Section 6: Introduction: Client Identification Requirements


Section 6: Client Identification Requirements

Introduction Module: About Identification

Learning Objectives

Upon completion of this module, you should be able to:

• Understand who has client identification obligations under the PCMLTFA.
• Identify key client identification and KYC risk areas.
• Recognize high-risk clients and situations.
• Understand PEP and HIO obligations.
• Understand penalties for non-compliance.  

Why Client Identification Matters

Client identification is a core AML/ATF requirement.

Organizations must:

• Know who their clients are.
• Verify identity when required.
• Update client information when necessary.
• Monitor clients and transactions for ML/TF risks.
• Apply enhanced scrutiny to higher-risk relationships.

KYC information supports the detection and prevention of money laundering and terrorist financing.  

Reporting Entities Subject to Client Identification Requirements

Know the major reporting entity groups:

• Financial Entities
• Money Services Businesses (MSBs)
• Casinos
• Securities Dealers
• Real Estate Brokers and Developers
• Mortgage Sector
• Life Insurance Companies Brokers and Agents
• Dealers in Precious Metals and Stones (DPMS)
• Accountants and Accounting Firms
• British Columbia Notaries
• Title Insurers
• Financing and Leasing Entities
• Factors
• Cheque Cashers
• Agents of the Crown Selling or Redeeming Money Orders
• Acquirer Services for Private ABMs  

Business Relationships

A business relationship is an important AML concept because it triggers ongoing monitoring obligations.

Common triggers:

• Many sectors: after two transactions requiring identification.
• Financial entities: account opening or two qualifying transactions.
• Casinos: account opening or two qualifying transactions.
• Real estate: one qualifying transaction.
• Title insurers: first identification event.

Exam focus is understanding that business relationships trigger ongoing monitoring.

Important Sector Examples

Financial Entities

If identity cannot be verified:

• Account cannot be opened.
• No transaction other than an initial deposit may occur.  

Casinos

If identity cannot be verified:

• Account cannot be opened.
• No transaction other than an initial deposit may occur.  

MSBs

Identity verification commonly required for:

• Large cash transactions.
• Certain transactions of $3,000 or more.
• Remittances or transmissions of $1,000 or more.  

Virtual Currency Dealers

Identity verification required for:

• Large virtual currency transactions.
• Virtual currency transfers or receipts of $1,000 or more.  

Dealers in Precious Metals and Stones (DPMS)

Threshold:

• $10,000 or more in a single transaction.  

Financing or Leasing Entities

Applies to:

• Business-purpose property financing.
• Property valued at $100,000 or more.
• Passenger vehicles in Canada.

Key number:

• $100,000.  

KYC Risk Areas

The module identifies five major KYC risk categories:

1. Type of Client

Higher-risk examples include:

• Offshore clients.
• Cash-intensive businesses.
• Casinos.
• Currency exchanges.
• Virtual currency dealers.
• Import/export companies.
• Precious metals dealers.  

2. Place of Origin

Consider:

• Citizenship.
• Residence.
• Place of birth.
• Jurisdiction of incorporation.
• Location of assets or business operations.  

3. Products and Services

Higher-risk products often:

• Allow anonymity.
• Permit rapid movement of funds.
• Allow third-party payments.
• Involve high transaction values.
• Have complex structures.  

Examples:

• Wire transfers.
• Foreign exchange.
• Virtual currency.
• Offshore services.
• Private banking.
• Correspondent banking.

4. Warning Lists

Organizations should monitor:

• Sanctions lists.
• Terrorist lists.
• Listed persons.
• High-risk jurisdictions.
• Government warning lists.  

Consequences may include:

• Asset freezing.
• Restrictions on dealing.
• Criminal penalties.

5. High-Risk Situations

Examples:

• Politically Exposed Persons (PEPs).
• Heads of International Organizations (HIOs).
• Family members and close associates.
• Correspondent banking relationships.  

Politically Exposed Persons (PEPs) and HIOs

When dealing with a PEP or HIO, organizations may need to:

• Establish source of wealth.
• Establish source of funds.
• Obtain senior management approval.
• Apply enhanced monitoring.
• Keep additional records.  

Exam focus:

PEP/HIO = higher risk = enhanced due diligence.

Correspondent Banking

A correspondent banking relationship exists when:

A Canadian financial institution provides services to a foreign financial institution.

Examples:

• International EFT services.
• Cash management.
• Cheque clearing.  

These relationships require ongoing monitoring.

Penalties

Criminal Penalties

Failure to meet record-keeping requirements may result in:

• Up to 5 years imprisonment.
• Fine up to $500,000.  

Administrative Monetary Penalties (AMPs)

Failure to:

• Verify identity.
• Keep records.
• Monitor transactions.
• Apply risk mitigation measures.

May result in penalties up to $100,000.  

Exam Focus

Know these concepts cold:

• Purpose of KYC.
• Reporting entities with identification obligations.
• Business relationship concept.
• Ongoing monitoring.
• High-risk clients.
• Offshore clients.
• PEPs and HIOs.
• Source of wealth vs source of funds.
• Correspondent banking.
• DPMS $10,000 threshold.
• MSB $3,000 and $1,000 triggers.
• Financing/leasing $100,000 threshold.
• Penalties: 5 years imprisonment, $500,000 criminal fine, $100,000 AMP.

Likely Review Test Questions

Expect questions on:

• Who has client identification obligations?
• What is a business relationship?
• What makes a client high risk?
• What is a PEP or HIO?
• What additional measures apply to PEPs?
• What is correspondent banking?
• What are the penalties for non-compliance?

This introduction feels very similar to the Section 5 Introduction. I would expect the review quiz to focus heavily on:

  1. Which sectors are reporting entities.

  2. Business relationship concepts.

  3. High-risk clients (PEP/HIO).

  4. Penalties.

  5. KYC risk factors.

I would not spend time memorizing all 16 sectors in detail yet; Module 1 and Module 2 are much more likely to contain the exam-heavy identification requirements.