Co-authored by Vlad Duta, Student-at-Law
In December 2014, as a result of a recent request1
made under the Access to Information Act2, the
Financial Transactions and Reports Analysis Centre of Canada
("FINTRAC") released its policy
interpretations regarding the Proceeds of Crime (Money
Laundering) and Terrorist Financing Act3
(the "Act") and its accompanying
Since 2008, FINTRAC has been providing policy interpretations in the form of responses to questions from persons and entities with obligations under the Act and the Regulations. Last month, FINTRAC released several hundred of these responses on its website. While they do not constitute legal advice, a number of these responses provide helpful guidance on FINTRAC's interpretation of the obligations of persons dealing in securities in Canada in reliance on the international dealer exemption (described below) ("IDE Persons").
Obligations of IDE Persons under the Act
Foreign securities dealers operating in Canada are exempt from the requirement to register as a dealer in Canada if they meet the "international dealer" exemption criteria5 in section 8.18 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registration Obligations (the "National Instrument").6 In the past, there has been some confusion regarding how this exemption interacts with the obligations for securities dealers under the Act, and whether this exemption effectively relieves IDE Persons from compliance requirements under the Act. McMillan has consistently advised its international dealer clients about their obligations under the Act, which have now been confirmed by FINTRAC in published policy interpretations.
FINTRAC notes in its published responses to policy interpretation questions that the Act applies to "securities dealers", which are defined under the Act and the Regulations as "persons and entities authorized under provincial legislation to engage in the business of dealing in securities or any other financial instruments or to provide portfolio management or investment advising services."7 With regard to this definition, a passage from one of FINTRAC's responses from 2012 clearly summarizes its position on exemptions from registration:
The definition of a securities dealer does not refer to registration but rather to being "authorized" to provide [dealing or advising services]. Therefore, the fact that one is exempted assumes that a provincial authority "authorizes" the entity to operate without being registered. Therefore, exempted entities, such as ... entities that are exempted from registration, are covered under our Act.8
FINTRAC has expressed this same position in a number of other
published responses.9 These responses confirm
FINTRAC's position that there is a definitive obligation on IDE
Persons to comply with the Act. This means that IDE Persons must
observe the entire suite of responsibilities under the Act,
including those with respect to reporting,10 record
keeping, ascertaining identity, politically exposed foreign persons
and third party determination. In addition, as part of their
compliance regimes, IDE Persons must develop and apply written
compliance policies and procedures.11
The policy interpretation responses from FINTRAC serve as an important reminder that foreign dealers should turn their mind to their obligations under the Act when initially seeking to become IDE Persons, including creating written policies and procedures for compliance.
Compliance Policies and Procedures for IDE Persons
In its responses to policy interpretation questions, FINTRAC also provides guidance on how IDE Persons should prepare their written compliance policies and procedures. FINTRAC clarifies that foreign securities dealers need only comply with obligations under the Act with respect to their Canadian activities:
[If] the foreign securities dealer is authorized by the province to be engaged in the activities described under subsection 1(2) of the [Regulations], under an International Dealer Exemption[,] [c]onsequently, the foreign securities dealer is subject to the [Act] for its Canadian activities, and has to develop and apply policies and procedures consistent with record keeping, client identification and compliance regime requirements for its Canadian activities only.12 [emphasis added]
In addition, FINTRAC makes it clear that if a non-Canadian
client of an IDE Person is listed under Canadian laws relating to
terrorist financing or United Nation sanctions, FINTRAC would
expect to receive a report in respect of that non-Canadian
client.13 This is consistent with the views of the
Canadian Securities Administrators about the reporting
responsibilities of IDE Persons as set out in CSA Staff Notice
31-317 (Revised) Reporting Obligations Related to Terrorist
More specific information about compliance obligations for securities dealers can be found in FINTRAC's Guideline 6E: Record Keeping and Client Identification for Securities Dealers.15
Foreign securities dealers operating in Canada in reliance on the international dealer exemption are considered by FINTRAC to be securities dealers for the purposes of the Act. As a result, they are required to develop and apply written policies and procedures relating to their record keeping, client identification and transaction reporting requirements under the Act for their Canadian activities.
McMillan is able to assist foreign securities dealers to better understand their obligations under the Act and to prepare written compliance policies and procedures as part of the process of becoming eligible to deal with Canadian clients in reliance on the international dealer exemption.
1 On September 22, 2014, Outlier Solutions Inc., a consulting company offering anti-money laundering and counter terrorist financing services, made a request to FINTRAC to disclose FINTRAC's policy positions related to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) from 2008 to the present.
2 RSC 1985, c A-1.
3 SC 2000, c 17 [PCMLTFA].
4 Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, SOR/2002-184 [PCMLTFR].
5 The "international dealer" exemption is available to non-resident persons or companies that are registered to carry on the business of dealing in securities or engage in the business of a dealer in their home jurisdiction. The exemption applies only to trades with "permitted clients" (defined in the National Instrument) and generally only to trades that involve "foreign securities" (defined in the National Instrument).
6 Available online at: http://www.osc.gov.on.ca/documents/en/Securities-Category3/ni_20150111_31-103_unofficial-consolidated.pdf.
7 PCMLTFA, s. 5(g); PCMLTFR, s. 1(2).
8 FINTRAC Policy Interpretations, "Other", response 48, available online at: http://www.fintrac-canafe.gc.ca/publications/fins/2-eng.asp?s=2.
9 See the following responses: FINTRAC Policy Interpretations, "Other", responses 2, 35 and 51, available online at: http://www.fintrac-canafe.gc.ca/publications/fins/2-eng.asp?s=2; FINTRAC Policy Interpretations, "Compliance Regime", response 44, available online at http://www.fintrac-canafe.gc.ca/publications/FINS/2-eng.asp?s=4, FINTRAC Policy Interpretations, "Reporting", response 91, available online at http://www.fintrac-canafe.gc.ca/publications/FINS/2-eng.asp?s=1.
10 Securities dealers must make reports on suspicious transactions, terrorist property, and large cash transactions.
11 PCMLTFA, s. 9.6(1); PCMLTFR, s. 71(1).
12 FINTRAC Policy Interpretations, "Other", response 2, available online at: http://www.fintrac-canafe.gc.ca/publications/fins/2-eng.asp?s=2.
13 FINTRAC Policy Interpretations, "Other", responses 2 and 35, available online at: http://www.fintrac-canafe.gc.ca/publications/fins/2-eng.asp?s=2.
14 Available online at: http://www.osc.gov.on.ca/documents/en/Securities-Category3/csa_20100730_31-317_rpt-obligations.pdf.
15 Available online at: http://www.fintrac-canafe.gc.ca/publications/guide/Guide6/6E-eng.asp.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2015