Gryphin AdvantageAnti-Money Laundering and

Anti-Terrorist Financing Training for Advisors

2014

CAILBA 2014

Agenda

• Refresher on money laundering• Review our compliance regime – why we do what we do.• Q&A

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What is Money Laundering?

• Any effort to disguise the source of money or assets derived from criminal activity. • The act of transforming dirty money into clean money.• Concealing or converting property or proceeds, knowing or believing the

property was derived from committing an offense.

• Money laundering is a prolonged and complicated process. Insurance products get used near the end of the process, when cash has already entered the banking system, been converted and has been through a few wash cycles.

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SCENARIO 1 – NO PICTURE ID

Potential customer shows a "passport" with no picture, saying that it is a military passport and that military passports do not have pictures. When asked for another form of ID, the person is unable to produce another and becomes irate, questioning whether the insurance company wants her business.

Lesson: It is critical that the customer (owner) be ID’d properly.

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SCENARIO NO. 2 – CHANGE IN PAYMENT BEHAVIOUR• A variety store owner applies for a corporate owned life insurance

policy. Valid articles of incorporation and documents verify its identity is accurate and complete.

• On the first of every month, the owner requests a loan, which is immediately paid back with “cash equivalents” like bank drafts and money orders.

Lesson: Businesses that take in cash are very attractive to money launderers and should be treated as high risk.

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SCENARIO NO. 4 – DISREGARD FOR MONETARY LOSSESA policy owner surrenders an annuity he held for less than one year.

The owner indicates that the fees and losses do not matter and demands to make the surrender immediately, asking that the money be wired to an account located in Europe.

Lesson: If a transaction doesn’t seem to make sense for the owner, that’s a red flag. Launderers are prepared to lose a lot of money to get clean money.

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SCENARIO NO. 5 – FOREIGN CLIENTS AND OVERSEAS MARKETSA broker says that 2 of his clients currently reside in North Korea but the

address of record of both clients is in Ontario. Both contracts have been in force for 10 years and were issued in Canada. You learn that 1 life insured lives in North Korea but the policy owner resides in Ontario. The other client is both the owner and insured of her policy and also currently lives in North Korea. Both policies are being paid via electronic bank drafts with funds from Canadian credit unions.

Lesson: Customers and agents with ties to countries known for terrorism and money laundering should be seen as high risk. Monitoring is required.

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SCENARIO NO. 6 – CRIME CONNECTION AWARENESS You become aware through the newspapers that a broker’s long-

standing client was involved in organized crime activities in a foreign country. The insurance policies have been on the books for many years. One provides for a death benefit of close to $1 million. The other is a UL product with a cash value of over $500,000.

Lesson: Red flags can pop up long after policy issue.

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What Laws Apply to Us?

• The Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations (“The Act”). • Canada is beefing up its AML-ATF efforts, so this is not going away.

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Who Enforces the Law?

• The Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) established as independent financial intelligence unit.• Collects and coordinates data in effort to recognize money laundering.• Primary responsibility for ensuring compliance with the Act. • Has authority to audit us without notice and levy penalties.

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Steep Penalties for Non-Compliance

• Failure to:• file a required FINTRAC report: up to 5 years in jail and/or $2 million fine• maintain a required record = From $500,000 to $1,000,000 for each offence.• implement a compliance regime and/or failure to assist FINTRAC in a

compliance review = up to 5 years in jail and/or a $500,000 fine.• Disclosing a STATR filing = up to 2 years in jail.• If any person or entity covered under the Act commits an offence, any officer or director may

be party to and guilty of the same offence and subject to the same penalties, depending on the facts. This ensures responsibility and accountability.

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Immunity and Due Diligence Defense

- Criminal or civil proceedings can’t be brought against us for making reports in good faith.

- Complying with the requirements of the Act provide us with some measure of protection if we do miss something.

- Lesson: making a suspicious transaction report is far less risky than not making it.

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What are the Stages of Money Laundering?

• Placement• Layering – where insurance products are affected. We never see cash,

but we see transactions that involve partially-cleaned money. This is the most common stage in the life insurance business. • Integration

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Why are Insurance Products and Mutual Funds Attractive?• Lots of investment options• Liquidity• Portability and ease of transfer• Can purchase in large amounts without triggering a regulatory inquiry• Insurance changes the form of the funds• Sometimes money launderers use dirty money to buy insurance

because they need insurance like the rest of us

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What are the Rules that Apply to Us?

Mandatory Compliance Regime – you must adopt a compliance program and ensure that your employees and those who act on your behalf comply with the Act.

Advisors do not act on behalf of the MGA. Some insurers make compliance program templates available for you to use. See also Advocis and IFB.

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Mandatory Compliance Regime

• Appointment of Compliance Officer• Development, application and maintenance of up-to-date written

policies and procedures.• Documented risk assessment• Ongoing training program for staff • Regular review of policies and procedures (at least every 2 years) –

“self assessment”

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AML Risk Assessment

If Product is non-registered- UL/whole life- segregated fund- endowment or annuity or- any plan with a lump sum payment of $100,000 or more,

Consider these higher risk.

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Risk Assessment Questions

1. Did you meet with the client? If “no”, this makes it high risk.2. If a money order was submitted, this is a higher risk.3. Does this sale involve trusts, corporations, foundations/charities?

Any complicated sale that makes it hard to figure out who’s doing what is a higher risk.

4. Is a lawyer, accountant, power of attorney or someone else acting for the client? This kind of involvement is a higher risk.

5. Was a 3rd party or PEFP is involved? Always a higher risk.

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Risk Assessment

7. Does owner’s or payor’s occupation generate a lot of cash, if known? (i.e. variety stores, pizzerias, money service businesses, jewellers, metal dealers etc).

Cash businesses are higher risk than others.

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Risk Assessment – Inforce Transactions

- Does an inforce transaction bump up cash value significantly?- Is a lawyer, power of attorney, accountant or someone else acting for the client?- Was a 3rd party or PEFP was involved in original sale? Is a 3rd party or PEFP

involved now?- Does transaction involve trusts, corporations, foundations, charities?- Is this a change of banking, address, payor, owner or beneficiary? All can be

a sign of fraud/money laundering- Is this a free look return?- Is this an unplanned dump in or additional deposit?- If a lump sum of $100,000 or more, has producer done PEFP determination?

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Trust Your Gut

According to FINTRAC, “as a general guide, a transaction may be connected to money laundering or terrorist activity financing when you think that it (or a group of transactions) raises questions or gives rise to discomfort, apprehension or mistrust.”You’re looking for things that seem out of the normal.

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Treat as high risk

• All PEFPs, all non-registered charities• High cash value policies• Any time something about a client sale doesn’t seem right• Whenever the answers or other information available cause you to be

concerned about what is being attempted with application or inforce transaction.

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Suspicious Transaction Reports (STATRs) to FINTRACYou are required to:• Submit within 30 days of having reasonable grounds to suspect a

transaction/attempted transaction relates to money laundering or terrorist activity financing offenses. No minimum dollar threshold. • Take reasonable measures to ascertain the identity of the person

making/attempting the transaction unless you believe this would tip the person off. You can’t disclose to the customer that you have filed a report. • Keep a copy of any STATRs you file.• This is why you risk-assess the business that comes in.

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Common Suspicious Transaction Indicators – The Client:• Doesn’t want mail sent to home address.• Uses same address but changes recipient’s name.• Is very interested in internal systems, controls, policies.• Home or business phone has been disconnected or there is no such

number when contact is attempted after account opening.• Insists on quick transaction.• Frequent transfers among client’s products.• Inordinate delay in presenting incorporation documents.• All identification is foreign or newly issued.

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Other Indicators – (Particularly if There are Other Red Flags)• Cheque offered is drawn on an account other than client’s personal

account.• Free look return.• Transaction involves payments coming from outside of Canada.• Using life insurance like a bank account, with frequent premium

payments and partial withdrawals.• Early surrender.

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Terrorist Group or Listed Property Reports to FINTRAC• You must report to FINTRAC if you have property in your possession or

control that you (or an associated person) knows is owned or controlled by or on behalf of a terrorist group or listed person. This includes a premium payment., benefit payment, or policy.• Criminal Code of Canada requires each Canadian, regardless of where

residing, to disclose to CSIS and the RCMP the existence of property in that person’s possession or control that meets the criteria above. • If anyone encounters any such circumstance, they may not complete or

be involved in the transaction or attempted transaction. They must remove themselves from any involvement . The property might need to be frozen.

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Time is of the Essence!! – Escalate Quickly!

• You only have a limited time to make any of the required reports before you’re in violation of rules, so don’t delay in acting on your concerns.• Better safe than sorry.

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Records Retention

• Records must be retained for 5 years from the date created or from the date of the last transaction. Records must be in machine-readable form or in electronic form with a proper electronic signature. They must be provided to FINTRAC within 30 days after a request.• (In fact, most policy records must be kept for 15 years past date of

policy termination, according to insurers’ rules).

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Client ID Records – Individual owners

For life, segregated fund and annuity policies where premiums paid over the life of the policy would reach $10,000 or more, you must verify client identity by referring to valid original documents within 30 days and by creating a record that contains the Owner’s • Name• Address• Date of birth• Principal business or occupation. • Advisor must also identify the “business relationship” with the customer – so

check to make sure that the “purpose for insurance” is identified on the application.

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Client ID and Beneficial Ownership – Corporate

ID Must be govt issued – information required includes Company’s:□ Name and address□ Name, address and occupation of all of the corporation’s directors)□ Information on ownership, control and structure of organization.□ Names and addresses of all direct or indirect beneficial owners (25% or more ownership) If unavailable, complete ID on most senior officer.□ Corporate ID (if missing, do a corporate search)

- If paper record, retain a copy- If electronic record, corp.’s registration number, type of document and source

of record.

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Client ID - Trusts• Name and address of all trustees and known beneficiaries and settlors

of the trust.• Information on ownership, control and structure of the trust.

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Ownership by entities other than corporations• Names and addresses of all beneficial owners• Information on ownership, control and structure of the entity.

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Our Client ID Procedures

Individual Policies• Insurers have embedded (most of ) the ID requirements on their

applications.• Check to make sure that all requirements are filled out• Check make sure that insurer has asked all the necessary questions.• Client means owner.• Ensure that you identify the purpose of insurance, as this is the same

as his “business relationship” with the owner.

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Not-for-Profit Organization Record

If owner is a not-for-profit organization, record must indicate:- whether the customer is a charity registered with CRA (check for CRA

number) or- a non-registered entity that solicits charitable financial donations.Non-registered charities are higher risk. Monitor closely.

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3rd Party Determination Record

• Advisors must make every reasonable effort to determine if a policy owner is acting on behalf of a 3rd party. If so, a 3rd Party Determination Record must be created.

• An individual Record consists of:- Name- Address- DOB- Principal business of the 3rd party- Nature of the relationship between the policyowner and the 3rd party.- Any suspicions of 3rd party involvement identified by the Advisor or staff.

• An entity or corporate Record consists of all above except DOB plus- Incorporation number- Place of incorporation

• Treat 3rd party involvement as high risk.

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Politically Exposed Foreign Person (“PEFP”) Record• For all lump sum payments of $100,000 or more for an immediate or

deferred annuity or life policy if owner is identified as a PEFP:• Source of funds used for the transaction• The position that causes this person to be a PEFP• Date PEFP status was determined• Name of senior management who reviewed within 14 days.• Date reviewed.• PEFPs are always high risk and must be monitored.

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Who Exactly is a PEFP?

Anyone who holds or has held one of these positions in a foreign country and their immediate family*:

• head of state or government• member of executive council or legislature• deputy minister• ambassador, attache or counsel• Military general (or higher)• President of state-owned bank or company• Head of government agency• Judge• Leader of a political party in a legislature• *spouse, partner, parent, child, sibling, spouse’s parent

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Procedure for Records, Client ID and Beneficial Ownership• Check all applications and change forms to make sure you have

completed the required information.• Check to make sure the insurer has actually included all the

requirements.• Retain a copy of the communications with the client, as evidence of

“reasonable efforts” to obtain the information• Where corporate records/ID are incomplete, attempt to do a

corporate search• Monitor higher risk cases

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Ongoing Monitoring Required for all High Risks• High cash value whole life, UL, non-registered segregated funds• Any policy with a premium of $ or more• Unexpected large dump-ins• Big, complicated cases or sales to professional corps., particularly

number companies or those that are cash businesses• Customers who have red flags• Country of origin or ties• Known criminal connections

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What About Privacy?

FINTRAC’s privacy safeguards include:• independence from law enforcement and other agencies to which it is

authorized to disclose information;• criminal penalties for unauthorized use or disclosure of personal

information under its control;• requirement that police get a court order to obtain further

information from FINTRAC; and• the application of the Privacy Act to FINTRAC.

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Risk Assessment

You are required to do a risk assessment at least every two years and client risk assessments for each new client.• Risk assessments should take into account• Product risk• Channel risk• Client risk• Supplier risk• Geographic risk• Other risk

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Regular Review of Policies and Procedures

• Policies and procedures represent “controls” that “mitigate” some of the risks of money laundering.• You have to kick the tires of our program at least once every 2 years.

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Staff Training• You have to train your staff • Use this PowerPoint as a starting point and also look to Advocis, IFB

• CLIFE (education provider) offers online AML compliance training.• Gryphin has arranged for a 20% discount for all courses and packages in the

2015 catalogue (GRY20).

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Q&A