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Did you know, as an accounting professional, you have obligations to help detect, prevent, deter and report fraud to help combat money laundering and terrorist activity financing in Canada?
I know this sounds like an episode of Inspector Gadget, but bear with me!
These obligations fall under the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), which helps provide guidance for understanding further obligations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and associated regulations.
In other words, FINTRAC’s procedures help you understand your role as an accountant in preventing money laundering, terrorist financing and other things like these. And with an acronym like PCMLTFA, who couldn’t use a little help, right?
In this blog, I’ll discuss the why, the when and the how to cover your arse. Above all else, I’ll touch on ongoing monitoring. This makes sure you’re compliant under PCMLTFA and also provides you the opportunity to review if your client information is still accurate and update the terms and obligations in your client engagement letters.
⚡ Ongoing monitoring is a process that you must develop and use to review all the information you have about clients you have a business relationship with.
Know Your Client (KYC): What is it and why is it important?
Know Your Client, or KYC, is an all-in-one resource for knowing when you need to verify the identity of the people or entities you’re doing business with. While FINTRAC’s procedures are pretty in-depth, familiarizing yourself with KYC requirements is a perfect place to start.
So, how does paying attention to your clients’ business activities cover your arse anyway? Well, outside of the fact that this is legislated and required under the PCMLTFA, the more you pay attention to your clients’ business activities , the less likely you are to become the victim of fraudulent activities. Not to mention it means you’ll also be less likely to become an accessory to these kinds of crimes, which have some pretty hefty consequences.
And, realistically, if potential clients know you have these practices in place, you are likely to ward off those who may not be the best professional fit for you anyhow.
When do you have to verify your clients?
Now that we know why, let’s look at when you need to verify a client’s identity. If I tie this back to payroll processing, for instance, this becomes very important.
Think about the last pay run you ran for a client, including source deduction payments for the Canada Revenue Agency (CRA). Let me guess… it was likely over a few thousand dollars, right? This segues perfectly into the various scenarios where proving your client’s identity comes up:
- When you send or receive large cash transactions.
- When you send or receive large virtual currency (VC) transactions.
- When you are suspicious of transactions.
- When you or your client is in receipt of funds of $3,000 or more.
It’s important to mention, under the KYC requirements, you also need to understand the difference between verifying identity and keeping client identification information up to date.
Verifying identity means:
- Verifying a document or other informational resources with ID information against what a person or entity already provided.
Keeping client identification information up to date means:
- Keeping client ID information up to date. How often you’ll have to do this varies based on risk assessment and your own policies and procedures.
🧠 Read more about the difference between identity verification and updating information.
How do you know to verify your clients identity?
Within KYC, there are various methods to use for verifying the identity of individuals and entities. While I won’t get into all of them, let’s go over the most common ways of figuring out who your clients really are.
For validating the identity of a person, the easiest way is by checking government issued ID. If the person is not present, there are alternative solutions with the help of good ol’ technology.
🧠 Read up on all ways to validate the identity of a person.
For validating the identity of an entity, the first thing is confirmation of existence. This is exactly how it sounds. You’re confirming that the entity, quite simply, is a real, legitimate organization.
What to check when validating an entity’s identity
When validating a corporation here are some things to check:
- CRA and business records, such as Certificates of Incorporation.
- Ask for an annual report, and check to see that it’s been filed under the provincial securities register.
- Ask for a letter or notice of assessment for the corporation, issued from a municipal, provincial, territorial or federal government.
- Search for a Federal Corporation through the online filing centre to cross check documents.
When validating an entity other than a corporation, here are some things to check:
- Ask for the partnership agreement.
- Check the articles of association.
- Check the most recent version of any other record that confirms the entity’s existence.
Important note: Always be sure that no matter the method, you confirm that the record(s) include the company name, company address and the names of its directors. Also ensure the authenticity and current status of the documents.
There are a few other background check steps you can take to verify an identity. These aren’t required by the KYC, but they’re handy to keep in mind.
- Does the business have any social media presence?
- Do you see more than one company or location when doing a Google search? If contradicting information comes up when you Google a business, do more digging!
- Research the address, email and phone number provided to determine if a business actually exists at that address.
- Cross check the contact information to match void cheques or pre-authorized debit agreements.
Due diligence will keep you out of doo-doo.
When we typically think of fraud, our thoughts tend to be examples relating to cyber, credit card or even romance-related fraud. (Those who have watched 90 Day Fiancé know what I’m talking about with that last one!) Unfortunately it doesn’t stop there.
Fraudsters have some of the most convincing and creative strategies to loop their victims in, oftentimes without you even knowing that you have become their victim. Due diligence around knowing your clients is imperative to not only employees’ livelihoods, your bottom line and the vendors you engage with on your clients’ behalf, but also your legal obligations under your accounting professional designation.
Moral of the story, if you do your due diligence, you will keep yourself out of doo-doo!