MEMBER REGULATION. notice

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1 MEMBER REGULATION INVESTMENT DEALERS ASSOCIATION OF CANADA notice ASSOCIATION CANADIENNE DES COURTIERS EN VALEURS MOBILIÈRES Contact: L. Boyce: (416) MR 104 October 12, 2001 ATTENTION: Ultimate Designated Persons Chief Financial Officers Panel Auditors Distribute internally to: Corporate Finance Credit Institutional Internal Audit Legal & Compliance Operations Registration Regulatory Accounting Research Retail Senior Management Trading desk Training Implementation of Suspicious Transaction Reporting Regulations Under The Proceeds of Crime (Money Laundering Act, 2000 On August 28, 2001 the Governor General in Counsel made Regulations under the Proceeds of Crime (Money Laundering) Act, 2000 ( the Act ) implementing the requirement in section 7 of the Act to report suspicious transactions. The Regulations, a copy of which is attached, were published in the Canada Gazette, Part II on September 12, 2001 and become effective November 8, Section 7 of the Act applies to all Members of the Association involved in dealing in securities, including portfolio management and investment counseling. It requires reporting of suspicious transactions to the Financial Transactions and Reports Analysis Centre of Canada ( FINTRAC ), a new agency created by the Act. Further regulations implementing other sections of the Act will be published over the next several months. Included are amendments to the existing know-your-client (client identification and verification) regulations and regulations on reporting to FINTRAC of large cash transactions. Members will be notified as new regulations and amendments come into affect. This notice provides a brief summary of the new Regulation and recommendations to assist Members in identifying suspicious transactions. For information about the current know-your-client regulations, which are carried over from the Act s predecessor, please consult Compliance Interpretation Bulletin C-55 dated March 4, 1993 and Compliance Interpretation Bulletin C-123 dated December 3, What is a suspicious transaction? A suspicious transaction is defined as a financial transaction that occurs in the course of their [in this case a Member s] activities and in respect of which there are reasonable grounds to suspect that the transaction is related to the commission of a money laundering offence. TORONTO Suite 1600, 121 King Street West, Toronto, Ontario M5H 3T9 Telephone: (416) Fax: (416) CALGARY Suite 2300, 355 Fourth Avenue S.W., Calgary, Alberta T2P 0J1 Telephone: (403) Fax: (403) HALIFAX Suite 1620, TD Centre, 1791 Barrington Street, Halifax, Nova Scotia B3J 3K9 Telephone: (902) Fax: (902) MONTRÉAL Suite 2802, 1 Place Ville Marie, Montréal, Québec, H3B 4R4 Téléphone: (514) Télécopieur: (514) VANCOUVER Suite 1325, P.O. Box 11614, 650 West Georgia Street, Vancouver, B.C. V6B 4N9 Telephone: (604) Fax: (604)

2 October 12, MR-104 Money laundering offences are those under sections of six Federal acts which deal with the movement of assets derived from the commission of specific offences, generally called predicate offences, under each piece of legislation. In each case, money laundering is described as to transfer the possession of, send or deliver to any person or place, transport, transmit, alter, dispose of or otherwise deal with, in any manner and by any means, any property or any proceeds of any property with intent to conceal or convert that property or those proceeds, knowing or believing that all or a part of that property or of those proceeds was obtained or derived directly or indirectly from the commission of one or more predicate offences. Predicate Offenses The predicate offences under the Controlled Drugs and Substances Act, the Excise Act the Customs Act and the Competition Act are incorporated by reference in the proceeds of crime definitions in the Criminal Code, therefore in the following synopsis the Criminal Code provisions includes all the predicate offences under those Acts. The Criminal Code also incorporates an offence under the Competition Act that is not directly defined in the Act included as a money laundering offence. Each of the following pieces of legislation makes it an offence to launder the proceeds of various predicate offences or conspiracy to commit those offences. 1. Criminal Code Section (1) of the Criminal Code makes it an offence to launder the proceeds of two classes of predicate offences: designated substance offences and enterprise crime offences and. The section applies whether the proceeds were derived from a predicate offence in Canada or from act(s) or omission(s) which would have constituted a predicate offence had they occurred in Canada. Designated substance offences are any offences under Part I of the Controlled Drugs and Substances Act, generally trafficking in or unauthorized production, import or export of scheduled drugs and substances, but not simple possession. Enterprise crime offences are defined in section of the Criminal Code and include Criminal Code offences relating to weapons, corruption, public morals, gambling, theft, forgery, fraud, counterfeiting, possession of property obtained by crime and participation in a criminal organization. Other enterprise crime offences are bootlegging of tobacco products and possession or laundering of the proceeds therefrom under the Excise Act; evasion of duty and possession or laundering of the proceeds therefrom under the Customs Act; and telemarketing offences under the Competition Act. Section 462.3, which shows the full list of predicate offences and the relevant section numbers, is attached. 2. Corruption of Foreign Public Officials Act Section 5 of the Corruption of Foreign Public Officials Act makes it an offence launder proceeds derived from the bribery of foreign public officials. 3. Crimes Against Humanity and War Crimes Act Section 28 of the Crimes Against Humanity and War Crimes Act makes it an offence to launder proceeds derived from offences related to genocide, crimes against humanity or war crimes, whether committed in or outside of Canada; or from offences related to obstruction of, perjury before or bribery of an official of the International Criminal Court.

3 October 12, MR-104 How can suspicious transactions be identified and reported? FINTRAC has published guidelines to assist financial institutions in identifying suspicious transactions. The guidelines are attached to this Bulletin. Guideline 1: Backgrounder contains general descriptions of several methods used to launder money, the international effort to combat money laundering, the Proceeds of Crime (Money Laundering Act (2000) and its implementation, including the requirement to report suspicious transactions, and the operations of FINTRAC. Guideline 2: Suspicious Transactions contains advice on identifying suspicious transactions, including indicators common to all types of financial transactions and industry-specific indicators. Section 5.6 lists industry-specific indicators for securities dealers. It also contains general information about how to use the indicators. Guideline 3: Submitting Reports to FINTRAC outlines the timeline requirements and methods of reporting suspicious transactions. Reports can be made either electronically if the reporting entity has the capacity (Internet access and a browser meeting the specification set in the guideline) or on paper if the reporting entity does not have the necessary electronic capacity. There is no requirement to report an approach, however suspicious, that does not result in a transaction. However, such approaches can be reported on a voluntary basis through the same reporting system. The Act does not provide direct protection from liability for such voluntary reports, but they do have the same protection as good faith voluntary reports to police. The Association strongly recommends the voluntary reporting, either to FINTRAC or the police, of any approach that raises a suspicion of being related to criminal activity or money laundering. The Associations Enforcement Department can provide assistance to any Member faced with such a situation. Liability, Offences and Penalties Members and/or their employees that are required under the Act and Regulations to report suspicious transactions to FINTRAC are protected from criminal and civil legal proceedings for doing so in good faith. Failure to comply with the reporting requirements can lead to criminal charges against a Member and/or responsible employee. Knowing failure to report a suspicious transaction is punishable by up to five years imprisonment, a maximum fine of $2,000,000 or both. An employee cannot be convicted if the transaction has been reported to his or her superior. It is also an offence to disclose that a suspicious transaction report has been made, or to disclose the contents of the report, with the intent to prejudice a criminal investigation, whether or not such an investigation has begun. This offence, sometimes called tipping off, is punishable by up to two years imprisonment. If the suspicion that assets are derived from money laundering offences is raised to a certainty, the Member should contact police and report the matter to FINTRAC. Any movement or disposition of such assets would constitute knowing involvement in money laundering under section of the Criminal Code, which is punishable by up to ten years imprisonment.

4 October 12, MR-104 Compliance Recommendations Following are suggestions to assist Members in complying with the new requirements. 1. Implement a compliance regime including a responsible partner, officer or director. While revision of client identification and verification requirements has not yet been completed, the revised regulations will include a requirement for Members to implement a compliance regime to ensure compliance with all regulations pursuant to the Act. The required regime will probably include the following elements. The appointment of an individual to be responsible for the implementation of the regime. This is similar to IDA requirements to designate a partner, director or officer as responsible for compliance with particular provisions of IDA regulations. The person responsible for the regime should also be a partner, director or officer approved as an Alternate Designated Person. The development and application of compliance policies and procedures. This requirement is again similar to IDA requirements for compliance policies and procedures regarding IDA by-laws and regulations. A review as often as is necessary of those policies and procedures to test their effectiveness, to be conducted by an internal or external auditor. An on-going employee compliance training program. Suggestions regarding education and training are included below. 2. Centralize the reporting function under the designated compliance officer Whether a transaction or series of transactions gives reasonable grounds to suspect that they are related to a money laundering offence will not always be easy to determine. Initial identification of unusual transactions under the guidelines will in many cases be done by registered representatives or supervisors, but may require further investigation before the reporting threshold is reached. The designated person should develop and maintain more in-depth knowledge of money laundering and experience in determining whether unusual transactions raise suspicions of money laundering, or what additional investigation needs to be done to make such a determination. Member s procedures should therefore require that transactions that might raise a suspicion of money laundering be reported to the designated compliance officer or persons under her or his direct supervision who are involved in the reporting function. 3. Conduct an internal risk assessment to identify areas of the greatest risk for use by money launderers Development of policies and procedures, while having to cover all aspects of all regulations under the Act, should include an assessment of all areas of a Member s operations to determine which are most at risk of use by money launderers. The policies and procedures should then reflect that assessment by including specific measures to address high risk areas. While each Member will be best able to identify its own high risk operations, the following are suggested as examples that Members may need to consider.

5 October 12, MR-104 Cash deposit facilities. Members do not, in general, accept cash deposits. However, some members have facilities to accept deposits through automatic teller machines at financial institutions. Such facilities could be used for structured deposits or smurfing (see FINTRAC s Guideline 1: Backgrounder, page 5.) Movements of funds and securities While Members have well-developed supervisory procedures for the supervision of securities activity in accounts in order to comply with suitability requirements, the movement of funds into and out of accounts may have been viewed as primarily a credit control issue. However, movements of funds are critical to the layering phase of money laundering and need to be subject to surveillance by Members. For example, funds being deposited into accounts and then moved out again, with no apparent interest in using them for bona fide investment purposes, may give rise to a suspicion of money laundering activity. Similarly, payments or deliveries of securities out to third parties may in some cases give rise to suspicion. Other instruments which would not normally be used to make payments into securities accounts, such as traveller s checks, bank drafts, third party cheques, bearer securities or securities registered to third parties, may also warrant review. Dealings with off-shore entities Money launderers frequently make use of accounts at off-shore financial institutions, particularly in bank secrecy jurisdictions, and private off-shore corporations. The Association is proposing changes to Regulation 1300 requiring Members to attempt to ascertain the identity of the beneficial owners of private corporations and to follow special account opening procedures and exercise heightened supervision of transactions if they are unable to do so. In addition, the Financial Action Task Force ( FATF ), the principal international organization dealing with anti-money laundering efforts, maintains a list of non-cooperative jurisdictions, countries which do not have adequate anti-money laundering laws. Members procedures should include heightened supervision of transactions for accounts from such jurisdictions. Members have been notified of changes to the FATF list of non-cooperative jurisdictions, most recently in Member Regulation Notice MR-100, dated September 28, Further notices will be issued as changes to the list are made. Suitability exempt and on-line trading accounts Recent changes to the suitability requirements in Regulation 1300 will permit Members to open accounts on a suitability-exempt basis. In some cases, account opening and operation may be entirely on-line, with no person-to-person contact with the Member. While the client identification and verification regulations under the Act will continue to cover such accounts, the lack of a suitability obligation will remove the necessity for members to collect financial information such as income and net worth. Many of the FINTRAC guidelines note that transactions may be suspicious in relation to the client s financial ability and normal investment practice. Where a member has reduced information about a client s financial ability and/or less direct contact with the client, it will have to develop means of transaction surveillance to identify patterns of account activity requiring review, and then supplement

6 October 12, MR-104 its knowledge of the client through other means to determine whether the transactions are suspicious in relation to the client s financial ability, business or other client details. 4. Suspicious transactions in relation to market manipulation Fraud and stock market manipulation are enterprise crime offences under section of the Criminal Code. Movement of the proceeds of fraud or stock market manipulation is therefore a money laundering offence. Where a Member has reasonable grounds to believe that the transactions in an account are related to a stock market manipulation or other fraud, such transactions also give rise to a suspicion that they are related to money laundering and should be reported to FINTRAC. Nothing in the Act or regulations thereunder prevents a Member from reporting suspicious activity to both FINTRAC and other police or regulatory agencies. Where a Member is suspicious that an account is involved in market manipulation or other fraud, it should also report the matter to the relevant police or regulatory authorities. 5. Education and Training Mandatory suspicious transaction identification and reporting are new to the industry. They require awareness at all levels of a Member of the types of reviews required and types of activity that should be reported to the responsible partner, director or officer. In some cases, the responsible partner, director or officer will have to educate him or herself on money laundering before developing education and training programs. FINTRAC is aware of the educational needs in the financial services industry and has begun a project to develop educational material. In preparation, it has consulted the Association and other industry groups on education and training needs in the securities industry. Information on the availability of training material will be communicated to Members as it becomes available. There is a large amount of material on money laundering available through the Internet, from both public sources and subscription services. FINTRAC s Guideline 1: Backgrounder contains a short list of Web sites on 7 and 8. For general background on money laundering, the FATF Web site at contains material such as an annual report on money laundering typologies. The Egmont Group, a group of financial investigation units of which FINTRAC is a Member, has compiled 100 case histories (sanitized to prevent identification of the actual cases) submitted by its Members. That report is available through the U.S. Financial Crimes Enforcement Network Web site at although few of the cases involve securities dealings. As money laundering training is developed, it should become part of the Member s continuing education program for Compliance. Relevant personnel should also be kept up-to-date on developments such as changes to the FATF list of non-cooperative jurisdictions. The Compliance and Legal Section of the Association will be including a session on money laundering and suspicious transaction reporting as part of its annual seminar for compliance officers in Toronto on December 4, 2001.