OSFI Issues Draft Revised Guideline B-8 – Deterring and Detecting Money Laundering and Terrorist Financing Jacqueline Shinfield As anticipated, on November 7, 2008, the Office of the Superintendent of Financial Institutions of Canada (OSFI) released a DRAFT revised Guideline B-8, which deals with OSFI’s expectations in respect of federally regulated financial institutions (FRFIs) policies and procedures and risk controls for deterring and detecting money laundering and terrorist financing. This Guideline has been expected by the financial industry for some time, given that the previous Guideline B-8 was issued before the recent amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PC Act) and many of its provisions have been incorporated in the PC Act and its regulations. The Guideline is still in draft form. OSFI will be accepting comments regarding the Guideline until Wednesday, December 10, 2008 through industry associations. Of significant note is that OSFI is of the view that the Guideline does not create any new regulatory requirements, but rather is intended to underpin current regulatory requirements. Accordingly, OSFI has advised that FRFIs should consider the provisions of the Guideline as mandatory. FRFIs should review their existing policies and procedures to ensure that they meet the expectations of this Guideline. Given the short comment period and the intention of OSFI to implement this Guideline in December 2008, it is unlikely that there will be significant changes. Highlights of the Guideline as are follows: 1. FRFIs. The Guideline applies to federally regulated financial institutions, which is defined at the end of the Guideline to include “banks, authorized foreign banks in respect of their business in Canada (foreign bank branches or FBBs), companies to which the Trust and Loan Companies Act applies, and life insurance companies or foreign life insurance company branches to which the Insurance Companies Act applies; and includes an FRFI’s branches and subsidiaries world wide, if applicable”. 2. The Role of the CAMLO. The Guideline sets out detailed information on OSFI’s expectations of the person who assumes the role of the Chief Anti-Money Laundering Officer (CAMLO). The CAMLO is expected to be positioned centrally at an appropriate senior corporate level and should have clear and documented responsibility and accountability for the AML/ATF program content and design. The CAMLO should have unfettered access to all pertinent information, records and personnel throughout the FRFI and should have working knowledge of AML/ATF regulatory requirements. Appropriate professional qualifications, including strong leadership skills, are seen as essential. The Guideline also sets out specific duties for which the CAMLO should be responsible. The CAMLO is expected to be responsible for both the regulatory compliance component and the broader risk management component of the FRFI’s AML/ATF program. 3. Assessment of Internal Risk. The Guideline sets out risk categories that an FRFI should utilize in its risk assessment, but provides that such categories should not be regarded as “checklists” or finite sets of requirements. In the various risk categories set out in the Guideline, the following points are noteworthy of what OSFI considers may indicate higher risk customers: Client Risk clients who began a relationship or opened an account with the FRFI prior to the coming into force of the PC Act and who have not been subsequently identified and had their identities ascertained; Business Relationship Risk accountants, lawyers or other professionals holding comingled fund accounts where beneficial ownership of funds is difficult to verify; Product/Service Risk trade finance services where the FRFI cannot assess whether the value of goods or services is reasonable; credit accounts where large credit balances can be maintained; and Delivery Channel Risk Internet, telephone and mail, when used to deliver client applications and other electronic banking services. 4. Control Policies and Procedures. OSFI has indicated that it is essential that the AML/ATF procedures of an FRFI clearly state what actions are to be taken by whom, where and when. 5. Client Due Diligence. The Guideline provides that, as a general principle, a business relationship should only be entered into or maintained with a client if the FRFI is satisfied that the information gathered demonstrates that the FRFI knows the client; in other words, the client has disclosed their true identity and a legitimate purpose for entering into or maintaining the business relationship with the FRFI. 6. Client Identification. OSFI indicates in the Guideline that where a client presents a higher risk, the FRFI should consider supplementing the identification requirements set out in the PC Act with additional evidence of identity. 7. Source of Accumulated Funds or Wealth. The Guideline provides that FRFIs should satisfy themselves with respect to the amount of a client’s accumulated funds or wealth to ensure that it appears consistent with and reasonable in light of information provided by the customer. 8. Mortgage Loans. The Guideline requires an FRFI to assess the risk that property secured by a mortgage loan might be used for illegal cultivation or manufacture of illicit substances. If there is such a risk, additional due diligence measures are prescribed. 9. PEFPs and Commercial Databases. OSFI provides guidance in the Guideline in respect of consulting a commercial database for screening for PEFPs, including consideration of the limitations of commercial databases. 10. New Technologies. The Guideline addresses new technologies that may not be caught under the PC Act. In this respect, the Guideline indicates that it expects FRFIs to have policies and procedures in place to ensure that new and developing technologies are included in the risk assessment. By doing so, an FRFI can ensure that appropriate AML/ATF measures and controls are in place. Examples that OSFI cites of new and developing technologies include: stored value cards where clients are permitted to download funds into a deposit or credit account; mobile telephone technology; and various e-money services that have similar characteristics. 11. Screening of Financial Institutions’ Directors and Officers. OSFI’s recent Guideline E-17, finalized in February 2008 and effective as of January 31, 2009, outlines OSFI’s expectations in respect of assessing suitability and integrity of an FRFI’s directors and senior management. Although that Guideline does not specifically require AML/ATF checks against directors and officers, FRFI’s policy in respect of such assessments will now be reviewed as part of an FRFI’s AML/ATF assessment. 12. Sanctions/Name Searching. OSFI has indicated that it will issue a new Guideline in 2009 dealing with the obligations imposed on FRFIs relating to designated name searching, listing and reporting, and economic and anti-proliferation sanctions. 13. Other matters addressed in the Guideline. OSFI provides detailed analysis and guidance in the following additional areas: correspondent banking; processing electronic funds transfers; trade finance issues; aggregation of cash transactions; suspicious and attempted suspicious transactions; self-assessment and controls; and effectiveness testing. If you have any questions in respect of the Guideline, please contact Jacqueline Shinfield at 416-863-3290 or Dawn Jetten at 416-863-2956 or any other member of our Financial Services Group. 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