On September 15th, the Financial Action Task Force (FATF) released its Mutual Evaluation Report (Report) of Canada's measures for combatting anti-money laundering (AML) and the financing of terrorism (CFT). FATF is an international organization originally formed by the G-7 countries in 1989. FATF has developed 40 Recommendations for measures that countries should take to combat money laundering. Part of its mandate is to conduct peer reviews of the progress being made by its members in implementing the 40 Recommendations. The report issued on September 15th follows an on-site visit by the International Monetary Fund conducted in November 2015. The Report concludes that Canada has a strong anti-money laundering and anti-terrorist financing regime that achieves good results in some areas. However, the report also states that further improvements are required for the regime to be fully effective.
Under FATF's assessment methodology, a country's systems are assessed both for their technical compliance with the 40 Recommendations and for their effectiveness in mitigating the risks and threats of money laundering, and financing of terrorism and proliferation of weapons of mass destruction. With respect to technical compliance with the 40 Recommendations, Canada was rated as "compliant" (the best rating) or "largely compliant" with respect to 27 Recommendations, "partially compliant" with respect to six Recommendations" and "non-compliant" with respect to three Recommendations. The effectiveness of Canada's efforts was rated "substantial" (its highest rating) in five of FATF's assessment areas, "moderate" in five and "low" (its lowest rating) in one assessment area.
The Report may lead to regulatory changes in order to address the gaps identified and to implement its recommendations. As such, it may have significant implications for various sectors of Canada's economy, including banking, insurance, real estate, money transfer and other businesses and professions that facilitate financial transactions. Some of the key recommendations, findings and observations discussed in the report are summarized below. We have focused on those findings that will be of most interest to providers of financial services.
Key Findings, Recommendations and Observations
FinTRAC should be authorized to request and obtain from any reporting entity (RE) further information related to suspicions of money laundering and terrorist financing. Currently, FinTRAC is largely dependent on what is reported to it and does not have the ability to request additional information (beyond asking for clarification and completion of missing information).
Gaps in the Regime
All high-risk areas are covered by Canada's AML/CFT regime, except for the legal profession, online casinos, open loop prepaid cards and white label ATMs. FATF believes that the AML/CFT regime should be extended to apply to open loop prepaid cards (including those provided by non-FIs), factoring companies, leasing and financing companies, check cashing businesses, unregulated mortgage lenders, online gambling, and virtual currencies. Legislative steps have already been taken with respect to online gambling, open loop prepaid cards and virtual currencies.
FATF concluded that financial institutions (FIs) have a good understanding of their risks and obligations, but that this is not true for designated non-financial businesses and professions (DNFBPs) (including for example, accountants and real estate brokers). FATF believes that Canada should consider introducing a licensing regime or other controls for DNFBPs.
Life Insurance Companies
FATF found that the life insurance sector appears to underestimate the level of risk that it faces and that provincially regulated insurance companies appear to have a weaker understanding of their ML/TF risk than federally regulated companies. FATF also found that provincially regulated companies appear to be resistant to improving their compliance.
Supervision and Enforcement
FATF recommended that Canada increase its efforts to detect, pursue and bring before the courts cases of ML related to high-risk predicate offenses other than drugs and fraud (such as corruption and smuggling) as well as third-party ML, self-laundering, laundering of proceeds of crimes committed outside of Canada and the misuse of legal persons and trusts in ML activities.
FATF also believes that the sanctioning regime for breaches of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) has not been applied in a proportionate and/or sufficiently dissuasive manner.
Transparency of Legal Persons and Arrangements
FATF found that Canadian legal entities and legal arrangements are at a high risk of misuse for money laundering and terrorist financing purposes and this risk is not mitigated, especially in the case of nominee shareholding arrangements. FATF felt that there is an undue reliance by FI's on customers' self-declarations for the purpose of confirming beneficial ownership and that FinTRAC and/or the Government of Canada should ensure compliance by all FIs with the requirement to confirm the accuracy of beneficial ownership information.
FATF Recommendations 24 and 25 address the use of legal persons (corporations) and legal arrangements (trusts) as vehicles for money laundering and terrorist financing stemming from the potential to use them as a means of hiding or obscuring the true beneficiary of a financial transaction. Under the Recommendations, countries are to ensure that adequate, accurate and timely information on beneficial ownership can be obtained by competent authorities.
Currently, no are no public registers that collect beneficial ownership information. However, under the PCMLTFA, certain financial entities are required to obtain this information when opening and account for a company or trust. In the absence of a public register of beneficial ownership information, the financial entities have no independent source for verification of the information provided by their customers. FATF noted that law enforcement agencies can generally obtain this information but not necessarily on a timely basis.
The concern about the misuse of legal entities was exacerbated to some extent, in FATF's view, by the fact that lawyers are not currently subject to Canada's regime as often they are involved in the creation of corporate structures and could be a valuable source of beneficial ownership information.
In FATF's opinion, the lack of effectiveness for mitigating the risk associated with the use of legal persons and arrangements warranted a low effectiveness rating, and only a partially compliant rating for Recommendation 24 and a non-compliant rating for Recommendation 25.
Additional Guidance Needed
FATF believes that FinTRAC should issue further guidance (especially to non-FIs) regarding the new requirements relating to domestic politically exposed persons and should strengthen its feedback to small banks and the insurance sector on the use of suspicious transaction reports.
Guidance should also be provided to all REs to facilitate the detection of misuse of open-loop prepaid cards in ML and TF schemes.
Pending Legal Developments
Canada's Assessment of the Inherent Risks of Money Laundering and Terrorist Financing (published by the Department of Finance in July 2015 and which FATF refers to as the National Risk Assessment or NRA) will be updated this Fall to identify and prioritize actions to mitigate the residual risk (this is the risk remaining after considering the strength of Canada's AML and CTF regimes). This may lead to additional legislative and/or regulatory amendments.
A second package of regulatory amendments expected to be released this Fall will include measures to address prepaid payment products, virtual currencies and MSBs without a physical presence in Canada.
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