Anti-Money Laundering 2021: Frequently Asked Borrower Questions
Money laundering is a serious crime worldwide. To combat it, Canada’s financial sector is expected to comply with Anti-Money Laundering ("AML") controls that include detailed record keeping and client identification requirements. Failing to comply threatens the integrity of domestic and international financial systems and may result in significant harm to society. Since 2000, these requirements have expanded and evolved under the leadership of Canada’s financial intelligence unit called FINTRAC https://www.fintrac-canafe.gc.ca/intro-eng. In this interview, Taryn Kelly, Manager, AML Compliance – Commercial Mortgages answers frequently asked questions on the practical implications of AML controls on the commercial borrower experience at First National.
Taryn, what information is First National required to gather and is it necessary for borrowers to involve their legal or accounting professionals in submitting it?
On every underwriting, there is a specific due diligence process involved in the overall transaction. But specifically with respect to AML, we are required to obtain detailed ownership information from every borrower. If a borrower isn’t certain about the details of their corporate structure, it’s best to engage a lawyer or accountant who will have all the relevant information. For example, it makes a difference if a company is owned by a Family Trust, rather than by an individual personally.
When a Trust is a shareholder of a borrower or guarantor, does First National ask for more information on trustees, settlors and beneficiaries than banks?
No, we ask only for the Trust information that is stipulated in FINTRAC guidelines, which is names and addresses of settlors, trustees, beneficiaries, and whether the Trust is discretionary. On occasion, we’ve heard from some clients that they’ve never had to provide these details to their bank or other institution. All we can say is that regulations require this information be gathered by all regulated institutions. Our objective is to provide responsive service to borrowers while living up to our legal obligations and it helps that our underwriters are fully versed in AML requirements. If a bank has not asked for this same information, perhaps it’s because they gathered it long ago and already have it on file.
Some borrowers have been clients of First National’s for decades and you know they would never launder money. Why do you still need to verify their information?
We are not asking for this information because we think a borrower may engage in money laundering. It’s simply part of conforming to “Know Your Client” rules set out by FINTRAC. In order to follow regulations, internally and externally, we must obtain and record the necessary information to ensure First National is compliant. Put a different way, we believe our borrowers would not want us to engage with anyone we thought could be involved in illicit behavior. Enabling it would be bad for the financial system, bad for the property market and bad for Canada. That said, we can assure all borrowers that we appreciate and value the relationships that we build with you.
When a borrower has a number of investors in a property, can you provide advice on how to complete the shareholder information form?
There are a variety of ways that a corporate structure could be set up, especially in relation to an interest or ownership in a property. For example, there could be a nominee on title for multiple beneficial owners, or a limited partnership with multiple limited partners, or a corporation with multiple shareholders. So my main advice is to explain the structure to your First National underwriter or representative in the beginning. Your underwriter can guide you on completing the relevant ownership details found in the Loan Information Form which is attached to commitment letters. If a borrower has a corporate organizational chart already drafted, it’s a good idea to share it with us. Ultimately, our goal in obtaining this information is to identify the individuals who own or control 25% or more of the borrower’s overall corporate structure.
When a borrower is buying out the interest of another partner, what information do you require?
We ask for a copy of the share purchase or transfer agreement, and information and documentation on the source of funds for the amount of the cost to buy out the partner. Additionally, we are required to confirm the overall new borrower structure. That confirmation typically comes from the borrower’s lawyer, once the transaction is complete.
If a borrower is adding a guarantor to the subject loan, what information do you need?
In addition to evaluating the new guarantor from a credit and “Know Your Client” perspective, we will need to identify the guarantor. If it’s an individual, they will need to have their identity verified, which will usually happen through their solicitor. With their solicitor, the guarantor will complete an Agent Examination of ID form which is a fairly straight forward document and the same one we require for every borrower, guarantor or signing authority. If the guarantor is an entity rather than a person, we will need to understand the ownership of that entity and determine the AML beneficial owners – that is, any individuals who own or control 25% or more of that entity directly or indirectly. We will need to obtain documentation for the corporation/entity to confirm its existence and good standing, the ownership structure, and to ensure that we verify the identity of the signing officers/authorized signatories for the entity.
If a borrower transfers property ownership from a personal name into a corporation, what information do you require?
We will need to engage with the borrower’s lawyer to ensure the proper title and security changes are made. In regard to AML requirements specifically, we have to obtain documentation for the corporation to confirm its existence and good standing, the ownership structure, and to ensure that we verify the identity of the signing officers/authorized signatories for the entity, if they differ from the individuals who were originally named as Borrower.
When a borrower dies, what information do the heirs need to provide?
We will request a copy of the death certificate, and a copy of the probated will to confirm who will inherit the property. If an Estate is established, typically the Estate would take over as borrower until it is dissolved, and we would need to verify the identity of the executors of the Estate and confirm the beneficiaries. Once the Estate is dissolved and property ownership transfers to the beneficiaries, we will need to verify the identity of the new borrower/beneficiaries and confirm the property ownership is properly documented and registered.
Have there been any recent changes to AML or related laws that borrowers should know about?
Yes, FINTRAC updated their guidelines as of June 1, 2021 and expanded the requirements to confirm the accuracy of beneficial ownership to all regulated entities. This now includes the requirement to determine the Trustees and any individual who owns or controls 25% or more units of a publicly traded or widely held Trust. For example, a widely held Real Estate Investment Trust. Previously, REITs like this fell under an AML exemption.
Is there anything on the horizon that borrowers should know?
In the financial services industry, there is a lot more talk about transparency in beneficial ownership than in the past. This is partly because concealment of beneficial ownership information is a technique commonly used in money laundering and terrorist activity financing schemes and in general, Canada is seen to be behind other countries that put more emphasis on transparency. Identifying beneficial ownership removes the anonymity of the individuals behind transactions and is an important step to mitigate the risk of money laundering. That said, the Government of Canada recently announced plans to implement a beneficial ownership registry for corporations in Canada, which could be publicly accessible by 2025. Depending on how this registry works, it could make it easier for our clients and all lenders to comply with AML requirements and help Canada identify money launderers. At the provincial government level, regulations have already been implemented in certain provinces involving recording and documenting beneficial ownership. One example is BC’s requirement that came into effect last year for private companies that were incorporated under the British Columbia Business Corporations Act to prepare and update a Transparency Register that documents each person who is a “significant individual.” Another example is BC’s Land Owner Transparency Act that established a registry that will provide public access to certain beneficial ownership information for entities that own land in the province. These initiatives may spur further and more widespread transparency measures.
Any final advice you have for borrowers?
To help a deal closing run smoothly and on time, the best thing to do is provide your underwriter or First National representative with any and all the information they request right at the outset. If we have accurate details going in, the process will be must faster.