Anti-Money Laundering and Finance Compliance Risks for Wealth Managers

With the stock markets near record levels and Baby Boomers transferring an estimated $1 trillion in personal wealth to the next generation, wealth management and investment counsellors are under increased scrutiny by regulators looking to protect against anti-money laundering and other financial crimes.

As a result, asset management firms and other finance-related institutions are under pressure to show that they have strong compliance frameworks in place that meet both provincial, federal, and global regulatory requirements.

Is Money Laundering Relevant for Asset Managers?

Like any business in the financial services sector, asset managers are subject to strict guidelines regarding money laundering and terrorist financing. In Canada, registered wealth management professionals are guided by the principles set forth by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

FINTRAC works with asset managers, banks, real estate brokerages, and others finance services companies to help recognize when individuals might be trying to launder illicit cash.

Any registered individual or entity authorized under their provincial legislation to provide portfolio management or investment advising services is a securities dealer under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

The act requires all securities dealers to have a compliance program in place and report any suspicious activity to FINTRAC. They also need to maintain detailed account records and verify the identities of their clients.

What Exactly Is Money Laundering?

Money laundering is the practice of making money through criminal activity appear as though it was made by legitimate means. The proceeds of crime are deposited into the financial system (cash cheques, wire transfers, bank drafts) with the sources concealed through various financial transactions (shell companies, electronic transfers, offshore banks, and invoice payments).

The illegal money is then used to make transactions that make the origin of the money appear legal. This can include buying or selling stocks, stock market investments, real estate, or luxury goods (commodities, art, collectibles, etc.)

While the wealth management and asset management sector is not always thought of as a means through which dirty money is transferred, the growing sophistication of agencies, like FINTRAC, means criminals are looking for new ways to exploit less traditional channels, including wealth and asset managers.

Is Money Laundering An Issue in Canada?

Money laundering is a serious problem in Canada with an estimated $113 billion being laundered annually. To put that amount into perspective, it represents more than 5% of Canada’s gross domestic product (GDP).

In fact, according to a report from the United States Department of State, Canada is a “major money laundering country” with weak laws that put it in the same company as countries like Afghanistan, China, Colombia, and Kazakhstan.

In Canada, the biggest money laundering offenses occur in real estate, where university students with dubious sources of income are purchasing million-dollar homes. It’s not just real estate, of course. Money laundering and other financial crimes are affecting all financial sectors, like asset management companies, banks, and money service businesses.

For example, an individual with an annual income of $40,615 was able to collectively transfer $114 million to various major banks and credit unions in British Columbia. In another instance, a loan shark in Richmond, British Columbia cleaned dirty money by giving garbage bags full of illicit funds to gamblers to play Baccarat in casinos.

Another popular way of money laundering involves using a legitimate business to wash laundered money as daily cash flow. Firms can overstate operating costs, like renovations, cost of services, multiple invoicing, or phantom shipments. This kind of money laundering was popularized in the television show Ozark.

What Kind of Fines Do Asset Managers and Banks Face for Money Laundering?

It’s imperative that registered wealth management, retirement planning, and portfolio managers follow strict anti-money laundering compliance laid out by FINTRAC. Failing to do so can result in large fines or a jail sentence of up to 10 years.

Despite the strict guidelines, some investment advisors still act unethically and turn a blind eye, or are actively involved in money laundering. In 2022 a Winnipeg investment advisor was handed a $5 million penalty from the Investment Industry Regulatory Organization of Canada (IIROC). That’s the largest penalty IIROC can levy.

The wealth management advisor falsified information, vastly overstating the value of assets in his accounts, in order to secure $172 million in loans. The investigation shed light on other parts of the scandal which led to the asset manager also being charged with money laundering and fraud.

While we expect trusted asset managers to be charged if they break the law, financial institutions can face hefty fines even if they fail to develop compliance policies, monitor business relationships, or fail to take appropriate action if they believe transactions are related to money laundering offenses.

In February 2023, Wealth One Bank was fined $675,000 for not complying with anti-money laundering regulations. FINTRAC imposed the fine on the Vancouver-based bank for non-compliance of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its associated Regulations.

FINTRAC said the bank’s violations included failing “to submit suspicious transaction reports where there were reasonable grounds to suspect that transactions were related to a money laundering offense.”

All of this goes to illustrate how asset managers and others in the financial sector are being used increasingly to launder money or used to fund terroristic activity. It’s also why it’s imperative that any asset management firm you’re considering understands the inherent risks they face, implements and maintains oversight controls, and conducts risk assessments.

Sharp Asset Management for Your Retirement Planning

With the amount of wealth under management increasing, compliance requirements have become more comprehensive and will continue to expand. Using a certified asset management company that understands the various aspects of money laundering laws and financial crime means your investment is in safe hands.

Sharp Asset Management Inc. is an independent Portfolio Management firm that is 100% owner-operated. We are not affiliated with any financial institution, securities firm, or mutual fund company. As a result, our investment decisions are unbiased. Nor do we earn any commissions or fees on investments we choose on behalf of our clients.

All of our investment counsellors are charter financial analysts, the highest level of achievement, and have over 10 years of experiencing managing portfolios. To learn more about investing with Sharp Asset Management, contact us today.