The wait is over. On June 9, 2018, the Department of Finance (Department) released the long-awaited amendments to the regulations to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) (Revised Regulations). Highlights include the regulations of virtual currencies, businesses providing foreign money services and pre-paid products.
In addition, the life insurance sector is to become subject to the same requirements as other financial entities in respect of any loan or pre-paid products that they offer. While the identity verification requirements are less burdensome, the record-keeping requirements have expanded dramatically, especially for electronic funds transfers, including a new requirement to verify the identity of beneficiaries for electronic funds transfers of over C$1,000.
There is a 90-day comment period for these regulations, expiring on September 9, 2018. Regulated entities are encouraged to review the Revised Regulations and make submissions on the provisions that may be challenging to implement.
This article provides an overview of the highlights of the Revised Regulations and covers:
Suspicious Transaction Reports Record Keeping Virtual Currencies Pre-Paid Payment Products Foreign Money Service Businesses Electronic Funds Transfers Politically Exposed Persons Authorized Parties Travel Rule Identity Verification Life Insurance Companies Other Notable Matters
SUSPICIOUS TRANSACTION REPORTS
The Revised Regulations require suspicious transaction reports to be filed with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) within three days after the day on which a regulated entity took measures to establish that there are reasonable grounds to suspect that a transaction or attempted transaction is related to money laundering or terrorist financing. This is a significant change from the current 30-day period from the time a regulated entity “first detects a fact that constitutes reasonable grounds to suspect.” The Regulatory Impact Analysis Statement published with the Revised Regulations states that “in practice this means that the report would be filed three days after the completion of the analysis that established reasonable grounds for suspicion”. However, the Revised Regulations do not provide for this; instead, they require the report to be filed three days after the day the regulated entity “took measures to establish reasonable grounds”; not completed such measures.
Moreover, one of the other significant changes to the suspicious transaction reporting regulation is the amendment to the reporting schedule. The reporting schedule requires much more detailed information to be filed with FINTRAC then previously was required, including, by way of example, where the report is filed in respect of an entity:
- The name of each person (up to three) authorized to bind entity
- Information respecting ownership, control and structure of entity
- Name of each person who owns directly or indirectly 25 per cent or more of the entity
- Name, address and e-mail address of each director
- Information on beneficiaries of trusts and settlors of trusts.
As such, it is likely that completing the reports (as well as the new electronic funds transfer (EFT) reports discussed below) will be a much more time-consuming process, where there is only a three-day period to file. For larger regulated entities where these reports need to be reviewed by more senior levels, the reduced time period to file may prove challenging.
The Revised Regulations have amended certain definitions, resulting in more comprehensive record-keeping requirements, including:
- For financial entities and casinos, an expanded definition of “deposit slip”, which includes “every other known detail that identifies the deposit”
- For financial entities, a new requirement to maintain account applications
- For financial entities, additional obligations for credit card accounts (signature cards, intended use of account, record-keeping requirements for transfers of C$1,000 or more)
- An expanded definition of “foreign currency exchange transaction ticket”, which includes the exchange rate used, and more detailed information in respect of the conductor as well as “every known detail that identifies the transaction”
- A new “large virtual currency transaction record” definition (and accompanying record-keeping requirement) including “every other known detail that identifies the receipt”
- As discussed below, expanded record-keeping requirements in respect of EFTs
- A new definition of a “virtual currency exchange transaction ticket”
- Expanded record-keeping requirements for redemptions of money orders of C$3,000 or more
- An expanded definition of a “receipt of funds record”, which includes “every known detail that identifies the receipt.”
As the above provisions illustrate, the Revised Regulations place a strong emphasis on regulated entities collecting significant amounts of data in respect of customer transactions.
As expected, the Revised Regulations treat entities that “deal in virtual currencies” as money services businesses (MSBs) (either foreign or domestic) and provide express provisions that regulate transactions related to virtual currencies carried out by all regulated entities.
The term “virtual currency” is defined in the Revised Regulations as:
- A digital currency that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchange for funds; or
- Information that enables a person or entity to have access to a digital currency referred to in paragraph (a).
Presumably, subsection (b) of the definition is intended to catch digital currency platforms so that “dealing in digital currency” will include those that operate digital currency platforms as well as virtual currency exchangers.
The Revised Regulations require reporting to FINTRAC by financial entities, MSBs and foreign MSBs of the transfer of any amount of C$10,000 or more in virtual currency at the request of a person or entity (casinos have a similar requirement in respect of the receipt of virtual currency). There is a carve-out of this provision for transfers of virtual currency made to pay “miners” for validating transactions.
There are also reporting requirements for the receipt from a person of C$10,000 or more of virtual currency that mirror the large cash reporting obligations under the existing regulations, and an accompanying requirement to maintain a large virtual currency transaction record, similar to a large cash transaction record.
With respect to record-keeping requirements, there is a requirement to maintain comprehensive records where electronic transfers of C$1,000 or more in virtual currency are made or received or where the is a “virtual currency exchange transaction”. These requirements apply to financial entities, MSBs and foreign MSBs. The required records to be kept are quite detailed (see discussion below in respect of EFTs).
The requirements imposed in respect of virtual currency transactions at the C$1,000 level and above require identity verification, extensive record-keeping requirements, and a determination of beneficial ownership (for entities undertaking transactions).
There is likely to be a lot of commentary from those involved in the virtual currency space, given that the extensive requirements imposed do not translate well in the digital environment.
While the Revised Regulations subject those that deal in virtual currency to the regulatory regime of the PCMLTFA, the requirements for the receipt of virtual currency in amounts of C$10,000 or more and virtual currency record-keeping flow through all regulated sectors.
PRE-PAID PAYMENT PRODUCTS
As was expected, the Revised Regulations have specific provisions that apply to pre-paid payment products and effectively treat them similar to traditional bank accounts. The pre-paid product provisions of the Revised Regulations only apply to pre-paid products issued by financial entities and life insurance companies.
A “pre-paid product” is defined as a product issued by a financial entity that enables a person to engage in a transaction by giving them electronic access to funds or virtual currency paid to a pre-paid product account held with a financial entity in advance of the transaction. The definition carves out a product that provides access to a debit or credit account or one that is issued for use only with particular merchants.
A “pre-paid product account” is defined as an account connected to a pre-paid payment product and that permits one or more transactions that total C$1,000 or more to be conducted within a 24-hour period or a balance of funds or virtual currency available of C$1,000 or more to be maintained.
Based on this definition, in order for the Revised Regulations to apply, it does not matter if a pre-paid product actually has a load value of C$1,000 or more, but rather if a load of C$1,000 or more is permitted under the terms of the card. As such, this definition will catch the vast majority of reloadable pre-paid cards issued by financial entities.
The record-keeping requirements in respect of pre-paid payment product accounts are extensive and include:
- A signature card
- Name, address, telephone number of card holders and the nature of their occupation/principle business and for an individual, their date of birth
- Name, address, telephone number of authorized users, and the nature of their occupation/principle business and, for an individual, their date of birth
- For corporate accounts, copies of official corporate records to bind the corporation
- Name, address, telephone number, of every person or entity that makes a payment of C$1,000 or more to the pre-paid product account, occupation/principle business and, in the case of an individual, their date of birth
- A record of the intended use of the pre-paid payment product account
- A record of every application in respect of the pre-paid product account
- Every account operating agreement that a financial entity creates or receives in respect of the pre-paid product account
- A pre-paid payment product slip in respect of every payment that is made to the pre-paid payment product account (this is a defined term with seven elements including “every other known detail that identifies the payment”)
- Every debit and credit memo that a financial entity creates or receives in respect of the pre-paid product account
- A copy of every account statement that a financial entity sends to a holder of a pre-paid product account
- A foreign currency exchange transaction ticket in respect of every foreign currency exchange transaction that is connected to the pre-paid product account
- If an EFT is initiated for C$1,000 or more and the funds are transferred from the pre-paid product account, extensive and detailed information on the sender and the transaction (including the purpose of the transfer, the exchange rate and “every other known detail that identifies the initiation”)
- If an EFT is received for a payment to a pre-paid product account, extensive and detailed information on the beneficiary and the transaction
- Similar records for the transfer and receipt of C$1,000 or more in virtual currency.
As noted above, the provisions in respect of pre-paid accounts incorporate the concept of an “authorized user”. An authorized user is defined as a person who is authorized by a holder of a pre-paid payment product to have electronic access to funds or virtual currency available in the account by means of a pre-paid product that is connected to it.
The record-keeping requirements are extensive and will require the reworking of pre-paid card applications to capture the required information.
In addition to the record-keeping requirements, there are accompanying identity verification requirements. These requirements apply with respect to:
- An individual, corporation or other entity for whom the financial entity opens a pre-paid product account
- An authorized user of a pre-paid product account opened for an individual
- Any other individual, corporation or other entity who makes a payment of C$1,000 or more to a pre-paid product account.
Financial entities that offer reloadable pre-paid cards will be required to implement system changes to ensure that the required records are maintained and that proper controls are put in place for transactions where more than C$1,000 is loaded onto a pre-paid payment product.
In respect of pre-paid card accounts and politically exposed foreign and domestic persons and heads of international organizations (collectively, PEPs), the Revised Regulations require financial entities to take reasonable measures to determine whether an authorized user of a pre-paid product account is a PEP. In addition, a PEP determination is also required for a person who makes a payment of C$10,000 or more to a pre-paid payment product account. This threshold is much lower for PEP determinations than the C$100,000 threshold for other EFTs and applies to all loads, even those that occur entirely within Canada.
In addition, financial entities are required to take reasonable measures on a periodic basis to determine if either a holder or an authorized user of a pre-paid card account is a PEP, similar to the existing requirements for other accounts.
As expected, the Revised Regulations now regulate foreign MSBs, which are defined to include persons or entities that do not have a place of business in Canada, but direct prescribed services to persons or entities in Canada.
Such services include:
- Foreign exchange dealing
- Remitting and transmitting funds
- Issuing or redeeming money orders, traveller’s cheques and other negotiable instruments
- Dealing in virtual currencies.
The requirements that are imposed on foreign MSBs are similar to the ones imposed on domestic MSBs, except that certain of the record-keeping obligations do not apply. As with domestic MSBs, there is also a requirement to report on transfers of virtual currency.
Significant changes have been made in respect of EFTs and the accompanying record-keeping and reporting obligations for those regulated entities that are subject to the EFT requirements (financial entities, MSBs, foreign MSBs and casinos).
Currently, the requirement to report EFTs under the existing regulations only apply to transactions that are requested by “clients” and therefore not EFTs that are sent by regulated entities for back office or treasury management purposes. In the Revised Regulations, the requirement for EFTs to be tied to a client request to be reportable has been eliminated. Instead, EFTs requested by a “person or entity” are now reportable whether or not they involve a client. The only exception to this is a carve-out found in the definition of an EFT, where both the persons or entities that initiate and receive the transmission are acting to clear or settle payment obligations. This is a narrow exception and not all back office functions will fall within this category.
EFT reporting requirements apply to the transfer of “funds”, the definition of which has been expanded to include cash and other fiat currencies and “information that enables a person or entity to have access to a fiat currency other than cash”. While this definition may be an attempt to address digital fiat currency, it is not otherwise clear what this expanded definition is meant to capture.
In respect of the reporting requirements, the current exemptions for reporting cross-border electronic transfers of C$10,000 or more where there is more than one regulated entity involved in the transfer are being eliminated. Instead, the reporting obligations in respect of cross-border electronic funds transfers now operate as follows:
- For outgoing EFTs, the reporting entity will be the entity that is “initiating” the transaction. “Initiation” is defined as the first transmission of the instructions for the transfer of funds. As such, if an EFT is going from one regulated entity to another regulated entity before leaving Canada, it is the entity that originated the transfer that is required to report it. This is a change from the current regime.
- Similarly, for incoming EFTs, the reporting entity is the entity that has the final receipt of the EFT. “Final receipt” is defined as the receipt of instructions by the person or entity that is to make remittance to a beneficiary.
EFT reporting requirements also apply to the transfer and receipt of virtual currency in amounts of greater than C$10,000. There are no cross-border requirements tied to the reporting of these transactions. As such, any virtual currency funds transfer transaction of C$10,000 or more carried out by a regulated entity (or for casinos, received by them) is reportable.
The Revised Regulations clarify that MSBs and foreign money services that send EFTs on their own networks (where they are the sender and recipient) are also required to report those transactions unless they start and end in Canada.
In addition to the foregoing, wherever an EFT is reportable, there is now a requirement imposed on reporting entities to make a third-party determination in respect of the initiator of the transaction and keep the required records if such is the case.
The provisions in respect of the 24-hour rule and “single transactions” have been refined (this applies in respect of large cash transactions as well). The concept of aggregating transactions based on the initiator only has been eliminated and the 24-hour rule is now based on a broader test that takes into account the initiators, the beneficiaries and requests made on behalf of other persons or entities.
In keeping with the changes made to the 24-hour rule, there is no longer a requirement to report transactions based on the person at an entity sending the transaction. This is discussed below under the heading “Authorized Parties”.
The definition of an EFT has also changed and no longer excludes Society for Worldwide Interbank Financial Telecommunication (SWIFT) transactions other than MT103s. Instead, as noted above, there is a more principles-based exclusion for EFTs where both the persons or entities that initiate and receive the transmission are acting to clear or settle payment obligations. Other exclusions from the EFT definition include direct deposits and pre-authorized debits, cheque imaging and presentment.
Regarding the requirement to verify identity, the current regulations impose that requirement in respect of the initiator of transactions. The Revised Regulations now impose this requirement in respect of beneficiaries of EFTs of C$1,000 or more as well as where the regulated entity makes the final remittance. Although not unreasonable, this requirement will have a direct effect on the speed and efficiency of payments. In addition, certain questions will need to be addressed; for example: if a beneficiary is the recipient of two or more EFTs, does that constitute a business relationship that requires ongoing monitoring? What are the implications of being required to monitor someone with whom you have no customer relationship?
One of the other significant changes to the provisions in respect of EFTs are the record-keeping and reporting requirements. There are extensive record-keeping obligations for EFTs a regulated entity initiates, EFTs that it sends (initiated by another person), and EFTs that it receives. In addition, all of the reporting forms have been changed and significantly expanded, requiring more detailed information. These changes also affect the new provisions of the travel rule discussed below.
The amount of detail that is required in the reporting forms and required records, including the catch all “every other detail that identifies the EFT” seems particularly onerous. Moreover, the amount of internal resources that regulated entities will need to devote to record-keeping and reporting will undoubtedly be affected. There are similar requirements for EFTs sent or received in virtual currency and for financial entities for any EFTs sent or received using a pre-paid product or a credit card.
Regulated entities subject to these provisions will also be required to make significant system changes to capture the new reporting structures and it is important that a sufficient amount of time is provided to regulated entities in order to do so. Regulated entities should consider this in their submissions.
The Revised Regulations have some additional provisions that deal with PEPs. As previously noted, the PEP requirements now extend to transactions relating to pre-paid product accounts. In addition, the following changes have been made in respect of the PEP requirements:
- Similar to domestic PEPs, heads of international organizations (HOIs) will be required to be treated as PEPs for a period of five years after they cease to hold that position
- Financial entities, MSBs and foreign MSBs will be required to use reasonable measures to make a PEP determination in the following additional circumstances:
- Where a person requests a transfer of virtual currency of C$100,000 or more
- Where a beneficiary receives virtual currency in an amount of C$100,000 or more
- The current requirement imposed on financial entities and MSBs to make a PEP determination for all cross-border EFTs (initiator and beneficiary) of more than C$100,000 has been expanded so that it now applies to all EFTs of C$100,000 or more, even those within Canada. This requirement will also apply to foreign MSBs.
- Life insurance companies will be required to make PEP determinations for beneficiaries to whom they remit an amount of C$100,000 or more over the duration of an immediate or deferred annuity or life insurance policy
- In addition to the current record-keeping requirements for PEPs, regulated entities are required to take reasonable measures not only to determine the source of funds but also the source of the person’s wealth.
This will likely be a sensitive issue for those who are family members or close associates of PEPs.
The current regulations place emphasis on individuals that are undertaking transactions on behalf of corporate entities. The Revised Regulations move away from this approach. As a starting point, section 7 of the existing regulations, which provides that a person acting on behalf of their employer is considered to be acting on behalf of a third-party, has been eliminated. In addition, the record-keeping requirements for funds transfers made by entities now focus on the entity, not on the individual at the entity originating the transfer. However, because of this change in approach, the Revised Regulations now place much more focus on persons authorized to give instructions on accounts.
For financial entities, securities dealers and casinos, the Revised Regulations impose a record-keeping requirement for all persons who are authorized to give instructions in respect of an account, including the name, address, telephone number, date of birth, and the nature of their principal business/occupation.
As previously noted, for pre-paid products, authorized users’ identity must be verified.
For authorized users of credit cards, there are additional-record keeping requirements.
Section 9.5 of the PCMLTFA and section 66.1 of the current regulations, set out what is commonly referred to as the travel rule; that is, when an EFT is sent, certain information in respect of the originator must accompany the transfer.
The Revised Regulations expand the travel rule to:
- Apply to foreign MSBs
- Not be limited to cross-border EFTs, but instead apply to all fund transfers, including those that occur solely within Canada
- Include additional information within the transfer. The information that is currently required to be included with the transfer is limited to the name, address and account number or other reference number of the client who requested the transfer. This requirement has been expanded to require the following additional information:
- The beneficiary’s name, address and telephone number and if known, the nature of their principal business/occupation and in the case of a person, their date of birth
- If applicable, the beneficiary’s account number and other reference number connected to the transaction
- Any other information in respect of the EFT that is in the regulated entity’s possession or control, including information that relates to the person or entity that requests the initiation of the EFT or the beneficiary.
These new requirements, coupled with the additional information that is contemplated to be maintained for all EFTs, turns the travel rule into a mechanism for reporting large amounts of data to other parties. It will be interesting to see if Canada’s privacy commissioner has any comments on these provisions.
There have been some positive changes in respect of the requirements imposed for identity verification. Most significantly, the current regulations provide that if a document is used to verify identity it must be original, valid and current. The Revised Regulations modify this requirement by providing that a document used for verification of identity no longer has to be original, but must be “authentic, valid and current”. In this regard, the Revised Regulations would permit identification documentation presented by way of electronic methods to be utilized to verify identity, provided that it can be authenticated (which many remote offerings provide for).
For the dual source method, the current regulations provide that any information used to verify identity must be valid and current, and a regulated entity cannot rely on an “electronic image” of a document (for example, a scanned copy of a bank statement). The electronic image prohibition has not allowed regulated entities to rely on scanned copies of documentation when using the dual method. The Revised Regulations have eliminated this requirement so that regulated entities will be able to rely on scanned copies of documentation used for the dual process method. This is a positive development moving in the right direction for digital verification. It’s possible that, in keeping with the consultation paper on revising the PCMLTFA, that the next iteration of the regulations will contain a more principled-based approach to identity verification. For further information on the consultation paper, please see our February 2018 Blakes Bulletin: Department of Finance Reviewing Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime.
Other notable changes made to the identity verification provisions include:
- When using a credit report as a single source of identity verification, the information in the report must be derived from more than one source
- Confirmation of a pre-paid product account is acceptable as a dual source method
- For the use of a credit file in the dual source method, the credit file must have been in existence for at least six months.
Regulated entities are now entitled to rely on identity verification undertaken by other regulated entities. This method still requires a written agreement and a requirement to deliver the identity documentation within three days of a request.
The ability to rely on identity verification done by foreign affiliates has been qualified in the Revised Regulations. In order to rely on any such identity verification, regulated entities must be satisfied (taking into account money laundering and terrorist financing risk) that the entity has similar identification, record-keeping and compliance program requirements and that the entity’s compliance with those policies is subject to the supervision of a competent authority under that state’s legislation.
LIFE INSURANCE COMPANIES
Under the current regulations, life insurance companies, their agents and their brokers are only subject to anti-money laundering obligations (except for reporting suspicious transactions) in respect of life insurance and annuity products. In this regard, the Revised Regulations make significant changes in the application of the regulations to the life insurance sector.
Specifically, the Revised Regulations provide that life insurance companies, brokers and agents are now subject to the same obligations as financial entities when they offer loans or pre-paid products to the public or when they maintain accounts with respect to such products. Accordingly, whenever a life insurance company (or its brokers or agents) offer any loan or pre-paid products, they will be subject to the same compliance regime for these products as financial entities.
OTHER NOTABLE MATTERS
Beneficial Ownership: the Revised Regulations require expanded information in respect of trusts. There is also an express requirement to continually update all beneficial ownership information and its accuracy in the context of ongoing monitoring.
Correspondent Banking: where a financial entity enters into a correspondent banking relationship, it is required to obtain a copy of the foreign institution’s banking licence or charter. The Revised Regulations provide that such a certificate must have been issued within the previous year.
Reasonable Measures: the existing regulations have many provisions that require regulated entities to take “reasonable measures” to obtain certain information. Recent amendments have also required regulated entities to maintain records of the reasonable measures that they have taken. The Department has recognized that this requirement has been particularly onerous and has removed this requirement.
Simplified Due Diligence: there are some provisions that allow for simplified due diligence when onboarding corporate entities that are low risk in respect of confirming corporate existence. All other requirements (i.e., beneficial ownership) still apply.
Reporting Schedules: as previously noted, the reporting schedules under the Revised Regulations have been significantly revised. This will require system changes for regulated entities that may require significant lead times. In addition, much more information is being requested in the schedules than is currently required.