Amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "PCMLTFA") and other acts related to the anti-money laundering and anti-terrorist financing regime have been enacted by the Canadian Parliament. Recently, draft regulations ("Draft Regulations") related to these amendments have also been published.
Following the Canadian Government’s 2005 consultation paper, Enhancing Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime (the "Consultation Paper"), the amendments to the PCMLTFA, together with the Draft Regulations, are designed to make Canada’s laws consistent with international standards, reflecting the recommendations of the Financial Action Task Force ("FATF"). Canada will be evaluated in 2007 by the FATF on the extent to which it has implemented these international standards.
This Bulletin describes the new requirements on reporting entities for a risk-based compliance program, including enhanced identification and monitoring requirements for high-risk activities such as correspondent banking relationships and dealings with politically exposed foreign persons ("PEFPs"). This Bulletin also describes the new requirements for reporting suspicious attempted transactions, new measures for identifying customers in non-face-to-face transactions, the registration requirements for money services businesses ("MSBs") and, potentially, other businesses as well as the new administrative monetary penalty regime for compliance with the legislation.
Other legislative amendments close perceived gaps in the regime, increase compliance and monitoring requirements for financial entities and intermediaries, and strengthen the intelligence function of the Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC"). This Bulletin provides an overview of some of the more significant amendments to Canada’s anti-money laundering and anti-terrorist financing regime.
Risk-Based Compliance Program
A new feature of the statutorily mandated compliance program for reporting entities is a risk assessment program. Reporting entities must develop policies and procedures that assess the risk of a reporting entity’s activities being used for money laundering or terrorist financing activities.
If the risk assessment for particular activities is high, the reporting entity must take special measures to identify the client, keep records and monitor financial transactions in respect to those activities that pose the high risk.
The Draft Regulations provide that a risk-based compliance program includes:
- appointing a person who is to be responsible for the implementation of the program;
- developing and applying written compliance policies and procedures that are approved by a senior officer and are kept up to date;
- assessing and documenting, in a manner that is appropriate for the reporting entity, the money laundering and terrorist financing risk, taking into consideration relevant factors;
- developing and maintaining a written ongoing compliance training program for employees, agents or persons authorized to act on the entity’s behalf; and
- instituting and documenting a review of the policies and procedures, the risk assessment and the training program for the purpose of testing their effectiveness. This review is required to be carried out every two years by an internal or external auditor of the entity, or by the entity itself if it does not have an auditor.
The Draft Regulations also require that the findings of the review, the resulting updates to the policies and procedures made during the reporting period, and the status of implementation of the policies and procedures and their update be reported in written form to a senior officer at intervals of two years or less.
Where a reporting entity considers the risk of a money laundering offence or a terrorist financing offence to be high, it must develop and apply written policies and procedures for: (a) taking reasonable measures to keep client identification information and beneficiary information up to date; (b) taking reasonable measures to conduct ongoing monitoring for the purpose of detecting suspicious transactions or attempted transactions; and (c) mitigating these risks. The reasonableness of measures taken will depend in part on the assessment of the level of risk related to the client’s activities. Where the risk of money laundering or terrorist financing activity is high related to a particular product, risk mitigation may impact on product design and delivery.
The Office of the Superintendent of Financial Institutions ("OSFI"), the regulator of federal financial institutions, many of which are reporting entities, has suggested that a risk-based approach involves: (a) base-line due diligence; (b) enhanced due diligence commensurate with money laundering and terrorist financing risk; and (c) Board, senior management and business lines being fully engaged.
A risk-based approach is important when developing policies and procedures to address dealings with PEFPs, addressing correspondent banking relationships and shell banks as well as identification requirements when conducting non-face-to-face transactions, all of which are dealt with in the Draft Regulations.
Politically Exposed Persons
Amendments to the PCMLTFA and the Draft Regulations strengthen due diligence requirements relating to customers of financial institutions and other intermediaries in response to international concern that politically exposed persons pose a higher-risk as it is believed that they have potentially greater opportunities to engage in corrupt activities. The amendments to the PCMLTFA and the Draft Regulations attempt to address this concern by bringing Canada in line with FATF recommendations.
Who is a PEFP?
Although the Consultation Paper suggested that domestic politically exposed persons would be captured by the new requirements, the legislation only imposes requirements related to PEFPs. The PCMLTFA amendments require greater due diligence related to a broad range of non-Canadian public officials, including heads of government, members of legislatures and heads of political parties, deputy ministers, ambassadors, senior military officers, heads of state-owned companies and institutions, and members of the judiciary. The Draft Regulations expand the list of PEFPs to family relations of these non-Canadian public officials.
Circumstances in which PEFPs are to be Identified and their Transactions Monitored
Reporting entities are required to take reasonable measures to identify, and monitor transactions with, PEFPs. Financial entities such as banks, foreign bank branches, trust and loan companies, and credit unions and caisses populaires as well as securities dealers will be required to take reasonable measures to determine both whether a person for whom it opens an account is a PEFP and whether, based on the level of risk, current account holders are PEFPs. There is no minimum financial threshold for compliance with this requirement. Identifying and maintaining current information about PEFPs and family members of PEFPs will likely be challenging and potentially costly.
Financial entities and money services businesses are expected to take reasonable measures to determine whether a person who initiates or receives an electronic funds transfer of $100,000 or more is a PEFP. Life insurance companies, brokers and agents are required to take reasonable measures to determine whether a person who initiates a payment of $100,000 or more for the purchase of an immediate or deferred annuity or life insurance policy on their own behalf or on behalf of a third party is a PEFP.
Due Diligence Measures
Where a financial entity or securities dealer determines that a person for whom it is opening an account is a PEFP, it must: (a) take reasonable measures to establish the source of the funds that have been, will be or are expected to be deposited in the account in question; (b) obtain the approval of senior management to open the account within ten days of the determination; and (c) conduct enhanced ongoing monitoring of the activities in respect of the account.
Where a financial entity or money services business determines that a customer conducting or receiving an electronic funds transfer of $100,000 or more is a PEFP, and where a life insurance company or life insurance broker or agent determines that a person who initiates a payment of $100,000 or more for the purchase of an annuity or life insurance policy is a PEFP, it must: (a) take reasonable measures to establish the origin of the funds to be used for the transaction in question; and (b) in respect of the transaction in question, obtain the approval of senior management before the transaction is conducted.
Where the opening of an account for, or conducting a transaction with, a PEFP is approved by senior management, a financial entity, life insurance company or broker or agent, securities dealer or money services business must keep certain records, including the source, if known, of the funds that are, or are expected to be, deposited to the account or used for the transaction.
Correspondent Banking Relationships and Shell Banks
To address the potential abuse of correspondent banking relationships and use of shell banks by criminals, the FATF has prescribed enhanced due diligence measures for cross-border correspondent banking. The PCMLTFA amendments and the Draft Regulations seek to meet international standards by enhancing requirements in high-risk situations, including financial entity dealings with correspondent banking relationships and shell banks.
Correspondent Banking Relationships
A correspondent banking relationship means a relationship created by agreement or arrangement under which a deposit-taking institution in Canada undertakes to provide to a "prescribed foreign entity" (not defined in the Draft Regulations - we refer to it here as a foreign financial institution) services such as international electronic funds transfers, cash management and cheque clearing. Other services may be prescribed.
Before entering into a correspondent banking relationship with the foreign financial institution, the deposit-taking institution in Canada must obtain a substantial amount of information about the foreign financial institution and its activities, including a copy of its banking licence or charter, its most recent annual report or audited financial statements, the written agreement or arrangement setting out the respective parties’ responsibilities, information about the anticipated account activity and services to be used, confirmation from the foreign financial institution that it does not have correspondent banking relationships with shell banks, its anti-money laundering and anti-terrorism financing procedures, and a statement from the entity that it is in compliance with anti-money laundering and anti-terrorism financing procedures in its home jurisdiction.
The deposit-taking institution in Canada must ensure that the foreign financial institution is not a shell bank, and must obtain the approval of its senior management to enter into the correspondent banking relationship or arrangement.
The deposit-taking institution in Canada must take reasonable measures to ascertain, based on publicly available information, whether there are any sanctions against the foreign financial institution in respect of anti-money laundering requirements and, if so, to monitor the correspondent banking relationship.
Where a customer of the foreign financial institution has direct access to the services provided under the correspondent banking relationship, the deposit-taking institution in Canada must take reasonable measures to ascertain that the foreign financial institution has, in respect of that customer, met requirements that are consistent with the record-keeping, client identification and measures for identification requirements under the PCMLTFA. The foreign financial institution must agree to provide customer identification data to the Canadian institution on request.
Under the PCMLTFA amendments, no person or entity is permitted to enter into a correspondent banking relationship with a shell bank. A shell bank is defined in the Draft Regulations as a foreign financial institution that does not have a physical presence (as defined in the Draft Regulations) in any country, unless it is controlled by or is under common control with a deposit-taking institution or foreign financial institution that has a physical presence in Canada or in a foreign country. Sufficient due diligence must be undertaken by the Canadian deposit-taking institution to satisfy these information requirements.
Customer Identification in Non-Face-to-Face Transactions
The Draft Regulations set out new ways in which client identity may be ascertained where a person is not physically present when identity must be ascertained. This change recognizes that account opening, applications for credit cards and other transactions may be undertaken in non-face-to-face situations, such as by way of the internet or telephone.
There are two ways in which identity can be ascertained in non-face-to-face transactions.
- The first method involves obtaining from the person their name, address, date of birth and occupation and:
(b) verifying that the name, address, telephone number and date of birth in the record kept by that affiliated entity or member corresponds to the information provided in accordance with the Draft Regulations by the person.
For the purpose of these provisions, an entity is affiliated with another entity if one of them is wholly owned by the other or both are wholly owned by the same entity. This is a restrictive definition of affiliation.
- The second method involves relying on permitted combinations of identification methods set out in Schedule 7 to the Draft Regulations. The identification methods set out in Schedule 7 include the following:
(b) confirming, after obtaining authorization from the person, certain information by referring to that person’s Canadian credit file that has been in existence for at least six months;
(c) obtaining an attestation from a commissioner of oaths in Canada or a guarantor (who falls within a listed category) in Canada that they have seen a client identification document permitted by the Draft Regulations to identify a physically present person;
(d) confirming that a cheque drawn on a deposit account of a Canadian financial entity (other than an account that is exempted from the client identification requirements) has cleared; and
(e) confirming that a person has a deposit account with a Canadian financial entity (other than an account that is exempted from the client identification requirements).
Other identification methods are available in respect of credit card accounts. Additional identification methods are available for credit card accounts opened for a person with no credit history in Canada if the credit limit on the card is not more than $1,500.
A person or entity required to take measures to ascertain identity where a person is not physically present may rely on an agent or mandatory to take those measures only if that person or entity has entered into an agreement or arrangement in writing with that agent or mandatory for the purposes of ascertaining identity.
In high risk circumstances, as part of their risk-based compliance program, reporting entities must take steps to keep client information current.
Information on Directors, Partners, Beneficial Owners and Managers of Clients
Financial entities, securities dealers, life insurance companies, insurance brokers or agents, and money services businesses required to confirm the existence of their corporate and unincorporated clients in particular circumstances must take reasonable measures to obtain and, if obtained, keep a record of the name, address and occupation of all directors and partners of their clients (as applicable) and of all persons who beneficially own 25 per cent or more of their clients or manage the entity. The reasonableness of measures taken will depend in part on the assessment of the level of risk related to the client’s activities.
Reporting Suspicious Attempted Transactions
Canada’s current anti-money laundering and anti-terrorist financing regime requires reporting entities to submit a report of any suspicious transaction that has occurred to FINTRAC. Certain FATF member countries, such as Australia and the United States, require entities to report suspicious attempted activities. The PCMLTFA amendments align Canadian law with FATF standards by requiring reporting entities to report every financial transaction that occurs or is attempted in the course of their activities in respect of which there are reasonable grounds to suspect that the transaction is related to the commission or attempted commission of a money laundering offence or a terrorist financing offence. It is expected that FINTRAC will release sector-specific guidelines on what constitutes an attempted suspicious transaction.
Registration Regime for MSBs
Amendments to the PCMLTFA require MSBs, federal or provincial departments or agencies that accept deposits, sell money orders to the public or that sell prescribed precious metals (no metal is prescribed in the Draft Regulations), and other prescribed reporting entities to register with FINTRAC. A MSB is a person or entity that engages in the business of foreign exchange dealing, of remitting or transmitting funds, or of issuing or redeeming traveller’s cheques or other bearer negotiable instruments. A person or an entity is ineligible for registration if they or a director, certain officers or shareholders of the entity has been convicted a money laundering, terrorist activity financing or certain other offences. An application for registration must include a list of the agents, mandatories or branches that engage in the registrable activity for the applicant.
A registrant must update their information or provide clarifications of the information filed if requested by FINTRAC within 30 days of a change of information or of a request for clarification, respectively. Notification must also be given if a registrant ceases carrying on an activity for which they are registered. Registrations must be renewed every two years (or a longer period if prescribed) and when a MSB ceases to carry on its activities. It is unclear when the registration requirements under the PCMLTFA will come into force and, therefore, when registrations must be made. Failure to register when required or knowingly providing false or misleading information to FINTRAC on conviction on indictment is subject to a fine of no more than $500,000 and imprisonment for a term of not more than five years.
In the future, registration requirements may be extended to others, including homebuilders and precious metal and stone dealers.
Administrative Monetary Penalty Regime
In step with FATF recommendations, the PCMLTFA amendments create an administrative monetary penalty system whereby certain contraventions of the legislative provisions will be designated by regulation as minor, serious or very serious violations, and a series of minor violations may be designated as a serious or very serious violation. Maximum penalties for violations are $100,000 for a person and $500,000 for an entity.
Unless the amount of a penalty is fixed for a violation of a legislative provision, the amount of a penalty is to be determined by taking into account the harm done, that the purpose of a penalty is to encourage compliance and any other prescribed criteria. A notice of violation issued by FINTRAC may include an offer to reduce the penalty proposed in half if the person or entity enters into a compliance agreement with FINTRAC. Persons and entities may make representations to FINTRAC in respect of a notice of violation. Due diligence is a defence in a proceeding in relation to a violation and, except to the extent that it is not inconsistent with the legislation, common law rules and principles related to a justification or an excuse in respect to a charge for an offence apply in respect of a violation.
A person or entity that enters into a compliance agreement is deemed to have committed the violation to which the agreement relates. A compliance agreement will require compliance with the legislative provision to which the violation relates and will specify terms and conditions. Violation of a compliance agreement may result in a notice of default, which would have the effect of the person or entity being liable for the remainder of the penalty imposed and a prescribed additional penalty. In some circumstances related to notice of decision about a serious or very serious violation, a person or entity has a right to appeal the decision to the Federal Court.
The following are examples of other noteworthy PCMLTFA and Draft Regulations amendments to the anti-money laundering and terrorist financing regime:
- financial entities must ascertain the identity of every person who has not signed a signature card when that person requires the financial entity to: (a) redeem or issue a money order; traveller’s cheque or other negotiable instrument in an amount of $3,000 or more; (b) remit or transmit $1,000 or more by any means through any person or entity; or (c) make a foreign currency exchange of $3,000 or more. The requirements in paragraphs (b) and (c) also apply to money services businesses;
- in respect of "prescribed electronic funds transfers", reporting entities must take reasonable and any prescribed measures to obtain the name, address and account number or other reference number of the client requesting it and other prescribed information (none is prescribed in the Draft Regulations);
- lower risk activities have reduced client identification requirements, such as, for financial entities, in respect of the opening of credit card accounts and, for financial entities, securities dealers, life insurance companies and life insurance agents or brokers, in respect of the opening of a group plan account, the identification of individual members of the group plan if the member’s contributions are made by the plan sponsor or by payroll deduction, and the existence of the sponsor has been confirmed in accordance with the regulations;
- accountants and accounting firms must keep a receipt of funds record for amounts of $3,000 or more received in the course of a single transaction, unless the amount is received from a financial entity or a public body or a large cash transaction record was created for that transaction;
- real estate brokers and sales representatives must keep a receipt of funds record for all amounts received related to a single transaction, unless the amount is received from a financial entity or a public body or a large cash transaction record was created for that transaction. In addition a client information record for each purchase or sale must be maintained; and
- the sale of reinsurance products is exempt from the requirements of Part 1 of the PCMLTFA.
The amendments to the PCMLTFA and the Draft Regulations create significant and challenging new obligations for reporting entities. Reporting entities should seek specific advice about how the amendments affect their business activities and compliance program.
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.