LIFE INSURANCE ADVISORS are poised to play a bigger role in the fight against money laundering and terrorist financing. A new set of rules will force these advisors to keep closer tabs on their clients than ever before.

The rules could mean onerous new compliance requirements for you – and if you fail to comply, you could be subject to hefty fines and potentially even jail time, industry associations warn.

“They’ve expanded the scope of [the rules],” says Susan Allemang, head of regulatory and policy affairs with Mississauga, Ont.-based Independent Financial Brokers of Canada. “We’re very concerned that a lot of people operate small financial practices, and yet they have to have all of these procedures in place.”

Specifically, insurance firms and brokers now are required to take extra steps to gather and verify information about the identity of clients who are buying life insurance policies and to monitor clients more closely on an ongoing basis for any risks that could emerge.

These new requirements stem from amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) that took effect on Feb. 1, along with a new set of guidelines from the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) that outline the new responsibilities in detail.

The goal of PCMLTFA is to improve the detection and deterrence of money laundering and terrorist financing. An advisor’s role under the act, broadly speaking, is to alert the authorities to any suspicious transactions.

Although the insurance industry has been subject to that requirement for more than a decade, the revised rules expand the specific responsibilities that advisors and insurers face under the act. The changes are intended to bring the Canadian regulations in line with international ones established by the Financial Action Task Force.

“There are increased requirements for obtaining information about who the client is that you’re dealing with,” says James Wood, counsel with the Canadian Life and Health Insurance Association Inc. (CLHIA). “And you have to take reasonable measures to confirm the accuracy of information.”

The new rules subject the insurance industry to many of the same compliance requirements as other financial services entities. Some insurance industry players question that “one size fits all” approach, given that other industries – such as banking – are considerably more vulnerable to money laundering.

“I imagine [insurance] is not the first place that money launderers or terrorists would look at in order to obtain funds,” says Frank Zinatelli, vice president and general counsel with CLHIA. “There are other industries that are higher risk.”

However, insurance products with cash or investment components, in particular, can be used to launder money in creative ways, according to Peter Lamey, a FINTRAC spokesman. For example, he says, a client potentially could use an insurance policy as a pseudo bank account by overfunding it, then either make periodic withdrawals or cancel it altogether.

“The goal,” he says, “may be to convert cash to something more legitimate, such as a cheque from a Canadian insurer.”

In order to prevent such scenarios, the new rules require you to gather more information about a client’s intended use and purpose of a life insurance policy at the time of purchase, the source of funds being used to purchase the policy and the ownership details of any corporation or other entity involved in the insurance policy.

Next: Advisors will be more likely to find themselves with compliance deficiencies
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Advisors will be more likely to find themselves with compliance deficiencies

FINTRAC periodically conducts random audits to assess compliance with the rules. Advisors will be more likely to find themselves with compliance deficiencies under the new rules, Allemang says, vs the relatively vague nature of the regulations that previously were in place.

“[The new rules] give FINTRAC greater potential to find deficiencies in an audit,” Allemang says, adding that such deficiencies can lead to hefty fines of up to $500,000 and jail sentences. “That’s where we are concerned, because the penalties are significant.”

Not all of the new requirements will mean big changes for advisors. For instance, Wood notes, most advisors already collect information about the intended use of a life insurance policy as part of the sales process.

“If you’re already doing customer due diligence,” Wood says, “you already know the answer to those questions.”

Brian Shumak, an independent certified financial planner and owner of Brian Shumak Financial Services in Toronto, says that because he engages in comprehensive financial planning, he already gathers extensive client information: “I ask those invasive questions anyway as part of getting to know the client.”

But insurance advisors who take a less comprehensive approach are likely to feel the effects of the new rules, Shumak says. He warns that compliance can lead to uncomfortable conversations, as some clients have a natural tendency to become defensive when certain questions are asked.

“It’s going to be a little bit more intrusive,” he says, “than [some advisors] are used to.”

Furthermore, you won’t be able to rely entirely on information provided by your clients. The new rules require you to verify the accuracy of the information provided. In cases in which a life insurance policy is being purchased by a corporation, for instance, you must identify any individuals who have an ownership interest in the corporation – with paperwork to prove it.

“You must search through as many levels of information as necessary in order to determine beneficial ownership,” says Lamey. “You must keep a record of the measures you took and the information you obtained in order to reach that conclusion. You have to show your work.”

In cases of private corporations that are not required to disclose ownership information publicly, that information can be difficult to find, Wood says: “There’s no public source for this type of information. It could be a fairly onerous requirement to get this information lined up.”

You also are required to monitor the clients you work with more closely on an ongoing basis under the new FINTRAC guidelines. Whereas you previously were required to keep tabs on any clients considered high risk from a money laundering or terrorist financing perspective, you now must monitor almost all your client relationships.

“[Regulators] seem to be moving away from the risk-based approach,” Allemang says. “There’s more of an obligation for ongoing monitoring – not just in high-risk cases but in other cases as well.”

Specifically, in cases in which a client has opened an account or conducted two or more transactions, you are required to keep the client’s information up to date, periodically reassess the level of risk associated with the client’s transactions and activities, and ensure that new transactions are consistent with the information you obtained previously.

In cases in which the client is considered to be a high risk, FINTRAC urges advisors to go further by taking steps to mitigate the risk, such as imposing transaction limits or requiring the first payment to be carried out through an account in the client’s name.

Insurance advisors can expect to hear much more about money laundering. The Office of the Superintendent of Financial Institutions (OSFI) is expected to released its new guidance in this area in the months to come.

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