The Department of Finance Canada released a consultation paper (the “Paper”) on reviewing Canada’s anti-money laundering (“AML”) and anti-terrorist financing (“ATF”) regime on February 7, 2018. Comments on the Paper are due April 30, 2018. This Paper comes following the recent 2016 Financial Action Task Force (FATF) mutual evaluation report for Canada which generally stated that Canada had a strong AML/ ATF regime but identified certain gaps in the regime.
The Paper contemplates the potential extension of obligations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCMLTFA”) and its regulations (the “Regulations”) to several new sectors and activities within financial services. The Paper also considers how to better achieve information sharing, and puts forward for consultation certain administrative and technical measures intended to modernize and improve the AML/ATF regime.
Addressing Legislative and Regulatory Gaps: Expanding the Scope of PCMLTFA Obligations
New Entities Proposed to be Subject to the PCMLTFA
The Paper contemplates expanding the scope of PCMLTFA obligations to a number of additional entities:
- White Label Automated Teller Machines (“WLATMs”): The Paper contemplates including this sector in Canada’s AML/ATF regime as WLATMs can generally be owned and operated by any person or entity, thereby posing money laundering and terrorist financing risk.
- Pari-Mutuel Betting and Horse Racing: The Paper notes this sector presents similar money laundering vulnerabilities as casinos that are regulated under the PCMLTFA and therefore contemplates subjecting this sector to the regime.
- Real Estate Sector and Non-Federally Regulated Mortgage Lenders: The Paper recommends expanding the scope of the PCMLTFA to mortgage insurers, land registries and title insurance companies, especially to the extent such entities are engaged in high-risk activities including assisting or performing the purchase or sale of properties and facilitating access to financial institutions, mortgages and loans. The Paper also emphasizes the money laundering risk inherent in mortgages and complex loan schemes and acknowledges the fragmented nature of obligations currently applicable to non-federally regulated mortgage lenders. To address these risks, the Paper contemplates a consolidation of obligations by the PCMLTFA to mortgage lenders including mortgage finance firms, real estate investment trusts, mutual fund trusts, mortgage investment corporations, syndicated mortgages and individuals acting as private lenders.
- Non Transactional Activities of Designated Non-Financial Businesses and Professions (“DNFBPs”): The Paper classifies as DNFBPs “accountants and accounting firms, real estate brokers, sales representatives, real estate developers, casinos, dealers in precious metals and stones and British Columbia notaries public and notary Corporations”. While the PCMLTFA regulates financial activities of DNFBPs, the Paper notes DNFBPs engage in other high-risk activities, including the management of client assets and the creation, operation and management of legal arrangements.
- Company Service Providers: The Paper recognizes that service providers may be used to facilitate the misuse of corporations for money laundering and terrorist financing. It therefore contemplates that PCMLTFA obligations should extend to service providers engaged for the purposes of business formation and management, acting as a director or shareholder and completing corporate filings for a company. In particular, the Paper emphasizes the high degree of money laundering and terrorist financing risk posed by legal professionals who perform financial transactions on behalf of clients and thereby act as gatekeepers to the financial system. The Paper recommends subjecting lawyers, within constitutional boundaries, to the AML/ATF framework.
- Finance, Lease and Factoring Companies: The Paper identifies that various means of repayment accepted by finance, lease and factoring companies can facilitate the laundering of proceeds. In response, the Paper contemplates imposing PCMLTFA obligations upon entities of all sizes operating in these sectors.
- Armoured Cars: Consistent with the United States, the Paper contemplates subjecting this sector to the PCMLTFA to mitigate the risk associated with the anonymous movement of bulk cash.
- High-Value Goods Dealers: The Paper contemplates including these dealers in the regime as a result of the risk stemming from the ease of storing value and laundering proceeds of crime in luxury goods.
- Jewellery Auction Houses: The Paper contemplates subjecting this sector to the PCMLTFA as it presents similar money laundering risks to dealers in precious metals and stones which are subject to the regime.
The Paper recognizes the importance of ensuring corporate ownership transparency to prevent the use of complex corporate vehicles for money laundering and terrorist financing. Presently, only four reporting entity sectors – financial entities, securities dealers, money service businesses and life insurance companies – are obliged to collect beneficial ownership information on corporations or other complex legal entities. The Paper notes the difficulty of accessing beneficial ownership information in Canada. In response, the Paper seeks input on ways to improve corporate ownership transparency and timely access to beneficial ownership information.The Paper also seeks views on risks associated with legal entities that are not corporations, such as partnerships and trusts.
The Paper references the 2017 federal budget which announced that the Government of Canada is working to establish a national strategy to enhance the transparency of legal arrangements and strengthen the availability of beneficial ownership information. In December 2017, Canada’s Finance Ministers agreed to pursue legislative amendments to corporate statutes at federal, provincial and territorial levels. The amendments are intended to come into force by July 2019 and are designed to ensure corporations maintain appropriate beneficial ownership information available to relevant authorities and to eliminate usage of bearer shares and bearer share warrants and options.
Structuring of Transactions
The Paper identifies as a potential deficiency the current lack of a prohibition against arranging business models and transactions to avoid triggering reporting requirements under the PCMLTFA. Therefore, the Paper proposes implementing an explicit prohibition on structuring of transactions to avoid reporting requirements and the creation of a criminal offence for breach of such prohibition.
Politically Exposed Persons (“PEPs”) and Head of International Organizations (“HIOs”)
As a result of holding influential positions, PEPs and HIOs are especially vulnerable to corruption and money laundering risk. Only four reporting entity sectors – financial entities, securities dealers, money service businesses and life insurance companies – are presently subject to obligations to identify PEPs and HIOs in certain situations. The Paper proposes extending the requirement to make PEP and HIO determinations to a broader set of regulated sectors.
The Paper also recommends adding more precision to the list of individuals and entities covered by the definition of PEP, including for example First Nation Chiefs, and broadening the definition of HIO to include the heads of certain international organizations not established by governments but that may hold considerable influence, such as the International Olympic Committee (IOC) and the Fédération Internationale de Football Association (FIFA).
Enhancing Information Sharing
The Paper emphasizes that information sharing, both within the private sector and between the public and private sectors, is critical to detect and deter money laundering and terrorist financing. The Paper makes several recommendations to improve information sharing, including:
- Broadening Disclosure of Financial Intelligence Information
The Paper notes that currently the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) is authorized to disclose certain information to Canadian law enforcement agencies, the Canada Border Services Agency, the Canada Revenue Agency and the Canadian Security Intelligence Service. The Paper proposes to expand FINTRAC’s authority to disclose “financial intelligence” to additional recipients, namely, the Competition Bureau (to assist combating “mass marketing fraud”) and Revenu Québec (to aid Revenu Québec in combatting tax fraud).
- Information Sharing with the Private Sector
The Paper notes that the federal Personal Information Protection and Electronic Documents Act (PIPEDA) protects personal information collected, used and disclosed by private sector organizations in the course of their commercial activities. The main mechanisms used to empower individuals to control their own information are knowledge and consent. In certain circumstances, however, PIPEDA allows for the disclosure of certain personal information without either knowledge or consent (for instance, in cases of suspected fraud). However, the language of PIPEDA that permits such disclosures is vague, and many organizations decline to rely on this PIPEDA exemption because they fear civil or regulatory liability. The Paper calls for “circumstances and protocols surrounding the effective and appropriate exchange of information” not only between private sector organizations and government institutions but also between private sector organizations.
PIPEDA is the federal private-sector privacy legislation. However, three Canadian provinces also have private-sector privacy legislation (British Columbia, Alberta and Québec) which applies, generally speaking, to provincially-regulated businesses and businesses operating wholly within provincial borders. The proposed expansion of the application of the PCMLTFA to new entities may capture organizations subject to provincial privacy legislation, an area not specifically addressed by the Paper.
- Enhancing Information Sharing on Methods and Trends of Money Laundering and Terrorist Financing
To support partners in AML/ATF related investigation and prosecution, the Paper advocates for more effective information sharing both within government and with the private sector on methods, trends and transactions related to money laundering and terrorist financing. To achieve this, the Paper encourages collaboration between reporting entities, FINTRAC, national security agencies and law enforcement.
- Privacy Review of the PCMLTFA
The Privacy Commissioner is granted the authority to review the personal information handling practices of federal departments and agencies; under the Privacy Act, FINTRAC is to be reviewed every two years. The Paper proposes that such reviews be conducted every four years instead.
Strengthening Intelligence Capacity and Enforcement
To improve financial intelligence in a rapidly evolving environment, the Paper makes the following recommendations that are grounded in international policy trends.
- Electronic Funds Transfers (“EFTs”)
The Paper notes that EFTs passing through Canadian financial institutions where Canada is not the originating nor recipient source are not currently subject to reporting requirements under the PCMLTFA. The Paper contemplates subjecting non-client initiated EFTs and other types of transfers that relate to new and evolving payment methods (such as letters of credit, precious metals and securities) to reporting requirements under the regime.
- Bulk Cash
The Paper recognizes the connection between possessing bulk cash and involvement in criminal activity. The Paper queries: (i) whether a limit should exist on the amount of bulk cash permitted to be carried by a person in Canada in the absence of a legitimate reason; and (ii) whether Canada should establish a registry for businesses dealing in high volumes of cash and whether a limit should be imposed on the amount of cash Canadian businesses could accept and/or report on.
- Geographic Targeting Orders
The Paper suggests that geographic targeting orders, imposing specific obligations in respect of certain transactions in higher-risk geographic areas, may improve financial intelligence on money laundering and terrorist financing activities. The imposition of such orders, as currently used in the United States, would target popular destinations for transactions in high-value goods, real estate and bulk cash.
- Border Enforcement – Definition of “Monetary Instrument”
The Paper notes that the PCMLTFA currently requires reporting by persons and entities importing or exporting currency or “monetary instruments” of $10,000 or more. The Paper suggests that the existing definition of “monetary instrument”, which includes stocks, bonds, bank drafts, treasury bills, promissory notes, endorsed and travellers’ cheques and money orders, may be too narrow. The Paper contemplates expanding the definition to include, among others, prepaid payment products.
Modernizing the Framework and its Supervision
The Paper raises the following considerations in pursuit of modernizing and effectively managing the AML/ATF regime.
- Addressing De-Risking of Money Services Businesses (“MSBs”)
The Paper recognizes that, consistent with a global trend, certain MSBs in Canada have been facing challenges in obtaining and/or maintaining access to banking services as a result of “de-risking” (which the Paper defines as “the practice of financial institutions (or other businesses) exiting relationships with and closing the accounts of clients, either individuals or institutions, because the financial institution perceives the client to be high-risk.”).
The Paper emphasizes that “reporting entities are expected to manage (but not necessarily eliminate) their exposure by taking a risk-based approach with respect to their clients.” and that such “assessment is expected to take place on a case-by-case basis and not impact an entire industry.” De-risking of the MSB industry as a whole can have significant impacts as it affects the ability of the industry to operate and can result in MSBs using alternate banking channels which are less accessible to regulators. These comments echo similar comments made in the Competition Bureau’s Fintech report.
- Strengthening Registration of MSBs
The Paper notes that registration procedures for MSBs could be improved to strengthen the integrity of the MSB registry and MSBs operating in Canada, including for example by expanding the list of offences that would make an applicant ineligible for registration, and by providing for the option to suspend the registration of a MSB on a discretionary basis when the owners/operators of the MSB are subject to criminal court proceedings.
- Enhancing and Strengthening Identification Methods
The Paper notes that recent amendments to the Regulations have provided further flexibility in methods that can be used to ascertain identity. However, given the increasing availability of reliable and effective digital identification methods, such as those leveraging blockchain and biometrics (including facial recognition), the Paper recommends that Regulations continue to remain flexible and progress towards a principles-based approach that facilitates risk-based approaches to verifying identity while leveraging technology solutions (including “digital ID” solutions) to the extent possible.
- Regulatory Sandboxes (Exemptive Relief and Administrative Forbearance)
The Paper notes the establishment of regulatory sandboxes, both in various foreign jurisdictions and in Canada in the securities context by the Canadian Securities Administrators, and notes the potential for such approach to foster innovation in Canadian financial services. Granting flexibility to such entities to conduct regulatory pilots (by way of exemptive relief and/ or administrative forbearance), while protecting the integrity of the AML/ATF regime, could facilitate greater innovation, including the greater use of RegTech solutions. The Paper however notes that careful attention should be paid to considerations surrounding the approval of any such regulatory pilots.
The Paper seeks views on whether the whistleblowing framework in the PCMLTFA should be strengthened, in particular with respect to issues related to MSBs, ID methods, and oversight.
Administrative and Technical Considerations
The Paper puts forward the following administrative and technical considerations to improve the operation of the AML/ATF regime.
- Public Naming of Administrative Monetary Penalty (“AMP”) Recipients
The Paper recognizes that public naming of an AMP recipient can serve as a highly effective deterrent in furtherance of AML/ATF. Nevertheless, the Paper emphasizes that prior to FINTRAC making public AMP-related information, regard should be had to circumstances in which it would be inappropriate to name an AMP recipient, for example, where it may jeopardize the stability of Canada’s financial system.
The Paper also highlights a limitation of public naming as a means of deterrence as FINTRAC is not permitted to disclose AMP-related information until all proceedings with respect to a violation, including appeals, have concluded. This allows considerable time to elapse between the occurrence of the violation and public disclosure of the violation, and may incentivize prolonged litigation.
- Confidentiality in Court Proceedings
The Paper reinforces that the purpose behind granting confidentiality orders in AMP appeal procedures is to avoid disclosure of sensitive financial intelligence. These orders should not be granted simply to protect any information in respect of a reporting entity.
- Calculation of AMPs
In response to criticism (in particular the decision of the Federal Court of Appeal in Kabul Farms Inc. v Canada) that the formula to calculate AMP is vague and lacks transparency, the Paper recommends incorporating a formula into the Regulations specifying how AMPs should be calculated. Any such formula should allow for consideration of the specific harm caused by the violation in each case.
- Clarifying the “Travel Rule” on Electronic Funds Transfer (“EFT”)
The Paper suggests the “travel rule”, which provides that every reporting entity include with the EFT certain prescribed information and that they take reasonable measures to ensure that any transfer that it receives includes such information, be clarified. Currently, certain financial intermediaries are not passing along the originating client’s information and instead treating the originating financial institution or another financial institution as the client who requested the EFT.
- Evaluating Correspondent Relationships
The Paper identifies as a potential deficiency that, upon establishing a correspondent banking relationship, the PCMLTFA presently only requires that financial institutions conduct an initial evaluation of such relationship. The Paper suggests that this requirement be made consistent with international standards that require: (i) financial institutions to evaluate such relationships on a continuous basis; and (ii) upon entering such a relationship, correspondent entities are required to identify and take reasonable measures to verify the identity of beneficial owners of a respondent institution.
- Establishing a Uniform Reporting Schedule
To reduce regulatory burden and complexity, the Paper recommends the creation of a uniform reporting schedule to encompass all information required to be reported upon by reporting entities.
- Eliminating the Alternative to Large Cash Transaction Reports
As a result of low adoption, the Paper recommends the elimination of the Alternate Large Cash Transaction Record.
The Paper contains a wide-ranging set of potential measures that, should they be implemented, could result in a significantly expanded AML/ ATF regime in Canada. In addition to the longer-ranging potential changes set out in the Paper, in the nearer term, amendments to the Regulations are anticipated to be released setting out, among other things, additional obligations relating to foreign MSBs operating in Canada, prepaid cards and virtual currencies.