On June 1, 2020, certain provisions of the amended regulations (Regulations) to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) came into force. In addition, on May 18, 2020, the most recent amendments to the Regulations under the PCMLTFA were published with some small, but important, tweaks. These developments, together with new Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) guidance on suspicious transaction reporting (STR) and on FINTRAC’s approach to compliance in the time of COVID-19 are summarized in this bulletin.
On June 1, 2020, certain provisions of the amending Regulations came into force. Most notably, effective June 1, 2020, regulated entities (REs) under the PCMLTFA are now required to file suspicious transaction reports with FINTRAC “as soon as practicable after they have taken measures that enable them to establish that there are reasonable grounds to suspect that the transaction or attempted transaction is related to the commission of a money laundering offence or a terrorist activity financing offence." Previously, REs were provided with a 30-day period within which to file these reports.
FINTRAC defines “as soon as practicable” in its Glossary as follows:
A time period that falls in-between immediately and as soon as possible within which a suspicious transaction report (STR) be submitted to FINTRAC. In this context, the report must be completed promptly, taking into account the facts and circumstances of the situation. While some amount of delay is permitted, it must have a reasonable explanation. The completion and submission of the report should take priority over other tasks.
In light of the changes to the reporting requirements, FINTRAC updated its guidance in respect to submitting suspicious transaction reports to FINTRAC. In that respect, FINTRAC has provided some guidance in respect of what it considers “measures” that enable an RE to determine that it has reasonable grounds to suspect that a financial transaction is related to a money laundering or terrorist financing office. These measures—which FINTRAC notes should be included in a RE’s policies and procedures—include:
- Screening for and identifying suspicious transactions; this is part of an REs ongoing monitoring obligation
- Assessing the facts and context surrounding the suspicious transaction
- Linking money laundering (ML)/terrorist financing (TF) indicators to the assessment of facts and context
- Explaining the RE’s grounds for suspicion in an STR
In that respect, FINTRAC notes that it expects REs to articulate how the facts, context and ML/TF indicators allowed the RE to reach its conclusion and specifically to note why the transaction(s) or attempted transaction(s) are related to the commission or attempted commission of an ML/TF offence. In addition, REs are to include in the STR the ML/TF indicators used to support the REs suspicion and the suspected criminal offence related to ML/TF, if known.
It is after completing these measures that FINTRAC requires a RE to submit a report to FINTRAC as soon as practicable. In that regard, FINTRAC notes the following:
As soon as practicable should be interpreted to mean that you have completed the measures that have allowed you to determine that you reached the RGS threshold and as such the development and submission of that STR must be treated as a priority report. FINTRAC expects that you are not giving unreasonable priority to other transaction monitoring tasks and may question delayed reports. The greater the delay, the greater the need for a suitable explanation. STRs can be complex yet you must treat them as a priority and ensure they are timely; you must also complete the measures that enabled you to conclude that you have RGS the commission of an ML/TF offence before you submit the report to FINTRAC.
As such, REs will be examined from a more stringent perspective in respect of their timeliness of filing STRs, although FINTRAC has indicated that it believes most REs currently comply with this standard in any event. If there are delays in filing STRs, these should be appropriately documented and explained.
The guidance requires REs to provide much more detailed information in filing STR reports than was previously the case. In that respect, it is noteworthy that these new “standards” are not clearly spelt out in the FINTRAC Assessment Manual.
Although these requirements come into place June 1, 2020, REs have a bit of breathing room in light of the COVID pandemic. In that regard, FINTRAC has indicated that it is not scheduling any examinations of REs at this point in time. Moreover, based on public comments made by FINTRAC, they will be “reasonable and flexible” in their approach, thereby providing REs with a bit of an informal grace period.
FOREIGN MONEY SERVICES BUSINESSES
In addition to the change in timing and procedures for reporting STRs, as of June 1, 2020, the Regulations introduce a new category of money services businesses (MSB): foreign MSBs. Foreign MSBs are required to be registered with FINTRAC. Moreover, under the PCMLTFA financial institutions are prohibited from opening or maintaining an account for a foreign MSB, unless they are registered with FINTRAC.
FINTRAC, on its website, notes that a foreign MSB is a person or entity that is engaged in the business of providing at least one money services business service and that:
Does not have a place of business in Canada
Directs its services at persons or entities in Canada
Provides these services to clients in Canada
However, it is noteworthy that what activity makes a person or an entity an MSB—whether foreign or domestic—has not changed. In this respect, the definition of an MSB and the exceptions from those definitions under applicable legislation are different around the world. As such, entities that are MSBs in Canada may not be MSBs in other parts of the world, and persons that are MSBs in other global jurisdictions may not be MSBs in Canada.
As such, it is important to for REs to consider the Canadian regime when determining if clients are foreign MSBs, and therefore required to be registered with FINTRAC.
CHANGES IN THE NEWEST SET OF AMENDING REGULATIONS
On February 19, 2020, the Department of Finance (Finance) released proposed further amendments to the Regulations. For more information, please see our February 2020 Blakes Bulletin: Yet More Amendments to the PCMLTFA Regulations. On May 18, 2020, Finance released the final version of these amendments with some small refinements. Some noteworthy changes from the original draft of the Regulations are as follows:
- Under the previous draft of the Regulations, although it was clear that credit and prepaid cards had specific requirements in respect of who was required to be identified upon the opening of an account, there was a “catch all” provision in section 86(a)(ii) of the Regulations that required a financial entity to verify the identity of “every person, other than an account holder, who was authorized to provide instructions on an account.” In the context of credit cards, this provision required all authorized users of credit cards to be identified in accordance with the Regulations, which was a new and material requirement from a compliance perspective. Thankfully, the amendments have clarified that the requirement to verify the identity of all persons authorized to give instructions on an account does not apply to credit card or prepaid card accounts, which have their own specific requirements.
- In respect of identity verification for credit card accounts, the Regulations have been revised to provide that identity verification is required before the credit card is activated. The previous version required verification before the card was “issued.”
- In respect of securities dealers, the original draft of the Regulations required a securities dealer to obtain the name, address, occupation and date of birth for every person authorized to give instructions on an account. The Regulations now clarify that for business accounts, that information is only required for up to three people.
GUIDANCE RELATED TO COVID-19
As a final note, FINTRAC has released numerous pieces of guidance in respect of COVID-19-related matters. For more information, please see our March 2020 Blakes Bulletin: FINTRAC Issues COVID-19 Guidance to Reporting Entities. In guidance released on April 23, 2020, FINTRAC reiterated that it is providing REs with flexibility in respect of methods for verifying the identity of an individual, or confirming the existence of a corporation.
In respect of identity verification, FINTRAC notes that, until further notice, REs can consider an identity document or information as valid and current pursuant to its issuing authority where the document expired after March 1, 2020. In addition, FINTRAC has relaxed the requirement to authenticate a government-issued photo identification document through the use of a technology, as is required by the current guidance. FINTRAC notes that where an individual is not physically present, REs can apply “human judgement” to determine whether a document that they are viewing appears to be authentic.
FINTRAC notes in its guidance that this accommodation is temporary and that it expects REs to keep records of where they have implemented these measures with a plan to properly re-identify individuals once the physical distancing bans have been lifted. For any REs that are implementing these temporary accommodations, at a later point in time, FINTRAC will likely review an REs remediation efforts as part of its examination process. Where there is an impact on an RE’s ability to meet a given obligation, FINTRAC indicates that the RE should keep a record indicating why such is the case—for example, a memo outlining reduced staffing levels—and, where possible, include any measures taken to mitigate the risk of non-compliance.
As such, REs are advised to make sure they have appropriate follow-up plans in place and should ensure that their customer-facing documentation provides them with the right to terminate customer relationships, where requested information is not provided in an appropriate timeframe—post-pandemic.
FINTRAC also notes that it is currently deferring examinations of REs. In respect of examinations in general, FINTRAC notes that it will consider the impact of COVID-19 when assessing an RE’s compliance with the PCMLTFA with a flexible and reasonable approach.
Due to COVID-19, FINTRAC has been unable to update its reporting forms in respect of foreign MSBs and MSBs dealing in virtual currency. Specifically, the forms do not allow for the entry of foreign RE location information (Part A) in an STR—applicable to foreign MSBs only—or the entry of virtual currency (VC) transaction and disposition information in STRs and Large Cash Transaction Reports. FINTRAC, in its guidance provides information on how these reports are to be completed in this interim period.