By James MacKenzie
Money laundering investigators in India, always outnumbered by their criminal counterparts, will soon cease to be outgunned. “Special Agents, and Agents will be able to carry firearms after the Directorate of Criminal Investigation (DCI) is operationalised in the I-T (Income Tax) Department”. Says a top official in the department who spoke anonymously in advance of the mobilization.
A move to arm agents comes as a wave of massive money laundering cases hits the Indian justice system, typified by the investigation of billionaire Hasan Ali Khan. Coupled with the sprawling and sometimes Byzantine nature of Indian high finance, the move is not altogether incongruent.
The widespread intimidation by criminal organization leveled against AML investigators will be lightened, the Directorate of Income Tax feels, by sending out its accountants with iron on their hip.
The same official noted that the armed investigators would be deployed against “persons and transactions suspected to be involved in criminal activities having cross-border, inter-state or international ramifications, that pose a threat to national security and are punishable under the direct tax laws.”
Look for the mobilization to occur in early 2012. Williams McGuire will study the results carefully and preemptively buy cowboy holsters incase the program proves a success.
Department of Finance Consultation Paper – Proposed Amendments to PCMLTFR
In a consultation paper released on November 7, 2011, the Department of Finance (“Finance Canada”) sought comments on proposed amendments to The Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR) on Ascertaining identity.
The proposed changes are not final. At this stage, we suggest that reporting entities should consider the potential impact, advise their senior management and directors about that potential impact, and contribute comments to the Department of Finance (preferably through industry representatives). Regulations can be changed without an Act of Parliament, and we would expect that the eventual changes would be enacted by June 2012.
Finance Canada asserts that it is seeking the amendments to align Canada’s anti-money laundering legislation more closely with the recommendations of the international standard setting body - the Financial Action Task Force (FATF). Canada is a member of the FATF, and is subject to periodic evaluations by the FATF to assess its compliance with those recommendations. In 2008, Canada’s evaluation revealed deficiencies, particularly with respect to ascertaining identification.
There are three principal proposed changes, which are explained below. More details appear in the consultation document.
Proposed Change Number 1: Introducing the concept of “business relationships” and related obligations
Finance Canada proposes that:
A) The PCMLTFR be amended to introduce the concept of a “business relationship”. Certain obligations would be triggered at the time a “business relationship” was established, and still others required throughout the business relationship.
They state that a business relationship arises between a reporting entity and a client when a reporting entity conducts any financial activity or transaction in respect of which it is required to keep a record (without a dollar threshold). And further, that the business relationship would not come into existence until that financial activity or transaction was conducted. They also suggest that a business relationship includes the “entirety of its relevant financial activities with the customer”.
Record-keeping obligations are wide-reaching in the PCMLTFR. By way of example, financial institutions would be required to keep every credit and debit memo related to an account, as well as every cleared cheque.
Finance Canada’s concern is apparently that certain financial transactions which attract record-keeping obligations do not also attract other obligations, such as the requirement to assess risk or conduct enhanced due diligence measures. Based on their explanation, they also seem concerned that those financial transactions would not be considered as part of the “entirety of its relevant financial activities with the customer” when applying obligations which apply to that customer.
Foreign exchange transactions with a value less than CAD 3,000 would presumably be one such transaction – at a money services business or at a financial institution (where the customer does not have an account). Similarly, electronic funds transactions with a value of less than CAD 1,000 are subject to record-keeping requirements, but not currently to client identification standards. Significantly, reporting entities which currently conduct low-value transactions on a one-off basis, without opening an account or having to identify an individual, may be required to catalogue and refer to all transactions conducted by that individual over time.
B) Reporting entities must obtain and keep a record of the purpose and intended nature of a business relationship. Presumably, this record would supplement the current requirement to record the intended use of an account, and require an advance declaration by a customer of their ‘intentions’ for all their dealings with the reporting entity. We suspect that this information would form a baseline for the new ongoing monitoring requirement, discussed below, and would need to be kept current pursuant to that requirement.
C) Ongoing monitoring be required for all business relationships, and the entity business relationship, regardless of the level of risk.
According to the FATF, ongoing monitoring includes: scrutiny of transactions being undertaken throughout the course of the relationship to ensure that the transactions being conducted are consistent with the institutions’ knowledge of the customer, their business and risk profile, and where necessary, the source of funds. It may also include the maintenance of up-to-date client records for all business relationships.
The effort to monitor all business relationships in an ongoing way is significant, and would likely require the use of technology.
D) High risk business relationships be subject to special measures, such as such as additional initial and ongoing identification and monitoring measures.
Proposed Change Number 2: Expanding the range of activities to which client due diligence is required
Finance Canada proposes that:
A) Reporting entities must take reasonable measures to ascertain the identity of customers who conduct transactions that give rise to a suspicion of money laundering or terrorist financing, regardless of whether those are customers would normally be exempt from identification requirements.
Currently exempt transactions include, for example: the purchase of group life insurance, the purchase of registered products, the purchase of annuity products, and those conducted by public bodies and large corporations.
Practically, reporting entities have suggested that it is difficult to take those measures without running afoul of tipping-off provisions related to suspicious transaction reporting.
B) Reporting entities must take reasonable measures to take reasonable measures to ascertain the identity of customers who attempt transactions that give rise to a suspicion of money laundering or terrorist financing, rather than only with conducted transactions.[1]
Proposed Change Number 3: Expanding the scope of customer due diligence obligations
Finance Canada proposes that:
A) Reporting entities always collect beneficial ownership information (rather than just taking reasonable measures to do so), and that they take reasonable measures to ascertain (confirm) the beneficial ownership information.
Ascertaining ownership information will, like the requirement to ascertain the existence of a corporation, require reference to authoritative documentation. In the case of ownership, this may only be contained in the minute-book of the corporation/entity, or described in a partnership agreement. Reporting entities would also have to keep a record of the reasonable steps taken in their attempts to ascertain beneficial ownership information.
B) That the beneficial ownership requirements described above apply also to obtaining beneficial ownership/beneficiaries of trusts.
C) Reporting entities conduct ongoing monitoring to all clients and activities to which the PCMLTFA applies, not just those that a reporting entity has assessed as being high risk. And that the ongoing monitoring apply to the entire business relationship.
As mentioned above, according to the FATF, ongoing monitoring includes: scrutiny of transactions being undertaken throughout the course of the relationship to ensure that the transactions being conducted are consistent with the institutions’ knowledge of the customer, their business and risk profile, and where necessary, the source of funds. It may also include the maintenance of up-to-date client records for all business relationships.
D) Enhanced due diligence measures (special measures), such as additional initial and ongoing identification and monitoring measures, be applied to high risk clients, activities and business relationships. Currently, those measures are apparently only targeted to “activities”, although practically, reporting entities are often applying these special measures to identified high risk clients.
Reporting entities can expect further changes to the legislation because of the international standard body – the FATF – is itself conducting a consultation process to amend its anti-money laundering control recommendations for countries. Those changes are set to be announced February 2012. As a member of the FATF, Canada is likely soon to align its legislation with those revised recommendations.
Comments related to the consultations should be forwarded to the Department of Finance by December 16, 2011.
Contact Williams McGuire AML at info@amlcompliance.ca to discuss the potential impact of these changes – particularly those that might require a change in your risk based approach and the introduction of AML technology.
[1] Subsection 53.1(1) currently requires reasonable measures to ascertain the identity of “…every person with whom the person or entity conducts a transaction that is required to be reported to the Centre under section 7 of the Act.”