On December 21, 2011, the Department of Finance released a Consultation Paper entitled, Strengthening Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime (the Consultation Paper), which proposes various amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PCMLTFA) and the regulations under that Act.
The proposals in the Consultation Paper are wide-ranging and, in some cases, quite significant. The Consultation Paper comes on the heels of the Consultation Paper on Proposed Amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations on Ascertaining Identity issued by the Department of Finance in November 2011, which focussed on measures to enhance customer identification and customer due diligence (CDD).
This bulletin summarizes the more significant proposals set out in the Consultation Paper. The Consultation Paper contains additional proposals not addressed in this Bulletin and so those seeking a comprehensive understanding of the changes that may be coming should review the Consultation Paper.
The Government has requested comments on the Consultation Paper by March 1, 2012.
Strengthening Customer Due Diligence Standards
Client Identification Records for Authorized Signers for Business Accounts
Currently, financial entities and casinos are required to ascertain the identity of at least three authorized signers of a business account, but are not required to keep a record of the identity of those signers or the measures taken to determine their identity. The Government proposes to amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR) so that financial entities and casinos will be required to keep a client identification record in respect of each signer whose identity they ascertain.
Enhancing Customer Due Diligence Exemptions for Introduced Business
Another amendment proposed in the Consultation Paper relates to scenarios where one financial business introduces or refers a client to another financial business (referred to as introduced business). For certain prescribed introduced business scenarios, the PCMLTFA carves out exemptions whereby reporting entities that receive introduced business can rely on the CDD performed by the introducing reporting entity. The Government proposes to review the current exemptions from CDD and record-keeping in the context of introduced business in order to improve the continuity of record-keeping and to clarify how responsibility for the CDD information is divided among the party introducing the business and the party receiving the business. In addition, the Consultation Paper states that consideration will be given to expanding the scope of introduced business scenarios that would qualify for an exemption from certain CDD obligations.
The need for non-face-to-face client identification measures is critical in the financial services industry, especially given the increasing popularity of mobile and online banking. The Consultation Paper addresses several aspects of the current non-face-to-face customer identification regime, including the following:
- The Government is seeking input regarding the security features that are included in electronically provided bank statements and that would assist with determining the authenticity of such statements.
- The Government proposes to review current non-face-to-face identification requirements for credit card companies in response to concerns related to the decreased usefulness of the telecommunications directory as a reliable independent data source.
- The Government proposes to review the requirement that a hand-written signature card, or electronic image of a hand written signature, must be maintained when accounts are opened.
Politically Exposed Foreign Persons (PEFPs)
In order to strengthen Canada's compliance with the FATF recommendation regarding politically exposed persons and anti-corruption, the Government proposes to expand reporting entities' obligations with respect to PEFPs as follows:
- The Government is considering expanding the definition of PEFP to include "close associates" of a PEFP.
- The Government is considering requiring life insurance companies, agents and brokers to take reasonable measures to determine if persons are PEFPs when opening an investment or loan account for a client, or in respect of existing clients who have investment or loan accounts. Where such persons are determined to be PEFPs, the full range of PEFP related obligations would apply.
- The Government is considering amending the PCMLTFR to clearly provide that reporting entities are required to assess whether all existing account holders are PEFPs where such a determination has not already been made (currently the requirement is to take reasonable measures to do this based on the level of risk).
Lower Risk Situations
The PCMLTFR currently provides that reporting entities do not have to conduct customer identification or due diligence measures in certain prescribed situations, which are viewed as being low-risk. The Government proposes to expand the list of low-risk customers to include all corporations whose shares are traded on a Canadian or other foreign stock exchange designated by the Minister of Finance under subsection 262(1) of the Income Tax Act.
Ongoing Due Diligence
The PCMLTFA requires reporting entities to verify the existence of corporations in certain circumstances by referring to certain documents. Currently, there is no restriction on how current such documents must be. The Government is considering amending the PCMLTFA to specify that documents used to prove the existence of a corporation must not be more than one year old.
Closing Gaps in Canada's AML/ATF Regime
Eliminating the Electronic Funds Transfers Threshold
Reporting entities are currently required to report any electronic funds transfer (EFT) of $10,000 or more entering or leaving Canada to FINTRAC. This threshold is viewed as limiting the detection of terrorist financing. Consistent with the approach taken in other jurisdictions such as Australia and the United States, the Government is considering eliminating the $10,000 threshold so that financial entities, casinos and money service businesses would be required to report all EFTs entering or leaving Canada. This proposed change gives rise to a number of concerns, including that this would increase the number of reports reporting entities are required to make and that this would require extending CDD obligations to ensure that such reporting entities identify all clients remitting or transmitting funds internationally (currently, CDD obligations only apply to transactions over $1,000).
Currently, the application of Canada's AML/ATF regime to prepaid products (including retail gift cards and open-loop prepaid cards) is somewhat unclear because the regime does not specifically address these types of products. There is a growing concern that the characteristics of prepaid payment technologies make them vulnerable to use in money laundering or terrorist financing schemes as prepaid access devices may offer anonymity or a relatively inconspicuous way of transporting large monetary amounts.
The Government is proposing to review CDD requirements to determine whether to extend these measures to prepaid access devices. The Government is seeking guidance on what types of devices should be covered, which party in the supply chain of prepaid access should bear the responsibility for the CDD requirements (e.g. financial institution, payment network, program operator, retailer), and the operational impacts for reporting entities should such CDD requirements be imposed. Firms that offer prepaid products should carefully consider the implications of the proposed application of CDD requirements to these products.
The Government is also considering whether to expand the definition of monetary instrument under the Cross-border and Monetary Instruments Reporting Regulations to include prepaid access. This would mean, for example, that a person would be required to submit a report if they brought a prepaid card with a value of $10,000 or more across the border.
CDD and Record-Keeping Requirements for Life Insurance Companies and Life Insurance Agents and Brokers
Currently, client identification requirements applicable to life insurance companies, agents and brokers are triggered when a client purchases an immediate or deferred annuity or life insurance policy for which the client may pay $10,000 or more over the duration of the annuity or policy.
The Government is considering expanding client identification and record-keeping requirements applicable to life insurance companies and life insurance brokers and agents to include transactions and account openings in respect of investment and loan products which are not currently captured under the PCMLTFR (i.e., to impose requirements similar to those currently imposed on financial entities and securities dealers). The Government is also considering eliminating a tax related exemption and the $10,000 threshold, which would result in the requirement applying to additional annuities and life insurance policies.
Large Cash Transaction Reports
At present, there are certain exemptions under the PCMLTFR which exempt life insurance agents and brokers from reporting transactions over $10,000 to FINTRAC where the origin of the funds to purchase certain specified financial products is unknown. The Government is considering amending the PCMLTFR to limit the exemptions for large cash transaction reporting by life insurance companies and life insurance agents and brokers to only those transactions where the origin of the funds may be easily identified and determined to be of low risk for money laundering (specifically, those identified in paragraphs 62(2)(c) to (f) of the PMCLTFR).
The Consultation Paper also states that the Government is proposing an amendment that would require reporting entities to record and report large cash transactions of $10,000 or more even where the cash is received by an agent or affiliated entity on behalf of a reporting entity.
Clarifying the 24-Hour Rule
The Consultation Paper proposes amending the definition of "single transaction" under the PCMLTFR to include all transactions conducted on behalf of the same person or entity within a 24-hour period, regardless of their amount, where the combination of the transactions totals at least $10,000.
Improving Compliance, Monitoring and Enforcement
Requiring the Documentation of Reasonable Measures
Reporting entities are currently required to take reasonable measures in certain circumstances, but are not generally required to keep a record of the reasonable measures they have taken. In order to assist FINTRAC in monitoring and ensuring the compliance of reporting entities under the PCMLTFA, the Government is proposing an amendment which would require reporting entities to document and keep records of the "reasonable measures" undertaken in response to a requirement under the PCMLTFA.
Introducing a List of Potential Countermeasures
Budget 2010 proposed introducing two new authorities for the Minister of Finance (neither of which are in force yet): (1) the authority to issue directives that require reporting entities to take countermeasures in respect of transactions originating from or destined to designated foreign jurisdictions and foreign entities, and (2) the authority to recommend that the Governor-in-Council issue regulations limiting or prohibiting reporting entities from entering into transactions originating from or destined to designated foreign jurisdictions and foreign entities. The Government proposes that these authorities would be brought into force along with the other amendments proposed in the Consultation Paper.
The Government also proposes to clarify the Minister's new authorities by enacting regulations that would prescribe a list of countermeasures that the Minister can require reporting entities to take in respect of a designated foreign jurisdiction or foreign entity when issuing a directive. The countermeasures would fall into the following categories:
- verification of client identity;
- exercise of CDD;
- monitoring of financial transactions or accounts;
- record keeping and retention;
- financial transaction reporting; and
Under the proposed scheme, directives would apply to the same activities as are currently regulated under the PCMLTFA (i.e., the Government is not proposing to expand the scope of regulated activities) and would set out in detail the actions required in any given circumstance.
It is proposed that administrative monetary penalties could be issued to reporting entities that are in violation of a directive or a regulation.
Broadening the Requirement to Report Suspicious Transactions
At present, reporting entities must report suspicious transactions, which are defined as any financial transactions that occur or are attempted in the course of a reporting entity's activities that give rise to a suspicion of money laundering. The Government is proposing to amend the definition by including activities undertaken for the purpose of a financial transaction (e.g. an account application) within the scope of the reporting obligations. The Consultation Paper states that this would clarify that reporting entities would be required to submit a suspicious transaction report if, for example, it considered an account application to be suspicious.
Amending Obligations Related to Client Credit Files
Under the PCMLTFR, financial entities are required to keep a client credit file where created in the normal course of business. In order to further clarify this requirement, the Government proposes to amend the relevant section of the PCMLTFR such that financial entities would be required to create and keep records of a client credit file when entering into a credit arrangement with a client. The proposed amendment would also clarify that the requirement does not apply to money services businesses, as they do not conduct credit arrangements.
The Consultation Paper proposes a number of significant changes to Canada's AML/ATF regime. Some of the proposed changes have the potential to expand reporting entities' obligations. As such, interested stakeholders should review the Consultation Paper in detail and consider submitting feedback to the Government in respect of such changes.
 See Fasken Martineau's Bulletin entitled, Significant Proposed Changes to Canada's Anti-Money Laundering and Anti-Terrorist Financing Legislation for a summary of the November 7th Consultation Paper.
 The authors acknowledge the contribution of Sarah Goodwin, student-at-law.
 In particular, this Bulletin does not address changes that we view as being of a technical nature, proposed amendments relating to precious metals and stones and accountants, and proposals relating to enhanced information sharing between FINTRAC and others involved in financial intelligence.