What Borrowers Need to Know About Anti-Money Laundering Legislation
August, 2012
By Peter Cook and Robert Fleet
Money laundering and terrorist financing is a common problem that no country, politician or law enforcement in the world has been able to escape, because it ranges from small individual operations to organized crime.
It’s been around for decades and it takes on many different forms, which makes it very hard to identify. It’s also been a hot topic over the last few years because of its direct correlation to a country’s economic growth, and is more than a billion-dollar problem in Canada alone.
New government legislation is cracking down on this illegal practice to help preserve the integrity of financial services industry and the social demand to put criminals behind bars. If you’ve applied for funding in Canada since 2008, you may have noticed new detailed requirements that – while certainly frustrating to navigate – provides a significant contribution to Canada’s defense against money laundering and other illicit financial activity.
Regulating bodies
Canada has several organizations to prevent money laundering and terrorism financing (AML). The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) was created in the early 2000s. The intention was to facilitate the detection, prevention and deterrence of money laundering and terrorist activity financing while ensuring the protection of personal information. To support the role of FINTRAC, the Office of the Superintendent of Financial Institutions Canada (OSFI) plays a valuable role by overseeing hundreds of financial institutions to verify their financial condition, ensure compliance with governing statute law and make the appropriate recommendations to FINTRAC. To help strengthen their efforts against financial fraud, FINTRAC and OSFI consulted with the federal government to amend the Proceeds of Crime (Money laundering) and Terrorist Financing Act, S.C. 2000, c. 17 (Act) in 2008. Real estate investors are now seeing the effects from changes to this act, as they purchase new properties, refinance debt and renew existing mortgages.
Effects of the legislation
The amendments have increased the burden on banks, credit unions, and other financial institutions to verify the identity of their client and prove the origin of equity for all real estate transactions. Mortgage lenders typically accomplish this by verifying the identity of the client with two pieces of ID and having them complete a detailed borrower information form. Lenders must also verify down payment proceeds by reviewing three months of bank statements to confirm the client has had the proceeds for an extended period of time.
In addition to borrowers providing identification for new mortgages, they will need to provide ID upon renewal of their existing mortgages funded pre-legislation. Both new and experienced investors are generally surprised by these extra steps when working with their lender, as they believe it is specific only to their institution. In fact, this is not the case as every FINTRAC and OSFI-regulated institution must abide by this legislation.
Penalties
To demonstrate just how seriously they take AML issues, FINTRAC and OSFI have implemented a strict auditing process for all regulated institutions. OSFI employs a number of methods ranging from regular monitoring, intensive document reviews and regular communication with the lender’s senior management. OSFI also reserves the right to audit any service provider of a regulated institution provided it gives reasonable notice. It provides feedback when necessary to insure the institutions and their service providers adhere to the provisions within the act. If an institution is found to be non-compliant, FINTRAC has the legislative authority to issue administrative penalties which can include:
| Infraction Type |
Penalty |
| Minor (individual/entity) |
Up to $1,000 |
| Serious (individual/entity) |
Up to $100,000 |
| Very serious (individual) |
Up to $100,000 |
| Very serious (entity) |
Up to $500,000 |
FINTRAC also has the ability to report extensive non-compliance to law enforcement. These infractions include:
| Infraction |
Penalty |
| Failure to report suspicious transactions |
Up to $2 million and/or 5 years imprisonment. |
| Failure to report a large cash transaction or an electronic funds transfer |
Up to $500,000 for the first offence. Up to $1 million for subsequent offences. |
| Failure to meet record keeping requirements |
Up to $500,000 and/or 5 years imprisonment. |
| Failure to provide assistance or provide information during compliance examination |
Up to $500,000 and/or 5 years imprisonment. |
| Disclosing the fact that a suspicious transaction report was made, or disclosing the contents of such a report, with the intent to prejudice a criminal investigation |
Up to 2 years imprisonment. |
These are serious offences that management of lending institutions cannot take lightly. Lenders must make sure they cross all their T’s and dot all their I’s when it comes to AML. Failure to comply with the AML legislation can be damaging to an institution with both monetary penalties and more importantly restrictions on their ability to lend.
With these mandatory provisions present in commercial financing and the regulatory bodies stepping up their efforts against money-launderers, lenders and borrowers should certainly expect additional hurdles to navigate in order to get their mortgages funded.
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