4.4 Anti-Money Laundering (AML/ATF) and FINTRAC Compliance

4.4 Anti-Money Laundering (AML/ATF) and FINTRAC Compliance

Mutual fund dealer members operate on the front lines of Canada's defense against illicit financial flows. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and regulations overseen by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) impose stringent compliance obligations on all registered dealers and dealing representatives. Branch Compliance Officers (BCOs) play a pivotal supervisory role in ensuring that client identity is verified through approved methods, high-risk individuals are scrutinized, and suspicious or reportable transactions are identified and transmitted without delay.

---

The Three Stages of Money Laundering in Mutual Funds

Money laundering is the process whereby criminals disguise the illicit origin of funds derived from criminal activity to make them appear legitimate. In the mutual fund sector, money laundering typically unfolds across three distinct stages:

+-------------------------------------------------------------------------+
|                 THE THREE STAGES OF MONEY LAUNDERING                    |
+-----------------------+-------------------------------------------------+
| 1. PLACEMENT          | Introducing illicit physical currency or dirty  |
|                       | funds into the financial system (e.g., small    |
|                       | cash deposits or bank drafts into an account).  |
+-----------------------+-------------------------------------------------+
| 2. LAYERING           | Creating complex layers of financial            |
|                       | transactions to obscure the audit trail (e.g.,  |
|                       | rapid fund switches, transferring between       |
|                       | accounts, purchasing and immediate redemption). |
+-----------------------+-------------------------------------------------+
| 3. INTEGRATION        | Re-entering laundered capital into the economy  |
|                       | as legitimate wealth (e.g., using redemption    |
|                       | cheques from a reputable dealer to buy assets). |
+-----------------------+-------------------------------------------------+

Mutual funds are particularly vulnerable during the layering and integration stages. A criminal may place illicit funds into a mutual fund and, shortly thereafter, redeem the units—incurring a redemption fee or deferred sales charge as a minor business expense—to receive a clean redemption cheque or electronic transfer from a recognized Canadian securities dealer.

---

Mandatory Client Identity Verification Methods

Under FINTRAC regulations, a securities dealer must verify the identity of each person for whom it opens an account before any transaction other than an initial deposit is carried out. FINTRAC prescribes the government-issued photo identification, credit file, dual-process, affiliate or member, and reliance methods. The first three are the everyday branch methods:

1. Government-Issued Photo Identification Method

• The representative must examine an original, valid, authentic, and current (unexpired) photo identification document issued by a federal, provincial, or territorial government (or foreign equivalent).
• Acceptable IDs: Valid Canadian or foreign passport, provincial driver's license, provincial photo card, Canadian permanent resident card, or Secure Certificate of Indian Status.
• Mandatory Recorded Data: Full legal name, document type, unique reference number, issuing jurisdiction, and expiry date.
• Provincial Health Card Restrictions: In Ontario, Manitoba, and Prince Edward Island, provincial privacy legislation explicitly prohibits financial institutions from asking for or recording provincial health cards. In Quebec, a health card cannot be requested, but may be accepted if the client voluntarily offers it. In British Columbia and Alberta, health cards with photos are acceptable. To maintain uniform compliance, most national dealers establish policies prohibiting health cards nationwide.

2. Credit File Method

• The dealer verifies identity by accessing a Canadian credit file maintained by a national credit reporting agency (Equifax Canada or TransUnion Canada).
• Mandatory Requirements:
  • The credit file must have been in existence for at least three full years (36 months);
  • The name, address and date of birth in the credit file must match the information the client provided.

3. Dual-Process Method

• The dealer verifies identity by reviewing information from two independent, reliable sources from different issuers. Acceptable combinations include:
  • Source 1 (Name and Address): A utility bill (hydro, gas, water), bank statement, or property tax notice;
  • Source 2 (Name and Date of Birth): A CRA Notice of Assessment, Canadian marriage certificate, or pension statement;
  • Source 3 (Name and Financial Account Confirmation): Confirmation that the client maintains a deposit account or credit card with a Canadian financial institution.
• Both sources must be valid and original (or verified digital statements), and neither source can be issued by the dealer itself.

Keeping Client Information Up to Date

Identification is not a one-time task. FINTRAC requires reporting entities to conduct ongoing monitoring of business relationships and to keep client identification and beneficial ownership information up to date. How often this happens depends on the firm's risk assessment: high-risk clients are reviewed more frequently. FINTRAC does not set a fixed calendar for re-verifying identity documents. Separately, MFD Rule 2.2.4 requires KYC information to be reviewed with the client at least every 36 months.

---

Politically Exposed Persons (PEPs) and Heads of International Organizations (HIOs)

Individuals who hold prominent public offices possess heightened access to public funds and regulatory power, making them vulnerable to corruption, bribery, and money laundering. Canadian law establishes four distinct categories:

Mandatory Compliance Measures for PEP/HIO Accounts

1. Mandatory PEP Screening: Every NAAF must contain a PEP/HIO screening questionnaire.
2. Source of Wealth (SOW) and Source of Funds (SOF): The dealer must document how the client accumulated their total overall net worth (SOW) and the specific origin of the capital being invested (SOF).
3. Senior Management Approval: A dealing representative or BCO cannot approve a PEP account alone. Opening an account for a Foreign PEP (or a high-risk Domestic PEP/HIO) strictly requires prior approval from Senior Management (such as the Chief Compliance Officer or Ultimate Designated Person) within 30 days of the determination.
4. Enhanced Ongoing Monitoring: PEP accounts are subjected to frequent supervisory review to detect transactions inconsistent with their declared legitimate wealth.

Mandatory FINTRAC Reporting Obligations

Dealer members must file specific statutory reports directly to FINTRAC upon the occurrence of designated triggering events:

+-------------------------------------------------------------------------+
|                       MANDATORY FINTRAC REPORTS                         |
+-----------------------+-----------------------+-------------------------+
| Report Type           | Triggering Threshold  | Statutory Deadline      |
+-----------------------+-----------------------+-------------------------+
| Large Cash            | \$10,000+ in cash     | Within 15 calendar days |
| Transaction (LCTR)    | (24-hour rule)        | of the transaction      |
+-----------------------+-----------------------+-------------------------+
| Suspicious            | Reasonable grounds to | As soon as practicable  |
| Transaction (STR)     | suspect ML/TF (no \$) | after reaching grounds  |
+-----------------------+-----------------------+-------------------------+
| Terrorist Property    | Possession of assets  | IMMEDIATELY to FINTRAC; |
| Report (TPR)          | of listed terrorist   | disclose to RCMP/CSIS   |
+-----------------------+-----------------------+-------------------------+
| Large Virtual         | \$10,000+ in virtual  | Within 5 working days   |
| Currency (LVCTR)      | currency (24-hour)    | of the transaction      |
+-----------------------+-----------------------+-------------------------+

1. Large Cash Transaction Report (LCTR)

• Filed whenever a dealer receives $10,000 or more in physical currency (cash) in a single transaction, or across multiple cash transactions totaling $10,000 or more within a 24-hour window conducted by or on behalf of the same client (the "24-hour rule").
• Must be submitted to FINTRAC within 15 calendar days.
• Note: Virtually all Canadian mutual fund dealers have strict operational policies refusing physical cash altogether; however, BCOs must know the statutory threshold for regulatory examinations.

2. Suspicious Transaction Report (STR)

• Filed when a dealer member or representative has reasonable grounds to suspect that a completed or attempted transaction is related to the commission or attempted commission of a money laundering or terrorist financing offense.
• Zero Dollar Threshold: An STR has no minimum monetary limit. A transaction involving $500 can be just as reportable as one involving $500,000 if suspicious indicators exist.
• Statutory Filing Deadline: Must be submitted to FINTRAC as soon as practicable after the dealer has completed the measures that allow it to establish reasonable grounds to suspect. The former 30-day deadline was replaced, and FINTRAC expects the STR to be treated as a priority once that threshold is reached.

The Strict "No Tipping Off" Criminal Prohibition

Section 8 of the PCMLTFA prohibits disclosing that a Suspicious Transaction Report has been or will be made, or its contents, with the intent to prejudice a criminal investigation:

If a client behaves suspiciously, the representative and BCO must maintain complete professional composure, gather documentation, process or decline the trade according to dealer policy, and report the matter internally to the Anti-Money Laundering Compliance Officer (AMLCO) without giving any indication of suspicion to the client.

3. Terrorist Property Report (TPR)

• Triggered when a dealer has in its possession or control property that is known, or believed on reasonable grounds, to be owned or controlled by or on behalf of a listed terrorist entity (under the Criminal Code or UN Sanctions).
• Filing Deadline: Must be filed immediately with FINTRAC and law enforcement (RCMP and CSIS).
• Mandatory Freezing: The dealer must freeze the account immediately; no trades, withdrawals, or disbursements may be processed.

---

AML Red Flags in Mutual Fund Operations

Branch Compliance Officers must train branch staff to identify classic money laundering red flags:

• Immediate Redemption After Deposit: A client invests a large lump sum and requests full redemption within a few weeks, demanding payment to a third party or a foreign bank.
• Indifference to Fees and Penalties: A client insists on redeeming a mutual fund subject to heavy short-term trading fees or severe Deferred Sales Charges (DSC), exhibiting zero concern over financial losses.
• Structuring Transactions: A client conducts multiple transactions of $9,500 over consecutive days to intentionally evade the $10,000 LCTR reporting threshold.
• Unexplained Source of Capital: A client with low declared income and modest net worth deposits substantial bank drafts or third-party cheques without plausible commercial explanations.
• Reluctance to Identify: A client becomes evasive, aggressive, or defensive when requested to present valid government photo identification or clarify beneficial ownership.