By Adam Feldman, CAMS, CAMS-RM, CSC, Guest Contributor
REALTORS® have been required to conduct ongoing monitoring of their business relationships ever since the concept was introduced into regulation in 2014. At that time, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) clarified that a business relationship is established if a Realtor conducts two activities in a period of five years, which requires them to verify the identity of the client (both individuals and entities). However, there have been a series of amendments made to the regulations, and effective June 1, 2021, Realtors are considered to have entered into a business relationship with a client the first time they are required to verify the client’s identity. As clients need to be identified at the start of every real estate deal, this means that Realtors will enter into a business relationship with each and every client they represent!
The good news here is that the new business relationship requirements will only be applied to relationships that are established after June 1, 2021, so if you represented a client in a deal last year, you’re not in a business relationship with the client (unless they conducted two or more deals within the last five years).
Also, when conducting a deal where the other party is unrepresented, although you’re required to verify that party’s identity as they are not your client, the identity verification doesn’t trigger the establishment of a business relationship.
Help! I’m in a business relationship!
What happens once you enter into a business relationship?
- For starters, you’ll need to keep a record of the “purpose and intended nature of the relationship.” This is a record that describes why the client is using your services. For the real estate sector, this usually involves keeping a record that describes the type of property the client is or will be buying or selling. For example, purchase or sale of luxury home, purchase or sale of warehouse, etc. The idea behind the purpose and intended nature record is that it should provide some context in terms of the types of transaction flows you’d expect to see throughout the relationship. Transactions that don’t appear to be consistent with the purpose and intended nature should prompt additional questions and perhaps even the filing of a suspicious transaction report if those questions are not answered to your satisfaction.
- When you enter into a business relationship, you also need to make a determination as to whether a client is a politically exposed person, or PEP. We’ll talk more about PEPs in a future post, but for now suffice it to say that a PEP is someone who holds a senior position in the government, military or judiciary, either in Canada or in a foreign country.
- In addition to making periodic ongoing PEP determinations, there are three additional ongoing monitoring requirements that Realtors need to conduct:
- Assessment of risk – When Realtors enter into a business relationship, they need to assess the relationship’s risk. Due to the fluid and ever-changing nature of risk, Realtors also need to periodically reassess the risk of the relationship. For example, a reassessment could be conducted at the start of each new real estate deal
- Transaction review – Realtors also need to periodically review the transactions that their clients conduct to make sure the transactions are consistent with their understanding of the relationship and to identify any indicators of suspicious activity. High-risk relationships need to be monitored to a greater depth and at a higher frequency than low-risk relationships.
- Information review and update – Lastly, Realtors need to keep client information up to date. Specifically, Realtors need to periodically review and update the information that is contained in their files that can be used to contact a client (such as phone number or email address), as well as information that might be used to assess the risk of a relationship (such as client occupation). This could involve periodically contacting a client and asking them to confirm the information that is contained in your files. Information reviews must be conducted more frequently for higher-risk clients.
Ongoing monitoring measures need to be taken for all business relationships, even if the client doesn’t conduct any additional deals after the business relationship has been established.
I want out of this relationship!
So, how does a business relationship end? A business relationship naturally expires five years after the client conducts the last transaction that requires the brokerage to verify their identity. It cannot be terminated earlier at the request of the client or the brokerage.
Business relationship requirements can be both time- and resource-intensive. These obligations and FINTRAC’s focus on the sector demand solid compliance programs to comply with these new rules. Given their complexity and ongoing nature, technology-based approaches to support your compliance efforts may be the best option.
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