Getting Ready for the June 1 FINTRAC Changes: Politically Exposed Persons - Part 2
CATEGORY: Practice Tips
TAGS: 2021 FINTRAC Changes Anti-Money Laundering FINTRAC Politically Exposed Persons
By: Adam Feldman, CAMS, CAMS-RM, CSC, Guest Contributor
If you remember last week's post, starting on June 1, 2021, brokerages will need to determine if an individual with whom they are dealing is a politically exposed person (PEP). A PEP is an individual who holds a senior position in a government, military, judiciary or international organization. PEPs fall into one of the following categories:
- foreign PEPs,
- domestic PEPs,
- heads of international organizations (HIOs), or
- relatives and close associates of a domestic or foreign PEP or HIO.
For simplicity's sake, we'll refer to them collectively as "PEP's", unless there's a reason to differentiate.
The last post also talked about the different ways that you can determine if you're dealing with a PEP.
Now that we're all caught up, let's continue the discussion!
What do I do if I determine that the individual is a PEP?
Once you've determined that you're working with an individual who is a PEP, your next step is to determine if you're dealing with a high-risk PEP. If you determine that the individual is a foreign PEP, this is a very simple determination, as all foreign PEPs are considered to be high-risk PEPs forever by federal anti-money laundering legislation.
If you determine that the individual is a domestic PEP or HIO, you'll need to conduct an assessment to evaluate if they're a high-risk PEP. When assessing the risk of a domestic PEP or HIO, you can consider the same factors that you use to evaluate the risk of all your business relationships. You might want to consider other factors as well, such as:
- whether the individual currently holds the office or position and, if they don't, how much time has elapsed since they left office;
- if the individual attempts to shield their identity;
- if the person uses intermediaries, such as an accountant or lawyer, which is unusual based on the nature of the deal;
- if the person uses family members or close associates as legal owners for property or entities in a way that doesn't fit the person's profile;
- if the person is associated with an industry that has been identified as being vulnerable to corruption by Transparency International;
- whether there is any adverse media that indicates that the institution in which the individual serves or served, has a reputation for corruption; and
- if the individual provides you with inaccurate information or is reluctant to provide you with the additional information you need to evaluate their risk.
Whatever methodology you use to assess the risk of domestic PEPs and HIOs, make sure you document it as part of your risk-based approach and follow your FINTRAC obligations, and brokerage's policies and procedures.
I've completed my risk assessment. Now what?
Other than conducting ongoing monitoring and record keeping, as you're required to for all business relationships, if you determine that the individual is not a high-risk PEP, you don't need to take any further actions, aside from keeping a record of your assessment of the PEP's risk. If, however, you assess the PEP as representing a high risk, there are a few enhanced measures that you need to take depending on what triggered the high-risk PEP determination in the first place.
If you determine that an individual is a high-risk PEP, after entering into a business relationship or as a result of ongoing monitoring of a business relationship, you need to take reasonable measures to establish their source(s) of wealth. This means that you need to try to understand the individual's financial profile. Where does their money come from? Some common sources of wealth include salary, business income, investments and inheritance. Reasonable measures to determine source(s) of wealth could include asking the individual, using an enhanced due diligence research service, or conducting online, open source research on the individual. You also need to conduct the same enhanced due diligence measures that are documented in your brokerage's policies and procedures that you would conduct for all your high-risk business relationships.
Although unlikely, if you determine that an individual is a high-risk PEP as a result of receiving $100,000 or more in cash or the equivalent value in virtual currency, in addition to taking the enhanced measures described above, you also need to take reasonable measures to determine the source of funds (or virtual currency) that was used for the transaction. Examples of sources of funds could include savings, sale of real estate and sale of a car or boat. But that's not all. Once you've taken reasonable measures to determine the source of funds and source of wealth, you'll also need to get a managing broker to review the transaction.
How much time do I have to complete PEP obligations?
Brokerages have 30 days from the date of the event that triggered the PEP determination requirement to:
- make the PEP determination,
- conduct the risk assessment (for domestic PEPs and HIOs), and
- complete the enhanced measures (for high-risk PEPs).
What records do I need to keep?
Regardless of the outcome, brokerages need to keep a record of the outcome of that determination. If it's determined that the client is a domestic PEP or HIO, you need to keep a record of your assessment of whether the individual is a high-risk PEP. For high-risk PEPs, you need to keep that information plus the following records:
- the office or position that the individual holds or held,
- the name of the organization or institution in which the individual serves or served,
- the date that the PEP determination was made, and
- the individual's source of wealth (if known).
In the unlikely event that the PEP determination was made as a result of receiving $100,000 or more in cash or virtual currency, your records will also need to include:
- the source of the funds or virtual currency that were used for the transaction (if known),
- the name of the managing broker that reviewed the transaction, and
- the date of the managing broker's review.
Remember, brokerage really means real estate professional!
Although both brokerages and real estate professionals have obligations to comply with federal anti-money laundering regulations related to reporting suspicious transactions or the possession or control of terrorist property, the bulk of the compliance obligations, including the requirement to make a PEP determination, fall to the reporting entity. This is typically the brokerage. However, a brokerage often delegates certain compliance processes to their real estate professionals who help the brokerage remain compliant by conducting those processes in the manner specified by the legislation, regulations, and brokerage policies and procedures.
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: Beneficial Ownership
- Getting Ready for the June 1 FINTRAC Changes: Politically Exposed Persons - Part 1
- Getting Ready for the June 1 FINTRAC Changes: Virtual Currency Obligations
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