Yet More Amendments To The PCMLTFA Regulations - Money Laundering

On February 15, 2020, the Department of Finance published further proposed amendments to the amended regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) in the Canada Gazette.

These amendments further amend the regulations that were contained in the package of amendments released in June 2019 and are proposed to come into force on June 1, 2021. In the Executive Summary, the Department of Finance properly notes that that the anti-money laundering regime (Regime) must be continually updated to be responsive to emerging risks and evolving standards, and in that regard, provides that this package of amendments is meant to addresses three such circumstances:

The 32 recommendations made by the House of Commons Standing Committee on Finance in November of 2018 to strengthen the Regime as part of the five-year parliamentary review of the PCMLTFA (for more information, please see our November 2018 Blakes Bulletin Confronting Money Laundering and Terrorist Financing: Canada Considers Vast Changes to AML Regime);
The recommendations made in the series of reports commissioned by the Government of British Columbia in respect of the heightened vulnerabilities of the casino and real estate sector to money laundering; and
The June 2019 Financial Action Task Force (FATF) finalized standards that address the travel rule for virtual currency transfers.

While the majority of the changes focus on the casino, real estate sector, dealers in precious metals and stones, accountants and accounting firms, British Columbia notaries, and departments and agents of Her Majesty in right of Canada or of a province, there are also significant changes that apply to money services businesses—including dealers in virtual currency—and one that applies to all other regulated entities (REs). As such, it is recommended that REs review the proposed amendments and provide comments to the Department of Finance within the 30-day prescribed comment period.

A summary of the proposed material amendments are as follows:

1. CHANGES TO THE BUSINESS RELATIONSHIP AND ONGOING MONITORING STANDARDS

The proposed amendments clarify and amend what constitutes a "business relationship." The concept of a business relationship is important as all REs are required to engage in periodic ongoing monitoring of their "business relationships."

In that respect, the regulations currently, and as was proposed, define a "business relationship" in the following manner:

Where the client holds one or more accounts with an RE, all transactions and activities relating to those accounts; and
Where the client does not hold an account, only those transactions and activities in respect of which that person or entity is required to verify the client's identity.

Under the proposed regulations, these provisions have been expanded to address different circumstances that are now deemed to constitute a business relationship, which are discussed below. However, one of the most significant changes to the definition of a "business relationship" is that currently (and as was proposed) there is an exemption from the requirement to engage in "ongoing monitoring" of a business relationship where the client is:

A public body;
A corporation or trust that has minimum net assets of C$75-million on its last audited balance sheet and whose shares are publicly traded on a recognized stock exchange, and that operates in a country that is a member of FATF; or
A subsidiary of any of the above, if the subsidiary's financial statements are consolidated with that of the public body, corporation or trust, as the case may be.

(each an Exempt Body)

However, the proposed amendments remove the Exempt Bodies exemption from the scope of the ongoing monitoring obligations. As such, the proposed amendments now contemplate a requirement for financial entities, securities dealers, casinos and money services businesses that enter into ongoing service agreements to perform ongoing monitoring of Exempt Bodies. This is significant change and will require REs to add these Exempt Bodies into their periodic monitoring procedures. Because the frequency of ongoing monitoring requirement is tied to risk, most Exempt Bodies will be at the lower end of the monitoring spectrum, but nonetheless, this is a new requirement that REs will need to address. It is also noteworthy that REs are not required to collect beneficial ownership information and identifying information from these Exempt Bodies under the regulations. However, the ongoing monitoring requirement requires this information to be kept up to date, which is somewhat confusing.

In addition to those changes, the proposed amendments also set out specific circumstances where an RE will be deemed to enter into a business relationship. Specifically, an RE will be deemed to enter into a business relationship with a client at the earliest of the following events:

The time when an RE opens an account for the client, subject to certain exemptions;
The second time that the RE is required to verify the identity of the client under the regulations (which is consistent with current Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) guidance);
If the person is a real estate broker or sales representative, the first time that the person or entity is required to verify the identity of the client under the regulations; and
If the person is an money services business (MSB) or a foreign MSB at the time that the RE enters into an ongoing service agreement.

One of the significant changes in this provision applies in respect of real estate brokers and sale representatives (Real Estate RE). In that regard, if a Real Estate RE engages in only one transaction that will trigger the ongoing monitoring obligation. In that regard, the Executive Summary to the proposed regulations provides that this change is meant to address a gap where criminal actors could conduct only a single transaction and avoid repeated transactions to circumvent the formation of a business relationship, and the associated record keeping, risk assessment and ongoing monitoring obligations.

However, the ongoing monitoring obligation requires REs to periodically conduct ongoing monitoring of business relationships, based on risk, for the purpose of (i) detecting suspicious transactions, (ii) keeping client information up to date, (iii) reassessing risk levels of the client, and (iv) determining whether transactions or activities are consistent with information obtained from the client including the risk assessment. In that regard, once the transaction has closed and a Real Estate RE has no further dealings with a client, it is difficult to understand how the Real Estate RE could reach out to the former client and ask for updated client information or reassess the client's risk in circumstances where there is no ongoing relationship or further transactions. At the time of the transaction, under the current regime, the Real Estate RE would in fact need to determine if a transaction is suspicious and report it as such, using appropriate real estate red flag indicators. The "ongoing monitoring" requirement seems to create this requirement in perpetuity for a transaction that has already closed. It would appear to require Real Estate REs to engage in adverse media monitoring to see if there is any information about their clients that may change the way they viewed the original transaction and then file a suspicious transaction reports (STRs). This will be a significant change for Real Estate REs.

2. POLITICALLY EXPOSED PERSONS

A politically exposed person (PEP) or a head of an international organization is a person that has been entrusted with a prominent public function that would provide that person with the ability to influence decisions, thus presenting a higher risk for potential money laundering offences such as bribery or corruption. The PCMLTFA addresses these money laundering vulnerabilities by requiring certain REs to undertake PEP determinations in respect of their client base upon the occurrence of certain events, such as upon account opening, when an electronic funds transfer of more than C$100,000 is sent or received, on an periodic ongoing basis for account-based relationships or where the RE detects a fact that constitutes reasonable grounds to suspect that the client is a PEP.

Currently, these PEP requirements apply only to financial entities, money services businesses, securities dealers and life insurance companies and brokers/agents. The proposed amendments now extend the PEP requirements to other specific non-financial businesses and professions (NFBPs), as well as to casinos. They also expand the current PEP requirements that apply to money services businesses.

Specifically, the requirement to determine if a client is a PEP (or a close associate or family member of a PEP) now extends to casinos, as well as the following NFBPs: British Columbia Notary Publics and notary corporations, accountants, accounting firms, Real Estate REs, dealers in precious metals and precious stones and department or agents of Her Majesty in right of Canada or of a province.

NFBPs will be required to make a PEP determination when they enter into a business relationship with a person and to periodically take reasonable measures to determine whether a person they have a business relationship with is a PEP. In addition, NFBPs will be required to take reasonable measures to determine whether a person from whom they receive an amount of C$100,000 or more is a PEP. Lastly, if a NFBP detects a fact that constitutes reasonable grounds to suspect that a person with whom they have a business relationship is a PEP, they are required to take reasonable measures to determine whether they are such a person. In the case that a NFBP determines that they are dealing with a PEP, they must take prescribed measures including, depending on the circumstances, determining source of wealth/funds, having a member of senior management review or approve the transaction and employ enhanced due diligence measures in respect of the client.

For casinos, the PEP determination requirements apply on account opening, as well as periodically for all existing account holders. In addition, the PEP determination requirements will also apply in the following circumstances:

Where a person requests the casino to initiate an international electronic funds transfer (EFT) of C$100,000 or more;
Where a person is a beneficiary for whom the casino receives an international EFT of C$100,000 or more; or
Where the casino receives C$100,000 or more from a person in cash or virtual currency.

Casinos are also required to take reasonable measures to make PEP determinations where they detect a fact that constitutes reasonable grounds to believe that an account holder may be a PEP. If such is the case, the casino will be required to obtain the prescribed information and keep the prescribed records. For account holders that are PEPs, a casino will be required to obtain the approval of a member of senior management to keep the account open.

In addition to the foregoing, there are changes to the PEP determination requirements for foreign and domestic MSBs. Currently, MSBs are required to undertake a PEP determination when they send or receive international EFTs for amounts of greater than C$100,000. Under the proposed regulations, MSBs are now required to undertake PEP determinations where they enter into a "business relationship" with a person. It is noteworthy that a "person" is defined under the PCMLTFA as an individual. As such, the PEP determination provisions, by definition, will not apply to ongoing business relationships, as those can only be entered into with entities. However, because the proposed amendments now define a "business relationship" to include any individual that has undertaken two or more transactions that require their identity to be verified, effectively, any person that engages in two money transmission transactions with an MSB that are for more than C$1,000 will become subject to the PEP determination requirements. This, in turn, will require an MSB to make a PEP determination, the second time that a person executes a transfer of more than C$1,000, effectively requiring a flag in an MSBs system after an individual enters into any transaction for more than C$1,000. The programming required for this will be significant.

In addition, once a business relationship is established, an MSB will also be required to periodically take reasonable measures to determine if any of such clients are PEPs, again an onerous requirement to implement for non-account-based relationships. Similar to other REs, MSBs will also be required to take reasonable measures to make a PEP determination where they detect a fact that constitutes reasonable grounds to believe that a person with whom they have a business relationship may be a PEP.

For MSBs and other regulated entities, the revised PEP requirements are going to require significant system changes.

3. BENEFICIAL OWNERSHIP

The beneficial ownership requirements in the regulations currently apply to only financial entities, MSBs, securities dealers and life insurance companies. The proposed amendments expand the beneficial ownership requirements to all REs, whenever they are required to verify an entity's identity in accordance with the regulations. As such, casinos and NFPBs will now be subject to these requirements.

4. MSBs

In addition to the new PEP requirements imposed on MSBs, the proposed amendments add additional recordkeeping and client identity requirements on MSBs where they "remit" or "transmit" amounts of C$1,000 or more. This is a curious change to the regulations, given that MSBs already have recordkeeping and client identity obligations when they initiate or receive electronic funds transfers, as defined in the regulations (EFTs). In the Executive Summary provided with the proposed changes, the Department of Finance notes that it is reintroducing the terms "remit" and "transmit" to describe an MSBs EFT activities to "align with the Act." However, the requirements in respect of EFTs still apply to MSBs.

In that regard, the proposed amendments add new recordkeeping and client identification requirements, similar to those that already exist for EFTs, when an MSB either:

Transmits an amount of C$1,000 or more at the request of a person or entity, other than in the case of an EFT; or
Remits an amount of C$1,000 or more to a beneficiary at the request of a person or entity, other than in the cast of an EFT.

Given that MSBs already have reporting and recordkeeping obligations when they send or receive EFTs, it is difficult to understand what these provisions are attempting to capture. In that regard, these provisions apply to remittances and transmittances, other than EFTs. The definition of an EFT under the regulations expressly excludes the following EFT transactions:

SWIFTs messages that are not MT-103s;
Transactions carried out by debit, credit or prepaid card, if the beneficiary has an agreement with a payment service provider that permits payment by that means for the provision of goods and services;
That involve the beneficiary withdrawing cash from their account;
That are carried out by direct deposit and pre-authorized debit;
That are carried out by cheque imaging and presentment;
That are both initiated and received by persons or entities that are acting to clear or settle payment obligations between themselves; or
That are initiated or finally received by an RE for the purposes of internal treasury management, provided one of the parties to the transaction is a subsidiary of the other or they are subsidiaries of the same corporation.

It is unclear if the intent is therefore to include these excluded transactions into the "remit and transmit" category for MSBs. If such is the case, then, contrary to the assertions in the Executive Summary, this would not serve to level the playing field across all REs, but rather will provide a more onerous compliance burden on MSBs.

It may also be that the definition of an EFT in the regulation is tied to the transmission of "instructions" for the transfer of funds, as opposed to the transfer of funds itself. It may be that these revisions are an attempt to clarify that it is not only instructions to transfer funds that create obligations, but also the actual transfer of funds in and of itself. If such is the case, it is unclear why similar amendments were not made in respect of financial entities. This is something that MSBs should consider in making submissions in respect of the regulations.

5. CASINOS

In addition to the new PEP requirements and the requirements to verify beneficial ownership, the proposed amendments provide additional obligations upon the casino sector. Specifically, it is contemplated that casinos would be required to keep a receipt of funds record and verify the identity of individuals when they receive C$3,000 or more in a "single transaction." Although the term "single transaction" is used, it is not tied to the single transaction requirements in the regulations that require transactions to be aggregated on a 24-hour consecutive basis.

6. VIRTUAL CURRENCY TRANSFERS

Although the last set of regulatory amendments regulated virtual currency and those who deal in virtual currency, because Financial Action Task Force (FATF) had not yet released its guidance in respect of virtual currency transfers, the regulatory amendments did not deal with virtual currency transfers. Now that FATF has finalized its guidance, the proposed amendments set out regulatory requirements for virtual currency transfers and specifically extend the travel rule to virtual currency transfers.

In that regard, the proposed amendments impose a "travel rule" requirement on financial entities and MSBs for virtual currency transfers. Specifically, financial entities and MSBs that are required to keep a record in respect of virtual currency transfers—which is triggered at the C$1,000 level—are required to:

(a) include with the transfer, the name, address and, if any, the account number or other reference number of both the person or entity that requested the transfer and the beneficiary; and

(b) take reasonable measures to ensure that any transfer received includes the information referred to in paragraph (a) above.

Similar to the travel rule for EFTs, financial entities and MSBs are required to develop and apply risk-based policies and procedures for determining whether they should suspend or reject a virtual currency transfer—or any follow up measures to be taken—where the required information is not received with a virtual currency transfer.

The implementation of the travel rule for cryptocurrency and blockchain transactions will, in the majority of cases, require an accompanying technology build. There is a lot of global commentary about the difficulty to implement the travel rule to these kinds of transfers in practice and it remains to be seen how this requirement will affect this sector moving forward.

7. RISK ASSESSMENTS

There is one small change in the proposed amendments is in respect of risk assessments. In that respect, the risk assessment provisions clarify that not only are REs required to perform risk assessments in respect of their offered products, but they are also required to do so in respect of their offered services.

Although this is a small regulatory package, it does make material changes to the regulations for all REs. REs are encouraged to provide comments to the Department of Finance within the 30-day timeframe.

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Canada: Yet More Amendments To The PCMLTFA Regulations