Financial advisors and insurance agents are vulnerable to criminals intent on laundering the proceeds of their crimes.

“Financial services professionals are at the front end of the legitimate financial system that operates in Canada,” said Peter Lamey, spokesperson for the Financial Transactions and Reports Analysis Centre of Canada in Ottawa. “They’re the gatekeepers for those who want access to this system, a role they may not have anticipated when they started their careers.

“Money laundering, or obscuring the illegal source of money, gives organized crime the funds to conduct further illegal acts,” he added. “It also provides funding for terrorist activities.”

Financial advisors take large sums of money from clients to invest them in financial products, added Ed Skwarek, Toronto-based vice president, regulatory and public affairs, at Advocis, The Financial Advisors Association of Canada. “This makes them a target for criminals who want to muddy the money trail.”

Under the Proceeds of Crime and Terrorist Financing Act, federal legislation adopted in 2000 to combat money laundering and the financing of terrorist activities, large cash transactions must be reported to FINTRAC, Canada’s financial intelligence unit. Reports need to be filed electronically on FINTRAC’s website at www.fintrac-canafe.gc.ca. Under the act, a large cash transaction means receiving an amount of $10,000 or more in cash in a single transaction, or two or more cash amounts of less than $10,000 that total $10,000 or more within 24 consecutive hours from or on behalf of the same person or entity.

“But if they don’t see any cash coming in, they may assume there’s no risk,” Mr. Lamey said. “But cash is the easiest stage at which to spot money laundering.”

On its website, FINTRAC notes the three stages of the money-laundering process:

? Placement. Placing the proceeds of crime in the financial system.

? Layering. Creating complex layers of financial transactions to disguise the audit trail, and the source and ownership of the funds.

? Integration. Placing the laundered proceeds back in the economy.

“Our members don’t take cash, even amounts well under $10,000, so we’re generally not vulnerable at the first stage,” said J-P Bernier, senior vice-president, compliance-risk management, and general counsel with the Canadian Life and Health Insurance Association in Toronto. “But it’s at the layering stage that we’re at risk. One money-laundering strategy is purchasing an insurance policy, cancelling it soon after, and then opening a bank account with the insurance company’s cheque.”

“Purchases may also be made with travellers’ cheques, money orders, bank drafts or third-party cheques,” Mr. Lamey said. “The aim is to create distance between the person conducting the transaction and the ultimate destination of the funds. The more sophisticated the criminal, the wider the variety of assets he will try to use, including real estate. He’s moved beyond the hockey bag full of cash.

“Financial professionals need to assess every client for the risk of money-laundering he or she poses,” he added. “And they need to assess the potential risk of their products, services and delivery channels.”

FINTRAC’s website lists the records that life insurance companies, brokers and agents need to keep to be in compliance with the act: amounts of large cash transactions, copies of official corporate records, copies of suspicious transaction records and beneficial ownership records. Specific measures must also be taken to identify individuals or entities that conduct large cash transactions, purchase annuities or life insurance policies of $10,000 or more, and any member of a group plan account when contributions to the plan are not made by payroll deductions or by the plan’s sponsor.

They also need to take reasonable measures to determine if a person opening a new account or holding an existing account is a politically exposed foreign person. PEFPs include those who are or have been heads of state of foreign countries, members of government, ambassadors and heads of state-owned banks and companies. PEFPs also include family members of the above.

“It comes down to knowing your client,” Mr. Lamey said.

The FINTRAC site has a separate page for securities dealers. In addition to the record requirements given above, they need to keep records of signature cards and account applications, account holder information, new account applications, confirmations of purchase or sale, trade authorizations, powers of attorney, joint account agreements, correspondence pertaining to the operation of accounts, account statements and the intended use of an account. They also need to take measures to identify those who undertake large cash transactions, sign signature cards and who are authorized to give instructions for an account. And they need to try to determine if a client is a PEFP.

“The financial services professional isn’t legally obliged to know where the dirty money is coming from,” Mr. Lamey noted. “His obligation is rather around keeping records of identity – such as occupations, employers, addresses – when clients open accounts.”

When dealing with other financial intermediaries, advisors should make an effort to know who the owner of the account is, or who is setting up the trust and who its beneficiaries are, he added. “They’ll need to make a best effort to find out, but if they are told that the parties would rather remain anonymous, they can still go ahead and open the account; however, they should realize that criminal activity likes anonymity. Any attempt to maintain secrecy is suspicious.”

The Investment Industry Regulatory Organization of Canada’s regulations on client and account identity are, in some aspects, more stringent than what’s required under the act, noted Kris Dameron, IIROC’s Toronto-based manager, business conduct compliance. An updated IIROC regulation document, published last fall, has beefed up identity verification procedures for clients who are not seen face-to-face. “The act requires ascertaining the identity of any individual who is the beneficial owner of more than 25 per cent of a corporation or similar entity,” she said. “But we require ascertaining the identity of anyone who is the beneficial owner of more than 10 per cent of a corporation.”

“This can sometimes be difficult to ascertain because there can be blind trusts and minors involved,” said Joe Yassi, IIROC’s vice-president, business conduct compliance.

“But if you’re having difficulty identifying a beneficiary, do you really want to take the risk?” Ms. Dameron asked.

Mr. Yassi said advisors will often see indicators of money-laundering at the initial client meeting. “One sign is a client who shows too much interest in the firm’s compliance with government reporting requirements and its account monitoring procedures. Another is if the client’s investment strategy makes no business sense but will result in a lot of transactions.”

“We’re in the middle of the layering process,” Ms. Dameron said. “The dirty money has already gone a few places by the time it enters a securities account.”

Mr. Skwarek said longstanding clients can also pose a risk: an affluent, longstanding client, for example, could ask an advisor to turn a blind eye to a large cash deposit or unusual third-party cheques. “An advisor who does this would be violating Advocis’s Code of Conduct and Ethics, and would be opening himself up to a world of trouble,” he said. “If he’s caught, he’s going to lose more than just this client. He’ll lose his ability to practice.”

Red flags

Mr. Lamey listed other red flags that could alert advisors to attempts at money-laundering, including:

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• A client who does not live in the city where the advisor’s office is located.
• A client who wants to give a post office box as his address, or who wants an account set up under a different address than his own.
• A client who is reluctant to discuss his financial affairs.
• A client who is running a company that does not appear to have any employees, if that is unusual for the type of business.
• Attempting to purchase a life insurance or investment product with a cheque other than from the client’s personal bank account.
• Over-paying on a premium, and then asking that the excess go to a third party.
• Clients who instruct you to transfer funds electronically to a third party.
• Funds that are wired in from countries being monitored by the Financial Action Task Force, an inter-governmental body that develops policies to combat money laundering and terrorist financing.
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  CLHIA’s AML/ATF Guidance Manual for members can be found on its website at www.clhia.ca. “One of the legal obligations for both the company and the agent is to have a written policy document on anti-money-laundering and terrorist financing,” Mr. Bernier said. “Our Guidance Manual was designed to be used as such a document. Members can download and customize it.”

   

  A significant part of Advocis’s online Best Practices Manual is devoted to anti-money laundering. Advocis also offers its members a free online self-study program. The hour-long power-point presentation gives an overview of money-laundering and terrorist financing, discusses advisors’ mandatory requirements and is followed by an online quiz. Members receive one continuing education credit for successful completion of the quiz.

  Rosemary McCracken