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:
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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.