Getting Ready for the June 1 FINTRAC Changes: Beneficial Ownership
CATEGORY: Practice Tips
TAGS: 2021 FINTRAC Changes Anti-Money Laundering Beneficial Ownership FINTRAC
By Adam Feldman, CAMS, CAMS-RM, CSC, Guest Contributor
What is a beneficial owner, and why do I need to know?
A beneficial owner is defined in Canadian federal anti-money laundering regulations as an individual who owns or controls 25% or more of an entity. This could be through direct ownership or ownership of another entity. For example, Offshore Holdings Inc. owns 50% of Legitimate Business Corp., and Offshore Holdings is wholly owned by Boris Badinov. Boris, therefore, owns 50% of Legitimate Business Corp.
Bad guys love to use corporate and other types of entity structures to conduct transactions or make purchases using their proceeds of crime because these structures provide a perfect opportunity to remain anonymous and place extra layers between them and their dirty money. That's why it's so important to know who is directing and benefitting from real estate transactions that are conducted by an entity.
I'm sensing that this means new regulatory obligations...
Great instincts! Beneficial ownership requirements are nothing new to the Canadian anti-money laundering space, and money services businesses, banks and credit unions, securities dealers, and life insurance companies have long been required to determine who the individuals are that ultimately own their entity clients. As of June 1, 2021, real estate brokerages will be required to obtain and verify beneficial ownership information of their entity clients, as well.
Brokerages can obtain an entity's beneficial ownership information by referencing official documentation, such as an annual corporate return, asking the entity's representative for the information and keeping a record of their response, or having the entity's representative provide the information in writing.
As of June 1, whenever a brokerage needs to verify the identity of an entity, they'll be required to obtain information about the ownership and control structure and keep a record of the name and address of any individual who owns or controls 25% or more of the entity. If the entity is a corporation, the brokerage will also need to record the names of the directors. If the entity is a trust, the record needs to include the name and address of the trustee, and all known settlors and beneficiaries. For not-for-profit organizations, brokerages will also need to determine if the entity is registered as a charity with the Canada Revenue Agency and, if it's not registered, determine if the organization accepts donations from the public.
Speaking of not for profits, those types of organizations might not have individuals who own the entity. In this case, brokerages need to determine who controls the organization, for example, the board of directors or board of governors.
I need to verify the information, too?
Wait, there's more! In addition to obtaining information about the beneficial ownership and control structure of an entity client, brokerages will also need to make reasonable efforts to verify or confirm the accuracy of that information. The reasonable efforts made to verify the accuracy of the information cannot be the same as the efforts used to obtain the information. For example, it would not be acceptable to obtain a corporation's beneficial ownership information by referring to a shareholder registry and rely on that same document to verify the information.
If an entity is the owner of a property located in BC, you might be able to search for publicly available information in the Land Owner Transparency Registry, or LOTR. It's important to note, however, that the information publicly available through the LOTR is not always current and does not confirm title or ownership of estates and interests - it's merely a repository of records. If you're trying to verify the beneficial ownership information about the buyer, or you're unable to find your client in the LOTR, you can verify the beneficial ownership information by taking other measures such as asking the entity's representative to sign a document stating that the beneficial ownership information that they provided is accurate to the best of their knowledge.
Seems straightforward, right? Well, not quite. If the entity has a complex ownership structure, with multiple layers of parent-subsidiary relationships, relying on the entity's representative to promise they're telling the truth isn't going to cut it. In these cases, you'll need to refer to external, official documentation such as a shareholder register, partnership agreement or trust agreement. You'll also need to keep a copy of those documents in your records. You may also want to seek advice from your managing broker or legal professional.
Is that everything?
Almost! If you remember from the first blog post of this series, brokerages are required to conduct ongoing monitoring of their business relationships. As of June 1, 2021, these ongoing monitoring obligations include confirming beneficial ownership information. This means that brokerages will need to determine if there's been a change to the ownership and control information of their entity clients according to a risk-determined frequency. If they determine that there has been a change, they need to go through those same steps to record and verify the new information.
What if I can't verify the beneficial ownership information?
If, after your best efforts, and documenting the reasonable measures you've taken, you're unable to verify the beneficial ownership information, all is not lost. You can still represent the client; however, if you're in a business relationship with an entity, that relationship will automatically be classified as high risk and subject to all of the enhanced due diligence measures that go along with that classification. You'll also need to take reasonable measures to verify the identity of the entity's CEO or equivalent, using either the government-issued photo ID method, the credit file method or the dual-process method.
Did I say brokerage? I meant real estate professional!
While brokerages and real estate professionals are jointly responsible for suspicious transaction and terrorist financing reporting obligations, the responsibility for compliance with other federal anti-money laundering regulations belongs to the reporting entity, which is typically the brokerage. This is true of the new beneficial ownership obligations, as well. In practice, however, brokerages often delegate certain information collection and verification processes to real estate professionals and expect them to complete these processes in the manner specified by the legislation and regulations to ensure the brokerage remains in compliance.
Beneficial ownership determination imposes additional regulatory obligations for brokerages and requires the development and implementation of additional compliance procedures. However, understanding who ultimately directs and benefits from real estate transactions is an important step in keeping money from criminal activity out of BC's real estate market.
Be sure to check out the other blogs in this series at the links below:
- Getting Ready for the June 1 FINTRAC Changes: Business Relationships
- Getting Ready for the June 1 FINTRAC Changes: Politically Exposed Persons - Part 1
- Getting Ready for the June 1 FINTRAC Changes: Politically Exposed Persons - Part 2
- Getting Ready for the June 1 FINTRAC Changes: Virtual Currency Obligations
For additional information and resources on the June 1 FINTRAC changes, click here.
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