NIN 93/08 - Money Laundering: New Federal Regulations [NIN - Rescinded]

The federal Proceeds of Crime (Money Laundering) Act (the "Proceeds of Crime Act") and regulations under that act (the "Regulations") came into force on March 26, 1993. A copy of that legislation is attached to this notice.

As part of a coordinated international effort to control money laundering and to help enforce various Canadian laws, the Proceeds of Crime Act imposes record keeping and related requirements on financial institutions, foreign exchange dealers, securities dealers, life insurers and others. This notice is intended to help registered dealers and advisers ("registrants") comply with the Proceeds of Crime Act and Regulations.

1. What is money laundering?

Money laundering is the conversion of the proceeds of economic crime into seemingly legitimate funds using complex transactions through the financial institution deposit and withdrawal system. Money laundering begins when the proceeds of crime are deposited into the financial system. Complex transactions are then used to obscure the audit trail of the funds so they appear to be legitimate when eventually withdrawn. The three typical stages of money laundering are placement, layering and integration.

2. Money laundering through the securities industry.

Because securities transactions are generally not settled in cash the securities industry is less at risk than mainstream banking from the initial placement of proceeds of crime. Most securities transactions are settled by cheque drawn on another financial institution at which the funds have already been deposited. Nevertheless, payment for securities in cash is not uncommon and the risk of registrants being used at the placement stage of a money laundering scheme cannot be ignored.

Registrants are probably more at risk of being used in the second stage of money laundering, layering, the use of multiple transactions and institutions to obscure the original source and the final destination of funds. Securities markets are attractive to the money launderer for several reasons. Markets offer a wide variety of available investment options, liquidity, portability and ease of transfer. Securities markets also have the capacity to absorb huge amounts of capital, lawful or illicit, without attracting extensive regulatory review. Unlike mainstream banking, securities transactions allow the money launderer to change the form of funds, not just from cash in-hand to cash on-deposit, but from cash to a secure and liquid asset in an entirely different form. Instruments that are cash equivalents, such as bearer bonds and other "street form" negotiable securities, may be particularly attractive as vehicles for money laundering.

For these reasons, securities markets can offer the sophisticated money launderer an ideal route for effective integration of the proceeds of crime into the legitimate economy.

3. Purpose and consequences of the Proceeds of Crime Act.

The Proceeds of Crime Act and Regulations establish the minimum records that registrants and other financial businesses must create and retain. These records will facilitate detection, investigation and prosecution of money laundering offences under the Criminal Code, the Food and Drugs Act and the Narcotic Control Act. The Proceeds of Crime Act also requires that registrants verify the identity of their clients and those who have authority over client accounts.

Anyone contravening or failing to comply with the Proceeds of Crime Act is guilty of an offence and liable to fine or imprisonment. Registrants should review the Proceeds of Crime Act and Regulations carefully and discuss the requirements of the legislation with their professional advisers and staff to ensure that violations do not occur.

The staff of the Commission will consider compliance with this legislation in assessing a registrant's ongoing suitability for registration in this jurisdiction.

4. What records must registrants keep?

Many of the records required to be kept under the Proceeds of Crime Act are already required under section 29 of the Securities Regulation, B.C. Reg. 270/86. Others, such as the large cash transaction records described later in this notice, are new.

The new legislation requires that registrants keep the following records:

(a) Signature of Authorized Individuals

Registrants must obtain and keep on file the signature of each individual authorized to give instructions for an account. The signature can be on a signature card, account agreement or new account application form.

(b) Account Number of a Bank, Trust Company, Credit Union or Caisse Populaire

To develop an audit trail for client funds, registrants must record and keep on file the chequing or savings account number of the deposit taking institution used by the authorized individuals.

(c) Client Documentation and Monthly Statements

Registrants must keep, for each client, a file containing the account application forms, trade confirmations, account agreements, correspondence with the client, and copies of all monthly account statements.

(d) Large Cash Transaction Records

Registrants must keep records of all cash transactions greater than $10,000 for any account.

5. Who must the registrant identify?

A registrant must verify the identity of all individuals authorized to give instructions for a client's account. This requirement is effective for all new accounts opened after March 26, 1993. However, if the account is owned or operated by a Canadian financial institution (such as a chartered bank, co-operative, insurance company, or trust and loan company), or another Canadian registrant, then the registrant need not verify the authorized individual. In these circumstances the registrant may rely on the financial institution, dealer or adviser who is operating the account to verify the identity of the client.

6. How should a Registrant verify the identity of an authorized individual?

The Proceeds of Crime Act provides three ways for registrants to verify the identity of the individuals authorized to give instructions for accounts.

a. Physical Verification

The registrant can compare the signature of an authorized individual to the signature on a driver's licence, passport, or similar document. The registrant can verify the signature in the initial meeting with the client when the client completes the new account application form.

b. Cheque Verification

The registrant can ensure that a cheque from the authorized individual is properly cleared through the Canadian financial institution on which it was drawn.

c. Bank Reference Check

Registrants can confirm that the authorized individual holds the bank, trust or credit union account disclosed on the new account application form by checking directly with the financial institution.

Regardless of how the identity is verified, a registrant must do so within six months of opening an account.

Practically speaking, in many cases the client's signature can be obtained at the time of account opening. The Commission expects that registrants opening accounts by telephone should generally ensure that the client's signature is on file within three weeks, which is a reasonable length of time to mail the application form or signature card to the client and have it signed and returned.

7. What are large cash transactions?

Large cash transactions are defined as cash transactions greater than $10,000 in any one day, by or on behalf of one person. Multiple transactions on the same day must be treated as a single transaction for the purpose of the reporting requirement. Under the Proceeds of Crime Act registrants must record significant information relating to every large cash transaction, including:

• the name of person from whom the cash is received
• the person's address, occupation and nature of business
• the date and nature of the transaction
• the number and identity of the accounts which are affected by the transaction
• amount of cash received and the currency

Registrants may wish to use the attached "Declaration of Funds" form for this purpose.

8. How long must registrants keep client records?

The Proceeds of Crime Act requires that registrants must keep the required client records for five years. This is the same period of retention specified by the Securities Regulation. 

9. Can registrants keep automated records?

Registrants meet the record retention requirement by keeping, on file, computer coded or microfiche records of client documents, monthly statements, and large cash transactions. Registrants must be able to provide printed copies of these records if requested.

10. Designated director or other officer.

Registrants must designate a director or other officer to be responsible for compliance by the registrant and its employees and agents with the Proceeds of Crime Act.

Registrants should formulate and adopt a clear policy statement on money laundering based on the current federal statutory requirements. This statement should be provided in writing to all management and staff involved in investment operations and the registrant should review the statement on a regular basis.

11. How does a registrant recognize suspicious transactions?

Money launderers use an almost unlimited array of types of transactions, and therefore it is difficult to define a suspicious transaction. However, a suspicious transaction will often be one which is inconsistent with an investor's known legitimate business or personal activities or with the normal business of that type of investor. The key to recognizing a suspicious transaction is knowing enough about the investor's business or investment objectives to recognize when a transaction, or series of transactions, is unusual.

To prevent the investment industry from being used for money laundering, registrants should consider the following questions before entering into a transaction:

• Does the registrant know the investor personally?
• Is the transaction in question in keeping with the investor's investment objectives?
• Is the transaction in keeping with normal practice in the market to which it relates, i.e., with reference to market size and frequency?
• Is the role of any intermediary involved in this transaction unusual?
• Is the transaction to be settled normally?
• Are there other transactions linked to the transaction in question that could be designed to disguise money and divert it into other destinations and beneficiaries?

Some situations are more prone to money laundering activities. Registrants may need to make additional enquiries in situations in which:

• payment is offered in cash
• payment is by way of third party cheque without any apparent connection to the prospective investor
• payment is by cheque where there is a variation between the account holder, the signatory, and the prospective investor
• settlement either by registration or delivery of securities will be made to an unverified third party
• settlement will be made by way of bearer securities from outside a recognized clearing system

Registrants should introduce appropriate procedures to generate a level of awareness and vigilance to enable a report to be made to the designated director or officer responsible for compliance with the Act if suspicious transactions are encountered. The designated director or officer should be able to provide direction on suspicious transactions both internally and to law enforcement agencies.

At present there is no Canadian federal or provincial legislation requiring registrants to report suspicious transactions. However section 462.47 of the Criminal Code provides immunity from civil and criminal prosecution for individuals providing information relating to transactions suspected of being the proceeds of crime. The designated director or officer responsible for compliance with the Proceeds of Crime Act should report suspicious transactions to the proper law enforcement agencies.

DATED at Vancouver, British Columbia, on April 1, 1993.

Dean E. Holley
Superintendent of Brokers