On April 27th, 2022 the Canadian Department of Finance published amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTF Regulations). The new amendments target crowdfunding platforms as well as certain payment service providers that were not previously regulated and makes these entities subject to existing requirements under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTF Act) for money services businesses (MSBs). Obligations under the PCMLTF Act were extended to crowdfunding platforms by classifying them as a prescribed service, while the definition of electronic funds transfer was amended to remove the exemption that had previously applied to certain payment service activities.

The amendments to the PCMLTF Regulations stem from perceived loopholes in Canada’s anti-money laundering regime that was exposed by the “Freedom Convoy” that overtook the Canadian capital of Ottawa in early 2022. These protests were sparked by a mandate that required Canadian cross-border truckers to be vaccinated against COVID-19 but quickly broadened into a demonstration against lockdowns and other public health measures, as well as vaccine mandates, in general.

In response to the Convoy’s complete occupation of Canada’s capital, on February 15th 2022, the Federal Cabinet pronounced the Emergency Economic Measures Order SOR/2022-22. The Order prohibited financial institutions, securities dealers and MSBs from dealing with and/or holding property of “designated persons”. The definition of designated person was aimed at those individuals participating in the Freedom Convoy that occupied Ottawa. In addition, the Order required certain payment service providers as well as crowdfunding platforms to register as MSBs and be subject to the obligations under the PCMLTF Act. The Canadian Government focused on these entities due to the fact that the Convoy was successfully utilizing a number of crowdfunding platforms to raise millions of dollars to support the occupation.

On February 23, 2022 the Order was revoked following large-scale police operations that alleviated the congestion that had blockaded Ottawa. Following this revocation, the Canadian Government amended the PCMLTF Regulations.

Payment service providers

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) notes the obligations under the PCMLTF Act were ‎‎extended to certain payment service providers by amending the definition of “electronic funds transfer” ‎‎by removing the exemption for the payment processing of credit, debit, and prepaid products. This exemption was meant to prevent merchant processing activities (i.e. the provision of settlements ‎directly ‎to merchants on behalf of the merchant’s customers for the purchase of goods and services) from being subject to the requirements for MSBs.

This exemption complemented FINTRAC’s Policy Interpretation that the PCMLTF Act was not meant to apply to certain payment processing activities; i.e. where ‎the transfer of ‎funds is simply a corollary of their actual service. For ‎example, if a ‎business provided payroll and commission services, the transmitting of funds was ‎considered to be a ‎corollary of its business and FINTRAC’s previous position was that type of business was not to be considered a MSB.

However, FINTRAC has recently revised that guidance and now takes the position that persons or entities that provide invoice payment services or payment services for goods or services are engaged in the business of remitting or transmitting funds, therefore meeting that part of the definition of a MSB (or foreign MSB). Such entities are subject to the requirements of a MSB under the PCMLTF Act.

The guidance provides some exceptions. Notably, a person or entity will not be considered to be providing invoice payment services if they receive payment on behalf of a payee to settle a debt and do not further transfer the payment instructions to the original payee.

Further, there are two exceptions for those engaged in payment services for goods or services. If a person or entity only accepts payment for goods or services they supply to their own customers, or if they solely provide hardware (such as a point-of-sale debit/credit terminal), these entities will not be considered to be engaged in remitting or transmitting funds.

These regulatory and administrative changes are wide-ranging and significant changes to the interpretation of the “remitting and transmitting” arm of the MSB definition, since before, it was generally understood that entities ‎‎were not engaged in the business of transmitting funds if the transmission of funds was a corollary of their ‎‎actual service. This was based on the explicit wording of the PCMLTF Act which states a business is a ‎‎MSB if they are “engaged in the business” of transmitting funds, among other activities. Therefore, the newly revised guidance has created some uncertainty in the law.

Arguably, the better interpretation is ‎‎that for an entity to be engaged in the business of transmitting funds, the transmission of funds should ‎‎be integral to their business and not something that is collateral or incidental to their primary business.

This interpretation is consistent with the three aforementioned exceptions. For example, if an entity is solely accepting payments for goods or services they provide to their own customers, they are engaged in payment processing; however, that transmission is ancillary to their actual business, being the sale of goods and/or services. The business of such an entity would be the provision of goods and services; they solely process payments to facilitate the sale of the good or service they provide. Seen from this perspective, FINTRAC’s revised guidance is still consistent with the view that businesses who are engaged in the transmission of funds as ancillary to their business should not be considered MSB’s for the purposes of the PCMLTF Act.

This interpretation is bolstered by provisions in the Retail Payment Activities Act(RPA Act). The RPA Act has received Royal Assent, but the majority of the operative provisions have yet to come into force. Many of the business activities subject to regulation under the RPA Act are also caught under the definition of MSB under the PCMLFT Act.

While payment service provider is not defined in the PCMLTF Act, it is defined in the RPA Act. The definition of payment service provider in the RPA Act explicitly exempts persons or entities that perform payment service functions that are incidental to another service or business activity. This could provide some insight as to the Government’s intentions with respect to requirements for MSBs and payment service providers under the PCMLTF Act. It could signal the intention is to still exclude businesses who provide money transfer services that are a corollary of their actual business. However, we caution that without explicit guidance from FINTRAC stating such, this remains an evolving area of the law and a regulatory risk for businesses providing these services.

It is possible to apply to FINTRAC for a policy interpretation that will indicate the opinion of the regulator on a specific matter. Now that FINTRAC has published a definitive statement, it may be prudent and advisable for any business which engages in these kind of services, to inquire with FINTRAC whether their business is subject to the requirements under the PCMLTF Act.

Crowdfunding platforms

Businesses that provide crowdfunding platform services are also now required to comply with the ‎provisions of the PCMLTF Act as MSBs. Crowdfunding platform services are defined as: “the provision and maintenance of a crowdfunding platform for use by other persons or entities to raise funds or virtual currency for themselves or for persons or entities specified by them.” Meanwhile, crowdfunding platform is defined as: “a website or an application or other software that is used to raise funds or virtual currency through donations.”

These ‎definitions are quite broad and could capture businesses which may not traditionally be considered ‎crowdfunding platforms. For example, various social media websites allow users to hold fundraisers on their platforms. Under this revised definition, these fundraising tools could make social media sites subject to regulation under the PCMLTF Act, depending on the activity and how it is conducted.

Careful examination of any platform that supports online donations is warranted insofar as they may be subject ‎to the requirements as a MSB under the PCMLTF Act. It should also be noted that ‎the requirements under the PCMLTF Act for Crowdfunding platforms are more extensive than those that ‎apply to MSBs generally and include obligations to keep records in respect of the purpose for which funds or virtual currency are being raised, whom the funds are being raised for, and every person or entity for whom the platform provided services.

Other considerations

These changes not only affect payment service providers and crowdfunding platforms, but also financial entities. Financial entities will be prohibited from opening up accounts for foreign MSBs that are not registered with FINTRAC. They will have to re-asses who their account holders are, and whether they are entities that are now subject to registration requirements as a MSB.

Conclusion

These amendments significantly expand the Canadian anti-money laundering regime and the entities that are now subject to it. It will be a major undertaking for those engaged in the payments industry to bring themselves into compliance with the PCMLTF Act. FINTRAC has acknowledged there will be challenges in meeting these obligations and noted it will be reasonable in assessing and enforcing the PCMLTF Act.