Effective August 19, 2024, reporting entities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act ("PCMLTFA") must report transactions suspected to be related to sanctions evasion to the Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC").
See FINTRAC's compliance guidance Report suspected sanctions evasion, applicable to reporting entities.
These changes are part of government initiatives to combat sanctions evasion that stem from Canada's 2023 Fall Economic Statement, and arise from legislative amendments to the PCMLTFA enacted in Bill C-59, which received royal assent on June 20, 2024.
These legislative amendments add "transactions related to the commission or the attempted commission of a sanctions evasion offence" to the list of transactions that reporting entities must report to FINTRAC. "Sanctions evasion offence" is defined to capture all offences related to contraventions of Canada's sanctions legislation, and their associated regulations:
- The United Nations Act,
- The Special Economic Measures Act, or
- The Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law).
These enhanced reporting requirements will provide information to FINTRAC that will allow it to develop intelligence products, and, where appropriate, disclose its findings to law enforcement partners. Reporting entities under the PCMLTFA are already required to report suspicious transactions to FINTRAC and are subject to Canada's sanctions laws and regulations.
Under the PCMLTFA, reporting entities include:
- Accountants and accounting firms (when carrying out certain activities on behalf of their clients)
- Agents of the Crown that sell money orders
- Armoured car businesses
- Casinos
- Dealers in precious metals and precious stones
- Financial entities such as:
- Banks (that is, those listed in Schedule I or II of the Bank Act) or authorized foreign banks with respect to their operations in Canada
- Caisses populaires
- Credit unions
- Credit union centrals (when they offer financial services to anyone other than a member entity of the credit union central)
- Departments and agents of the Crown that accept deposit liabilities while providing financial services to the public
- Financial services cooperatives
- Life insurance companies, or entities that are life insurance brokers or agents, in respect of loans or prepaid payment products they offer to the public and accounts they maintain with respect to those loans or prepaid payment products (other than those specified in the definition in the Regulations)
- Loan companies
- Trust companies
- Unregulated trust companies
- Life insurance companies, brokers and agents
- Money services businesses and foreign money services businesses
- Mortgage administrators, brokers and lenders (effective as of October 11, 2024)
- Public notaries and notary corporations of British Columbia (when carrying out certain activities on behalf of their clients)
- Real estate brokers, sales representatives and developers (when carrying out certain activities)
- Securities dealers
- Employees of these reporting entities for the purposes of suspicious transactions
Identifying financial transactions associated with sanctions evasion
To aid reporting entities under the PCMLTFA in complying with the new requirements, FINTRAC issued a Special Bulletin on financial activity associated with suspected sanctions evasion (the "Bulletin") in June 2024.
The Bulletin sets out guidance to help reporting entities identify the characteristics of financial transactions associated with sanctions evasion. These are based on established techniques and channels used to circumvent sanctions, as well as the use of alternative financial channels if traditional methods are not available to individuals and entities sanctioned by the Government of Canada. Reporting entities should consider the Bulletin in conjunction with other applicable FINTRAC guidance.
The characteristics identified in the Bulletin are:
Use of intermediary jurisdictions: This includes routing transactions through non-sanctioned financial institutions and financial institutions in other countries. This may involve professionals and service providers in offshore financial centres catering to clients from sanctioned jurisdictions.
Special attention should be given to jurisdictions with low barriers for setting up shell companies, international trade hubs with anti-money laundering deficiencies, and regions like the UAE, Türkiye, China, and Hong Kong, which may be used to bypass sanctions and export controls.
Evasion of import and export controls: Sanctions regulations prohibit Canadians from engaging in activities related to the import, export, sale, supply, or shipping of certain goods to sanctioned entities or jurisdictions.
Evasion methods include routing purchases through intermediary jurisdictions, using shell companies, falsifying shipping information, and exporting high-value goods through known intermediary jurisdictions.
Use of opaque corporate structures: Sanctioned individuals and entities use complex corporate structures, including shell and front companies, to conceal their involvement in financial transactions.
Indicators include the use of opaque corporate entities, suspicious companies with minimal online presence, newly created or dormant companies engaging with sanctioned jurisdictions, and generic or frequently misspelled corporate names.
Non-resident banking: Entities often use financial institutions in jurisdictions outside their home jurisdictions, known as non-resident banking.
Indicators include nested correspondent banking, Canadian financial institutions used for correspondent banking, and sudden increases in transfers to institutions linked to Russian financial flows without clear economic or business reasons.
Use of proxies and enablers: Sanctioned individuals may obscure asset ownership by transferring legal ownership to others or using professional enablers like lawyers and accountants.
Indicators include asset transfers to family or associates, use of professionals to manage transactions, and real estate purchases involving opaque structures and intermediaries.
Virtual currencies and other alternative financial channels: Cryptocurrencies and other emerging financial technologies may be used to facilitate illicit financial flows and sanctions evasion by concealing the source of funds.
Indicators include transactions from IP addresses in sanctioned jurisdictions, connections to virtual currency addresses linked to sanctioned entities, and the use of unlicensed brokers to avoid regulatory scrutiny.
Reporting
Starting August 19, 2024, entities must report suspicious transactions to FINTRAC if there are reasonable grounds to suspect sanctions evasion, in addition to their existing reporting requirements. Reports should include all information that helps identify the transaction as suspected sanctions evasion activity and be submitted in accordance with FINTRAC's reporting guidelines.
This includes details about the transaction, products or services involved, accounts, addresses, and any links to sanctioned jurisdictions. Information on ownership, control, and structure of entities involved should also be provided, including details about owners, directors, officers, and related persons or entities.
Sanctions considerations
Global Affairs Canada ("GAC"), in collaboration with the Royal Canadian Mounted Police ("RCMP"), are responsible for the administration of Canada's sanctions legislation. As Canada and its allies have increased their use of economic sanctions as a tool to respond to global conflicts, the monitoring and enforcement burden associated with the regime has rapidly increased.
In response to the need for increased resource allocation, the Government of Canada appears to be prioritizing legislative changes that will allow GAC to collaborate with other enforcement agencies and leverage existing and better-developed reporting and enforcement regimes, in order to identify and prosecute sanctions offences.
The PCMLTFA reporting obligations permit Canada to leverage existing financial crime enforcement measures to identify and address sanctions evasion and are reflective of this trend. The new obligations further reinforce reflect Canada's continued view of reporting entities such as financial institutions as key front-line players in Canada's sanctions enforcement strategy.
Related legislative amendments are anticipated to continue this trend. For example, additional proposed amendments to regulations under the PCMLTFA, which were circulated for consultation in July 2024, would further bolster reporting obligations related to sanctioned property.
Existing enforcement agencies are also expected to be leveraged, including the Canada Border Services Agency ("CBSA"). Notably, Bill C-59 introduces an array of other updates to the PCMLTFA regime, including a requirement for declarations respecting money laundering, the financing of terrorist activities and sanctions evasion to be made in relation to the importation and exportation of goods.
The Bill also introduces related enforcement procedures, including search, seizure and forfeiture, in relation to these declarations. These import/export declaration requirements and supporting provisions will come into force by order of the Governor in Council, and so the timing of their implementation is not yet known.
It is important to recognize that these heightened obligations on FINTRAC reporting entities and all persons and entities involved in the import and export of goods are being layered onto a legal regime for sanctions compliance in Canada that is widely viewed as vague, opaque and lacking in guidance. Requiring additional reporting intensifies the need for detailed, sophisticated and nuanced guidance of the type provided in other jurisdictions.
Absent such guidance, those who are subject to the requirements will struggle to define and justify requests to their business partners for information required to assess compliance and will have difficulty providing authorities with information that can lead to meaningful enforcement activities of the type that Canada has so far failed to undertake.
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