What homebuilders need to know about anti-money laundering compliance

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Corey Anne Bloom

By Corey Anne Bloom, CA•IFA, CFF, CFE, ACFE Regent Emeritus
EASTERN CANADA LEADER, FORENSICS AND LITIGATION SUPPORT, MNP

Canada’s housing industry is vulnerable to money laundering. The housing market is attractive to criminals and potential money launderers, for many reasons, including:

• Money launderers can enjoy the property, as a residence and/or to conduct criminal activities;
• A large sum can be laundered in a single transaction;
• Additional sums can be laundered during renovations; and
• Perception of real estate as a safe investment.

Many professionals in the housing industry, including home builders and developers, are unaware that they must comply with Canada’s money laundering/terrorist financing laws and regulations. Even when aware, compliance is often a challenge. Noncompliance leaves CHBA members potentially open to substantial fines and/or criminal charges.

What is FINTRAC?

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is Canada’s financial intelligence unit. Its mandate is to detect, prevent and deter money laundering and terrorist financing activities. Its enabling legislation – the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) – is aimed at meeting Canada’s international obligations to fight cross-border crime and terrorism, and to help Canadian law enforcement respond to organized crime. It achieves this by placing obligations for customer identification and record keeping on businesses susceptible to money laundering.

Records of financial transactions reported to FINTRAC are used to provide intelligence to law enforcement. This intelligence is only as good as the information provided to it from those business required comply with the Act. As a result, FINTRAC can audit the compliance programs of those businesses to ensure there are effectively designed and operating to help FINTRAC meet its obligations.

Corey Anne Bloom

Does your business need to take action?

The questions below will help you determine if you are required to comply with the PCMLTFA. If you are, you must take steps to comply with FINTRAC guidelines and avoid attracting administrative monetary penalties.

QUESTION 1: Are you a reporting entity?

FINTRAC defines a real estate developer as anyone who, in any calendar year since 2007, has sold to the public:

• Five or more new houses or condominium units,
• One or more new commercial or industrial buildings,
• One or more new multi-unit residential buildings each of which contains five or more residential units, or
• Two or more new multi-unit residential buildings that together contains five or more residential units.

If the answer is “yes” to any of the above questions, you are considered a real estate developer. Real estate developers are considered Reporting Entities by FINTRAC and they are obligated to comply with the PCMLTFA, including the requirement to build and implement a compliance program.

Reporting entities also include real estate brokers and sales representatives. The PCMLTFA considers individuals or entities as real estate brokers or sales representatives when they act as agents for the purchase or sale of a real estate property (new and resale), and are provincially registered and licensed to do so. This includes the buying or selling of land, houses and commercial buildings.

QUESTION 2: Do you have an exemption?

You may not be required to comply with the PCMLTFA if you answer yes to any of the questions below:

• Do you engage exclusively in property management activities such as leases and rental management transactions?
• Are you a real estate agent acting exclusively on behalf of a broker or developer?
• Do you sell properties through a real estate brokerage, which will in turn sell the units to the end buyer?

If any of these exemptions apply to you, it is recommended that you contact an AML specialist to help you make a definitive determination on your regulatory compliance obligations.

 

 

You’ve determined you do need to take action. Here are the next steps

If you are a reporting entity, you are obligated by the PCMLTFA and FINTRAC guidelines to build and implement a compliance program. An Anti-Money Laundering (AML) program comprises five pillars that must be incorporated for compliance. These five pillars are:
1. Compliance officer: Have you appointed a compliance officer? This individual will be responsible for implementing the compliance program and will be the first point of contact for FINTRAC.
2. Policies and procedures: Do you have written AML policies and procedures? This document must outline what requirements need to be met and how your program will meet them. At a minimum, the policies and procedures must be up-to-date and address: The compliance regime, reporting suspicious transactions, terrorist property, and large cash transactions, record keeping, ascertaining identities, use of personal information, business relationships and third-party determination.
3. Risk assessment: Have you performed a risk assessment of your business? This will include an assessment of the AML risks specific to your business, along with measures that will be taken to mitigate such risks. A risk-based approach will assess your business-level and relationship-level risk exposure from the perspective of four factors including products, services, delivery channels, geography, client and relationships, and other relevant factors.
4. Training: Are you providing ongoing Training to your staff? This will entail the development of a training program for all staff and agents, including those involved in real estate deals, which must be implemented and tailored to your business.
5. Effectiveness review: Have you performed an effectiveness review of your program in the last two years? At least a biennial testing program must be implemented to test the AML program and ensure it is effective and current. This assessment can be conducted by either internal or external auditors and FINTRAC expects rapid remediation of identified gaps or deficiencies.

Other regulatory obligations

In addition to ensuring you have an AML program in place, your company has other obligations, some of which are outlined below in brief. We’ve supplied more details for you at chba.ca/fintrac.

Know your customer (KYC): As someone who sells homes, you are required to verify the identity of persons and entities for certain transactions and activities, using one of the prescribed methods by FINTRAC. You are also required to enter a business relationship when certain criteria are met and conduct ongoing monitoring. Other KYC obligations include beneficial ownership and politically exposed persons determination and third-party determination.

Reporting obligations: You are required to file certain reports to FINTRAC, including Suspicious Transaction Reports (STR), Terrorist Property Reports, Large Cash Transaction Reports (LCTR), and Large Virtual Currency Transaction Reports.

Record-keeping obligations: You are also required to maintain large cash transaction records, large virtual currency transaction records, and records of all reports filed to FINTRAC, including Suspicious Transaction Reports, Terrorist Property Reports, Large Cash Transaction Reports, and Large Virtual Currency Transaction Reports. Other record-keeping obligations include receipt of funds records, information records, and the identification of unrepresented party records.

Seek assistance to ensure you are compliant

Creating and maintaining a compliance program does not have to be daunting. Third-party AML professionals can help ensure your organization meets all regulatory requirements, starting with evaluating your need for a compliance program and preparing or assessing your compliance program. They also will evaluate your training regime, help you seamlessly integrate your program, and keep your program relevant, up-to-date, and efficient by conducting independent compliance effectiveness reviews.
CHBA members can find more details on this topic at chba.ca/fintrac.