Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Financial Services Regulatory, November 2011
On November 7, 2011, the Minister of Finance proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the Regulations) through the publication of a consultation paper (the Consultation Paper). For the most part, these amendments are focused on strengthening both the identification and customer due diligence provisions of the Regulations in order to bring the Regulations into alignment with the recommendations of the Financial Action Task Force (FATF). The comment period on the consultation paper is open until December 16, 2011, and if there are perceived stumbling blocks for reporting entities in the implementation of the proposed amendments, consideration should be given to making submissions to the Department of Finance.
What follows is an overview of the proposed amendments to the Regulations.
As the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PC Act) and its Regulations are currently drafted, they apply to reporting entities in circumstances where they engage in specified financial transactions, and, for financial entities, in circumstances where they "open accounts".
The Consultation Paper proposes amending the Regulations to extend the application of certain obligations under the Regulations so that they will apply in circumstances where there is a "business relationship". The term "business relationship" is defined in the Consultation Paper as any financial relationship established to provide financial activities or transactions. A business relationship will be deemed to have occurred where a reporting entity conducts any financial activity or transaction in respect of which records are required to be kept under the Regulations.
Accordingly, "business relationship" would encompass circumstances where there is a single:
- foreign exchange transaction;
- electronic funds transfer transaction;
- sale of traveller's cheques, money orders or similar negotiable instruments; or
- redemption of a money order.
It is important to note that the proposed amendment refers to a "business relationship" and not to an "ongoing business relationship". This is an important distinction given how FinTrac Guideline 4 is currently drafted. Specifically, Guideline 4 provides that completing a risk assessment is appropriate where there is an ongoing relationship. The Guideline goes on to provide that where dealings with a client are limited to a single transaction, there is no ongoing relationship. The proposed changes to the Regulations abandon the concept of an "ongoing" relationship in the circumstances of the deeming provision discussed above.
In respect of "business relationships", it is proposed that the Regulations would require:
- ongoing monitoring of "business relationships";
- application of enhanced customer due diligence measures to high-risk business relationships; and
- maintaining records of the purpose and intended nature of the "business relationship".
Suspicious Transactions and Attempted Suspicious Transactions
The Consultation Paper proposes amendments to the Regulations to require reporting entities to take "reasonable measures" to ascertain the identity of an individual who undertakes or attempts to undertake a suspicious transaction, including in circumstances where the client or transaction in question may be subject to identity verification exceptions.
In this regard, it is important to note that section 53.2 of the Regulations, as currently drafted, provides an exemption to the requirement to ascertain identity for suspicious (or attempted suspicious) transactions in circumstances where the reporting entity believes that complying with that requirement would "tip off" the person that the transaction is being reported. From a practical perspective, it is difficult to see how requesting identifying information from a person who chooses not to complete a transaction would not tip off that person that the reporting entity intends to report the attempted transaction.
As the Regulations are currently drafted, reporting entities are required, in prescribed circumstances, to take reasonable measures to obtain and retain information in respect of the beneficial ownership of customers that are corporations, entities or trusts. The information required to be collected includes the name, address and occupation of all persons who own or control, directly or indirectly, more than 25% of the entity. In the event that the beneficial ownership information cannot be obtained, then the Regulations allow reporting entities to keep a record as to why such information could not be obtained.
The requirement to take "reasonable measures" to obtain this beneficial ownership information allows for circumstances where it is impractical, if not impossible, to obtain the requisite beneficial ownership information. The proposed amendment to the Regulations seeks to remove the requirement to take "reasonable measures" to obtain beneficial ownership information and instead make the collection of this information mandatory. Moreover, the Consultation Paper also provides that, in addition to obtaining mandatory beneficial ownership information, reporting entities must also now take reasonable measures to ascertain the identity of the individual beneficial owner(s). As the verification of identity procedures set out in the legislation for non face-to-face transactions are very Canadian-focused, this requirement will likely prove difficult in circumstances where there are non-Canadian beneficial owners.
The Consultation Paper also provides clarification in respect of the requirement to collect beneficial ownership information on trusts. In this respect, the Consultation Paper proposes that beneficial ownership information must include information in respect of beneficiaries (those which are identifiable), settlors and trustees. The mandatory requirement to obtain beneficial ownership information on trusts may prove challenging in the context of public REITs and trusts that are used as securitization vehicles.
Extending Ongoing Monitoring Obligations
Currently, the Regulations require reporting entities to monitor financial transactions in circumstances that have been identified by the reporting entity as being high risk for money laundering or terrorist financing activities, as well as in more specific circumstances for financial entities.
The Consolidation Paper recommends extending the ongoing monitoring obligations not only for high-risk clients but also for any clients and activities to which the legislation applies. Leveraging off the concept of a "business relationship", the Consolidation Paper recommends that reporting entities should conduct ongoing monitoring activities in respect of a reporting entity's business relationship with a client as a whole.
For some institutions with robust monitoring systems, this requirement will not likely be particularly onerous, but may be very cost sensitive for institutions with less sophisticated monitoring procedures and those that currently do not have "ongoing" business relationships.
The Regulations propose a new record-keeping requirement for reporting entities. In this regard, a record that sets out the purpose and intended nature of a business relationship between a reporting entity and its customer will now be a mandatory requirement. This measure is aimed at improving the capacity of reporting entities to know and understand their clients' activities.
Enhanced Client Due Diligence (CDD)
The Consultation Paper proposals would require reporting entities to implement enhanced due diligence not only for high-risk clients but also for high-risk activities or business relationships. In this respect, the Consultation Paper recommends that, in these particular circumstances, the current requirement to use "reasonable measures" to conduct enhanced due diligence for high-risk situations be amended so that enhanced CDD is a mandatory requirement. Moreover, it is proposed that enhanced CDD provisions be clarified to ensure that enhanced CDD for high-risk situations goes beyond the standard due diligence undertaken on medium- or low-risk situations.
Specifically, the Consultation Paper proposes that compulsory enhanced due diligence measures for high-risk situations be expanded to include:
- enhanced measures to ascertain the identity of an individual or confirm the existence of a corporation or entity;
- enhanced measures to keep client identification up-to-date; and
- measures to conduct enhanced ongoing monitoring of business relationships for the purpose of detecting suspicious transactions.
The Consultation Paper clarifies that the requirement to implement these additional enhanced CDD procedures will apply to the totality of the relationship between the client and the reporting entity for all products and services, even those that may be seen as low risk.
The comment period on the proposed amendments to the Regulations runs until December 16, 2011.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.