Canada: To MSB Or Not To MSB: An Analysis Of FINTRAC Guidance On The Interpretation Of Money Services Business

Canada's anti-money laundering/counter-terrorism financing ("AML/CTF") legislation, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "PCMLTFA") and its associated regulations ("Regulations") apply only to certain entities. In some cases, the PCMLTFA applies to an entity by virtue of the type of entity, for example, a financial institution such as a bank, a credit union, or an insurance company. In other cases, the PCMLTFA applies to an entity by virtue of the fact that the entity performs a certain type of activity. This is the case for "money services businesses" ("MSB") which are defined in the PCMLTFA as "persons and entities engaged in the business of foreign exchange ("FX") dealing, of remitting funds or transmitting funds by any means or through any person, entity or electronic funds transfer network, or of issuing or redeeming money orders, traveller's cheques or other similar negotiable instruments except for cheques payable to a named person or entity."

Determining whether an entity is an MSB can be challenging, especially in the case of financial technology ("Fintech") entities. Fintech entities often have unique and innovative business models which can present complexities and ambiguities in determining whether they are operating as an MSB. The penalties, should an entity get this wrong, can be steep: the Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC") has been particularly active in imposing administrative penalties against MSBs. Of the 79 administrative penalties issued by FINTRAC to date, the largest number (36) have been imposed on MSBs (with a total of $814,805 in administrative penalties imposed against MSBs to date). In addition, under the national retail payments framework, as proposed by the Department of Finance Canada in July 2017, a payment service provider's registration under such regime could be denied or revoked as a result of the payment service provider's failure to register with FINTRAC as an MSB

FINTRAC provides Policy Interpretations ("Policy Interpretations") and other guidance on its views as to when FINTRAC considers a business to be an MSB. This paper aims to shed some clarity on the issue of determining whether an entity is an MSB, through a review and analysis of the Policy Interpretations and guidance FINTRAC has provided.

On June 9, 2018, draft regulations ("New Regulations") were issued proposing a number of amendments to each of the existing Regulations under the PCMLTFA. The New Regulations specifically address some, but not all, of the ambiguities in FINTRAC's Policy Interpretations regarding MSBs. We explain the matters that have been clarified in the New Regulations in our discussion below. We also discuss the Policy Interpretations which provide guidance in the interim until the New Regulations come into force.1

1. Who does FINTRAC consider to be an MSB?

FINTRAC Interpretation Notice no. 1 – Criteria for "Engaged in a Money Services Business" (the "MSB Interpretation Notice") provides additional guidance on the definition noted above. In particular, the MSB Interpretation Notice confirms, consistent with the PCMLTFA statutory definition, that any of the following three types of activities will result in a business being engaged in the activity of an MSB: "(1) foreign exchange dealing; (2) remitting or transmitting funds by any means or through any person, entity or electronic funds transfer network; or (3) issuing or redeeming money orders, traveller's cheques or other similar negotiable instruments except for cheques payable to a named individual or entity." With respect to the second category, FINTRAC clarifies that an alternative money remittance system, such as Hawala, Hundi and Chitti, will be an MSB.

FINTRAC also outlines in the MSB Interpretation Notice that undertaking any of the following activities will result in a business being an MSB:

  • Offering money transfer services in any amount;
  • Issuing or redeeming money orders, travellers' cheques or other similar negotiable instruments for more than $1,000 during a single transaction with the same individual or entity (a single transaction includes two or more transactions related to the redemption of money orders, travellers' cheques or similar negotiable instruments of less than $1,000 each made within 24 consecutive hours that total $1,000 or more);
  • Conducting FX transactions for more than $1,000 during a single transaction with the same individual or entity (single transaction includes two or more transactions related to an FX transaction of less than $1,000 each made within 24 consecutive hours that total $1,000 or more);
  • Advertising (through newspaper, television, yellow pages, internet, any other media, or by an interior or exterior sign) the fact that a business is engaged in any of the money services business activities listed above;
  • Holding a permit or license related to any of the money services business activities listed above;
  • Being registered as someone carrying on any of the money services business activities listed above; and
  • Reporting income from any of the money services business activities listed above as income from a separate business for tax purposes

2.What does FINTRAC consider not to be an MSB?

The MSB Interpretation Notice clarifies those activities that FINTRAC does not consider to be activities relating to being "engaged in an MSB", such as:

  • conducting money services business activities solely as an agent or mandatary for another business that is an MSB; or
  • carrying out money services business activities as part of other activities for which the entity is already subject to the PCMLTFA and Regulations.

3. Previously ambiguous activities clarified in the New Regulations

The New Regulations clarify ambiguities regarding the applicability of MSB requirements to dealers in virtual currency and foreign MSBs.

The following is a brief summary of the current situation in each of these areas and the changes that will come into effect under the New Regulations.

Dealers in Virtual Currency

In 2014, the Government of Canada amended the PCMLTFA to include persons dealing in virtual currency as MSBs. However, these changes will not come into force until the New Regulations defining what it means to be dealing in virtual currency are enacted.

The New Regulations define "virtual currency" as "a digital currency that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds"; or "information that enables a person or entity to have access to such digital currency", for example, access to the private key of a cryptocurrency. The New Regulations do, however, exempt "a transfer or receipt of virtual currency as compensation for the validation of a transaction that is recorded in a distributed ledger; or an exchange, transfer or receipt of a nominal amount of virtual currency for the sole purpose of validating another transaction or a transfer of information", for example, a reward for mining cryptocurrencies. "Distributed ledger" means "a digital ledger that is maintained by multiple persons or entities and that can only be modified by a consensus of those persons or entities".

Persons dealing in virtual currency, which will include those offering virtual currency exchange services (i.e., the exchange of virtual currency for funds, or one type of virtual currency for another) and value transfer services, will be required to register with FINTRAC as an MSB and to have in place a full AML/CTF compliance program, including a chief anti-money laundering officer ("CAMLO"), AML/CTF policies and procedures, a training program and independent assessment of its AML/CTF compliance program, as set out below in our discussion of the implications of being an MSB.

When the New Regulations come into force, the list of activities that make a business an MSB will include dealing in virtual currency activities. In the interim, the Policy Interpretations provide some guidance from FINTRAC on how dealers in virtual currency are treated.

According to FINTRAC's Policy Interpretations, if a business provides any of the aforementioned MSB activities (FX dealing, funds transfer or issuance/redemption of negotiable instruments) to clients through the use of virtual currencies, the business is required to register with FINTRAC as an MSB, even before the New Regulations come into force.

It is important to note that "virtual currency" while including the term "currency", is not considered a currency for the purposes of determining whether the business is a foreign exchange dealer. Therefore, if a business exchanges Canadian dollars for bitcoin, it is not considered to be exchanging one type of currency for another currency (i.e. foreign exchange dealing); however, the business may still fit the definition of an MSB. For example, FINTRAC considers the following activities and business models to be MSBs:

To read the full article click here

Footnote

1. The New Regulations were open for comment until September 7, 2018 and will come into force 12 months after their registration.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions