Staying Anti-Money Laundering Compliant in Your Practice

You need to remember many things when deciding to become an independent financial advisor. From creating a healthy work-life balance to implementing a solid feedback culture or even adopting the use of technology to serve your clients better…there’s no shortage of balls you need to juggle. And while it all may seem overwhelming initially, one significant component can be easy to overlook: fulfilling Anti-Money Laundering (AML) and other reporting requirements mandated by different regulatory bodies. Money laundering is the process of disguising the source of funds coming from illegal means. In plain language, it is essentially “washing” or “cleaning” illicit funds into legal and clean money.

Money laundering poses a significant risk to the integrity and stability of the international financial system and, on a broader scale, the entire global economy. Many criminals rely on laundered funds to participate in illegal activities like embezzlement, insider trading, bribery, and computer fraud schemes. It’s overly simplified to think that money laundering is only about transactions. In reality, money laundering can be achieved through virtually every medium, financial institution, or business.

It’s essential to have an AML program and remain compliant with regulations to protect your business as well as your clients. So, let’s go through the basics to ensure your practice stays out of any regulatory crosshairs.

What is money laundering?

Money laundering often involves disguising financial assets through a complex series of transactions that are difficult to distinguish. In a nutshell, it’s broken into three stages: Placement, Layering, and Integration.

1. Placement — The first stage involves introducing illicit funds into legal and formal financial institutions, casinos, and other legitimate businesses. It is also at this stage where money laundering is most often detected. Typical examples include repaying legitimate loans using laundered funds, breaking up funds into smaller amounts and depositing them into different banks or accounts, or gambling at the casino.
2. Layering — Once the illicit funds have arrived, criminals begin moving the funds around and creating complex layers of transactions to mask the original source. The ultimate goal is to obscure the audit trail, often making this stage the most complex and difficult to detect. Some examples include moving funds from financial institution to another, moving funds from country to country and investing in real estate, shell companies or legitimate businesses.
3. Integration — The final stage is the re-entry of funds back into the economy, essentially returning the money to the criminal through legitimate business or personal transactions. Examples of how integration occurs include investing in high-value assets, luxury goods, or business ventures.

Who oversees AML reporting?

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is Canada’s financial intelligence unit. Their mandate is to ensure the compliance of businesses subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and associated regulations. They also generate actionable financial intelligence for law enforcement and national security agencies to assist in the investigation of money laundering and terrorist activity financing offences or threats to the security of Canada. In addition, FINTRAC outlines guidelines and requirements with which reporting entities must comply.

What happens if I don’t comply?

FINTRAC has the authority to issue administrative monetary penalties (AMPs), which are civil penalties to individuals and entities that fail to comply with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. In severe cases, individuals may also be charged criminally for non-compliance, resulting in heftier fines or even imprisonment. This may sound extremely severe and intimidating, but non-compliance leading to imprisonment is not overly common — some entities choose to over-report to avoid potential errors or oversights.

What activities must I report?

While considering compliance when going independent may feel daunting, you can ensure you meet the requirements with a proper compliance program. Here are a few tips to get you started. The following is by no means an exhaustive list, but these are some of the key things you’ll have to do to stay AML-compliant:

• Client identification
• Use appropriate methods for verifying your client’s identity
• Identify Politically Exposed Persons and Heads of International Organizations
• Initial risk assessment of your business
• Ongoing monitoring, including:
• Enhanced monitoring of high-risk clients (you must determine which clients pose a low, medium, or high risk to your practice and monitor these clients accordingly)
• Reviewing clients to confirm if any are on the sanctions list and reporting to the regulators as identified
• Suspicious transaction reporting (any potential concerns that transactions are related to money laundering or terrorist financing)
• Large cash reporting (transactions that exceed $10,000)

One thing to note is that everyone’s AML compliance program is different. Firms can and should tailor their AML program to fit their business model, business needs, and risks. You should consider various criteria like the number of clients, the types of transactions your clients engage in, and the types of accounts your practice maintains. The fundamental elements or requirements of an AML program are outlined in the four pillars:

1. Develop your internal policies, procedures, and controls.
2. Designate or hire a compliance officer in your practice. This person will be responsible for understanding, implementing, and overseeing the policies and procedures outlined in your AML program
3. Train your employees regularly. All employees must receive ongoing training as it pertains to your AML program — this usually happens annually.
4. Conduct an independent audit or testing function to test the overall effectiveness of your AML program, identifying any deficiencies and weaknesses. Please note that the person conducting this audit cannot be the designated compliance officer.

The Bottom Line

AML compliance may seem like a lot to consume, but please do not feel overwhelmed; these are only a requirement to safeguard you and your clients. By understanding what money laundering is and the need for transparency — especially as a financial advisor — you can properly implement an AML program into your practice. You will find that these requirements will integrate into your practice seamlessly and become just another part of your regular business activities.

-John Leung is a compliance manager at Purpose Advisor Solutions