The previous federal government introduced amendments to money laundering regulations this past summer to implement a program of financial surveillance of senior public officeholders, their family members and their close associates. While the new regulations still await cabinet approval, the status of which is uncertain following the federal election result on October 19th, the breadth of the proposed changes has already attracted some controversy.
This bulletin reviews the new regulations, their adoption under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCTFA”), and what they may mean for Canadian financial institutions and senior public officeholders, or “politically exposed persons” (“PEP”), who are deemed to be at risk of involvement in corruption and money laundering.
The current scope of financial surveillance in Canada
The current legislative regime under PCFTA only covers the concept of Foreign Politically Exposed Persons (“FPEP”), which refers to individuals who have been entrusted with a prominent public function in a jurisdiction other than Canada. FPEPs are deemed “high risk” because of their position of influence and the potential for abusing that influence for the purposes of money laundering or terrorist financing. Under the PCTFA, FPEPs are subject to strict due diligence requirements for financial institutions.
The new regulations effectively forgo this jurisdictional distinction and effectively treat a PEP in Canada the same as an FPP and thus will require financial institutions such as banks, brokers and insurance companies to maintain closer oversight on the finances of PEPs, their family members and their close associates.
Who qualifies as a PEP?
Bill C-31 introduced the concept of a domestic PEP. PEPs are persons who are or have been entrusted with “prominent public functions” in Canada in the last 20 years. Specifically, PEPs include, but are not limited to, those who hold or have held the following offices on behalf of a government in Canada (whether it be on the federal, provincial or municipal level):
- Governor General, lieutenant-governor or head of federal or provincial government;
- ambassador, or counsellor of an ambassador;
- deputy minister of a federal or provincial government;
- head of a federal or provincial government agency;
- holder of other office or position that may be specified in the regulations;
- judge of an appellate court, the Federal Court of Appeal or the Supreme Court of Canada;
- leader of a major political party;
- member of the Senate or House of Commons or member of a provincial legislature;
- military officer with a rank of general or above; or
- president/CEO/chairman of a state-owned company.
Implications of the proposed regulations
Under the new regulations, financial institutions and similar entities will be required to monitor the financial activities of a PEP during their time in office and for 20 years thereafter. Entities will also have to monitor family members of PEPs and FPEPs, as well as “individuals the entity knows or should reasonably know are closely associated, for personal or business reasons”, with a PEP or FPEP.
The first step that financial institutions will need to take is identifying existing account holders or customers who are PEPs. For new clients, banks will have to take reasonable measures (which are yet to be defined) to determine whether the account is being opened for a PEP, a head of an international organization, a family member of one of those persons or a person who is closely associated with a PEP or FPEP. The assessment of whether a customer is a PEP or FPEP is ongoing and financial institutions are expected to periodically review their customers as such designations change over time.
Following the determination that a customer is politically-exposed, a risk assessment is required based on criteria that include the reporting entity’s clients and business relationships, products, delivery channels and geographic location of activities. If a PEP is determined to be “high risk” the financial institution must continuously monitor his or her account activity to determine, among other factors, the source of funds that are being deposited in the account. (Note: this “high risk” requirement for a PEP applies to all FPEPs regardless of risk). The new regulations will also require reporting entities to consider new developments and the impact of new technologies on their clients, business relationships, products, delivery channels and geographic location of activities.
Any suspicious activity involving a PEP will need to be reported to Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”), a federal intelligence agency that was created under the PCTFA. FINTRAC will then investigate and, if necessary, cooperate with any additional investigations by the RCMP or the Canada Revenue Agency.
With a new cabinet just sworn in on November 4, 2015, it may be some time before these changes take effect, and, if and once approved by cabinet, the new PEP requirements will come into force one year from the date of cabinet approval. Until then, regulated entities should closely monitor developments in this area and consider whether their compliance policies and practices will need to be updated to meet the new PEP obligations, if and when adopted.
*Simon Hurdon is an articled student based in Toronto.