On July 10, 2019, Canada’s Department of Finance published comprehensive amendments to the ‎regulations (the “New Regulations”) made ‎‎under the Proceeds of Crime (Money Laundering) and Terrorist ‎Financing Act (the “Act”). The purpose of the New Regulations is to close loopholes found in the existing regime and to adapt to the commercial realities in ‎an era of e-commerce, FINTECH and digital technology. In June 2020, the New Regulations concerning Cross-Border Currency and Monetary Instruments Reporting Regulations and “virtual ‎currency dealers” are scheduled to take ‎effect; all other regulatory amendments of the New Regulations come into effect ‎in June 2021. This article will focus specifically on the new reporting entities‎ (“REs”) captured under the Act, specifically ‎foreign money service businesses, the life insurance sector and dealers in virtual currency.‎

Foreign money services businesses ‎

Currently under the Act, the definition “Money Services Businesses” (“MSBs”) does not distinguish ‎between domestic and foreign money services businesses. ‎

The New Regulations create two separate definitions: one for domestic MSBs and one for foreign MSBs. ‎In fact, the Act was amended in 2014 to add the definition of foreign MSBs, but that amendment will not ‎come into effect until the New Regulations relating to foreign MSBs do, namely in June 2021. The New ‎Regulations amend the definition of MSBs to only include domestic MSBs by inserting the language ‎‎“entities that have a place of business in Canada.” ‎

The definition of MSB under the current regulations is:‎

persons and entities engaged in the business of foreign exchange dealing, of remitting funds or ‎transmitting funds by any means or through any person, entity or electronic funds transfer ‎network, or of issuing or redeeming money orders, traveller’s cheques or other similar negotiable ‎instruments except for cheques payable to a named person or entity.

The definition of a domestic MSB under the New Regulations will be: ‎

‎persons and entities that have a place of business in Canada and that are ‎engaged in the ‎business of providing at least one of the following services:‎

‎(i) foreign exchange dealing;

‎(ii) remitting funds or transmitting funds by any means or through any ‎person, entity or ‎electronic funds transfer network;

‎(iii) issuing or redeeming money orders, traveller’s cheques or other ‎similar negotiable ‎instruments except for cheques payable to a ‎named person or entity;

‎(iv) dealing in virtual currencies, or

‎(v) any prescribed service.

The definition of a foreign MSB under the New Regulations will be: ‎‎

persons and entities that do not have a place of business in Canada, that ‎are engaged in the ‎business of providing at least one of the following ‎services that is directed at persons or entities ‎in Canada, and that provide ‎those services to their clients in Canada:

‎(i) foreign exchange dealing;

‎(ii) remitting funds or transmitting funds by any means or through any ‎person, entity or ‎electronic funds transfer network;‎

‎(iii) issuing or redeeming money orders, traveller’s cheques or other ‎similar negotiable ‎instruments except for cheques payable to a ‎named person or entity,;

‎(iv) dealing in virtual currencies, or

‎(v) any prescribed service.

Under the current definition, it has been the position of some non-resident entities that, while they may ‎have been engaged in the activities enumerated in the subparagraphs (i)-(iii), they were not in the ‎business of doing so in Canada, and were therefore not caught by the definition. Given that cases under ‎these provisions of the Act rarely make their way to the court, and due to existing persuasive legal ‎precedent, Parliament therefore decided to add the definition of foreign MSB to close the gap on non-‎residents who transact money services business with Canadians from outside of Canada. ‎

Under the New Regulations, foreign money services businesses will have the same obligations as ‎domestic businesses when they provide at least one of the listed services which are directed at and ‎provided to clients located in Canada. According to FINTRAC, the new definitions are designed to level ‎the playing field between domestic and foreign MSBs, the latter now being required to fulfill the same ‎obligations as the former ‎for ‎the same activities (e.g. register with FINTRAC, exercise customer due ‎diligence, report ‎transactions, and keep records).‎

In addition, Canadian financial entities are prohibited from opening or ‎maintaining an account for, or ‎having a ‎correspondent banking relationship with, ‎an unregistered foreign MSB (s. 9.3(1) of the ‎Act). ‎Furthermore, the New Regulations provide that a foreign MSB’s registration is revoked if, ‎after ‎having been ‎issued an administrative monetary penalty for non-‎compliance, it fails to pay the penalty ‎‎associated with it, thus making it ineligible to ‎do business with Canadians.‎

Potential issues arising from the new definitions for MSB: the meaning of “direct”

In order to fall under the definition of a foreign MSB, an MSB must “direct” its services to persons in ‎Canada. It is an open question as to how the term “direct” will be interpreted by FINTRAC. For example, ‎the meaning of “direct” could involve advertising on social media platforms or on broadcast television. ‎FINTRAC is expected to provide further information on activities and platforms that in its view will be ‎captured by the term “direct.” One wonders why Parliament did not opt for the more obvious terms ‎‎“advertise,” “solicit” or “promote” to identify the targeted conduct, which arguably would have had more ‎certainty in terms of activities caught by the New Regulations. At a minimum, the requirement that foreign ‎MSBs must be “directing” their services to Canadians will set the bar higher than simply having a Canadian ‎bank account, which FINTRAC has previously asserted is sufficient to give it jurisdiction over such non-‎resident foreign MSBs. ‎

The life insurance sector

Prior to the New Regulations, the life insurance sector was not subject to the same obligations as other ‎REs under the Act, even when it engaged in similar activities. The New ‎Regulations specify that where the life insurance sector is engaged in mortgages, loans, and other ‎activities similar to those undertaken by REs, they are now subject to the same obligations under the ‎Act. Accordingly, life insurance companies captured by the New Regulation will need to implement new ‎processes and procedures in order to fulfill their obligations under the Act.‎

It is to be noted that the New Regulations exclude non-collateralized loans, as well as low-risk ‎collateralized loans (i.e. loans secured by ‎the value of an insurance policy), including those issued for ‎the sole purpose of funding treatment of a ‎terminal illness or the purchase of a life insurance policy.‎

Under the New Regulations a ‎financial entity in the life insurance sector is defined as: ‎

‎(c) a life insurance company, or an entity that is a life insurance broker or agent, in ‎respect of loans or ‎prepaid payment products that it offers to the public and accounts ‎that it maintains with respect to those ‎loans or prepaid payment products, other than

‎(i) loans that are made by the insurer to a policy holder if the insured person has a ‎terminal ‎illness that significantly reduces their life expectancy and the loan is ‎secured by the value of an ‎insurance policy;‎

‎(ii) loans that are made by the insurer to the policy holder for the sole purpose of ‎funding the life ‎insurance policy; and

‎(iii) advance payments to which the policy holder is entitled that are made to them by ‎the insurer.‎

Dealers in virtual currency ‎

The New Regulations create new obligations for dealers in virtual currency that offer services to Canadian ‎clients. This category will likely capture online trading platforms, exchanges and other intermediaries ‎which engage in virtual currency transactions.‎

Under the New Regulations virtual currency is defined as:

‎(a) a digital representation of value that can be used for payment or investment ‎purposes that is not a ‎fiat currency and that can be readily exchanged for funds or ‎for another virtual currency that can be ‎readily exchanged for funds; or

‎(b) a private key of a cryptographic system that enables a person or entity to have ‎access to a digital ‎representation of value referred to in paragraph (a).‎

‎Additional definitions of importance include:

fiat currency - a currency that is issued by a country and is designated as legal tender in ‎that country, and

funds - (a) cash and other fiat currencies, and securities, negotiable instruments or ‎other ‎financial instruments that indicate a title or right to or interest in them; ‎or (b) a private key of a ‎cryptographic system that enables a person or entity to ‎have access to a fiat currency other than cash.‎ ‎

Money services businesses will include domestic and foreign businesses that are “dealing in virtual ‎‎currency.” The “dealing in” activities include virtual currency exchange services ‎and value transfer ‎services. As is required of all MSBs, persons and entities dealing ‎in virtual currencies will also need to fulfill all ‎‎‎obligations, including implementing a ‎full compliance program and registering with FINTRAC. In ‎addition, ‎‎any reporting ‎entity in any sector that receives $10,000 or more in virtual currency (e.g. ‎receiving ‎‎‎deposits or any form of payment) would have record keeping, identification and ‎‎reporting obligations.‎

The goal of the New Regulations with respect to virtual currency dealers is to mitigate the money ‎‎laundering and terrorist activity ‎financing vulnerabilities of virtual currency, while not unduly hindering ‎‎innovation. FINTRAC thus stated that “‎the amendments are targeted at persons or entities engaged in the ‎‎business of ‎dealing in virtual currencies, and not virtual currencies themselves”‎