The Government of Canada has recently published its proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2019 (PCMLTFA) (the "Act") and its corresponding regulations. These amendments are intended to strengthen Canada's Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) regime by increasing oversight measures intended to reduce foreign money laundering. However, these proposed changes will also have a significant impact on the obligations of any virtual currency dealer offering services in Canada. The purpose of this post is to provide an overview of the proposed changes and their impact on virtual currency dealers.
1. What Are the Proposed Legislative Changes and Who Will They Affect?
A. Domestic and Foreign Money Services Business ("MSB") Registration
The most impactful amendment to the PCMLTFA is the requirement that all virtual currency dealers will be required to register as an MSB with the Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC") in order to continue to direct their services to Canadian clients. While the current legislation requires that businesses dealing in virtual currencies are only required to register as an MSB if they satisfy the criteria of a "money service business". Under the proposed changes, any person or entity "dealing in virtual currencies" must register as an MSB. While "dealing in" activities are not specifically defined in the legislation, they will likely include virtual currency exchange services and value transfer services.
This amendment not only affects money service businesses situated within Canada (Domestic MSBs), but also those businesses that operate outside of Canada, but serve Canadian customers. Under current legislation, a foreign business that qualifies as an MSB is only required to register with FINTRAC if it has a "real and substantial connection to Canada", which includes one or more of the following: (i) the business is incorporated in Canada; (ii) the business has agents in Canada; (iii) the business has physical locations in Canada; or (iv) the business maintains a bank account or a server in Canada. However, the proposed changes will subject foreign MSBs to the same broad registration and compliance requirements as those applicable to domestic MSBs. Foreign MSBs are defined as persons and entities that: (a) do not have a place of business in Canada; (b) are engaged in providing at least one of the regulated types of MSB services; and (c) provide those services to their customers in Canada.
In addition to the registration requirement discussed above, persons and entities dealing in virtual currencies are also required to: implement a compliance program, exercise customer due diligence, and report transactions and client identity information. Non-compliance with these requirements may result in the imposition of financial penalties, ranging from up to $1,000 for a minor violation to $500,000 for a very serious violation by a corporate entity. A failure to comply with any penalties imposed could also not only lead to the revocation of one's MSB registration, resulting in an ineligibility to carry on business in Canada, but also the imposition of criminal penalties under the Canadian Criminal Code. The criminal penalties range anywhere from $500,000 to $2,000,000 in fines and/or up to 5 years of imprisonment.
B. Definition of "Virtual Currency" and 'Funds"
The definition of "virtual currency" will be amended to include the following:
(a) a digital representation of value that can be used for payment or investment purposes 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
(b) a private key of a cryptographic system that enables person or entity to have access to a digital representation of value referred to in paragraph (a).
Furthermore, the term "Funds" would be amended to include the following:
(a) cash and other fiat currencies, and securities, negotiable instruments or other financial instruments that indicate a title or right to or interest in them; or
(b) a private key of a cryptographic system that enables a person or entity to have access to a fiat currency other than cash.
For greater certainty, it does not include virtual currency.
This new definition of "funds" seems to capture those digital tokens that are backed by fiat currency. As a result, transactions including an exchange of tokens will be subject to the same requirements as those currently required of cash transactions, and not those required for virtual currency transactions.
C. Record Keeping and Reporting
The proposed amendments will impose additional record keeping and reporting obligations on those dealing in virtual currency. In doing so, the amendments define the terms "large virtual currency transaction record", "virtual currency exchange transaction", and a "virtual currency exchange transaction ticket". These terms impose a general obligation on all virtual currency MSBs to report the receipt of $10,000 or more of virtual currency. The amendments also require that virtual currency MSBs monitor transactions and where there are reasonable grounds to suspect a transaction is related to illegal purposes, a suspicion transaction report must be filed "as soon as reasonably practical". This is a significant change from the current legislation, which requires that the report be filed within 30 days from where reasonable grounds of suspicion are discovered. With respect to record-keeping, the amendments require that all virtual currency MSBs retain transaction records which include all transaction identifiers, including the sending and receiving address, and any reference numbers equivalent to an account number.
However, MSBs are exempt from this record-keeping requirement if the amount received is from another financial entity or a public body or from a person who is acting on behalf of a client that is a financial entity or public body. Furthermore, where an MSB receives $10,000 or more through two or more transactions on behalf of the same person, and such transactions occur within 24 hours, they are deemed to be a single transaction and are subject to the same record-keeping requirement mentioned above.
D. Verifying Client Identity
Lastly, the amendments impose an obligation on all virtual currency MSBs that undertake to transfer $100,000 or more in a transaction to:
- verify an entity's identity and involved directors;
- obtain information on the ownership, control, and structure of the entity; and
- take reasonable measures to determine whether the person who requests the transfer or a beneficiary for whom it receives virtual currency is (i) a politically exposed foreign person, (ii) politically exposed domestic person, (iii) a head of an international organization, or (iv) a family member of one of those persons or is closely associated with a politically exposed foreign person.
For further detail on the specifics of the proposed amendments, you can access the full length version of Canada's PCMLTFA legislation here.
2. When Do the Amendments Come into Effect?
The proposed amendments come into effect on June 1, 2020. The Federal Government also announced that further regulatory amendments will be brought into effect on June 1, 2021, which will require that financial institutions dealing in virtual currencies comply with these same obligations.
3. What Can I Do Now?
There are steps virtual currency dealers can take before June 1, 2020 to prepare for these changes:
- Chief Compliance Officer and Internal Policies – Virtual currency dealers may wish to appoint a chief compliance officer in order to ensure an adequate compliance program is in place when the amendments come into force. This may include the drafting and adoption of anti-money laundering policies and procedures that address how the dealer intends to comply with previously discussed record keeping and recording obligations.
- Business Risk Assessment – Virtual currency dealers should also undertake an adequate risk assessment of their business operations in order to identify potential money laundering risks and determine what, if any, processes are in place or need to be put in place to control exposure.
- Update and Review Practices – As a general practice, dealers should also be prepared to regularly update and review these policies and procedures and provide adequate employee training policies to ensure business operations are secure and in compliance with all regulatory duties.
Complying with all of the above in less than 1 year may seem like a daunting task, and you may even be wondering whether your business is required to register as a virtual currency MSB. This is where we recommend engaging the help of cryptocurrency & blockchain professionals in order to ensure you and your business understand the effects of the new legislation and the impact it may have on your business.
The lawyers at McKercher LLP have a depth of experience acting on behalf of virtual currency dealers as well as dealing with general corporate/commercial, corporate governance, tax, and corporate finance matters that are crucial to the proper analysis of this type of planning. We would be pleased to discuss these legislative changes and their potential impact with you and assist with the creation of necessary policies and procedures to ensure compliance with these new rules.
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.