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Mortgage Companies and the Trickle-Down Effect of Money Laundering Legislation

27/09/2012


Mortgage companies in Canada generally do not have explicit anti-money laundering (AML) obligations, and the application of AML obligations has not been proposed as part of a recent review of Canada’s AML legislation. Others financial services companies, like banks and credit unions and foreign exchange companies, do have such obligations. Those obligations include things like identifying clients in a particular way, keeping records about activities, reporting cash and suspicious transactions, managing money laundering risk, and putting in place a program to make sure they comply with the AML laws.

But what happens when a regulated bank buys mortgages from a mortgage company that isn’t subject to AML legislation? Canada’s bank regulator, the Office of the Superintendant of Financial Institutions (OSFI), recently announced that those banks have to establish that the mortgage company they are dealing with has followed prevailing AML laws (voluntarily), or they have to start from scratch with each mortgage. Starting from scratch is expensive because it could impact the price and cost associated with selling bundles of mortgages. It can involve invasively re-identifying every person that signed onto each mortgage in the bundle being sold, and according to the strict and specific requirements of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). As a consequence, many mortgage and finance companies are voluntarily adopting AML compliance programs and taking measures to evaluate and remediate historical mortgages files to comply with contemporary AML standards.

Client Identification and Related Steps

Photocopying the driver’s licence of a mortgagor is not enough to satisfy Canada’s AML legislation.

  1. If the mortgage company meets the mortgagor in person, they have to check the name and address of the individual against particular government identification, which must be valid and not expired at the time they meet.
  2. If the mortgage company does not meet the mortgagor in person, they must either identify the individual using prescribed combinations of methods permitted by the PCMLTFA, or have in place an advance agreement with the required components with the broker/agent or lawyer that conducted the identification.

If the client identification was not conducted using one of these methods, the PCMLTFA would say that the client’s identity had not been ascertained, and prohibit the bank from dealing with the client. To satisfy their regulator, banks may require that mortgage companies identify each mortgagor in a bundle of mortgages according to current standards before they can be purchased.

In addition to ascertaining the client’s identification, certain information must be gathered from the client, and certain determinations made. By way of example, the mortgage company would have to gather the mortgagor’s date of birth and occupation (with the specificity required of relevant guidelines). Also, the mortgage company would seek to determine if the person was dealing on behalf of another person, previously held prescribed positions in any foreign government (i.e. a politically exposed foreign person), or was listed on terrorist financing or other sanctions lists.

Renewals complicate matters, because new accounts can trigger additional record-keeping obligations, and the reliance on initial identification may be barred in certain circumstances.

Money Laundering Risk Management

Banks and other financial services companies are also required to assess and document their risk of money laundering, and then to apply measures proportionate to the risk assessed. Legislation requires that those companies keep identification information up-to-date for clients involved in high risk activities, as well as to subject their transactions to enhanced monitoring. For mortgages, high risk clients might be isolated for risk-sensitive measures because of their occupation (e.g. real estate dealers and employees), their product mix (e.g. non-income qualifier mortgages), their activities (e.g. cash intensive transactions, early repayment, third party payments), and their geographic location (e.g. high intensity drug trafficking areas). Mortgage companies may wish to voluntarily adopt a risk management program for anti-money laundering in order to avoid price discounts or rejections of mortgages for perceived unmitigated risk.

Reporting

For regulated entities, prescribed transactions are reported to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Prescribed transactions include those reporting terrorist property (terrorist property reports or “TPRs”), international funds transfer transactions with a value of CAD 10,000 or more (electronic funds transfer reports, or “EFTRs”), cash transactions of CAD 10,000 or more (large cash transaction reports or “LCTRs”), and suspicious and attempted suspicious transactions (“STRs”). Since mortgage and finance companies are not among the categories of financial services companies with responsibilities to AML legislation, they are not obligated to file TPRs, EFTRs, LCTRs, or STRs with FINTRAC, and may be prevented from doing so by privacy legislation. Notwithstanding, it is an offence in Canada to knowingly deal with the proceeds of crime, and the criminal code grants immunity to persons disclosing to law enforcement in good faith information relevant to a crime or terrorist property. Some persons provide information voluntarily to FINTRAC in respect of transactions they deem suspicious. It is unclear whether provisions for civil and criminal immunity apply in respect of these voluntary disclosures to FINTRAC.

It is worth noting that guidance drafted by OSFI prohibits banks and other entities it regulates from issuing a mortgage in cases where an STR has been filed.

In Short

AML legislation applicable to financial services companies, as well as heightened expectations applied by federal regulators, have trickled down to impact the activities of mortgage and finance companies, which are not formally subject to those same regulatory standards. Ignoring those expectations can lead to unsalable and underpriced mortgage portfolios. Voluntary adoption of domestic AML standards which apply to expected purchasers can lead to easier sales processes, and can help to preserve the mortgage company’s reputation.