Hub Capital 2014 Compliance Presentation

Hub Capital 2014 Compliance Presentation
Vancouver, Calgary, Toronto, Montreal, Quebec City

TODAYS AGENDA PREPARING for the changing regulatory landscape
KYC, determining suitability, suitability review triggers, client notes STRATEGIES for dealing with an aging clientele AML update Our goal today is to provide: provide an update of important regulatory changes that you need to be aware of and integrate into your practices guidance on meeting your fundamental obligation to Know-your-client guidance on supporting KYC and investment recommendations Insight into our regulatory responsibilities to provide effective oversight Information to assist you with dealing with aging clients and, provide the required annual AML training

Global (G8, G20) pressure on relationships, fees, disclosures
REGULATORY LANDSCAPE Financial crisis 2008 Global (G8, G20) pressure on relationships, fees, disclosures Regulatory Responses UK, US, AU Canada POS, CRM, FATCA, Anti-Spam In the wake of market meltdowns and ongoing financial crisis, especially in UK, EU world regulators. Regulators (worldwide) devoting increased attention to regulation of financial advice and “sanctions” based compliance (i.e. Basel II, Dodd-Frank) Significant increase in expectations of conduct of advisor, disclosure, evidence of meeting responsibilities and obligations Improving the regulatory landscape is a significant focus of the G20 countries. In Canada – CRM/POS – Plain Language, Disclosure, Accountability

POS CRM2 FATCA ANTI-SPAM
2014 JUNE - JULY REGULATORY CHANGES POS CRM2 FATCA ANTI-SPAM In Canada, summer 2014 convergence of significant regulatory change Other regulatory initiatives: Fiduciary Duty NI (significant impact that would require that advisors prove why the recommended funds was the best choice for the client) Mutual Fund Cost Structure NI (significant pressure on the costs of mutual funds) Insurance, while not directly related to today’s discussion, we are also seeing significant focus on increasing regulation in the insurance sector to be more reflective of an “MFDA” like environment

POINT OF SALE (POS) Vision to provide investors with more meaningful and effective prospectus disclosure Investors do not read the prospectus Investors do not understand product features, risks, fees, rely on advice Three staged implementation Stage 1 Fund Facts available on fund company websites, implemented July 2011 Stage 2 Fund Facts are to be delivered in lieu of a prospectus within two days of purchase, effective June 13, 2014 Stage 3 Pre-sale delivery requirement currently being analyzed by the CSA expected late 2014-early 2015

FUND FACTS (FF) DOCUMENT
Effective June 13, 2014, mandatory to deliver Fund Facts in place of Simplified Prospectus Fund Fact documents required for each class or series of securities of a mutual fund i.e. CI Growth and Income; CI Signature Growth and Income Delivery of the Fund Facts will satisfy the current prospectus delivery requirements under securities legislation Prospectus available upon request Proof of delivery The CSA designed the Fund Facts to make it easier for investors to find and use key information. It is in plain language, no more than two pages double-sided and highlights key information important to investors, including past performance, risks and the costs of investing in a mutual fund. With delivery of the Fund Facts, investors will be able to review key information about the potential benefits, risks and costs of investing in a mutual fund in an accessible format within two days of buying a mutual fund when they still may change their investment decision. We also think familiarity with the Fund Facts may assist investors in their decision-making process and in discussions with their representatives, and highlight for investors where they can find further information about the mutual fund. A separate Fund Facts document continues to be required for each class or series of a mutual fund.

FUND FACTS (FF) DOCUMENT
Example: CIG Signature Income & Growth

DOCUMENTS THAT CAN BE DELIVERED WITH FF
Fund Fact documents must not be attached to or bound with any other materials or documents, except: a general front cover pertaining to the package of attached or bound materials and documents trade confirmation fund facts document of another mutual fund simplified prospectus or document referenced in the simplified prospectus, plan/account applications documents

DOCUMENTS THAT CANNOT BE DELIVERED WITH FF
Fund Fact documents must not be attached to or bound to documents such as: marketing materials, sales communications financial plans, investment recommendations, general client communication articles of interest statements, unrelated trade confirmations

POS STAGE 3 POS STAGE 3 ( ) Point of sale or pre-trade delivery requirement Fund Facts ETFs likely to require same POS BEYOND STAGE 3 International focus to harmonize POS disclosure Basel Committee on Banking Supervision, International Organization of Securities Commissions, International Association of Insurance Supervisors Align other products such as Segregated Funds

InvestorPOS SOLUTION InvestorPOS Solution Manages 32,000+ FF documents
Current FF documents difficult to identify on manufacturers websites capability with proof of delivery tracking In place for all HCI advisors effective June 1

InvestorPOS

CLIENT RELATIONSHIP MODEL 2 (CRM2)
CRM regulatory initiative under NI to enhance disclosure Conflicts of interest, fees, performance reporting Benchmarks July 15, 2014 Relationship Disclosure Information – Benchmarks July 15, 2014 Oral or written pre-trade disclosure of The “charges” the client will be required to pay in respect of the purchase or sale of a security – with particular focus on mutual funds The deferred sales charges that may be charged on redemption of mutual funds (including the fee schedule) Whether the firm will receive trailing commissions in respect of the security being acquired July 15, 2015 for new disclosure requirements, including for fund managers quarterly account statements with disclosure on: “Name of the party that holds or controls each security and a description of how it is held, Identification of which securities are subject to DSC, Name of applicable investor protection fund July 15, 2016Annual report of “charges” and compensation

CLIENT RELATIONSHIP MODEL 2 (CRM2)
PRE-TRADE DISCLOSURE JULY 15, 2014 Charges in respect of the purchase or sale, or a reasonable estimate if the actual amount of the charges is not known to the firm at the time of disclosure DSC on subsequent sale of the security and the fee schedule that will apply Disclosure that firm will receive trailer fees

CRM2 PERFORMANCE & FEE REPORTING
JULY 15, 2016 Clients will have greater awareness of costs as new disclosure rules are implemented Performance and fee reporting will clearly provide investors with annual summary of what they paid, (including trailer fees, referrals fees) and what they made

Performance report will show the annualized percentage return for the client’s account Include dividends and interest in addition to capital gains and losses, be calculated net of charges Money-weighted method mandated (measures the impact of all the factors that affect a portfolio’s performance, including the actions of the investor) Annualized returns will be provided for the 12 months, three years, five years and 10 years There are two main approaches to calculating investment returns: The first approach is to measure the impact of the market together with the skill of the portfolio advisor (Fund Manager). The impact of the investor’s actions is excluded. Rates of return calculated using this approach are known as time-weighted returns. The second approach is to measure the impact of all the factors that affect a portfolio’s performance, including the actions of the investor. Rates of return in this family are known as money-weighted returns or dollar-weighted returns. This has been mandated for the Fees and Compensation Report The money-weighted return is a personal rate of return. It is most unlikely that two investors will have the same personal rate of return even if they happen to use the services of the same portfolio advisor. This is because the money-weighted return takes into account all the factors that affect the return on a portfolio, including the investor’s decisions. It is most unlikely that two investors will add money to or withdraw money from their respective portfolios at precisely the same time.

Sample – Annual Charges and Compensation Report WHAT YOU PAID
CRM2 PERFORMANCE & FEE REPORTING Sample – Annual Charges and Compensation Report WHAT YOU PAID

SAMPLE ANNUAL CHARGES AND COMPENSATION REPORT

Sample – Your Investment Performance Report WHAT YOU MADE

Sample – Your Investment Performance Report (cont’d)

Build awareness of the value you bring Engage clients by asking the right questions Annual meetings provide opportunities to learn more, improve service offering Demonstrate your value by showing clients what you do Demonstrating Value (Mackenzie Advisor PDF) Shift the focus from investment performance to wealth management Wealth protection • Wealth accumulation • Wealth transfer • Charitable giving strategy • Tax savings • Disability planning • Providing a team of experts internally and externally to help your clients navigate life-changing events

A permanent resident of the U.S. U.S. green card holder
FATCA JUNE 30, 2014 U.S. legislation known as the Foreign Account Tax Compliance Act (FATCA). Under U.S. tax law, "U.S. Person" includes: A citizen of the U.S. [including an individual born in the U.S., but resident in Canada (or another country) who has not renounced their U.S. citizenship] A permanent resident of the U.S. U.S. green card holder U.S. corporations and U.S. estates and trusts The Agreement between Canada and the U.S. is intended to improve tax compliance in both countries through enhanced information sharing between the two governments and to provide the U.S. government with information required under U.S. legislation known as the Foreign Account Tax Compliance Act (FATCA).

FATCA JUNE 30, 2014 Clients may also be considered a U.S. Person if they spend considerable time in the U.S. on a yearly basis. For example, some Canadian “snowbirds” may be considered U.S. Persons for U.S. tax purposes Financial accounts that are reportable include most bank accounts, mutual fund, brokerage and custodial accounts, annuity contracts (including segregated fund contracts) and some life insurance policies with cash value

FATCA FATCA Government registered retirement and savings plans (such as RRSPs, RRIFs, RPPs and PRPPs) will be exempt Non-registered life insurance policies with cash value under $50,000 and individual depository accounts (such as bank accounts) under $50,000 are not reportable

FATCA JUNE 30, 2014 Required to monitor for changes to customer information to identify U.S. indicia that could indicate a change in the U.S. tax status of a client KYC to capture “US Persons” for new clients

Identification of the account holder as a U.S. citizen or resident
FATCA U.S. INDICIA Identification of the account holder as a U.S. citizen or resident U.S. place of birth Current U.S. mailing or residence address (including a U.S. PO Box) a current U.S. phone number Standing instructions to transfer funds to an account maintained in the U.S. Currently effective power of attorney or signatory authority granted to a person with a U.S. address, or “In-care-of” or “hold mail” address that is the only address in the file for the client

CANADA’S ANTI-SPAM LEGISLATION (CASL)
July 1, 2014 CASL prohibits the sending of commercial electronic messages in any form without the prior consent of the recipient, unless subject to a statutory exemption The definition of “commercial” includes activities carried on without the prospect of gain, catching many organizations including not-for-profits and charities

CANADA’S ANTI-SPAM LEGISLATION (CASL)
Even with recipient’s consent, the sender of a commercial electronic message will have to identify themselves in their electronic communications and provide a way for recipients to unsubscribe from receiving further messages Prior consent required for the installation of software on another person’s computer system (unless required under a contract) CASL prohibits fraudulent and misleading activities such as phishing, hacking, malware and spyware, and harvesting of addresses

competence to excellence
QUESTIONS competence to excellence 31

ROLE OF COMPLIANCE Best Practices Increase Value Mitigate Risk
SUPERVISE DETECT MANAGE ENSURE COMMUNI-CATE RESOLVE Best Practices Increase Value Mitigate Risk SUPERVISE all dealer activity DETECT compliance deficiencies, unethical behaviours and product arbitrage MANAGE client complaints, investigations ENSURE proper disclosure, follow-up and compliance to corporate and regulatory policies and procedures COMMUNICATE changes in policies, risk management issues – Compliance Department a “Resource Centre” RESOLVE deficiencies and address repeat issues SROs PROVINCIAL FINTRAC PRIVACY

RESPONSIBILITIES OF UDP & CCO
UDP - ULTIMATE DESIGNATE PERSON Terri DiFlorio Supervise activities of the firm that are directed towards ensuring compliance with securities legislation by the firm and each individual acting on the firm’s behalf; and Promote compliance by the firm, and individual's acting on its behalf, with securities legislation NI CCO - CHIEF COMPLIANCE OFFICER Cheryl Hamilton Establish and maintain procedures for firm and individuals acting on firm’s behalf. Monitor and assess Compliance by firm and individuals acting on firm’s behalf. Report on state of compliance, non-compliance with securities legislation, patterns of non-compliance to UDP and HCI Board of Directors. Responsibility for compliance Promoting compliance culture Escalation of compliance issues Roles of dealer, directors, management, compliance officers, supervisors and others Enforcement (violations, aid/abet, fail to supervise) Onus on actions to resolve Regulators have Expanded view on which individuals within a firm may be subject to enforcement proceedings

HIGH REGULATORY RISK Suitability KYC Leverage
Outside Business Activities Personal Financial Dealings Churning FE-DSC, DSC-DSC This diagram shows the areas that are the highest risk, under the most oversight and focus of the MFDA. Why…..driven by investor protection concerns, client complaints and dealer audits. The MFDA can’t force a dealers or advisors to compensate clients, but they do react through the enforcement and policy making processes. They have significant “moral suasion” Regulatory Focus Pre-Signed Blank Forms Evidence of Client Direction Leverage

STANDARDS OF CONDUCT Prudent Investor Rule
Fiduciary duty “Honestly, Fairly and in Good Faith” Duty to uphold the reputation of the industry Client interests are paramount Conflict of interests are avoided; Clients are not exploited; Clients are provided with full disclosure; Services are performed reasonably prudently; Duty to act fairly, honestly and in good faith Statutory best interest standard for advisers and dealers in Alberta, Manitoba, Newfoundland and Labrador In Quebec, according to both the general civic law and the Securities Act (Quebec), registered dealers and advisers are currently subject to a duty of loyalty and a duty of care and must act in the client’s interest

KYC AND ASSESSING SUITABILITY
“As professionals, advisors need to get into clients' heads to understand their present needs and future goals; to determine what their values are (know your client [KYC]). In addition, advisors are obliged to develop a deep understanding and figure out from the multitude of products and strategies available what is best for each of their clients. A single strategy does not fit all clients” Ellen Bessner

Suitability Review Triggers MFDA Rule 2.2.1 Each recommendation made or order accepted Transfer of assets to the dealer or transfer assets into an existing account Material change in client situation – marriage, additional dependants, loss of job, etc. Account reassigned from another advisor Suitability of investments = investor/advisor protection

KYC document sets the standards of conduct and basis for portfolio suitability Portfolio design is highly subjective KYC matching to portfolio NOT acceptable KYC updates, justification for downgrading Addressing portfolio drift Notes, 3rd party to understand why recommendation suitable Significant supervision and regulatory focus Accuracy of client KYC information CRITICAL to electronic review Electronic review major role in streamlined business practices and supervision Integrity of client statements depends on accuracy in WealthServ KYC to be updated PRIOR to transaction taking place – Stamp in time – record of infractions

Trade Query Resolution
KYC, TRADE and ASSESSING SUITABILITY EFFICIENCIES and REGULATORY FOOTPRINT Enter KYC Enter Trade Trade to KYC Suitable Trade Approval 20 sec Enter KYC Enter Trade Trade to KYC Unsuitable Trade Query Trade Query Tracking Trade Query Resolution Regulatory Stamp Talk through slide Impress upon efficiencies and footprint of non-compliance 1 hour Queries need immediate attention. Majority of issues should be resolved within 48 hours. All queries should be closed within 25 days. Queries leave record of non-compliance, even if quickly remedied.

COMMON DEFICIENCIES KYC and Applications not submitted to Regional Office for review within the required 1 day turn around. Trade instructions forwarded directly to the fund company. Clients not dating their own signatures. Modifications to client instructions without client date and/or initial. Suitability Failure to disclose client awareness of DSC penalties on redemption or DSC schedule upon purchase. notes: for transfers, acknowledge whether or not client is incurring fees as a result of the transfer, if paperwork will not be received at Head Office in time for review, write an explanation as to why pre-signed forms: cannot re use old documents and pre-signed forms are reportable to the MFDA Use tools and fund company resources to support KYC risk.

REPVISION PLAN SUITABILITY

REPVISION PLAN SUITABILITY REPORT

TIMELY RESOLUTION OF TRADE QUERIES
Tier 1, Tier 2 Trade Queries, client issues, branch review (audit) deficiencies, etc. Take queries, issues seriously & respond professionally Be mindful and respect the professional liability of your supervisor, management and compliance staff Understanding polices & procedures and adopting solid practices will limit queries and client issues

TIMELINESS OF TRADES AND SUPERVISION
NI , MFDA POLICY 2 10.2 Transmission and Receipt of Redemption Orders (1) Each redemption order for securities of a mutual fund received by a participating dealer at a location that is not its principal office shall, on the day the order is received, be sent by same day or next day courier, same day or next day priority post, telephone or electronic means, without charge to the relevant security holder or to the mutual fund, to the principal office of the participating dealer. Under NI we are obligated to process orders on the day we receive them or by next day if received after processing cut-off. This is a significant issue for all dealers from an MFDA perspective, and now has become a significant focus of external auditors that must audit to regulatory standards. Unfortunately, NI doesn’t provide for exceptions. Delays may cause financial losses to clients that need to be addressed through the LOI process. We recognize that there may be some exceptions in trying to comply with this, however, they should be exceptions, not normal occurrences. It’s very important that paperwork be date stamped when received in the branch to mitigate this risk which can be very costly in times when markets are volatile.

TIMELINESS OF KYCs, SUPERVISION, UPDATES
MFDA Policy 2 - KYCs must be approved within one business day MFDA Policy 2 - Material changes to KYC updates must be approved within one business day Annual review with client is best practice Client objectives, risk, etc. are typically longer term and changes need to be well documented and supported

CLIENT NOTES Notes, presentations, s form part of dealer records and branch files (MFDA) Professional quality notes and documentation Quantity & Quality (Ellen Bessner) Correct, Current, Complete, Consistent Details of disclosure of all fees relating to transactions at time of purchase, sale, switch, transfer Professional quality files are required and are also your first line of defence

CLIENT NOTES and FILE MANAGEMENT
KYC meant to be a snapshot; provide supporting documentation to evidence how the conclusions on the KYC were determined Terminology – use the clients own words. Write what the client says. This demonstrates that you have heard and understood what the client has told you Follow Up – Send a summary of key conversations to your client via or registered mail detailing the conversation. Keep a copy of the letter or in the client file The quality of the client file is a significant issue that needs to be taken seriously by every advisor and supervising branch manager. The information contained in the file should be robust enough for an unrelated 3rd party (i.e. judge, regulator, new advisor, etc.) to understand what recommendations were made and why, what transactions were undertaken, what disclosures were made, fees agreed to, etc.

CLIENT NOTES and FILE MANAGEMENT
If a client chooses not to follow your advice, ensure that that is documented as well Do not rely on memory Consistent Filing System – establish a consistent filing system where the methodology of note taking and the type of document maintained is the same for every client A separate file must be secure and maintained for each registration type. For example, for a married couple with individual accounts and one joint account, there would be three separate files Non mutual fund business must be maintained in separate files and in a separate cabinet Professional quality files are required and are also your first line of defence

STRATEGIES FOR DEALING WITH AGING CLIENTS

UNDERSTAND RISKS ASSOCIATED WITH SERVICING SENIOR CLIENTS Judges and regulatory panels assume seniors are ignorant, unsophisticated and therefore vulnerable Strength of paper trail is the difference between an issue being escalated or nipped from the start Support change in KYCs with external evidence associated to support the change Instructions from a senior client's power of attorney may lead to the client account being managed in a manner that is later difficult to substantiate i.e. more aggressive than clients risk, objectives, etc.

LEGAL CAPACITY MENTAL CAPACITY
the ability to understand information relevant to making a decision; AND The ability to appreciate the consequences of making a decision or not. Test is capacity, not function Capacity to provide “meaningful” consent Mental capacity matter of provincial jurisdiction Time specific, can be capable at one time and not at another

LEGAL CAPACITY Approximately 15% of Canadians 65 or older have dementia The risk for dementia doubles every 5 years Most advisors dealing with clients in this age range will be confronted with this issue Poses significant risks to the clients, advisors and dealers

LEGAL CAPACITY Advisors do not decide capacity
Lawyers, doctors letters provide “actual” notice Advisors need to know how to recognize problems “Problems” means “conduct that would lead a reasonable person to think the client is incapable”

LEGAL CAPACITY EXAMPLES OF WARNING SIGNS
Unable to explain the nature of instruction or purpose Attends with relative who speaks for the client Attends with a “new” relative Investment instruction inconsistent with past history Inconsistent instructions, memory lapses, gaps in conversation Behaviour out of ordinary for that client Non-communicative

LEGAL CAPACITY IF YOU HAVE CAPACITY CONCERNS
Ask the client if she/he understands Bring to the attention of next of kin, lawyer or compliance With client’s consent, consider involving trusted friend or family member Take DETAILED notes, including behaviour i.e. “client was engaged in conversation and appeared to fully understand the details of the transaction and decided to proceed…..”

PRIVACY and CONFIDENTIALITY
Work with aging clients to get express consent to discuss their affairs with a trusted family friend or relative while capacity is not an issue Acceptable to disclose personal information without consent in order to communicate with next of kin or authorized representative (i.e. executor) of an injured, ill or deceased person Acceptable to disclose personal information without consent to the next of kin or authorized individual if there are reasonable grounds to believe an individual has been a victim of “financial abuse”

POWER OF ATTORNEY Grants authority where the “Grantor” gives another “Attorney) the legal authority to make decisions Continuing, Enduring or Durable refers to continuation beyond mental incapacity The POA must state that it continues after capacity Can be General or Limited POA has fiduciary duty to act in best interests of the client Effective upon execution or occurrence of specific contingency i.e. Springing

SIGNS OF FINANCIAL ABUSE Sudden unexplained changes to bank account or banking practices Sudden unexplained changes to a will or other financial document Sudden drop in cash flow or financial holdings

Hub Capital 2014 Compliance Presentation
Vancouver, Calgary, Toronto, Montreal, Quebec City

FINTRAC THE FINANCIAL TRANSACTIONS AND REPORTS ANALYSIS CENTRE OF CANADA (FINTRAC) Created in 2000, FINTRAC is Canada’s financial intelligence unit, a government agency created to collect, analyze and disclose financial intelligence on suspected money laundering and terrorist financing activities. FINTRAC reports suspicious leads to law enforcement, CRA, Canada Border Services Agency, Communications Security Establishment, and its international counterparts. In 2009, it was estimated there were over 950 organized crime groups in Canada, with approximately 80 % of those involved in drugs.

FINTRAC Regulations The Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations (PCMLTF) This regulation prescribes: The entities that are subject to Part I of the Act The information that must be in a suspicious transaction report and a terrorist property report The time limits and the format of the reports The “designated information” which FINTRAC can disclose

FINTRAC Regulations The Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Regulations This regulation prescribes: Customer identification requirements Record keeping requirements Transactions that must be reported, i.e. large cash transactions Compliance regime requirements

FINTRAC Regulations This regulation: Defines “monetary instruments”
Prescribes the reporting threshold at $10,000 Prescribes the form and manner for reporting to the Canada Border Services Agency (“CBSA”)

FINTRAC Regulations Prescribes applications, notifications, clarifications and supplementary information for money services business (“MSB”) registration Sets out the specific violations and the classifications of those violations as minor, serious or very serious

Who has to report to FINTRAC?
Financial entities, i.e. banks, credit unions, trust and loan companies Insurance companies, brokers and agents Securities dealers Money Services Businesses Agents of the Crown that well money orders Accountants and accounting firms Real Estate brokers, representatives and developers Casinos Dealers in precious metals Notaries in British Columbia

Compliance Regime Under FINTRAC legislation, dealers are required to have in place a compliance regime consisting of: Appointment of a compliance officer Development and application of written compliance policies and procedures Assessment and documentation of risks for money laundering and terrorist financing and measures to mitigate high risks Implementation and documentation of an ongoing compliance training program Documented bi-annual review of the effectiveness of policies and procedures, training program and risk assessment

Risk Assessment Securities dealers are required to develop an assessment for potential risk using a range of criteria including: Products, services and delivery channels Geographic locations of clients and where business is conducted The nature and business of clients Any other relevant factors Although HCI considers our risk to be relatively low overall, we must be vigilant as criminals look for new ways to launder funds.

RISK MANAGEMENT Based on the risk assessment undertaken by the firm, securities dealers will implement the controls necessary to mitigate risks identified which may include, but not be limited to the following: Provide AMLTF training Know Your Client Third Party Determination Identifying and Reporting Suspicious Transactions Identifying and Reporting Politically Exposed Foreign Persons (“PEFP”) Ongoing monitoring of high risk transactions

PROCEEDS OF CRIME (AML) and TERRORIST FINANCING (TF)
competence to excellence 71

WHAT IS MONEY LAUNDERING?
Process whereby 'dirty money', produced through criminal activity, is transformed into 'clean money' whose criminal origin is difficult to trace Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention Global money laundering estimated at > than 1 trillion $$$ Money laundering in Canada estimated at 5-17 billion $$$ Money laundering is real and financial advisors are prime targets! competence to excellence 72

OTHER REASONS FOR CRIMINALS TO LAUNDER MONEY
Avoid seizure of their assets Avoid prosecution Tax evasion Increasing profits through reinvestment Creating the perception of legitimacy

ORGANIZED CRIME In Canada, six broad organized crime groups include:
Outlaw motorcycle gangs Eastern European Organized Crime Asian Organized Crime Traditional Organized Crime Aboriginal-based Crime Gangs Indo-Canadian Criminal Groups In the last 30 years, criminal organizations have used white collar professionals to help launder funds. Some of these professionals are hired, some are unknowingly involved.

STAGES of MONEY LAUNDERING
There are three stages of money laundering: Placement - the physical disposal of cash proceeds derived from illegal activity. Layering - separating illicit proceeds from their source by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity. An example is the creation of “shell” companies. Integration - the provision of apparent legitimacy to criminally derived wealth. If the layering process has succeeded, integration schemes place the laundering proceeds back into the economy in such a way that they re-enter the financial system appearing to be normal business funds. 75

PROCEEDS OF CRIME (AML) and TERRORIST FINANCING (TF)
76

METHODS OF MONEY LAUNDERING
Nominees: One of the most common methods of laundering and hiding assets is the use of family members, friends or associates who are trusted within the community, and who will not attract attention, to conduct transactions on their behalf Structuring or “smurfing”: Many inconspicuous individuals deposit cash or buy bank drafts at various institutions, or one individual carries out transactions for amounts less than the amount that must be reported to the government, and the cash is subsequently transferred to a central account. These individuals, commonly referred to as “smurfs”, normally do not attract attention as they deal in funds that are below reporting thresholds and they appear to be conducting ordinary transactions Asset purchases with bulk cash: Individuals purchase big-ticket items such as jewelry, cars, boats and real estate. In many cases, launderers use the assets but distance themselves from them by having them registered in a friend’s or relative’s name. The assets may also be resold to further launder the proceeds.

METHODS OF MONEY LAUNDERING
Exchange transactions: Individuals often use proceeds of crime to buy foreign currency that can then be transferred to offshore bank accounts anywhere in the world Currency smuggling: Funds are moved across borders to disguise their source and ownership, and avoid being exposed to the law and systems that record money entering into the financial system. Funds are smuggled in various ways (such as by mail, courier and body-packing) often to countries with strict bank secrecy laws Gambling in casinos: Individuals bring cash to a casino and buy gambling chips. After gaming and placing just a few bets, the gambler redeems the remainder of the chips and requests a casino cheque

KNOW OUR CLIENTS Money launders and terrorists need to get their money into the system. Know who we’re dealing with and what they do for a living. Watch for odd behaviour, suspicious transactions and patterns that are outside the norm for brokers and clients. Rely on advisors, employees and processes. 79

TERRORIST ORGANIZATIONS NEED MONEY
Recruit and sustain: money is needed to recruit, support, train, transport, house, compensate and equip terrorist agents Acquire influence: money is needed to sustain media campaigns and win political support Build the support base: money is needed for educational and social programs to win members and create a support base Carry out terrorist activity 80

TERRORIST FINANCING Terrorist groups are often culturally based and able to develop strong foundations of financial support across communities, countries, and in some cases the world. At the community level, immigrants generally give donations or pay membership fees to local associations and religious groups, which replicate those of their homeland and assist in protecting their heritage. Through legal acquisition of funds, and legal financial transactions of the association or religious group (such as sending wire transfers home and setting up accounts at home), the ability to place terrorist-destined funds into another country’s economy often comes with relative ease. competence to excellence 81

TERRORIST FINANCING vs. MONEY LAUNDERING
competence to excellence 82

OUR RESPONSIBILITIES New accounts supported by appropriate ID and banking information. Know the “beneficial owner” of the funds, if someone else may be providing instructions on the account Payments for investments are in keeping with AML guidelines. Information correctly input into EWMS, systems in place to detect and report suspicious activity. Know who our advisors and employees are. Not to be adversely influenced by clients, brokers or internal employees. 83

EXAMPLES of HIGH RISK BUSINESSES
Currency exchange houses, money transmitters and cheque cashers. Offshore corporations and banks located in tax/secrecy havens. Car, truck, boat and airplane dealerships, import/export companies. Jewel, gem and precious metal dealers. Cash-intensive businesses such as restaurants, retail stores and parking garages. Telemarketers. 84

EXAMPLES of SUSPICIOUS TRANSACTIONS
The type of transactions which may be used by a money launderer are almost unlimited and therefore, difficult to define a “suspicious” transaction. Additional inquiries need to be made where: Payment is offered in cash. Verification of client’s identity proves unusually difficult. Transactions not in keeping with the investor’s normal activity, the financial market in which the investor is active or the investor’s business. The client makes a series of purchases then sells all of the assets in one transaction, with the proceeds credited to a different account. 85

EXAMPLES of SUSPICIOUS TRANSACTIONS
Clients ask to have mail sent to a foreign address The client makes frequent deposits which cannot be substantiated Client over justifies the explanation for a transaction, nervousness Corporations that do not clearly explain the activities they conduct A corporate account appears to have close connections with another account with no apparent reason The client is accompanied and/or watched, has unusual knowledge of the law 86

IDENTIFYING SUSPICIOUS TRANSACTIONS
Does the transaction make sense? Is the client incurring cost/loss for no apparent reason? Is the client offering gratuities or favours? Does the client seem to be doing something not consistent with his/her normal practice? Does the transaction/account involve non-residents and offshore transactions? Client refuses to produce personal identification documents, or provides inappropriate identification when opening an account Client shows uncommon curiosity about internal systems, controls competence to excellence 87

IDENTIFYING SUSPICIOUS TRANSACTIONS
Review of client file reveals incomplete or contradictory identification information or for example, there is a note in the file that the client desired to deposit cash funds directly into the account, was informed of non-cash acceptance policy and advised to take the funds to a bank. Mutual fund investments have since been sold and the proceeds transferred out of the account to an account with a financial institution. Analysis of a particular individual’s transactions reveals an abnormally high volume of flow-through transactions. The volume of purchase and sale of mutual fund investments compared to amounts remaining invested is abnormal when compared to past activity or same period activity for other dealers. 88

REPORTING SUSPICIOUS TRANSACTIONS
Suspicious transactions or attempted suspicious transactions are to be immediately reported to the Regional Compliance Officer. The Regional Compliance Officer will make the Chief Compliance Officer aware of the concerns. The situation will be investigated and reported to FINTRAC by the Chief Compliance Officer if there are reasons to suspect a connection to money laundering and/or terrorist financing. 89

TIPPING-OFF IS AN OFFENSE
Securities dealers, including staff and agents must ensure that they do not disclose to anyone (including customers) that suspicious transaction reports have been made to FINTRAC, or disclose the contents of such reports, with the intent to prejudice a criminal investigation, whether or not a criminal investigation has begun. FINTRAC receives close to 10 million reports of suspicious activity annually. 90

GUIDELINES FOR IDENTIFICATION
For individual clients refer to an original of one of the following: Birth certificate; Driver’s license; Passport (must be current and original) Provincial health card (except Ontario, Manitoba and Prince Edward Island) Other government issued options may be available, please contact Compliance for more information If the individual is not physically present when the account is opened, confirm that the individual holds an account in his/her own name with a Canadian financial entity or that a cheque drawn on the individual’s account with a Canadian financial entity has been cleared. 91

For corporate accounts: Legal name, address, contact information Articles of incorporation, trust deed, etc. detailing the organization and the corporation’s registration number Determine the nature of the business Confirmation of the status of the entity by way of a certificate of corporate status; a copy of a record required to be filed annually by provincial securities legislation; other record such as the corporation’s published annual report signed by an independent audit firm or notice of assessment

For identification of corporate accounts, continued… Corporate resolution documents authorizing the opening of an account with preferably some direction regarding the type of investments and list of signing officers, those authorized to invest and specimen signatures Determination of any Politically Exposed Foreign Persons (“PEFP”) A list of the corporation’s directors (

Requirements for identification of corporate accounts, continued… Reasonable attempts must be made to ascertain the intended use of the account and beneficial ownership of the corporation. If you do obtain the information, you need to record: The occupation of all directors The name, address and occupation of all individuals who directly or indirectly own or control 25% or more If you are not able to ascertain beneficial ownership, you must keep a record explaining why. Reasonable measures are to be taken to keep the information current

Identification of entities other than corporations Partnership agreement, articles of association, sole proprietorship documents Additional information required for non-profit organizations Determination if it is a registered charity for income tax purposes ( If it is not a registered charity, determine whether it solicits charitable financial donations from the public

THIRD PARTY DETERMINATION
Third parties have more to do with who gives instructions on an account, not necessarily who owns the account. If there is a third party, you have to keep a record of the following: Third party’s name, address and principal occupation Date of birth if the third party is an individual or incorporation number and place of incorporation if a corporation Nature of the relationship between the account holder and the third party

IDENTIFYING PEFPs A politically exposed foreign person (“PEFP”) is an individual who holds or has ever held one of the following offices or positions in or on behalf of a foreign country: a head of state or government a member of the executive council of government or legislature a deputy minister (or equivalent) an ambassador or an ambassador's attaché or counselor a military general (or higher rank) a president of a state-owned company or bank a head of a government agency a judge a leader or president of a political party in a legislature 97

IDENTIFYING PEFPs A politically exposed foreign person (“PEFP”) also includes the following family members: Mother or father Child Spouse or common law partner Spouse’s or common law partner’s mother or father Brother, sister, half-brother or half-sister PEFPs must be reported immediately to Compliance who will report to Senior Management. 98

GUIDELINES FOR PROCESSING
Cheques to be made payable to HCI Capital Inc. “In Trust”. Do not accept cash deposits (in any amount). Do accept “acceptable” corporate cheques made payable to the client (Fund Company, Insurance Company, Employer, Lawyer). KYC or NAAFs must be received in good order, including record of client ID. 99

IMPLEMENTATION OF A COMPLIANCE REGIME
Along with identifying and reporting of suspicious transactions, there is also a requirement to implement a compliance regime to ensure compliance with obligations under the legislation. The requirement of a compliance regime is not restricted to “dealers”. Although mutual fund representatives can rely on the dealer’s compliance regime, individual insurance brokers and agents are responsible for their own compliance regime.

REQUIRED ELEMENTS OF A COMPLIANCE REGIME
Appointment of a Compliance Officer: Should be a senior officer of the organization Can be the individual agent/broker Although a senior officer can delegate tasks, they retain responsibility Development of compliance policies and procedures: Must be in writing Incorporates reporting, record keeping, client identification, risk assessment and mitigation Must be communicated to and adhered by employees

Assess and document of risks of money laundering and terrorist financing and measures to mitigate risks: Risk assessment – analyze potential threats and vulnerabilities Business risk – products/delivery/geographic location Relationship risk – nature and business of clients/duration of relationship Outline measures to mitigate high risks – awareness, monitoring and controls Implementation and documentation of an ongoing training program Training for all those who contact clients or see client transaction activity Individual agents/brokers are not required to have a written training program, but must have policies and procedures in place

Documented reviews every two years of: Effectiveness of policies and procedures Training program (if applicable) Risk assessment More information on the regulations regarding the development and maintenance a compliance regime can be found at

CRIMINAL PENALTIES FOR NON-COMPLIANCE
Failure to report suspicious transactions: up to $2 million and/or 5 years imprisonment. Failure to report a large cash transaction or an electronic funds transfer: up to $500,000 for the first offence, $1 million for subsequent offences. Failure to meet record keeping requirements: up to $500,000 and/or 5 years imprisonment. Failure to provide assistance or provide information during compliance examination: up to $500,000 and/or 5 years imprisonment. Disclosing the fact that a suspicious transaction report was made, or disclosing the contents of such a report, with the intent to prejudice a criminal investigation: up to 2 years imprisonment. 104

MONETARY PENALTIES FOR NON-COMPLIANCE
Violations are classified by the PCMLTF Regulations as: “Minor”, “Serious” or “Very Serious 105

PRIVACY AND PROTECTION OF INFORMATION
FINTRAC is subject to the Privacy Act (“Act”) which strictly regulates how federal institutions can use and disclose personal information collected about individuals. In additions, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act stipulates that FINTRAC is to ensure that the personal information under its control is protected from unauthorized disclosure. The Act also sets out that information would be relevant to investigating or prosecuting a money laundering offence or a terrorist activity financing offence, or to the Canadian Security Intelligent Service (“CSIS”) when there are reasonable grounds to suspect that it is relevant to threats to the security of Canada. Even in those circumstances, only “designated information” can be disclosed. Finally, the Act stipulates that FINTRAC employees and contractors are subject to criminal penalties of up to 5 years in jail or a fine of up to $500,000 or both, for unauthorized disclosure or use of information.

EVERYONE is responsible for compliance
IN CLOSING EVERYONE is responsible for compliance Know the rules and regulations Conduct your business to the highest standards of ethics and professionalism Be alert to unusual situations and red flags Ask if your not 100% sure….it may save your career and reputation

Hub Capital 2014 Compliance Presentation

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