The Financial Action Task Force (FATF) is an inter-governmental body that develops, monitors, and evaluates countries’ compliance with 40 anti-money laundering and counter-terrorist financing (“AML/CTF”) recommendations (the “FATF Recommendations”). The FATF Recommendations act as an AML/CTF framework to evaluate a country’s response to preventing organised crime, corruption and terrorism.
Since Canada’s membership in 1990, Canada has routinely participated in mutual evaluation reports (“MERs”) whereby FATF member countries conduct peer reviews to assess levels of implementation of the FATF Recommendations. The MERs provide a ranking scheme: Compliant, Largely Compliant, Partially Compliant, and Non-Compliant.
On October 1, 2021, the FATF released a follow-up report (the “2021 Report”) on Canada’s progress addressing technical compliance deficiencies identified in the 2016 MER. For a refresher on the 2016 MER, please see our previous post here. [NTD: Link not working]
Eight FATF Recommendations were re-ranked in the 2021 Report, seven of which saw ratings increase. One FATF Recommendation pertaining to non-profit organizations saw its rating decrease from “Compliant” to “Partially Compliant”. Following the 2021 Report, Canada is no longer Non-Compliant with any FATF Recommendation.
1. Politically Exposed Persons
Recommendation 12: Politically exposed persons (“PEPs”) are senior ranking individuals categorized into three groups: foreign PEPs, domestic PEPs, and heads of international organizations (“HIOs”). With respect to foreign PEPs, financial institutions should have appropriate systems in place to determine whether the customer or beneficial owner is a PEP, obtain senior management approval for establishing such business relationships, establish the source of wealth or funds, and conduct enhanced ongoing monitoring of such business relationships. These PEP requirements should also apply to family members and close associates of PEPs.
“Non-Compliant” to “Largely Compliant”: Canada’s Non-Compliant ranking in the 2016 MER was largely due to the lack of regulatory oversight identifying and managing PEPs. Canada’s favourable re-rating in the 2021 MER stems from the implementation of amendments to regulations (“PCMLTFA Regulations”) made under the the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”). Under the PCMLTFA, reporting entities, which are those required to report certain transactions to the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”), must determine if they are dealing with a PEP or HIO and take the appropriate measures listed in the preceding paragraph. For more information on the recent changes to the PCMLTFA Regulations, please see our post here.
2. New Technologies
Recommendation 15: New products, business practices and the use of new technologies, particularly virtual assets (“VAs”), need to be assessed for money laundering and terrorist financing risks.
Methodology change since 2016 MER: The methodology for assessing this FATF Recommendation was revised in October 2019 to require identifying, assessing and understanding risks associated with VA activities of “virtual asset service providers” (“VASPs”), registering VASPs, applying AML/CTF supervision to VASPs, and adopting measures related to international cooperation to VASPs.
“Non-Compliant” to “Largely Compliant”: The amendments to the PCMLTFA Regulations established obligations for reporting entities to assess and document money laundering and terrorist financing relating to new technologies, and to consider the products, services, delivery channels, and geographic location of their activities in compliance programs. For more information on these amendments, please see our post here.
3. Travel Rule
Recommendation 16: To detect and prevent money laundering and terrorist financing, countries should have regulations in place requiring financial institutions to monitor wire transfers to detect those which lack required originator and/or beneficiary information. Countries should also ensure that financial institutions take freezing action to prohibit transactions with designated persons and entities.
“Partially Compliant” to “Largely Compliant”: In 2019 and 2020, Canada increased its rating with respect to this FATF Recommendation by implementing amendments to PCMLTFA Regulations to require intermediary and beneficiary institutions to identify and take action against cross-border electronic funds transfers that contained inadequate originator information. Safeguards have also been implemented in relation to confidentiality and information exchange. For more information on these amendments, please see our post here.
4. Reliance on Third Parties
Recommendation 17: When certain criteria are met, it is permissible for financial institutions to rely on third parties to perform elements of the customer due diligence measures, such as identifying and verifying the identity of customers and beneficial owners and obtaining information on the purpose and nature of the business relationship. However, financial institutions should ultimately be responsible for customer due diligence measures even when relying on third parties.
“Non-Compliant” to “Compliant”: Although life insurance companies and securities dealers were already considered to be reporting entities under the PCMLTFA, key AML/CTF measures were missing at the time of the 2016 MER. The recent amendments to the PCMLTFA Regulations have brought Canada into compliance with this FATF Recommendation by requiring life insurance companies and securities dealers to comply with customer due diligence and record keeping obligations, as well as to assess which countries are high risk for third party reliance.
5. Suspicious Transactions Reporting
Recommendation 20: If a financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should be required to promptly report its suspicions to its national financial intelligence unit.
“Partially Compliant” to “Largely Compliant”: Canada now requires reporting entities to report suspicious transactions “as soon as practicable” when there are reasonable grounds to suspect that the transaction or attempted transaction relates to the commission or attempted commission of offences related to money laundering or terrorist financing. This remedied the 2016 MER’s finding that there was a lack of a prompt timeline for suspicious transaction reporting, however, the scope of the PCMLTFA remains a minor deficiency. Previously, a STR was required to be reported within 30 days after the day on which the person or entity or any of their employees or officers detects a fact respecting a financial transaction or an attempted financial transaction that constitutes 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. For more information on these amendments, please see our post here.
6. Designated Non-Financial Businesses and Professions: Customer Due Diligence
Recommendation 22: Casinos, real estate agents, dealers in precious metals, lawyers, notaries and other independent legal professionals, accountants, as well as trust and company service providers must all perform customer due diligence and maintain records when engaged in certain activities, such as a particular type of transaction or engaging in financial transactions above a certain threshold.
“Non-Compliant” to “Partially Compliant”: The amendments to the PCMLTFA Regulations now impose customer due diligence requirements for Designated Non-Financial Businesses and Professionals (“DNFBP”). Canada did not receive a more favourable ranking for the implementation of this FATF Recommendation largely due to the exclusion of certain relevant DFNBPs, as discussed below. For more information on these amendments, please see our post here.
7. DNFBP: Other Measures
Recommendation 23: Countries are strongly encouraged to extend the reporting requirements of suspicious transactions to lawyers, notaries, other independent legal professionals and accountants, as well as to dealers in precious metals and trust and company service providers.
“Non-Compliant” to “Largely Compliant”: In Canada (Attorney General) v. Federation of Law Societies of Canada, the Supreme Court of Canada determined that certain provisions of the PCMLTFA infringed s. 8 of the Charter to the extent it applied to lawyers and documents in the possession of legal counsel. The 2021 Report found that the exclusion of these professionals affects the overall outcome of compliance with this FATF Recommendation.
8. Non-Profit Organisations
Recommendation 8: There are many risks associated with non-profit organizations (“NPOs”), including terrorist organizations posing as legitimate entities, legitimate NPOs being exploited as conduits for terrorist financing (i.e., escaping asset-freezing measures), and diverting funds intended for legitimate purposes to terrorist organizations. Countries need laws and regulations related to NPOs that are vulnerable to terrorist financing.
Methodology change since 2016 MER: Following the 2016 MER, this FATF Recommendation shifted from a rules-based approach to a risk-based approach for evaluating NPOs, which includes enhanced requirements for identifying suspicious transactions within financial groups and new tipping-off provisions.
“Compliant” to “Partially Compliant”: The main area of concern identified in the 2021 Report is that Canada’s existing NPO outreach activities address charities with an international connection, but not the domestic terrorist financing risks. Canada’s risk mitigation primarily focuses on registered charities, which represent a significant portion of the NPO sector. Canada has also recently revised its National Inherent Risk Assessment and updated the NPO sector review, however the recent nature of these developments currently results in minimal requirements and obligations for some NPOs.