The Department of Finance issued on July 4, 2015 for consultation proposed amendments(Proposed Amendments) to certain Regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Act). The consultation period expires September 2, 2015.Once the Proposed Amendments come into force, Financial Transactions and Analysis Centre of Canada (FINTRAC) guidance will be updated to set out how the requirements of the Proposed Amendments are to be met.
The Proposed Amendments provide greater flexibility to reporting entities with respect to methods of client identification and acceptable electronic signatures. They also add new requirements relating to domestic politically exposed persons (PEPs) and make changes to reporting and record-keeping requirements and risk assessment methodology. The Proposed Amendments are partially aimed at improving Canada’s compliance with international Financial Action Task Force (FATF) standards with respect to PEPs and risks of new technologies, in advance of Canada’s FATF evaluation scheduled for 2015-2016.
More Flexible Identification Methods
The Proposed Amendments significantly update the methods that can be used to verify the identity of clients, allowing for more flexible methods than those currently permitted. This will be particularly helpful in an online context. Under the Proposed Amendments, a reporting entity can use any one standalone measure or any two dual measures to confirm identity.
Proposed standalone measures to confirm identity include:
- referring to an original, valid and current Canadian or foreign government-issued identification document that contains the client’s name and photograph (but not an identification document issued by a municipal government) and verifying that the name and photograph are those of the person;
- referring to information concerning the client that is received on request from a federal or provincial government body (or a body that is acting as the agent or mandatary of such a body) that is authorized in Canada to ascertain the identity of persons, and verifying that either the name and address or the name and date of birth contained in the information are those of the person; or
- referring to a client’s credit file where that file is located in Canada and has been in existence for at least 3 years,and verifying that the name, address and date of birth contained in the credit file are those of the client.
As an alternative to the standalone measures, identity can also be confirmed by using any two of the following proposed dual methods:
- referring to information from a “reliable source” that contains the client name and address, and verifying that the name and address are those of the person;
- referring to information from a “reliable source” that contains the client name and date of birth, and verifying that the name and date of birth are those of the person; or
- referring to information that contains the client name and confirms that the client has a deposit account or a credit card or other loan account with a Canadian financial entity, and verifying that information.
The information used for the dual method must come from different sources. The person whose identity is being ascertained and the person or entity that is ascertaining their identity cannot be a source of the information. FINTRAC will provide further guidance on what constitutes acceptable information from a reliable source, such as a Notice of Assessment issued by the Canada Revenue Agency.
The Proposed Amendments also seek to limit the duplication of identity verification efforts: (i) a reporting entity that relies on an agent (such as a deposit broker) to verify client identity on its behalf can use identification measures previously undertaken by that agent on behalf of another reporting entity or itself with respect to the same client, where the client’s identity was ascertained in accordance with the requirements of the Regulations and the identification document remains unexpired and valid; (ii) a reporting entity can rely on identification by a foreign affiliated entity that has confirmed the identity of a client in accordance with the permitted identification methods: and (iii) where a reporting entity has previously ascertained the identity of a client, the reporting entity’s employee is not required to subsequently ascertain that same identity again if the employee recognizes the client. The Proposed Amendments provide that a client can be recognized not only by voice or sight but also through other forms of recognition such as digitally, where a client logs in online.
More Flexibility for Electronic Signatures
The Proposed Amendments expand the definition of “signature” to include any type of signature in electronic form that is created or adopted by a client and accepted by a reporting entity as being unique to that client. They also expand the definition of “signature card” to include electronic data that constitutes the signature of a person authorized to give instructions in respect of an account. This new flexibility regarding acceptable electronic signatures represents a significant change from the more prescriptive current FINTRAC guidance which appears to permit only handwritten signatures by specifying that an electronic signature means an electronic image of the signature and does not include a personal identification number (PIN). This amendment aims to assist with the opening of accounts through online channels.
New Requirements Regarding Politically Exposed Persons
The Act was amended by the 2014 federal budget to expand the concept of PEPs to include domestic PEPs and heads of international organizations, in addition to foreign PEPs. The Proposed Amendments set out new requirements relating to domestic PEPs and heads of international organizations, and also modify certain requirements relating to foreign PEPs to bring these in line with the new requirements relating to domestic PEPs and heads of international organizations.
The Proposed Amendments stipulate when a reporting entity must determine that a client is a domestic PEP or the head of an international organization, or a close associate or family member of such a person, and the measures it must take if a client is identified as such. These include measures to obtain information on sources of funds and to require senior management approval to keep an account open.
In addition, the Proposed Amendments require that reporting entities periodically determine whether existing clients are foreign PEPs, where such a determination has not already been made. This change brings the requirements with respect to foreign PEPs in line with the new requirements relating to domestic PEPs and heads of international organizations. The Proposed Amendments also extend the amount of time within which a reporting entity must make a determination that a client is a foreign PEP from 14 days after the day on which the account is openedto 30 days.
Changes to Reporting Requirements
The Proposed Amendments modify the suspicious transaction reporting requirement to include transactions or attempted transactions that “could reasonably be expected to raise reasonable grounds to suspect” that the transaction or attempted transaction is related to the commission of a money laundering offence or a terrorist activity financing offence. The current requirement is to report transactions that “constitute” reasonable grounds to suspect the transaction was related to a money-laundering offences or terrorist activity financing. This proposed change appears to lower the threshold for what is required to be reported as a suspicious transaction or attempted transaction under the Regulations.
The Proposed Amendments also repeal existing exemptions regarding the reporting of large cash transactions in the life insurance sector for product purchases where the source of funds is not easily identifiable.
Changes to Record-Keeping Requirements
The Proposed Amendments include minor changes relating to record-keeping requirements. They introduce a formal requirement that a reporting entity must keep a record of any “reasonable measures” it has taken in cases where it was unable to ascertain, establish or determine specified information. They replace the specific detailed definition of “client credit file”, which had been interpreted narrowly, with a broader requirement to keep certain information in respect of “every credit arrangement” that the reporting entity enters into with a client.
Changes Regarding Risk Assessment
The Proposed Amendments require certain reporting entities (banks, credit unions, life insurance companies, trust companies, and loan companies in a financial conglomerate) to take into consideration the risks resulting from the activities of their affiliates as part of their compliance programs.
In addition, the Proposed Amendments require 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), in accordance with FATF Recommendation 15.
The Proposed Amendments expand the type of information FINTRAC is permitted to disclose to law enforcement, intelligence, and foreign bodies. They also update the list of provisions for which FINTRAC can issue an administrative penalty to include the failure to comply with revised provision of the Act that prohibit a reporting entity from having a relationship with a shell bank. As well, the Proposed Amendments clarify that, where a securities dealer is a reporting entity under the Act, brokers employed by the securities dealer would not also be considered reporting entities required to maintain their own compliance program. Other Proposed Amendments will update the definition of “casino” and the circumstances under which entities are considered to be affiliated, to align with amendments to the Act.
The Proposed Amendments propose fairly significant changes to the existing anti-money laundering/ counter-terrorist financing regulatory regime. If these changes are implemented, reporting entities will need to carefully examine and update their existing anti-money laundering/ counter-terrorism financing processes and procedures to comply with the new requirements, including those regarding domestic PEPS and heads of international organizations. The modernization of, and increased flexibility for, identification methods and electronic signatures in particular will be a welcome change in the current financial services environment which is increasingly moving to an online and mobile platform. We will need to wait for FINTRAC’s further guidance in respect of the changes, however, to fully assess their impact.