The federal government published the final version of the amendments (the “Final Amendments”) to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “Act”) in the Canada Gazette, June 29, 2016, Vol.150, No.13, Part II. A draft version of the proposed amendments to these regulations (“Proposed Amendments”) was previously issued for comment on July 4, 2015 (please see our prior legal update “Proposed Amendments to the Regulations to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act Issued” for further detail). For the most part, the Final Amendments remain substantively the same as the Proposed Amendments, subject to certain points set out below. This legal update highlights the changes between the Proposed Amendments and the Final Amendments.
Each of the following regulations has now been amended pursuant to the Final Amendments: the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations (the “STR Regulations”), the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the “PCMLTF Regulations”), the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations (the “AMP Regulations”) and the Proceeds of Crime (Money Laundering) and Terrorist Financing Registration Regulations (collectively, the “Regulations”).
Concurrently with the Final Amendments being passed, the Financial Transactions and Analysis Centre of Canada (“FINTRAC”) has issued the new Guideline: Methods to ascertain the identity of individual clients (“FINTRAC Guideline”). We have described this additional guidance in respect of the new identification requirements for individuals, in a separate legal update “FINTRAC Releases New Guideline on Identification Requirements for Individuals”.
Amendments to STR Regulations
The Proposed Amendments modified the suspicious transaction reporting requirement in the STR Regulations to include transactions or attempted transactions that “could reasonably be expected to raise 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. This language has been reverted back in the Final Amendments to the current requirement to report transactions that “constitute” reasonable grounds to suspect the transaction was related to a money-laundering offence or terrorist activity financing offence. Accordingly, the Final Amendments maintain the current threshold for what is required to be reported as a suspicious transaction or attempted transaction under the Regulations. This change was made as a result of stakeholder comments expressing concern that the wording in the Proposed Amendments would have lowered the reporting threshold and resulted in “over reporting” of suspicious transactions.
Amendments to PCMLTF Regulations
The Final Amendments implement a number of changes to the identification requirements consistent with the Proposed Amendments. These changes allow regulated entities greater flexibility in how they verify identity. Additional guidance and detail in respect of the new identification requirements are set out in the new FINTRAC Guideline which we describe in our separate legal update “FINTRAC Releases New Guideline on Identification Requirements for Individuals”.
The Final Amendments also introduce a new exception to the identification requirements where a bank complies with the requirements set out in the Access to Basic Banking Services Regulations under the Bank Act in respect of a retail deposit account. This change was in response to the concern that the requirement in the Proposed Amendments for a photo identification document would contradict the Access to Basic Banking Regulations, which require banks to open a bank account for persons with a birth certificate and social insurance number card.
Politically Exposed Persons
The Act was amended by the 2014 federal budget to expand the concept of politically exposed persons (“PEPs”) to include domestic PEPs and heads of international organizations, in addition to foreign PEPs and the Final Amendments update the regulations accordingly. The Final Amendments set out the final new requirements for financial entities and securities dealers to take reasonable measures to determine whether an account is being opened by a domestic PEP, the head of an international organization or a family member of one of those persons or a person who is closely associated with a PEP (“PEP Related Person”) and also modify certain requirements relating to foreign PEPs to bring these in line with the new requirements for financial entities and securities dealers to take reasonable measures to determine whether an account is being opened by domestic PEPs and heads of international organizations. Financial entities and securities dealers are now required to take reasonable measures on a periodic basis to determine if an existing account holder is a PEP Related Person, and when they detect a fact that could reasonably be expected to raise reasonable grounds to suspect that an existing account holder is a PEP Related Person, financial entities and securities dealers must take reasonable measures to determine whether the account holder is in fact a PEP Related Person. The final requirements are generally consistent with those set forth in the Proposed Amendments.
However, the Final Amendments significantly decreased the prescribed period that applies to determining whether a person who previously held a position remains a domestic PEP from 20 years in the Proposed Amendments to 5 years in the Final Amendments. This change was made in response to comments received from stakeholders during the consultation period, that the 20-year timeframe for domestic PEPs to retain their status is too long and burdensome. Consistent with the Proposed Amendments, the Final Amendments extend the time period for making the PEP determination and related review and approvals to 30 days from the current 14 days.
In addition, the Regulatory Impact Analysis Statement released with the Final Regulations clarifies that, further to comments received from stakeholders during the consultation process, FINTRAC will be providing additional guidance to clarify the terms “close associate” of a PEP, “periodic basis” and “reasonable measures” used in connection with screening PEPs.
Consistent with the Proposed Amendments, the Final Amendments introduce some minor changes to record-keeping requirements, including a formal requirement that a reporting entity must keep a record of any “reasonable measures” it has taken in cases where it was unable to ascertain, establish or determine specified information.
Stakeholders in the consultation process expressed concern with the term “reasonable measures” and the potential additional burden relating to the expanded record-keeping requirements. This wording was retained, however, as the Department of Finance views this wording as necessary to strengthen compliance requirements in Canada. A 12-month grace period has been introduced in respect of compliance with this expanded requirement, in order to provide an opportunity for stakeholders to integrate the changes into regular system updates and training programs.
Consistent with the Proposed Amendments, the Final Amendments expand the definition of “signature” to include any type of signature in electronic form that is created or adopted by a client and accepted by a reporting entity as being unique to that client. They also expand the definition of “signature card” to include electronic data that constitutes the signature of a person authorized to give instructions in respect of an account. This new flexibility regarding acceptable electronic signatures represents a significant change from the more prescriptive current FINTRAC guidance which appears to permit only handwritten signatures by specifying that an electronic signature means an electronic image of the signature and does not include a personal identification number (PIN).
Consistent with the Proposed Amendments, the Final Amendments require reporting entities to assess and document the risks posed by the impacts of new developments and technologies on the existing risk assessment criteria (business relationships, products, delivery channels or geographic locations), in accordance with FATF Recommendation 15. They also require financial entities and securities dealers, when performing a risk assessment, to consider any risk resulting from the activities of an affiliated Canadian financial entity, securities dealer or affiliated foreign entity that carries out similar activities.
Amendments to AMP Regulations
FINTRAC has had the power to impose administrative penalties (AMPs) since 2008 where an entity fails to comply with the Act or the regulations. The Final Amendments include amendments to the AMP Regulations adding certain provisions to the list of provisions that can trigger an administrative penalty, including some classified as “serious” (for which the administrative penalty will range from $1 to $100,000) or “very serious” (for which the administrative penalty will range from $1 to $500,000). The changes to the AMP Regulations are primarily intended to capture new requirements in the Act or the Regulations.
In particular, the following violations are now listed as “very serious” violations in the AMP Regulations: failure to comply with a ministerial directive (s. 11.43 of the Act) and failure to ensure that a foreign branch or foreign subsidiary complies with a ministerial directive (s. 11.44(1) of the Act). New “serious” violations include: having a correspondent banking relationship with a shell bank (s. 9.4(2) of the Act), failure to be registered with FINTRAC (s. 11.1 of the Act) and failure to treat activities in respect of a person as high risk and to take the prescribed special measures (s. 54.4, 56.4, 57.3, 59.02, 59.12, 59.22, 59.32, 59.52, 60.2 and 61.2 of the Act).
Given the recent $1.1 million fine issued by FINTRAC against a bank for violations of the Act and regulations, including for the failure to file a suspicious transaction report within the 30 day required timeline, reporting entities should carefully review the new violations added to the list of violations potentially triggering AMPs. FINTRAC will still retain discretion to determine whether to name a reporting entity against which an AMP is issued.
Effective Date of Amendments
We understand that measures providing more flexibility for reporting entities to fulfill their existing obligations, such as the updated identification methods and requirements for maintaining a record of a signature and measures that are internal to government came into force June 17, 2016.
Measures that will require reporting entities to fulfill new requirements, such as those with respect to domestic PEP’s and heads of international organizations, are expected to come into force on June 17, 2017.
We anticipate that there may be further amendments to the “in force” date of the Final Amendments.
Additional Changes Anticipated
Additional changes to the Regulations are expected in the near future including those relating to persons dealing in virtual currencies. In addition, as noted in this legal update, additional guidance from FINTRAC will be provided to clarify some points raised by stakeholders during the consultation process leading to the issuance of the Final Regulations.