DETERRING MONEY LAUNDERING ACTIVITY

Transcription

1 DETERRING MONEY LAUNDERING ACTIVITY A Guide for Investment Dealers October 2002

2 Table of Contents Preamble Anti-Money Laundering Program Written Anti-Money Laundering Procedures Overview of Procedures Designation of an Anti-Money Laundering Department, Unit, Group, Committee or Compliance Officer Procedures Relating to Limitations and Restrictions on Types of Deposits Procedures Should Be Separate but Related to the Concept of "Know Your Client" Procedures Related to Monitoring Certain Transactions Procedures to Assist in Identifying Suspicious or Unusual Transactions Know Your Client KYC Generally Resident Individual Accounts Non-Resident Individual Accounts Domestic Operating or Commercial Entities Domestic Trusts Foreign Operating Commercial Entities Personal Investment Corporations or Personal Holding Companies Offshore Trusts Institutional Accounts, Hedge Funds, Investment Funds and Other Intermediary Relationships Accounts Opened via the Internet Confidential Accounts Additional KYC Efforts Senior Foreign Government/Public Officials Suspicious Transaction Reporting Potential Indicators of Suspicious Activity...13

3 4.2 Firm Practice Regarding the Reporting of Suspicious Activity Review of Suspicious Activity General Recordkeeping Requirements Anti-Money Laundering Contacts Monitoring of Account Activity Monitoring Generally Watch Lists Anti-Money Laundering Training Training Generally Relevant Topics to be Addressed Continuing Training Audit Program Audit Report and Follow-Up Relationship Between Introducing and Carrying Brokers Allocation of Responsibilities Between the Parties Availability of Reports Communication Audit...21 Further Reading...21 Appendix A: Summary of Requirements of PCMLTF Regulations...23

4 DETERRING MONEY LAUNDERING ACTIVITY A Guide for Investment Dealers Preamble This Guide is intended to highlight what the Anti-Money Laundering Committee of the IDA s Compliance and Legal Section believes to be key elements for a Canadian investment dealer to consider in developing an effective anti-money laundering program. It is the hope of the IDA that this Guide will prove helpful to Members as they implement their anti-money laundering programs, policies and procedures. This is a critical time in the development of anti-money laundering programs. Securities firms have been subject to a number of statutory and regulatory requirements regarding client identification since 1993, designed to assist the federal government and law enforcement in combating money laundering and terrorist financing. The suspicious transaction reporting requirements 1 (STR Regulations), implemented in November 2001, recent amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2001 (the Act), and new regulations thereunder (PCMLTF Regulations) that take effect in June and November 2002 add to the anti-money laundering requirements now imposed on securities firms and other financial institutions. One provision of the new PCMLTF Regulations effective June 12, 2002 requires all financial institutions, including securities firms, to establish an anti-money laundering compliance regime 2. Additions and changes to the PCMLTF Regulations can be expected as the Financial Action Task Force (FATF) 3 and other international bodies review and revise their standards and recommendations. We recognize that anti-money laundering compliance will be undergoing great change during the next year as various additional provisions of the Act and PCMLTF Regulations become effective. In the interest of time and with an understanding of the importance of this subject matter, the Anti-Money Laundering Committee is publishing this Guide at this time in order to help firms implement or enhance their anti-money laundering programs. This Guide assumes that many of the existing practices presently employed within the industry to deter money laundering will continue. For example, the widespread practice at brokerage firms of not accepting cash or limiting the deposit of cash and cash-like monetary instruments sets the securities industry apart from other financial institutions. 1 Proceeds of Crime (Money Laundering) and Terrorist Financial Suspicious Transaction Reporting Regulations, as amended May 14, Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations 2002, section 71 3 FATF is an inter-governmental body established by the G-7 summit in Paris, France in July 1989 to examine measures to combat money laundering worldwide. It is comprised of representatives of the financial, regulatory and law enforcement communities from over 29 jurisdictions including Canada and serves as a world leader in the development of effective anti-money laundering programs. 1

5 Given the variety and complexity of the securities industry today, and the considerable differences among and within securities firms, as well as the varying products and businesses within a single firm, the Anti-Money Laundering Committee recognizes that no one standard or model program can be appropriate for all firms industry wide. Among the different types of firms are full service retail firms (historically larger firms), introducing brokers (historically smaller firms), discount brokers, carrying firms, firms with an international presence and firms that provide clients the ability to transact business via the Internet. Brokerage firms can also be distinguished by their client base. Some firms service retail customers, others deal primarily with an institutional client base, some interact with the customer only over the Internet. Still others handle all types of customer accounts. Moreover, while large firms are able to facilitate customer trades and transactions involving millions of dollars, other organizations may operate in a local community and offer limited services with limited capital. This Guide should therefore be adapted to reflect the type of firm involved: the breadth and scope of its customer base, type of accounts and transactions, extent of international activities, the differing natures and risks of its individual lines of business and other relevant factors. Focused primarily on full service retail brokerage firm accounts as a starting point, this Guide should be viewed prospectively, as goals for Member firms to utilize as they develop their programs. Acknowledgements This guide is adapted from Preliminary Guidance for Deterring Money Laundering Activity prepared by the Anti-Money Laundering Committee of the Securities Industry Association, with the assistance of Betty Santangelo and Tim O Neal Lorah of Schulte Roth & Zabel LLP, and published in February References to United States anti-money laundering laws and regulations have been changed to reflect Canadian law. Some terms have been changed to reflect Canadian usage and other information and guidance has been added as appropriate. The IDA is solely responsible for the final content. The IDA would like to thank the Securities Industry Association for its permission to use its work in preparing this document. 2

6 1. Anti-Money Laundering Program Section 71 of the PCMLTF Regulations requires all securities firms to establish an anti-money laundering compliance regime. These regulations became effective June 12, Section 71(2) of the PCMLTF Regulations sets forth the minimum standards for such a program, as follows: the appointment of a person to be responsible for the implementation of the regime; the development and application of compliance policies and procedures; a review of those policies and procedures to test their effectiveness, to be conducted as often as necessary by an internal or external auditor; an ongoing compliance training program for employees and agents of the firm. In addition to specific procedures, a firm should, as part of its anti-money laundering program, adopt a broad statement that clearly sets forth the firm's policy against money laundering and any activity which facilitates money laundering or the funding of terrorist or criminal activities. Such a statement should evidence the strong commitment of the firm and its senior management to comply with all laws and regulations designed to combat money laundering activity, including those rules and regulations requiring the reporting of transactions involving currency, certain monetary instruments, and suspicious activity. In addition, the policy should emphasize the responsibility of every employee to protect the firm from exploitation by money launderers, and should set forth the consequences of non-compliance with the applicable laws and firm policy, including the significant criminal, civil and disciplinary penalties and reputational harm that could ensue from any association with money laundering activity. Firm policy could also include references to specific procedures adopted by the firm to prevent and detect money laundering and to the firm's commitment to educating and training its employees in money laundering prevention. A statement of the firm's anti-money laundering policy should be disseminated in the most effective way possible given the structure of the firm to all appropriate personnel, including those who deal directly with customers, supervisors and operations personnel who may effect client-directed non-trading transactions. 2. Written Anti-Money Laundering Procedures Each securities firm should adopt written procedures designed to implement its anti-money laundering program. 2.1 Overview of Procedures A firm's program should include anti-money laundering procedures setting forth the systems and controls on which the firm relies, both to prevent and detect money laundering, and to 3

7 comply with the requirements of the Act, the PCMLTF Regulations, the STR Regulations and guidance issued by the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC). The firm's procedures should discuss its "know your client" (KYC) policy, as well as its procedures intended to protect the firm and its employees from inadvertently assisting in money laundering, such as those procedures related to deposits of currency and cash equivalents. The written procedures could include a discussion of the firm's efforts to monitor account activity for unusual or suspicious transactions, and state firm policy with respect to the reporting of suspicious transactions. In addition, a firm's written procedures should include any supplemental procedures implemented for those types of transactions or accounts deemed by the firm to pose a heightened risk for money laundering activity. In establishing that program, firms should consider guidance published by FinTRAC, the IDA, the FATF and other agencies. A firm's existing policies and procedures for its various business functions should form the basis for its overall money laundering prevention program. This will assure that anti-money laundering compliance reaches all aspects of a firm's business. As an initial matter, a firm could consider reviewing and evaluating those procedures and, where appropriate, enhance them to address anti-money laundering issues. Initial memoranda and other learning materials outlining specific anti-money laundering procedures are a useful part of the educational process, but anti-money laundering procedures should be integrated into the firm s over-all KYC and supervisory procedures both for reference in context and to show that they are part of established firm practice. In reviewing existing procedures, a firm should bring to bear a thorough understanding of money laundering risks arising from its types of business and clientele and of appropriate counter-measures. These can be gained from research of publicly available material, some of which is mentioned elsewhere in this Guide, through attendance at industry seminars, discussions with industry and counterparts or through retaining outside experts. It is not sufficient to hope that existing systems for preventing fraud or supervising account activity to meet securities industry standards such as suitability will be sufficient to detect suspicious activity. A firm's anti-money laundering procedures should be reviewed regularly and updated as necessary based on any legal/regulatory or business/operational changes, such as additions or amendments to existing anti-money laundering rules and regulations or business expansion. 2.2 Designation of an Anti-Money Laundering Department, Unit, Group, Committee or Compliance Officer A firm must designate a compliance officer for its anti-money laundering program. The compliance officer may effect his or her responsibilities through a specific department, unit, group, or committee. Depending on the size, structure, business and resources of the firm, the designated department, unit, group, committee or officer may be dedicated solely to the firm's anti-money laundering efforts, or the firm may elect to incorporate the anti-money laundering responsibilities into existing duties. The designated compliance officer, either directly or through the designated department, unit, group or committee, should be a central point of 4

8 contact for communicating with FinTRAC and other agencies regarding issues related to the firm's anti-money laundering program. 2.3 Procedures Relating to Limitations and Restrictions on Types of Deposits Each firm should assess its business and implement procedures with regard to those types of deposits that pose the greatest risk to the institution. These could include procedures regarding the acceptance of cash and cash equivalents, such as traveler's cheques, money orders, cashier's cheques and bearer bonds which, although legitimate, have been utilized in connection with fraudulent activity. Such procedures should be in writing. Despite the fact that most securities firms do not accept cash - or place limitations on the acceptance of cash, money orders and traveler's cheques - a firm should alert its employees to the legal prohibition against "structuring," which may be evidenced by an attempt by a customer to spread deposits of currency or cash equivalents on a single day, over a number of days or in a number of accounts. 2.4 Procedures Should Be Separate but Related to the Concept of "Know Your Client" A firm's anti-money laundering procedures should incorporate, to the extent appropriate, its existing KYC obligations as described in the rules of the IDA and Canadian Securities Administrators. IDA Regulations and and Policy 2 require that for each account opened, a firm obtain and maintain certain customer information. Similarly, a firm's anti-money laundering procedures should emphasize the obligation of the firm to request the essential facts relating to each customer and each account. Despite the different types of customers in the industry and the well-established approaches to customer identification, firm procedures should make clear that the PCMLTF Regulations set forth the minimum identification and documentation requirements for different types of customers and accounts. In addition, each firm should give careful consideration to whether these minimum requirements are sufficient to adequately address the risks inherent in its business. The identification of suspicious transactions may require more information about the customer than has traditionally been gathered to meet suitability obligations. Given the nature of the securities business, the standards for knowing one's client continue to develop over time. 2.5 Procedures Related to Monitoring Certain Transactions Each firm should have in place a monitoring program to review for unusual or potentially suspicious account activity. Depending upon the size and the nature of the firm's business activities, a monitoring program could take various forms, ranging from the manual monitoring of significant transactions or activity to the use of automated monitoring systems. Once the firm has determined the appropriate method or manner to effectively monitor account activity, it 5

9 should adopt suitable related procedures. Exception reporting may be based on different factors, including the size of transactions and volume of activity. 2.6 Procedures to Assist in Identifying Suspicious or Unusual Transactions Certain activity may warrant the firm to make or file reports with various governmental agencies or law enforcement authorities, including: reports to FinTRAC on transactions raising suspicions of money laundering; reports to FinTRAC, the Royal Canadian Mounted Policy and the Canadian Security Intelligence Service on property or transactions related to property of terrorist groups; reports filed with the IDA under the UN Suppression of Terrorism Regulations. Firms should have procedures in place that are designed to assist personnel in detecting unusual or suspicious activities. Firm procedures should make clear that employees should report such activity, once detected, to managers or other supervisory personnel. Specific internal channels for reporting unusual or suspicious activity should be established. 3. Know Your Client A securities firm must undertake measures to verify the identity of its clients as described in the PCMLTF Regulations. The required measures are summarized in Appendix A. The PCMLTF Regulations also require firms to maintain records of the information used to verify a person's identity, and the UN Suppression of Terrorism Regulations require that the person s name be checked against a government list of suspected terrorists. The process of knowing one's client is not concluded once the initial account opening information has been obtained. Even after the account is established, in the normal course of the relationship, firms should continue to build upon the information initially provided by the customer and update their records accordingly. 3.1 KYC Generally The establishment of the customer-firm relationship often presents the best opportunity for the firm to begin to develop its knowledge about the customer and the types of transactions in which the customer is likely to engage. As noted in section 2.4 above, securities firms start with the basic KYC requirements mandated by the PCMLTF Regulations and IDA Regulation 1300 and Policy 2. Consistent with those requirements, a firm's anti-money laundering program should be designed to permit the firm to make a reasonable risk-based determination as to their customers, their customers' source of income and their expected activity. In assessing the risks associated with particular customers or transactions, the firm should first evaluate its business to ascertain those areas in which the likelihood of suspicious or potentially illegal activity may 6

10 be greater. Such an evaluation should serve as the basis for determining what extra customer identification information and documentation may be necessary for a particular customer or for customers in the same or similar categories and the extent of the monitoring that such customers or accounts may require. For example, in dealing with offshore customers a higher level of due diligence may be appropriate. A firm s account opening procedures may list particular types of accounts that require additional screening, either through specially trained in-house personnel or outside vendors. Extra due diligence may include credit checks, checking of outside databases through the Internet, verification of personal details and references or other more extensive background checks using external resources. Similarly, firms opening large numbers of retail accounts might find it useful to implement a system for cross-checking addresses to look for multiple accounts with the same address. A firm may consider the following factors, among others, in assessing the risk posed by particular customers or transactions: whether the customer is an individual, an intermediary, public, private, domestic or foreign corporation, a financial or non-financial institution, or a regulated person or entity; whether the customer has been an existing customer for a significant period of time; how the client became a customer of the firm; whether the business of the customer, or the particular type of account, is a type more likely to be involved in illicit activity (e.g., cash intensive businesses); whether the customer's home country is a member of FATF or is otherwise subject to adequate anti-money laundering controls in its home jurisdiction; and whether the customer resides in, is incorporated in or operates from a jurisdiction with bank secrecy laws, or one which has otherwise been identified as an area worthy of enhanced scrutiny. Members should recognize that the KYC requirements of both the PCMLTF Regulations and the IDA Regulations and Policies are minimum requirements, and that situations may arise in which additional steps should be taken to ensure the bona fides of customers. Subject to the firm's own assessment of any additional due diligence necessary to assess risk, the following procedures are ordinarily appropriate for the following types of accounts. 3.2 Resident Individual Accounts For accounts opened by an individual, each firm should obtain the following information at the commencement of the business relationship: 7

11 the name and address of the customer(s); the customer's date of birth; the customer's social insurance number or other taxpayer identification number; the customer s citizenship and, if non-canadian, immigration status; the customer's occupation and employment data, such as the employer's address (generally understood to be the customer's source of income); the customer's investment experience and objectives, if applicable; the customer's net worth and annual income; and the names of all authorized persons. While suitability-exempt discount firms may not require some of this information for other purposes, information such as net worth and annual income may be necessary for proper implementation of anti-money laundering procedures. 3.3 Non-Resident Individual Accounts In addition to the information obtained under 3.2, for non-resident individual accounts, firms should record a current passport number or other valid government identification number, whether or not such identification is to be reviewed to verify the client s identity under the PCMLTF Regulations. 3.4 Domestic Operating or Commercial Entities Each Member should obtain information sufficient to ascertain the identity of the corporate or business entity establishing the business relationship and the authority of the business representative to act on the corporation's or entity's behalf. The type of documentation obtained by a firm may vary depending upon the nature of the corporate or business entity, as described in the PCMLTF Regulations. Firms should also attempt to ascertain the identities of the beneficial owners of more than 10% of private entities and carefully consider the risks of doing business with any entity that refuses to provide such information. Requirements to obtain information on beneficial owners of corporations and other entities are currently the subject of international discussion. An FATF Consultation Paper on possible revisions to its current 40 recommendations on anti-money laundering measures reports that one of the new measures being considered is: 8

12 Financial institutions and non-financial businesses should understand the structure and purpose of the corporate vehicle, determine the source of funds and identify the natural person[s] who are the ultimate beneficial owners, including those who have control of the funds. 4 While not yet a formal recommendation or requirement, Members should consider this as a reasonable basic standard and carefully consider the circumstances in which it is prepared to do business with corporations or other entities for which it does not have beneficial owner information and what additional supervision or other procedures may be appropriate in the absence of such information. In this regard, Members should consider that when and if strict requirements to obtain such information are adopted, they may be required to obtain the information for existing as well as new accounts. 3.5 Domestic Trusts Firms should identify the principal ownership of a trust for the reasons noted above in connection with corporate entities. In addition, the firm should obtain information regarding the authorized activity of the trust. The PCMLTF Regulations require firms to obtain information on the persons authorized to act on behalf of the trust. 3.6 Foreign Operating Commercial Entities Taking into account various factors, including the entity's country of incorporation and the foreign or offshore jurisdiction in which the business is located, firms should undertake appropriate internal processes for corporations or entities established or located in jurisdictions outside of Canada. Based upon its own risk-assessment, a firm may consider whether additional identifying information about the customer is necessary. There is no specific prohibition in Canada against opening an account for a shell bank 5. However, the Office of the Superintendent of Financial Institutions (OSFI) has encouraged Canadian financial institutions within its jurisdiction to adopt measures to ensure they do not enter into correspondent relationships with shell banks 6. The Association also recommends that Members ensure that they do not deal with shell banks. 4 Financial Action Task Force on Money Laundering, Review of the FATF 40 Recommendations, Consultation Paper, May 30, 2002, Page 60, Paragraph 195 available at 5 In the United States, Section 313 of the Uniting and Strengthening America by Providing Appropriate Tools to Intercept and Obstruct Terrorism Act (USA PATRIOT) Act of 2001 prohibits financial institutions from dealing with "a foreign bank that does not have a physical presence in any country." The prohibition does not apply if the foreign bank is an affiliate of a depository institution, credit union, or foreign bank that maintains a physical presence in the United States or a foreign country, as applicable, and is subject to supervision by a banking authority in the foreign country regulating such affiliated depository institution, credit union or foreign bank. An "affiliate" is a foreign bank that is controlled by or is under common control with a depository institution, credit union or foreign bank. 6 OSFI Advisory P : Enhanced Due Diligence For Correspondent Accounts, February 22, 2002 available at 9

13 3.7 Personal Investment Corporations or Personal Holding Companies A firm should identify the principal beneficial owner(s) of all corporate accounts, domestic or offshore, where such accounts are personal investment corporations or personal holding companies. Although the documentation may vary, a firm should strive to obtain sufficient documentation regarding the principal beneficial owner(s) of the account. Additional due diligence may also be warranted depending on a number of factors, including the location of the entity and the location of the principal beneficial owner(s). For example, while the PCMLTF Regulations require verification of identity only for those having authority over an account, firms should consider verifying the identity of the principal beneficial owner(s) using the methods permitted under the PCMLTF Regulations. 3.8 Offshore Trusts Firms should identify the principal ownership of a trust established in a foreign jurisdiction. A firm should consider conducting additional due diligence for trusts established in jurisdictions that lack regulatory oversight over trust formation. Although the documentation may vary, a firm should strive to obtain sufficient documentation regarding the principal ownership of the account. Additional due diligence may also be warranted depending on a number of factors, including the location of the offshore entity and the location of the principal owner(s). 3.9 Institutional Accounts, Hedge Funds, Investment Funds and Other Intermediary Relationships Firms' anti-money laundering procedures should cover their institutional business and clients. While it is understood that institutional business differs from traditional retail business on a number of levels, there are at the moment no general exemptions from the PCMLTF Regulations or the IDA By-laws, Regulations and Policies from the KYC requirements. Instead, there are specific, limited exceptions and exemptions 7. However, institutional accounts have historically been the subject of an analysis different from retail accounts because the former are generally viewed as accounts opened for financially sophisticated customers, who typically buy and sell in the market frequently and often in significant volume. Institutional clients often are widely known, regulated and/or publicly held. In addition, consistent with normal, legitimate business and competitive practices, firms may have limited or no contact with the underlying beneficiaries of institutional clients, and deal solely through intermediaries. Investment funds and "hedge funds" are examples of these types of intermediary accounts. In addition to these types of relationships, other institutional accounts frequently are established 7 See Member Regulation Bulletin MR-143 for descriptions of exceptions to identification and verification requirements under the PCMLTF Regulations. IDA Policy 4 on the opening, operation and supervision of institutional accounts is, at the time of writing, under development and will include a definition of the types of clients eligible to open institutional accounts. 10

14 solely for trade execution and therefore these clients maintain a limited relationship with the firm. Nevertheless, firms should remind appropriate personnel that, with respect to institutional accounts, due diligence may need to be performed, notwithstanding the fact that these accounts do not represent a credit risk to the firm, either because they are Acceptable Institutions or Acceptable Counterparties under the IDA Regulations, or due to the delivery versus payment nature of the accounts. Firms should conduct due diligence on the institutional/intermediary client as required by the applicable self-regulatory organization rules and the PCMLTF Regulations, depending on the nature of the entity, as provided in sections 3.1 through 3.8 above, keeping in mind that institutional/intermediary accounts may require more or less scrutiny based on various factors. Firms should ascertain via representation or otherwise the institution's/intermediary's authority to act on behalf of the underlying client and, where appropriate, whether the institutional client/intermediary has policies and procedures to know its own clients 8. Factors to evaluate in determining whether additional due diligence is appropriate when doing business with a particular institution/intermediary may include whether: the institution/intermediary has established anti-money laundering policies and procedures; the firm has historical experience with the institution/intermediary; the institution/intermediary is a registered financial institution based in a major regulated financial center or is a registered financial institution located in a FATF jurisdiction; the institution/intermediary has a reputable history in the investment business; and The institution/intermediary is from a jurisdiction characterized as an offshore banking or secrecy haven or is designated as a noncooperative country by credible international organizations or multilateral expert groups such as the FATF Accounts Opened via the Internet A firm should extend its anti-money laundering procedures to accounts opened via the Internet or similar technology. The firm's policies for customer identification and related documentation relating to accounts opened on-line or through similar technology should be, to the extent relevant, consistent with the requirements discussed above under section The ability of a Member to deal with off-shore intermediaries that are in the business of dealing in securities without knowing the ultimate beneficial client in a transaction is dealt with in section 9(5) of the PCMLTF Regulations (see Member Regulation Notice MR-143, page 3). This section is a clear illustration of the concept that Members must ensure that they can rely on the intermediary to know its clients. 11

15 The identity verification requirements under the PCMLTF Regulations apply regardless of the method by which an account is opened. Where personal identity documents are used, the original documents must be reviewed by an employee or agent of the firm in the presence of the person. Photocopies, facsimile images or other electronic reproductions are not acceptable, even when certified as true copies by an attorney acting for the client. Where appropriate, a firm's policies should reflect a reasonable risk-based assessment that would serve as the basis for the firm's determination as to whether any additional identifying information is necessary for a particular customer or for customers in the same or similar categories Confidential Accounts In situations in which a firm permits confidential accounts for appropriate reasons, such as a client's prominence or due to concerns for personal safety, sufficient documentation identifying the underlying owners should be obtained and on file with the firm and available to appropriate compliance staff Additional KYC Efforts In appropriate cases, after account opening procedures have been followed and where an account presents suspicious indicators, a firm may undertake a variety of efforts to obtain additional information about the customer or authenticate the customer's identity. Consistent with privacy requirements, the availability of public information, and the firm's own assessment of the risk for a particular customer or type of account, a firm may consider utilizing outside vendors or software programs to assist in verifying information provided by the customer. For example, for individual customers, firms may elect to screen customer name and address information through various vendor databases for possible anomalies in the customer's social insurance number, date of birth, or residential address. Similarly, for commercial accounts, a firm may elect to utilize a service provider or software program to screen for inconsistencies between business or corporate documentation and the location and legitimacy of the stated business address. A firm may also elect to make use of its fraud detection policies and procedures to assist in its anti-money laundering program Senior Foreign Government/Public Officials Several high profile money laundering cases have involved the proceeds of corruption in foreign countries. A firm should employ reasonable measures to identify accounts maintained for senior foreign government/public officials, their immediate family members and/or close associates (sometimes called politically exposed persons ) and conduct enhanced due diligence on all such accounts. A firm's due diligence should be reasonably designed to detect and report transactions that may involve the proceeds of foreign corruption. In opening personal investment corporations or personal holding companies, care should also be taken to 12

16 ascertain if the account is being established by, or for the benefit of, a senior foreign public official or other politically exposed person. 4. Suspicious Transaction Reporting All firms are now required to file Suspicious Transaction Reports (STRs) pursuant to section 7 of the Act and the STR Regulations and, therefore, should have procedures in place for detecting and, as required, reporting suspicious transactions. 4.1 Potential Indicators of Suspicious Activity FinTRAC has issued guidelines for the identification and reporting of suspicious transactions, including both general and industry-specific indicators 9. Suspicious activity can occur either at the outset of the client relationship or long after the relationship has been initiated. Transactions should be viewed in the context of other account activity and a determination of whether the transaction is actually suspicious will necessarily depend on the customer and the particular transaction, compared with the customer's normal business activity. Unusual or questionable transactions may include transactions that appear to lack a reasonable economic basis or recognizable strategy based upon what the firm knows about the particular customer. Examples of activity that may be indicative of unusual or potentially suspicious activity should be provided to all appropriate firm personnel through standard distribution channels and should be incorporated into the firm's anti-money laundering policies and procedures, as well as its anti-money laundering training materials. Firms should also make it clear to all employees that any suspicion that transactions are related to unlawful activities such as fraud and market manipulation is equivalent to a suspicion that they are related to money laundering, and must be reported. Although by no means exhaustive, the following is a list of potential indicators of suspicious activity which, if unexplained, may evidence money laundering activity. Indicators at the Account Opening Stage: A customer exhibits an unusual concern regarding the firm's compliance with government reporting requirements, particularly with respect to his or her identity, type of business and assets, or is reluctant or refuses to reveal any information concerning business activities, or furnishes unusual or suspect identification or business documents. A customer wishes to engage in transactions that lack business sense, apparent investment strategy, or are inconsistent with the customer's stated business/strategy. 9 Financial Transactions and Reports Analysis Centre of Canada, Guideline 2: Suspicious Transactions, revised May, 2002, available at 13

17 A customer (or a person publicly associated with the customer) has a questionable background or is the subject of news reports indicating possible criminal, civil or regulatory violations. A customer appears to be acting as the agent for another entity but declines, evades or is reluctant, without legitimate commercial reasons, to provide any information in response to questions about that entity. A customer has difficulty describing the nature of his or her business or lacks general knowledge of his or her industry. A customer attempts to dissuade the firm from following its normal account opening procedures or attempts to have transactions executed immediately, before all the firm s normal checking and verification procedures can be completed. Indicators Related to Account Activity: A customer attempts to make frequent or large deposits of currency, insists on dealing only in cash equivalents or asks for exemptions to the firm's policies relating to the deposit of cash and cash equivalents. A customer engages in transactions involving cash under $10,000 or cash equivalents or other monetary instruments that appear to be structured to avoid government reporting requirements, especially if the monetary instruments are in an amount just below reporting or recording thresholds and/or are sequentially numbered. A customer engages in multiple transfers of funds or wire transfers to and from countries that are considered bank secrecy or "tax havens" that have no apparent business purpose or are to or from countries listed as non-cooperative by FATF and the Financial Crimes Enforcement Network (FinCEN), or are otherwise considered by the firm to be high-risk. A customer's account has unexplained or sudden extensive wire activity, where previously there had been little or no wire activity, without any apparent business purpose. A customer makes a funds deposit followed by an immediate request that the money be wired out or transferred to a third party, or to another firm, without any apparent business purpose. A customer makes a funds deposit, for the purpose of purchasing a long-term investment, followed shortly thereafter by a request to liquidate the position and a transfer of the proceeds out of the account. For no apparent reason, a customer has multiple accounts under a single name or multiple names, with a large number of inter-account or third-party transfers. 14

18 A customer directs journal entry or other transfers of funds or securities between unrelated accounts without any apparent business purpose, including transfers to other dealers. A customer requests that a transaction be processed in such a manner so as to avoid the firm's normal documentation requirements. A customer engages in transactions involving certain types of securities, such as penny stocks, which, although apparently legitimate, have been utilized in connection with fraudulent schemes. A customer deposits bearer bonds followed by immediate request for the disbursement of funds. A customer uses an account only for non-investment activities such as holding and movement of cash or cash equivalents. A customer exhibits a total lack of concern regarding risks, commissions, or other transaction costs. 4.2 Firm Practice Regarding the Reporting of Suspicious Activity Although the firm's internal structure for reporting suspicious activity will be dependent on a number of factors, including the firm's size, structure, resources and nature of its business, a firm should endeavor to centralize its reporting practices to ensure consistency and uniformity. In developing its procedures, a firm must designate a particular person or persons to be responsible for determining whether the transaction or account activity warrants further investigation and for making the final determination with respect to the filing of a STR. Such person(s) need not be the one(s) conducting the investigation and the firm may elect to delegate this responsibility to more senior personnel, such as the anti-money laundering compliance officer, or an individual or committee from another area of the firm, such as the office of the general counsel, the legal department, or corporate security. In the appropriate case, outside counsel could be retained to assist in this process. A firm may have difficulty making a determination whether to file an STR in a borderline situation. If all avenues to assist in making the decision have been explored and the firm is still in doubt, it is preferable to file a report. FinTRAC receives a variety of reports from many financial institutions. An isolated, borderline transaction is unlikely to generate further interest in and of itself, but it may fit with a pattern of activity reported by other institutions. The firm should also designate a person or persons to be responsible for maintaining copies of all documentation, records and communications relating to a reported transaction. A firm's procedures should make clear that STRs are confidential and may not be disclosed to any person involved in the transaction. 15

19 4.3 Review of Suspicious Activity Where an account has been identified as requiring further review for possible money laundering or suspicious activity, the firm may utilize various analytical approaches depending upon its resources, its corporate structure and its business activity. The extent of any analysis is also dependent upon the nature and source of the inquiry. Depending on the size of the firm's anti-money laundering unit, and the size and resources of the firm, some or all of the analytic work may be performed by other areas of the firm. 4.4 General Recordkeeping Requirements A firm should adopt specific record retention policies consistent with the various recordkeeping and reporting requirements embodied within the Act, the PCMLTF Regulations and other regulatory requirements. The firm's recordkeeping policies should be reviewed periodically by firm personnel to ensure they remain compliant with all requirements. 4.5 Anti-Money Laundering Contacts Firms should disseminate information on whom to contact for anti-money laundering questions or issues. As part of that effort, firm personnel should be provided with specific points of contact, including telephone numbers. Firms that already have a hotline for other purposes could advise employees that they can use the same number for anti-money laundering purposes as well in order to discuss such matters on a confidential basis. 5. Monitoring of Account Activity A firm should adopt procedures setting forth appropriate parameters and methods of monitoring account activity so that unusual or suspicious transactions can be detected. 5.1 Monitoring Generally An objective of a firm's anti-money laundering efforts is to identify potentially suspicious and unusual activity in its customers' accounts. Monitoring transactions is essential to determining if any particular transaction is unusual or suspicious in nature or may be related to money laundering. The process of monitoring transactional activity can be a complex and costly process and will necessarily vary from firm to firm depending on the type of firm involved, its size, its customer base, its business and its resources. Given these factors, monitoring could be accomplished in a number of ways, including the use of internal or external automated monitoring systems specific to the firm, and the manual monitoring of account activity by various branch, operations or compliance personnel. While Members are required to have their own monitoring procedures and systems, a subsidiary of another financial institution may consider sharing of information with, or using facilities provided by, its parent or affiliated entities. 16

20 In designing its monitoring efforts, a firm should endeavor to capture activity that could be considered suspicious or unusual so that appropriate action can be taken. Accordingly, a firm should monitor for the following: Wire Transfer Activity. A firm should perform some type of monitoring for wire transfers. Whether conducted manually or by use of an automated system, parameters for wire activity could include specific dollar thresholds, volume or velocity thresholds and wires directed toward certain geographic destinations identified as "high-risk. Deposits. Where a firm accepts cash (i.e., currency), some form of monitoring should be conducted with respect to cash. If there are limitations on the amounts that can be received, the monitoring should look for exceptions to the policy. If there are no limitations, the firm should at a minimum look for deposits aggregating in excess of $10,000. Monetary Instruments. If a firm accepts cash or cash equivalents, including cashier's cheques, money orders and traveler's cheques, it should have procedures in place to monitor for the structuring of such deposits. Because not every transaction can be monitored, a firm could consider developing certain types of specialized or exception reports that can be reviewed periodically for indications of suspicious or unusual account activity. Firms should also consider carefully where to assign responsibility for different types of monitoring. For example, monitoring of wire transfers and other funds movements may be done in the department responsible for executing such transactions. 5.2 Watch Lists Firms should consider developing watch lists of clients that have exhibited suspicious behaviour, either in the account opening process or in account activity, or of high risk accounts such as accounts in FATF non-cooperating countries and territories. These can help firms concentrate their efforts on monitoring the highest risk accounts. 6. Anti-Money Laundering Training All appropriate personnel should be trained regarding the firm's anti-money laundering policies and procedures, as now required by the PCMLTF Regulations. 6.1 Training Generally A firm should train all appropriate new employees with respect to its anti-money laundering procedures, including the detection of unusual or suspicious transactions and compliance with the various federal rules, regulations and reporting requirements. The firm's anti-money laundering policy should be made available to all new employees, as well as other relevant firm 17

21 materials, such as the firm's code of ethics or conduct, which should incorporate a section explaining the firm's anti-money laundering policy. All appropriate employees should receive training to ensure that they are knowledgeable about their role in the firm's anti-money laundering efforts. While salespeople having direct contact with clients may be in the best position to identify some forms of suspicious activity, other business units or areas will also benefit from training, including treasury, operations, margin, credit, corporate security, audit and legal and compliance. Employee training can take a variety of forms, including live presentations, educational videos, on-line training programs or the use of other media. In addition, bulletins or other guidance documents can be distributed or circulated to employees firm-wide, or to select groups of employees as appropriate (i.e., registered representatives in particular branch locations, cashiering, margin, or operations personnel). Departments within the firm such as compliance, legal, internal audit, and human resources can all assist in developing the firm's training programs and in training firm personnel. Firms should maintain evidence of their training efforts. 6.2 Relevant Topics to be Addressed A firm should endeavor to tailor the contents of its anti-money laundering training to the specific needs and business of the organization. In so doing, the following themes should be addressed: the firm's KYC policy and procedures; potential indicators of suspicious activity; the rules and regulations for reporting currency transactions, transportation of monetary instruments and suspicious activity; the firm's procedures for reporting such transactions or activity; and the civil and criminal penalties associated with money laundering. Firms should also contemplate updating their training materials to reflect recent developments, techniques or money laundering trends identified by various government agencies such as FinTRAC and FATF FATF publishes an annual report on money laundering typologies, available at In addition, FINCEN publishes an annual review of suspicious activity reports in the United States, entitled the Suspicious Activity Review, available at 18

22 6.3 Continuing Training A firm should determine which of its employees need to receive additional specific periodic training relative to money laundering prevention. As the firm gains more experience with the application of anti-money laundering procedures and reviews the results of its audit program, it may identify areas in which more training or refresher training is required, and may be able to add specific examples of suspicious transactions from its own experience (suitably disguised, of course, to prevent the disclosure of client identities). Firms should also ensure that additional training is provided as rules change. For example, draft regulations under the Act regarding reporting of the cross-border movement of currency and other monetary instruments are, as of the time of writing, out for comment. Those responsible for cross-border delivery of securities, whether to clients or for transfer, will require training on the reporting requirements and procedures. 7. Audit Program A firm is required under section 71 of the PCMLTF Regulations to develop an independent audit program designed to ascertain whether those areas that have the primary responsibility for detecting money laundering are in compliance with the firm's anti-money laundering procedures. The audit program should also be designed to evaluate the firm's anti-money laundering program. The audit program can provide for the use of either or both an internal or external auditing process. The PCMLTF Regulations require that audits be conducted as often as necessary. A firm s procedures should specify the frequency of such audits, their terms of reference, who is to conduct them and the process for communicating the results. Except for very small firms, the audit should be at least annual. As with any audit process, records should be kept of the audit steps taken and records reviewed. 7.1 Audit Report and Follow-Up The audit should result in a report identifying any weaknesses in a firm s procedures or their implementation. Firms should keep records of measures undertaken to correct any weaknesses identified in the audit. The report and steps taken should be communicated to the firm s senior management. Firms should make the anti-money laundering procedures review a part of its annual report to the Board on compliance matters required under IDA By-law Relationship Between Introducing and Carrying Brokers In the anti-money laundering context, the issues surrounding KYC and suspicious activity reporting become even more complex when viewed in terms of allocating responsibilities between introducing brokerage firms and the firms that clear securities transactions on their 19

23 behalf. The PCMLTF Regulations and STR Regulations contain no guidance in this regard and provide no exemption for carrying brokers from compliance with all requirements with respect to carried accounts. Given that the introducing broker has the primary relationship with the customer and is generally in the best position to know its client, suitability requirements generally fall on the introducing broker 11. Likewise, in the anti-money laundering context, the responsibility to know the client logically falls upon the introducing broker. However, the carrying firm may have the necessary systems for monitoring transactions, and may deal directly with the client in conducting transactions such as account deposits, withdrawals and wire transfers. Introducing and carrying firms need to ensure that there is a clear understanding between them as to where the operational responsibility for all anti-money laundering procedures lies, and that sufficient information is available to those responsible for carrying out those procedures. 8.1 Allocation of Responsibilities Between the Parties The introducing/carrying agreement should specifically set forth the respective obligations between the introducing broker and the carrying broker relating to compliance with applicable anti-money laundering laws, rules and regulations, including recordkeeping responsibilities, reporting of currency transactions and filing of STRs. 8.2 Availability of Reports Based upon the allocation of responsibilities and subject to a reasonable request by the introducing broker, carrying brokers may need to develop certain tools, or enhance existing tools, to assist the introducing broker in analyzing the transactional activity of its customer. These tools could include reports intended to assist the introducing firm in supervising and monitoring customer accounts, such as exception reports reflecting deposit and trading activity that might detect possible money laundering activity, including the structuring of deposits. Carrying brokers could include these reports on the list of reports required to be provided to introducing brokers at the inception of the introducing/carrying relationship. 8.3 Communication Introducing and carrying brokers should also develop a way to facilitate effective communication between the two firms whenever questionable activity or potential indications of suspicious activity are detected. A carrying firm cannot, for example, consider its responsibilities fulfilled if it simply reports what it considers potentially suspicious activity to the introducing firm. It should be provided by the introducing firm with sufficient information to satisfy itself that the activity has been appropriately dealt with, either through the filing by 11 Although in a Type 1 introducing/carrying relationship under IDA By-law 35, the introducing and carrying broker are jointly and severally responsible, the direct contact for most purposes will generally be between the introducing broker and the client. 20

24 the introducing broker of a suspicious transaction report or through the receipt of an explanation sufficient to conclude that the activity gives no reason for suspicion. 8.4 Audit The allocation of responsibilities should be made known to those conducting the annual audits of anti-money laundering procedures at both the introducing and the carrying firm. Those conducting the audits should be encouraged to work together and share information to ensure that there are no gaps and that both parties are properly executing their responsibilities. This is particularly important because the PFMLTF Regulations do not exempt carrying brokers as regards introduced accounts, therefore some procedures such as identity verification can be considered as completed by the carrying broker only in that the introducing broker is acting as an agent of the carrying broker when it does the required verification. The carrying broker therefore has a responsibility to ensure that the introducing broker is properly fulfilling its responsibilities. Further Reading The Financial Transactions and Reports Analysis Centre of Canada publishes guidance documents which can be found at The current guideline documents relevant to dealers are: 1 Backgrounder 2 Suspicious Transactions 3A 3B Submitting STR Reports to FINTRAC Electronically Submitting STR Reports to FINTRAC by Paper 4 Implementation of a Compliance Regime 5 Submitting Terrorist Property Reports to FINTRAC 6 Record Keeping and Client Identification 7A 7B Submitting LCT Reports to FINTRAC Electronically Submitting LCT Reports to FINTRAC by Paper 8 Electronic Funds Transfers The Financial Action Task Force at has general background information on money laundering, the FATF 40 recommendations and the non-cooperating countries and territories initiative. It also publishes consultation documents and an annual review of money laundering methods and trends that can be found on its Web site. 21

25 The Financial Crimes Enforcement Network, a Division of the United States Treasury Department having the same general function as FinTRAC, publishes the SAR Review outlining trends in suspicious activity reporting by U.S. financial institutions and giving tips and case histories. These can be found at FINCEN also issues advisories on dealings with clients in particular countries. While binding only on U.S. financial institutions, these may serve as useful guidance, particularly in determining whether a foreign securities dealer is located in a jurisdiction compliant with the FATF customer identification recommendations. At the same location, FINCEN publishes occasional SAR Bulletins giving general outlines of the kinds of Suspicious Activity Reports filed by specific types of U.S. financial institutions and giving descriptions of cases developed from such reports. 22