Confusion surrounds money laundering act requirements

By Daniela Cambone | August 20 2003 03:48PM

One year following the requirement changes in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, many life insurance brokers feel there is a fuzzy line between what the law requires and what insurers are asking for.

Though money laundering has been a criminal offence for several years in Canada, life brokers were not affected until the changes brought about to the Act on June 13, 2002.

The new regulations made it obligatory for brokers to keep records of large cash transactions and client information records (see inset text). Brokers must now submit reports to the body overseeing the act, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

David Bate, a dual licensed broker and partner of the brokerage, Bate, Warren and Partners is concerned about the money laundering act, which he says is being misinterpreted by the industry. “The current compliance has become a nightmare of red tape, misinterpretation and buck passing,” he says.

Especially with the new privacy legislation (PIPEDA) coming into effect January 2004, Mr. Bate explains that brokers need clarification as to what should be collected and who should have a copy of it. His concerns are that the broker may get into hot water for asking for too much private information and clients will file complaints.

He says that the problem is not with the law itself, but the way that insurers are enforcing the act. Many insurers are now requiring client identification forms that need to be filled out for the policy to be issued.

However, some insurers are asking for more information than the act requires.

Mr. Bate explains that when he asks the insurers why they are requesting such information, he never receives a clear answer. “The companies blame the regulators and the regulations. The regulators blame the government and the laws. And the government cannot understand the confusion,” he stresses.

So what happens if a broker collects too much information? Is it legal and ethical if the law does not require it?

“We set a minimum requirement, provided they meet the requirements of our act. That is our concern. … If they go beyond that, it might become an issue for the provincial regulator. I don’t know,” answers Peter Lamey, Senior Officer at FINTRAC.

For transactions over $10,000, the act only requires the broker to ask for one piece of identification in order to create a client record. However, some insurers are going beyond the act and requiring additional information.

Sun Life Financial requests a Client Identity Verification form to comply with the act and will no longer approve or issue universal life (UL) policies without it. David Shuen, Director of Compliance at Sun Life, explains that it asks brokers for two things: to look at an original copy of one acceptable piece of identification and to ask if a third party has access to the policy and account.

But the form only applies to high-risk products such a UL, says Mr. Shuen. Mr. Shuen explains that, at the beginning, brokers were hesitant about the new form since it requires extra work on their part. “The key is communication and to let people know that it is a legal requirement and it is not a unique requirement from this company.”

As to whether Sun Life’s form will comply with PIPEDA, Mr. Shuen says not to worry. He reassures that there will be no conflict with the law since a new section of the privacy act specifically allows companies to report whatever is required to FINTRAC. “Even for suspicious transactions, the money laundering law gives you a safe harbour, meaning you can report without fear of being prosecuted,” he says.

Nevertheless, some insurers are also requiring their clients’ banking information, which leaves Mr. Bate puzzled.

Mr. Shuen stresses that Sun Life will only ask for banking information if the client chooses to make pre-authorized payments or if the client is not in front of the broker at the time of the transaction.

Sylvie Des Roches, Manager Group Savings and Pension Compliance for Standard Life Canada, says that on the life side, it does not ask for specific banking information in relation to money laundering. However, she says if the accounts are set-up for direct deposits, then banking information would be required.

But, Mr. Bate wants an answer for his clients when they ask why they need to divulge such private information if there is no direct deposit involved.

This was the case when a client of Mr. Bate’s refused to give out his banking information when purchasing mutual funds from Standard Life’s mutual fund brokerage subsidiary Performa Financial Group. In turn, the client issued a formal complaint to the company. The Insurance Journal obtained a copy of the response letter sent from the President of Performa to Mr. Bate’s client. It read:

“Following the events of September 11, 2001, the federal government has intensified its fight against terrorist and criminal activities by adopting the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. … In order to comply with this Act, Performa Financial Group Limited must, as a financial institution, be able to identify its clients and therefore have your banking information on file.”

Frédéric Belleau, Vice-President of Compliance for Performa Financial Services, says that Performa is simply following the act’s security dealer guidelines. Since Mr. Bate is dual-licensed, he applies to these guidelines too. Confusion occurs when dual-licensed brokers only read the life insurance guidelines, where banking information is not required, he says.

“As a security dealer, we presently have three main obligations in the act. We have to identify the client, we have to disclose suspicious transactions and we have to keep records of clients,” he explains. “In the record keeping section, it says that we have an obligation to ask for banking information when we open an account,” he highlights.

Currently the act reads: “For every account that you open, you have to keep records.… It has to also set out the account number of any financial entity account that is in the individual’s name. A financial entity means a bank, credit union, caisse populaire, a trust and loan company, or an agent of the Crown that accepts deposit liabilities.”

The way the current guidelines are worded, Performa is not crossing the line. However, the guidelines are not being interpreted the way they were intended which has caused FINTRAC to react and revise them. It recently issued a letter stating: “It has been brought to our attention that some confusion exists as to when securities dealers are required to obtain financial entity account information (e.g., bank account number) when opening an account.”

With the revisions, security dealers will no longer be required to obtain the banking information. The organization writes: “When a client is present when opening a securities account, securities dealers are not required under the Regulations to obtain the financial entity account information for a client.”