The Canadian government has proposed a number of amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations. They have published the proposed amendments and a regulatory impact statement in the Canada Gazette and have invited comment. All the items out for consultation are listed on Finance Canada's “Consulting with Canadians” page.
Here are the amendments, handily summarized in the Canada Gazette:
The following suite of regulatory amendments is proposed as part of the Government of Canada’s efforts to strengthen Canada’s anti-money laundering and anti-terrorist financing regime.
The proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations would update due diligence requirements regarding customers when dealing with politically exposed persons.
- An amendment would prescribe the circumstances under which a reporting entity must make a determination that a client is a domestic politically exposed person or the head of an international organization, or a close associate or family member of such a person, and the measures to be taken as a result (such as obtaining information on sources of funds and requiring senior management approval to keep an account open). The prescribed circumstances include account openings and, where no account exists, very large specified transactions that are deemed to be of higher potential risk, such as lump-sum payments of $100,000 or more for the purchase of life insurance policies or annuities. The Regulations currently contain requirements with respect to politically exposed foreign persons.
- An amendment would require reporting entities to periodically determine whether existing account holders are politically exposed foreign persons, where such a determination has not already been made. This amendment will align with the design of the new measures for politically exposed domestic persons and heads of international organizations.
- An amendment would extend the time within which a reporting entity must make a determination that a client is a politically exposed foreign person from 14 days to 30 days. This amendment will align with the design of the new measures for politically exposed domestic persons and heads of international organizations.
The proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations would clarify the type of customer information that reporting entities must obtain and keep as part of the due diligence process regarding customers.
- An amendment would clarify the records that must be kept with respect to a client’s credit file (i.e. a file related to a lending product). The existing wording in the Regulations could be interpreted narrowly. The Regulations currently define the term “client credit file” as containing specific types of information, some of which may not be applicable to certain types of credit arrangements. In the past, this has led to some reporting entities interpreting that in cases where only certain information listed in the definition of a “credit file” is available (i.e. the file is incomplete), there is no obligation to maintain any of the information nor provide it to FINTRAC in an examination. The amendment is needed to ensure there is a positive obligation for reporting entities to collect specific information that must be included in a credit file, information which would have to be provided to FINTRAC if asked in a compliance examination. Specifically, the amendment would repeal the defined term “client credit file” and instead list the relevant types of information that must be maintained, when they are relevant to the client credit arrangement under consideration.
- An amendment would update the existing list of methods that reporting entities must use to verify the identity of their clients. The new methods would be more flexible and allow for a broader range of reliable and independent sources to be used. In particular, the amendment would identify the specific types of sources that are deemed reliable enough to be used on a standalone basis (e.g. government-issued photo identification documents), and broadly allow other types of sources that are reliable and independent to be referred to on a dual-method basis (i.e. in combination). Since the latter category is not prescriptive, it will provide flexibility for reporting entities to consider various sources that are not currently accepted (e.g. a Notice of Assessment issued by the Canada Revenue Agency). FINTRAC would provide guidance on the methods that could be considered under these new provisions.
- An amendment would expand the definition of a signature to more broadly include electronic signatures, which would facilitate account openings in a non-face-to-face environment.
The proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations would limit the duplication of identity verification efforts.
- An amendment would extend the existing exemption from ascertaining the identity of a client where the client is recognized by voice (e.g. telephone) or sight (e.g. in person or through video conferencing) to more broadly capture other forms of recognition (such as digitally, where a client logs in online).
- An amendment would clarify that a reporting entity that relies on an agent (e.g. deposit broker) to verify client identity on its behalf could use identification measures that were previously undertaken by that agent on behalf of another reporting entity or itself with respect to the same client. This would only apply where the client’s identity was ascertained in accordance with the requirements of the Regulations and the identification document remains unexpired and valid.
The proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations would close gaps in Canada’s anti-money laundering and anti-terrorist financing regime.
- Paragraph 71(c) of the Regulations lists the elements that should be considered in a reporting entity’s risk assessment. An amendment would add an element to this list that requires reporting entities to assess and document the risks posed by the impacts of new developments and technologies on the existing risk assessment criteria (business relationships, products, delivery channels or geographic locations). This would ensure Canada’s anti-money laundering and anti-terrorist financing regime is consistent with the Financial Action Task Force’s Recommendation 15 on the risks of new technologies. (see footnote 2)
- An amendment would clarify reporting obligations to improve the financial intelligence that FINTRAC receives. In particular, it would repeal exemptions regarding reporting cash transactions of $10,000 or more in the life insurance sector for product purchases where the source of funds is not easily identifiable.
The proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations would improve compliance, monitoring and enforcement efforts.
- An amendment would require reporting entities to keep a record of any “reasonable measures” they have taken (as required under the Regulations) in cases where they were unable to ascertain, establish or determine the information specified.
- Since 2008, FINTRAC can impose administrative monetary penalties (AMPs) when reporting entities fail to comply with their obligations. An amendment would update the existing list of provisions for which FINTRAC can issue an AMP to ensure that new or modified requirements that were passed through the Economic Action Plan 2014 Act, No. 1, and other requirements that came into force in February 2014, have a corresponding AMP related to them. For example, reporting entities have traditionally been prohibited from entering into a correspondent banking relationship with a shell bank, but this prohibition was expanded in the Economic Action Plan 2014 Act, No. 1 to more comprehensively prohibit them from “having” such a relationship. Since the existent AMP description reflects the former prohibition, it is being updated to more accurately reflect the revised prohibition.
The proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations would strengthen information sharing in the regime. They would
- repeal any identifying information of reporting entity employees from the reporting form schedules;
- require reporting entities in a financial conglomerate to take into consideration the risks resulting from the activities of their affiliates as part of their compliance programs; and
- expand the designated information that FINTRAC can disclose to disclosure recipients, once relevant thresholds are met, to include information about references that were used to ascertain the identity of an individual (such as type of source, a reference number, place of issue and expiry date of relevant documents). FINTRAC’s disclosure recipients include law enforcement, intelligence, and foreign bodies.
A proposed amendment to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations would clarify that, where a securities dealer is a reporting entity under the Act, any brokers employed by that securities dealer would not be considered reporting entities in their own right. Therefore, although the brokers would be required to abide by the compliance program of their securities dealer employer, they would not be required to maintain their own compliance program.
In addition, various amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations would address technical issues that have been identified through regime reviews and stakeholder comments. The following are examples of these amendments:
- an amendment would ensure the existing definition of “casino” is updated to align with a legislative amendment in the Economic Action Plan 2014 Act, No. 1 that clarified the types of entities that are subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act when they conduct and manage a lottery scheme or game;
- an amendment would update the circumstances under which an entity is considered to be affiliated with another entity to align with a similar legislative amendment that was made in the Economic Action Plan Act 2014 Act, No. 1;
- an amendment would replace the existing French term for money services business with an updated term (i.e. “entreprise de transfert de fonds ou de vente de titres négociables” with “entreprise de services monétaires”). The existing term creates confusion as it is not commonly used by stakeholders and it fails to encompass foreign currency exchange and virtual currency dealing;
- an amendment would correct an inaccurate reference to the title of a Quebec law in the “Financial services cooperative” definition;
- an amendment would update the definition of “public body” to correct a discrepancy between the English and French versions and provide greater certainty, for the purposes of the Act, that cities, towns and other municipal districts are only included in the definition of “public body” when they are located in Canada;
- an amendment would update the provision dealing with foreign currency conversion to ensure it is done “using” an exchange rate rather than “based” on an exchange rate, to ensure no other factors are being considered when converting currency; and
- an amendment would update the definition of “funds” to better align the concept of entitlement as referenced under the Civil Code.
The rest of the regulatory impact statement is really fascinating reading. For one, it estimates the rough costs of these changes on businesses (around $700K or so) – apparently, there is an exemption for small businesses (call the “small business lens”, which Mr. Watchlist will now research) that actually will not apply here. It notes where the compliance burden will actually decrease, lays out some of the history behind these changes, as well as the rationale behind making them.