As contemplated in the November 2011 Consultation Paper of the Department of Finance (the Department) (see our November 2011 Blakes Bulletin for further details), amendments have been introduced by the Department to Canada’s anti-money laundering legislation, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act) under the general regulations (the Regulations), with the stated purpose of improving Canada’s compliance with the Financial Action Task Force’s Recommendation 5 (reformulated now as recommendation 10) dealing with customer due diligence. The amendments to the Regulations are contemplated to come into force one year after final publication. Once finalized, entities regulated under the Act will be required to update their anti-money laundering policies and procedures to comply with these new requirements.
The material amendments proposed to the Regulations are set out below.
The Regulations introduce the concept of a “business relationship”, which is defined to include any relationship established between an entity regulated under the Act (a Regulated Entity) and a client to conduct either financial transactions or provide services related to those transactions and (a) if the client holds one or more accounts with the Regulated Entity, all transactions relating to these accounts; or (b) where the client does not hold an account with the Regulated Entity, those transactions and activities in respect of which the Regulated Entity is required to ascertain the identity of a person or confirm the existence of an entity.
Where a Regulated Entity is required to ascertain the identity of a person or confirm the existence of an entity, it will be automatically required to conduct ongoing monitoring of its business relationship with that client, regardless of the level of risk attributed to the business relationship. In respect of the ongoing monitoring obligation, Regulated Entities will also be required to keep a record of the monitoring measures they have implemented and to retain the information that they have obtained from those monitoring activities. In addition, Regulated Entities that enter into business relationships will be required to keep records that set out the purpose and intended nature of the business relationship. This requirement seems similar to (and duplicative of) the current requirement imposed on certain Regulated Entities to determine the “intended use of the account”. In this respect, it seems that where a client conducts a one-time transaction that requires identity verification, the “intended” nature of the business relationship would not in all circumstances be easily known. The concept of a “relationship” indicates ongoing interaction between the parties; it is difficult to see how a Regulated Entity can determine, on the basis of a single transaction, the true purpose and nature of the business relationship as the relationship has not progressed beyond the point of first contact.
As noted above, once a Regulated Entity is required to ascertain the identity of a person or confirm the existence of an entity, they will be required to conduct ongoing monitoring of the business relationship. A definition of “ongoing monitoring” is set out in the Regulations. In that respect, “ongoing monitoring” is defined to mean monitoring on a periodic basis based on the risk assessment of the business relationship with a client, for the purposes of:
- detecting suspicious transactions
- keeping client identification and beneficial ownership information up to date
- reassessing the level of risk associated with the client’s transactions and activities
- determining whether transactions or activities are consistent with the information previously obtained about the client, including, specifically, the risk assessment undertaken on the client.
As such, the concept of ongoing monitoring involves more than just “monitoring” but also imposes the requirement to update client identity and beneficial ownership information on a “periodic basis”, depending on risk. What a reasonable “periodic basis” would be is not specified in the Regulations and is left for Regulated Entities to determine based on their own risk assessments.
Clients That Hold “Accounts”
The effect of these proposed amendments on Regulated Entities that open accounts is significant for institutions that offer more than one financial product. In this respect, it is noteworthy that the word “account” is not defined in the Regulations. The Department has in the past indicated that this omission was intentional, so as to give the term “account” the broadest possible interpretation. As such, the offering of a new product by a Regulated Entity, in most circumstances, would likely be seen to constitute the opening of an account. Once the ongoing monitoring requirement is triggered, the proposed Regulations require monitoring of all transactions “relating to these accounts”, and most products offered by Regulated Entities will likely constitute “accounts”, therefore the effect of these amendments will be to require monitoring of all client transactions for all accounts on an institution-wide basis.
By way of example, for consumer clients, monitoring would have to be undertaken on lines of credit, mortgage loan transactions, and credit card transactions, and for business clients, monitoring would have to be undertaken on corporate loans and commercial mortgages. This may require extensive modifications to the information systems of Regulated Entities to ensure that monitoring can be performed across all business lines. Products that are currently excluded from identification verification requirements, such as RRSPs, will be exempted from these ongoing monitoring requirements. It is noteworthy that once the ongoing monitoring requirement is triggered for clients that hold accounts, it applies to all financial transactions of clients with Regulated Entities relating to those accounts regardless of whether the transactions are those in respect of which identity must be verified.
Clients That Do Not Hold Accounts
For Regulated Entities that do not open “accounts” or where the client does not hold an account with the Regulated Entity, the proposed Regulations require ongoing monitoring in respect of those transactions for which identity must be verified. As such, for Regulated Entities that do not open or hold any “accounts” of the client, the monitoring obligations threshold may be somewhat lessened, as generally speaking, identity verification requirements are not applicable until transactions reach the C$1,000 threshold.
In circumstances where a Regulated Entity considers the risk of a client being involved in money laundering or terrorist activity financing to be high, the Regulations expressly require the client to be classified as “high risk”. Where a client is in fact classified as high risk, certain prescribed measures are to be taken by the Regulated Entity under the Regulations. These prescribed measures are as follows:
- Taking enhanced measures, based on risk, to ascertain the identity of a person or confirm the existence of an entity. Such enhanced measures are in addition to those measures that are already prescribed under the Regulations.
- Taking other enhanced measures to mitigate risks including: keeping client identification information and beneficial ownership information up to date, and, in addition to the “ongoing monitoring” requirements noted above, conducting ongoing monitoring of business relationships for the purpose of detecting suspicious transactions.
- These requirements are mostly duplicative of the ongoing monitoring requirements previously discussed which are contemplated under the Regulations. The only additional requirement these provisions seem to impose is a requirement to obtain “enhanced” verification/ identification information in respect of high-risk clients over and above that which is required under the Regulations.
- While there is no guidance as to what this information could constitute, the Office of the Superintendent of Financial Institutions (OSFI) Guideline B-8 provides some assistance. Specifically, OSFI in Guideline B-8 indicates that for individuals, where only a birth certificate or social insurance number is used to confirm identity, original government-issued identification with a photograph can also be reviewed, or where not available, a property tax bill or a utility bill could be reviewed. These additional methods of verifying identity are consistent with some of the non-face-toface verification methods set out in the Regulations including those available to Regulated Entities that issue credit cards. This enhanced due diligence requirement will likely require privacy policies and consent language in financial product documentation to be updated to address any additional verification methods that Regulated Entities may implement to address this additional collection of personal information.
While the current Regulations require beneficial ownership of an entity to be obtained in certain circumstances, Regulated Entities are only required to take “reasonable measures” to do so. Under the proposed amendments to the Regulations, the requirement to obtain beneficial ownership information, at first glance, no longer appears to be subject to “reasonable measures”, but rather appears to be an absolute obligation. This is discussed further below. Additionally, Regulated Entities will also be required to obtain additional information “establishing the ownership, control and structure” of the entity – a new regulatory requirement. This will entail collecting significant information from entities where the beneficial ownership determination is required. Moreover, in addition to collecting this information, Regulated Entities are required to “take reasonable measures” to confirm the accuracy of the beneficial ownership information obtained.
In this regard, the Regulations require Regulated Entities to keep a record of not only the information obtained but also to maintain a record of the measures that the Regulated Entity took to confirm the accuracy of this information. In circumstances where the Regulated Entity cannot obtain the beneficial ownership information or cannot confirm the accuracy of the information obtained, the Regulations require Regulated Entities to take reasonable measures to ascertain the identity of the “most senior managing officer” of the entity and to treat the entity as high risk.
As such, while the Regulations require beneficial ownership information to be obtained, in the same section, the Regulations provide that if the required beneficial ownership information cannot be obtained, then, in such circumstances, the foregoing additional requirements apply. This seems to modify the absolute requirement to obtain beneficial ownership information that the Regulation seems to require. We note that there is no definition of the “most senior managing officer” provided in the Regulations or any guidance on how the identity of such a person is to be verified. The proposed modifications to beneficial ownership requirements will now require Regulated Entities to obtain significant amounts of information from their commercial clients and to amend their anti-money laundering policies accordingly.
The Regulations will go into force one year after the final version is published in the Canada Gazette. There is a 30-day period for Regulated Entities to comment on the proposed Regulations. Once the Regulations are final, Regulated Entities will need to update their anti-money laundering policies, their financial product documentation, their privacy policies and likely their information systems to address these compliance requirements.