By Christine J. Duhaime
The Canadian government is undertaking a potentially significant revision to its anti-money laundering (AML) and counter terrorist financing regime that will affect Realtors by increasing the reporting, record-keeping and client due diligence obligations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PCMLTFA) and by increasing the regulatory costs for Realtors to comply with the changes. This latest set of proposed changes is in addition to those proposed by the government in November 2011.
The key changes that will affect Realtors are as follows:
1. Increased client due diligence for introduced businesses – Realtors often refer clients to banks, insurance companies, mortgage brokers and notaries and they often acquire clients from such referrals. Under the AML Proposals, when clients are introduced to Realtors by other reporting entities in the AML regime (such as banks or notaries), the Realtor will be required to receive from the introducer the documents they used to verify the client, and to retain the information as part of his record-keeping obligations with the aim of making it available to the Financial Transactions Reports Analysis Centre of Canada (FINTRAC).
2. Obtain current corporate records – Currently, Realtors who deal in commercial real estate transactions, or who sell residential properties to or on behalf of companies, partnerships or other legal entities, are required to take steps to confirm the identity of the legal entity and to maintain those records. Realtors often rely on certificates of incorporation for such identification purposes. Under the AML Proposals, when dealing with corporate clients or legal entities, Realtors will now be required to obtain incorporation documents, including certificates of incorporation, that are no more than 12 months old. The proposed requirement will be impossible to be complied with by Realtors unless the legal entity is less than 12 months old, since certificates of incorporation are issued by corporate registries upon incorporation. For a company more than a year old, Realtors must obtain certificates of incorporation, yet those certificates will be unacceptable for the purposes of compliance with the PCMLTFA.
3. Change the phrase “third party” to “instructing party” – Under the AML Proposals, the term “third party” will be changed to “instructing party” to clarify to all reporting entities, including Realtors, that when there is a large cash transaction, or a client record being created, Realtors must take reasonable measures to determine if the client is acting on the instructions of another party (whether individual or corporate) and if so, Realtors must obtain information on the other party. The change is prompted by the view of FINTRAC that reporting entities do not understand the term “third party”.
4. Require the reporting of large cash transactions among agents – Under the AML Proposals, Realtors and developers would be required to report large cash transactions among themselves. The AML Proposals are not clear on how this would operate and which transactions are contemplated but given the broad wording, it may contemplate, for example, the reporting of transactions among agents and offices operating under the same marking banner (such as Re/Max) since they are “affiliated entities.” This may result in double-reporting of many large cash transactions.
5. Provide FINTRAC with greater enforcement tools against Realtors – Currently, Realtors and the directors and officers of developers and agent offices that are reporting entities are subject to some of the highest criminal and administrative penalties in the country under the PCMLTFA. For example, the PCMLTFA imposes a penalty of five years imprisonment and a fine of $500,000 for Realtors for certain failures to report to FINTRAC or keep records under the PCMLTFA. Under the AML Proposals, FINTRAC would be given even greater sanction power against reporting entities, such as the power to impose recurring fines and penalties.
6. Documentation of reasonable measures taken – Currently, Realtors are required to take reasonable measures to ascertain identity and other information when completing suspicious transactions or when completing third-party determinations. Under the AML Proposals, Realtors will now be required to document and keep a record of the measures they took. This requirement will expose Realtors to additional fines and penalties because ultimately it will be up to FINTRAC to determine whether, in its view, the measures taken were “reasonable” or not.
7. Require more suspicious transaction reports – Currently, Realtors are required to report a suspicious transaction in limited circumstances. If there is a financial transaction occurring or attempted in the course of the real estate agency’s activities (for example, related to client transactions), and the Realtor has “reasonable grounds to suspect” that the financial transaction is related to the commission of a money laundering or terrorist financing offence under the Criminal Code of Canada, it must be reported. If all those conditions are not met, the Realtor has no obligation to file a suspicious transaction report since the conditions’ precedent is not met.
The reporting threshold was kept high on purpose to avoid over-reporting of personal information and to maintain a balance in the law. Under the AML Proposals, however, Realtors will now be required to report non-financial transactions that may be suspicious if there is a connection, however tenuous, to activities undertaken for the purposes of an eventual financial transaction, such as opening up an account.
The AML Proposals are expected to be implemented by this summer.
Christine J. Duhaime is a lawyer with Duhaime Law in Vancouver. She has a specialized practice in anti-money laundering and advises reporting entities, including Realtors, with respect to their reporting obligations. She is a Certified Anti-Money Laundering Specialist. Email [email protected].
