Real Estate Developers

Christopher:: Good afternoon, I'd like to welcome you to today's FINTRAC Webinar on new requirements for real estate developers in anti-money laundering and anti-terrorist financing regulations. Thank you very much for being with us this afternoon. My name is Christopher and I will be moderating our discussion. I would like to introduce you to one of my colleagues, Marilyne Landry, who is the manager of Program Development here at FINTRAC. She will be presenting the webinar this afternoon. Welcome, Marilyne.

Marilyne:
Good afternoon.

Christopher:
Now I want to encourage all of you to ask any questions that you have at any point during the webinar. We will be taking pauses at various points to go through some of your questions, and we'll also stop at the end to address any remaining questions. You'll find an email address on your screen and that's the way to send us questions so we'll get them in real time. And feel free, as I said, at any point to send them along. I'll also note that in order to move between slides you'll find arrows on your screen to move the slides back and forth so you can move forwards and backwards as you wish, and Marilyne will let you know when she's moved onto the next slide so you can follow along. And with that I will turn things over to Marilyne.

Slide 2

Marilyne:
Thank you so much, Christopher, and welcome to everyone. Thank you for taking time out of your busy schedule to join us this afternoon, or morning, if you're joining us from the Western Coast. I will jump straight to slide number 2, which will provide you with an overview of the material we'll be covering today. There'll be a brief introduction and then some information with respect to the Financial Transaction Reports Analysis Centre of Canada, or FINTRAC for short, followed by an overview of money laundering and terrorist financing. We will then focus on the core of the presentation which are the requirements for real estate developers, and then spend a little time talking about FINTRAC's compliance approach.

Slide 3

Now, as an introduction, you may be aware that, as of February 20, 2009, real estate developers will have new requirements under the Proceeds of Crime (Money Laundering) Terrorist Financing Act. We're now on slide 3, and often you will see the acronym PCMLTFA. That's the acronym for our Act, but for shortening purposes, I'll just refer to the Act as opposed to referring to its full name. A reminder as well that FINTRAC will be responsible for ensuring compliance with all requirements. So part of those obligations is making presentations such as this one so that real estate developers have a better understanding of their obligations.

Slide 4

We'll now jump into slide number 4, and if we were to identify the most important slide in the presentation, I would argue that this is probably it, because it will tell you whether or not you have obligations under the Act. So who is a real estate developer? It's any individual or entity that has sold to the public, in a given year after 2007, any of the following: five or more new dwelling units; one or more new commercial or industrial buildings; one or more new multi-unit residential buildings that total five dwelling units or more. Essentially, the first component is that you need to have sold units or buildings. If we're talking about residential units, we're talking about five or more new dwelling units. When we're talking about commercial or industrial, it's one or more. Finally, when we talk about multi-unit residential buildings, let's say condos, for example, you need to have sold one condo building that would have five dwelling units or more within it. So, if you've sold any one of these, you have obligations under our Act. Now, very important to note that if you do land development, or sell land, that is not covered. You do not have obligations under our Act. It's also important to note that if you hire a real estate broker or a real estate sales representative, you will not have obligations. It will be the real estate broker or sales representative that will have all the obligations. The only exception to that is if you hire the real estate sales representative as your employee; at that point, you would have the obligations. But just to make it crystal clear: if you hire a real estate broker or sales representative, they have the obligations and you are essentially off the hook with respect to all the obligations we'll be talking about this afternoon. So again, slide 4 helps you determine whether or not you have obligations under our Act. Also, a little subtlety that I wanted to mention: we're talking about the sale of a dwelling unit or an industrial building. If, as a real estate developer, you do contracting work and someone hires you to build their house, but you never actually own it, or you don't sell it, you do not have obligations. It's only when you actually sell either the dwelling unit, the commercial or industrial building that you actually have obligations. In terms of the thresholds, slide 4 tells you exactly how many either dwelling units you need to sell.

Slide 5

Moving on now to slide number 5, and giving you a little overview as to who FINTRAC is. FINTRAC is Canada's financial intelligence unit. Our role is to produce financial intelligence for law enforcement and national security agencies. In government terms, we're a federal government agency, we were created in 2000 and we're one of the key partners in Canada's efforts to combat organized crime and terrorism. We're an independent agency reporting to the Minister of Finance and Parliament, and we operate at arm's length from law enforcement. I'll explain a little bit more what operating at arm's length from law enforcement means. Now very key in terms of our work: we work in partnership with individuals and entities that are subject to the Act and that partnership is key. We have many, many different sectors, whether it's banks, casinos, life insurance, real estate, securities, money services businesses, a whole variety of different sectors that have obligations under our Act and who submit reports to FINTRAC. Because we're a financial intelligence unit, and because our key role is to actually produce financial intelligence, we obviously can't produce financial intelligence if we don't receive key financial information. So the partnership that we have with real estate developers and the other sectors is key to the success of FINTRAC and the broader anti-money laundering, anti-terrorist financing initiative within Canada.

Slide 6

I'm now going to move to slide 6 and speak to FINTRAC's role. Essentially, the Centre plays four key functions. I've talked about FINTRAC being Canada's financial intelligence unit. What that means is we collect information from the various sectors that I've mentioned. Once we receive it in our database, we analyze it, assess it, and try to determine whether or not the transactions are related to money laundering or terrorist financing. Only when there is a suspicion that the transactions are related to either money laundering, terrorist financing or the threats to the security of Canada, only then can we actually disclose the information to law enforcement and security agencies. It's very important to note that one of the key roles that FINTRAC plays is producing financial intelligence, but that we also have a mandate to ensure the protection of the information that we receive. For that reason, FINTRAC's database is highly protected and information can only leave the database when we meet the legislative threshold of suspicions to money laundering or terrorist financing. In addition to producing financial intelligence that we give to either law enforcement or intelligence agencies, we also have a role of ensuring compliance with the Act. What we're doing now in terms of presenting information and raising awareness with respect to real estate developers and their obligations is part of that compliance role, where we want to make sure that people understand their compliance obligations and that they respect it. A little bit later on in the presentation, I'll be talking about FINTRAC's compliance mandate and how we ensure compliance. Our final mandate is to enhance public awareness of money laundering and terrorist financing. Through information sessions across the country, through webinars or communication products, we want to raise the awareness not only of entities and individuals who have obligations under the Act, but also the general public. Those are the four key mandates for FINTRAC.

Slide 7

I will now turn to slide number 7 and speak to "what is money laundering?" The United Nations defines money laundering as any act to disguise the source of money or assets derived from criminal activity. In plain language, it's taking "dirty" money that came from a crime, and transforming it into "clean" money. When we talk about money laundering, we might say "Okay, money laundering might be a victimless crime". Always keep in mind that money laundering doesn't occur without a crime first occurring. When we're talking about drug trafficking, human smuggling, prostitution, the sale of arms and fraud, all of these things will occur and generate money, and then what happens to those funds is money laundering. There is a very direct link between money laundering, the safety of our communities, and our battle against organized crime. In terms of what FINTRAC is trying to do, we're trying to identify key individuals within the organized crime organization, and see where the money is going, who's profiting from this crime. Ultimately, in partnership with law enforcement, our goal is to be able to apprehend those individuals, but also to seize the proceeds of the crime so that they don't benefit from their criminal activities.

Slide 8

Now, slide number 8 goes into a little bit more detail, and provides the various stages of money laundering. As I mentioned earlier, you can't have money laundering without first having crime. So let's say there is a drug dealer who's just sold $50,000 worth of cocaine. Well, that drug dealer has likely received payment for that cocaine in cash, because these days, you can't pay for your drugs with your credit card; the transactions are usually conducted in cash. So the first stage of money laundering is to actually put the cash into the financial system. We call this the placement stage. A little bit later on, we'll be talking about large cash transactions and the fact that they are reportable. One of the reasons they are reportable is because large amounts of cash can sometimes be linked to criminal activity. If you're successful as an organized crime business, you're generating a lot of cash and you need to place it within the financial system. The second stage is the layering stage where you create layers of financial transactions to disguise the audit trail and the source of funds. What you're trying to do at the layering stage is to distance yourself from the original criminal activity. You might see here that the $50,000 in cash would have been deposited, let's say in a bank account. From the bank account, you might have a series of wire transfers coming in and out of Canada so that it's that much more difficult to say "Well, where did these funds actually originate from?" You might also have someone purchasing securities or a life insurance policy. So again, these are transactions that really complicate things and make it more difficult to actually know where the money came from originally. The final stage of money laundering is integration, where you're returning the laundered funds back into the economy to create a perception of legitimacy. Here, it's much more difficult to actually detect that the funds came from criminal sources, because the money looks clean. It's at this stage that you might see someone purchase high value goods such as a house, a diamond ring, a boat, or a car. At this point, the money is fully integrated into the financial system and it's very hard to detect that the origins of the funds are derived from criminal activity.

Slide 9

Now, moving onto slide number 9, and talking about terrorist financing. Terrorist financing is the process by which money is provided to an individual or group to fund terrorist activities. It's different from money laundering in that with money laundering, you have a crime and then you have the process by which you're trying to disguise the origins of the funds derived from the crime. With terrorist financing, you might actually have legitimate funds that help finance terrorism. We've also seen that terrorist organizations also use illegitimate sources such as drug trafficking or weapons trafficking to fund their activities. The other difference that we see, as compared to money laundering, is that we often deal with smaller amounts than money laundering. So it makes it that much more difficult to detect. Before I move on to the next section, I'll just take a pause here to see if there are any questions with respect to slide 4 and what the triggering activities are to determine whether you have obligations or not, or general questions with respect to FINTRAC, money laundering or terrorist financing.

Christopher:
Well you're right, Marilyne. The couple questions we have do pertain to the fourth slide that speaks to when an entity or an individual is actually deemed to be a real estate developer, and therefore has to comply with these requirements. They are mostly requests for clarification. So we spoke about condo buildings as an example of a building that might be sold, and you mentioned that, if an entire new condo building was sold, that would be captured under the commercial or industrial category. Now, if individual units in a condominium building are sold, just to be clear, does that fall under the dwelling unit category?

Marilyne:
It does. If you sell five or more condo units, then you would have obligations under the Act. I will just make it clear that, with respect to selling a new condo building, which is actually the third bullet, you would need to sell one multi-unit residential building, so one condo building, but you would need to have a total of five dwelling units in it. So you would need to have five condos in your building for it to be covered under these obligations.

Christopher:
But generally speaking, you'd be selling the condos individually, so that's where that would fall, so…

Marilyne:
Exactly, exactly.

Christopher:
I guess that's it for that person who asked that question; there are requirements for the individual condo units. To be clear, you don't necessarily have to report every single sale. Marilyne will be explaining in more detail exactly what your obligations are on a transaction-by-transaction basis as we move forward in the presentation. But before we get to that, I do have a couple more questions for you: another clarification. In the industry, I think it's common to refer to the builder's employee who is sitting in the show home as a sales representative.

Marilyne:
Yes.

Christopher:
So when we say sales representative, we're really talking about real estate agents and trying to make a distinction between whether your properties are sold by a real estate broker or not?

Marilyne:
Exactly. We're talking about licensed real estate brokers or agents, or as you call them, sales representatives. It's someone that actually holds a real estate license or a license to sell real estate. If you are employing, you've entered into an agreement with a real estate broker, sales representative, or agent, they have the obligations and not you. But they need to actually hold a real estate license.

Christopher:
They're acting on behalf of a brokerage in that case.

Marilyne:
Exactly.

Christopher:
… as opposed to as your employee. So I hope that clears up those circumstances for those two questioners, based on what's going on in your particular businesses. Feel free to submit any further questions if you're looking for more clarification. And for all the rest of you listening as well, please keep the questions coming. I am just going to revisit the question we discussed in our French language session this morning, before we move on with the rest of the presentation. That one also deals with slide 4, which mentions that you're covered based on, for dwelling units, five sales within one year, or for commercial buildings, one sale within a year. This morning, we were asking whether the clock starts over again every year. Are you only covered at the fifth one each year, or is this on a go-forward basis as of now?

Marilyne:
What we're looking at in slide 4 is that you only need to ask yourself this question once. Once you meet the criteria that's listed on slide 4, you have obligations on an ongoing basis. So it's not a one-year evaluation. Once you meet the criteria, you have obligations from now on unless you can demonstrate that your business has changed substantially, so that you wouldn't be conducting these triggering activities.

Christopher:
Excellent. Well I think that clarifies that very important slide 4. And with that, I believe we are now on slide 10.

Slide 10

Marilyne:
That is correct. One of the most common questions that we get, and a very understandable one, is why are real estate developers covered, or why will they have obligations starting February 2009? Real estate is one of several business sectors that has a risk for money laundering. If we look at a study that was conducted of RCMP money laundering cases, 50% of those money laundering cases involved real estate. And one can understand why: First of all, real estate is a good investment and secondly, criminals need a roof over their heads and need a place to live. Essentially, real estate is not only a good investment opportunity, but also provides them with a dwelling where they can live. So it's not surprising that we see many money laundering cases involving real estate. The Financial Action Task Force, which is the international standard-setting body with respect to money laundering and terrorist financing, has also ascertained that real estate is a means used by criminals to obscure the source of funds and hide ownership of assets. We have cases, both domestically and internationally, where we can see that real estate is used to help obscure the source of funds and help facilitate money laundering. Also, in terms of a level playing field, real estate brokers and sales representatives have been covered since the Act first came to be. Given that real estate developers conduct similar transactions, we wanted to make sure that the real estate development sector wasn't more vulnerable to money laundering and terrorist financing.

Slide 11

Slide 11 provides examples of various publications that cite real estate money laundering risks. If you want to read a little bit more about how the real estate sector is vulnerable, slide 11 gives you many examples. I will draw attention specifically to Guideline 2: Suspicious Transactions, that is published by FINTRAC. At the end of our presentation, we'll be posting our Web site address where we have a series of guidelines. Guideline 2 actually highlights how the real estate sector could be vulnerable to money laundering and terrorist financing. That might be a good source of information if you want to learn more about how the real estate sector could be vulnerable to both money laundering and terrorist financing.

Slide 12

Going to slide 12. If slide 4 is the most important, slide 12 is the second most important just because once you've determined that you have obligations under the Act, slide 12 actually tells you what you need to do. There are three categories of obligations. The first one is to implement a compliance regime. Then, you must report three different types of transactions to FINTRAC. Finally, you need to keep client information (you need to identify clients and keep records). The rest of the presentation will go into great detail as to what exactly you need to do to comply with these three categories of obligations.

Slide 13

Slide 13 introduces client identification and record-keeping requirements.

Slide 14

I will jump immediately to slide 14 and highlight when you must identify a client. There are two situations where you must identify a client: 1) when a client purchases a new home or building; and 2) when a client provides funds, in any amount, in any form, as part of the purchase of a new home or building. So two situations: when someone purchases a new home or building, and when someone gives you funds, usually in the context of a deposit. Those are the two situations.

Slide 15

Slide 15 speaks to the situation when someone actually purchases either a new home or building. It highlights that whenever an agreement of purchase and sale, or the equivalent depending on which province you're in, is signed, you need to identify all the individuals that are party to the purchase. If Mr. and Mrs. Landry are purchasing a new home, you would identify both Mr. and Mrs. Landry. Now, if the purchase is conducted by a corporation or an entity, in addition to identifying the client that's in front of you that's conducting the transaction, you would also need to confirm the existence of the corporation or entity, and you have thirty days to do that. Once you've identified the client, you need to keep certain key information that's contained in a client information record.

Slide 16

Slide 16 tells you what information you need to keep. So you need to keep the client's name and address, the client's date of birth, and then the nature of their occupation or principal business. If the client is a corporation, you also need to keep a copy of the corporate records that bind the individual (the client that you're dealing with) and the corporation, as well as ascertain the existence of the corporation.

Slide 17

Slide 17 speaks to the situation when you actually receive funds. In addition to having to identify anyone who is purchasing a new home or commercial building, you also need to identify anyone who provides you with funds, usually a deposit with respect to the purchase of the new home or commercial building. We call that a receipt of funds record. Essentially, you need to keep a receipt of funds record regardless of the amount of the deposit. It's important to note that, if the person giving you the funds is different from the person who is purchasing the new home or commercial building, you also need to identify the person who is actually giving you the funds. In a situation where Marilyne is a student buying a condo, but Marilyne's mother, Judy, is actually providing the various deposits, and it's Judy that actually brings you the deposit cheques; you would need to verify the identity of Judy in addition to verifying Marilyne's I.D. Once again, if you're dealing with a corporation, you also have to confirm the existence of the corporation.

Slide 18

Slide 18 actually tells you what information you need to keep with respect to a receipt of funds record. When you look at this (again this is when you're receiving a deposit), you're probably already collecting most of this information because you need to document exactly who gave you the money, where they live, so their address, as well as the amount of the deposit and the date. What I would suggest is that you look at slide 18 to see if there's anything else in there that you're not already collecting. But chances are that you're collecting most of this information already.

Slide 19

I'll jump to slide 19 and as a reminder that, in a situation where you receive the funds from a corporation, you need to keep a copy of the corporate record that binds the corporation to the individual that's actually conducting the transaction as well.

Slide 20

It's very important to note that, if you're keeping a client information record, let's say you've identified Marilyne and you've taken down all of her information (her name, address, date of birth, occupation); you don't need to repeat that information again in a receipt of funds record. If you've collected the information once, you don't have to repeat it and you can keep it all in the same place if you choose to do so. You don't have to duplicate records.

Slide 21

Slide 21 speaks to "How do you identify?" I would imagine that the most common type of transaction is where the individual is actually in front of you to conduct the transaction. If that's the case, you need to refer to a valid government-issued identification document. It can be a passport, a driver's license, a health card in some provinces, although certain provinces do not allow this. Manitoba, Ontario, and Prince Edward Island do not allow you to use the health card, but in other provinces, you can. Once you've verified their identification document, you need to document the type of I.D. that you looked at (Was it a driver's license? Was it a passport?), the actual I.D. number, and then the place where the document was issued. You may choose to photocopy your client's I.D. and you can certainly do that if your client is comfortable with it, but that's not mandatory. What is required is for you to actually document the type of I.D., the I.D. number, and the place of issue.

Slide 22

For situations where your client is not face to face, Guideline 6B provides you with options to be able to identify an individual that isn't present. If you do conduct non face to face transactions, you may want to take a look at Guideline 6B to see what options would be most appropriate for you. One of those options is the use of an agent or mandatary. Essentially, you're asking someone to act on your behalf to identify your clients. If you're going to use an agent or a mandatary, you actually need to have a written agreement with that individual. You need to make sure that your agent or mandatary provides you with the information once they've identified the client. It's also important to note that once you've identified an individual, you do not need to identify them again if you recognize them. In the context where you have identified Marilyne, she comes back and provides another deposit cheque; you don't have to identify Marilyne again if you actually recognize her. The only time you would need to identify her again is if you had doubts about the information she provided you. Once you identify someone, that's it, you don't have to do it again. So that ends the section on client identification and record-keeping. I'll take a pause now to see if there are any questions from the audience.

Christopher:
We do have a few coming in, yes. I'm watching the time. I won't be able to ask all of them right away, but I'll put some of them to the end of the presentation and, hopefully, we'll have time to get to them then. If we don't get to your question over the course of the presentation, we will certainly follow up with you directly after the presentation, but I will take time for two or three questions before we move on. The first question is about who's covered, and a lot of this goes back to slide 4. We're talking specifically about real estate developers and the sale of new properties. Are these same rules coming into effect now for existing properties? Could you speak a little bit to what the requirements have been previously for real estate and why we're splitting them in two?

Marilyne:
First of all, with respect to existing properties, if they are sold through a real estate broker or sales representative, that requirement dates back to 2000, when the Act was enacted and then subsequent regulations were developed. So existing buildings would be covered if a real estate agent, sales representative, or broker was helping with the sale. It doesn't, however, cover private sales.

Christopher:
Perfect. I think that will answer the question that we received. Thank you, Marilyne.

Marilyne:
You're welcome.

Christopher:
A question in terms of talking about the nature of sales and the nature of client relationships. If a company is only occasionally involved in selling property, be it new property, existing property, or new development; if they've had a longstanding client that they're very familiar with, and have been for perhaps dozens of years, do they still have to identify a client they know?

Marilyne:
The answer is yes, but you only need to identify them once. I will direct anyone who is concerned about this particular requirement to our Web page. Under the Publications section, there is a pamphlet that is targeted particularly to your clients explaining why you need to ask for identification. I know that during our presentations across the country, many real estate developers have said, "Well look, he's my brother-in-law, of course I know it's him." But it is a requirement under the law, and you can say "Look, the government is requiring me to do this", and we do have some documentation for you to share with your clients if they have concerns.

Christopher:
Speaking of identification; when it comes to identifying a client, you spoke of checking a valid piece of identification, does it have to be a Canadian government issued document or can a foreign document suffice?

Marilyne:
A document issued by a foreign government can suffice. The most logical one, if you're talking about someone who isn't from Canada, would be a passport. But a driver's license would also be acceptable. So any government issued I.D., regardless of whether it's the Canadian government or another government, would be acceptable, as long as it's valid, of course, and that there is a unique identifier number on the piece of I.D.

Christopher:
We'll answer one last question dealing with receiving funds, and then we'll move along, and as I said, we'll try to get to the rest of the questions at the end of the presentation or during one of our subsequent breaks for questions. When it comes to transactions involving new properties, transactions are often going between two solicitor's trust accounts; perhaps the client's solicitor and the developer's solicitor, or at least one lawyer is involved in the transaction. When funds are received from a solicitor, can you speak a little bit about whether that changes what's required to be kept?

Marilyne:
Essentially, we're talking about the receipt of funds record, and you're only required to keep a receipt of funds record when you are the one receiving the funds from the client. If the client is providing the funds directly to a lawyer, a solicitor, or a notary, you would not have to keep a receipt of funds record.

Christopher:
But if they provide the funds to you for you to pass on to your own lawyer, then you've received funds, even if it's in a cheque, correct?

Marilyne:
That's correct.

Christopher:
I'll just do one quick follow up and then we will move on, I promise. If a developer receives the funds directly, but the funds are coming from the client's solicitor, and the solicitor does not wish to divulge the number of their trust account; is the developer expected to be able to get that information on a lawyer's trust account?

Marilyne:
No. If the lawyer does not provide the information, either on the trust account or on the name of their client (because sometimes that might occur), the real estate developer should actually document the fact that they asked the lawyer, and that the lawyer did not provide the information to them.

Christopher:
So that's the way of ensuring that you're documenting all the proper precautions that you took?

Marilyne:
That's correct.

Christopher:
Okay, thank you, Marilyne, for those clarifications. And as promised, we'll move on with the presentation.

Slide 23

Marilyne:
Sounds good. So we're now at slide 23. And we're going to be talking about the types of reports you'll need to submit to FINTRAC. The first type of report is the large cash transaction report. When you receive $10,000 or more in cash, you will need to report this to FINTRAC. This is really important: when we're talking about cash, we mean cold, hard cash. We mean bills, pennies and quarters. We do not mean cheques, bank drafts, wire transfers, credit payments, or debit card payments. We only mean cold, hard cash. So, only when you receive $10,000 or more in cash, like $20 bills or $50 bills, only then would you need to report it to FINTRAC. If you do receive $10,000 or more in cash, you have 15 days to report it to FINTRAC.

Slide 24

You'll see on slide 24 that we talk about the 24-hour rule, which is when the same client provides you a total of $10,000 or more in cash, but in two or more payments within the same 24 hours. For example, Marilyne comes in, provides you with $5,000 in cash on Monday at noon, and then comes back Tuesday morning at 9 a.m. and provides you with $9,000 in cash. Together, it's $14,000 in cash within the 24-hour period, therefore it would be reportable to FINTRAC.

Slide 25

In addition to having to report to FINTRAC, you will also need to keep a large cash transaction record. You can simply print a copy of your large cash transaction report, and that will do it. You will need to identify the client because you've received funds, and you will need to ask whether the cash that the client gave you was provided by a third party. "Does the money belong to someone else?" Here is a modified scenario of the situation we talked about earlier. Let's say Marilyne comes in, she's a student, she's buying a condo, she has $14,000 in cash and you ask her "Marilyne, does this money belong to someone else?" Marilyne would say "Yes, it does, it actually belongs to Judy, my mother". You would then need to document the information on her mother, including name and address, but you would not have to identify the third party. You would need to take down the information about the third party, but you would not have to identify them.

Slide 26

That's the first report that needs to be sent to FINTRAC, again, $10,000 or more in cold, hard cash. The second report is probably the most important report that FINTRAC receives: the suspicious transaction report, which is when you suspect that a transaction or an attempted transaction is related to money laundering or terrorist financing activities. I say it's the most important report because, if you think something isn't right within your industry, well you are clearly the best judge of what is suspicious or irregular in your industry. FINTRAC attaches enormous importance to this report and there is someone that actually reviews every single suspicious transaction report that is submitted to the Centre, to determine whether or not a case should be started based on the suspicious transaction report. Now, really important here: you'll remember that we talked about the three stages of money laundering, with placement being mostly cash coming into the system, layering, confusing the money trail, and then integration where you can't really tell where the money comes from, that the money came from criminal activity. So it's really important here to note that suspicious transactions can be of any amount and they're not only in cash. It can be a wire transfer, a bank draft, or a cheque. Anything that seems suspicious to you and that you think may be related to money laundering or terrorist financing should be reported to FINTRAC.

Slide 27

Slide 27 highlights that, when you're looking at suspicious transactions, it also includes suspicious attempted transactions, which is when a client has started a transaction, let's say an agreement of purchase or sale, but hasn't gone through with the transaction, let's say because you asked for a piece of identification and they said "No, no, no, no, no, I'm not comfortable with this, I'm just going to back away." Well, that would be an example of an attempted transaction. Now, it's very important to remember that we're always talking about suspicious attempted transactions, and you should only report it if you are suspicious and think that the attempt is related to money laundering or terrorist financing. With respect to your obligations for suspicious transactions, you need to first report it to FINTRAC and then keep a copy of the report. That's it.

Slide 28

If you're trying to determine "What would a suspicious transaction look like?", slide 28 gives you some indicators of suspicious transactions, and those are, essentially, red flags. In some instances, it may make perfect sense, but in most situations, if you have one of these indicators, it may be related to money laundering and terrorist financing. You may want to just take an extra careful look and really think about "Could this be suspicious?" Now, when we talk about indicators (and you can see those on slide 28), here are some key things to remember. First of all, does the transaction provide anonymity to the person who will ultimately benefit from the property? If the answer is yes, it could potentially be suspicious because, again, money launderers don't like to flash their properties. They want to remain as anonymous as possible. The other key thing is "Is it unusual in your business?" If you think that it's unusual, well, again, ask yourself a few questions and say "Could this potentially be related to money laundering or terrorist financing?" And if you say "Yeah, probably, it might be, uh yeah, I kind of have, uh, you know, I think I'm suspicious", you should report it to FINTRAC. I should also mention that, in the context of real estate particularly, many of you are no doubt aware of the problems that surround marijuana grow operations, and I believe we have something on the slide, I think it's the fifth bullet. If "Client shows minimal interest in the nature of the property itself and wants to close the deal quickly", again, there might be some legitimate reason why that is, but if someone is saying "I don't really care what the finishing touches are or what the house looks like, as long as I have a big circuit breaker and a huge place downstairs, where, you know, I'm happy". Well, that might be a red flag that may lead you to report to FINTRAC. Suspicious transactions are very key to the work that FINTRAC does, and the second report that needs to be sent to FINTRAC.

Slide 29

The final one won't happen very often: it's a terrorist property report, which is when you know that you're in the possession or control of terrorist property. You may or may not know that all Canadians actually have an obligation to contact the RCMP and CSIS (our intelligence agency) when one is in possession or control of terrorist property. If you're a real estate developer, in addition to having to contact the RCMP and CSIS, you would also need to report it to FINTRAC. It's important to note here that this is the only report that you send by paper, and that's because of the sensitive nature and the urgency, obviously, of the information. So, very important: in the unlikely event that you are in possession or control of terrorist property.

Slide 30

Slide 30 speaks to how you can submit reports to FINTRAC. We talked about terrorist property reports, those you submit by paper. As for suspicious transaction reports, or STRs, or large cash transaction reports, or LCTRs, they must be reported to FINTRAC electronically if you have an Internet connection. If you have an Internet connection, you need to use FINTRAC's secure Web site. We have a system called F2R, which doesn't stand for anything, but F2R allows you to report to FINTRAC. You would need to contact FINTRAC so that we enroll you, provide you with a username, organization number and password, and with that information you would be able to access FINTRAC's secure Web site via our main Web address. So again, if you have an Internet connection, you must report electronically. Just to recap: there are three reports that you need to report to FINTRAC: 1) large cash transactions: $10,000 or more in cold hard cash. If you never accept cash, you won't have to send this report; 2) suspicious transaction report: that can be any amount, whether it's cash or not. Any time you think something is suspicious; and 3) terrorist property reports where, as unlikely as it is, if you're in possession or control of terrorist property, you need to report it to FINTRAC.

That ends our reporting section. We'll take a pause here to see if we've received any questions.

Christopher:
Yes, we've received a few more, one that I think will enable us to maybe take a step back and draw a bit of a distinction between all of the different pieces we've been discussing here so far. This is the distinction between what has to be reported to FINTRAC and what has to be kept as a record.

Marilyne:
Ah.

Christopher:
If you could just go back over and re-emphasize. There are two main types of reports because, as you've said, the terrorist property reports are less common. And then there are two types of records. Just quickly, just to clarify what does and does not need to be sent to FINTRAC?

Marilyne:
You must identify everyone who purchases a new real estate property, whether a dwelling unit or a commercial building. You must identify them and you need to keep a record that stays in your business cabinet. You also need to identify anyone who gives you funds (that's a receipt of funds record); that too stays in your cabinet, does not need to be reported to FINTRAC. The only thing that needs to be reported to FINTRAC is terrorist property reports (doesn't happen often), when you receive $10,000 or more in cold, hard cash, or when you think something is suspicious. Only in those three situations do you need to report to FINTRAC. In all other situations, you just keep in your records the information that you gather when you identify a client, and it will be there either when FINTRAC comes and examines you, or when law enforcement conducts an investigation. But it does not need to be reported to FINTRAC.

Christopher:
I hope that clarifies the distinction, and again, keep the questions coming if there are any subsequent clarifications that you're seeking to that. I'll go back to our discussions about funds that are sent to the developer's solicitor. If the developer receives a cheque made payable in trust to the solicitor; what is their requirement?

Marilyne:
If it is the developer that actually physically receives the cheque, they need to keep a receipt of funds record, to identify the person who gave them the funds, and gather all of the information that's on slide 18. So, even though the cheque is to the lawyer's trust account, if it is the real estate developer that actually accepted the cheque, they must keep a receipt of funds record and identify the person who gave them the funds.

Christopher:
A similar question now. If someone purchases a home and the solicitor receives the first deposit directly, but the subsequent deposits are received by the developer; does the developer have to then identify and keep records for those subsequent deposits even though the solicitor got the first one?

Marilyne:
The answer is yes. Anytime the real estate developer receives funds, let's say there are five deposits, they need to keep five different receipt of funds records for each deposit, each time the developer receives the funds.

Christopher:
Excellent. I think that is the end of the questions on that particular issue. We do have a few more there, that are on other subjects, but as I said, I will let us go on with the presentation and we'll return to them at the end.

Slide 31

Marilyne:
Sounds good. So, slide 31 talks about implementing a compliance regime.

Slide 32

Slide 32 provides a summary of what a compliance regime is. You'll see that there are five elements to the compliance regime: 1) the appointment of a compliance officer;
2) the development and application of written policies and procedures; 3) conducting a risk-assessment; 4) implementing and documenting an ongoing compliance training program if you have employees or agents; and then 5) doing a review of the policies and procedures, the risk assessment and the training program every two years. I'll just take a few minutes to go through each of the elements.

Appointing a compliance officer. A compliance officer is the person who is responsible for implementing everything that we've talked about today and it can be anyone. It can be yourself if you are a sole proprietor, and you are a real estate developer that operates alone. It can be one of your employees as long as the person who is the compliance officer has the necessary authority and has adequate access to senior management. If it's a very junior person that is never able to speak to senior management, that wouldn't be acceptable. But there are no restrictions in terms of who can be a compliance officer. Anyone can be a compliance officer as long as they have the necessary authority and power.

Written policies and procedures. You need to document how you're going to comply with these requirements. You'll see at the bottom of slide 32, that we refer to Guideline 4: The Implementation of the Compliance Regime. Guideline 4 provides you with lots of examples and help with respect to how you can document your policies and procedures. You can even take elements of this presentation, cut and paste them to help you develop your policies and procedures. But once again, Guideline 4 would be very useful in terms of helping you develop those written compliance policies and procedures. It's really important to note that they need to be kept up-to-date. If there are changes to requirements, you need to make sure that your policies and procedures reflect those changes to your requirements.

If you have employees and agents, you also need to put in place a training program. It might be that you take the presentation that we've gone through today and get your employees to read through it. This webinar will actually be posted on our Web site. It'll be archived so it might be that your employees actually listen to the webinar. It might be a training program that you develop on your own. Whatever it is, you need to document what you've done and make sure that all your employees and agents follow the compliance training program.

Review of the effectiveness of the policies and procedures, the training and the risk assessment, need to happen every two years. It needs to be documented, so you need to have someone review, say "Well the client I.D. policies and procedures could be beefed up a little bit." That needs to be documented. If you're a corporation or an entity, you need to report the findings of the review to a senior officer and provide an update if you found any deficiencies or things that needed to be improved.

You may have noticed that I skipped through bullet number 3 with respect to the risk-based approach and conducting a risk assessment. I will spend a little bit more time on that particular requirement starting on slide 33.

Slide 33

The risk-based approach is essentially an approach where you evaluate the risk of money laundering and terrorist financing, and you focus your attention on the highest-risk situations. There are four components to it: you need to evaluate the risks and then, if you've identified anything that's high-risk, you need to take certain mitigation measures; you need to keep client information up-to-date; and you need to do ongoing monitoring of high-risk situations.

Slide 34

So I'll get into each of those components separately, starting with slide 34, and "How do you conduct a risk assessment?" A risk assessment is meant to identify those situations that are at highest risk of money laundering. For example, you might say that situations where you don't meet the client, for which you don't have as much information and are not as familiar with their activities, might be of higher risk than a transaction that you're going to conduct with a long-time either friend or brother-in-law. You're very familiar with their situation, with their types of transactions, and with where the funds that they're providing are coming from. In terms of how to conduct a risk assessment, it's up to you to decide how you want to conduct the risk assessment, but slide 34 and the regulations say you must evaluate five different elements. You need to evaluate your clients; your business relationships; your products and services; what your delivery channels are ("Is it face to face, is it non face to face?"); the geographic location of your activities as well as your clients' activities; and any other relevant factor that you think would apply. In terms of conducting your risk assessment, FINTRAC has developed a checklist that you can use to help identify higher risk situations. When we're talking about conducting a risk assessment on your clients, it's not necessary that you conduct a risk assessment for each and every client. You can group them into broad categories. For example, your clients that are non face to face may be considered higher-risk, longstanding clients that you have done business with for the last ten years might be considered lower-risk. The other thing to mention when you're evaluating your clients' risk: we're only talking about clients with whom you have an ongoing relationship. If you don't have an ongoing relationship (if it's a single transaction), you don't need to conduct a risk assessment on that client. However, you still need to do an assessment of your business relationships, your products and services, your delivery channels, and the geographic location of your activities. That's the first step: conducting a risk assessment. Again, Guideline 4 has a checklist that you can use to help you do that.

Slide 35

Now, slide 35 tells you that "Once you've identified something as a higher risk of money laundering or terrorist financing, there are three things you need to do." You need to mitigate the high risk, and that can be anything from getting senior management to review the transaction. You also need to keep client information up to date; it doesn't mean that you have to identify the client again, it just means that you need to confirm that the information has stayed the same. That needs to occur every two years, again, only for clients with whom you have an ongoing relationship. And then finally you need to do ongoing monitoring to detect suspicious transactions. That kind of makes sense because if you think something is higher risk, you should keep a closer eye to see if there might be money laundering or terrorist financing going on.

Slide 36

Guideline 4 provides you with examples of what risk mitigation measures might be, how you can conduct ongoing monitoring, as well as a checklist that helps you do your risk assessment. Again, all of that is mentioned on slide 36.

That actually ends the section with respect to the compliance regime. It also ends the section that talks about the requirements that real estate developers need to comply with. So that's it. As we said, there are three major categories of requirements: identifying clients and keeping records; reporting; and then a compliance regime.

So I'll take a pause here to see if we have any questions.

Christopher:
So what we're talking about with this risk assessment is not so much a transaction-by-transaction approach, necessarily, as much as it's a framework to guide your oversight of your business as a whole.

Marilyne:
Exactly. So what categories of transactions would be considered higher risk? I think the most common one would be the one where you don't meet the client; that may be considered higher risk. Another category is maybe where a third party is involved and you don't actually know who is conducting the transaction. That might be another category of transactions that you would consider higher-risk. It's taking a look at your business activity and saying "Out of the transactions that I conduct, which ones are the highest-risk?", and then placing a little bit of additional focus on those transactions.

Christopher:
So we have a question here that, I'm not sure whether the questioner intended for me to do this or not, but I'm going to tie it into the risk assessment discussion. We might talk about a bank draft or a money order potentially providing a higher risk than a certified cheque because there is no connection to an account.

Marilyne:
Exactly.

Christopher:
You don't necessarily know that the person providing the deposit is an account holder. Is there an expectation in a case like this that the developer would have to ascertain where these funds have come from to purchase the bank draft or the money order?

Marilyne:
There is no direct requirement to do so. However, if you determine that a bank draft might be a higher-risk situation, that might be one of the mitigation measures that you would want to apply, but FINTRAC doesn't tell you what those mitigation measures might be. But I think that would be an excellent example of a mitigation measure, if you thought that that situation was considered higher-risk.

Christopher:
And it's not necessarily even a question of investigating or really trying to definitively ascertain that before you carry through with the transaction. It's more a question of doing your own due diligence, maybe asking the customer a question or two. But it's really at that level.

Marilyne:
Exactly, we're not trying to turn you into Sherlock Holmes, but just to ask one or two questions to maybe better understand. But, there is no requirement to dig any deeper. Essentially, the risk mitigation measures are at the discretion of the individual or the entity.

Christopher:
If you're not satisfied with the responses provided by your client, let's say in terms of where the funds came from to purchase the bank draft (to continue with this example), if they don't seem to fit their income level, or something doesn't make sense, or you're uncomfortable; are you required at any point to stop the transaction, or is it simply a matter of doing that due diligence and reporting if your uncomfortable?

Marilyne:
At no point must you refuse a transaction. Nowhere in the legislation or the regulations does it say that you can't proceed with the transaction. However, if you're uncomfortable and you think that it's suspicious and potentially related to money laundering or terrorist financing, you should report it to FINTRAC.

Christopher:
Alright, so that provides a little more insight into some of the risk assessment requirements as well as the reason for that type of requirement to certainly feed into the suspicious transaction detection process, among other things. I'll save the questions that aren't directly related to that theme, again as I've said, until the end, and we'll just tie everything up with the last section of the presentation.

Slide 37

Marilyne:
Excellent. As Christopher mentioned, the last section of the presentation speaks to FINTRAC's approach to ensuring compliance.

Slide 38

Slide 38 essentially focuses on FINTRAC's cooperative approach. As we've mentioned, FINTRAC is dependant on the information that's provided by the entities and individuals that have obligations under the Act. It's in our interest to work cooperatively with you so that you can understand your obligations, and so that you can comply with them. And certainly, in our experience in dealing with all sectors that have obligations, the vast majority of individuals and entities want to comply, and we want to help you comply. So, very key in terms of how FINTRAC conducts its compliance activity.

Slide 39

In terms of slide 39, because FINTRAC has a mandate to ensure compliance, the legislation provides FINTRAC with the authority to enquire into the business of individuals and entities that have obligations under the Act. Essentially, we can do that by three ways: we can request information; send you a compliance questionnaire that asks you questions about your compliance regime and how you do some of your activities; or we can conduct an on-site examination.

Slide 40

How would an on-site examination work? We're now at slide 40. Essentially, very cooperative. In most instances we would contact you to let you know that we were planning to come. We would agree to a date and time, we would confirm that date and time in a letter, and let you know exactly what records we would want to see. The purpose of the examination would be to test the effectiveness of the mechanisms and controls that you've put in place with respect to your obligations. Our compliance officers would look at certain records, have interviews with some of your employees, and then at the end of the exam, have an exit meeting to tell you the findings of the examination. We would then document those findings and send you a findings letter. There are two possible situations: if everything is perfect and you're compliant with all requirements, the letter would just highlight the scope and results of the examination. However, if there were deficiencies that were identified or detected, the letter would highlight the areas that are in need of corrective action, we would ask that you develop an action plan and we'd work with you if you needed assistance in terms of coming up with a plan that would help you address the deficiencies.

Slide 41

Now slide 41. As we've said earlier, we have a cooperative approach. If we do find some deficiencies, our goal is to help you address those deficiencies. However, in cases where entities don't want to comply at all, or have repeated cases of deficiencies (the same deficiencies that aren't addressed), FINTRAC does have the ability to issue administrative monetary penalties or fines. As well, in cases of very serious non-compliance, there are criminal penalties.

Slide 42

That brings our presentation to a close. I would like to remind you that if you meet the triggering activities that are listed in slide 4, you must have a compliance regime in place by February 20, 2009. And from February 20, 2009 onwards, you'll need to identify clients, keep records and report to FINTRAC.

Slide 43

I've mentioned our guidelines in a few instances. They can be found on our Web site (Web site address is on page 43). On our Web site, you will see a series of guidelines as well as other documents to help you comply with your requirements. We encourage you to consult our Web site for more information. We have about ten minutes left, so maybe we can take that time to go through some of the questions that we've received from the audience.

Christopher:
Yes, thanks, Marilyne. I think we should have time to go through most, if not all of the questions we have here. Please feel free to continue sending questions. As I said, if we don't happen to get to them before the top of the hour, we will certainly get back to you by phone or email directly. So please don't hesitate to continue sending questions in if there is anything you're still wondering about. The first one I'll bring up is a question dealing with privacy, certainly something that is an issue often brought up in respect to these requirements. Specifically, how does the requirement to keep all this personal information on your clients relate to privacy legislation? Are there any policies that need to be emended to account for this information? Can you elaborate on that a little bit please?

Marilyne:
Certainly. Our Act has been reviewed by the Privacy Commissioner. There are specific provisions in the federal Privacy Act that allow for this information to be collected. In terms of modifying policies and procedures, I don't think that's necessary. The Privacy Act allows for this information to be collected specifically. So there is no conflict between the Privacy Act and our legislation.

Christopher:
Just to expand on that: if you do feel more comfortable including a document or if you create a form or a database to keep track of this information, you can certainly indicate that it's being kept for the purposes of this particular legislation. That's not a requirement, however. As Marilyne said, there are provisions in both federal and provincial privacy legislation to account for personal information that has to be kept as per federal law. So you don't have to worry about being in contravention of privacy rules so long as you do safeguard this information as you would any of the rest of your client information. Thank you for that excellent question. I am going to quickly ask you to restate something, because we've received this question a few more times from a few participants. If you're a developer using a registered or licensed real estate broker or sales agents as the agent for sales transaction, that means they are already required to collect client information because of the rules for real estate brokers. Does the developer also have to keep that information? Do they have to get it from the broker? Do they have to keep it themselves?

Marilyne:
The real estate developer is off the hook with respect to all obligations if it uses a real estate, a licensed real estate broker or sales agent. So, off the hook. Don't have to do anything. The only thing is that the real estate agent will likely identify you as their client, but that's it. You do not have to do anything; the obligation rests with the real estate agent or broker.

Christopher:
For a final precision, that's if that real estate is or broker is acting for a brokerage and not as the employee of the developer.

Marilyne:
That is correct.

Christopher:
Hopefully that is clear. That is a little bit roundabout, but ultimately, if the broker is acting for the brokerage, the obligations rest with the brokerage. If they're an employee of the developer, the obligation is with the developer.

Marilyne:
That is correct.

Christopher:
Perfect. Another question that's just coming in. Actually, this one is one that we actually receive quite a lot. If a firm is involved in the building of modular or prefabricated homes, but is not selling directly to the public; one entity is building it, and a different entity is selling the homes to the public. That second entity is the one that puts it on the land, builds the foundation. Who has requirements in that situation?

Marilyne:
The entity that sells the new home to the public is the one that has the obligations.

Christopher:
So specifically then, with respect to this individual's question, if a modular home that is sold to an end-user, so to speak, then it is that last party that does that last transaction with the party that is actually going to inhabit the home that has the obligations.

Marilyne:
Exactly. So whoever sells it to the person who's moving in, that's the person who has the obligations.

Christopher:
Perfect, that should be a helpful clarification. So to be clear: prefabricated homes are certainly in fact covered, as are mobile homes and the like. Just a few more trickling in, so bear with me just a moment. Moving back to perhaps speak a little more broadly, when we say "Sales to the public"; are there any other specific indications that we could keep in mind? If a company sells to another unrelated company, there are still obligations with respect to that transaction?

Marilyne:
That's correct. The only exception would be an individual wanting to live in the house. The only exception would be if you're selling to one of your subsidiaries; that wouldn't be considered a sale to the public.

Christopher:
That's a strong example of that exemption, but generally speaking, ask yourself, whenever you are selling a new building under the circumstances described in slide 4. As Marilyne said, it's a very important slide. Go back to that as your resource in almost all scenarios that you would be engaged in that type of transaction where you are dealing with a sale that would be covered for the purposes of the regulations. If anybody has a specific scenario that they want to address with us, please feel free to send it to that outreach email address, and we'll get back to you directly to clarify that, gladly. We do have a couple more minutes, so I believe we've gotten through essentially all the questions that have come in. I do apologize if I've missed one or two, but that brings us to the end of our presentation. I would like to thank Marilyne for being with us, and for providing all of these answers and this content. Thank you to all of you for joining us, also very much appreciated. As I've said, I do want to encourage you to get in touch with us. There are FINTRAC compliance officers across the country that will be responsible for ensuring you are in compliance with these new rules, but also to assist you, to work cooperatively with you to ensure you're understanding these rules, and to provide you the guidance you need in being able to implement these changes. To find out who your compliance officer is, to get in touch with them, to ask any questions by phone, you can call FINTRAC toll-free at 1-866-346-8722. That's 1-866-346-8722, and that's if you prefer to reach us by phone, so that one of our compliance officers will get back to you. If you do prefer corresponding with us by email, that outreach address on your screen is the way to do it, and again, one of our compliance officers will get back to you. In terms of looking for resources to help you with your training or with your continued understanding and learning about these new requirements before they come into force, there are a great deal of resources on our Web site, as Marilyne mentioned: guidelines, pamphlets, copies of this presentation as well as other presentations that FINTRAC has delivered over the past few months on money laundering, terrorist financing, FINTRAC's role, and other regulatory requirements. So feel free to download those, to download past webcasts. All of those will provide you with more information about these requirements and they're available under the Publications link on the FINTRAC Web site. You can also order publications from us through that Web site or through that toll-free number. That does bring us to the end of our webcast, just shy of three o'clock, so thank you once again for being with us. Thank you, Marilyne. I hope you enjoy the rest of your afternoon.

Marilyne:
Thank you very much and have a good day.