Canada: Anti-Money Laundering And Anti-Terrorist Financing Laws To Be Strengthened

On December 14, 2006, Bill C-25, which includes amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Amendments), received Royal Assent. It is expected to be proclaimed into force as soon as ancillary amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (Regulations) have been released and finalized.

By introducing tougher "know your client" standards, and enhanced compliance, monitoring and enforcement powers, the Amendments seek to ensure that the Canadian anti-money-laundering and anti-terrorist financing legal regime is consistent with international standards. The Amendments have been introduced in anticipation of the 2007 assessment of Canada’s anti-money laundering and anti-terrorist financing regime by the Financial Action Task Force (FATF), and are expected to have a significant impact on how financial institutions and other financial intermediaries transact their business in Canada.

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act), which came into force in 2001, requires (among others) financial institutions, financial intermediaries, life insurance companies, brokers and agents, securities dealers, foreign exchange dealers and money service businesses (collectively, Reporting Entities) to comply with certain client identification, record-keeping, reporting and internal compliance requirements. Such requirements include reporting any suspicious transactions, large cash transactions and international wire transfers to Canada’s financial intelligence unit, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), and to the Canada Border Services Agency. As mentioned above, the Regulations, which are expected to resolve certain open issues left by the Amendments (some of which are noted below), have not yet been released by the Federal Government.

The key Amendments include:

• Introducing a registration requirement for money service businesses and foreign exchange dealers;
• Introducing a requirement that suspicious attempted transactions be reported;
• Expanding client identification, due diligence and record keeping requirements by introducing a "risk-based approach" in determining the level of compliance required (in particular as they relate to non face-to-face transactions);
• Introducing a requirement that all Canadian Reporting Entities with foreign subsidiaries in countries that are not members of FATF ensure that those foreign subsidiaries also comply with the obligations of the Act;
• Tightening client identification requirements in relation to correspondent banking relationships, and transactions or arrangements involving foreign shell banks or politically exposed foreign persons;
• Expanding FINTRAC’s authority to disclose information to certain other government agencies and their foreign counterparts, as well as allowing for a broader range of information sharing between federal departments and agencies;
• Creating a more flexible administrative and monetary penalties regime; and
• Increased record-keeping requirements for information to be contained in electronic funds transfers.

The Amendments establish a registration regime for money services businesses (e.g., pay day lenders, among others) and foreign exchange dealers. Under the Amendments, all persons engaged in money services businesses, the business of foreign exchange dealing or who sell money orders to the public, will be required to register with FINTRAC. The application for registration must include a list of the applicant’s agents, mandataries or branches engaged in the relevant business. FINTRAC must be notified of any changes to the information in the registration within thirty days. Registered persons must also respond to any requests for clarification by FINTRAC within thirty days, failing which FINTRAC may revoke the registration. Registrations will generally be renewable every two years.

The Amendments introduce enhanced client identification and record keeping requirements for Reporting Entities relative to the risk associated with the respective transaction (this applies particularly in the context of non face-to-face customer identification). The Amendments further require Reporting Entities to adopt additional monitoring measures for client identification purposes in the context of correspondent banking relationships and foreign shell banks, as well as transactions involving politically exposed foreign persons.

Any correspondent banking relationships with a shell bank (to be defined in the Regulations) are prohibited, and Reporting Entities are required to take specified measures before entering into a correspondent banking relationship. A correspondent banking relationship typically includes services such as international electronic fund transfers, cash management, cheque clearing and foreign exchange services. The measures to be undertaken in these circumstances include (i) obtaining prescribed information about the foreign entity and its activities, (ii) ensuring that the entity is not a shell bank, and (iii) obtaining senior management approval.

Also included in the Amendments is a requirement that a Reporting Entity take measures to identify and monitor the transactions of foreign nationals who hold prominent public positions. Having first determined that the transaction involves a "politically exposed foreign person", a Reporting Entity must obtain senior management approval and take certain "prescribed measures", which are expected to be set out in the Regulations. The definition of "politically exposed foreign person" is broad and ranges from heads of state, high-ranking military officers and members of the judiciary, to a catch-all holder of any other office or position to be set out in the Regulations. The definition also includes "any prescribed family member" of such a politically exposed foreign person.

The Act currently requires all Reporting Entities to report any suspicious transactions related to either money laundering or terrorist financing activity to FINTRAC, regardless of monetary value. Under the Amendments, this reporting requirement will now extend to any attempted suspicious transactions of that nature. As such, Reporting Entities will need to implement additional internal safeguards, policies and procedures to ensure compliance with this requirement.

The Amendments also extend the Canadian Reporting Entities’ obligations under the Act to operations of their foreign subsidiaries in countries that are not members of FATF. The Amendments do, however, allow for an exemption from this requirement when implementation of policies required by the Act would violate the laws of the country where the foreign subsidiary operates.

The Amendments also strengthen FINTRAC’s intelligence function by permitting it to disclose and exchange more information contained in FINTRAC disclosures with both domestic and foreign law enforcement and intelligence agencies. The intention of such amendments is to increase the value of the disclosures for intelligence units, ideally leading to more complete investigations and an increased rate of prosecution for non-compliance. Additionally, the Amendments include changes to the Income Tax Act which allow the CRA to disclose information to FINTRAC (and other government intelligence agencies) about charities suspected of being involved in terrorist financing activities.

The penalty regime under the Act previously only allowed for significant penalties (including fines and jail terms) if the Act was contravened. Recognizing that FINTRAC should be given the ability to impose non-criminal sanctions to deal with lesser contraventions, the Amendments introduce the concept of a "violation" (which, although yet to be defined in the Regulations, appears to fall short of an offence). Less onerous administrative penalties and fines will apply to violations, giving FINTRAC more flexible and workable enforcement capability.

Reporting Entities will be required to more closely monitor "prescribed electronic funds transfers" (most likely to be denominations in excess of $10,000) by including with the transfer the name, address, and account number of the client requesting the funds and any further information required by the regulations. Reporting Entities are also required to take reasonable measures to ensure that any transfers received include such information.

While the Amendments do not require legal counsel to file suspicious transaction reports or other prescribed transaction reports, this issue is not entirely off the agenda as the Department of Finance has stated that client identification, record keeping and internal compliance procedures for legal counsel when they act as financial intermediaries will be the subject of a further consultation process.

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