The Financial Action Task Force (FATF) released its Mutual Evaluation Report (the “Report”) for Canada on September 1, 2016, outlining its assessment of current anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) measures in Canada. The FATF is an independent inter-governmental body that develops and promotes global AML/ CTF policies and sets global standards. This Report assesses Canada’s level of compliance with the FATF 40 Recommendations and the level of effectiveness of Canada’s AML/CFT regime.
The prior 2008 Mutual Evaluation Report issued by the FATF rated Canada as non-compliant in a number of areas. Since then, a number of amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”) and associated regulations have been introduced to address some of the issues identified in the 2008 evaluation, including with respect to politically exposed persons and persons dealing in virtual currencies. For details in respect of some of these amendments, refer to our prior legal update “Anti-Money Laundering Update: Final Amendments to Regulations to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act Released”.
The Report states that Canada largely has a strong legal framework and competent authorities dealing with money laundering and terrorist financing risks. In addition, the 2015 Canadian self-assessment (Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada) was also rated as being of good quality. However, the Report identified gaps in the Canadian AML/CTF regime in a number of sectors, including the legal industry, the real estate industry, online casinos, dealers in precious metals and stones, trust companies, life insurance companies, and, most notably for Fintechs, money services businesses (“MSBs”). In addition, the Report noted concerns with respect to the identification of beneficial ownership and transparency in Canada and transparency of legal persons and arrangements.
The Report specifically refers to a number of anticipated upcoming regulatory developments that will be relevant to Fintechs, including amendments in respect of MSB activities, prepaid cards and virtual currencies.
Money Services Businesses
As noted above, the Report identified gaps in the Canadian AML/CTF regime with respect to MSBs. An entity is a MSB if it is engaged in any of the following activities: (a) foreign exchange dealing, (b) remitting or transmitting funds by any means or through any person, entity or electronic funds transfer network; or (c) issuing or redeeming money orders, traveller’s cheques or other similar negotiable instruments (except for cheques payable to a named person or entity). Full-service MSBs can be particularly vulnerable to ML/TF as they are widely accessible and exposed to clients in vulnerable businesses or occupations and clients conducting activities in locations of concern.
According to the Report, MSBs’ awareness of their AML/ CTF obligations was typically commensurate with their size and sophistication, and the Report recommended that there be greater monitoring and oversight of small retail MSBs’ compliance with AML/ CTF requirements. This would include, for example, smaller remittance entities.
In addition, the Report refers to upcoming regulatory amendments to the PCMLTFA regulations which will include measures to cover MSBs that do not have a physical presence in Canada. Currently, an entity conducting MSB activities in Canada is only required to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) as a MSB if it has a “real and substantial connection” with Canada, and physical presence is one of the factors used in determine whether such connection exists.
Prepaid Cards and White Label ATMs
The Report identified in particular open loop prepaid cards and white label ATMs as high-risk areas that are not adequately covered by the Canadian AML/CTF regime. According to the Report, global open loop prepaid card transaction volumes have grown by more than 20% over the past four years and, in 2014, were expected to reach 16.9 billion annually. The Report also noted that white-label ATM operators are vulnerable to ML/TF and that, according to the RCMP, organized criminal groups use white-label ATMs to launder proceeds of crime in Canada.
According to the Report, upcoming amendments to the PCMLTFA regulations will be introduced to bring open loop pre-paid payment products within the AML/CTF regime. In addition, the Report notes that the Office of the Superintendent of Financial Institutions (OSFI) has previously instructed federally regulated financial institutions that reloadable prepaid cards pose similar AML/CTF risks to deposit accounts, and therefore require similar mitigation measures.
Virtual currencies are also identified as being subject to higher ML/TF vulnerability due to increased anonymity, their ease of access and their high degree of transferability. According to the Report, Payments Canada reported that, as of April 10, 2014, there were between 1,000 and 2,000 daily transactions in Canada involving bitcoin, which represent 1/100 of 1% of the total volume of the country’s daily payments transactions. The PCMLTFA was previously amended to specifically extend the definition of MSBs to include persons dealing in virtual currencies, and regulations implementing this change are in the process of being developed.
The Report generally rated Canada as non-compliant with respect to new technologies, and therefore vulnerabilities remain in Canada in connection with AML/CTF risks relating to new technologies. In particular, it stated that there is currently no explicit legal or regulatory obligation to risk assess new products, technologies and business practices before or after their launch. However, the recent amendments to the PCMLTFA regulations will 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).
The Report also indicated that banks have stated that there is a lack of information from Canadian authorities regarding typologies on possible exploitation of new technologies and products that would be helpful in their risk assessment.
As noted above, a number of regulatory amendments that could affect the Fintech industry are to be expected, including amendments in respect of MSB activities, prepaid cards and virtual currencies. Fintech entities should pay close attention to upcoming developments and prepare for the possibility of increased compliance obligations that could result from such amendments, and possible future amendments with respect to new technologies generally.
In addition, the Report identified a number of other issues that could lead to further regulatory developments, including with respect to beneficial ownership identification and transparency of legal persons and arrangements.