Risk-based approach workbook
Money services businesses (MSB)
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 Guidance on the Risk-Based Approach and Compliance program requirements.
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 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:
- foreign exchange dealing;
- remitting or transmitting funds by any means or through any individual, entity or electronic funds transfer network; or
- issuing or redeeming money orders, traveller's cheques or other similar negotiable instruments. Cashing cheques made out to a particular individual or entity is not included.
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:
- 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 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:
- 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 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:
- Foreign exchange transactions
- Electronic funds transfers
- Issuing or redeeming money orders
- Non face-to-face services (Internet, mail or telephone)
- Etc.
You may want to consider the following:
- Assess the products and services by the type of client they are meant for (e.g. corporate, individuals, wholesale, retail, etc.)
- Do the products and 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?
- How do you provide your product? Do clients have to come to your location to buy a product or service or can they conduct a transaction over the phone, by fax or online?
Some examples of potentially high-risk products, services and delivery channels are:
- Electronic funds transfers (EFTs) can pose a higher risk because they support the rapid movement and conversion of assets into, through and out of the financial system.
- Products offered through the use of agents. When a third party identifies clients on your behalf, this may pose a greater risk as they may not be properly following policies and procedures.
- Offering products and services through non-face-to-face (phone, fax, online) means. These delivery channels may pose higher risks because it may be more difficult to identify the client.
- Your business may be offering products and services that are based on new technologies such as electronic wallets, mobile payments, or virtual currencies. These may be considered higher risk as they can transmit funds more quickly or anonymously.
For examples on how to assess risk for products, services and delivery channels, see the RBA Guidance document.
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 your business close to a border-crossing? Proximity to a border-crossing could increase the risk due to the fact that your business may be the first point of entry into the Canadian financial system.
- If you transfer funds to a country 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 RBA Guidance document.
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 branches, and employees, such as:
- A business with a high employee turnover
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.
| 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: Assess each factor (e.g. low, medium or high) |
Column C: Explain why you assigned that particular rating |
Column D: |
|---|---|---|---|
Electronic funds transfers (EFTs) |
High risk |
EFTs can be used to move large amounts of money into or out of Canada. |
|
Proximity to a large border crossing with USA |
High risk |
The business may be the first point of entry into the financial system. |
|
Use of an agent network |
High risk |
The business is accountable for the activities conducted by the agents. |
|
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 client characteristics that can be considered high-risk:
- A client frequently uses wire transfers for no apparent reason.
- A client uses some products or services that you offer that are non-face-to-face (phone, fax, online) or conducts business only through your agents.
- A client who is not a local resident or is outside your normal customer base.
- A client who remits or sends money transfers in larger amounts than your other clients.
- A client based in or conducting business in a high-risk country with known higher corruption, known organized criminal activity, is a tax haven or is known to have links to terrorist organizations.
- Beginning a client relationship (new client).
- Your client is a cash-based business.
- Behaviour or transactions that are unusual compared to other similar clients.
- You are aware or you become aware, from a reliable source (that can include media or other open sources), that a client is suspected of being involved in illegal activity.
- Domestic Politically Exposed Person and Head of an International Organization
- Once you have determined that a person is a domestic PEP, a HIO, or the family member or close associate of them, you must assess to determine if that person poses a high risk for committing a money laundering or a terrorist activity financing offence.
- If you assess the risk to be high, then the person must be treated as a high-risk client
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;
- An individual with foreign government connections (Politically Exposed Foreign Persons);
- An entity that has a complex business structure which conceals the identity of its beneficial owners (i.e. you are not able to confirm the identity of the beneficial owner(s)).
For more examples of how to assess risk for client and business relationships, see the RBA Guidance document.
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 RBA Guidance document.
| 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
| 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 RBA Guidance document and Compliance program requirements. |
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 Methods to identify individuals and confirm the existence of entities and Beneficial ownership requirements. |
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 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:
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 see When to identify individuals and confirm the existence of entities – Money services businesses and Beneficial ownership requirements. |
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
- 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 persons and Head of an international organization:
- A politically exposed person (PEP) or the head of an international organization (HIO) is a person entrusted with a prominent position that typically comes with the opportunity to influence decisions and the ability to control resources. The influence and control a PEP or HIO has puts them in a position to impact policy decisions, institutions and rules of procedure in the allocation of resources and finances, which can make them vulnerable to corruption.
- 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/
Guidance References:
Guideline 1: Backgrounder
Guidance – Main Page
Money Services Business (MSB) – Main Page
Reporting entities – Main Page
Politically exposed persons and head of international organizations: Money service businesses
Risk-based approach
Compliance program requirements
- Date Modified: