On November 7, 2011 the Department of Finance (Canada) released its Consultation Paper on Proposed Amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations on Ascertaining Identity (the Consultation Paper). The Consultation Paper sets out significant proposed amendments to the customer due diligence (CDD) requirements contained in the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the Regulations).
The proposed amendments will, if adopted, significantly raise the bar with respect to the CDD requirements applicable to entities subject to the Regulations (referred to as reporting entities). Many reporting entities, particularly those that do not have large sophisticated compliance groups, are likely to find the proposed amendments quite onerous.
The proposed amendments are intended to improve Canada's compliance with the Financial Action Task Force's 40+9 Recommendations on Money Laundering and Terrorist Financing, particularly Recommendation 5 relating to CDD. The Consultation Paper states that the proposed amendments are also expected to enhance the ability of reporting entities to take a risk-based approach to customers, products and activities and to compliance with the Regulations.
The Department of Finance has invited comments on the paper to be submitted by December 16, 2011.
This Bulletin summarizes the amendments proposed in the Consultation Paper.
A key change proposed in the Consultation Paper is the introduction of the concept of "business relationships". Currently, CDD requirements only apply where an account is opened or certain financial transactions are conducted. The Consultation Paper proposes amending the Regulations to extend the application of certain obligations to business relationships, which would be defined as "any financial relationship established to provide financial activities or transactions". A business relationship would be deemed to arise when a reporting entity conducts any financial activity or transaction in respect of which it is required to keep a record under the Regulations.
This proposed change is designed to require reporting entities to consider the entirety of their relationships with customers. Reporting entities would be required to apply designated measures to business relationships only once the reporting entity had conducted a financial activity or transaction in respect of which a record is required to be kept under the Regulations. Designated measures would include: (1) conducting ongoing monitoring of business relationships; (2) applying enhanced CDD measures in respect of high risk business relationships; and (3) keeping a record of the purpose and intended nature of a business relationship.
The Consultation proposes clarifying customer identification requirements in the context of suspicious transactions.
There are two general requirements relating to ascertaining identity:
- Reporting entities are required to ascertain the identity of customers in connection with account opening and prescribed transactions. There are prescribed exceptions from this requirement relating to transactions and activities that are viewed as low risk.
- Reporting entities are required to take reasonable measures to ascertain the identity of customers when they conduct a suspicious transaction.
Currently, the Regulations do not explicitly specify that the obligation to take reasonable measures to ascertain the identity of customers applies regardless of whether the relevant transaction and activity would fall within an exception to the requirement to ascertain the identity of customers in connection with account opening and prescribed transactions.
The Consultation Paper proposes amending the Regulations to clarify that reporting entities are required to take reasonable measures to ascertain the identity of customers who conduct any suspicious transaction regardless of whether such a transaction is subject to a prescribed exception.
The Consultation Paper also proposes amending the Regulations to clarify that reporting entities must take reasonable measures to ascertain the identity of individuals who attempt to conduct a suspicious transaction in addition to those who have completed a suspicious transaction.
Beneficial Ownership Information
The Regulations provide that, when confirming the existence of a client that is a corporation or other entity, reporting entities are required to take reasonable measures to obtain the name and occupation of all directors of the corporation and the name, address and occupation of all persons who own or control, directly or indirectly, 25% or more of the corporation or entity. The Consultation Paper proposes significantly extending the beneficial ownership requirements as follow:
- the obligation to obtain beneficial ownership information would become mandatory (i.e., not limited to taking reasonable measures);
- reporting entities would be further required to take reasonable measures to ascertain (i.e., verify) the beneficial ownership information obtained and would be required to keep a record of whether or not they were able to ascertain the information and the specific measures they undertook to do so; and
- it would be clarified that reporting entities are required to obtain and take reasonable measures to ascertain beneficial ownership of trusts (including names of identifiable beneficiaries, settlors and trustees) with which they conduct designated financial transactions.
Extending Ongoing Monitoring Obligations
Currently, the Regulations require reporting entities to conduct ongoing monitoring of customers' activities and financial transactions only in respect of correspondent banking relationships, politically exposed foreign persons, and customers and activities that have been identified by the entity as being high risk. Further, these obligations do not apply equally to all types of reporting entities.
The Consultation Paper proposes changing the ongoing monitoring provisions of the Regulations to:
- extend reporting entities' obligations to conduct ongoing monitoring of clients to all clients and activities to which the Proceeds of Crime (Money Laundering) and Terrorist Financing Act applies (not just those which have been assessed as high risk); and
- specify that reporting entities should conduct ongoing monitoring activities in respect of the business relationship as a whole.
The Consultation Paper proposes a new record-keeping requirement. Reporting entities would be required to keep a record that sets out the purpose and intended nature of a business relationship between the reporting entity and its customers. This proposal, among others, is an outgrowth of the proposed introduction of the concept of business relationships.
Extending Enhanced CDD Measures
The Consultation Paper proposes extending the obligation to implement enhanced CDD as follows:
- to include circumstances in which a client, activity or business relationship (which, again, is a new concept introduced in the Consultation Paper) has been deemed to be at high risk of money laundering or terrorist financing as the result of ongoing monitoring (which, as discussed above, is proposed to be mandatory with respect to all clients and activities to which the Proceeds of Crime (Money Laundering) and Terrorist Financing Act applies);
- to make the obligation to conduct enhanced CDD measures in high risk situations mandatory (the current requirement is that reporting entities take reasonable measures to implement such measures); and
- to clarify that enhanced CDD measures to be taken in high risk situations must (a) be enhanced and go beyond the scope of measures taken in respect of low or medium risk clients, activities or business relationships and (b) be commensurate with the risk identified and with the activities and business practices of the reporting sector in question.
The Consultation Report proposes that compulsory enhanced due diligence measures would include (a) enhanced measures to ascertain the identity of any person or confirm the existence of any corporation or entity, (b) enhanced measures to keep client identification information up to date, and (c) measures to conduct enhanced ongoing monitoring of business relationships for the purpose of detecting suspicious transactions.
The changes proposed in the Consultation Paper are significant. Obligations on reporting entities would, if these changes were adopted, become significantly more onerous. Accordingly, reporting entities should carefully consider the implications of the proposed changes to their businesses and consider commenting on the Consultation Paper. That being said, it needs to be recognized that the proposed changes are designed, in part, to ensure that Canada meets its commitment to comply with the Recommendations of the Financial Action Task Force and so the likelihood of the Government retreating from the significant aspects of the Consultation Paper should be considered.