Verifying the identities of your clients is important to comply with FINTRAC AML regulations, whether you operate as a Money Services Business (MSB) or a foreign money services business (FMSB).
Below is a detailed guide on when and how to verify identities for individuals and entities.
When is Identity Verification required? A detailed analysis!
1. Large Cash Transactions
The identity of the client must be checked during any cash transaction of $10,000 or more. This step is absolutely necessary for FINTRAC compliance and to ensure that anti-money laundering and other related financial crimes do not occur using your fintech platform.
The 24-hour rule requires that several cash transactions amounting to $10,000 or more in 24 hours be treated as one transaction. This means that even when a client has conducted just a few small transactions, their cumulative value over the day should be monitored, and identity verification should be conducted at every instance when the $10,000 threshold is reached.
2. Large Virtual Currency (VC) Transactions
The rise of cryptocurrency has necessitated verifying identity in virtual currency transactions. Any virtual currency transactions over $10,000 in a single transaction need to be verified.
Since tracking cryptocurrency transactions can be challenging, greater attention needs to be paid to identity verification when large crypto-based transactions are attempted. This will help guarantee that illegal activities such as money laundering or terrorism financing will not occur using crypto under an MSB or fMSB.
3. Suspicious Transactions
Any suspicious transaction, regardless of its amount, should lead to identity verification. If one has doubts about the legitimacy of the transaction or it seems out of the ordinary for the client, a Suspicious Transaction Report should be filed. This aids in the prevention of any suspected money laundering or terrorist financing.
4. Issuing or Redeeming Traveler's Cheques or Similar Instruments
Identity verification is required for any transaction of $3,000 or more involving traveler's cheques, money orders, or other similar instruments.
5. Transmitting Funds (Non-EFT)
An identity check is required for fund transmissions of $1,000 or more, excluding electronic funds transfers. This type of transaction includes fund transfers that are physically moved or moved by any other non-electronic means.
6. Initiating Electronic Funds Transfers (EFTs)
Any electronic fund transfer over $1,000 requires identity verification. This move helps in tracing and tracking electronic funds, which can otherwise be used for illicit activities.
7. Foreign Currency Exchange
When exchanging foreign currency for $3,000 or greater, the client's identity must be verified. This requirement helps prevent large-scale money laundering using foreign currency.
8. Transferring Virtual Currency
If a virtual currency transfer of $1,000 or more occurs, the client's identity must be verified. This step is critical in the digital currency world, where anonymity can lead to misuse.
9. Exchanging Virtual Currency
If there is a virtual currency exchange of $1,000 or more, identity verification is also required. This helps ensure that all exchanges are transparent and not used for illegal purposes.
10. Remitting Funds (Non-EFT)
If a non-EFT remittance of $1,000 or more is made to a beneficiary, identity verification is mandatory to avoid money laundering activities.
11. International EFT Remittance
All international electronic funds transfers of $1,000 or more must undergo verification. This process helps avoid illegal cross-border transactions.
12. Remitting Virtual Currency
Virtual currency remittances equivalent to $1,000 or more must undergo identity verification. This ensures that digital money transfers are not exploited for illegal activities.
13. Crowdfunding Donations
Verifying the identity of donors contributing $1,000 or more in funds or virtual currency is mandatory to ensure that the donations are legitimate.
What are the methods of Identity Verification?
1. Government-issued photo identification
The authenticity, validity, and current status of the government-issued ID needs to be verified. A document issued by the federal, provincial, or territorial government should bear a person's name, photograph, and unique identifying number.
2. Credit File Method
A Canadian credit file that has existed for a minimum of three years and shows information from multiple sources highlighting a person's name, address, and date of birth.
3. Dual-process Approach
Combine any two of the following:
• Independent, reliable source information indicating the person's name and address.
• Independent, reliable source information indicating the person's name and date of birth.
• Information that verifies the person is the holder of a deposit, a prepaid payment product, a credit card, or a loan account with a financial entity.
4. Affiliate or Member Method
Conduct an identity verification call with an affiliate or a member who has done this verification process with the client before to cross-check their credibility.
5. Reliance Method
Lean on the identification measures that were taken previously by credible reporting entities, ensuring compliance with local and international standards.
Best Practices for Identity Verification
1. Regular Training and Updates
Staff should be provided with regular training and kept up-to-date on compliance guidelines and best practices. They should also try to keep abreast of regulatory changes and learn about new types of identification documents, recognizing signs of fraudulent documents.
2. Use of Technology
The latest technologies and tools can improve the identification process. Digital verification tools and databases can speed up and increase accuracy. Biometrics and several other advanced technologies would add more layers of security and verification.
3. Risk-Based Approach
Adopt a risk-based approach to verifying clients' identities. Follow a more rigid verification measure for high-risk clients and transactions. It is also essential to review and update your risk assessment processes regularly.
4. Periodic Audits and Examinations
Conduct periodic audits of your identity verification operations to ensure compliance and identify areas for improvement. This involves reviewing the records, testing the current verification methods, and ensuring that any duties delegated for verification are being adequately performed.
Using an Agent or Mandatary for Verification
You can delegate identity verification to an agent or mandatary. They must adopt the recommended techniques, such as government-issued photo identification, credit file, or dual-process. Also, ensure that you have a written agreement outlining their verification process.
Verifying the Identity of Entities
1. Confirmation of Existence Method
This will involve checking if the entity exists through official documents. For corporations, this may be a certificate of incorporation, annual filings, or other documents from the registering authority confirming the corporation's name, address, and directors. For other entities, it would be documents such as a partnership agreement or articles of association. These documents confirm that the entity is bonafide with legal existence.
2. Reliance Method
Similar to the verification method for individuals, this method allows relying on previous verification measures taken by other reporting entities or affiliated foreign entities. The MSB must ensure the verification information is valid, current, and compliant with applicable standards. Regular updates and checks are necessary to maintain the accuracy and reliability of this method.
3. Simplified Identification Method
A simplified identification method can be used for low-risk entities like government bodies or publicly traded companies. Due to strict transparency requirements and heavy scrutiny by regulatory bodies, publicly traded companies fall under a low-risk category. Simplified methods could include verification via public records or official websites.
Record Keeping Requirements
It is crucial to maintain comprehensive records of all identity verification processes. This includes keeping copies of documents or electronic versions used in verification. When entities are verified through public databases, it is essential to record the registration number, the type of record, and the source.
Record-keeping helps the MSB demonstrate compliance during auditing or other forms of regulatory review.
It also helps track and review the effectiveness of the verification processes over time. These records should be kept secure to protect the client's information but readily accessible when needed.
Conclusion
Knowing when and how to verify identities is critical for maintaining compliance. Proper identity verification also protects your business against financial crimes and complies with regulations.
This guide will help MSBs and FMSBs handle the intricacies of verification-of-identity requirements as applicable in their jurisdictions.
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The content on this website is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind.
