Mortgage industry players will have new reporting obligations under Canada’s anti-money laundering and anti-terrorist financing regime, starting October 2024. Mortgage brokers, lenders, and administrators will have to prepare now to comply under these reporting rules, which will be monitored by Canada’s anti-money laundering watchdog and financial intelligence agency, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). These rules—which investment dealers and advisers are already subject to—will now include those involved in mortgage transactions as “reporting entities.”
The federal government noted that this change is due to growing money laundering risks resulting from increased digitization in the global economy. Each year, between $45 billion to $113 billion is laundered across the country, based on a 2020 report from Criminal Intelligence Service Canada. According to FINTRAC, mortgage and real estate transactions are a common method of money laundering because it involves the transfer of large amounts of money. For example, criminals could use illegal funds to pay a mortgage and turn these funds into legitimate equity in real estate.
As a mortgage broker, it’s important to be alert to money laundering risks and take important steps to avoid them. Even if you engage in money laundering activity unknowingly, there’s still a risk to your reputation and legitimacy in the market. In this blog, we’ll walk through how the new rules will affect you and your clients. We’ll also examine how partnering with transparent and trusted lenders, as well as leveraging technology for mortgage process automation, can help you in preparing to comply with these regulations.
What are your obligations under the new rules?
There are many requirements and obligations under these new rules. Mortgage brokers, lenders, and administrators will have to:
- Develop a compliance program
- Perform customer due diligence, including identifying verification and beneficial ownership identification
- Maintain records for receipts of every amount received for a mortgage
- Report suspicious transactions, large cash and virtual currency transactions, and follow specific steps when funds are moved from or to certain countries
You will also be required to review your anti-money laundering program every two years and conduct ongoing monitoring. Here are some of the rules that you’ll need to prepare for now.
Develop your compliance program now
One of the first steps is to establish and implement a compliance program. It’s important to get a head start on building out your compliance plan to mitigate future risk. To develop your plan, FINTRAC notes that you must:
- Appoint a compliance officer to implement the program
- Develop and apply written compliance policies and procedures that are kept up to date
- Complete a risk assessment of your business to assess and document the risk of money laundering or terrorist activity financing within the course of your activities
- Include an action plan within your written policies and procedures for what should be done if a high risk is identified. The plan should include:
- Special measures to verify the identity of any person or entity involved
- Other measures to mitigate risks
- Create, maintain, and deliver an ongoing compliance training program for your employees, agents or other authorized persons
- Devise a plan to review the compliance program for the purpose of testing its effectiveness and carry out this review every 2 years at a minimum
Under these rules, you’ll be required to verify client identities and keep various records relating to the client.
Prepare to keep records and submit reports
Before the rules come into effect, you should also consider how best to keep your records, as the obligations outlined by FINTRAC are quite extensive. These records will be essential in preparing reports that you need to send to FINTRAC on suspicious transactions, terrorist property, as well as large cash and virtual currency transactions. You must keep the following records for at least five years:
- Large cash and virtual currency transactions
- Copies of all reports sent to FINTRAC
- Receipt of funds records
- Records with information on mortgages you arrange, and loan information on the client’s financial capacity, the nature of their job or business, and the terms of the loan
- A client’s personal information and identification records
- Beneficial ownership records
- Politically exposed persons records
- Records related to any business relationship
- Third party determination records
Know your client
Mortgage brokers are already well versed with ‘know your client’ (KYC) best practices. KYC principles require you to verify the identity, suitability, and risks involved with maintaining a business relationship. This includes doing your due diligence on your client’s identity, their source of funds, and money laundering risks. It will continue to be important to ask questions and get all the information up front.
Penalties
If you don’t comply with these rules, fines can be steep. Recent multi-million dollar penalties levied against a few of Canada’s big banks provide a cautionary tale. There are different levels of penalties depending on the severity of the violation. For a minor violation, penalties can go up to $1000. For a more serious violation, you could be fined up to $100,000, and for a very serious violation, fines could reach $500,000 (or $100,000 for an individual).
We’re in this together
Like you, mortgage lenders are also subject to these reporting obligations. For responsible and transparent private lenders like CMI, many of these principles come as second nature and anti-money laundering has always been top of mind. Since private lenders are more flexible, particularly when it comes to gifted down payments and working with different types of borrowers, it’s always been our priority to ensure that funds are legitimate. Brokers and lenders alike are responsible for knowing the borrower that we work with and are lending to. When submitting a mortgage application, it’s important to cover all important information on clients. You can use the 5 C’s as a guide:
- Character: an explanation for derogatory credit, and explain your client’s circumstance and ability to pay back their debt
- Capital: details of client’s other assets and financial resources, as well as details on source of funds
- Capacity: details on income and employment status
- Conditions: details on the purpose of the loan, any concerns about the deal, and the client’s exit strategy
- Collateral: disclosure around property information and intended use
To help meet these obligations, you may also want to consider onboarding new technology, such as mortgage workflow automation, to help prepare your business for some of the reporting and record-keeping obligations. Mortgage automation could be a helpful tool to achieve regulatory benchmarks, such as complying with anti-money laundering rules, through automated record-keeping and increasing operational efficiencies. Larger national brokerages have been using online tools, such as MortgageBOSS and Velocity, but smaller, newer brokerages should also consider adopting similar tools to stay competitive. For example, you could implement automated document verification or risk assessment software, technical tools to simplify and ensure accurate reporting, or for medium-sized to larger brokerages, cloud-based record-keeping tools could help streamline your processes. In addition, even though you may be compliant, it’s a good idea to think about digitizing your records. Many independent brokers may still keep paper records, which could be more challenging to keep track of. Some of these technologies can help you explore new ways to keep records digitally so that you can find what you need more efficiently.
At CMI, we know brokers because we started as one. Partner with us today and learn how we can help build and protect your business—not compete for it.
