Risk-based approach workbook
Money services businesses (MSB)

September 1st, 2015

Risk-based approach workbook for MSBs (PDF version, 269 KB)


Introduction

FINTRAC has designed this workbook to help you with your risk-based approach (RBA).  It is structured to help you identify risks by products, services and delivery channels; clients and business relationships; geography and other relevant factors.  It will also help you implement effective measures and monitor the money laundering and terrorist financing (ML/TF) risks you may encounter as part of your activities and business relationships. 

For more detailed information on implementing a risk assessment, please refer to the information contained in the FINTRAC Guidance on the Risk-Based Approach and Guideline 4: Implementation of a Compliance Regime.

Who should use this document?

This document is for a small business in the money services business (MSB) sector.  A money services business means an individual or entity engaged in the business of any of the following activities:

How should you assess your risks?

As part of your risk assessment, you need to identify the areas of your business that are vulnerable to being used by criminals for conducting money laundering or terrorist financing (ML/TF) activities. 

This means that you need to assess the risks associated with all your business services and activities. Specifically, you must address the following four areas:

To do so, you need to consider the types of clients you deal with, the products and services you provide, how you deliver your products or services and the location of your business. 

If you identify situations that represent a high risk for ML/TF activities, you need to control these risks by implementing mitigation measures, including conducting enhanced ongoing monitoring and keeping client information up to date.  This will be explained further in the document. 

Risk-based approach cycle

The following cycle represents the main steps of your risk-based approach:

The following chart depicts the cycle of the steps of the risk-based approach.  Each step is described in the following pages.

View the text equivalent
  1. Identification of your inherent risks

    Products, services and delivery channels:
    Products, services and delivery channels offered that may pose higher risks of ML/TF.

    Geography:
    Location of your business and activities in relation to certain landmarks, populations or events.

    Other relevant factors:
    Other factors that are relevant to your business

    Clients and business relationships:
    Inherent risks linked to the nature and type of business that your clientele has with you through:

    1. the products, services and delivery channels they utilize;
    2. their geography; and
    3. their characteristics and patterns of activities.
  2. Create risk-reduction measures and key controls
    Risk mitigation is about implementing controls to limit the ML/TF risks you have identified while conducting your risk assessment.
    When your risk assessment determines that risk is high for ML/TF, you will have to develop written risk mitigation strategies and apply them to the high-risk situations or clients you have identified.
  3. Implement your risk-based approach:
    Once you have gone through the risk assessment exercise, you will apply your risk-based approach as part of your day-to-day activities.
    It is important that your compliance policies and procedures are communicated, understood and adhered to by all the staff dealing with clients.
  4. Review your risk-based approach:
    Part of your risk assessment must also include a periodic review (minimum every 2 years) to test the effectiveness of your compliance regime.
    This will help evaluate the need to modify existing policies and procedures or to implement new ones. A risk-based approach is not a static exercise. The risks identified will change or evolve over time as new products or new threats enter your business context.

To better assess your inherent risks effectively, you can divide your risk assessment into two parts:

  1. Business-based risk assessment: your products, services and delivery channels; the geographical location in which your business operates along with other relevant factors.
  2. Relationship-based risk assessment: products and services your clients utilize, the geographical locations in which they operate or do business as well as their activities, transaction patterns, etc.

It is important to note that there is no prescribed methodology for the assessment of risks.  What follows is FINTRAC's suggested assessment process which will need to be adapted to your business situation.  Although presented separately, parts 1 and 2 could be done simultaneously.  You can also create your own assessment process.

1 - Business-based risk assessment

Products, services and delivery channel  

Begin your risk assessment by taking a business-wide perspective.  As an MSB, you must assess all your products, services and delivery channels to determine if they pose a high risk of ML/TF.  This may include, but is not limited to:

You may want to consider the following:

Some examples of potentially high-risk products, services and delivery channels are:

For examples on how to assess risk for products, services and delivery channels, see the RBA Guidance document and Guideline 4: Appendix 1: Products, Services, Delivery Channels and Geographic Locations.

Geography

Assess whether your own office location, the countries to which you transfer funds, and the countries from which you receive funds could pose a high risk for ML/TF activities.

In the assessment of your geography, you have to consider whether the geographic locations in which you operate or undertake activities potentially pose a high risk for money laundering and terrorist financing. Depending on your business and operations, this can range from your immediate surroundings, whether rural or urban, to a province or territory, multiple jurisdictions within Canada (domestic) or other countries.

Some examples of geographic elements that need to be reflected in your assessment are:

For more examples on how to assess risk for geographic locations, see the RBA Guidance document and Guideline 4: Appendix 1: Products, Services, Delivery Channels and Geographic Locations.

Other factors relevant to your business (if applicable)

Assess other factors that may apply to your business that do not fall in the other categories. There may be something about your business that can make it more attractive to individuals who want to carry out ML/TF activities.

Some examples that may apply to you are:

Business-based risk assessment worksheet

The following worksheet is for illustrative purposes only (please see additional instructions in Annex A).  Using this worksheet could be an easy way for your entity to present the inherent risks related to your business, or you may develop your own worksheet.

Note: The information below is provided as an example only.  Your entity may have more risk factors to consider.  Furthermore, you may have different risk ratings.  For more options, you can consult the matrix included in the RBA Guidance document.

Business-based risk assessment worksheet
Column A:

LIST OF FACTORS

Identify all the  factors that apply to your business (i.e. products, services and delivery channels, geography, other relevant factors)

Column B:
RISK RATING

Assess each factor (e.g. low, medium or high)

Column C:
RATIONALE

Explain why you assigned that particular rating

Column D:
DESCRIBE MITIGATION MEASURES FOR HIGH RISKS IDENTIFIED IN COLUMN A.

Electronic funds transfers (EFTs)

High risk

EFTs can be used to move large amounts of money into or out of Canada.

  • Increase the frequency of the ongoing monitoring of EFT transactions to ensure that they are assessed against the client profile and that any potential suspicious transaction has been assessed and reported to FINTRAC.
  • Seek additional information beyond the minimum requirements to ascertain the client's identity or the beneficial ownership information of an entity

Proximity to a large border crossing with USA

High risk

The business may be the first point of entry into the financial system.

  • Put a limit on certain cash transactions
  • Increase awareness through training so that staff better understand the placement stage of money laundering and its potential impacts

Use of an agent network

High risk

The business is accountable for the activities conducted by the agents.

  • Ensure that the training program is adequate and provides appropriate and sufficient information to the agents
  • Apply due diligence for the monitoring of agents' activities (including background checks)

Etc.

2 - Relationship-based risk assessment (i.e. your clients)

If you have a business relationship, you need to make a risk assessment based on the inherent characteristics of your client.  This can be done based on the combination of the following factors, some of which were identified in the previous section:

However, it is possible that your business is dealing with clients outside of a business relationship.  The interactions with these clients may be sporadic (e.g. few transactions over time that are under the identification threshold requirement or even a single transaction).  As such, there will not be a lot of information available for your business to fully assess this client (as opposed to a client in a business relationship with information, patterns of activities, etc.).  The risk assessment of such clients will most likely focus on the monitoring of transactions as opposed to having a client file.  This monitoring is basically your obligation to report a suspicious transaction if you suspect that the transaction is related to a money laundering or terrorist financing offence.

If you do not have business relationships, it is not necessary for you to complete the Relationship-based risk assessment worksheet.  However, if you have high-risk clients outside a business relationship, you need to include them in the following worksheet. 

Below are some client characteristics that can be considered high-risk:

Please note that the following indicators, when encountered, will place clients in the overall high-risk category, regardless of other factors:

For more examples of how to assess risk for client and business relationships, see the RBA Guidance document and Guideline 4: Appendix 2: Clients Within and Clients Outside of Business Relationships.

Relationship-based risk assessment worksheet

The following worksheet is for illustrative purposes (please see additional instructions in Annex B).  Using this worksheet could be an easy way for your entity to present the inherent risks related to your business relationships, or you may develop your own worksheet. 

This worksheet is to assess all your business relationships and high-risk clients. For more information on business relationships, see Guideline 6C: Record Keeping MSB, section 5 Ongoing Monitoring of Business relationship and related records.

Note: The information below is provided as an example only.  For more options, you can consult the matrix included in the RBA Guidance document.

Relationship-based risk assessment worksheet
Column A:

BUSINESS RELATIONSHIPS

Identify all your business relationships or high-risk clients (individually or as groupings) 

Column B:

RISK RATING

Assess each  business relationship (e.g. low, medium or high)

Column C:

RATIONALE

Explain why you assigned that particular rating

Column D:

DESCRIBE ENHANCED MEASURES TO ASCERTAIN ID FOR HIGH-RISK BUSINESS RELATIONSHIPS

Column E:

DESCRIBE MITIGATION MEASURES FOR HIGH-RISK BUSINESS RELATIONSHIPS

Column F

DESCRIBE THE PROCESS TO KEEP CLIENT INFORMATION UP TO DATE FOR HIGH-RISK BUSINESS RELATIONSHIPS

Column G:

DESCRIBE ENHANCED ONGOING MONITORING FOR HIGH-RISK BUSINESS RELATIONSHIPS

Group A

Low

Known customer who sends money back home

N/A

N/A

N/A

N/A

Client B (or group B)

High

Client conducts several large cash transactions with many third parties

Dollar thresholds for ascertaining identification of these clients are more stringent (e.g. threshold for foreign currency transactions may be lowered to $1,500 instead of the $3,000 threshold required by the legislation)

Request bank drafts for debit transactions instead of accepting large amounts of cash

Ask the client to provide information to confirm or update their identification information at every transaction that requires identification.

Quarterly review of transactions conducted by client.

Where feasible, obtain additional client information through public databases or other sources of information.

Parameters for transactions that will trigger early warning signals and require a mandatory review have been increased.

Etc.

ANNEX A

Instructions to complete the Business-based risk assessment worksheet (Products, services and delivery channels; geography; other relevant factors)
This worksheet is for illustration. You may develop your own, so long as it includes the concepts that are described below.
Column A:

List of factors

Describe your products, services, delivery channels, factors related to your geographical location(s) and other relevant factors.

Column B:

Risk rating

Rate each risk factor (products, services, delivery channels, factors related to geographic location(s) and other relevant factor).

Please note that the PCMLTFA and Regulations do not require you to use a low, medium and high scale.  You could decide to have low and high risk categories or to have a more complex rating scale. A scale must be established, tailored to the size and type of business you have.

Column C:

Rationale

Provide the reasons why you assigned a particular risk rating to each product, service, delivery channel, geography, or other relevant factor.  You can make reference to a website, a publication, a report, etc.

Column D:

Describe mitigation measures for high-risk factors

By law, all factors identified as "high-risk" must be addressed with documented mitigation measures. You have to write policies and procedures to explain how you are going to reduce and how you will control these risks in your day-to-day activities.

Below are some examples of mitigation measures you may want to consider (not an exhaustive list):

  • Increase awareness of high-risk situations within business lines across your organization;
  • Provide adequate controls of higher-risk services, such as management approvals;
  • Set transaction limits for high-risk products such as wire transfers to high-risk jurisdictions; and/or
  • Monitor transactions relating to high-risk products and services more frequently.

For more examples of controls or ways to reduce risks, see the RBA Guidance document and Guideline 4: 6.2.1 Measures to mitigate the risks.

ANNEX B

Instructions to complete the Relationship-based worksheet (clients and business relationships)
This worksheet is for illustration. You may develop your own, so long as it includes the concepts that are described below.
Column A:

Business relationships or high-risk clients.

Identify all your business relationships and high-risk clients.  You may decide to risk assess each business relationship separately or to do so by groups that share similar characteristics.

Column B:

Risk rating

Rate each business relationship.

You can use a scale of low, medium and high to rate your business relationship.  Please note that the PCMLFTA and Regulations do not require you to use a low, medium and high scale.  You could decide to have low and high risk categories or to have a more complex rating scale.

Column C:

Rationale

Provide the reasons why you assigned a particular risk rating to each client type/business relationship.

Column D:

Describe enhanced measures to ascertain the identity of high-risk clients or to confirm the existence of a high-risk entity

You need to describe how identification was ascertained or how the existence of an entity was confirmed for each high-risk business relationship and high-risk client.

Below are some examples:

  • Seeking additional information beyond the minimum requirements to ascertain the client's identity or the beneficial ownership information of an entity; Obtaining independent verification of the information (that is, from a credible source other than the client);
  • Establishing more stringent thresholds for ascertaining identification.

For more information on beneficial ownership, see Guideline 4: 6.3: Keeping client information, beneficial ownership and business relationship information up to date.

Column E:

Describe mitigation measures for high-risk business relationship

You need to put controls in place for each high-risk business relationship and high-risk client that you identified,

Below are some examples of mitigation measures that you may want to consider (not an exhaustive list):

  • Set limits to transaction amounts in certain situations;
  • Request bank drafts for debit transactions instead of accepting large amounts of cash;
  • Request source of funds for any cash amount; and/or
  • Conduct certain transactions only in person.

For more examples of controls or ways to reduce the risk, see Guideline 4: 6.2.1 Measures to mitigate the risks.

Column F:

Describe how you will keep client information and beneficial ownership information up to date for high-risk business relationships

You have to develop policies on how often and how you will update the client information of high-risk business relationships and high-risk clients 

The information that needs to be updated generally includes:

  • For an individual, the individual's name, address and occupation or principal business.
  • For a corporation, its name and address and the names of the corporation's directors.
  • For an entity other than a corporation, its name, address and principal place of business.

Measures to keep client identification up to date include asking the client to provide information to confirm or update their identification information.  For example, you may ask a client for an additional piece of identification. You may also confirm the information through public sources if available.

Keep beneficial ownership up to date

As an MSB, you need to keep the beneficial ownership of all your high-risk business relationships up to date.   Describe the frequency and your process to update this information in this section of the worksheet.

For more information on beneficial ownership, see Guideline 4: 6.3: Keeping client information, beneficial ownership and business relationship information up to date.

Column G:

Describe enhanced monitoring for high-risk business relationships 

For all business relationships, you will need to conduct ongoing monitoring.  This means that you will monitor your business relationships on a periodic basis for the purpose of:

  • Detecting any transactions that are required to be reported in accordance with the PCMLTFA;
  • Keeping client identification information up to date;
  • Reassessing the level of risk associated with the client's transactions and activities; and
  • Determining whether transactions or activities are consistent with the information you obtained about your client.

However, for high-risk business relationships and high-risk clients, you need to conduct monitoring more frequently and with more scrutiny than with your other business relationships. This is called enhanced monitoring.

Describe all aspects of your enhanced monitoring:

  • When is it done (frequency);
  • How is it conducted; and
  • How is it reviewed.

Examples of how enhanced monitoring is conducted and reviewed for high-risk business relationships:

  • Obtain additional information on the client (occupation, volume of assets, information available through public database);
  • Review transactions based on an approved schedule that involves management sign-off;
  • Develop reports or perform more frequent reviews of reports that list high-risk transactions. Flag activities or changes in activities and elevate concerns as necessary;
  • Set business limits or parameters regarding transactions that would trigger early warning signals and require mandatory review; and/or
  • Review transactions more frequently against suspicious transaction indicators relevant to the relationship. See Guideline 2: Suspicious Transactions for more information about indicators.

For more information on enhanced ongoing monitoring, see Guideline 4: 6.4 Ongoing monitoring of business relationships.

ANNEX C
Glossary and useful links

Beneficial ownership:
Beneficial ownership refers to the identity of the individuals who ultimately control a corporation or entity.  You must search through as many levels of information as necessary in order to determine beneficial ownership.
Business relationship:
You enter into a business relationship when a client opens an account or undertakes two or more transactions with you that require you to ascertain the identity of the client, regardless of whether the transactions are related to one another.
Delivery channels:
Medium that can be used to obtain a product or service, or through which transactions can be conducted.
FINTRAC:
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), is Canada's financial intelligence unit.
Inherent risk:
Risk that exists before the application of controls or mitigation measures.
Mitigation measures:
Controls put in place to limit the potential money laundering and terrorist financing risks you have identified while conducting your risk assessment.
Non-face-to-face transactions:
Transactions where the client is not physically present (for example, Internet, telephone or mail)
Politically exposed foreign persons:
Individual who holds or has held specific offices or positions in or on behalf of a foreign country (also includes some of their family members).
Risk-based approach:

In the context of ML/TF, a risk-based approach is a process that encompasses the following:

  • The risk assessment of your business activities and clients using certain prescribed elements: Products, services and delivery channels; geography; clients and business relationships; and other relevant factors.
  • The mitigation of risk through the implementation of controls and measures;
  • Keeping client identification and, if required, beneficial ownership and business relationship information up to date; and
  • The ongoing monitoring of transactions and business relationships.
Third party:
Individual or entity other than the individual who conducts the transaction. When you are determining whether a third party is involved, it is not about who "owns" the money, but rather about who gives instructions to deal with the money.
Vulnerabilities:
Elements of a business that could be exploited.  In the ML/TF context, vulnerabilities could be weak controls within a business offering high-risk products or services.

Regulatory references:
http://laws-lois.justice.gc.ca/eng/acts/P-24.501/
http://laws-lois.justice.gc.ca/eng/regulations/SOR-2001-317/
http://laws-lois.justice.gc.ca/eng/regulations/SOR-2002-184/
http://laws-lois.justice.gc.ca/eng/regulations/SOR-2007-121/
http://laws-lois.justice.gc.ca/eng/regulations/SOR-2007-292/

Guideline 1: Backgrounder:
http://www.fintrac-canafe.gc.ca/publications/guide/Guide1/1-eng.asp

Guideline 2: Suspicious transactions (includes ML/TF indicators):
http://www.fintrac-canafe.gc.ca/publications/guide/Guide2/2-eng.asp

Guideline 4: Implementation of a compliance regime:
http://www.fintrac-canafe.gc.ca/publications/guide/Guide4/4-eng.asp

Guideline 6: Record keeping and client identification:
http://www.fintrac-canafe.gc.ca/publications/guide/guide6/6C-eng.asp

RBA Guidance document:
http://www.fintrac-canafe.gc.ca/publications/rba/rba-eng.asp

Money laundering and terrorist financing (ML/TF) typologies and trends for Canadian money services businesses (MSBs):
http://www.fintrac-canafe.gc.ca/publications/typologies/2010-07-eng.asp

Trends in Canadian suspicious transaction reporting (STRs) – Part 1:
http://www.fintrac-canafe.gc.ca/publications/typologies/2011-03-eng.asp

Trends in Canadian suspicious transaction reporting (STRs) – Part 2:
http://www.fintrac-canafe.gc.ca/publications/typologies/2011-10-eng.asp

Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada:
http://www.fin.gc.ca/pub/mltf-rpcfat/index-eng.asp

Date Modified: