The Department of Finance Canada ("Department") has proposed amendments to a number of regulations ("Proposed Regulations") related to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "Act") that the Department indicates will strengthen the regime by, among other things, regulating businesses dealing in virtual currency, including foreign money service businesses ("MSB") in the regime, updating customer due diligence and beneficial ownership reporting requirements, and clarifying various other existing requirements.
The Department notes that the Act and the associated regulations were originally intended for traditionally-offered financial services and "bricks and mortar" institutions. With the financial industry increasingly moving to the digital world (e.g.,prepaid cards, virtual currency, foreign MSBs), the Department notes that updating the legal framework is a necessity.
This summary draws on the Regulatory Impact Analysis Statement that was issued by the Department on June 9, 2018 with respect to the Proposed Regulations.
New Business Models and Technologies
Dealing in Virtual Currency
Under the Proposed Regulations, persons and entities that are "dealing in virtual currency" would be considered financial entities or other entities deemed as domestic or foreign MSBs, as the case may be. These “dealing in” activities include virtual currency exchange services and value transfer services. As required of all MSBs, persons and entities dealing in virtual currencies would need to implement a full compliance program and register with the Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC"). In addition, all reporting entities that receive $10,000 or more in virtual currency (e.g. deposits, any form of payment) would have record-keeping and reporting obligations.
Prepaid Access Products
Under the Proposed Regulations, prepaid access products (e.g. prepaid credit cards) would be treated as bank accounts for the purposes of the regulations. Therefore, reporting entities issuing prepaid access products would be subject to the same customer due diligence requirements as those imposed on these reporting entities who offer bank accounts (e.g. verifying the identity of their clients, record-keeping, and reporting suspicious transactions related to a prepaid payment product account). The amendment would not apply to issuers of products restricted to use at a particular merchant or group of merchants, such as a shopping-centre gift card.
While domestic MSBs are captured as reporting entities by the Act and its regulations, similar foreign businesses that offer money services directly to people located in Canada are currently not subject to obligations under the Act or regulations. The Proposed Regulations would capture these foreign businesses that provide services to people located in Canada but that do not have a place of business in Canada, such as those offering such services through the Internet. Furthermore, financial entities would be prohibited from opening or maintaining an account for, or having a correspondent banking relationship with, an unregistered foreign MSB.
Clarifying Existing Requirements Under the Act and its Regulations
The Proposed Regulations seek to:
- Change existing requirements with respect to conducting a risk assessment of products and their delivery channels to an assessment of the risks associated with the use of new technologies prior to their launch.
- 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.
- 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 would simplify the way reporting entities submit reports pursuant to the 24-hour rule.
- Ensure that the 24-hour rule applies to beneficiaries of multiple cash transactions (i.e., where deposits or transfers of money are received by the same person and the aggregate amount over a 24-hour period is $10,000 or more). In addition, these amendments would clarify that any cash transactions that a reporting entity receives in the aggregate amount of $10,000 or more, regardless of its corporate structure, must be reported.
- Require reporting entities, after determining that a person is a politically exposed person, to take reasonable measures to establish the sources of the person’s wealth.
- Clarify the policy intent for the requirement to file a suspicious transaction report with FINTRAC and align it with international standards. After taking certain measures (such as conducting an assessment of the transaction) to be able to establish that there are reasonable grounds to suspect that the transaction is related to the commission or attempted commission of a money laundering or terrorist activity financing offence, the reporting entity would now have to file a suspicious transaction report to FINTRAC within three days as opposed to 30 days.
- Require reporting entities that are intermediaries in a transaction or that send or receive a wire transfer to identify, keep records of, and include information about the transaction.
Updating the Requirements for Reporting Entities
Currently, reporting entities may conduct their own customer due diligence or rely on information collected by an agent, an affiliate or a subsidiary. This requirement would be expanded by the Proposed Regulations to allow a reporting entity to rely on customer identification that has already been performed by other entities, including foreign affiliates.
In connection with confirming the existence of corporate entities, the Proposed Regulations would require that documents used to establish proof of corporate existence of a client be no more than one year old for the certificate of corporate status and “most recent” for other permissible documents (e.g., annual audited financial statements).
With respect to verifying the identity of individuals, the Proposed Regulations would repeal the current prohibition on the use of scanned/photocopied documents, and the requirement for an original, valid and current documents, and in its place require instead an "authentic, valid and current" document.
The Proposed Regulations will also exempt reporting entities from the requirement to conduct customer due diligence for certain low-risk customers (e.g., large companies that are listed on the Toronto Stock Exchange).
In light of the evolution of the lines of business of the life insurance sector, the Proposed Regulations would now require the life insurance sector to follow the same record-keeping, reporting, and customer due diligence requirements in respect of the issuance of loans (e.g., mortgages, loans against the amount of an insurance policy) as other financial entities. The Proposed Regulations will also clarify that when a life insurance company is acting on behalf of another life insurance company, it is not a reporting entity.
The Proposed Regulations would require reporting entities to take steps to confirm the accuracy of new information with respect to beneficial ownership as it comes in or as it is updated over time.
Finally, the Proposed Regulations would repeal the requirement for reporting entities to keep a record of any "reasonable measures" they have taken in cases where they were unsuccessful in meeting certain obligations.
Schedules and Technical Amendments
There are eight schedules to the current regulations of the Act that set out the types of information that reporting entities must provide to FINTRAC. The Proposed Regulations will update these schedules to require reporting entities to submit information that reflects current practices (e.g., online identifiers and email addresses).
Currently, MSBs must renew their registration with FINTRAC every two years on the anniversary of the original registration, and provide supporting documentation to support the renewal. The Proposed Regulations will provide flexibility for the timing of the renewal and reduce the type of information that needs to be submitted (e.g., fax number).
Finally, the following technical amendments would also be adopted: repealing and replacing obsolete references in the regulatory text; improving the organization of the text; making it easier for reporting entities to find and understand the requirements that apply to them; updating the schedules to the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations to reflect new and updated obligations (e.g., to include businesses dealing in virtual currency); and, updating the reference to the "Canadian Institute of Chartered Accountants" in the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations to "Chartered Professional Accountants of Canada," in light of the recent process of unification of the accounting profession.
The Proposed Regulations have been published in Part 1 of the Canada Gazette for public comment. The comment period expires on September 9, 2018. Once the Proposed Regulations are approved, FINTRAC will update its guidance and the Proposed Regulations would come into force 12 months after their registration. For further information regarding the Proposed Regulations or assistance in preparing a submission to the Department, please feel free to contact any of the authors listed below.