Risk-based approach workbook
Dealers in Precious Metals and Stones (DPMS)

May 16th, 2016


Risk-based approach workbook for dealers in precious metals and stones (DPMS) (PDF version, 289 KB)


Introduction

FINTRAC has designed this workbook to help you with your risk-based approach (RBA).  It is structured to help you identify your risks by products, services and delivery channels; clients and business relationships; geography and other relevant factors. It will also help you implement effective measures and monitor the money laundering and terrorist financing (ML/TF) risks you may encounter as part of your activities and business relationships. 

For more detailed information on implementing a risk assessment, please refer to the information contained in the FINTRAC Guidance on the Risk-Based Approach and Guideline 4: Implementation of a Compliance Regime.

Who should use this document?

This document was designed for a small business in thedealers in precious metals and stones (DPMS) sector. 

For more detailed information on who is subject to the requirements and an explanation of possible exclusions, please refer to the DPMS page on the FINTRAC website.

How should you assess your risks?

As part of your risk assessment, you need to identify the areas of your business that are vulnerable to being used by criminals for conducting money laundering or terrorist financing (ML/TF) activities. 

This means that you need to assess the risks associated with all your business services and activities. Specifically, you must address the following four areas:

To do so, you need to consider the types of clients you deal with, the products you provide, how you deliver your products and the location of your business. 

If you identify situations that represent a high risk for ML/TF activities, you need to control these risks by implementing mitigation measures, including conducting enhanced monitoring and keeping client information up to date.  This will be explained further in the document.

Risk-based approach cycle

The following cycle represents the main steps of your risk-based approach:

  1. identification of your inherent risks; 
  2. creating risk-reduction measures and key controls; 
  3. implementing your risk-based approach; and 
  4. reviewing your risk-based approach.

The following chart depicts the cycle of the steps of the risk-based approach. Each step is described in the following text.

View the text equivalent
  1. Identification of your inherent risks

    Products, services and delivery channels:
    Products, services and delivery channels offered that may pose higher risks of ML/TF.

    Geography:
    Location of your business and activities in relation to certain landmarks, populations or events.

    Other relevant factors:
    Other factors that are relevant to your business

    Clients and business relationships:
    Inherent risks linked to the nature and type of business that your clientele has with you through:

    1. the products, services and delivery channels they utilize;
    2. their geography; and
    3. their characteristics and patterns of activities.
  2. Create risk-reduction measures and key controls
    Risk mitigation is about implementing controls to limit the ML/TF risks you have identified while conducting your risk assessment.
    When your risk assessment determines that risk is high for ML/TF, you will have to develop written risk mitigation strategies and apply them to the high-risk situations or clients you have identified.
  3. Implement your risk-based approach:
    Once you have gone through the risk assessment exercise, you will apply your risk-based approach as part of your day-to-day activities.
    It is important that your compliance policies and procedures are communicated, understood and adhered to by all the staff dealing with clients.
  4. Review your risk-based approach:
    Part of your risk assessment must also include a periodic review (minimum every 2 years) to test the effectiveness of your compliance regime.
    This will help evaluate the need to modify existing policies and procedures or to implement new ones. A risk-based approach is not a static exercise. The risks identified will change or evolve over time as new products or new threats enter your business context.

To better assess your inherent risks effectively, you can divide your risk assessment into two parts:

  1. Business-based risk assessment: your products and delivery channels; the geographical location in which your business operates along with other relevant factors.
  2. Relationship-based risk assessment: products your clients utilize, the geographical locations in which they operate or do business as well as their activities, transaction patterns, etc.

It is important to note that there is no prescribed methodology for the assessment of risks. What follows is FINTRAC's suggested assessment process which will need to be adapted based on your business situation.  Although presented separately, parts 1 and 2 could be done simultaneously. You can also create your own assessment process.

1-Business-based risk assessment

Products and delivery channel 

Begin your assessment by taking a business-wide perspective. As a DPMS, you must assess all your products and delivery channels to determine if they pose a high risk of ML/TF. This may include, but is not limited to:

You may want to consider the following:

Some examples of potentially high-risk products and delivery channels are (please note that some indicators may apply to a retail location, while others may apply at a wholesaler level):

Gold can be a high-risk product, as it is transformable, easily exchangeable and potentially provides anonymity in transactions. It has a universal price standard and can be used as a currency.  

Certain red flags for high-risk activity include:

Diamonds can be higher-risk products, as they are easily transported and concealed, can carry enormous value, provide anonymity in transactions and are difficult to trace.

Certain red flags for high-risk activity include:

Behaviour of the counterparty in some transactions:

Other indicators of high risk:

For examples on how to assess risk for products and delivery methods, see the FINTRAC Guidance on the Risk-Based Approach.

Geography

Assess whether your own store or business location, the countries to which you transfer funds, and the countries from which you receive funds could pose a high risk for ML/TF activities.

In the assessment of your geography, you have to consider whether the geographic locations in which you operate or undertake activities potentially pose a high risk for money laundering and terrorist financing. Depending on your business and operations, this can range from your immediate surroundings, whether rural or urban, to a province or territory, multiple jurisdictions within Canada (domestic) or other countries.

Some examples of geographic elements that need to be reflected in your assessment are:

For more examples on how to assess risk for geographic locations, see the FINTRAC Guidance on the Risk-Based Approach.

Other factors relevant to your business (if applicable)

Assess other factors that may apply to your business that do not fall in the other categories. There may be something about your business that can make it more attractive to individuals who want to carry out ML/TF activities.

Some examples that may apply to you are:

Business-based risk assessment worksheet

The following worksheet is for illustrative purposes only (please see additional instructions in Annex A). Using this worksheet could be an easy way for your entity to present the inherent risks related to your business, or you may develop your own worksheet.

Note: The information below is provided as an example only. Your entity may have more risk factors to consider. Furthermore, you may have different risk ratings. For more options, you can consult the matrix included in the FINTRAC Guidance on the Risk-Based Approach.

Business-based assessment worksheet
Column A:

LIST OF FACTORS

Identify all the  factors that apply to your business (i.e. products and delivery channels, geography, other relevant factors)

Column B:

RISK RATING

Assess each factor (e.g. low, medium or high)

Column C:

RATIONALE

Explain why you assigned that particular rating

Column D:

DESCRIBE MITIGATION MEASURES FOR HIGH RISKS IDENTIFIED IN COLUMN A.

  • High value products (e.g. gold, diamonds) with retained value.
High risk High value products that can be easily concealed, transported or liquidated.
  • Increase the frequency of monitoring for high-risk business relationships purchasing these items.
  • Note and analyze transactions that differ from those initially anticipated.
  • Put a limit on cash transactions and increase awareness of other suspicious indicators for these particular products.
  • Non-face-to-face delivery channels (by phone, Internet, or mail)
High risk Possibility of third party involvement in the payment or receipt of products.
  • Increase employee awareness of the risk of online markets.
  • Identify and verify counterparties and customers before conducting high-value transactions.
  • Set parameters within which certain transactions require management review and approval.
  • Proximity to a large border crossing with the USA
High risk The business may be the first point of entry into the financial system.
  • Increase awareness through training so that staff better understand the placement stage of money laundering and its potential impacts.
  • Attempt to obtain information to understand the counterparty or customer's circumstances or business.
  • Put a limit on cash transactions.
  • Etc.
     

2-Relationship-based risk assessment (i.e. your clients)

As a DMPS, you enter into a business relationship when a client conducts two or more reportable transactions with you that require you to ascertain their identity, regardless of whether the transactions are related to each other. If you have a business relationship, you need to make a risk assessment based on the inherent characteristics of your client. This can be done based on the combination of the following factors, some of which were identified in the previous section:

However, it is possible that your business is dealing with clients outside of a business relationship. The interactions with these clients may be sporadic (e.g. few transactions over time that are under the identification threshold requirement or even a single transaction). As such, there will not be a lot of information available for your business to fully assess this client (as opposed to a client in a business relationship with information, patterns of activities, etc.). The risk assessment of such clients will most likely focus on the monitoring of transactions as opposed to having a client file. This monitoring is basically your obligation to report a suspicious transaction if you suspect that the transaction is related to a money laundering or terrorist financing offence.

If you do not have business relationships, it is not necessary for you to complete the Relationship-based risk assessment worksheet. However, if you have high-risk clients outside a business relationship, you need to include them in the following worksheet.

Below are some examples of client and transaction characteristics that can be considered high-risk:

Clients

Transactions

Please note that the following indicator, when encountered, will place clients in the overall high-risk category, regardless of other factors:

For more examples of how to assess risk for client and business relationships, see the FINTRAC Guidance on the Risk-Based Approach.

Relationship-based risk assessment worksheet

The following worksheet is for illustrative purposes (please see additional instructions in Annex B).  Using this worksheet could be an easy way for your entity to present the inherent risks related to your business relationships, or you may develop your own worksheet.

This worksheet is to assess all your business relationships and high-risk clients. For more information on business relationships, see Guideline 6I: Record Keeping DPMS, section 5 Ongoing Monitoring of Business relationship and related records.

Note: The information below is provided as an example only. For more options, you can also consult the matrix included in the FINTRAC Guidance on the Risk-Based Approach.

Relationship-based assessment worksheet
Column A:

BUSINESS RELATIONSHIPS

Identify all your business relationships or high-risk clients (individually or as groupings) 

Column B:

RISK RATING

Assess each  business relationship (e.g. low, medium or high)

Column C:

RATIONALE

Explain why you assigned that particular rating

Column D:

DESCRIBE ENHANCED MEASURES TO ASCERTAIN ID FOR HIGH-RISK BUSINESS RELATIONSHIPS

Column E:

DESCRIBE MITIGATION MEASURES FOR HIGH-RISK BUSINESS RELATIONSHIPS

Column F

DESCRIBE PROCESS TO KEEP CLIENT INFORMATION UP TO DATE FOR HIGH-RISK BUSINESS RELATIONSHIPS

Column G:

DESCRIBE ENHANCED MONITORING FOR HIGH-RISK BUSINESS RELATIONSHIPS

  • Group A: Business relationships that are not high risk
Low Client conducts two or more large cash transactions that are within their means, and make sense (for example buying an engagement ring with cash that has been saved). N/A – regular identification procedures are applied N/A N/A N/A
  • Group B: High-risk customers and high-risk business relationships
High Client conducts several large cash transactions that seem to be beyond their means.

Take additional steps to verify documents previously obtained from these clients or request additional identification documents.

Identification information is updated more frequently.

Request source of funds for any cash amount. Ask the client to provide information to confirm or update their identification information (address, date of birth, occupation, nature and purpose of business relationship, etc.) at every identification threshold transaction.

Review transactions conducted by client quarterly.

Where feasible, obtain additional client information through public databases or other sources of information.

Set parameters for transactions that will trigger early warning signals and require a mandatory review at the threshold for transactions requiring ID.

  • Etc.
           

ANNEX A
Instructions to complete the Business-based risk assessment worksheet (Products and delivery channels; geography; other relevant factors)

This worksheet is for illustration. You may develop your own, so long as it includes the concepts that are described below.
Column A: List of factors

Describe your products, delivery channels, factors related to your geographical location(s) and other relevant factors.

Column B: Risk rating

Rate each risk factor (products, delivery channels, factors related to geographic location(s) and other relevant factors).

Please note that the PCMLTFA and Regulations do not require you to use a low, medium and high scale. You could decide to have low and high risk categories or to have a more complex rating scale. A scale must be established, tailored to the size and type of business you have.

Column C: Rationale

Provide the reasons why you assigned a particular risk rating to each product, delivery channel, geographic location, or other relevant factor. You can make reference to a website, a publication, a report, etc.

Column D: Describe mitigation measures for high-risk factors

By law, all factors identified as “high-risk” must be addressed with documented mitigation measures. You have to write policies and procedures to explain how you are going to reduce and how you will control these risks in your day-to-day activities.  

Below are some examples of mitigation measures you may want to consider (not an exhaustive list):

  • Increase your awareness of high-risk situations within business lines across your organization;
  • Provide targeted training to staff regarding potential red flags and indicators for high-risk, high-value products such as diamonds and gold.
  • Provide adequate controls for  higher risk products, as necessary, such as management approvals; and/or
  • Increase the monitoring frequency of transactions relating to high-risk products.

For more examples of controls or ways to reduce risks, see the FINTRAC Guidance on the Risk-Based Approach and Guideline 4: 6.2.1 Measures to mitigate the risks.

ANNEX B
Instructions to complete the Relationship-based worksheet (high-risk clients and business relationships)

This worksheet is for illustration. You may develop your own, so long as it includes the concepts that are described below.
Column A: Business Relationships or high risk clients. Identify all your business relationships and high-risk clients. You may decide to risk assess each individual business relationship separately or to do so in groups that share similar characteristics.
Column B: Risk rating

Rate each business relationship.

You can use a scale of low, medium and high to risk rate your business relationship. Please note that the PCMLFTA and Regulations do not require you to use a low, medium and high scale. You could decide to segregate between low and high risk categories or have a more complex rating scale.

Column C: Rationale

Provide the reasons why you assigned a particular risk rating to each client type/business relationship.

Column D: Describe enhanced measures to ascertain the identity of high-risk clients or to confirm the existence of a high-risk entity

You need to describe how identity was ascertained or how the existence of an entity was confirmed for each high-risk business relationship and each high-risk client.   

Below are some examples:

  • Seeking additional information beyond the minimum requirements to ascertain the client's identity;
  • Obtaining independent verification of the information (that is, from a credible source other than the client);
  • Establishing more stringent thresholds for ascertaining identification.
Column E: Describe mitigation measures for high-risk business relationship

You need to put controls in place for each high-risk business relationship and high-risk client that you identified.

Below are some examples of mitigation measures that you may want to consider (not an exhaustive list):

  • Set limits to transaction amounts in certain situations;
  • Request source of funds for any cash amount;
  • Conduct certain transactions only in person.

For more examples of controls or ways to reduce the risk, see Guideline 4: 6.2.1 Measures to mitigate the risks.

Column F: Describe how you will keep client information up to date for high-risk business relationships or high-risk clients

You have to develop policies on how and how often you will update the client information of high-risk clients and high-risk business relationships.

The information that needs to be updated generally includes:

  • For an individual, the individual's name, address, telephone number and occupation or principal business.
  • For a corporation, its name and address and the names of the corporation's directors.
  • For an entity other than a corporation, its name, address and principle place of business.

Measures to keep client identification up to date include asking the client to provide information to confirm or update their identification information.  For example, you may ask a client for an additional piece of identification. You may also confirm the information through public sources.

Column G: Describe enhanced monitoring for high-risk business relationships

High-risk business relationships

For high-risk business relationships, you need to conduct enhanced monitoring.

Enhanced monitoring process

Describe all aspects of your enhanced monitoring:

  • When is it done (frequency);
  • How is it conducted; and
  • How is it reviewed.

Examples of how enhanced monitoring is conducted and reviewed for high-risk business relationships:

  • Obtain additional information on the client (occupation, volume of assets, information available through public database);
  • Review transactions based on an approved schedule that involves management sign-off;
  • Develop reports or perform more frequent reviews of reports that list high-risk transactions. Flag activities or changes in activities and elevate concerns as necessary;
  • Set business limits or parameters regarding transactions that would trigger early warning signals and require mandatory review; and/or
  • Review transactions more frequently against suspicious transaction indicators relevant to the relationship. See Guideline 2: Suspicious Transactions for more information about indicators.

For more information on enhanced monitoring, see Guideline 4: 6.4 Ongoing monitoring of business relationships

ANNEX C
Glossary and useful links

Business relationship:
As a DMPS, you enter into a business relationship when a client conducts two or more reportable transactions with you that require you to ascertain the identity of the client, regardless of whether the transactions are related to each other. You also enter into a business relationship if you submit two or more Suspicious Transaction Reports (STRs) on a client.
Counterparty:
A person or entity that is party to a transaction such as the purchase or sale of precious metals or precious stones, including both suppliers and retail customers.
Delivery channels:
Medium that can be used to obtain a product, or through which transactions can be conducted. 
FINTRAC:
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), is Canada's financial intelligence unit.
Inherent risk:
Risk that exists before the application of controls or mitigation measures. 
Jewellery:
Objects made of precious metals, precious stones or pearls, intended for personal adornment, such as earrings, bracelets, rings, necklaces, brooches, watches, etc.
Mitigation measures:
Controls put in place to limit the potential money laundering and terrorist financing risks you have identified while conducting your risk assessment.
Non-face-to-face transactions:
Transactions where the client is not physically present (for example, Internet, telephone or mail).
Precious metals:
Gold, silver, palladium or platinum, whether in coins, bars, ingots, granules or in any other form.
Precious stones:
Diamonds, sapphires, emeralds, tanzanites, rubies or alexandrites.
Risk-based approach:
In the context of ML/TF, a risk-based approach is a process that encompasses the following:
  • The risk assessment of your business activities and clients using certain prescribed elements: Products and delivery channels; geography; clients and business relationships; and other relevant factors.
  • The mitigation of risk through the implementation of controls and measures;
  • Keeping client identification and business relationship information up to date; and
  • The monitoring of high-risk business relationships.
Third party:
Individual or entity other than the individual who conducts the transaction. When you are determining whether a third party is involved, it is not about who "owns" the money, but rather about who gives instructions to deal with the money.
Vulnerabilities:
Elements of a business that could be exploited.  In the ML/TF context, vulnerabilities could be weak controls within a business offering high-risk products.

Regulatory References:
http://laws-lois.justice.gc.ca/eng/acts/P-24.501/
http://laws-lois.justice.gc.ca/eng/regulations/SOR-2001-317/
http://laws-lois.justice.gc.ca/eng/regulations/SOR-2002-184/
http://laws-lois.justice.gc.ca/eng/regulations/SOR-2007-121/
http://laws-lois.justice.gc.ca/eng/regulations/SOR-2007-292/

Guideline 1: Backgrounder:
http://www.fintrac-canafe.gc.ca/publications/guide/Guide1/1-eng.asp

Guideline 2: Suspicious Transactions (includes ML/TF indicators):
http://www.fintrac-canafe.gc.ca/publications/guide/Guide2/2-eng.asp

Guideline 4: Implementation of a Compliance Regime:
http://www.fintrac-canafe.gc.ca/publications/guide/Guide4/4-eng.asp

Guideline 6I: Record Keeping and Client Identification:
http://www.fintrac.gc.ca/publications/guide/guide6/6I-eng.asp

RBA Guidance Document:
http://www.fintrac-canafe.gc.ca/publications/rba/rba-eng.asp

Trends in Canadian Suspicious Transaction reporting (STRs) – Part 1:
http://www.fintrac-canafe.gc.ca/publications/typologies/2011-03-eng.asp

FATF Money Laundering and Terrorist Financing Risks and Vulnerabilities Associated with Gold
http://www.fatf-gafi.org/publications/methodsandtrends/documents/ml-tf-risks-and-vulnerabilities-gold.html

FATF Money Laundering and Terrorist Financing Through Trade in Diamonds
http://www.fatf-gafi.org/documents/news/ml-tf-through-trade-in-diamonds.html

FATF RBA Guidance for Dealers in Precious Metals and Stones
http://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatfguidanceontherisk-basedapproachfordealersinpreciousmetalsandstones.html

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