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Anti-Money Laundering 101 for Exempt Market Dealers

July 15, 2013  
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Source: Originally published in Exempt Market Update, Issue 3 - the leading national magazine for the exempt market professionals.

By: David Gilkes, EMDA Vice Chair and President of North Star Compliance & Regulatory Solutions Inc.

Most exempt market dealers think of the major banks or IIROC member firms when thinking about compliance with Anti-Money Laundering and Terrorist Financing (AML/ATF) laws and regulations. Many exempt market dealers don’t realize that there is a lot more to AML/ATF laws and regulations than filing of monthly ‘nil’ reports to the securities regulators to verify new clients aren’t on one of the UN or other watch lists.

It has been three years since the implementation of National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103) and the introduction of the exempt market dealer (EMD) registration category. Most EMDs have adapted to or are at least aware of the requirement to comply with securities legislation. However, the creation of the EMD category of registration made all participants in the exempt market subject to Canadian AML/ATF legislation. Too many EMD’s are still not aware of their AML obligations, and the significant risk of being offside.

Under The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act) and accompanying regulations (the Regulations) a "securities dealer” is defined as:

persons and entities authorized under provincial legislation to engage in the business of dealing in securities or any other financial instruments, or to provide portfolio management or investment advising services.

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the agency responsible for the administration and enforcement of the Act and Regulations, has taken the position that the authorization "to engage in the business of dealing in securities” can take the form of either registration or an exemption from registration under provincial legislation. As a result of this interpretation, the AML/ATF laws and regulations apply to all participants in the exempt market whether they are registered as EMDs or operate under the "Northwest Exemption”.

The AML/ATF laws serve important purposes:

  • detecting and deterring money laundering and financing of terrorism;
  • ensuring crime doesn’t pay; and
  • fulfilling Canada’s international commitments to fight crime.

Exempt market dealers are "reporting entities” under the Act and Regulations and have certain obligations including:

  • implementing a compliance regime;
  • maintaining certain records and verifying client identification; and
  • reporting suspicious transactions and terrorist property to FINTRAC.

Some of these obligations are met by complying with securities legislation, in other cases an EMD must do more to comply with the AML/ATF laws and regulations.

As noted above, most EMDs are familiar with the monthly terrorist property reports sent to securities regulators (which eventually make their way to FINTRAC). Reporting suspicious transactions applies to dealers and all their employees and includes attempted transactions. For example, an "investor” whose full name is ‘Bugsy’ and has a P.O. Box for an address wishes to make a large investment with a suitcase of $100 bills, and then immediately asks how he can redeem his investment. Obviously a dealer should refuse to enter into this transaction, however, the dealer must also report this to FINTRAC as an attempted suspicious transaction.

Client due diligence is required under securities legislation as well as AML/ATF laws and regulations. Verification of a client’s identity is important for both purposes. The AML requirements for dealers also include the identification of politically exposed foreign persons (PEFP) which is aimed at preventing corrupt funds from entering the Canadian market. As a result, the Regulations require additional levels of approval and enhanced monitoring if a dealer conducts

transactions with a PEFP.

EMDs are most likely to fall short when it comes to the requirement to have an AML compliance regime. As with securities legislation, the AML/ATF laws and regulations require a compliance regime tailored to reflect the nature, size and complexity of the dealer. The compliance regime

must include:

  • appointment of an AML compliance officer;
  • written policies and procedures to comply with the Act and Regulations;
  • a written assessment of the AML/ATF risks of the business and mitigation;
  • a training and compliance program for employees; and
  • every two years a review must be done of the EMD’s policies and procedures, risk assessment, and training program to test their effectiveness.

Commonly, the Chief Compliance Officer may administer the AML/ATF policies and procedures which are part of the EMD’s written policies and procedures to comply with securities legislation and prudent business practices.

The written assessment of the AML/ATF risks and mitigation, include identifying the risks presented by the EMD’s business model or its clients. Due to illiquidity and long hold periods, exempt securities generally present low risks of money laundering activity. However, they are not impervious to this activity or to risks from terrorist financing.

The Regulations also require an EMD to have a training program for its employees. The training program must be in writing, up to date, and conducted with some frequency.

Finally, the EMD must have a review conducted of its AML/ATF compliance program. The review should be done by an internal or external auditor or an outside consultant. The review must address whether policies and procedures are in place, being adhered to, and comply with the AML/ATF laws and regulations. Testing effectiveness and adherence will likely include interviews with employees who meet with clients and a review of client files. The EMD can conduct a self-assesment which should be conducted by a person who is independent of the reporting, record-keeping, and compliance monitoring functions of the dealer.

Like the securities regulators, FINTRAC has compliance officers who conduct reviews of securities dealers to ensure they have AML programs in place that meet the requirements under the Act and Regulations. Similar to the securities regulators, FINTRAC will issue a report based on the field review and require a plan to correct the deficiencies within 30 days. And like the securities regulators FINTRAC has been conducting compliance field reviews of EMDs.

Unlike the securities regulators, FINTRAC can levy a fine against an EMD for not meeting the requirements under the Act or Regulations. Failure to comply with the AML requirements, AML compliance regime, reporting, record keeping, high risk client monitoring or client identification requirements can lead to criminal charges against an EMD. Conviction for failure to retain records could lead to up to five years imprisonment, to a fine of $500,000, or both.

Alternatively, failure to keep records or identify clients can lead to an administrative monetary penalty. FINTRAC can impose administrative fines of up to $100,000.


For more information on FINTRAC or to see the guidance on meeting the obligations under the Act and Regulations they provide, please visit: www.fintrac-canafe.gc.ca

For more information contact:
David Gilkes - davidgilkes@northstarcompliance.com

For more articles, please download the Exempt Market Update, Issue 3 - the leading national magazine for the exempt market professionals


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