The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) recently released the final version of the regulations amending the Regulations to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (as amended, the Regulations). The Regulations govern anti-money laundering (AML) rules in Canada. The changes in the Regulations are quite substantial and, given the scope, regulated entities (REs) will be required to significantly overhaul their existing compliance policies and procedures. Except for one change in respect of identity verification that is beneficial to REs, the Regulations will not come into force until June 1, 2020 and, in the case of certain provisions, until June 1, 2021.
The Regulations indicate that regulators are coming to terms with the increasingly dynamic nature of the financial services industry; particularly with the advent of new technologies, such as virtual currencies, virtual assets and digital payment methods. Overall, the Regulations represent increased oversight and extend the monitoring regime to include new innovations. As it stands, the Regulations now apply specifically to certain issuers of prepaid cards, virtual currencies and foreign money services businesses (MSBs), among others
Below are certain high-level takeaways from the amendments to the Regulations:
- Money Services Businesses
As anticipated, the Regulations have modified the provisions pertaining to MSBs by expressly differentiating between domestic MSBs and foreign MSBs. As a result, MSBs will need to be mindful of those provisions that apply to them in their capacity as either foreign or domestic MSBs. Further, the definition of an MSB has been expanded beyond the traditional definition and now include those that deal in virtual currency. This includes operators of digital currency platforms, digital wallet providers, as well as those that provide transfer services in respect of digital currency, who will now need to register with FINTRAC and adhere to certain MSB obligations under the Regulations.
- Beneficial Ownership
In connection with domestic and foreign MSBs, the Regulations have introduced an extended list of circumstances where an MSB is required to determine beneficial ownership, and this goes beyond the previous requirement of an “ongoing services agreement.” The list expands the type of service agreements that will trigger the requirement to ascertain beneficial ownership. This includes ongoing international electronic funds transfer agreements, and service agreements to redeem money orders.Further, the Regulations now require reasonable measures to be taken to confirm the accuracy of beneficial ownership information when the information is first obtained and in the course of ongoing monitoring. This change has occurred due to practical concerns by FINTRAC. This provision is meant to address instances where there is a change in the beneficial ownership information during the course of a client relationship, the awareness of which naturally arises from the ongoing monitoring process.
Currently, the exceptions to record keeping and identity verification only apply to large public corporations, among others. Now, however, the Regulations have been extended to apply to public trusts (on prescribed stock exchanges) which have net assets of C$ 75 million or more and which operate in a Financial Action Task Force member country. There is also a new requirement to determine the beneficial ownership of widely held or publicly traded trusts that do not qualify for this exemption. In particular, the Regulations require that a RE obtain the name of all trustees, and the names and addresses of all persons who own or control, directly or indirectly, 25 per cent or more of the units of the trust for widely held or publicly traded trusts.
- Prepaid Payment Products
The Regulations now regulate prepaid cards issued by financial entities and life insurance companies. This is similar to those regulations that apply to regular accounts, such as certain record-keeping and client identity requirements, politically exposed person (PEPs) and third-party determination requirements. As anticipated, certain record keeping requirements apply equally to prepaid products, and such records must include the name of the account holder/authorized user, nature of business/occupation, account applications, product slips, and corporate records. The Regulations exempt certain low-risk products and exclude prepaid payment products that are part of a corporate retail rebate program, that can only be funded or reloaded by a public body, or that can only be funded or reloaded by a non-profit agency or registered charity for the purposes of humanitarian aid relief.One important effect of this change is that it potentially impacts other stakeholders beyond financial entities and life insurance companies. This includes those in the prepaid payments products industry, including program managers, processors and retailers.
- Virtual Currency
In addition to expanding MSBs to those that deal in virtual currencies, “virtual currency” itself has been defined as “a digital representation of value that can be used for payment or investment purposes, 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 “a private key of a cryptographic system that enables a person or entity to have access to a digital representation of value.” The new definition now includes representations of value for “investment purposes,” which may include certain types of initial coin offerings; and with the inclusion of “private keys” in the second part of the definition, this now likely extends to those that host digital wallets.
- Suspicious Transaction Reporting
The Regulations now require REs to file suspicious transaction reports (STRs) with FINTRAC “as soon as reasonably practicable” after establishing whether there are reasonable grounds to suspect that a transaction or attempted transaction is related to money laundering or terrorist financing. Currently, the Regulations require a RE to file an STR within 30 days from the time that a RE first establishes reasonable grounds to suspect that a transaction or attempted transaction is related to money laundering or terrorist financing. The difference is that FINTRAC will make the determination of “as soon as reasonably practicable” on a case-by-case basis with a view to understanding how REs respond in these circumstances.
- Electronic Funds Transfers
The Regulations have expanded the definition of electronic funds transfer (EFT) to include instructions initiated and received by the same person or entity. As is the case in the current definition, in order for a transaction to be an EFT, it does not require the actual transfer of funds, but rather only a transmission for the instruction to transfer funds. Importantly, the EFT definition is no longer limited to only international EFTs; instead it includes both domestic and international EFTs. The reporting requirements now apply in regards to both outgoing EFTs to the RE that initiates the EFT, and incoming EFTs to the RE that is the final recipient of the EFT. On this basis, REs will need to completely restructure their respective EFT reporting processes.
- Credit Cards
The Regulations now require issuers of credit cards to collect information in regards to “account holders,” as opposed to what was previously described as “clients.” Certain REs will now need to maintain foreign currency transaction tickets for foreign currency exchange transactions connected to the account. REs will also need to maintain EFT records for international EFTs in connection with the credit card.
- Single Transaction Rule
Currently, a requirement exists to report large cash transactions and EFTs where the transaction is for more than C$ 10,000 or, where there have been smaller transactions over a 24-hour period that total C$ 10,000, or more that are conducted by, or on behalf of, the same person or entity. As anticipated, the Regulations now extend the rule to both casino disbursements and to receipts of virtual currency. In addition, multiple transactions of less than C$ 10,000 made over any 24-hour period will be deemed to be a single transaction in certain circumstances.
- Identity Verification
In a welcome development, the Regulation no longer requires an identity document relied upon to be “original.” Instead, a RE will be expected to rely on an identity document where it is “valid, authentic and current.” This provision came into force on June 25, 2019 and is the only provision in the Regulations that has immediate effect.
- Politically Exposed Persons
The Regulations now require that REs make PEP determinations for (i) the opening of a prepaid product account; (ii) authorized users of prepaid products; (iii) persons who request a transfer of C$ 100,000 or more in virtual currency; and (iv) persons who make payments of C$ 100,000 or more to prepaid product accounts. In addition, life insurance companies will also be required to undertake a PEP determination in respect of beneficiaries to whom they remit an amount of C$ 100,000 or more over the duration of an immediate or deferred annuity or life insurance policy.
- Life Insurance Companies
The Regulations have now added requirements that apply to the life insurance sector in the circumstances where a life insurance company makes loans or issues prepaid payment products. Life insurance companies will now need to expand the ambits of the proper modifications to their policies and procedures to capture these types of products. In addition, life insurance companies will also be subject to PEP determination requirements in certain instances.
The author would like to thank Vahini Sathiamoorthy and Lauren Rennie, summer law students, for their contribution to this article.