NEW ANTI-MONEY LAUNDERING AND ANTI-TERRORIST FINANCING REQUIREMENTS FOR BROKERS, LENDERS AND ADMINISTRATORS

How do the changes impact the mortgage brokering sector?

BY RAY BASI, J.D., LL.B., DIRECTOR OF EDUCATION FOR CMBA-BC AND MBIBC

Mortgage brokers, lenders and administrators are about to become subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act). This will trigger significant new compliance requirements. Why the change now? What is the change? What impact will the change have on mortgage brokers, lenders and administrators?

WHY THE CHANGE?

Money laundering is the process by which proceeds from criminal or illegitimate sources are concealed or disguised (that is ‘cleaned’ or ‘laundered’) to make them appear as if they are from legitimate sources. Terrorist financing is the collecting and providing of funds to fund terrorist activity. It is, of course, in society’s interest to make criminal and illegitimate activity less appealing by making it less profitable. As well, it is in society’s interest to make it financially less feasible for terrorists to carry out their activities in Canada or in other parts of the world.

The federal government in Canada Gazette, Part 1, Volume 157, Number 7: Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act expressed its views that: n Real estate is increasingly being used to launder illegitimate funds and to hold the wealth of criminal and terrorist groups. n There is a growth in the volume and value of mortgages issued by businesses that are not currently subject to the Act. n These mortgage lenders, unregulated under the Act, can be highly vulnerable to exploitation for money laundering/terrorist financing (such as by engaging in ordinary matters of helping clients borrow funds, or sending and receiving money).

The Act targets deterring, detecting, investigating and prosecuting money laundering and terrorist financing. Importantly, it requires “reporting entities” (specified businesses and occupations) to develop and implement compliance programs, including processes to identify clients, monitor business relations, keep records, and report specified types of financial transactions. Significantly, the Act establishes the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) as Canada’s primary anti-money laundering and anti-terrorist financing agency.

FINTRAC is both a regulator and financial intelligence unit. It enforces the requirements imposed on reporting entities and produces data and records to assist national and international agencies to combat money laundering and terrorist financing.

Mortgage brokers, lenders and administrators have to date not been included as reporting entities and so have not been subject to the Act or FINTRAC’s requirements. Others in the financing sector (such as banks, trust companies, loan companies and federal credit unions) have been included as reporting entities for quite some time.

The federal government believes that not including mortgage brokers, lenders and administrators as reporting entities for purposes of the Act makes them more vulnerable to being exploited for money laundering and terrorist financing purposes.

The vulnerability for this group relates particularly to both receiving funds that are proceeds of crime (for example, down payments and

The federal government believes that not including mortgage brokers, lenders and administrators as reporting entities for purposes of the Act makes them more vulnerable to being exploited for money laundering and terrorist financing purposes.

repayments of loans) and lending potential proceeds of crime to clients. The federal government believes including entities of all sizes that are involved in the mortgage lending process (mortgage originators, lenders/ underwriters and administrators) as reporting entities would reduce the vulnerabilities of these entities being misused for money laundering or terrorist financing activities. Accordingly, the published draft regulations would include mortgage brokers, mortgage lenders and mortgage administrators as “reporting entities.” The proposed definitions are sufficiently broad that together they would take in most persons engaging in the mortgage arranging and administering process. Specifically, they provide:

n “mortgage broker”: a person or entity that is authorized under provincial legislation to act as an intermediary between a mortgage lender and a borrower;

n “mortgage lender”: a person or entity, other than a financial entity, that is engaged in providing loans secured by mortgages on real property or hypothecs on immovables; (Note: Financial entities are covered otherwise than by this definition.)

n “mortgage administrator”: a person or entity, other than a financial entity, that is engaged in the business of servicing mortgage agreements on real property or hypothec agreements on immovables on behalf of a lender.

n Apply customer due diligence measures;

n Keep appropriate records;

n Report certain types of transactions;

n Have a compliance officer;

n Have a compliance program in place;

n Have a training program in place;

n Have a training plan in place; and

n Review your compliance program at least every two years.

THE TAKEAWAY

Suffice to say that by virtue of being included as a reporting entity for purposes of the Act, the compliance requirements imposed on mortgage brokers, lenders and administrators will increase significantly. For a more detailed discussion of the contents of the compliance program, as it concerns money laundering and terrorist financing, please read the companion article in this magazine (p.24).

This article is not intended as legal advice. You are advised to obtain legal advice in specific instances.