Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Financial Services Regulatory, January 2012
On December 21, 2011, the Department of Finance released a consultation paper (the Consultation Paper) focused on strengthening Canada's anti-money laundering (AML) and anti-terrorist financing (ATF) regime.
The Consultation Paper proposes significant amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PC Act) and its regulations (the Regulations) to achieve this purpose. The government is seeking input on the recommendations set out in the Consultation Paper, and the comment period is open until March 1, 2012. In light of the significant modifications proposed to the PC Act and its Regulations, entities that are, or will be, regulated by the PC Act are encouraged to review the proposals set out in the Consultation Paper and provide comments to the government as requested in the Consultation Paper.
What follows is a high-level summary of the material modifications recommended to be made to the PC Act and its Regulations and the matters in respect of which the government has requested industry input.
International Electronic Funds Transfer Reporting
Currently, certain regulated entities under the PC Act are required to report to the Financial Transactions and Reports Analysis Centre of Canada (Fintrac) the sending out of Canada or receipt from outside of Canada of any electronic funds transfer (EFT) of C$10,000 or more.
In light of the patterns observed in terrorist financing cases where smaller dollar amounts are typically involved, the Consultation Paper recommends eliminating the C$10,000 threshold so that all international EFTs sent or received, regardless of the amount, would be reportable to Fintrac by financial entities, money service businesses and casinos.
What is not clear from the Consultation Paper is whether this reporting requirement would also require the affected regulated entities to verify the identity of senders and recipients of any international EFTs. Currently, identity verification is only required at the C$1,000 threshold. The requirement to verify identity for all international EFT transactions could be problematic for regulated entities that operate exclusively in an online environment.
Canada currently has no specific anti-money laundering or anti-terrorist financing controls in place on prepaid access products. This lack of regulation in respect of prepaid access was identified as a deficiency in Canada's AML/ATF legislation by the Financial Action Task Force (FATF) in its mutual evaluation of Canada in 2008.
It is not surprising then that the Consultation Paper recommends regulating prepaid access from an AML/ATF perspective and in this regard makes two proposals to mitigate the money laundering and terrorist financing risks posed by prepaid access products.
The first proposal is to examine enhanced due diligence requirements that are already contained in the PC Act to determine whether these measures should be extended to prepaid access devices. The Consultation Paper outlines that the government is seeking views on this potential course of action including:
- Types of prepaid access devices that should be covered (for example, reloadable, closed loop, open loop);
- Which party involved in the issuance and distribution of prepaid access should have compliance responsibilities under the PC Act (for example, issuers, payment networks, retailers, program managers, processors, distributors); and
- Potential operational impacts associated with imposing due diligence requirements on the sale and distribution of prepaid access.
Given the breadth of prepaid access products in the Canadian market place, the regulation of prepaid access products could have material effects not only on issuers and distributors but also on retailers that sell prepaid access products.
The second proposal is expanding the definition of "monetary instruments" for purposes of cross-border reporting under the Cross-Border Currency and Monetary Instruments Reporting Regulation to include prepaid access products. This amendment would require that when prepaid access devices loaded with C$10,000 or more cross-Canadian borders, a report would need to be filed as is currently the case with the importation or exportation of cash of C$10,000 or more.
Strengthening Customer Due Diligence
In addition to the due diligence measures outlined in the Consultation Paper of November 7, 2011 (see our November 2011 Blakes Bulletin), the government has recommended additional due diligence measures in the Consultation Paper. These additional measures include:
- Requiring regulated entities that are required to ascertain the identity of authorized signers for business accounts to also keep a "client identification record" in respect of that signer;
- Requiring regulated entities relying on "introducers" (where a financial business introduces a client to another financial business) to receive documentation in respect of information used to verify a client's identity by that introducer;
- Expanding the definition of a "politically exposed foreign person" (a PEFP) so that it includes "close associates" of such a person (currently the definition extends only to family members);
- Requiring that regulated entities review their entire client base to determine if any existing account holders are PEFPs (currently this requirement only applies to high-risk accounts);
- Expanding the requirements of the PC Act in its application to life insurance companies (see discussion below);
- Specifying that, for purposes of obtaining proof of existence of a corporation when required by the Regulations, the documentation utilized (for example, certificates of status) must be no more than one year old; and
- Amending the provisions in respect of third-party determination requirements to replace the term "third party" with "instructing party" to clarify that Fintrac requires information on the person providing the instructions as opposed to the person carrying out the instructions.
Other modifications to the PC Act that are under consideration that would be helpful to regulated entities include:
- Reviewing the requirement for a handwritten signature to be maintained by regulated entities for record-keeping purposes when accounts are opened. In this respect, the government is seeking industry views on this issue to explore account holder authority established by electronic means and the ability to share client signature cards where a client has consented to such sharing.
- Expanding the client identification and other record-keeping exemptions from those currently available in respect of public companies to all corporations whose shares are traded on a Canadian or other foreign stock exchange designated under section 262(1) of the Income Tax Act. Currently, the public company exemptions will only apply if the corporation has more than C$75-million in net assets.
While non-face-to-face identity verification requirements were introduced in amendments made to the Regulations in 2008, many regulated entities feel that they do not adequately address transactions or account openings that occur in the online environment. The government, in recognizing the increased reliance on electronic means for product delivery, provides in the Consultation Paper that it is interested in examining emerging technologies that may represent an opportunity to strengthen the application of digital identification and authentication in the online environment. As such, the Consultation Paper requests commentary on the following matters:
- Where bank statements are used to confirm that an individual has a deposit account, what security features are included to assist in determining the authenticity of such statements; and
- For credit card issuers, information to address concerns that have been raised by the industry related to the decreased usefulness of the telecommunication directory as a reliable independent data source to ascertain identity.
The inability, in most circumstances, to verify identity in real time in the online environment in accordance with the requirements of the PC Act is problematic and regulated entities would be well served in proposing reasonable alternatives for non-face-to-face identity verification so that they are able to remain competitive and innovative in new payment technologies.
The Life Insurance Sector
The Consultation Paper proposes expansion of the scope of the application of the PC Act to the life insurance sector. Specifically, the proposed amendments in relation to the life insurance sector include the following:
- Expanding all record-keeping and client identification obligations under the PC Act and its Regulations to transactions and account openings for investment and loan products offered by life insurance companies. Currently, these obligations are only imposed on the purchase of an immediate or deferred annuity or a life insurance product where the client may pay more than C$10,000 or more over the life of the annuity or policy;
- Eliminating the C$10,000 threshold for the requirement to keep records and identify clients in respect of annuities or policies purchased;
- In keeping with the foregoing proposal, requiring life insurance companies and life insurance brokers and agents to take reasonable measures to determine if a person who opens an investment or loan account is a PEFP and, if so, to implement all required PEFP obligations under the PC Act and Regulations. This obligation would also extend to existing clients who have investment or loan accounts; and
- Limiting certain of the exemptions currently available to life insurance companies for reporting large cash transactions to only specified transactions where the origin of funds may be easily identified.
Other Proposed Modifications
Other modifications proposed by the Consultation Paper include:
- The requirement for regulated entities to do a "look back" and to file reports where there has been a failure to report transactions in the past, and the ability of Fintrac to impose additional penalties until such look-back reports are filed;
- In circumstances where the PC Act requires regulated entities to take "reasonable measures," a requirement to document the reasonable measures taken, unless the required information is in fact obtained; and
- Broadening the requirement to report suspicious transactions to encompass not only financial transactions but also activities conducted for the purpose of a financial transaction. Currently, suspicious transactions (or attempted suspicious transactions) reports are only required in respect of financial transactions. This is a significant broadening of potential activities that may be reportable as suspicious and may require regulated entities to make significant systemic refinements.
In our April 2010 Blakes Bulletin: Update on Financial Institution Legislation, proposed amendments to the PC Act dealing with the ability of the Minister of Finance (the Minister) to issue directives (Directives) were summarized. The Consultation Paper proposes that these provisions in respect of the issuance of Directives would be brought into force in conjunction with the other regulatory amendments outlined in the Consultation Paper.
In order to clarify the authority of the Minister to issue Directives, the Consultation Paper proposes that regulations would be implemented to provide greater detail and certainty to regulated entities as to how the use of these powers would be undertaken. These regulatory amendments would include:
- Providing a list of specific countermeasures that the Minister, when issuing a Directive, can require regulated entities to take. These countermeasures are set out in detail in the Consultation Paper and include:
- enhanced verification of customer identity (including frequency of customer identity, methods of ascertaining customer identity, information on directors and beneficial owners (at 5% and 10% ownership/control thresholds)), third-party identification requirements;
- exercise of customer due diligence measures including taking FATF advisories into consideration as part of a reporting entity's risk assessment;
- keeping specific transaction records;
- enhanced monitoring for certain correspondent banking relationships including senior management approval to establish new correspondent relationships;
- requirement for senior management review/approval of designated transactions;
- enhanced ongoing monitoring for designated transactions or accounts; and
- reporting specified transactions.
- Updating the existing Administrative Monetary Penalty Regulations to allow for administrative and monetary penalties to be assessed for the violation of Directives or any related regulations.
The Consultation Paper sets out significant detail on the contents of the regulations that are to be implemented in respect of Directives.
The Consultation Paper proposes amendments to clarify certain reporting obligations for dealers in precious metals and stones as well as for accountants. For money service businesses, the Consultation Paper proposes reducing the type of information required to apply for registration with Fintrac. There are also proposed measures to strengthen information sharing between Fintrac and law enforcement agencies and others involved in financial intelligence.
The comment period on the Consultation Paper is open until March 1, 2012. Given the significant changes proposed to the legislation, regulated entities are recommended to review their policies and procedures to determine the impact of the proposed changes so that they can make meaningful commentary.
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.