As announced in past bulletins,1 the Regulations Amending the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations came into effect on October 11, 2024. Pursuant to these amendments, mortgage administrators,2 mortgage brokers3 and mortgage lenders4 (the "mortgage sector entities") are being brought within the scope of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations (the "PCMLTFA") and are now required to comply with its requirements. This bulletin provides a summary of some of the key requirements that now apply to mortgage sector entities pursuant to the PCMLTFA.5
Reporting to FINTRAC
Mortgage sector entities are required to report to Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC") single cash transactions and single virtual currency transactions of $10,000 or more, unless the amount is received from a financial entity or public body or from a person who is acting on behalf of a client that is a financial entity or public body. Mortgage sector entities are also required to report when there are reasonable grounds to suspect that a financial transaction that occurs or is attempted is related to the commission or attempted commission of a money laundering or a terrorist activity financing offence. There are also reporting requirements in connection with terrorist property and sanctions evasions.
Keeping Records
Mortgage sector entities need to keep multiple records for a period of at least 5 years, including the following:
- large cash transaction records;
- large virtual currency transaction records;
- a receipt of funds record in respect of every amount that they receive in connection with a mortgage on real property or a hypothec on immovables;
- information records6 in specified circumstances;
- for each loan secured by a mortgage or a hypothec entered into with a client, a record of the client's financial capacity, the terms of the loan, the nature of the client's principal business or their occupation and, if the client is a person, the name and address of their business or place of work;
- beneficial ownership records;
- a record of any information obtained after determining that a third party is involved in a client's account (see below); and
- for transactions with a corporation, a copy of the part of official corporate records that contains any provision relating to the power to bind the corporation in respect of the transaction.
Other records may need to be kept depending on your activities.
Verifying the Identity of Persons and Entities
The mortgage sector entities are required to verify the identity of each person or entity in specified circumstances in compliance with applicable verification requirements.
Implementing a Compliance Program
Mortgage sector entities are required to implement a compliance program, including appointing a compliance officer, developing written policies and procedures, a risk assessment of the business, a training program, and an effectiveness review every two years.
Identifying PEPs and HIOs
Mortgage sector entities are also required to take reasonable measures to determine whether a person with whom they enter into a business relationship is a politically exposed domestic person ("PEP"), a politically exposed foreign person ("PEFP"), a head of an international organization ("HIO"), a family member of one of those persons, or a person who is closely associated with a PEFP. They will also need to periodically reassess whether or not persons with whom they have a business relationship fit any of these descriptions. As well, if they discover information, whether proactively or not, that constitutes reasonable grounds to suspect that one of their clients is a PEP, PEFP or a HIO, they will need to take reasonable measures to definitively ascertain whether they are such a person. When a determination is made that a person is a PEFP or the family member or close business associate of a PEFP, mortgage sector entities must treat such person as a high-risk client. When a determination is made that a person is a PEP, HIO or the family member or close business associate of a PEP or HIO, a risk assessment must be conducted to determine whether there is a high risk of a money laundering or terrorist activity financing offence being committed.
Upon establishing in the above cases that a client is a high-risk client or that there is a high risk of a money laundering or terrorist activity financing offence being committed, as applicable, mortgage sector entities must take reasonable measures to establish the person's source of wealth within 30 days and take any other applicable enhanced measures to (i) verify the person's identity, (ii) conduct additional ongoing monitoring of the business relationship, and (iii) mitigate the risks posed by such person.
Furthermore, mortgage sector entities are now required to take reasonable measures to determine whether a person from whom they receive an amount of $100,000 or more, in cash or in virtual currency, is a PEP, a PEFP or a HIO, or a family member of, or a person who is closely associated with, a PEP, PEFP or a HIO.
Third Party Determination
A third party is a person or entity that gives instructions to another person or entity to conduct a transaction or activity. Mortgage sector entities must take reasonable measures to determine whether there is a third party involved in giving instructions behind the scenes.
Mortgage sector entities must make a third party determination when they are required to:
- report a large cash transaction;
- report a large virtual currency transaction or keep large virtual currency transaction records; or
- keep an information record.
The reasonable measures to determine whether there is a third party involved could be the following:
- ask the client if another person or entity gave them, or will give them, instructions to conduct a transaction or activity;
- conducting open source searches;
- consulting commercial databases.
The reasonable measures to be taken must be documented in your written policies and procedures under your compliance program.
If it is determined that a third party is involved, mortgage sector entities must take reasonable measures to obtain additional information regarding the identity of the third party, as well as the relationship between the third party and the person receiving instructions from the third party.
Business Relationships
A business relationship is established when a mortgage sector entity conducts financial transactions for the client or provides services related to financial transactions for the client. Mortgage sector entities enter into business relationships with clients the first time they are required to verify the client's identity. As of that moment, they must keep a record of the purpose and intended nature of the business relationship.
Ongoing Monitoring
Ongoing monitoring is the process that mortgage sector entities must now develop and use to review all information they have obtained about the clients with whom they have a business relationship for the following purposes:
- to detect any suspicious transactions that must be reported to FINTRAC;
- to ensure current records regarding client identification information, beneficial ownership information, and the purpose and intended nature of the business relationship;
- to reevaluate the risk associated with a client's transactions and activities; and
- assess whether transactions or activities match the client information acquired and your risk assessment of the client.
When you establish a business relationship with a client, you must periodically perform continuous monitoring of that business relationship based on your risk assessment.
Mortgage sector entities that fail to comply with the new requirements under the PCMLTFA risk facing administrative monetary penalties imposed by FINTRAC or criminal charges under the same legislation. Administrative monetary penalties can range from $1 to $1,000 for minor violations, and up to $500,000 for very serious violations in the case of an entity. For criminal non-compliance, a summary conviction may result in a fine of up to $1,000,000 and/or imprisonment of up to two years, while a conviction on indictment can lead to a fine of up to $2,000,000 and/or imprisonment of up to two years. Beyond these penalties entities should also consider the reputational damage that may arise from being targeted by FINTRAC.
For additional information regarding these changes and their impact on your compliance obligations, please contact a member of our Investment Management Group or our Financial Services Group.
Footnotes
1 Further Proposed Changes to Canada's AML Regime and Final Regulations Released Amending Canada's AML Regime.
2 Defined in the newly amended Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, SOR2002-184 (the "Regulations") as "a person or entity, other than a financial entity, that is engaged in the business of servicing mortgage agreements on real property or hypothec agreements on immovables on behalf of a lender."
3 Defined in the newly amended Regulations as "a person or entity that is authorized under provincial legislation to act as an intermediary between a lender and a borrower with respect to loans secured by mortgages on real property or hypothecs on immovables."
4 Defined in the newly amended Regulations as "a person or entity, other than a financial entity, that is engaged in the business of providing loans secured by mortgages on real property or hypothecs on immovable."
5 This bulletin draws on information provided in the following "FINTRAC's requirements" page and related links: Mortgage administrators, brokers and lenders (canada.ca), Updated – effective October 11, 2024.
6 Defined in the Regulations as " a record that sets out the name and address of a person or entity and (a) in the case of a person, their date of birth and the nature of their principal business or their occupation; and (b) in the case of an entity, the nature of its principal business."
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.
