Getting Ready for the June 1 FINTRAC Changes: Business Relationships
CATEGORY: Practice Tips
TAGS: 2021 FINTRAC Changes Anti-Money Laundering Business Relationships Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)
By Adam Feldman, CAMS, CAMS-RM, CSC, Guest Contributor
Brokerages have been required to conduct ongoing monitoring of their business relationships ever since the concept was introduced into regulation in 2014. At that time, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) clarified that a business relationship is established if a brokerage conducts two activities in a period of five years, which requires them to verify the identity of the client (both individuals and entities).
However, there have been a series of amendments made to the regulations, and effective June 1, 2021, brokerages are considered to have entered into a business relationship with a client the first time they are required to verify the client's identity. While the FINTRAC regulations designate brokerages as responsible, in practice these obligations are typically delegated to REALTORS®. With that in mind, this blog post will refer to “Realtors”.
FINTRAC states that you need to identify a client at the "time of the transaction", which FINTRAC defines as the time when the deed is signed. Given that you might not be present when the transaction completes and that you have a duty to identify a client regardless of whether a transaction completes, best practice would be to identify your client either at the time you first meet them or when you sign an agreement to represent them. If your client is a corporation or other entity, their identity must be verified within 30 days of the transaction, i.e. within 30 days of signing the deed.
The good news here is that the new business relationship requirements will only be applied to relationships that are established after June 1, 2021. So if you represented a client last year, and did not form a business relationship (ie. they did not conduct two or more activities within the last five years), you’re not required to do ongoing monitoring, unless you enter into a business relationship with them after June 1, 2021.
Also, when conducting a deal where the other party is unrepresented, although you're required to take reasonable measures to verify that party's identity as they are not your client, the identity verification doesn't trigger the establishment of a business relationship.
Help! I’m in a business relationship!
What happens once you enter into a business relationship?
- For starters, you'll need to keep a record of the "purpose and intended nature of the relationship." This is a record that describes why the client is using your services. For the real estate sector, this usually involves keeping a record that describes the type of property the client is or will be buying or selling. For example, purchase or sale of a residential property, purchase or sale of a commercial property, etc. The idea behind the purpose and intended nature record is that it should provide some context in terms of the types of transaction flows you'd expect to see throughout the relationship. Transactions that don't appear to be consistent with the purpose and intended nature should prompt additional questions and perhaps even the filing of a suspicious transaction report if those questions are not answered to your satisfaction.
- When you enter into a business relationship, you also need to make a determination as to whether a client is a politically exposed person, or PEP. We'll talk more about PEPs in a future post.
- In addition to making periodic ongoing PEP determinations, there are three additional ongoing monitoring requirements that Realtors need to conduct:
- Assessment of risk – When Realtors enter into a business relationship, they need to assess the relationship's risk. Due to the fluid and ever-changing nature of risk, Realtors also need to periodically reassess the risk of the relationship. The assessment of risk helps determine the frequency of ongoing monitoring.
- Transaction review – High-risk relationships need to be monitored to a greater depth and at a higher frequency than low-risk relationships. Realtors need to periodically review the transactions that their clients conduct to make sure the transactions are consistent with their understanding of the relationship and to identify any indicators of suspicious activity.
- Information review and update – Lastly, Realtors need to keep client information up to date. Specifically, Realtors need to periodically review and update the information such as their name, address and phone number), as well as information that might be used to assess the risk of a relationship. This could involve periodically contacting a client and asking them to confirm the information that is contained in your files. Information reviews must be conducted more frequently for higher-risk clients.
Ongoing monitoring measures need to be taken for all business relationships, even if the client doesn't conduct any additional deals after the business relationship has been established.
I want out of this relationship!
So, how does a business relationship end? A business relationship naturally expires five years after the client conducts the last transaction that requires the brokerage to verify their identity. It cannot be terminated earlier at the request of the client or the brokerage.
Business relationship requirements can be both time- and resource-intensive. These obligations and FINTRAC's focus on the sector demand solid compliance programs to comply with these new rules. Given their complexity and ongoing nature, technology-based approaches to support your compliance efforts may be the best option.
Be sure to check out the other blogs in this series at the links below:
- Getting Ready for the June 1 FINTRAC Changes: Beneficial Ownership
- 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
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