What is FINTRAC?

December 13, 2024

FINTRAC stands for the Financial Transactions and Reports Analysis Centre of Canada. It is an agency established by the Canadian government to help detect and prevent money laundering and the financing of terrorist activities. FINTRAC plays a critical role in Canada’s anti-money laundering (AML) and anti-terrorist financing (ATF) efforts by monitoring financial transactions and ensuring compliance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).

Role of FINTRAC in Canada’s Financial System

FINTRAC collects, analyzes, and discloses financial intelligence to law enforcement and other agencies to help identify suspicious transactions and activities. It receives financial transaction reports from various reporting entities, including banks, credit unions, life insurance companies, and real estate professionals, among others. FINTRAC then analyzes these reports for patterns that may indicate money laundering or terrorist financing.

How FINTRAC Affects Mortgage Borrowers and Mortgage Brokers in Canada

1. Mortgage Brokers and Lenders' Compliance Obligations

Mortgage brokers, lenders, and other financial institutions are considered reporting entities under the PCMLTFA. This means they have a legal obligation to take steps to ensure they are not facilitating money laundering or financing terrorism. Some of the key obligations that mortgage brokers and lenders must comply with include:

• Client ID: Mortgage brokers must verify the identity of their clients (borrowers) before conducting transactions, such as approving a mortgage. This often involves collecting government-issued identification, proof of address, and other personal details.
• Ongoing Monitors: Brokers must monitor the relationship with their clients over time, ensuring that transactions are consistent with the client's known source of income and overall profile.
• Reporting Suspicious Exchange: If a mortgage broker or lender suspects a transaction is related to money laundering or terrorist financing, they are required to file a Suspicious Transact Report (STR) with FINTRAC.
• Large Exchange Report: Mortgage lenders must report large cash transactions (over $10,000) to FINTRAC. This includes cash down payments or other significant payments made by the borrower.
• Record Keeping: Brokers are required to keep detailed records of the transactions, including mortgage applications, for a period of at least five years. This ensures that there is an audit trail in case of further investigation by FINTRAC or other authorities.

2. Impact on Mortgage Borrowers

While the primary responsibility lies with mortgage brokers and lenders, mortgage borrowers are indirectly impacted by FINTRAC regulations in the following ways:

• Identity Verify: Borrowers will often be asked for additional documentation or proof of identity when applying for a mortgage. This may include government-issued identification (e.g., passport, driver's license) and proof of address. Lenders may also ask for documentation about the source of funds (e.g., bank statements or evidence of down payment origin) to comply with anti-money laundering rules.
• Enhanced Scrutiny for Large Exchanges: Borrowers who make large cash deposits or have irregular transaction patterns may be subjected to additional scrutiny. For example, if a borrower has a down payment that involves a large lump sum of cash, this could raise red flags with the lender, who is required to report such transactions to FINTRAC.
• Delays in Process: As part of the due diligence process, mortgage applications may take longer to process if additional verification is required. If a suspicious transaction is flagged, it could cause delays in the approval or closing of the mortgage.

3. Mortgage Brokers' Compliance Risks

Mortgage brokers face risks and potential penalties if they fail to comply with FINTRAC regulations. Non-compliance can result in:

• Fines and Penalties: Brokers and lenders can face significant fines if they do not comply with the reporting, identification, and record-keeping requirements. The fines can range from hundreds of thousands of dollars for larger financial institutions to smaller fines for individuals and smaller brokers.
• Reputation Damage: Non-compliance can also harm the reputation of the broker or lender. Being associated with money laundering or terrorist financing risks legal action, loss of clients, and damage to business operations.
• Regulation Scrutiny: Brokers and financial institutions that repeatedly fail to meet compliance standards may be subject to more frequent inspections or audits by FINTRAC and other regulatory bodies.

Summary: Key Takeaways for Mortgage Borrowers and Brokers

• Mortgage Brokers: Must verify clients' identities, report suspicious transactions, keep detailed records, and report large cash transactions to FINTRAC.
• Mortgage Borrower: May face additional documentation requests and potential delays if their financial transactions raise flags under anti-money laundering regulations.
• Comply Risks: Mortgage brokers must adhere strictly to FINTRAC’s rules to avoid financial penalties and reputational harm.

Source: Absolute Mortgage Team