Canada: An Overview Of AML For EMDs

Last Updated: March 25 2014
Article by Susan Han

The headlines are eye-catching and the amounts involved mind-boggling. "HSBC to pay $1.9 Billion in U.S. Anti-Money-Laundering Case....," "JP Morgan Chase Agrees to $2.6 Billion..." in a settlement Manhattan U.S. Attorney Preet Bharara promised was "...not the last big money-laundering" case his office would bring. And across the pond, Standard Bank was fined £7.6 Million for failure to enforce its AML rules. Most recently, BNP Paribas set aside $1.1 Billion to pay potential penalties for violations of anti-money-laundering laws and economic sanctions.

The typical EMD does not handle physical cash, and many do not control or have custody over client assets. That is no reason to be complacent about AML compliance. EMDs are Securities Dealers under AML legislation, and are subject to an extensive and wide-ranging set of obligations.


All EMDs are required under securities legislation, and in particular, National Instrument 31-103, to have in place a comprehensive system of compliance and internal controls. In addition, under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the regulations (collectively, AML Legislation) EMDs must do the following:

  • appoint a compliance officer for AML (CAMLO)
  • have up-to-date and appropriate AML policies and procedures which have been approved by a senior officer
  • have a written, well developed and well thought-out risk assessment which documents the ML/TF risks in the EMD's business, and sets out the mitigation measures that the EMD has adopted with respect to the assessed risks
  • provide ongoing training on AML/CFT to employees (and document evidence of participation in such training programs)
  • conduct an independent review of the effectiveness of the EMD's AML compliance program, at least every two years.

For most EMDs, the CAMLO will be the CCO. The policies and procedures should contain a description of the CAMLO's authorities and responsibilities, which will typically include responsibility for the overall implementation of all elements of the EMD's AML program.


The importance of the risk assessment to the EMD's overall AML compliance program cannot be overstated. In my practice, the lack of an appropriate (or sometimes even any) risk assessment is the most frequent deficiency I see cited by FINTRAC examiners when a review is conducted. AML regulation is principles-based, meaning that in lieu of detailed prescriptions of what every regulated entity must do, it is up to each regulated entity to perform a careful assessment of the risk of ML/TF in its business. The specific policies and procedures, the training program, the 'red flag' indicators, the scope and depth and breadth of the independent review, should all fall out of the risk assessment.

To do a proper risk assessment, you have to make an inventory of the ML/TF risks (potential threats and vulnerabilities) to your business, and then sort or weight them in some logical fashion. Most often, the measure of risk will incorporate both the likelihood of occurrence as well as the impact to the organization if the risk were to materialize. Some risks may be fairly likely, at least from time to time (some incorrect client information appearing in an account opening form, for example), but any one occurrence will not pose a major ML/TF threat. Contrariwise, a risk may be remote in terms of probability, but if it were to occur, the impact could be very serious or even affect the viability of the EMD.

FINTRAC suggests that securities dealers conduct their risk assessment at two levels: one at the level of the business, involving an examination of the products and services offered; and the other at the level of the clients, focussing on who they are and the kinds of activities they engage in. In terms of what to include in a risk assessment, FINTRAC publishes some checklists in its Guideline 4, Implementation of a Compliance Regime1, but be advised that FINTRAC provides these only as examples of factors that may be considered, and warns that your own risk assessment may have to be more detailed to be adequate for your particular business.

A key function of the risk assessment is to list the factors that will identify or categorize the EMD's high risk clients and other high risk situations. Under the new guidelines in force as of February 1, 2014, when an EMD has such a high risk client or other high risk situation, the EMD is required to conduct an 'enhanced' level of customer due diligence and monitoring. There is no mandated or prescribed list of what will constitute or satisfy the requirement to take enhanced measures, but FINTRAC does offer some suggestions.2


EMDs trade in securities which are exempt from the prospectus requirement, and in doing so, EMDs must ascertain a quantity of information about their clients, simply to establish that the person is eligible to be a client. It should therefore be relatively simple to ensure that the client identification requirements imposed by AML Legislation are incorporated into the existing KYC and client on-boarding procedures. The purpose of gathering KYC information in the securities context is primarily to enable the dealer to give the appropriate advice and recommendations and so that the suitability assessment can be performed.

For AML, the function of KYC is to verify the existence and identity of the client, and to minimize the possibility that unbeknownst to the dealer, the named client is not the same as the person who actually owns or controls the client assets. The EMD must make a positive identification of individual clients, preferably face-to-face, relying on a government issued document such as a driver's license or passport. There are special rules and guidance for the use of provincial health cards and social insurance number cards, and there are other, somewhat cumbersome procedures to be followed if a face-to-face, physically in-person identification cannot be made.

There are identification procedures for clients who are not individuals, such as corporations, trusts and partnerships, and they need careful attention. Just as with individuals, the EMD must confirm the existence of the entity.3In place of a passport or driver's license, the EMD will need to review, and keep in the file, a document such as a certificate of corporate status or other filing made with government authorities. For a limited partnership, it could be the partnership registration filing or a copy of the signed Limited Partnership Agreement; for a trust it could be the Trust Agreement or a tax filing made by the trust. In addition to identifying the corporation, the EMD must also confirm the identity of every person authorized to give instructions for the client's account.

Once you have established the existence of the entity, you must then investigate and document beneficial ownership and control. For a corporation, you have to obtain the names of all of the directors. You also have to identify the individuals who directly or indirectly control 25% or more of the corporation. So for example, where the shareholder of a corporation is another corporation, you have to look through (and multiply the percentage ownership through) the parent or holding corporation until you find an individual. Where the EMD is unable to ascertain the accuracy of information as to beneficial ownership or control, the EMD must take reasonable measures to ascertain the identity of the most senior managing officer, and must classify the client as high risk, thus triggering the obligation to take the enhanced measures discussed above.


Related to, but not identical to, determining beneficial ownership is the concept of Third Party Determination. The third party in this context is any individual or person other than the actual client named on the account who is authorized to give instructions for the account. As the FINTRAC Guideline states: "When you are determining whether a 'third party' is involved, it is not about who 'owns' the money, but rather about who gives the instructions to deal with the money."4An individual's account as well as a corporate or entity account may require the EMD to make a third party determination. The AML Legislation requires that the EMD take 'reasonable measures' to identify third parties. At the very least, this will mean that the EMD must ask the client whether there is anyone other than the account holder who is authorized to give instructions for the account, and to record the client's response, even where the response is negative.

If the EMD determines that there is indeed a third party for an account, there are extensive rules as to the records to be kept about the third party. There is also an anti-avoidance measure: if the EMD "has reasonable grounds to suspect" that a third party is involved, the EMD will be under an obligation to maintain records, including details of why the EMD suspects that an account is being operated on a third party's instructions.5


The recent amendments to the AML Legislation have sought to enhance certain Customer Due Diligence procedures for all regulated entities, and a key part of that effort is the introduction of an ongoing monitoring obligation with respect to an EMDS's relationship with the client.6The purpose of the monitoring is to enable the EMD to detect suspicious transactions to be reported, to keep client information up to date, to conduct reassessments of the ML/TF risk posed by the client in question and to determine whether the account activity is consistent with the client information in the EMD's records, including the risk assessment or risk classification assigned to the client by the EMD.

The EMD's risk assessment framework will provide guidance on the specific activities that will constitute the ongoing monitoring, but they will invariably include periodic contact with the client to confirm or update beneficial ownership information as well as review of the client's account activity.


For all practical intents and purposes, an EMD will need a process to identify its high risk clients. A client may be classified as high risk through the EMD's risk assessment, either initially at account opening or as a result of the ongoing monitoring. Once a client has been identified as high risk, the EMD will have an obligation to implement 'enhanced measures' to mitigate against the risk of ML/TF. As discussed above, such measures are to be determined by the EMD, and will be designed to address the particular circumstances of the EMD and the client. Enhanced customer due diligence could include more frequent monitoring of account activity, obtaining additional documentation and the application of more stringent standards with respect thereto, establishing and enforcing transaction limits, by dollar volume or frequency or both, and other similar measures.


As securities dealers, EMDs are reporting entities under the AML Legislation and are required to submit reports in prescribed form to FINTRAC. These include Suspicious Transactions Reports or STRs. An area that poses a challenge to many EMDs is to identify the triggers for filing the STRs. Unsurprisingly, the publicly available guidance in this area is general rather than specific.7Financial institutions and other reporting entities are anxious about 'painting a road map' for would-be money-launderers seeking to evade detection systems.

As importantly, the techniques used to launder money are constantly changing, in response to new technology, upgrades in AML detection programs undertaken by FIs and investigations by law enforcement authorities.8It is incumbent on the CAMLO to develop and keep up-to-date a set of criteria or red flags which will cause the EMD to investigate a transaction further and determine whether an STR is required. An EMD which has never filed a STR may attract attention from FINTRAC for precisely that reason. EMDS will need to be able to demonstrate that they are indeed conducting the appropriate monitoring for suspicious transactions and are prepared to file the STR when circumstances dictate.


AML is a critical component of an EMD's compliance regime and FINTRAC's importance as a regulator is only set to grow. EMDs should take note that the recent federal budget announced new powers for FINTRAC and proposed to provide the agency with up to $12 million on a cash basis over five years to improve FINTRAC's analytics system. The Government of Canada stated that "This investment will increase efficiency, improve data quality and better meet the needs of Canadian law enforcement and other regime partners." AML Compliance is a serious matter and is here to stay.

Originally published in Exempt Edge, Spring 2014.


1 Available on FINTRAC's website:

2 FINTRAC's Guideline 6E, Recordkeeping and Client Identification for Securities Dealers, updated as of February 1, 2014, contains a "non-exhaustive" list of enhanced measures on p. 26:

3 Technically, the requirement is to confirm the existence of a corporation or other entity that "opens an account." For purposes of this article, we will assume that the EMD will have an account agreement and ongoing relationship with the client.

4 Ibid, p.32.

5 There are certain exemptions from the Third Party Determination and related record-keeping rules, including accounts opened and maintained by lawyers, accountants and real estate brokers for the purpose of servicing their clients.

6 The AML Legislation makes a distinction between "account-based business relationships" and "non-account-based business relationships". Under the definition contained in the AML Legislation, a "business relationship" with a client can arise if a client has an "account", or conducts certain transactions with the regulated entity. There is no definition of "account".

7 FINTRAC Guideline 2, Suspicious Transactions, gives examples of industry specific indicators.

8 See the FAFT 2009 Report on Money Laundering and Terrorist Financing in the Securities Sector, available at The Report contains case studies and examples of ML/TF in the securities industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Susan Han
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