Lori Stein, Kashif Zaman
Jun 15, 2018
The Canadian Department of Finance has published wide-ranging draft amendments to regulations made under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2018 (PCMLTFA) which will affect financial and non-financial entities that provide access to Canada’s financial system, including dealers in virtual currency and foreign money services businesses. The proposed amendments are subject to a 90-day review period. The final version of the amendments is expected to be published in the fall of 2018, with implementation 12 months later, in the fall of 2019.
The objective of the proposed amendments is to bring Canada’s anti-money laundering and anti-terrorist financing regime (AML/ATF Regime) into line with international standards set by the Financial Action Task Force (FATF), an intergovernmental body of which Canada is a founding member, which promotes implementation of measures for combatting threats to the integrity of the international financial system. The FATF identified several deficiencies in its last evaluation of Canada in 2015 which have been addressed by proposed amendments in the following areas:
- customer due diligence requirements are modernized and, in some respects, broadened
- persons and entities dealing in virtual currency are regulated as money services businesses (MSBs)
- foreign MSBs are subject to the Canadian AML/ATF Regime to the extent their activities are directed to Canadian customers
- the deadline for filing suspicious transactions reports (STRs) is shortened from 30 days to 3 days
- prepaid credit cards and similar open-loop payment products are treated as bank accounts
- prior to launching new technologies, reporting entities are expected to assess the potential money laundering/terrorist financing risks posed by such technologies on their products and delivery channels
- certain existing requirements are clarified and technical amendments are made
Customer due diligence
The proposed amendments provide flexibility for reporting entities when conducting customer due diligence:
- Reliance on third parties and foreign affiliates. Reporting entities may rely on identity verification performed by a: (i) third party that is also a reporting entity under the PCMLTFA; or (ii) foreign affiliate, which should reduce duplication and improve efficiency amongst reporting entities. When relying on a third party or foreign affiliate, a reporting entity must immediately obtain the identity verification information and be satisfied that it is valid and current, and also have a written agreement in place with the third party pursuant to which all relevant information in the third party’s possession or control regarding the identified customer may be obtained within three days of a request by the reporting entity. In addition, when relying on a foreign affiliate, the reporting entity must conduct a risk assessment of the AML/ATF Regime in the jurisdiction of the foreign affiliate, and the foreign affiliate’s compliance with the regime.
- Scans and photocopies. The current requirement for identity verification documents to be “original, valid and current” is replaced with a requirement for the document to be “authentic, valid and current,” providing flexibility for reporting entities to rely on scans and photocopies when their authenticity can be verified.
- Exemption for low-risk customers. An exemption from certain customer due diligence requirements is provided for certain low-risk customers such as large, publicly traded companies, such that corporate identity verification documents no longer need to be collected, provided that the reporting entity: (i) is satisfied that the corporation exists and that every person who deals with them on behalf of the corporation is actually authorized to do so; and (ii) maintains a record of the grounds considered and information obtained about the corporation to determine that it is low-risk. In addition, all other recordkeeping, monitoring and reporting obligations of the reporting entity will continue to apply to clients determined to be low-risk.
- Repeal of recordkeeping for unsuccessful reasonable measures. The proposed amendments repeal the requirement introduced in June 2017 for reporting entities to maintain records of reasonable measures taken to meet certain obligations – for example, when a client refuses to answer whether he or she is conducting a large cash transaction on behalf of a third party – based on stakeholder feedback that the requirement is too onerous.
The proposed amendments also introduce certain new or enhanced customer due diligence requirements:
- Currency of entity identity verification documents. The proposed amendments stipulate that, when being used to verify the identity of an entity, a certificate of corporate status must be no more than one year old and other permissible documents (such as audited financial statements, articles of association or other record that proves its existence) must be the “most recent.”
- Accuracy of Beneficial Ownership Updates. Reporting entities are required to verify the identity of all “beneficial owners” of an entity customer, defined as all natural persons that own or control 25% or more of the shares or other ownership interests in the entity, as well as all directors of a corporation and trustees and known beneficiaries of a trust. Further, they must keep such information up to date through ongoing monitoring. Currently, reporting entities are required to take reasonable measures to confirm the accuracy of such information when it is initially obtained and keep records of such reasonable measures. The proposed amendments clarify that reporting entities are also required to take reasonable measures – and keep track of those measures – to confirm the accuracy of updated information obtained through ongoing monitoring.
- Loans by life insurance companies: The life insurance sector will be subject to the same recordkeeping, reporting and customer due diligence requirements as other financial entities when issuing loans, such as mortgages and loans against the amount of an insurance policy. This is a relatively new line of business for the life insurance sector and, consequently, had not been captured under the AML/ATF Regime.
Dealers in virtual currency
The PCMLTFA was amended in 2014 to apply to persons and entities engaged in the business of “dealing in virtual currencies”; however, the coming into force of those amendments was delayed pending development of updated regulations. The proposed amendments introduce a definition for virtual currency:
(a) a digital currency that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or
(b) information that enables a person or entity to have access to a digital currency referred to in paragraph (a).
This definition would capture well-known cryptocurrencies such as bitcoin and ether and is potentially broad enough to capture myriad other tokens, coins and cryptoassets which can be exchanged for funds, either directly or by way of an intermediate exchange.
Dealers in virtual currency that offer services to Canadian clients will generally be considered domestic MSBs or foreign MSBs under the AML/ATF Regime, and therefore subject to similar customer due diligence, recordkeeping, monitoring and reporting requirements as other reporting entities. Guidance published with the proposed amendments states that “dealing in” activities include virtual currency exchange services and value transfer services, which would likely include online trading platforms and brokerages/intermediaries for virtual currency transactions.
In addition, all reporting entities that receive $10,000 or more in virtual currency will have recordkeeping and reporting obligations.
Foreign money services businesses
The PCMLTFA was amended in 2014 to introduce foreign MSBs as a category or reporting entity; however, the coming into force of those amendments was delayed pending development of updated regulations. The proposed amendments will require foreign MSBs to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and be subject to the same compliance requirements as domestic MSBs, with slightly less onerous recordkeeping requirements. Money services businesses include foreign exchange dealing, money transferring and/or cashing or selling money orders, travelers cheques or anything similar and, upon the adoption of the proposed amendments, dealing in virtual currencies. Because MSBs without a place of business in Canada can access Canadian customers through the Internet and the use of financial technology (FinTech), regulation of foreign MSBs is necessary to level the playing field with Canadian MSBs and ensure that all businesses which provide access to Canada’s financial system are subject to the AML/ATF Regime.
The proposed amendments will authorize FINTRAC to levy administrative monetary penalties (AMPs) on foreign MSBs that are found to be non-compliant and to revoke the registration of foreign MSBs that fail to pay their AMPs. Financial entities will be prohibited from opening or maintaining an account for, or having a correspondent banking relationship with, an unregistered foreign MSB.
Reporting deadline for suspicious transactions
The proposed amendments will require reporting entities to file a suspicious transaction report within three days after measures have been taken to enable them to establish that there are reasonable grounds to suspect that the transaction or attempted transaction is related to the commission of a money laundering or terrorist financing offence. Guidance published with the proposed amendments states that, in practice, this means that the deadline is three days after completion of the analysis that establishes reasonable grounds for suspicion. Currently, STRs must be filed 30 days after the reporting entity detects a fact that constitutes reasonable grounds for suspicion, and industry practice generally interprets this deadline to permit time for an analysis to be conducted after the suspicious fact is detected with the report filed three days after suspicion is confirmed. The proposed amendment clarifies the expectation for STRs to be filed promptly.
Prepaid payment products
The proposed amendments would ensure that prepaid credit cards and similar open-loop prepaid payment products, which are not necessarily connected to a bank account, will be treated as bank accounts under the AML/ATF Regime and will be subject to the same customer due diligence, recordkeeping, monitoring and reporting requirements as those imposed on reporting entities offering bank accounts. Issuers of closed-loop payment products the use of which is restricted to a particular merchant or group of merchants, such as a shopping-centre gift card, are outside the scope of this proposed amendment.
Use of technologies
All reporting entities are required to conduct periodic risk assessments of their vulnerability to money laundering and terrorist financing activities as part of their compliance programs. The risk assessment criteria currently prescribed under the AML/ATF Regime, specifically the reporting entity’s business relationships, products, delivery channels and geographic locations, will be clarified to provide that risks associated with the use of new technologies prior to their launch must be considered in the assessment of products and delivery channels.
Clarification of existing requirements and technical amendments
- Transactions over $10,000 and 24-hour rule. The proposed amendments clarify that multiple transactions performed by an individual within a 24-hour period are considered a single transaction for reporting purposes when they total $10,000 or more, and that only one report should be submitted to capture all transactions within a 24-hour period that collectively meet or surpass this threshold. This new formula is expected to simplify the way reporting entities submit reports under the 24-hour rule by eliminating the need to back out transactions of over $10,000 from the aggregation calculation.
The proposed amendments also clarify that the 24-hour rule applies to a recipient of cash deposits and/or transfers in an aggregate amount of $10,000 or more over a 24-hour period, and that the large cash transaction reporting requirements apply to all aggregate transactions of $10,000 or more, regardless of corporate structure.
- Sources of wealth of politically exposed persons. The proposed amendments would require reporting entities to take reasonable measures to determine the sources of wealth of politically exposed persons. Presumably, this requirement would also be covered by the Criminal Code (Canada) prohibition against dealing with proceeds of crime. The proposed amendments would require that the amount of a client’s accumulated funds or wealth should appear to be reasonable and consistent with the information provided, and doubts about the origin of such funds or wealth would have to be satisfied before a reporting entity proceeds with the relationship or permits transactions to occur.
- Wire transfer records. Currently, reporting entities are required only to send a wire transfer to document information about the transaction. Under the proposed amendments, reporting entities that are intermediaries in a transaction or that send or receive a wire transfer would be required to identify, keep records of, and include information about the transaction. The stated purpose of this change is to help ensure this information remains with the wire transfer throughout the payment chain, and ensure that reporting entities have all of the relevant transaction information to detect and report suspicious transactions.
- Registration renewals by money services businesses. Currently, MSBs must renew their registration with FINTRAC every two years on the anniversary of the original registration and provide supporting documentation of the renewal. The proposed amendments will permit MSB registrations to be renewed at any time during the two-year period and eliminate certain information from the renewal submission (e.g., fax number).
- Managing general agents are not reporting entities. The proposed amendments clarify that life insurance companies that are managing general agents (MGAs) facilitating transactions between other life insurance companies which are themselves reporting entities are not reporting entities when acting in such capacity.
- Dealers in precious metals and stones. Exemptions for low-risk activities for dealers in precious metals and stones (e.g., manufacturing jewellery) would be expanded to capture other types of manufacturing processes that may also involve the use or consumption of precious metals and stones (e.g., diamonds used to manufacture drill bits), consistent with the original policy intent.
- Accountants. The proposed amendments clarify that accountants who only act as a trustee in bankruptcy services or as an insolvency practitioner would not be subject to the requirements of the Act.