FINTRAC issues new PEP guidance

Frequently Asked Questions in relation to Politically Exposed Persons in Canada and Heads of International Organizations 

According to the Financial Action Task Force, which establishes international standards to combat money laundering and terrorist financing, a politically exposed person is an individual who is or has been entrusted with a prominent public function. Due to their position and influence, it is recognized that many politically exposed persons are in positions that potentially can be abused for the purpose of committing money laundering offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing.

To more effectively detect and deter money laundering and terrorist financing, the Government of Canada implemented new legal requirements in June 2017 in relation to politically exposed persons in Canada and heads of international organizations. These requirements stem from legislative amendments made in 2014 to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

Under the legal requirements, Canadian financial institutions, life insurance providers, securities dealers and money services businesses must ask their clients questions to determine if they – or certain family members or close associates – are politically exposed persons in Canada, or a head of an international organization. If the Canadian financial institution, life insurance provider, securities dealer or money services business determines that these criteria have been met, they must then consider that fact as part of their broader risk assessment of the client, to determine if the client poses a high risk for money laundering or terrorist financing.

Who are politically exposed persons in Canada?

Politically exposed persons in Canada are people who hold, or have held, important public functions, including heads of state, senior politicians, senior government and judicial officials at all levels of government, senior military leaders, senior executives of state-owned corporations, and important political party officials.

Who are heads of international organizations?

A head of an international organization is someone in charge of an international organization that is established by treaty, such as the United Nations or the International Monetary Fund. This person may or may not be a Canadian citizen. The new legal requirements do not include non-governmental international organizations such as humanitarian and development agencies.

Who is considered a family member of a politically exposed person in Canada or a head of an international organization?

Under the legal requirements, family members of politically exposed persons in Canada and heads of an international organization include spouses or common-law partners, children, parents, the parents of spouses or common-law partners, and siblings.

Who is considered to be a close associate of a politically exposed person in Canada or head of an international organization?

Under the legal requirements, a close associate of a politically exposed person is someone who is closely associated with a politically exposed person or a head of an international organization for either personal or business reasons. Examples of close associates may include business partners and individuals involved in financial transactions with politically exposed persons or heads of international organizations.

Are all politically exposed persons in Canada or heads of international organizations automatically subject to extra monitoring, reporting, or any restrictions?

No. Under the new legal requirements, the fact that someone is a politically exposed person in Canada or head of an international organization – or that they have family members or close associates to whom these labels apply – is only one factor that goes into a broader risk assessment that must be undertaken by the financial institutions, life insurance providers, securities dealers or money services businesses.

These businesses are not required to take any additional measures if they determine that the individuals involved do not pose a high risk for money laundering or terrorist activity financing.

However, if these individuals are considered at high risk for money laundering or terrorist activity financing, then financial institutions, life insurance providers, securities dealers or money services businesses must take additional actions, including keeping records, establishing sources of funds, and obtaining senior management review of transactions or approval to keep the account open.

Should businesses always look to establish how politically exposed persons in Canada or heads of international organizations acquired their funds?

No. There is no requirement to ask how politically exposed persons in Canada, heads of international organizations, or family members or close associates of these individuals, obtained their funds if they are not considered at high risk for money laundering or terrorist activity financing. However, businesses may still have a need to ask about the source of funds in the context of other obligations.

Why were the requirements established by the Government of Canada?

The Government of Canada established these new legal requirements to detect and deter money laundering and terrorist activity financing. They are based on internationally recognized standards established by the Financial Action Task Force, the international standard-setting body that recommends that all countries consider domestic and foreign politically exposed persons and heads of international organizations as part of the approach to combatting these illicit activities. In its 2016 evaluation of Canada, the Financial Action Task Force recommended that Canada take more action in relation to domestic politically exposed persons and heads of international organizations.

The Government of Canada’s 2015 Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada considered the threat from corruption and bribery of politically exposed persons and heads of international organizations to be very high. This is due to their involvement in, and often influence over, the awarding of large public contracts. These contracts have the ability to launder large amounts of illicit money and are a frequent target of organized crime groups.

Why are family members or close associates of politically exposed persons in Canada or heads of international organizations covered by the new legal requirements?

In line with the Financial Action Task Force’s recommendations, the new legal requirements cover family members because they can be used to carry out, knowingly or unknowingly, illicit financial activity by domestic politically exposed persons or heads of international organizations looking to distance themselves from money they receive from illegal activities.

How do businesses determine if someone is a politically exposed person in Canada or head of an international organization, or a family member or close associate of these individuals?

As a result of the new legal requirements, financial institutions, life insurance providers, securities dealers, and money services businesses must determine whether an individual – or certain family members or close associates – are politically exposed persons in Canada, or heads of an international organization, at the following times: when accounts are opened, during regular reviews of the accounts of existing clients, and as a result of certain activities established in the legal requirements. They must take reasonable measures that could include asking the client questions, searching publically available information and monitoring current events.

How long is a person considered to be a politically exposed person in Canada or a head of an international organization?

Under the legal requirements, politically exposed persons in Canada cease to be considered politically exposed five years after they leave the office or position they were holding. Once an individual is no longer the head of an international organization, that person is no longer considered to be a head of an international organization.

When did these requirements come into effect?

The legal requirements related to politically exposed persons in Canada and heads of international organizations came into force in June 2017 with regulations made pursuant to legislative amendments that were passed in 2014. Requirements related to foreign politically exposed persons have been in effect for more than 10 years.

How does a foreign politically exposed person differ from a politically exposed person in Canada and what are the different requirements?

Foreign politically exposed persons are individuals holding important public functions outside of Canada at a national level within their country.

Politically exposed persons in Canada hold important public functions within Canada at the national, provincial or territorial, and municipal levels. This means, for example, that elected members of legislatures at the federal and provincial levels are domestic politically exposed persons, as are deputy ministers, heads of government agencies and Crown corporations, and senior judges. Mayors of cities or municipalities are also considered domestic politically exposed persons, but other municipal level officials are not.

Financial institutions, life insurance providers, securities dealers, and money services businesses are required to take measures to establish the source of all foreign politically exposed persons’ funds and they must obtain senior management approval to keep an account open.

Businesses are only required to take such measures in respect of politically exposed persons in Canada if they assess the individual as presenting a high risk of money laundering or terrorist activity financing. However, businesses may still have a need to ask about the source of funds in the context of other obligations.

How do I find out more about obligations relating to politically exposed persons and heads of international organizations?

Members of the public who have questions about these regulatory requirements can contact FINTRAC at 1-866-346-8722(communications3@fintrac-canafe.gc.ca).

Media enquiries can be directed to Finance Canada at 1-613-369-4000 (fin.media-media.fin@canada.ca).

 

Link:

FINTRAC PEP Guidance

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