Money laundering and terrorist financing indicators - Accountants

January 2019

This guidance on suspicious transactions is applicable to accountants and accounting firms that are subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and associated Regulations. It is recommended that this guidance be read in conjunction with other suspicious transaction report (STR) guidance, including:

This guidance provides money laundering (ML) and terrorist financing (TF) indicators (ML/TF indicators) organized by topic:

ML/TF indicators are potential red flags that could initiate suspicion or indicate that something may be unusual in the absence of a reasonable explanation. Red flags typically stem from one or more factual characteristics, behaviours, patterns or other contextual factors that identify irregularities related to financial transactions. These often present inconsistencies with what is expected of your client based on what you know about them.

The ML/TF indicators in this guidance were developed by FINTRAC through a three-year review of ML/TF cases, a review of high quality STRs, published literature by international organizations such as the Financial Action Task Force (FATF) and the Egmont Group, and consultation with reporting entity sectors. These ML/TF indicators do not cover every possible situation but were developed to provide you with a general understanding of what is or could be unusual or suspicious. On its own, a single ML/TF indicator may not appear suspicious. However, observing an ML/TF indicator(s) could lead you to conduct an assessment of the transaction(s) to determine whether there are further facts, contextual elements or additional ML/TF indicators that require the submission of an STR.

Criminal organizations often combine various methods in different ways in order to avoid the detection of ML/TF. If you detect unusual or suspicious behaviour or a transaction that prompts the need for an assessment, ML/TF indicators combined with facts and context can help you determine if there are reasonable grounds to suspect that the transaction is related to the commission or attempted commission of an ML/TF offence. These ML/TF indicators may also be used to explain or articulate the rationale for your reasonable grounds to suspect in the narrative portion of an STR, as they provide valuable information from a financial intelligence perspective.

Important considerations

One piece of the puzzle

The ML/TF indicators in this guidance are not an exhaustive list of ML/TF indicators to support all suspicious scenarios. These ML/TF indicators should be considered as examples to guide the development of your own process to determine when you have reasonable grounds to suspect that the transaction is related to the commission or attempted commission of an ML/TF offence. These ML/TF indicators are one piece of the puzzle and are designed to complement your own STR program and can be used in conjunction with other publicly-available ML/TF indicators.

During an assessment, FINTRAC will review your policies and procedures to see how you use ML/TF indicators within your STR program. Part of the assessment will include evaluating how the actual policies follow your documented approach and determining its effectiveness with respect to the use of ML/TF indicators. This can include a review of transactions to determine how your STR program identifies potential STRs and assesses them using facts, context and ML/TF indicators. For example, you can receive questions if you have not reported an STR for a client you have assessed as high risk and that client activity also matches against multiple ML/TF indicators.

Combination of facts, context and ML/TF indicators

If the context surrounding a transaction is suspicious, it could lead you to assess a client's financial transactions. Facts, context and ML/TF indicators need to be assessed to determine whether there are reasonable grounds to suspect that the transaction is related to the commission or attempted commission of an ML/TF offence. On its own, a single financial transaction or ML/TF indicator may not appear suspicious. However, this does not mean you should stop your assessment. Additional facts or context about the associated individual or their actions may help you reach the reasonable grounds to suspect threshold.

Alert or triggering system

FINTRAC acknowledges that a reporting entity may have developed a system that relies on specific alerts or triggering events to signal when to assess a transaction to determine if an STR should be submitted to FINTRAC. If you rely on such a system, FINTRAC expects that you review the alerts in a timely manner in order to determine if an STR should be submitted. Regardless of how you choose to operationalize these ML/TF indicators, FINTRAC expects that you will be able to demonstrate that you have an effective process to identify, assess and submit STRs to FINTRAC.

General ML/TF indicators

The ML/TF indicators in the following section are applicable to both suspected money laundering and/or terrorist financing. The ability to detect, prevent and deter money laundering and/or terrorist financing begins with properly identifying the person or entity in order to review and report suspicious financial activity.

As an accountant, you may observe these ML/TF indicators over the course of your business activities with a client. It is important to note that depending on your business activities, some of these ML/TF indicators may not apply.

ML/TF indicators related to identifying the person or entity

The following are examples of ML/TF indicators that you may observe when identifying persons or entities.

ML/TF indicators related to client behaviour

The contextual information acquired through the know your client (KYC) requirements or the behaviour of a client, particularly surrounding a transaction or a pattern of transactions, may lead you to conduct an assessment in order to determine if you are required to submit an STR to FINTRAC. The following are some examples of ML/TF indicators that are linked to contextual behavior and may be used in conjunction with your assessment and your risk based approach.

ML/TF indicators surrounding the financial transactions in relation to the person/entity profile

Clearly understanding the expected activity of a person or entity will allow you to assess their financial activity with the proper lens. For example, an entity involved in an industry that is not normally cash intensive receiving excessive cash deposits or a person conducting financial transactions atypical of their financial profile. The following are some examples of ML/TF indicators surrounding the financial transactions related to person/entity profile.

ML/TF indicators related to products and services

Accounts can take different forms (e.g. chequing, savings, investment, etc.) and for the purposes of this section, the ML/TF indicators below will aim to address the ML/TF risks linked to different types of accounts held by various reporting entities in Canada. There are many ML/TF indicators related to account activity. Your process to evaluate risk for products and services you provide should be documented as part of your KYC and risk based approach requirements. The following ML/TF indicators will focus on products or services that may be applicable within your business.

ML/TF indicators related to change in account activity

Certain changes regarding an account may be indicative of ML/TF for a multitude of reasons including, but not limited to, the use of an account to suddenly launder or transmit funds, an increase in volume, changes in ownership of an account, etc. Changes in account activity may trigger a need for further assessment of the person or entity holding the account and some examples to consider are listed below.

ML/TF indicators based on a typical transactional activity

There are certain transactions that are outside the normal conduct of your everyday business. These transactions may be indicative of a suspicious transaction, and would require additional assessment. Some examples of ML/TF indicators based on atypical transactional activity are listed below.

ML/TF indicators related to transactions structured below the reporting or identification requirements

Structuring of transactions to avoid reporting or identification requirements is a common method for committing or attempting to commit an ML/TF offence. There are multiple thresholds which trigger reporting/identification requirements by a reporting entity. Some examples of ML/TF indicators which may be indicative of a person or entity attempting to evade identification and/or reporting thresholds are listed below.

ML/TF indicators involving wire transfers (including electronic funds transfers)

In our current global environment, it is increasingly easier to transfer funds to, from or through multiple jurisdictions (municipal, national or international) in a rapid fashion. This presents an increased ML/TF risk as transactions through multiple accounts and/or jurisdictions increases the difficulty for reporting entities and law enforcement to trace illicit funds. Examples of these types of transactions which may require further assessment include the following.

ML/TF indicators related to transactions that involve non-Canadian jurisdictions

There are certain types of transactions that may be sent or received from jurisdictions outside of Canada where there is higher ML/TF risk due to more permissible laws or the local ML/TF threat environment. The following are examples to consider when making an assessment of the financial transaction conducted by a person/entity through your business.

Due to the ever-evolving nature of the ML/TF environment, high risk jurisdictions and trends are often subject to change. To ensure that you are referencing accurate information, FINTRAC encourages you to research publicly-available sources on a regular basis to support these ML/TF indicators as part of your STR program. There are multiple sources that identify jurisdictions of concern, including the FATF which publishes contextual information on high-risk jurisdictions in relation to their risk of money laundering and terrorist financing. You may also observe funds coming from or going to jurisdictions that are reported in the media as locations where terrorists operate/carry out attacks and/or where terrorists have a large support base (state sponsors or private citizens). Identifying high-risk jurisdictions or known trends can also be included as part of your risk based approach and internal STR program.

ML/TF indicators related to use of other parties

In the course of a ‘normal' financial transaction, there are a ‘normal' number of parties who are engaging in the transaction, depending on the nature of the transaction at hand. For example, in the instance of depositing cash to a personal bank account, there is generally one party to the transaction: the individual who holds the account depositing into their own account. In contrast, with the deposit of cash to a business account, you can have many different roles that may be expected, including: individuals associated with the business's finance function holding authority over the account, while another employee may be charged with depositing the cash.

Transactions that involve parties not typically associated with a transaction can present an elevated risk of money laundering and/or terrorist financing. These additional parties can be used to allow a criminal to avoid being identified or being linked to an asset or account. This section includes examples of how the involvement of other parties may be indicative of the structure of a criminal enterprise. Some examples of such other parties include the use of a third party or nominee.

Use of third party

A third party is any individual or entity that instructs someone to act on their behalf for a financial activity or transaction. There are some situations where there is an apparent and discernable rationale for the inclusion of the third party in a transaction and this may not be suspicious. However, you may become suspicious in a situation where the reason for a third party acting on behalf of another person or entity does not make sense based on what you know about the client or the third party. Use of third parties is one method that money launderers and terrorist financiers use to distance themselves from the proceeds of crime or source of criminally obtained funds. By relying on other parties to conduct transactions they can distance themselves from the transactions that can be directly linked to the suspected ML/TF offence. Some examples of ML/TF indicators related to the use of a third party can be found below.

Use of nominee

A nominee is a particular type of other party that is authorized to open accounts and conduct transactions on behalf of a person of entity. There are legitimate reasons for relying on a nominee to conduct financial activity of behalf of someone else. However, this type of activity is particularly vulnerable to ML/TF as it is a common method used by criminals to distance themselves from the transactions that could be linked to suspected ML/TF offences. These are some examples of ML/TF indicators relating to the misuse of nominees.

Indicators related to terrorist financing

In Canada, terrorist financing offences make it a crime to knowingly collect or provide property, which can include financial or other related services, for terrorist purposes. This section is focused on examples that are specific to the possible commission of a terrorist financing offence. However, please note that the other ML/TF indicators in this guidance may also prove relevant in determining when you have reasonable grounds to suspect the commission of terrorist financing as the methods used by criminals to evade detection of money laundering are similar.

Indicators specifically related to terrorist financing:

The indicators below are some examples of indicators relating to terrorist financing.

ML/TF indicators specific to accountants

In addition to the general ML/TF indicators that have been highlighted in this guidance, there may be more specific ML/TF indicators related to your business as an accountant. Below are some examples of sector specific ML/TF indicators that you should consider as part of your STR program.

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