The Financial Advisor Guide to Money Laundering. Self Study Course # 25

Transcription

1 The Financial Advisor Guide to Money Laundering Self Study Course # 25

2 COURSE DESCRIPTION This course introduces the Financial Advisor to money laundering. It will help you understand what money laundering is and provide you with information on how to identify probable money laundering activities. You will also learn how to protect you, your clients and your associates. In addition, you will learn about current Money laundering regulations and your obligations to comply under existing and future legislation. INTRODUCTION There is little doubt that narcotics trafficking and other organized criminal conspiracies generate billions of dollars annually. Cash is the universally accepted mode of payment in the underground economy and, as a result, criminal entrepreneurs in particular drug traffickers accumulate cumbersome amounts of currency, often in small denominations. A daunting task that confronts profitable criminal entrepreneurs is how to spend, invest, or transfer large amounts of cash, without attracting suspicion. Money laundering is a necessity if cash-intensive criminal entrepreneurs are to maximize their ability to use and enjoy the fruits of their illegal activity without attracting suspicion and/or government action. Within the criminal milieu, money laundering has taken on a life of its own and has become an integral component in the operations of criminal organizations, in part because of the dogged pursuit of illicit funds by law enforcement agencies. In recent years, money laundering has been highlighted as an emerging problem both in Canada and internationally. In Canada, it is estimated that the amount of money laundered on an annual basis is somewhere between $5 and $15 billion. Worldwide, it has been estimated that this figure may be as high as $1 trillion in U.S. currency. In 2009, Canadian police services substantiated 525 incidents of money laundering, accounting for about 1% of all police-reported Criminal Code incidents. 2

3 Expressed as a rate, there were approximately two police-reported incidents of money laundering for every 100,000 Canadians. Over the past 10 years, the rate of money laundering incidents reported by police has changed considerably. Following a period of relative stability in the early part of the decade, the rate of money laundering grew five-fold from 2004 to DEFINITION OF MONEY LAUNDERING Money laundering can be broadly defined as a process by which cash and other assets derived from illegal activity are disbursed for the purpose of concealing or disguising their criminal origin. A comprehensive money laundering operation satisfies three objectives: (1) it converts the cash proceeds of crime to another, less suspicious form, (2) it conceals the criminal origins and ownership of the funds and/or assets, and (3) it creates a legitimate explanation or source for the funds and/or assets. According to the Criminal Code, money laundering, also referred to as laundering the proceeds of crime, occurs when an individual or group uses, transfers, sends, delivers, transports, transmits, alters, disposes of or otherwise deals with, any property or proceeds that was obtained as a result of criminal activity. This is done with the intent to conceal or convert illegal assets into legitimate funds. THE PROCESS To realize the greatest benefit from money laundering, criminally-derived cash should not simply be converted to other, less suspicious assets; the illicit financing of the assets must also be hidden. The third objective (creating a legitimate explanation), while less frequently satisfied in most money laundering operations, is no less important than the former two: the effectiveness of a laundering scheme will ultimately be judged by how convincingly it creates a legitimate front for illegally-acquired cash and assets. 3

4 In short, money is not truly laundered unless it is made to appear sufficiently legitimate so that it can be used openly, precisely what the final stage of the cycle is designed to achieve. Moreover, one of the keys to satisfying the objectives of the laundering process is to conduct commercial and financial transactions that appear as legitimate as possible. The more successful a money laundering operation is in emulating the patterns of legitimate financial or commercial transactions, the less suspicion it will attract. In order to satisfy the above objectives, the money laundering process generally entails four stages: placement, layering, integration, and repatriation. The initial placement stage is where the cash proceeds of crime physically enter the legitimate economy, which satisfies the first objective of the laundering process. Once the funds have been placed in the legitimate economy, a process of layering takes place. It is during this stage that much of the laundering activity takes place, as funds are circulated through various economic sectors, companies, and commercial or financial transactions in order to conceal the criminal source and ownership of the funds and obscure any audit trail. The penultimate step of the money laundering process is termed integration because having been placed initially as cash and layered through a number of financial operations, the criminal proceeds are fully integrated into the financial system and can be used for any purpose. The final stage of the process involves repatriating the laundered funds into the hands of the criminal entrepreneur, ideally with a legitimate explanation as to their source, so that they can be used without attracting suspicion. The placement stage is the most perilous for the launderer as it involves the physical movement of bulk cash, usually in small denominations. It is at this stage that the offender is most vulnerable to suspicion and detection and where the funds can most easily be tied to criminal sources. 4

5 Once the funds are placed with the legitimate economy and converted from their original cash form, the opportunities for money laundering increase exponentially: the funds can transferred among, and hidden within dozens of financial intermediaries and commercial investments, domestically and internationally. SOURCES OF FUNDS According to RCMP data (which examined approximately 150 recent cases of money laundering), drug trafficking accounts for seventy two percent of all offenses relating to laundered money making it the single largest source of laundered proceeds. Customs and excise offences (e.g., the smuggling and distribution of contraband cigarettes and liquor) are next in line (15.4% of cases). Theft and fraud accounted for 7.4% of offences. SECTORS OF THE ECONOMY USED TO LAUNDER FUNDS Multiple sectors of the economy are often used to launder money. The most significant sectors of the economy used for laundering purposes in terms of both frequency and volume - are deposit institutions and real estate. Deposit institutions are used in 76.5% of cases while real estate transactions are involved 55.7% of cases. The service used most frequently at a deposit institution for money laundering purposes was a savings or chequing account. Other commonly used products and services were bank drafts, mortgages, safety deposit boxes, and wire transfers. The proceeds of crime found their way into the real estate sector in the form of mortgages, cash, and monetary instruments. According to RCMP data, a mortgage is used in slightly less than three quarters of cases involving real estate, and cash generated directly from illegal activities is used to finance the purchase of real property slightly more than three quarters of the time. Cash was generally used for the deposit, down payment, or mortgage payments, although in some cases real property was wholly purchased with cash. 5

6 The insurance sector was also implicated in about two thirds of money laundering cases, but in most of these, insurance was not used explicitly as a laundering vehicle instead insurance was purchased to cover big ticket assets (financed with the proceeds of crime). Motor vehicles were purchased or leased with the proceeds of crime with some regularity and in roughly a third of cases, companies are established or purchased by offenders to facilitate the laundering process. While, the insurance sector was somewhat tangential to the actual money laundering objectives and processes, in most cases, police cases also show that traditional services offered by the insurance industry such life insurance policies have also been used expressly to launder the proceeds of crime. According to a 1998 report, entitled Money Laundering Typologies, the Financial Action Task Force (FATF), single premium insurance contracts are often purchased from insurance companies and then redeemed prior to their full term at a discount. The balance is paid to the launderer in the form of a sanitized cheque from the insurance company, thereby creating a seemingly legitimate source for the funds. In a small number of cases, the insurance sector is used much like a bank: cash is deposited into accounts or term deposits; investments such as RRSPs and mutual funds are purchased; and mortgage financing is received. As the barriers that separate the different financial sectors continue to crumble in Canada, insurance companies are increasingly providing the type of banking services favoured by money launderers. As noted above, in the course of a single money laundering operation, a number of different sectors will often be used. Moreover, when used for money laundering purposes, these sectors are not mutually exclusive, but critically interconnected: one sector of the economy, such as deposit institutions, will frequently be used to access other sectors, such as real estate. 6

7 Both operating and shell companies are often established to facilitate the laundering process. No one type of business, however, is predominant. Collectively, money laundering companies operate (or purported to operate) in various lines of commerce, including currency exchange, retail fish sales, masonry, paving, painting, auto wholesaling, auto leasing, lumber supplies, fitness clubs, courier services, gas stations, hotels, restaurants, and bars, etc. MONEY LAUNDERING TECHNIQUES The techniques used to facilitate the laundering process generally involve attempts to hide the true ownership and source of criminal proceeds (through the use of nominees), avoid suspicion associated with large amounts of cash (by using smurfs ), circumvent reporting requirements (by structuring transactions), or create the perception that the criminal funds were derived from legitimate sources (e.g., establishing companies and then claiming the proceeds of crime as legitimate revenue). Each of these techniques is discussed in more detail below. Nominees The most common technique used in conjunction with money laundering was the use of nominees. Close to one half of money laundering cases involved some attempt by the accused to obscure a direct connection between himself and assets he owned, primarily by registering legal title to the asset in the name of another individual, usually a relative, a friend, business associate, or a lawyer. In most cases, the nominee is unconnected to the criminal activities and has no criminal record. The assets most often placed in the name of nominees were real estate, cars, companies, and banks accounts. Smurfs About 20% of the time a money laundering technique known as smurfing is used. A smurf is an individual used by a criminal enterprise to attend numerous banks or other financial service providers and perform, at each, transactions with a relatively small amount of cash. 7

8 Used primarily during the placement stage of the laundering process to circumvent mandatory reporting requirements and avoid the suspicion associated with large amounts of cash, each smurf is instructed to deposit less than $10,000 at a time. Larger criminal organizations may utilize a number of smurfs as part of an elaborate money laundering effort. The objective of this laundering technique is to avoid transactions involving large amounts of cash by spreading the funds among a sizeable number of individuals, financial institutions, and accounts. In the context of money laundering, the term smurf was derived from the blue cartoon characters, all of whom are innocuous in appearance (a characteristic of nominees that is highly valued by money launderers). Structuring Structuring is used to facilitate the laundering process in one out of every seven cases. Structuring refers to a process whereby large cash deposits and other transactions are broken down into smaller amounts to avoid the suspicion associated with large amounts of cash. Structuring is most commonly practiced at banks and similar financial service providers and is an integral part of smurfing. Then need for structuring as part of the money laundering process is heightened in Canada since legislation requires the financial services sector to record and report most cash transactions over $10,000. Layering Layering involves efforts to distance the illicit proceeds from their source, while obstructing any audit trail by creating several layers of financial and commercial transactions and/or assets. Specifically, layering is accomplished by either conducting multiple transactions with the illicit funds or by setting up complex hierarchies of assets in order to put as much distance between the laundered assets and their original source of funding. The layering stage is often the backbone of the money laundering process. 8

9 Claiming the Proceeds of Crime as Legitimate Revenue One of the techniques used frequently to satisfy the third objective of the laundering process creating the perception that the criminal proceeds were derived from a legitimate source is to claim the proceeds of crime as revenue from a legal business. Once this seemingly lawful source of revenue is established, criminal proceeds can be deposited into bank accounts under the guise of this business. In some cases, the proceeds of crime will be co-mingled with revenues generated from legal businesses and deposited into bank accounts. THE ROLE OF PROFESSIONALS In the vast majority of money laundering schemes, the money launderer or an accomplice conducts a transaction with a company in the legitimate economy and as such, they make contact with a professional. The professionals that most frequently came into contact with the proceeds of crime were deposit institution staff, lawyers, insurance agents or brokers, and real estate professionals. In the majority of these cases, the professionals were unwittingly used to facilitate the money laundering process, although, in some cases, the circumstances surrounding the transaction should have raised some suspicions. While lawyers were implicated in almost half of the proceeds of crime cases, the nature of the transactions they conducted suggest that they were not expressly sought out by offenders to facilitate money laundering. Instead, most lawyers came into contact with illegally-generated funds because the transaction conducted by the offender most notably, the purchase or sale of real estate commonly requires the services of a lawyer. MONEY LAUNDERING BY PROVINCE Money laundering is a national problem and as a general rule the number of cases is proportional to each provinces population. The two exceptions are Quebec and the Maritimes. In Quebec, the number of cases is disproportionately underrepresented. Either there is less money laundering in Quebec, or else Quebec money launderers are better at avoiding detection. 9

10 In the Maritimes, the number of cases is over represented. The following shows how money laundering cases are distributed across the country (from West to East) in percentage terms: British Columbia % of cases Alberta % Saskatchewan - 4.0% Manitoba - 3.4% Ontario % Quebec - 9.4% New Brunswick - 8.7% Nova Scotia % Newfoundland - 2.7% MONEY LAUNDERING AND LIFE INSURANCE Below are some actual and recent - cases of money laundering activities involving life insurance. Although some involve cases from the U.S. and overseas, reviewing this material will, nonetheless, help you to identify some of the situations that suggest money laundering activities. An individual attempted to purchase life policies for a number of foreign nationals. He requested life coverage with a high surrender value relative to the premium paid. There were also indications that in the event that the policies were cancelled, any money returned was to be paid into a bank account in a different jurisdiction. A drug trafficker deposited funds into several bank accounts and then transferred the funds to an account in a foreign jurisdiction. The drug trafficker then purchased a large life insurance policy and payment for the policy was made by two separate wire transfers from the foreign account. 10

11 It was purported that the funds used for payment were the legitimate proceeds of overseas investments. Over a million dollars of questionable funds was deposited in a bank account. The layering process involved the purchase of large high cash value insurance policies. In this process, the insurance agent became a top producer at his insurance company and later won a company award for his sales efforts. The insurance agent s supervisor was also involved in the scheme. Both were charged and convicted. This case has shown how money laundering, coupled with corrupt employees, can expose an insurance company to both negative publicity and criminal liability. Customs officials initiated an investigation which identified narcotics trafficking organisation buying insurance products with the rate of return tied to the major world stock market indices so the insurance policies were able to perform as investments. The account holders would over-fund the policy, moving monies into and out of the fund for the cost of the penalty for early withdrawal. The funds would then emerge as a wire transfer or cheque from an insurance company and the funds therefore appeared to be clean. Over 29 million dollars was laundered through this scheme. A person (later arrested for drug trafficking) made a financial investment by means of an insurance broker. He delivered a total amount of $250,000 in three cash instalments. The insurance broker did not report the delivery and deposited the three instalments in the bank. These actions raise no suspicion at the bank, since the insurance broker was known to them and was connected to a reputable insurance operation. The insurance broker then delivered three cheques payable to the insurance company - from the bank account under his name - thus avoiding raising any suspicions from the insurance company 11

12 Clients in several countries used the services of an intermediary to purchase insurance policies. Identification was taken from the clients, but these details could not be clarified by the insurance company which was reliant on the intermediary doing due diligence checks. The policies were put in place and the relevant payments were made by the intermediary. Then, after a couple of months had passed, the institution would receive notification from the clients stating that there was now a change in circumstances, and they would have to cancel their policies and suffer the penalties. Despite the penalties, the criminals involved received clean and substantial cheques from the institution. Another simple method by which funds can be laundered is taking out a large insurance contract and then accidentally, but on a recurring basis, significantly over pay the premiums due and then request a refund for the excess. Often, the person does so in the belief that his relationship with the company is such that no one will dare confront a longstanding and profitable customer. COMPLIANCE GUIDELINES The following material will provide you with an overview of the Proceeds of Crime (money laundering) and Terrorist Financing Act. This material will assist you in developing a knowledge base from which you can exercise your judgement in carrying out your obligation to report suspicious activity related to a money laundering or terrorist activity financing offence. The Act was passed on June 29, 2000 and amended in December 2001 to include provisions dealing with the financing of terrorism. It was amended further in December 2006 and again on June 23, The legislation s intent is to strengthen Canada s efforts in the fight against transnational crime specifically money laundering and the financing of terrorist activities. 12

13 The Act is divided into six parts. They are as follows: Part 1 - Identifies the groups and individuals to which the Act applies and sets out the reporting requirements. Part 2 - Sets out the requirements to report certain currency and monetary instruments for the amounts indicated in the regulations. Part 3 - Establishes the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to which reports are made. Part 4 - Provides for the creation of regulations. Part 5 - Details the offences and punishments for failure to comply with the reporting and record keeping provisions. Part 6 - Provides for the transition from the previous legislation to the current Act. The Act makes it mandatory for various individuals and entities, including life insurance agents and brokers, to report a variety of transactions to the Financial Transaction and Reports Analysis Centre of Canada (FINTRAC). The mandatory reporting is designed to assist in the detection and deterrence of money laundering and terrorist financing activities as well as to facilitate the investigation and prosecution of money laundering and terrorist activity financing offences. 13

14 Who is covered by this legislation? The Act applies to the following individuals and entities: Life insurance agents and brokers Life insurance companies Deposit-taking institutions Securities dealers including portfolio managers and investment counsellors Foreign exchange dealers Accountants and accounting firms Real estate brokers or sales representatives Casinos Agents of the crown or provinces that sell money orders or accept deposits from the public Money services businesses Employees of any of the above FINTRAC The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) was established as an independent financial intelligence unit. FINTRAC will collect and coordinate the data it receives in order to facilitate more effective and efficient recognition of money laundering and/or terrorist activity financing as well as conducting its own internal research and obtaining information from other international sources. It operates independently from law enforcement agencies even though part of its mandate is to assist in the detection and deterrence of money laundering and the financing of terrorist activity in Canada and around the world. FINTRAC also has the primary responsibility to ensure entities, such as life insurance agents and brokers comply with the Act and its requirements. FINTRAC has the authority to inquire into any life agents or brokers business and examine their records to ensure compliance with the Act. 14

15 FINTRAC s mandate also includes increasing the public s awareness and understanding of money laundering and it will issue periodic reports on the usefulness of information it has received. What does FINTRAC do with the Information reported? If FINTRAC determines, based on its analysis and assessment, that there are reasonable grounds to suspect that the information reported would be relevant to the investigation or prosecution of a money laundering or terrorist activity financing offence, it will disclose this information to the appropriate police force. If the police force wants more information than what FINTRAC has provided, it must obtain a court order. FINTRAC may also disclose this same information to other government agencies if certain key conditions have been met. Some of the other government agencies and some examples of the additional criteria that must be met are: Canada Revenue Agency (CRA) if FINTRAC determines that information is also relevant to an offence of evading or attempting to evade paying taxes or duties imposed under an Act of Parliament administered by the Minister of National Revenue. Canadian Security Intelligence Service (CSIS) If FINTRAC determines that the information is also relevant to threats to the security of Canada within the meaning of the Canadian Security Intelligence Service Act. Canada Border Services Agency, if FINTRAC determines that the information is also relevant to determining whether a person is a person described in section 34 to 42 of the Immigration and Refugee Protection Act (the IMRPA) or is relevant to an offence under any sections the IMPRA. 15

16 FINTRAC may also disclose the designated information to other Financial Intelligence Units where an information-sharing agreement is in place called Memorandum of Understanding. Protection of Privacy The Act requires FINTRAC to respect individual privacy and to protect confidential information. Some of the safeguards intended to protect the privacy of individuals are: Independence of FINTRAC from law enforcement and other government agencies, Significant criminal penalties for unauthorized use or disclosure of personal information That only limited designated information may be disclosed to law Enforcement and only once FINTRAC has determined that there are reasonable grounds to suspect that the information would be relevant to the investigation or prosecution of a money laundering offence or a terrorist activity financing offence The requirement that certain designated law enforcement and government agencies have to get a Production Order to obtain more than the designated information The fact that FINTRAC is subject to the federal Privacy Act. FINTRAC S AUTHORITY The Act authorizes FINTRAC to enter, at any reasonable time, any individual s or entity s business premises without a warrant. The only time a warrant may be required is when the individual s or entity s business premises are in a dwelling house. The owner or person in charge of the business premises and every person found there are required to give the authorized person all reasonable assistance to enable them to carry out their responsibilities. They are also required to furnish them with any information with respect to the Act. 16

17 A failure to assist a compliance officer (authorized person) in their effort could, upon conviction, can lead to up to five years imprisonment and/or a fine of $500,000. FINTRAC s Approach to Compliance Monitoring FINTRAC favours a co-operative approach to monitoring. The emphasis will be on working with life insurance agents and brokers to achieve compliance with the Act and regulations. As a general rule, when compliance issues are identified, FINTRAC will work with the life insurance agents and brokers in a constructive manner to find reasonable solutions. If these efforts are not successful or the breach is particularly egregious, FINTRAC may refer non-compliance cases to the appropriate law enforcement agencies. YOUR OBLIGATIONS The following is a summary of the legislative requirements under the Act applicable to life insurance companies, brokers or independent agents. If you are a life insurance agent and an employee of a life insurance company or broker, these requirements are the responsibility of the life insurance company except with respect to reporting suspicious transactions and terrorist property, which is applicable to both. All of the following areas will be discussed below: mandatory compliance, mandatory reporting, suspicious transactions, large cash transactions, terrorist property, record keeping, ascertaining identity, and penalties. MANDATORY COMPLIANCE All individuals and entities covered under the Act are required to have a compliance regime. The compliance regime is intended to ensure compliance with all obligations under the Act. Although you may never have to file a report, you will still have to put a compliance regime in place. The compliance regime is statutory required it is not an option. 17

18 The following five requirements must be met: 1. The appointment of an individual (the compliance officer) who is to be responsible for the implementation of the regime. A sole practitioner may serve as the compliance officer. 2. The development and application of compliance policies and procedures. These policies and procedures have to be written and kept up to date. If you are an entity, they also have to be approved by a senior officer. 3. An assessment and documentation of risks related to money laundering and terrorist activity financing. Where there is a high risk, special measures must be taken for identifying clients, keeping records and monitoring financial transactions in respect of the activities that pose the high risk. 4. A review, as often as is necessary, but at least every two years, of those policies and procedures to test their effectiveness, to be conducted by an internal or external auditor, where the person or entity has one, or by the person or entity itself, where it does not have an internal or external auditor. 5. If you have employees or agents or any other individuals authorized to act on your behalf, the implementation of an on-going compliance training program is required for them and it has to be in writing and maintained. Implementation of a compliance regime is a requirement as well as a good business practice for anyone subject to the Act and regulations. A well-designed, applied and monitored regime will provide a solid foundation for compliance with the legislation. FINTRAC recognizes that not all individuals or entities operate under the same circumstances, hence compliance regimes should be tailored to fit individual and entity needs and should consider the nature, size, and complexity of operations. 18

19 Although there is some flexibility, your program has to contain all five elements describe above. Appointment of a Compliance Officer The appointed compliance officer should have the authority and the resources necessary to discharge his/her responsibility effectively. Depending on the type of business, the compliance officer should report to the Board of Directors or senior management or to the owner or chief operator. You can also appoint yourself if your business is small. To ensure consistent and ongoing attention to the compliance regime, the compliance officer may choose to delegate certain duties to other employees. Even though the compliance officer may wish to delegate some of these duties, the compliance office remains responsible for overall compliance. Individuals who are subject to the Act may appoint themselves as compliance officer or may choose to appoint another individual to help them implement the compliance regime. The Act covers life insurance agents and brokers as a profession as individuals, as firms or members of firms and as partners in a partnership. This means individual practitioners in a firm or partnership will be responsible to make sure that their reporting obligations are met when it relates to any life insurance transaction they may be involved with. Establishing Compliance Policies and Procedures An effective compliance regime is a commitment by each life insurance agent and broker to institute policies and procedures to prevent, detect, and address noncompliance with the Act and the regulations. 19

20 The formality of the policies and procedures will depend on the degree of detail, specificity and formality of the regime, the complexity of the issues and transactions that you are involved in or will be involved in as well as the risk of exposure to money laundering and terrorist activity financing. The policies and procedures should provide you and/your personnel with enough information to properly process and complete a transaction. They should also provide a clear definition of roles and responsibilities for identifying reportable transactions, record keeping, record retention, and completing and filing of reports. You should consider what is necessary to ensure compliance with the requirements when assessing what specific policies and procedures should be implemented. The scope of policies and procedures will vary depending on the type and size of business you have. Assessment and Documentation of Risks You must take a risk-based approach to assessing and documenting the risks related to money laundering and terrorist activity financing. You have to assess and document the risks by considering the following factors: 1. Your products and services and the delivery channels through which you offer them, 2. The geographic locations where you conduct your activities and the geographic locations of your clients, 3. Other relevant factors related to your business, 4. Your clients and the business relationships you have with them. If you consider the risk of a money laundering offence or a terrorist activity financing offence to be high, the risk has to be mitigated by adopting prescribed special measures for identifying clients, keeping records and monitoring such life insurance transactions. 20

21 The special measures that are required to be taken when the risk is high include the development and application of written policies and procedures for: taking reasonable measures to keep client identification information up to date, taking reasonable measures to conduct ongoing monitoring for the purpose of detecting transactions that are required to be reported to FINTRAC, & mitigating the risks identified. Review of Compliance Policies and Procedures The Act calls for a mandatory review of the policies and procedures program. The review allows you to monitor the effectiveness of your compliance regime and evaluate the need to modify existing policies and procedures if necessary or implement new ones. The compliance review should be conducted as often as necessary but must be carried out every two years. Some factors to consider that would prompt a need for a review are changes in the legislation, non-compliance issues, or new services and products being offered beyond life insurance. The review must be conducted by either an internal or external auditor. If you do not have an internal or external auditor, you can do a self-review or have another outside party conduct the review. Whenever possible, the review should be conducted by an individual who is independent of the reporting, record keeping, and compliance monitoring so as to maintain objectivity. Within thirty days after the assessment, the following is required to be reported in writing to a senior officer: the findings of the review, any updates made to the policies and procedures within the reporting period, the status of the implementation of the updates to policies and procedures. While not specifically required under the Act, it would be good business practice to document the scope and results of the review. Deficiencies and weaknesses that appear should be identified and reported to the senior management. 21

22 The report should also include a request for a response indicating corrective measures and follow-up actions as well as a time-line for implementing such actions. Ongoing Compliance Training The success of a compliance regime is highly dependent on adherence. Only when you and/your staff are made aware of the requirements and responsibilities will you and/or they be able to contribute to the program. On-going training is essential to maintaining a sound compliance regime. All individuals should be generally familiar with the legislation and regulations and should receive training in areas directly affecting their responsibilities. They must also be trained in policies and procedures the entity or individual adopts to ensure compliance with legal obligations. Periodic training will help ensure adherence to policies and procedures. The method of training may vary greatly depending on your business size, time requirements, and the complexity of the subject matter. When assessing training needs, individuals and entities subject to the Act should consider the following elements: Legislative and regulatory requirements and related liabilities the training should provide an understanding of the legislative and regulatory requirements as well as the liabilities under the Act and applicable regulations, Policies and procedures the training should provide awareness of the internal policies and procedures for deterring and detecting money laundering that are associated with the job. It should also provide a concrete understanding of responsibilities, 22

23 Background information on money laundering and terrorist activity financing any training program should include some background information on money laundering and terrorist activity financing to ensure that money laundering and terrorist activity financing are understood. Staff also need to understand why criminals choose to launder money, and how the process usually works. MANDATORY REPORTING REQUIREMENTS The requirement to report is set in motion when a transaction occurs. In other words, the moment a deposit is received, you must consider whether it is large enough or suspicious enough to report. If a sales representative receives an amount in cash of $10,000 or more it must be reported within 15 days. You must also be aware of cross border transactions. All cross border transactions of $10,000 or more must be reported when they occur (note: cheques, drafts and money orders are not included in this requirement). There is no minimum dollar threshold for reporting suspicious transactions or attempted transactions. Suspicious transactions must be reported within 30 days. The Act has three sections that deal with mandatory reporting requirements that are applicable to the life insurance industry: 1. Suspicious transaction or attempted transaction reporting, 2. Large cash transaction reporting, 3. Terrorist group and listed person property reporting. Life insurance agents and brokers are covered as a reporting entity under the legislation. 23

24 SUSPICIOUS TRANSACTIONS OR ATTEMPTED TRANSACTIONS Officially, a suspicious transaction is a financial transaction where there are reasonable grounds to suspect a link to money laundering. It is important to understand that no minimum amount is set in identifying a suspicious transaction. You have to trust your own judgement! If a transaction or a series of transactions raises questions or gives rise to discomfort, apprehension or mistrust, then seriously consider whether it might be a suspicious transaction. As was mentioned already, no minimum monetary value helps identify a suspicious transaction. Cash amounts of $10,000 or more must be reported, but all suspicious amounts under $10,000 must also be reported. In other words, the amount of the transaction is not the only indicator. Essentially, the Act is meant to address all types of transactions and amounts. The Suspicious Transaction or Attempted Transaction Report (STATR) The Act requires you to submit a Suspicious Transaction or Attempted Transaction Report (STATR) if you have reasonable grounds to suspect that the transaction or attempted transaction is related to a money laundering or terrorist activity financing offence. The reporting of suspicious activity will require you, or your staff, to exercise judgement. The key questions to be asked are: What constitutes a suspicious transaction or attempted transaction? and What are reasonable grounds? There are no easy answers. It is expected that through training (this course being an example), you will develop the judgement necessary to answer these key questions for yourself and thereby fulfil your legal obligations under the Act. 24

25 Two important factors to understand concerning your obligation to report a suspicious transaction or attempted transaction under the Act are: 1. You are required to take reasonable measures to ascertain the identity of the person with whom the suspicious transaction or attempted transaction is being or has been conducted, unless you believe it would inform the person that the transaction or attempted transaction and related information is being or would be reported. 2. The transaction or attempted transaction has to occur in the course of your activities as a life insurance broker or agent. Recognizing Suspicious Transactions When looking at a transaction or attempted transaction with a view towards deciding whether it is suspicious, remember that behaviour is suspicious, people aren t. It is the consideration of many factors which will lead you to conclude that there are reasonable grounds to suspect that the transaction or attempted transaction is related to the commission of a money laundering or terrorist activity financing offence. What constitutes reasonable grounds must be decided in the context of what is reasonable under the circumstances, such as normal business practices and procedures within the client s industry, profession or environment. You must look at the overall picture and consider some of the following factors: Your knowledge of the client. Your knowledge of the client s industry. The context of the transaction - is it normal? Your understanding of money laundering and terrorist activity financing. 25

26 When looking at the context of the transaction and what is normal, think of the following example. Would you consider it normal for a client to buy a whole life policy based on a needs analysis? The answer is probably yes. Would you consider it normal for a whole life policy buyer to be more interested in early redemption features than financial security needs? Probably not. As you can see the same insurance transaction can be normal in one circumstance, but not in another. General Indicators of Suspicious Transactions or Attempted Transactions The following is a sample of some general indicators that might lead a life insurance agent or broker to suspect that a transaction or attempted transaction is related to money laundering or terrorist activity financing. It will not be just one of these factors alone that will trigger suspicion - but a combination of several factors in conjunction with what is normal and reasonable in the circumstances of the transaction or attempted transaction. Client admits to or makes statements about involvement in criminal activities. Client does not want correspondence sent to home address. Client appears to have accounts with several financial institutions in one area for no apparent reason. Client repeatedly uses an address but frequently changes the name involved. Client is accompanied and watched. Client shows uncommon curiosity about internal controls and systems. Client presents confusing details about the transaction. Client makes inquiries that would indicate a desire to avoid reporting. Client is involved in unusual activity for that individual or business. Client insists that a transaction be done quickly. Client seems very conversant with money laundering or terrorist activity financing issues. Client refuses to produce personal identification documents. 26

27 Life Industry Specific Indicators of Suspicious Transactions or Attempted Transactions The following is a sample of some of the life insurance industry specific indicators that might lead you to suspect that a transaction is related to a money laundering or terrorist activity financing offence. It will not be just one of these factors alone, but a combination of several factors in conjunction with what is normal and reasonable in the circumstances of the transaction or attempted transaction. Client proposes to purchase a life insurance product using a cheque drawn on an account other than his/her personal account. Client conducts a transaction that results in a conspicuous increase in investment contributions. Client cancels investment or insurance soon after purchase. Client shows more interest in the cancellation or surrender provisions, than in the long-term results of the investment. Client makes payments in cash, uncommonly wrapped notes, with postal money orders or with similar means of payment. The duration of the life insurance contracts is less than three years. The first (or single) premium is paid form a bank account outside the country. Client accepts very unfavourable conditions unrelated to his/her health or age. Additional situations that should raise suspicion include: Application for a policy from a potential client in a distant place where a comparable policy could be provided closer to home. Application for business outside the policyholder s normal pattern of business. Introduction by an agent/intermediary in an unregulated or loosely regulated jurisdiction or where organised criminal activities (e.g. drug trafficking or terrorist activity) or corruption are prevalent. 27

28 Any shortage of information or delay in providing information related to verification. An atypical incidence of pre-payment of insurance premiums. Large fund flows through non-resident accounts with brokerage firms. Insurance policies with premiums that exceed the client s apparent means. The client requests an insurance product that has no discernible purpose and is reluctant to divulge the reason for the investment. Insurance policies with values that appear to be inconsistent with the client s insurance needs. The client conducts a transaction that results in a conspicuous increase of investment contributions. Any transaction involving an undisclosed party. Early termination of a product, especially at a loss, or where cash was tendered and/or the refund cheque is to a third party. A transfer of the benefit of a product to an apparently unrelated third party. A change of the designated beneficiaries (especially if this can be achieved without knowledge or consent of the insurer and/or the right to payment could be transferred simply by signing an endorsement on the policy). Substitution, during the life of an insurance contract, of the ultimate beneficiary with a person without any apparent connection with the policyholder. Requests for a large purchase of a lump sum contract where the policyholder has usually made small, regular payments. Attempts to use a third party cheque to make a proposed purchase of a policy. The applicant for insurance business shows no concern for the performance of the policy but much interest in the early cancellation of the contract. The applicant for insurance business attempts to use cash to complete a proposed transaction when this type of business transaction would normally be handled by cheques or other payment instruments. 28

29 The applicant for insurance business requests to make a lump sum payment by a wire transfer or with foreign currency. The applicant for insurance business is reluctant to provide normal information when applying for a policy, providing minimal or fictitious information or, provides information that is difficult or expensive for the institution to verify. The applicant for insurance business appears to have policies with several institutions. The applicant for insurance business establishes a large insurance policy and within a short time period cancels the policy, requests the return of the cash value payable to a third party. The applicant for insurance business wants to borrow the maximum cash value of a single premium policy, soon after paying for the policy. The applicant for insurance business use a mailing address outside the insurance supervisor s jurisdiction and where during the verification process it is discovered that the home telephone has been disconnected. Note that the above indicators are far from exhaustive. Reporting Timelines for STATR You have thirty (30) days, from the date on which you have reasonable grounds to suspect that the transaction or attempted transaction is related to a money laundering or terrorist activity financing offence to file your report. If suspicion occurs at the time of the transaction or attempted transaction, the 30-day reporting timeline begins at that time. If the suspicion occurs after the transaction or attempted transaction or after multiple transactions or attempted transactions, the 30-day reporting timeline begins at the later time. You are not permitted to tell the client that you have made a report. 29

30 FINTRAC will send you an acknowledgement message when your report has been received electronically. This will include the date and time your report was received and a FINTRAC-generated identification number. If your report contains incomplete information, FINTRAC may contact you by phone, and you can file an updated report using the identification number assigned to the original report. This process must be completed within the 30-day time period, your obligation to report is not considered fulfilled unless the report is complete. Liability in Relation to Reporting STATR to FINTRAC The Act states that no criminal or civil proceedings lie against a person or an entity for making a report in good faith. In other words, you cannot be sued for disclosing information to FINTRAC as long as the report has been made in good faith. Failure to file STATRs carries a maximum $2 million fine and five years imprisonment. Prohibited Disclosure to Clients No person or entity shall disclose that they have made a report or disclose the contents of such a report, with the intent to prejudice a criminal investigation, whether or not a criminal investigation has begun. Basically, you are prohibited by law to tell the client that you have filed a report under the Act. The clause with the intent to prejudice a criminal investigation may be a defence in case of accidental disclosure. Every person or entity who submits a STATR to FINTRAC, must keep a copy of the report. LARGE CASH TRANSACTIONS Given the no cash policy of most, if not all, life insurance companies, the large cash transaction reporting obligation should be minimal. 30