• Exempt market dealers are “reporting entities” under the Act
and Regulations and have certain obligations including:
• implementing a compliance regime;
• maintaining certain records and verifying client identification;
• reporting suspicious transactions and terrorist property to
Some of these obligations are met by complying with
securities legislation, in other cases an EMD must do more to
comply with the AML/ATF laws and regulations.
As noted above, most EMDs are familiar with the monthly
terrorist property reports sent to securities regulators (which
eventually make their way to FINTRAC). Reporting suspicious
transactions applies to dealers and all their employees and
includes attempted transactions. For example, an “investor”
whose full name is ‘Bugsy’ and has a P.O. Box for an address
wishes to make a large investment with a suitcase of $100 bills,
and then immediately asks how he can redeem his investment.
Obviously a dealer should refuse to enter into this transaction,
however, the dealer must also report this to FINTRAC as an
attempted suspicious transaction.
Client due diligence is required under securities legislation
as well as AML/ATF laws and regulations. Verification of a client’s
identity is important for both purposes. The AML requirements for
dealers also include the identification of politically exposed foreign
persons (PEFP) which is aimed at preventing corrupt funds from
entering the Canadian market. As a result, the Regulations require
additional levels of approval and enhanced monitoring if a dealer
conducts transactions with a PEFP.
EMDs are most likely to fall short when it comes to the
requirement to have an AML compliance regime. As with
securities legislation, the AML/ATF laws and regulations require
a compliance regime tailored to reflect the nature, size and
complexity of the dealer. The compliance regime must include:
• appointment of an AML compliance officer;
• written policies and procedures to comply with the Act and
• a written assessment of the AML/ATF risks of the business
• a training and compliance program for employees; and
• every two years a review must be done of the EMD’s policies
and procedures, risk assessment, and training program to
test their effectiveness.
Commonly, the Chief Compliance Officer may administer
the AML/ATF policies and procedures which are part of the
EMD’s written policies and procedures to comply with securities
legislation and prudent business practices.
The written assessment of the AML/ATF risks and mitigation,
include identifying the risks presented by the EMD’s business
model or its clients. Due to illiquidity and long hold periods,
exempt securities generally present low risks of money laundering
activity. However, they are not impervious to this activity or to
risks from terrorist financing.
The Regulations also require an EMD to have a training
program for its employees. The training program must be in
writing, up to date, and conducted with some frequency.
Finally, the EMD must have a review conducted of its
AML/ATF compliance program. The review should be done
by an internal or external auditor or an outside consultant.
The review must address whether policies and procedures are in
place, being adhered to, and comply with the AML/ATF laws and
regulations. Testing effectiveness and adherence will likely include
interviews with employees who meet with clients and a review of
client files. The EMD can conduct a self-assesment which should
be conducted by a person who is independent of the reporting,
record-keeping, and compliance monitoring functions of the dealer.
Like the securities regulators, FINTRAC has compliance
officers who conduct reviews of securities dealers to ensure they
have AML programs in place that meet the requirements under
the Act and Regulations. Similar to the securities regulators,
FINTRAC will issue a report based on the field review and require
a plan to correct the deficiencies within 30 days. And like the
securities regulators FINTRAC has been conducting compliance
field reviews of EMDs.
Unlike the securities regulators, FINTRAC can levy a fine
against an EMD for not meeting the requirements under the Act
or Regulations. Failure to comply with the AML requirements,
AML compliance regime, reporting, record keeping, high risk
client monitoring or client identification requirements can lead to
criminal charges against an EMD. Conviction for failure to retain
records could lead to up to five years imprisonment, to a fine of
$500,000, or both. Alternatively, failure to keep records or identify
clients can lead to an administrative monetary penalty. FINTRAC
can impose administrative fines of up to $100,000.
For more information on FINTRAC or to see the guidance
on meeting the obligations under the Act and Regulations they
provide, please visit: www.fintrac-canafe.gc.ca
For more information contact: