Risk-based approach workbook
Accountants
December 2018
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 Risk assessment and Compliance program requirements guidance.
Note: Amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations including new technologies and developments will be coming into force in June 2017. This new element will be further developed in this guidance document in the coming months.
Who should use this document?
This document was designed for a small to medium firm in the Accounting sector, and applies only when you engage in, or give instructions with respect to any of the following activities on behalf of any individual or entity (other than your employer):
- receiving or paying funds (for example you receive funds in a trust to pay bills on behalf of your client);
- purchasing or selling securities, real estate property, business assets or entities; or
- transferring funds or securities by any means.
Giving advice to a client, in the context of your accountant-client relationship, is not considered providing instructions. If you need further clarification about this, refer to the main reference page on Accountants.
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 and 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:
- Products, services, and delivery channels;
- Geography;
- Clients and business relationships; and
- Other relevant factors.
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 and services, and the location of your business.
If you identify situations that represent a high risk of 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:
- identification of your inherent risks;
- creating risk-reduction measures and key controls;
- implementing your risk-based approach; and
- reviewing your risk-based approach.
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- 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 businessClients and business relationships:
Inherent risks linked to the nature and type of business that your clientele has with you through:- the products, services and delivery channels they utilize;
- their geography; and
- their characteristics and patterns of activities.
- 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. - 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. - 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:
- Business-based risk assessment: your products, services and delivery channels; the geographical location in which your business operates along with other relevant factors.
- 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 accountant or accounting firm, you must assess all of 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:
- Receiving or paying funds (except funds received as professional fees)
- Purchasing or selling securities, real property or business assets or entities
- Transferring funds or securities by any means or conducting large cash transactions;
- Providing non-face-to-face services (internet, mail, telephone)
- Domestic or international tax planning
- Advisory / consulting
- Audit
- Insolvency / restructuring / receivership
- Forensic accounting
- Etc.
You may want to consider the following:
- Assess the products and services by the type of market and to whom they are directed to (e.g. corporate, individuals, etc.)
- Do the services you provide allow your client to engage in high-risk transactions? For example, can your clients transfer funds on behalf of a third party or access other services on behalf of a third party?
- Do clients have to come to your location to receive a service or can they conduct certain transactions over the phone, by fax, or online?
Some examples of potentially high-risk products, services and delivery channels are:
- Creation of complex legal arrangements (trusts, holding companies) or offshore companies. There is a greater risk of ML because these can obscure the identity of the true owner and be used to evade taxes.
- Transferring funds, securities or assets between parties where the relationship between the parties is unknown.
- Services offered through the use of agents. When a third party that identifies clients on your behalf, this may pose a greater risk as the third party may not be properly following policies and procedures.
- Offering services by non-face-to-face (phone, fax, online) means. These delivery channels may pose higher risks as it may be more difficult for your business to identify the client.
For examples on how to assess risk for products, services and delivery channels, see the Risk assessment guidance.
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:
- High crime areas as they may present additional ML/TF risks.
- A rural area where clients are known to you could present a lesser risk compared to a large city where new clients and anonymity are more likely. However, the known presence of organized crime in a rural area would obviously present a higher risk.
- Is there an unexplained physical distance between yourself or your organization and the location of the client? If yes, you should ask yourself why the client would be seeking your services.
- If you transfer funds to a country or provide services to clients who are based in countries subject to sanctions, embargoes or other measures, you should consider that as high-risk. For example, the United Nations will occasionally issue an advisory about a certain country. Refer to:
For more examples on how to assess risk for geographic locations, see the Risk assessment guidance.
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:
- Your operational structure, size, number of offices, and employees, such as:
- A business with a high employee turnover.
- Providing services to clients in industries or activity sectors that are more vulnerable to money laundering or terrorist financing.
- Trends and typologies for your activity sector may include specific elements of risks that your business should consider.
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 Risk assessment guidance.
| 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. |
|---|---|---|---|
Complex legal arrangements created on behalf of clients such as trusts or offshore companies. |
High risk |
Complex legal structures can be used to obscure the beneficial ownership (e.g. for the purpose of tax evasion). |
|
Providing services to a client only through non-face-to-face means such as by phone, internet or fax. |
High risk |
Non-face-to-face services increase the risk of not adequately verifying the identity of your client. |
|
Transferring funds on behalf of a company whose activities are unclear or to a country lacking adequate AML laws. |
High risk |
Possibility of a shell corporation being used for the purpose of laundering and transferring funds |
|
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:
- The products, services and delivery channels your client uses;
- The geography related to your client (at which location is the client conducting the transaction and to/from which country is the client sending/receiving money); and
- Your client's characteristics and your client's activities and transaction patterns.
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 examples of client and transaction characteristics that can be considered high risk:
Clients
- A client with whom a business relationship has recently begun.
- Sudden activity from a previously dormant account.
- A client that starts or develops an enterprise with unexpected profit or early results.
- A client offering to pay extraordinary fees for services that would not ordinarily warrant such a premium.
- A client whose reason for choosing the firm is unclear, especially given the firm’s size, location or specialization.
- A client whose business has an unnecessarily complex legal / corporate structure.
- A client that is involved in transactions that are not in line with the established business profile.
- A client that only wants to contact/communicate/conduct business with you through non-face-to-face means (phone, fax, online).
- A client based or conducting business in a high-risk country with known higher corruption or organized criminal activity that is a known tax haven or is known to have links to terrorist organizations.
- A client purchasing a commercial property while residing overseas.
- A client who is not a local resident or who is outside of your normal customer base / geographical service area.
- A client who has been named in media as being involved with criminal organizations.
- A client that appears to be living beyond their means, or that has a history of changing bookkeepers or accountants yearly.
- A client that has cheques inconsistent with sales (i.e. unusual payments from unlikely sources).
- A client who is reluctant to provide all the required information or who gives information to the accountant that can be reasonably found to be wrong or insufficient.
- Companies that acquire large personal and consumer assets (i.e. boats, luxury automobiles, personal residences or cottages) when this type of transaction is not consistent with regular practices in that particular industry.
- Companies that are invoiced by organizations located in countries that do not have adequate money laundering laws and are known as a highly secretive banking and corporate tax havens.
- Companies that have no employees, which is unusual for the type of business.
- Companies that are paying unusual consultant fees to offshore companies.
- Companies whose records consistently reflect sales at less than cost, thus putting them at a loss position, while they continue operating without a reasonable explanation as to the continued loss.
Transactions
- Transactions that are unusual compared to other similar clients. For example, unusually high levels of assets or unusually large transactions compared to what might reasonably be expected of clients with a similar profile.
- Individual or classes of transactions that take place outside the established business profile.
- Payments received from unassociated or unknown third parties and payments for fees in cash when this would not be a typical method of payment.
- Investment in real estate at a higher / lower price than expected.
- Large international payments with no business rationale.
- Unusual financial transactions with unknown source of funds.
- Unexplained urgency of the services required.
- Sophisticated transactions / schemes.
- Transactions in which the accountant suspects that funds are being transferred on behalf of unknown third parties.
- The use of legal arrangements or complex corporate structures that have no apparent legal or legitimate tax, business, economic or other reason.
- Existence of fraudulent transactions or transactions that are improperly accounted for, such as:
- Over and under invoicing of goods / services.
- Multiple invoices for the same goods / services.
- Falsely described goods / services – over and under shipments (e.g. false entries on bills of landing).
Please note that the following indicators, when encountered, will place clients in the overall high-risk category, regardless of other factors:
- If you file a Terrorist Property Report, the client automatically becomes high-risk;
For more examples of how to assess risk for client and business relationships, see the Risk assessment guidance.
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 FINTRAC’s Business relationship requirements.
Note: The information below is provided as an example only. For more options, you can consult the matrix included in the Risk assessment guidance.
| 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 |
Clients with whom the accountant has a longstanding relationship that utilize services within the stated purpose of the business relationship and whose business activities are known. |
N/A |
N/A |
N/A |
N/A |
Client B (or group B) |
High |
Clients who use services that are incoherent with their personal or business profiles, or who use complex legal agreements (such as trusts) without a justifiable reason. |
Establish more stringent thresholds for ascertaining identification Gather additional documents, data or information; or take additional steps to verify the documents obtained. |
Increase accountants’ awareness of high-risk business relationships. Establish transaction limits. Identify patterns of transactions that need further examination. |
Ask the client to confirm or update their identification information at every transaction requiring ID. Obtain additional information on the client (e.g. occupation, volume of assets, information available through public databases). |
Increase due diligence, or understand your client’s objectives in utilizing your services. More frequent and in-depth monitoring of clients who have been identified as being high-risk. |
ANNEX A
| 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):
For more examples of controls or ways to reduce risks, see the FINTRAC Risk assessment and Compliance program requirements guidance. |
ANNEX B
| 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:
For more information, see For more information see Methods to identify individuals and confirm the existence of entities |
| 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):
For more examples of controls or ways to reduce the risk, see Compliance program requirements. |
| Column F: | Describe how you will keep client information up to date for high-risk business relationships |
You have to develop policies on how and how often you will update the client information of high-risk business relationships and high-risk clients. The information that needs to be updated generally includes:
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. For more information, see When to identify individuals and confirm the existence of entities – Accountants.. |
| 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:
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:
Examples of how enhanced monitoring is conducted and reviewed for high-risk business relationships:
For more information on enhanced ongoing monitoring, see Ongoing monitoring requirements |
ANNEX C
Glossary and useful links
- 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).
- 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 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/
Guidance References:
Guideline 1: Backgrounder
Guidance – Main Page
Accountants – Main Page
Reporting entities – Main Page
Risk-based approach
Compliance program requirements
FATF Guidance on the Risk-Based Approach for Accountants
http://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatfguidanceontherisk-basedapproachforaccountants.html
- Date Modified: