1. Money laundering & terrorist financing ‘red flags’
Earleen Moulton
Manager, Market Conduct Compliance

2. Why do we need to care about this?

3. Why Canada? Canada is an attractive territory:
Stable currency and economy
Large, mostly unprotected border
High volume of business transactions and exchanges with the U.S.

4. Why are financial products a target?
Many possibilities in terms of investment
Liquidity
Transferability and ease of making transfers
There are many attractive features about life insurance, mutual funds and segregated fund products for money laundering and terrorist financing. These products offer many possibilities in terms of investment, conversion into cash and transferability, and are somewhat flexible when it comes to transfers. It is possible to withdraw large sums without any controls by the regulatory authorities.
Insurance and investment transactions allow money launderers and terrorist financiers to convert the money, not only by making it look like a deposit, but also by converting it to legitimate liquid assets in any other form. A reimbursement cheque for a large amount of money issued by an insurance company or mutual fund company is an example of this.

5. What is a suspicious transaction?
Definition:
Financial transaction that you have reasonable grounds to suspect is related to a money laundering or terrorist financing offence
Consider:
No monetary threshold
Can include several factors, which on their own, are insignificant, but together, can raise suspicions
Taken out of context, are unusual business practices
Now must report attempted transactions, too
“Reasonable grounds” mean that which is reasonable under the circumstances, namely the normal practices and business systems of our industry.

6. “Attempted” Suspicious Transactions
An attempted transaction is more difficult to define than one which has actually happened, so you need to be more proactive in your thinking when it comes to this kind of activity
A good rule of thumb- if a client is asking about the possibility of doing something which seems suspicious, even if it does not proceed, it should be reported

7. Potential product ‘red flags’
Universal life insurance
Non-registered annuities or investments
Mortgages
Whole life insurance

8. Red flags related to client behaviour
The client does not want to receive mail at home
The client is unusually curious about in-house systems, controls and policies
The client is overly insistent in justifying the transaction
The client tries to have a close relationship with you
The client offers money, a tip or special favours for the services that could seem unusual or suspicious
Other examples are given on the advisor site
Once again, these indicators alone do not necessarily mean this is a case of money laundering. There must be a group of elements and circumstances that lead you to have a reasonable doubt.

9. Red flags related to the parties to the transaction
Politically exposed foreign persons (PEFP)
Beneficial Owners
Client Is “Not Physically Present”
Third party as owner, payer or payee
A politically exposed foreign person (PEFP) is an individual who holds or has held one of the following offices or positions in or on behalf of a foreign country:
a head of state or government;
a member of the executive council of government or member of a legislature;
a deputy minister (or equivalent);
an ambassador or an ambassador’s attaché or counsellor;
a military general (or higher rank);
a president of a state owned company or bank;
a head of a government agency;
a judge; or
a leader or president of a political party in a legislature.
A politically exposed foreign person also includes the following family members of the individual described above:
spouse or common law partner;
mother or father;
child;
brother, sister, half-brother or half-sister; or
spouse’s or common-law partner’s mother or father.
Beneficial owners: need to obtain information about individuals who own or control 25% or more of the entity or organization (non-individual entities = corporations, partnerships, associations and non-profit organizations)
Non face to face attestation: New identification requirements for individuals “not physically present” at the time of the transaction (i.e. phone or internet sales); Where clients or plan members are not meeting with an advisor

10. Transaction ‘red flags’
International transactions/transfers
Single large premium
The transaction is unnecessarily complex or disadvantageous
Premature surrender/policy cancellation
Payment of premiums by a third party or from multiple sources

11. Transaction ‘red flags’
Significantly accelerated financing of a policy
Apparent unintentional overpayment, especially if the refund is for a third party
Use of an insurance product as a bank account
Early surrender of the policy
The client makes payments using money orders
MORE examples:
The client asks for an insurance product without any apparent justification and is reticent to explain the reason for the investment
The client, who holds other policies for smaller amounts or who makes transactions financed by way of regular payments, suddenly asks to buy a policy for a large amount in one single payment
The client makes a transaction that results in a notable increase in his premiums
The client cancels an investment or insurance contract shortly after purchasing it

12. Real cases Premium deposit of $1million into 2 single-premium policies
Early surrender resulting in a loss of 40% of the initial assets
Goal: avoid paying creditors during a fraudulent bankruptcy
Major deposits into 4 universal life policies
Originating from Latin America and Eastern Europe
Goal: launder money from sale of drugs

13. What have we learned….

14. Which of the following scenarios would you identify as suspicious
Which of the following scenarios would you identify as suspicious? Select 2 choices
A) Large sums of money are regularly transferred to a couple of accounts in another country by members of a registered charity. The transactions appear in keeping with the humanitarian relief projects conducted by the organization
B) Within a month, a client sends several money transfers just under the reporting requirement of $10,000 to two individuals at the same location in a country of concern
C) Funds are generated by a business in Germany that is owned by a citizen of Sweden
D) An individual reportedly earns $35,000 a year but had a turnover of $35,000 in his account
Answers = B & D
« B and D »

15. True or false?
Since terrorist funding can come from legitimate sources, contributors might not know that the money they are giving is being used to support terrorist activities.
Answer = True
« True »

16. Select two of the following that will help you recognize a suspicious transaction.
Know the nature of your customer’s business
Know when a transaction makes little business sense
C) Know how to maintain customer records
D) know when to comply with law enforcement agencies
Answers = A & B
« A and B »

17. Out of the following scenarios, identify which two are suspicious:
A) A customer receives large incoming wire transfers on behalf of a foreign client, and is reluctant to provide an explanation
B) A business provides information regarding its previous banking relationships, officers and location
C) A customer asks if he wire transfers $7500 in the morning and $2500 in the afternoon, does he still have to report the transactions
D) A customer suddenly repays a problem loan with money she inherited
Answers = A & C
« A and C »

18. Which two of the following scenarios would you identify as suspicious?
A) You are a bank manager and a client who is a factory manager introduces two company managers to you who would like to open commercial bank accounts.
B) You have written an application for life insurance and the client provides payment in the form of 18 money orders totaling $9,088 that range from $88 to $1,000. The 25-year old client does not have a checking account.
C) You are doing a wire transfer for a client but when you ask where the recipient lives, the client replies: “I do not know where this person is located.”
D) You discover that a client has been withdrawing small amounts of funds that are automatically deposited into his account to send via an informal value transfer system to his family in India.
Answers = B & C
« B and C »

19. How to evaluate your suspicions
Knowledge of:
the client’s business
his financial history
his past investment behaviour
Does the transaction raise questions or give rise to discomfort, apprehension or mistrust? 
Trust your gut!
Keep in mind that it’s the behaviour that is suspicious not the person.

20. What to do if you believe you are dealing with a suspicious transaction?
Complete the report to FINTRAC, even if the transaction is only attempted
Process the transaction as usual
Do not warn the client that you are submitting a report
There’s no penalty for reporting