company involved, or have a third party helping with the purchase. Those details can have legitimate explanations. They also require more questions, documentation, and scrutiny. 

A transaction is suspicious when you have reasonable grounds to suspect, which is a lower threshold than to believe, that it is linked to criminal activity. You do not need proof, but you do need to explain why you feel it is suspicious based on facts, context, indicators, what you know about the client, and the nature of the transaction. 

You can still proceed with high risk and suspicious transactions. Your obligation is to assess the concern, document what happened, escalate internally, and report to FINTRAC when required. 

However, if a client is asking you to help them break the law or evade sanctions, then you absolutely cannot proceed with the transaction. 

Next Steps

For real estate brokerages, compliance is no longer something to address only when an exam is looming, the biggest risk is waiting too long.

If your real estate business does not have an AML compliance program, you need to implement one as soon as possible. Get support from a qualified compliance provider that can help create policies and procedures customized to the specific type of real estate business you conduct. Generic compliance templates are no longer effective because they are not tailored to align with your specific day-to-day operations. 

If you have an AML compliance program, but have not yet completed your two-year effectiveness review, start there. It will tell you where your program is working and where it’s not. Then use that information to prioritize what needs to be fixed first. 

Need an effectiveness review or support building, reviewing, or updating your AML compliance program? Contact Outlier to get clear, practical guidance on your obligations and next steps.

Amending the Amendments! 2020 AML Changes for Real Estate

Background

Back on July 10, 2019, the highly anticipated final version of the amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its enacted regulations were published. However, on June 10, 2020, further amendments to those amended regulations were published in the Canada Gazette. To make reading these changes a little easier, we have created a redlined version of the regulations, with new content showing as tracked changes, which can be found here.

The purpose of this round of amendments is to better align measures with international standards and level the playing field across reporting entities by applying stronger customer due diligence requirements and beneficial ownership requirements to designated non-financial businesses and professions (DNFBPs). The amendments come into force on June 1, 2021.

We have summarized the changes that will have an impact on real estate developers, brokers, and sales representatives below.

Business Relationship

One of the most significant proposed changes for real estate developers, brokers, and sales representatives is related to the definition of a business relationship. Currently, a business relationship is defined as:

If a person or entity does not have an account with you, a business relationship is formed once you have conducted two transactions or activities for which you have to:

  • verify the identity of the individual; or
  • confirm the existence of the entity.

The amendments change the definition for real estate developers, brokers, and sales representatives to the first time that the person or entity is required to verify the identity of the client.

For business relationships, a reporting entity must:

  • keep a record of the purpose and intended nature of the business relationship;
  • conduct ongoing monitoring of your business relationship with your client to:
    • detect any transactions that need to be reported as suspicious;
    • keep client identification and beneficial ownership information, as well as the purpose and intended nature records, up-to-date;
    • reassess your client’s risk level based on their transactions and activities; and
    • determine if the transactions and activities are consistent with what you know about your client;
  • keep a record of the measures you take to monitor your business relationships and the information you obtain as a result.

 This change in definition also means that ongoing monitoring must be applied for the following purposes:

  1. detecting any transactions that are required to be reported;
  2. keeping client identification information and the information up to date;
  3. reassessing the level of risk associated with the client’s transactions/activities; and
  4. determining whether transactions or activities are consistent with the information obtained about their client, including the risk assessment of the client.

PEP

The amendments will require real estate developers, brokers, and sales representatives to make a Politically exposed persons (PEP) determination when they enter into a business relationship (as defined above) with a client.

In addition, they will also be required to take reasonable measures to determine whether a client from whom they receive an amount of CAD 100,000 or more is a PEP.

If a positive determination is made, the following records must be kept:

  1. the office or position, and the organization or institution, in respect of which the person is determined to be a politically exposed foreign person, a politically exposed domestic person or a head of an international organization, or a family member of, or a person who is closely associated with, one of those persons;
  2. the date of the determination; and
  3. the source, if known, of the person’s wealth.

Beneficial Ownership

The amendments will require real estate developers, brokers, and sales representatives to comply with existing beneficial ownership requirements that apply to other reporting entities.

This means when identifying an entity, a reporting entity needs to collect the following information for all Directors and individuals who own or control, directly or indirectly, 25% or more of the organization:

  • Their full legal name;
  • Their full home address; and
  • Information establishing the ownership, control, and structure of the entity.

A record of the reasonable measures to confirm the accuracy of the information, when it is first obtained and in the course of ongoing monitoring of business relationships, must be retained.

We’re Here To Help

If you would like assistance in updating your compliance program and processes, or have any questions related to the changes, please get in touch!

2019 AML Changes For The Real Estate Sector

Background

On July 10, 2019 the highly anticipated final amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), and its enacted regulations, were published. This article is intended to give a high-level summary of changes as they relate to the real estate industry. If you’re the type that likes to read original legislative text, you can find it here. We also created a red-lined version of the regulations, with new content showing as tracked changes, which can be found here.

It is expected that all regulated entities will have to significantly revamp their AML compliance program due to the amount of changes. There are three different “coming into force” dates that should be noted.

 

  • June 25, 2019: a wording change from “original” to “authentic” related to identification. This is welcomed news for digital identification.
  • June 1, 2020: changes related to dealers in virtual currency (which do not apply to the Real Estate sector).
  • June 1, 2021: all other regulatory amendments.

While this does give regulated entities some time to get their AML compliance programs updated, we recommend that you start budgeting and planning from now.

Updated guidance from FINTRAC is expected to be seen ahead of coming into force dates. Given the legislative changes, there will be changes to FINTRAC policy interpretations as well, so be sure to monitor closely and save any interpretations that you may have used for due diligence purposes.

Hefty Disclaimer

This article should not be considered advice (legal, tax or otherwise). That said, any of the content shared here may be used and shared freely – you don’t need our permission. While we’d love for content that we’ve written to be attributed to us, we believe that it’s more important to get reliable information into the hands of community members (meaning that if you punk content that we wrote, we may think you’re a jerk but we’re not sending an army of lawyers).

What Does This Mean For My Business?

As stated above, there are quite a number of changes, but only some have an impact on real estate developers, brokers, and sales representatives. We’ve summarized the changes that will impact the real estate sector below.

Identification

The final regulations replace the word “original” with “authentic”, and state that a document used for verification of identity must be “authentic, valid and current”. This means you can confirm identification, using acceptable documents presented by way of electronic means, so long as it can be authenticated. This will be helpful to real estate developers, brokers, and sales representatives that identify clients in a non-face-to-face manner. This change came into force on June 25, 2019.

Other changes to the identity verification requirements are as follows:

  • For credit file verification (single source), the credit file information must now be derived from more than one source.
  • For the dual source method, when relying on a credit report as part of a dual source, the credit file must have been in existence for at least six months. Additionally, the person or entity that is verifying the information cannot be a source.

FINTRAC Reporting

Virtual Currency

For real estate brokers, sales representatives and developers that conduct transactions that involve virtual currency, the final regulations introduce new reporting requirements for the receipt of CAD 10,000 or more of virtual currency. These basically are the same as large cash reporting obligations, including making a determination if the person from whom the virtual currency is received is acting on behalf of a third party, and will require reporting entities to maintain a large virtual currency transaction record.

The requirements for reporting and recordkeeping for virtual currency are very similar to cash reporting requirements.

24-hour rule

The final regulations clarify that multiple transactions performed by, or on behalf of, the same customer or entity within a 24-hour period are to be considered as a single transaction for reporting purposes when they total CAD 10,000 or more. Only one report would need to be submitted to capture all transactions that aggregate to CAD 10,000 or more. For real estate developers, brokers, and sales representatives, this would apply to recipients of CAD 10,000 or more in cash or virtual currency.

Suspicious Transaction Reporting

Currently, if a reporting entity has reasonable grounds to suspect that a transaction, or attempted transaction, is related to money laundering or terrorist financing, a report must be submitted to FINTRAC within 30 days of the date that a fact was discovered that caused the suspicion. The revised regulations amended this to “as soon as reasonably practicable” after measures have been completed to establish that there are reasonable grounds to suspect that a transaction, or attempted transaction, is related to money laundering or terrorist financing.

This would require reports to be submitted to FINTRAC fairly soon after a reporting entity conducts an analysis that established reasonable grounds for suspicion. It will be important to have detailed processes for unusual transaction investigations. It will be interesting to see how FINTRAC looks at this obligation during examinations.

Terrorist Property Reporting

A very small change (or clarification), related to Terrorist Property Reports, has been made in the final regulations. The timing requirement for filing has changed from “without delay” to “immediately”. This means regulated entities need to report that they are in possession of terrorist property as soon as they become aware.

Schedules

The final regulations introduce changes to reporting schedules, requiring more detailed information to be filed with FINTRAC then previously was required. Even where information is marked as being optional, if a reporting entity has the information, it becomes mandatory to include it. As it relates to real estate developers, brokers, and sales representatives, these changes will impact attempted suspicious and suspicious transaction reporting, terrorist property reporting, large cash reporting, and large virtual currency reporting. Examples of the new data fields are as follows:

  • every reference number that is connected to the transaction (including the sending and receiving addresses for virtual currency transactions);
  • type of device used by person who makes request online;
  • number that identifies device;
  • internet protocol address (IP address) used by device;
  • person’s user name; and
  • date and time of person’s online session in which request is made.

Such changes may mean working with your IT folks to ensure you are retaining the needed data in a format that will be easy to extract.

For more details on what has changed for reporting fields, a comparison of current and proposed FINTRAC report fields can be found here.

Compliance Program

Risk Assessment

One of the deficiencies identified in the Financial Action Task Force (FATF) review of Canada was not having a requirement to assess new technologies before their launch. The final amendments require all reporting entities to assess the risk related to products and their delivery channels, as well as the risk associated with the use of new technologies, prior to release.

This has been a best practice since the requirement to conduct a risk assessment came into force, but this change makes this a formal requirement. This will require strong communication and closer cooperation between compliance officers and teams involved in the development of new services or technology changes.

Training

Under current regulation, if real estate developers, brokers, and sales representatives use agents, mandataries or other persons to act on their behalf, they must develop and maintain a written, ongoing compliance training program for those agents, mandataries or other persons. The final regulations introduce an additional requirement, in which there must be a documented plan for the ongoing compliance training program and delivery of the training.

Records

There are some changes to the details that must be recorded in records that real estate brokers or sales representatives must maintain. In addition to new information that is required for reporting purposes (see the schedules section below), the final regulations add the requirement that information records must contain details of every person or entity for which they act as an agent or mandatary in respect of the purchase or sale of real property or immovables. Under the previous regulations, only information related to the person or entity purchasing real estate was required.

In cases where real estate brokers, sales representatives and developers were required to keep records related to reasonable measures to obtain certain information, the requirement has been removed with this round of changes. It is important to note that you must still take reasonable measures where necessary, and it is only the requirement to keep a record of the measures used that has been repealed.

We’re Here To Help

If you would like assistance in updating your compliance program and/or processes, or have any questions related to the changes, you can get in touch using our online form on our website, by emailing info@outliercanada.com, or by calling us toll-free at 1-844-919-1623.

FINTRAC’s 2016 Real Estate Brief

Quick Overview

A little over a month ago, FINTRAC published an operational brief for the Canadian real estate industry.  The brief was intended to assist reporting entities in meeting the obligations to report suspicious transactions or attempted suspicious transactions that related to potential money laundering or terrorist financing.  The publication provided some common indicators that may be present in a transaction that suggest money laundering or terrorist financing could be involved.

What Does it Mean?

The suspicious indicators provided by FINTRAC list circumstances or activities that might signal potentially illicit activity.  This does not mean that if one or more of the indicators are present that the transaction is definitely suspicious and must be reported to FINTRAC, it is meant to ensure that you are aware of the potential that suspicious activity may be taking place.  In that context, if you are involved in real estate transactions, you must be aware of the indicators in the brief.  If you do encounter a transaction that may be considered suspicious, you will need to collect additional information that will aid in your decision to report it or document why it was not considered suspicious.

What Now?

In order to ensure familiarity for anyone who interacts with customers and their transactions, the list of FINTRAC’s indicators should be included in your ongoing AML compliance training program.  Furthermore, the indicators should also be included in your procedure manuals, allowing easy access to the information.  Finally, the indicators should be incorporated into your Risk Assessment documentation.  Specifically, when determining customer risk and the controls used to effectively mitigate potential risks.

We’ve made it easier for you to integrate this content into your program by putting the indicators in a Word document for you.

Need a Hand?

Outlier has taken the list of indicators provided by FINTRAC and formatted them into an easy to use Microsoft Word document, which can be downloaded here: FINTRAC Indicators Specific to Real Estate Transactions.  This should allow companies within the real estate sector to easily update their documentation and ensure they are sufficiently monitoring for potentially suspicious activity.  If you aren’t sure what to do with this information and would like some assistance, please feel free to contact us.

Would You Recognize Real Estate Red Flags?

Rodney_FINTRACOn November 14th, 2016 FINTRAC released a brief for all reporting entities who may be involved in real estate transactions.  The briefing is intended as guidance to provide some examples of indicators that may be present in transactions that may suggest they are linked to money laundering or terrorist financing.  The indicators described have been taken from transactions suspected of being related to money laundering or terrorist financing reported internationally.  The briefing focuses on the potential risks and vulnerabilities within the real estate industry and provides suggestions on how to ensure reporting entities are sufficiently meeting suspicious transaction reporting obligations.

The briefing is meant to provide operational guidance given the small overall number of suspicious transactions that have been reported to FINTRAC by the Real Estate industry.  The briefing states that these indicators will be used by FINTRAC to assess compliance with your reporting obligations.  If you are a reporting entity that interacts with the real estate industry in one form or another, the indicators and scenarios outlined in this brief should be considered when updating your Risk Assessment and training materials.

To put things into perspective, though the actual size of the real estate market is difficult to determine precisely, CMHC has produced some statistics.  CMHC suggests that between 2003 and 2013 over $9 trillion of mortgage credits were negotiated and roughly 5 million sales took place through Multiple Listing Services (MLS).  In contrast, FINTRAC received only 127 Suspicious Transactions Reports (STRs) from real estate brokers, agents and developers and 152 by other types of reporting entities, such as banks and trust/loan companies.  To go a step further, in FINTRAC’s 2015 Annual Report, between April 1, 2014 and March 31, 2015, a total of 92,531 STRs were filed across all reporting entities.

 

re-strs-filed-vs-sales

This evidence supports FINTRAC’s assertion that operational guidance for the real estate industry is needed.

The indicators and examples covered in the brief outline numerous scenarios that may suggest that a transaction is related to a money laundering or terrorist financing offense.  It also speaks to how the appearance of legitimacy obfuscates the clarity of suspicious transactions and requires more than a just “gut feel”.  What is required is the consideration of the facts related to the transaction and their context.  Does the transaction with all the known factors, positive or negative, make sense?

 

What This Means to Your Business? 

First off, FINTRAC will be using the indicators provided to assess your compliance with reporting obligations.  This has a couple different applications.  The first being, does your AML compliance program documentation make reference to the suspicious indicators that are provided.  Basically, are staff aware of the elements that may be present in a transaction that would suggest money laundering or terrorist financing may be occurring?

Secondly, is there an oversight process to ensure if there are transactions that contain one or more of these indicators where an STR was not submitted, is reviewed?  If so, does the process ensure supporting evidence that the Compliance Officer reviewed the transaction and determined there were not reasonable grounds to suspect its relation to money laundering or terrorist financing?  When you encounter a transaction involving any of the indicators provided, it is very important that you collect as much information as possible to assist the Compliance Officer with their determination of whether there are reasonable grounds to suspect that a transaction, or attempted transaction, may be related to money laundering or terrorist financing.  Alternatively, even if none of the indicators provided by FINTRAC are present but we still feel there is “something off” about our customer’s transaction, speak with your Compliance Officer.  They will be able to provide some insight on additional information that may assist our decision.  Once you have collected any additional information you may still not feel comfortable, but this does not mean you cannot complete the transaction, but that you must be sure your Compliance Officer is provided with all the information, which includes our reason for the escalation, so that they can decide whether there are reasonable grounds to suspect it may be related to a money laundering or terrorist financing offense.  The Compliance Officer will document their decision and, if necessary, submit an STR to FINTRAC.

Need a Hand?

If you are a reporting entity that interacts with the real estate industry and would like assistance updating your AML compliance program documentation or simply have some questions, please contact us.

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