On December 20, 2016, the Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC") released new guidelines (collectively, the "Guidelines") in respect of politically exposed persons ("PEPs") and heads of international organizations ("HIOs"). A separate guideline was released for each of financial entities, securities dealers, life insurance companies, agents and brokers and money services businesses (collectively, the "reporting entities"). The Guidelines will be effective June 17, 2017.
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "PCMLTFA") was amended pursuant to the 2014 federal budget to expand the concept of PEP to include domestic PEPs and HIOs, in addition to foreign PEPs. Corresponding amendments to the regulations to the PCMLTFA were also enacted in 2016. For further detail on the amendments to the PCMLTFA and the regulations, please see our prior legal updates " Anti-Money Laundering Update: Proposed Amendments to the Regulations to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act Issued" and Anti-Money Laundering Update: Final Amendments to Regulations to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act Released".
As a result of these amendments, effective June 17, 2017, financial entities will be required to take "reasonable measures" to determine whether a client is a domestic or foreign PEP or a HIO, or a "close associate" or family member of such a person:
- at account opening;
- on a "periodic basis";
- if the financial entity "detects a fact" that leads it to suspect the client is a PEP, HIO, or close associate or family member of such person; and
- upon receiving or sending an electronic funds transfer of $100,000 or more.
Similarly, life insurance companies, brokers and agents will need to make this determination when a person makes a lump-sum payment of $100,000 or more towards an annuity or life insurance policy; securities dealers will need to make this determination at account opening, on a periodic basis and if they detect a fact that leads it to suspect the client is a PEP, HIO, or close associate or family member of such person; and money services businesses will need to make this determination for incoming and outgoing electronic funds transfers of $100,000 or more.
The Guidelines provide additional guidance on some of these terms, including the terms "close associate", "periodic basis", "reasonable measures" and "detecting a fact":
- "Close associates" are individuals who are closely connected to a PEP or HIO for personal or business reasons and could include, for example, business partners, romantic partners, persons involved in financial transactions with the PEP or HIO, prominent members of the same political party or union, persons serving on the same board or persons closely carrying out charitable works with the PEP or HIO.
- The Guidelines stipulate that reporting entities must have a process in place to assess whether existing account holders are PEPs, HIOs, or close associates or family members of such persons, on a "periodic basis". The Guidelines do not set out specifically what "periodic basis" means in this context. This will need to be determined by each reporting entity based on its own facts and situation. The Guidelines do indicate, for example, that reporting entities may want to consider timing this obligation with existing requirements to conduct ongoing monitoring of business relationships.
- "Reasonable measures" that can be used to determine whether a client is a domestic or foreign PEP or a HIO, or a "close associate" or family member thereof, would include, for example, asking the client, media monitoring, ongoing monitoring of business relationships, and consulting a public or private database. More than one measure may be used. A reporting entity must keep a record when the reasonable measure undertaken is unsuccessful, which record must include the measure taken, the date and a record of why it was unsuccessful.
- "Detecting a fact" means having actual information that "constitutes reasonable grounds to suspect" that a person is a PEP or HIO or close associate or family member of a PEP or HIO. This could occur based on information provided by the client, as a result of media monitoring or knowledge of world events, or based on a search on a public or commercial database. The detection of such fact triggers a requirement to complete a determination as to whether the client is in fact a PEP or HIO or close associate or family member thereof.
In terms of timing, a foreign PEP is forever a foreign PEP, while a person ceases to be a domestic PEP 5 years after they have left the office. A HIO ceases to be a HIO when he or she is no longer the head of the international organization.
A client who is a foreign PEP, or a "close associate" or family member of such a person is automatically deemed to be a high-risk client. If a client is a domestic PEP or HIO, or a "close associate" or family member of such a person, the reporting entity must perform a risk assessment to determine whether the client is a high-risk client.
In either case, if the client is a high-risk client, the client must be subject to the reporting entity's policies and procedures for high-risk clients. The reporting entity is required to take measures to obtain information on sources of funds, obtain senior management approval to keep the account open within 30 days of determining the client is a high-risk client, and conduct enhanced ongoing monitoring.
The Guidelines set out a fairly detailed list of risk factors that may be relevant when conducting the risk assessment to determine whether a domestic PEP or HIO (or close associate or related person of a domestic PEP or HIO) is high-risk. These include, but are not limited to, the amount of time since the person held the position, the relevant organization where the person held the position and its reputation and industry, whether the person sought to hide their identity (through the use of intermediaries, nominees, family members, corporate vehicles, or otherwise), or whether the person has provided incomplete or inadequate information.
The Guidelines should assist reporting entities in better understanding their obligations under the PCMLTFA and regulations as recently amended. Reporting entities should update their policies and procedures to ensure compliance with the updated requirements in advance of the June 17, 2017 effective date.
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