On February 7, 2018, the Department of Finance (the Department) released a consultation paper (Consultation or Paper) as part of its review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its Regulations (the AML/ATF framework). After carefully reviewing the details of the Paper, our team at Dentons has prepared this analysis to highlight the following key findings that we hope will be useful to you and your business.
The Department’s review of the legislative framework is intended to support the upcoming Parliamentary review of the administration and operation of the PCMLTFA, which takes place every five years. Parliament’s review is meant to ensure that Canada’s legislative AML/ATF framework responds effectively to developments in technology, risk environment and marketplace, and keeps pace with international expectations and commitments. The Paper proposes a broad range of potentially significant changes. The most notable proposals are described below:
1. New reporting entities
The Consultation proposes expanding the obligations under the PCMLTFA to new types of businesses operating in other (currently unregulated) high-risk areas. The Department notes the increased reporting resulting from these new reporting entities would also give rise to privacy concerns for Canadians. Stressed here, is the Department’s focus on the need to weigh the cost of addressing identified risks against the potential benefits of preventing or tracing money laundering or terrorist financing activity. The proposed new reporting entities are:
(a) White Label Automated Teller Machines (WLATMs): The Consultation notes that WLATMs may be vulnerable to abuse because they can be loaded with large amounts of cash that are the proceeds of crime, and any entity or person can own them. In addition to that vulnerability, the Consultation argues that WLATMs should be subject to the same level of regulation as ATMs associated with established financial institutions.
However, the Consultation did not propose measures to address this vulnerability or level the playing field. Indeed, regulating the WLATM industry could prove challenging because, unlike traditional ATMs, the users of WLATMs have no client relationship with any of their users.
(b) Pari-mutuel betting and horse racing: With a similar risk-profile to casinos, the Paper proposes that these sectors should be regulated in much the same manner.
(c) Real estate sector: The real estate sector is covered to a degree in the PCMLTFA. Real estate brokers, sales representatives and developers have certain obligations. However, the Consultation proposes expanding the types of reporting entities to include non-federally-regulated mortgage lenders, including real estate investment trusts (REITs), mortgage investment corporations, mutual fund trusts, syndicated mortgages and individual private lenders.
This expansion would mark a significant and complex change that would have an obvious impact on the real estate sector.
(d) Designated non-financial businesses and professions (DNFBPs): While the PCMLTFA covers certain activities of some DNFBPs, such as accountants, dealers in precious metals and stones, and casinos, the Consultation proposes expanding the list of activities to include non-financial-transaction activities like operating legal arrangements, managing client funds, security and other assets
(e) Company Service Providers: The Consultation proposes including Company Service Providers as reporting entities. These organizations provide services related to the formation and administration of companies and the Consultation suggests they are exposed to high risk of money laundering.
(f) Finance, lease and factoring companies: The Consultation mentions the absence of coverage of these entities was noted in Canada’s Financial Action Task Force Mutual Evaluation. Because these companies allow a range of payment methods, including cash, electronic funds transfers and cheques, they offer opportunities to be used throughout various stages of the money laundering process. While these activities are subject to the AML/ATF regime today, it is only when the activities are being carried out by a regulated entity.
(g) Armoured cars: The lack of AML/ATF regulation of the armoured car industry in Canada creates an environment that facilitates the anonymous movement of bulk cash. Without regulation, this anonymity could facilitate money laundering and terrorist financing because there are no requirements to conduct client identification, keep records, collect information regarding source of funds, or carry out any reporting.
(h) High-value goods dealers: Because high-value goods provide a variety of opportunities for money laundering, the Consultation proposes including high-value goods dealers under the PCMLTFA regime. The Paper includes antiquities, boats and yachts, and automobiles as examples of luxury goods.
(i) Jewellery auction houses: While dealers in precious metals and stones (DPMS) have requirements under the PCMLTFA, jewellery auction houses are not covered by those requirements. Bringing these entities under the AML/ATF framework would level the playing field within the DPMS sector.
2. Enhancing and strengthening identification methods
As part of the Department of Finance’s effort to modernize the AML/ATF Framework, the Consultation proposes moving to more principles-based requirements when it comes to ascertaining the identity of a client. According to the Consultation, this shift would allow reporting entities to take a risk-based approach with respect to new technologies while supporting a more nimble framework.
While many will welcome the Department’s openness to move away from prescriptive identity verification requirements, there will be some concern about striking the right balance between innovation and a robust identity-verification system, which may be better supported by prescriptive requirements.
3. The introduction of a regulatory sandbox
Citing the rapid growth of the FinTech sector and the use of regulatory sandboxes internationally, the Paper proposes the introduction of regulatory pilots, which would allow FinTechs to apply for time-limited exemptive relief to test their products or services in a live environment, or to allow for more flexible approaches to compliance, given the appropriate risk mitigants are in place. The Consultation also introduces to the Canadian framework the concept of administrative forbearance, which would allow the regulator to exempt entire classes of sectors or businesses from certain obligations.
The overall effect would be a more flexible, risk-based AML/ATF framework that is supportive of innovation. The suggestion is in keeping with the recommendations of the Competition Bureau’s recent FinTech Market Study and would be viewed as a positive step to foster collaboration within the financial services industry. Indeed, moves to risk- and principles-based, functional regulation are being considered to some degree across the Canadian financial sector.
4. Beneficial ownership and corporate transparency
Corporate transparency and beneficial ownership are centrail themes to the Paper. The Department acknowledges the difficulty in maintaining accurate and up-to-date beneficial ownership information in Canada, which results in a variety of factors, including the shared federal and provincial jurisdiction over incorporation, the different requirements in each of those jurisdictions and the fact that information requirements are scattered across a number of different statutes. Moreover, Canada does not have a central registry of beneficial ownership information.
The Department is seeking views on how to improve corporate ownership transparency and access to beneficial ownership information by authorities that maintain the ease of doing business in Canada.
5. Strengthening Money Services Business (MSB) registration
The Department acknowledges that MSBs require access to financial services and have challenges maintaining accounts with financial institutions. The Paper references “de-risking” – the practice of financial institutions exiting relationships with and closing accounts of clients because the financial institution perceives the client to be high-risk. In comments that will sound similar to those who have read the Competition Bureau’s FinTech Market Study, the Department reiterates that reporting entities are expected to manage their exposure, rather than eliminate it entirely.
The Paper notes that, while MSBs must be registered with FINTRAC, with their registration renewed every two years, the process could be improved to safeguard the financial system.
6. Strengthening intelligence capacity and enforcement
The Consultation proposes measures to address challenges faced by evolving crime practices and advancements in technology, including changes to:
(a) Electronic funds transfers (EFTs): Payments made through Canadian financial institutions where Canada is not the sending or receiving destination should be captured. New payment methods such as letters of credit and finance should also be captured.
(b) Bulk cash: The Consultation gives thought to whether Canada should place a limit on the amount of bulk cash a person could carry in Canada without a legitimate purpose, and whether Canada should develop a framework for registering and monitoring those businesses that deal in high volumes of cash.
7. Balancing enhanced information-exchange with protecting Canadians’ privacy
According to the Consultation, protecting Canadians’ privacy is paramount, but information sharing is critical for combatting money laundering and terrorist financing. To strengthen the government’s ability to combat those crimes, the Department of Finance proposes to add additional “disclosure recipients” – public bodies that would benefit from specific types of financial intelligence.
This Consultation has potentially wide-reaching impacts, both for current reporting entities, and those individuals and organizations not currently regulated by the AML regime. Interested parties are advised to submit their comments to the Department of Finance before April 30, 2018.