As a commercial borrower, here is what you need to know about AML

  • First National Financial LP

Money laundering – a product of illegal drug trafficking, financial crimes, and commercial trade fraud -- is a serious crime worldwide. As a result, the Government of Canada has enjoined the country's financial institutions in putting up a united front in combating this complex problem with comprehensive Anti-Money Laundering ("AML") controls. In this interview with Taryn Kelly, Manager, Compliance – Commercial Mortgages, we learn more about the AML standards First National meets to stamp out this costly crime.

Taryn, what is money laundering?

It's a method by which illicit funds received from criminal activities are processed through legitimate businesses and converted into clean money that can't be easily traced back to their criminal origin. The term is said to have originated in the 1920's when organized criminals turned to laundromats to funnel ill-gotten gains.

Is it accurate to say that the governments have been working to combat this problem for years?

Definitely. To take a short walk through recent history, Canada is a founding member of the Financial Action Task Force on money laundering, established in 1989 by the G7. In 1991, the Canadian government passed the Proceeds of Crime (Money Laundering) Act and it established record-keeping and client identification requirements in the financial sector to help with the investigation and prosecution of money laundering offences under the Criminal Code of Canada and the Controlled Drugs and Substances Act. A major amendment was made to that Act in 2000 to expand the scope of its application and to establish a financial intelligence unit with national control over money laundering called FINTRAC. After the September 11th attacks on the U.S. in 2001, the Act was expanded again to deter terrorist activity and was renamed the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).

Has the Act changed since then?

Yes, we've seen additions including amendments designed to expand client identification, record-keeping and reporting requirements, and new obligations to report suspicious transactions as well as outgoing and incoming international electronic fund transfers and to undertake risk assessments and implement written compliance policies and procedures.

Would it also be accurate to say this is a never-ending battle?

I would say so, and the legislation continues to evolve. Canada is not unique in this fight but because we do not have a central corporate registry where beneficial owners of assets are listed, the government and financial institutions have had to take different steps than what you might see in other countries with businesses actively participating in identification and verification processes.

What would a corporate registry do?

A beneficial owner registry would make it difficult for beneficial owners to hide behind shell companies and it would help financial institutions more easily comply with Know Your Client “KYC” rules that are part of the legislation.

What's the purpose of Know Your Client rules?

As a lender, we have to ask ourselves, does a deal make sense to us? Does the borrower's track record, history, income level and ownership structure all add up or is there a gap or an inconsistency? By applying the Know Your Client rules, we can answer those questions, fill in any blanks and gain comfort on the identity of our clients, and sources of funds. This mandates that we dig deeper to get the full picture. As a lender, Know Your Client makes a lot of sense in any event, but this is a formalized system that all lenders must follow, without exception.  And in relation to AML regulations specifically, we are getting to the bottom of who benefits from a transaction.

So even though First National is a non-bank lender you still apply the AML rules?

Correct.  We are not a bank, but we absolutely apply the AML guidelines because we work with the largest regulated institutions in the country on a daily basis through our investor network, and on a moral and ethical basis, we absolutely want to do our part.

In practical terms, how have lenders like First National and your borrowers been affected by AML?

For First National, we've adopted new procedures and policies to incorporate AML standards into everyday business practice. This requires more paperwork, more document review, and more due diligence. For our clients, the rule changes have had the same impact. They are asked to provide more information and more disclosure and with it, submit more paperwork. It's time consuming but of course our clients understand why it's necessary. Really, AML is now such a big part of normal-course business in the financial and real estate industries that it's broadly accepted, even if it is intrusive.

By intrusive, what do you mean?

So for example, if a borrower applies for a loan and part of the asset is owned personally and part by their family trust, the Know Your Client rule requires us to know who the individual beneficiaries of that trust are, even if their family member beneficiaries are not directly subject to the loan or involved in running the asset. This kind of disclosure may seem excessive but as I said, absent a national, central corporate registry, it's necessary.

What are the penalties for non-compliance?

Lenders can face fines, operating restrictions or sanctions, and depending on the level of offense, there could be a significant loss of reputation.  Compliance is something we take very seriously.

What key documents or attestations should borrowers be prepared to provide First National upon loan application?

At the time of application, it's in a borrower's best interest to provide accurate and full disclosure on their corporate ownership structure, because this has an impact on the entire transaction from beginning to end. If we don't have full disclosure, or if a piece of information is missing about the ownership structure, it can delay a deal, force an additional guarantee on the loan, hold up funding, and, if it's a CMHC-insured transaction, it can change the certificate of insurance. To avoid these types of issues, my advice would be for borrowers to consult with their lawyers and accountants ahead of time to make sure they are relaying the most accurate ownership information to First National right from the beginning.

Is First National doing anything to make AML compliance easier for borrowers?

Absolutely, we've set up processes to mitigate issues and potential for delays. For example, some time ago we created a standardized loan information form as part of our commitment process and when a borrower fills it out, or sends it to a lawyer to do so, it goes a long way toward ensuring a smooth transaction and eliminating the back and forth that's otherwise necessary to satisfy the Know Your Client requirements.

What information do you need?

In addition to detailed corporate ownership data – including share ownership percentages – the legislation requires us to document Board structure, capture a list of signing officers, the name of the property manager, the insurance broker, the asset purchase price and intended use of loan proceeds. We also need a declaration if there are any politically exposed persons involved in the transaction.

What is a politically exposed person?

Anyone who holds a high position within the Canadian or a foreign government or within a government body or with an international organization. In short, a PEP is anyone who could be subject to unusual influence or corruption, or is closely associated to someone in that position. It's a declaration that's required on every transaction.

It sounds like you've put considerable effort into streamlining your processes.

We have; we've put a whole program behind AML on a company-wide basis.  Every member of the First National team gets specific AML training annually – regardless of their position in our organization – to help them do their jobs effectively. On the sales side, the team has become very proficient over the years in knowing what questions to ask and knowing how to help clients prepare to conform. We also share regular updates with frontline departments because new information is always coming forward.

Are more AML changes or refinements to legislation on the way?

I think there will always be changes to the legislation because the criminal element keeps evolving.

Even with the actions First National has taken to help borrowers, your clients can't exactly be over-joyed by being asked for extra information.

That's a fair comment and we understand that AML is a burden that is shared with our clients. But I think we're at a place now where we know the legislation isn't going away, and borrowers know that too.  Both First National and our clients recognize that there is a broader societal good being served through our actions. Since we accept it as an ongoing obligation, First National has prioritized developing the most efficient processes for helping our borrowers satisfy AML requirements.