On July 4th, 2015, the Canadian government published proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the Regulations) under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act). The proposed Regulations are subject to a 60-day comment period. The changes come as no surprise to most stakeholders as the Canadian government has been engaged in formal and informal consultations on these and other proposed changes for the last few years. While some of the proposed amendments — those related to politically exposed persons, more vigilant record-keeping and additional factors to be considered in risk assessment — increase the regulatory burden of compliance for reporting entities, the majority of the amendments alleviate the burden of compliance by streamlining processes, clarifying confusing language within the Regulations and providing increased flexibility to reporting entities as they continue to adapt to the ever-evolving world of technology.
Canada is a founding member of the Financial Action Task Force (FATF) — an intergovernmental body whose purpose is the development and promotion of policies and recommendations designed to combat money laundering and terrorist financing — and will be subject to a mutual evaluation by the Financial Task Force once again in 2015–2016. FATF updated its recommendations in 2012, enhancing international standards in a number of areas. Although the recommendations are not legally binding, given that Canada is a member of FATF, it has committed to implementing these recommendations. In addition, non-compliance could negatively impact Canada’s financial sector and could subject Canadian financial institutions to increased scrutiny when dealing with foreign counterparties or when conducting business overseas.
Accordingly, the Canadian government introduced legislative amendments to the Act in 2014 with the stated objective of strengthening Canada’s anti-money laundering and anti-terrorist financing regime in addition to improving Canada’s compliance with international standards. In keeping with those amendments to the Act, it is now proposing a suite of amendments to the Regulations under the Act.
The stated objectives of the proposed amendments are to:
- update and strengthen the legislation to combat money laundering and terrorist financing activities;
- strengthen due diligence requirements regarding customers;
- close gaps in Canada’s regime;
- improve compliance, monitoring and enforcement efforts;
- strengthen information sharing in the regime; and
- address technical issues.
Many of the proposed amendments provide clarity and consistency with respect to the Regulations. Further, several of the proposed amendments relieve the burden of compliance and provide reporting entities with increased flexibility and efficiencies with respect to their obligations under the Act. These include:
- extending the time within which a reporting entity must make a determination that a client is a politically exposed person from 14 days to 30 days;
- updating the existing list of methods that reporting entities may use to verify the identity of their clients;
- expanding the definition of a signature to more broadly include electronic signatures;
- extending the existing exemption from ascertaining the identity of a client where the client is recognizable by voice or by sight to include digital forms of recognition; and
- providing reporting entities with a greater ability to rely on agents to verify client entity on their behalf (where the identity was ascertained in accordance with the Regulations).
There are however several amendments that would enhance the number and scope of the obligations facing reporting entities, further increasing the financial and temporal burden of compliance. These include:
- prescribing circumstances under which a reporting entity must make a determination that a client is a domestic politically exposed person or the head of an international organization, or a close associate or family member thereof and the measures to be taken as a result;
- requiring reporting entities to periodically determine whether existing account holders are politically exposed foreign persons, where such a determination has not already been made;
- adding a requirement that reporting entities assess and document the risks posed by the impacts of new developments and technologies on the existing risk assessment criteria to the list of elements that should be considered in a reporting entity’s risk assessment;
- requiring reporting entities keep a record of “reasonable measures” they have taken in cases where they were unable to ascertain, establish or determine the information specified; and
- requiring reporting entities in a financial conglomerate to take into consideration the risks resulting from the activities of their affiliates as part of their compliance programs.
Reporting entities are expected to comply with the new obligations by making adjustments to their existing procedures, policies and systems, and as a result, will likely face increased administrative and compliance costs stemming from the amendments. It should however be noted that while some of the amendments are necessary to enact certain legislative amendments to the Act introduced in 2014, several of the amendments are meant to address challenges reporting entities were facing with respect to meeting their obligations in an online environment and are therefore meant to provide relief. As a result, for some reporting entities, it could be expected that some of the costs will be partially offset by the efficiency gains stemming from the improved clarity and consistency in the proposed amendments as well as the accommodation of online financial service delivery.