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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.

Is Your MSB Ready for a FINTRAC Exam?

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

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

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

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

In Person & Desk Examinations

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

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

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

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

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

The Introduction

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

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

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

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

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

Part 1 – FINTRAC MSB Registration

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

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

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

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

Part 2 – Compliance Policies & Procedures

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

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

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

Part 3 – Risk Assessment

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

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

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

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

Part 4 – Operational Compliance & Reporting

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

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

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

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

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

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

Exit Interview

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

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

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

After the Examination

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

Need a Hand?

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

Suspicious Transaction Reporting in 2015

Preparing for a FINTRAC examination

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

What is FINTRAC Looking for in STRs?

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

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

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

Tune Your Technology

Amber looking at laptop FINTRAC screen

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

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

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

Train Your Staff

Training

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

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

Refine Your Audits & Effectiveness Reviews

AML Compliance Effectiveness Review

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

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

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

Ask Your Industry & Working Groups for More

Hanshake

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

Need A Hand?

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

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