On November 8, 2011 the Department of Finance (the "Department") issued a consultation paper seeking input on some proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the "Regulations") related to ascertaining identity (the "Consultation Paper").
The Department is proposing changes to the Regulations in order to strengthen Canada's Anti-Money Laundering and Anti-Terrorist Financing ("AML/ATF") Regime and to improve Canada's compliance with the Financial Action Task Force's ("FATF") 40+9 Recommendations on Money Laundering and Terrorist Financing.
In 2008 the FATF conducted an evaluation of Canada's AML/ATF regime and concluded, in part, that Canada was non-compliant in respect of Recommendation 5 as part of FATF's 40+9 Recommendations on Money Laundering and Terrorist Financing. Recommendation 5 states that member countries should implement measures to ensure that financial institutions are adequately able to identify their customers when establishing business relations or carrying out occasional transactions. These measures include: identifying the customer using reliable, verifiable documentation; Identifying and taking reasonable measures to verify the identity of a beneficial owner; obtaining information on the purpose and intended nature of a business relationship; and conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution's knowledge of the customer, their business and risk profile, including, where necessary, the source of funds.
To address the shortcomings noted above, the Department is proposing a series of amendments to the Regulations, briefly described as follows.
First, persons and entities subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "Act" ) (also known as "reporting entities") are currently subject to various AML/ATF obligations when opening an account or when conducting various prescribed financial transactions above a designated threshold. The Act currently does not extend AML/ATF obligations to business relationships. Rather, the Act applies only to account openings and occasional financial transactions. This is further limited by the fact that certain reporting sectors do not offer accounts to clients; the obligations contained in the Regulations apply only to designated financial transactions conducted by such reporting entities. To address this perceived deficiency, the Department proposes to amend the Regulations to extend the application of certain AML/ATF obligations to business relationships, in addition to account openings and prescribed financial transactions.
Second, generally speaking, the Regulations require reporting entities to ascertain customer identity when opening prescribed accounts and conducting financial transactions above a designated threshold. Notwithstanding this general principle, the Regulations also provide exceptions for a number of prescribed financial transactions and activities from such obligations, on the grounds that those transactions and activities have been determined to be at low risk for money laundering or terrorist financing. In addition, the Regulations also provide that reporting entities must take reasonable measures to ascertain the identity of customers when they conduct any financial transaction in respect of which there are reasonable grounds to suspect money laundering or terrorist financing. This provision does not explicitly specify whether the obligation to take reasonable measures to conduct customer due diligence ("CDD") measures in respect of suspicious transactions overrides the exemption on CDD in respect of designated low risk financial transactions.
The Department proposes to amend the Regulations to clarify that reporting entities must take reasonable measures to ascertain the identity of customers who attempt to conduct a suspicious transaction. The Department believes that the extension of this obligation to include attempted transactions, which give rise to a suspicion of money laundering or terrorist financing, would assist reporting entities to better know their clients. As proposed, reporting entities would be required to take measures to ascertain client identity in respect of a broader range of transactions, thereby giving them a fuller picture of the scope of a client's activities.
Third, the Department proposes to expand the scope of certain CDD obligations to cover a wider range of activities and relationships. The Department indicates that the proposed amendments are intended to assist reporting entities to better know their clients by increasing the range of circumstances in which CDD measures are required. The proposed changes would also allow reporting entities, when implementing certain obligations under the Regulations, to examine the entire relationship with a client, rather than limiting scrutiny to designated financial transactions or activities. The Department anticipates that this will assist reporting entities in implementing a risk-based approach for identifying, assessing and mitigating customer risk levels.
The Consultation Paper concludes by indicating that the regulatory amendments the Department has proposed would help to make Canada's AML/ATF regime stronger by providing reporting entities with additional tools and opportunities to know their customers and to identify transactions and activities related to money laundering and terrorist financing. Furthermore, the Consultation Paper indicates that the proposed changes would help to protect Canada's financial system from transactions related to money laundering and terrorist financing, and will ensure that Canada remains a strong player in the global fight against money laundering and terrorist financing.
This proposed amendments to the Regulations have important implications for reporting entities' compliance regimes. The consultation process will provide reporting entities with an opportunity to consider whether the amendments as proposed are practical or whether there are alternative approaches that can be considered to meet the objectives identified by the Department. In addition, this is perhaps also an opportunity to encourage clarifications to be made to the various guidance documents that have been issued by FINTRAC to assist reporting entities to implement the requirements of the Act and the various regulations that have been promulgated under the Act. Comments on the proposed amendments to the Regulations are due on or before December 16, 2011.
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