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FATF Releases Review of Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime

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Financial Institutions Bulletin

In September 2016, the Financial Action Task Force ("FATF") and the Asia/Pacific Group on Money Laundering ("APG") released the fourth mutual evaluation report on Canada's anti-money laundering and combatting the financing of terrorism ("AML/CFT") regime.

The FATF report states that the main domestic sources of proceeds of crime are fraud, corruption and bribery, counterfeiting and piracy, illicit drug trafficking, tobacco smuggling and trafficking, and tax evasion. The report also points to Canada's open and stable economy and accessible financial system as the source of its vulnerability to significant foreign money laundering. The primary money laundering channels appear to be Canadian financial institutions and money service businesses. Additionally, the report characterizes the risk of terrorist financing in Canada as notably lower than money laundering risk.

Previously, in the third mutual evaluation report published in 2008, the FATF outlined a significant number of deficiencies in Canada's AML/CFT regime and, as a result, placed Canada on an annual follow-up list in order to more closely monitor Canada's compliance with the FATF's guidelines. After several years of working to address these deficiencies, Canada was removed from the follow-up list in 2014.

The 2016 report finds that, overall, Canada's AML/CFT framework continues to be strong: there is effective coordination of AML/CFT efforts among the various responsible authorities at the policy and operational levels; and Canada's financial intelligence unit, FINTRAC, has access to a wide range of information and maintains functional relationships with a variety of law-enforcement agencies and reporting entities. Additionally, the report states that all high-risk areas are covered by the AML/CFT regime, with the exception of the legal professions (other than British Columbia notaries),[1] online casinos, open loop prepaid cards, and while label ATMs.

Furthermore, the 2016 report states that Canada's financial institutions (FIs) "have a good understanding of their risks and obligations, and generally apply adequate mitigating measures." Canada received a compliance rating of either "compliant" or "largely compliant" with respect to a number of the FATF's Recommendations: financial institution secrecy laws; dealings with high-risk countries; customer due diligence; record-keeping; correspondent banking; internal controls and foreign branches and subsidiaries; assessing risks and applying a risk-based approach; and general regulation and supervision of FIs. However, Canada also received the lower "partially compliant" or "non-compliant" ratings in a number of other areas, such as wire transfers, reliance on third parties, reporting of suspicious transactions, transparency and beneficial ownership of legal persons and legal arrangements, politically exposed persons, and new technologies.

Some of these gaps are in the process of being addressed, as in the case of treatment of politically exposed persons (Recommendation 12). At present, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR) contain requirements in respect of politically exposed foreign persons, but not in respect of politically exposed domestic persons (although OSFI Guideline B-8 does state that where a FI is aware that a client is a politically exposed domestic person it should assess the risk of that client accordingly). Moreover, the PCMLTFA and PCMLTFR capture "family members" of a politically exposed foreign person, but do not extend so far as to capture "close associates". These gaps will be addressed by amendments to the PCMLTFA and PCMLTFR coming into force in June 2017.

The FATF sees other gaps as serious ongoing risks. The report identified the transparency and beneficial ownership of legal persons and legal arrangements (Recommendations 24 and 25) as especially vulnerable to money laundering and terrorist financing abuse. The report notes that there is no public register of beneficial ownership information, which limits the ability of reporting entities to independently verify this information.

Overall, the outcome of Canada's fourth mutual evaluation report is a substantial improvement over the results of the third evaluation in 2008. There remain gaps in the system, some of which will be addressed by amendments to the PCMLTFA and PCMLTFR; other areas, such as the ability of reporting entities to verify the beneficial ownership of legal persons, may pose longer-term challenges.

Visit the FATF website to view the full report.

[1] This follows from the 2015 Supreme Court of Canada decision Canada (Attorney General) v Federation of law societies of Canada in which the Court found that the AML/CFT requirements were in breach of the right to attorney-client privilege.


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