On June 9, 2018, draft regulations (the “New Regulations”) were issued proposing a number of amendments to each of the existing regulations (the “Regulations”) under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCMLTFA”). The New Regulations are open for comment until September 7, 2018 and will come into force 12 months after their registration.
The New Regulations contain a number of long-awaited changes, including clarification on the applicability of the PCMLTFA and its Regulations to virtual currency activities, prepaid cards and foreign money services businesses (“MSBs”). The New Regulations follow the recent 2016 Financial Action Task Force (FATF) Mutual Evaluation Report for Canada (the “FATF Report”) which concluded that Canada largely has a strong legal framework and competent authorities dealing with money laundering and terrorist financing risks, but noted certain deficiencies that needed to be addressed. The New Regulations give effect to certain amendments to the PCMLTFA made through the Economic Action Plan 2014 Act, No. 1 and the Budget Implementation Act, 2017, No. 1. In addition, the New Regulations are being issued in the context of a broader review of the AML regime as a whole (the “2018 Consultation Paper”).
The New Regulations make “prepaid payment products” issued by financial entities (i.e. banks, credit unions, insurance companies, trust companies and loan companies) subject to similar requirements as those applicable to bank accounts for purposes of the Regulations.
A “prepaid payment product” is defined as: “a product issued by a financial entity and that enables a person or entity to engage in a transaction by giving them electronic access to funds or virtual currency paid to a “prepaid payment product account” held with the financial entity in advance of the transaction. It excludes a product that enables a person or entity to access a credit or debit account or one that is issued for use only with particular merchants.” “Prepaid payment product account” (“Prepaid Account”) is itself defined as “an account that is connected to a prepaid payment product and that permits (a) one or more transactions that total $1,000 or more to be conducted within a 24-hour period; or (b) a balance of funds or virtual currency available of $1,000 or more to be maintained.”
Accordingly, the changes target general purpose open-loop prepaid cards, rather than mall cards or single merchant cards (closed-loop cards), and, in particular, general purpose open-loop prepaid cards that permit a balance of $1,000 or more, or the conclusion of transactions that total $1,000 or more within a 24-hour period.
The New Regulations impose on financial entities, among other things, identification and record-keeping requirements in respect of every Prepaid Account that it opens and every transaction made by means of a prepaid payment product connected to that Prepaid Account.
Under the New Regulations the provisions of the PCMLTFA and Regulations will not apply to a financial entity in respect of the processing for merchants of payments by credit card or prepayment product.
The PCMLTFA was amended in 2014 to extend to persons “dealing in virtual currencies”, but such amendments have not yet come into force, pending regulations.
The New Regulations provide the additional detail required to implement such changes. They define “virtual currency” as “a digital currency 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 “information that enables a person or entity to have access to such digital currency”.
The New Regulations do however exempt “a transfer or receipt of virtual currency as compensation for the validation of a transaction that is recorded in a distributed ledger; or an exchange, transfer or receipt of a nominal amount of virtual currency for the sole purpose of validating another transaction or a transfer of information”, where “distributed ledger” means “a digital ledger that is maintained by multiple persons or entities and that can only be modified by a consensus of those persons or entities.”
Persons dealing in virtual currency, which will include those offering virtual currency exchange services (i.e., the exchange of virtual currency for funds, or one type of virtual currency for another) and value transfer services, will be required to register with Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) as a MSB and to have in place a full anti-money laundering (“AML”) compliance program, including a chief anti-money laundering officer (“CAMLO”), AML policies and procedures, a training program and independent assessment of its AML compliance program.
Identification, record-keeping and reporting requirements, including requirements to file suspicious transaction reports and attempted suspicious transaction reports with FINTRAC will apply. In particular, the New Regulations provide that MSBs will be required to verify the identity of every person who requests an exchange of an amount of $1,000 or more in a virtual currency exchange transaction.
In addition, new record-keeping requirements will apply to other entities that are already subject to the PCMLTFA (including financial entities, securities dealers and casinos). In particular, all reporting entities will be required to maintain “large virtual currency transaction records” when they receive $10,000 or more in virtual currency (e.g. deposits, any form of payment). Financial entities will also be required to keep “virtual currency exchange transaction tickets” in the case of any exchange by the financial entity of virtual currency for funds, funds for virtual currency or one virtual currency for another, at the request of another person or entity.
Any business that operates a virtual currency automated teller machine or that provides a platform for trading virtual currencies in Quebec also remains subject to the separate registration requirement under the Quebec Money-Services Businesses Act.
Foreign Money Services Businesses
The PCMLTFA was amended in 2014 to extend to “foreign money services businesses”, being MSBs that are persons and entities that: (i) do not have a place of business in Canada, (ii) are engaged in the business of providing such services directed at persons or entities in Canada, and (iii) provide those services to their clients in Canada. The above would include foreign MSBs that offer services in Canada online. These amendments have not yet come into force, pending regulations. The New Regulations now provide the additional detail required to implement such changes. As result, domestic and foreign MSBs will be subject to the same general requirements, including the requirements to register with FINTRAC, have in place a compliance program and report certain transactions (including suspicious transactions) to FINTRAC.
In addition, if a foreign MSB (i) fails to comply with the requirements of the PCMLTFA and its Regulations, or (ii) is issued an administrative monetary penalty (“AMP”) and does not pay that AMP, its MSB registration can be revoked, thus making it ineligible to do business in Canada. Financial entities will also be prohibited from opening or maintaining an account for, or having a correspondent banking relationship with, an unregistered foreign MSB.
The New Regulations seek to address some concerns identified by the FATF Report with respect to the identification of beneficial ownership and transparency in Canada by requiring reporting entities to take steps to confirm the accuracy of beneficial information as it comes in or is updated over time.
The 2018 Consultation Paper also raised the issues of beneficial ownership and transparency and sought further input to continue to strengthen the Canadian regime in this area going forward.
The New Regulations contain a number of other proposed amendments, including the following:
- The requirement to file suspicious transaction reports within 3 days after the day on which the reporting entity completes the analysis that establishes that there are reasonable grounds to suspect that the transaction was related to the commission of a money laundering or terrorist activity financing offence, rather than within 30 days after the reporting entity determines it has reasonable grounds to suspect a transaction is related to a money laundering or terrorist financing offence, as is currently the case.
- Amendment of the prior requirement that an identification document be “original, valid and current” to require instead that such documentation be “authentic, valid and current”. This change will likely be welcomed by reporting entities as it will potentially allow for easier online identification verification, and ease the way for digital identity verification.
- Amendments to permit reporting entities to rely on customer identification performed by another reporting entity (as long as they immediately obtain the identification information and have a written agreement in place requiring the entity doing the identification to provide the identification verification within 3 days of request) or by an affiliate.
- Extension of identification and other standard compliance requirements to life insurance companies when issuing loans.
- Amendments to clarify that when a life insurance company is acting as a facilitator between brokers and insurer providing, for example, underwriting services, the life insurance company is not a reporting entity for purposes of the PCMLTFA.
- Requirement that any certificate of status used to verify corporate identity be no more than a year old, and that other types of documents used to verify corporate identity be the most recent version.
- Repeal of the prior amendment to require records of “reasonable measures” taken where a reporting entity is unable to ascertain certain information.
- Requirement that reporting entities determine the source of wealth for politically exposed persons.
- Amendments to exempt reporting entities from the requirement to conduct customer due diligence for certain low risk customers, such as large companies listed on the Toronto Stock Exchange.
- Amendments to expand the exemption for low risk activities of dealers in precious metals and stones to include types of manufacturing processes that involve the use of precious metals and stones, such as diamonds used to manufacture drill bits.
- Amendments to exempt accountants who only act as a trustee in bankruptcy or as an insolvency practitioner from the PCMLTFA.
- Amendments to clarify that as part of their compliance program, reporting entities are required to take their products and delivery channels into consideration in conducting their assessment of their exposure to money laundering and terrorism financing risk associated with the use of new technologies prior to their launch.