On June 17, 2016, the Department of Finance released amendments to the regulations of the Proceeds of Crime (Money Laundering) and Terrorist FinancingAct (the “New Amendments”). These were published in the Canada Gazette on June 29th, 2016.
The New Amendments follow proposed draft amendments to the PCMLTFA regulations, which were published in the Canada Gazette a year ago, on July 4, 2015 (the “Proposed Amendments”).
A new guideline was also published on June 17 by FINTRAC on its website (the “Guideline”). It contains the amendments relating to individual client verification methods.
Highlights of the New Amendments:
- New client verification methods to identify clients who are not physically present, providing some flexibility to the rigid and outdated verification process.
- After the expiry of the transition period on June 30, 2017, all individual client verification processes must comply with the new Guideline.
- Greater flexibility when relying on agents to verify client identity.
- The definition of signature is broadened to include electronic signatures.
- Increased obligations when identifying politically exposed persons.
The New Amendments, particularly those relating to the client identity verification process, will alleviate some of the regulatory burdens imposed on reporting entities. For example, the inclusion of electronic signatures obviates the need for clients to attend in person to sign account opening documents. Unfortunately, the amendments do not go far enough. For example, the failure to introduce simple measures, such as accepting scanned identification documents, could have significantly lessened the time and cost spent on client verification. Nonetheless, the amendments are a step in the right direction.
The significant changes contained in the New Amendments are described below.
- Client Verification Amendments
The New Amendments provide reporting entities with more options in how they carry out identity verification, particularly where the client is not physically present.
Three verification methods are available: (1) Credit File (2) Dual Process (3) Single Process.
- The Credit File Method is the most straightforward process to identify a client who is not physically present.
- The Dual Process Method also allows for verification absent a client’s presence, but it is a convoluted process with some uncertainties.
- The Single Process Method is relatively straightforward, but requires the client be physically present during the verification process.
The Guideline provides for a year-long transitional period between June 30, 2016 and June 17, 2017. During this period, both the old and new client identification methods may be utilized. After June 17, 2017, the reporting entities must use the identification methods set out in the Guideline, and discussed below.
The Credit File Method:
As discussed in the Proposed Amendments, the Credit File Method allows a reporting entity to verify client identity by referring to a Canadian credit file (available through institutions like Equifax Canada or Trans Union Canada).
The Credit File Method requires the following:
- The credit file must be Canadian and must have been in existence for a minimum of 3 years.
- The credit file details must match the name, date of birth and address provided by the client. If any of the information does not match, another client identification verification method must be utilized.
- The credit file search must occur contemporaneously with the client verification process.
Where available, this process serves as a relatively straightforward method of client verification.
The Dual Process Method:
The Dual Process Method was a key feature of the Proposed Amendments. It allows for client verification without the client’s physical presence by confirming the client’s name, address, date of birth, and financial account through two sources taken from the following categories:
- Original documents, including original electronic documents1; and / or
- Information from independent and “reliable” sources.
As the name suggests, the dual process method does not allow for verification from a single source, even if that single source confirms all the requisite information.
The Dual Process Method will provide reporting entities with much needed flexibility in the client verification process. However, it still falls short of embracing technological features that could lessen the cost and time of the verification process, such as viewing documents through online video conferencing. This failure to deploy existing technology exemplifies the excessively cautious approach taken in these New Amendments, and represents a lost opportunity to streamline the client identification process.
Additionally, some of the changes miss the mark entirely. For example, in an attempt to alleviate the strict reliance on original paper documents, clients can now use original electronic documents by showing a reporting entity their phone or tablet containing downloaded documents or emails in their inbox from the original sender. However, if the client is available to show their electronic device in person, the need for the dual process method is obviated.
The requirement that the source be “reliable” creates some uncertainty as well. What exactly constitutes a reliable source? The Guideline is of little assistance in this matter. It defines “reliable” to mean a source that is well known, considered reputable, and is one that the reporting entity trusts. These qualitative criteria are difficult to assess objectively and invariably lead to more questions:
- How do you determine that a source is well known or reputable?
- Does the reporting entity’s trust have to be reasonably placed?
- Will the reporting entity have to demonstrate the basis for its trust?
- If so, how will a reporting entity justify its trust?
Examples provided in the Guideline of “reliable” sources include cards or statements issued by a Canadian government body, including CRA documents, utility bills, RRSP documents or documents issued by financial institutions, including bank statements or cheques.
The Single Process Method:
The single process method allows for in person client identification by reference to valid and current photo identification.
Unfortunately, the Guideline explicitly prohibits reporting entities from viewing photo identification through video conference or through any virtual type of application. Scanned copies of identification are also prohibited.
- Use of Agents
Under the current regulations, reporting entitis may use an agent to verify client identity where a written agreement with that agent is in place. The New Amendments have maintained this requirement, but have introduced additional provisions allowing for greater flexibility.
The Guideline allows a reporting entity to rely on valid client identification information obtained by the agent. If the client information obtained by the agent has since expired, the reporting entity can still rely on the agent’s prior verification of the client’s identity if a written agreement existed between the agent and reporting entity before the information expired.
Reporting entities should ensure that written agreements are in place with all agents utilized for client verification. Based on these new changes, reporting entities may consider memorializing existing oral agreements with agents in the form of a written agreement.
- Electronic Signatures
The PCMLTFA regulations require that reporting entities receive and maintain signature cards when an account is opened. Consequently, under the old rules clients were obligated to attend in person to sign account opening documents.
Fortunately, the New Amendments have broadened the definition to include electronic signature, obviating the need for clients to appear in person. “Signature” and “signature card” are now defined to include electronic signature or other information in electronic form that is unique to that client and adopted by the reporting entity.
- Expansion of Politically Exposed Persons
The PCMLTFA regulations require reporting entities to make a determination of whether it is dealing with a “Politically Exposed Foreign Person” (“PEPs”). PEPs are defined to include individuals who hold certain senior ranking positions in or on behalf of a foreign country and include close family members of that individual. The New Amendments have expanded the scope of the obligations relating to PEPs.
Reporting entities are now required to determine not only whether they are dealing with a PEP, but also whether the individual falls within any of the following categories:
- A domestic PEP;
- The head of an international organization; and/or
- Closely associated with a PEP.
Additionally, reporting entities are now required to perform periodic checks of existing clients to see if they are domestic or foreign PEPs, or are closely affiliated with PEPs.
We anticipate that FINTRAC’s new guideline on PEPs, once published, will assist in clarifying some of these changes. For example, currently there is no indication in the New Amendments as to when an individual will be “closely associated” with a PEP.
Unfortunately, the expanded scope of obligations with respect to PEPs will require reporting entities to revise their established procedures and will undoubtedly add to due diligence costs.