Canada: Real Estate Developers Beware - New Amendments To Proceeds Of Crime (Money Laundering) And Terrorist Financing Act Will Apply To You

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Real Estate, February 2009

On February 20, 2009, key amendments to the regulations (the Regulations) under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act) will be brought into force. These amendments will make real estate developers part of the group of persons required to keep records and report certain transactions described in the legislation. Most importantly, real estate developers will have to develop comprehensive compliance regimes to specifically manage this reporting.

Do the new amendments apply to you?

For the purposes of the Act, you are a "real estate developer" if, in any calendar year after 2007, you have sold to the public:

• five or more new houses or condo units;

• one or more new commercial or industrial buildings; or

• one or more new multi-unit residential buildings, each of which contains five or more residential units, or two or more new multi-unit residential buildings that together contain five or more residential units.

Even one transaction after 2007 could cause you to be considered a real estate developer for the purposes of the Act. Only your activities within Canada will qualify you as a real estate developer.

Reporting Large Cash, Suspicious and Terrorist Financing Transactions

After February 20, 2009, if you are a real estate developer, the Act will now apply to you every time you sell to the public a new house, a new condominium unit, a new commercial or industrial building or a new multi-unit residential building, on your own behalf or, if you are a corporation, you do so on behalf of a subsidiary or affiliate (a prescribed activity). The Act imposes requirements on you to report certain large cash, suspicious or terrorist financing transactions in the context of prescribed activities.

Large Cash Transaction Reporting

If, in the course of a prescribed activity, you receive an amount in cash of C$10,000 or more over the course of a single transaction, the Act requires you to report the large cash transaction to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and to keep a large cash transaction record regarding such transaction. It is important to note that it is only if you receive the funds in cash (i.e., hard Canadian currency or the equivalent in foreign funds, not cheques or bank drafts) that these record-keeping requirements apply. You do not need to report the large cash transaction if the cash is received from a financial entity or a public body.

Large cash transaction reports must be sent to FINTRAC within 15 days after the transaction. If your transaction occurs on February 20, 2009, you may send the report within 30 days after the transaction. The form of report is prescribed by the Act, and Blakes can help you prepare these reports.

Suspicious Transaction Reporting

If, in the course of a prescribed activity, you suspect that the transaction may be related to a money laundering offence or a terrorist activity financing offence, you must report that transaction to FINTRAC.

What might be reasonable grounds for suspicion are largely determined by what is reasonable in the circumstances, and depends on the normal business practices within the industry. For example, you might become suspicious if the other party arrives at the closing with a large amount of cash to close the sale, or purchases multiple properties in a short time period, and seems to have few concerns about the location, condition, taxes payable and anticipated repair costs, etc., of each property.

Suspicious transaction reports must be sent to FINTRAC within 30 days after you or any of your employees or officers first suspect that the transaction may be related to a money laundering or terrorist financing offence.

Terrorist Financing Transaction Reporting

If, in the course of a prescribed activity, you come to know or believe that there is property in your possession or control that is owned or controlled by or on behalf of a terrorist or terrorist group, you must report this to FINTRAC.

In order to determine if the people or property you are dealing with may be related to terrorism, you will have to check various lists on a regular basis. Public Safety Canada maintains an online list of "listed entities" required under the Criminal Code and the Office of the Superintendent of Financial Institutions maintains an online list of entities and individuals required under UN Regulations dealing with terrorism financing. Various service providers can assist you in making this a regular part of your business practices going forward.

Incidents of terrorist financing transactions must be reported to the RCMP, CSIS and FINTRAC.

Identifying Your Clients

If you are required to make a large cash transaction report, suspicious transaction report or terrorist financing report, you will also have to ascertain the identity of every person with whom you conducted that transaction, in the manner set forth in the Regulations.

Individuals

The best way to identify an individual is to refer to some valid (not expired) piece of government issued personal identification, such as a birth certificate, driver's license, provincial health insurance card (if not prohibited by law) or passport while they are present in front of you. If an individual is not physically present for you to personally ascertain their identity, the Regulations also set forth a complex set of rules to properly ascertain their identity, with which Blakes would be happy to assist you. You must identify an individual at the time of a reportable transaction.

Corporations and Other Entities

Ascertaining the identity of a corporation or other entity is a little more complicated than ascertaining the identity of an individual. First, you should confirm the existence of the corporation by referring to a certificate of corporate status. You should also obtain its proper legal name and address and the names of the directors of the corporation, which can be done by obtaining and reviewing a corporate profile report. We can obtain both the status certificate and the corporate profile report for you. If you are dealing with a partnership or other entity, you should refer to its partnership agreement, articles of association or other similar record. The Regulations permit a longer period of time to do this for corporations and other entities – up to 30 days after the transaction.

It is important to note that once you have ascertained the identity of a person – whether it is an individual, corporation or other entity – you do not have to do so again for subsequent transactions if you recognize that person, unless you have doubts about the information you originally collected.

Third Party Reporting

At the time a large cash transaction record or client information record is created, you will have to take reasonable measures to determine whether the transaction is being conducted on behalf of a third party. If you suspect that the person you are dealing with is a front for someone else or is receiving instructions from someone else, that "someone else" is a third party on whom you should keep a third party record.

Your records regarding third party transactions should set out the name, address, and, if the third party is an individual, the nature of the principal business or occupation and date of birth of that third party. If the third party is a corporation, your records should include its incorporation number and place of issue. The record should also set out the nature of the relationship between the third party and the person with whom you are dealing.

If you are not able to determine that the transaction is being conducted on behalf of a third party, but you suspect that it might be, you should also keep a third party record. In that case, your records should indicate whether, according to the person you are dealing with, the transaction is being conducted on behalf of a third party along with reasonable grounds for your suspicions.

Detailed Record-Keeping

Additionally, when engaged in a prescribed activity, you will now be required to keep the following records:

• a receipt of funds record, unless the funds are received from a financial entity or a public body;

• a client information record; and

• where the receipt of funds record or the client information record is in respect of a corporation, a copy of the part of the official corporate records that contain any provisions relating to the power to bind the corporation in respect of transactions with you (the corporate information records). For example, this might include a certificate of incumbency, the articles and by-laws of the corporation.

The receipt of funds and corporate information records do not need to be kept if you also have to keep a large cash transaction record.

If you are required to keep records under the Act, you must retain those records for a period of at least five years following: (i) the day on which the last business transaction is conducted, for client information records and records identifying the client (as described above); (ii) the date the report was made, for suspicious transaction reports; and (iii) the day on which they were created, for all other records.

Required Compliance Regimes

If the Act applies to you, you will be also be required to implement a compliance program in order to manage your reporting and record-keeping. The compliance regime required by the Regulations can be quite onerous, and will require you to:

• appoint a person who will be responsible for implementation of the compliance program;

• develop and apply written compliance policies and procedures;

• assess and document risks related to money laundering and terrorist financing offences;

• review the policies and procedures that you have put in place, in order to test their effectiveness at least every two years; and

• develop and maintain a written ongoing compliance training program for your employees and agents.

Needless to say, you will also need to take measures to ensure ongoing monitoring of your financial transactions in order to detect and report large cash, suspicious or terrorist financing transactions. For example, this may require you to develop new internal reports to be completed with each transaction, or to set business limits or parameters regarding accounts or transactions that would trigger early warning signals and require mandatory review by your compliance officer.

It is very important to develop an appropriate compliance regime. Not only can failure to develop a compliance program make you liable to imprisonment of up to five years (if you are an individual who owns your business, or a director or officer of a corporation) or a fine of up to C$500,000 (or both), but the failure to develop a satisfactory compliance program could also result in failures to report these types of transactions – which, of course, attracts its own fines and penalties.

Although all compliance programs need to have the same basic elements, your compliance regime can be tailored to the particular needs of your organization. For example, if you are a smaller regional real estate developer, your compliance program may be simpler than that of a large national real estate developer.

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.