Winter is coming but anti-money laundering and counter-terrorist financing (AMLCTF) efforts remain a hot topic in Ottawa. On November 8, the Standing Committee on Finance (Committee) released Confronting Money Laundering and Terrorist Financing: Moving Canada Forward (the Report). The Report mirrors the outline of the topics in the Department of Finance paper that we discussed in our February 2018 Bulletin and comes on the heels of the proposed changes to the AMLCFT regime that we discussed in our June 2018 Bulletin.
The Report reviews the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and makes recommendations for strengthening the AMLCTF regime in Canada. Among the many recommendations, the following may be of particular interest to the securities industry:
- Create a pan-Canadian beneficial ownership registry for all legal persons and entities having at least 25% of total share ownership or voting rights, including foreign companies that own property in Canada. Some witnesses who spoke to the Committee recommended that the registry be publicly accessible, while others advocated for it to be accessible only to certain law enforcement agencies. The Committee’s decision to recommend the latter approach is controversial, and the New Democratic Party issued a dissenting opinion in favour of a public registry. If the Government decides to establish such a registry, it will be interesting to see whether it sticks with the Committee’s recommendation or succumbs to pressure to make at least some aspects of the registry accessible either to the public or at least to reporting entities who have obligations to verify and keep beneficial ownership information up-to-date.
- Make it a criminal offence to structure transactions to avoid AMLCTF reporting obligations.
- Amend Canadian privacy laws so that securities regulators can fully examine the professional conduct records of securities dealers and their employees. This recommendation appears to be intended to address the concern expressed by some witnesses that when employees of securities firms are suspected of wrongdoing, they can resign their position before the conclusion of any internal investigation, and then move to another firm that is unable to be informed about the allegations or unfinished allegations because of restrictions in Canadian privacy laws.
- Technology-focused roundtable: Establish a roundtable partnership with industry leaders who are investing significantly in technology that more efficiently tracks suspicious activities and transactions, to enhance industry practices.
- Set a deadline for conversion of existing bearer shares (new issuance of which has been banned under a recent amendment to the applicable legislation) into registered instruments.
- Make it easier to comply with the PEP regime: Review and clarify the definition of Politically Exposed Person (PEP) and move to a risk-based compliance model for PEPs that “softens” requirements for PEPs with transparent, non-suspicious portfolios.
- Cryptocurrency: Extend the regulatory framework to deal with crypto-exchanges (e.g., by establishing a license requirement that incorporates an AML program) and crypto-wallets (e.g., to ensure that proper identification is required and true ownership of the wallets is known to the exchanges and law enforcement bodies if needed).
- Consider prohibiting nominee shareholders, provided that if nominee shareholders are permitted, they should be required to disclose their status upon the registration of the company, be registered as nominees, and be subject to licensing and strict AML obligations.
In the Report, the Committee referred to the Investment Industry Association of Canada’s submission about ways that the Government could reduce the compliance burden for the securities industry. However, only the fourth and sixth recommendations described above seem to address this concern in any way. We will have to wait and see how the Government reacts to the Report to determine whether future reforms to the regime will, for example, reduce overlap in the rules, make it easier and more efficient for firms to report under the PCMLTA, or expand the scope of exemptions from the record-keeping and verification requirements for entities subject to comparable foreign regimes.
Given that organizations like the Financial Action Task Force (FATF) and the Committee have identified certain weaknesses and gaps in Canada’s AMLCTF regime (especially with respect to the availability of beneficial ownership information to law enforcement authorities), it’s likely that some of these recommended reforms to the regime will be introduced. But it is too early to say when the Government will act, how quickly it will move, and/or which recommendations it will adopt. AUM Law will monitor the Government’s response and report on any concrete developments in this area that are relevant to registrants.