On February 7, 2018, the Canadian federal government released a consultation paper for comments that has far-reaching implications for compliance with Canadian anti-money laundering requirements. The comment period on this paper ends on April 30, 2018.
In Canada, the anti-money laundering and anti-terrorist financing legislative framework is established by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its regulations (collectively, the AML Laws). Under the AML Laws, the administration and operation of these laws is required to be reviewed by the Canadian federal parliament every five years. This consultation paper is intended to support the upcoming parliamentary review that is required to be done in 2018.
The consultation paper notes that since 2013 (when the last review of the AML Laws was done), the money laundering and terrorist financing environment has evolved and there have been significant advancements in technology (e.g., developments related to virtual currencies, which offer new ways to move value with anonymity; the development of FinTech, which is changing the ways Canadians interact with the financial system; and digital identity recognition, which can facilitate the customer due diligence process, which is a cornerstone of the framework). A report released by Financial Action Task Force (FATF) in 2016 noted several areas where action could be taken to ensure the legislative framework meets technical standards and becomes more effective.
Summary of proposed changes:
The current AML Laws (i) require reporting entities to identify their clients, keep records and establish and administer an internal AML/ATF compliance program; (ii) create mandatory reporting requirements for suspicious financial transactions, large cash transactions, cross-border currency transfers and other prescribed transactions; and (iii) create obligations for the reporting entities to identify money laundering and terrorist financing risks and to put in place measures to mitigate those risks, including through ongoing monitoring of transactions and enhanced customer due diligence measures.
The amendments identified by the consultation paper would have a wide-ranging impact on the current AML requirements. In summary:
I. Legislative and regulatory gaps
New businesses, entities and standardized reporting:
If the new provisions proposed by the consultation paper are adopted, new businesses and sectors or persons in Canada that could be covered by AML Laws may include:
- the white-label ATM industry
- pari-mutuel or horse racing sector
- auto dealers
- company service providers
- mortgage insurers, land registries and title insurance companies
- non-federally regulated mortgage lenders
- armoured car companies
- jewellery auction houses
- financing, and leasing and factoring companies
In addition, the concepts relating to heads of international organizations and reporting obligations relating to politically exposed persons may be expanded.
The consultation paper also notes that amendments to reporting and client identification requirements may be introduced to standardize these requirements.
Canada does not have a central registry of beneficial ownership information, and information requirements are spread across a number of different statutes, including incorporation, tax and financial authorities. The government is seeking views on how to improve corporate ownership transparency and mechanisms to improve timely access to beneficial ownership information by authorities while maintaining the ease of doing business in Canada. This includes considering different beneficial ownership registry models and whether information should be made public. The government is also seeking views on risks associated with legal entities that are not corporations, such as legal partnerships.
II. Exchange of information
FINTRAC is currently authorized to disclose designated information (e.g., account holder name, transaction amount and date) to Canadian law enforcement agencies and other agencies such as the Canada Border Services Agency, the Canada Revenue Agency and the Canadian Security Intelligence Service in specific circumstances where there are reasonable grounds to suspect that information would be relevant to investigating or prosecuting money laundering or terrorist financing or threats to the security of Canada.
The consultation paper proposes that the AML Laws be amended to give FINTRAC the authority to disclose financial intelligence to the Competition Bureau and Revenu Québec.
The consultation paper also touches on a number of topics relating to information sharing between Canadian regulators and the privacy sector, as well as sharing between Canadian regulators and international organizations and foreign regulators. These topics touch on a wide range of laws, including privacy laws as well as statutes relating to the use of evidence for criminal proceedings. The government is seeking views from stakeholders on these topics.
III. Strengthening intelligence capacity and enforcement
The consultation paper identifies certain new tools and methods to detect and deter money laundering and terrorist financing, including by reviewing practices used in other jurisdictions.
Professional money launderers and recklessness:
The consultation paper notes that one of the most widely recognized difficulties in Canada in investigating and prosecuting money laundering offences is the legal requirement to link the act of money laundering to specific knowledge of an underlying criminal offence that produced the illicit funds, for example, drug trafficking or fraud. It appears that the government may introduce amendments to the Criminal Code provisions to make the prosecution of AML-related offences less burdensome from an evidentiary perspective.
Electronic Funds Transfers (EFTs):
Under current AML Laws, incoming and outgoing international EFTs over $10,000 are reported to FINTRAC when they are initiated by a client. However, this does not capture the transfers that pass through Canadian financial institutions where Canada is not the sending or recipient destination such as those originating through correspondent banking relationships. In addition, there are other types of transfers that relate to new and evolving payment methods - e.g., letters of credit and finance, trade, precious metals and securities - that are not currently captured. The consultation paper suggests that the government sees this expand the existing requirements to incorporate non-client initiated transfers.
The consultation paper notes that large cash denominations are an issue, as they are likely supporting the transportation and smuggling of large values in a manner that avoids drawing the suspicion of law enforcement officials, and removing legal tender status for large denominations could be considered as a practical next step to strengthen confidence that Canadian currency is being used for legitimate transactions domestically and internationally. This step would be consistent with recent practices of other countries.
The consultation paper notes that the physical transportation of cash across an international border is one of the oldest and most basic forms of money laundering, and it is still widespread today. The paper notes that consideration could be given to whether it is appropriate to place a limit on the amount of bulk cash a person could carry in Canada without a legitimate purpose, whether Canada should develop a business registry for those businesses that deal in high volumes of cash and whether there should be a limit on the amount of cash a business in Canada could accept and/or report on. It appears that the government may adopt some of these measures given that the consultation paper notes these types of mitigation measures have all been implemented in some form by other countries such as the United States, France and the United Kingdom.
Geographic targeting orders:
The consultation paper suggests that the geographic targeting orders (currently used in the United States for certain types of transactions) may be introduced in Canada.
The AML Laws require persons or entities to report the importation and exportation of currency or monetary instruments of $10,000 or more. Monetary instruments are stocks, bonds, treasury bills, bank drafts, promissory notes, travellers’ cheques, endorsed cheques and money orders, in bearer form or in such other form that title passes on delivery. The consultation paper suggests expanding the definition of monetary instrument, as it does not capture the cross-border movement of other types of value that could be used for money laundering or terrorist financing purposes. Other types of instruments could include diamonds, gold and other precious metals, prepaid payment products and others. The consultation paper notes that risk associated with these items lies in their transportability and the relative ease of moving and potentially accessing monetary value anonymously.
IV. Modernizing the framework and its supervision
The consultation paper also touches on a few topics relating to how the framework is managed and supervised.
Addressing the issue of money services business de-risking:
The consultation paper notes that the some financial institutions may, as part of their “de-risking” approach, decide not to do business with any money services businesses regardless of whether the actual business in question is high risk. The paper notes that this practice may inadvertently drive financial transactions to informal channels, which make these transactions more opaque to regulators and law enforcement when they are investigating money laundering and terrorist financing. It is not clear from the consultation paper how the government intends to convince financial institutions to not cease their business relationships with money services businesses.
Strengthening Money Services Businesses (MSB) registration:
The government is seeking to improve the registration application and procedures for MSBs to safeguard the integrity of the financial system. For example, the list of offences that would make an applicant ineligible could be expanded. Also, suspending the registration of a MSB could become possible on a discretionary basis, with appropriate legal safeguards, when the owners/operators of an MSB are subject to criminal court proceedings that, if they were to result in a conviction, would make them ineligible for registration.
Enhancing and strengthening identification methods:
The consultation paper notes that there is currently a reliance on physically viewing and validating identification documents to ensure they are original, valid and current. Advanced technology has the ability to perform remote validation, for example, by supporting enhanced online scanning processes that enable validation, data extraction and document authentication processes to assess the legitimacy of ID documents (such as passports, visas, identification cards, drivers’ licenses, etc.). The use of Blockchain, identification using biometrics, facial recognition and other advanced methods, which can be more reliable and effective than the human eye, are all areas of intense focus and development.
The consultation paper notes that the rapid rate of growth and innovation in the FinTech sector (and concepts of “digital ID” more specifically), calls for strengthening current identification methods and exploring new identification methods, while trying to leverage new technologies to facilitate and enhance the effectiveness of customer due diligence for the purposes of the AML/ATF Regime.
The consultation paper also notes that regulations need to continue to remain flexible and adaptive in an environment of rapid development and emerging technologies. Continuous progress towards more principles-based requirements could allow reporting entities to take a risk-based approach vis-à-vis new technologies. Such an approach to regulation would provide for a nimbler framework that would do a better job at leveraging technology solutions, which should ultimately enhance the effectiveness of the AML/ATF Regime.
Regulatory sandbox - Exemptive relief and administrative forbearance:
The consultation paper indicates that the government may be willing to grant exemptions to allow start-ups to operate in a supervised environment without having to necessarily comply with all of the regulatory requirements that may otherwise apply. It remains to be seen what amendments to AML Laws would be proposed to give the regulators the necessary flexibility to grant exemptive relief and administrative forbearance.
Administrative Monetary Penalties (AMP):
The consultation paper seeks feedback on issues relating to AMPs, including public naming of violators, use of confidentiality orders and penalty amounts.