A consultation paper titled Reviewing Canada's Anti-Money Laundering and Anti-Terrorist Financing regime (Paper) was released in February, which could potentially have broad implications for Canada's anti-money laundering and anti-terrorist financing (AML/ATF) regime. The Paper is driven by a number of factors, including the requirement in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) that the administration and operation of the PCMLTFA be reviewed every five years, the Financial Action Task Force's review of Canada's AML/ATF regime published in 2016, and the Assessment of Inherent Risks of Money Laundering and Terrorist Financing published in 2015.
The proposals contained in the Paper are diverse and far reaching. Some would extend the reach of Canada's AML/ATF regime. Others would reduce the burden of this regime on reporting entities. Some of the more noteworthy proposals are:
- New requirements to enable authorities to access and receive accurate, up-to-date beneficial corporate ownership information.
- Expanding Canada's AML/ATF regime to new parties, including: (1) mortgage insurers, land registries and title insurance companies; (2) non-federally regulated mortgage lenders; (3) unregulated financing, leasing and factoring businesses; and (4) dealers in high-value goods.
- A regulatory "sandbox" for fintech companies that would allow for exemptive relief and administrative forbearance for emerging technology companies.
The Paper is divided into five chapters, each of which is summarized below. Comments on the Paper are to be provided by April 30, 2018.
Chapter 1 - Legislative and Regulatory Gaps
In the wake of the Panama Papers and the Bahamas Leaks of 2016 and the Paradise Papers release of 2017, the issue of corporate transparency and beneficial ownership has been front and center. At present, Canada does not have a central registry which identifies corporate beneficial ownership. Although corporate reporting is required at both the federal and provincial levels, the information provided is not harmonized. This makes it challenging for reporting entities to comply with the current requirements relating to beneficial ownership.
The Department of Finance (Department) is seeking views on how to improve corporate ownership transparency. The Paper contemplates mechanisms to improve timely access to beneficial ownership information by authorities while maintaining the ease of doing business in Canada. This includes considering different beneficial ownership registry models.
Expanding the Scope of the PCMLTFA to High Risk Areas
The Department is considering expanding the AML/ATF regime to include additional categories of reporting entities.
Politically Exposed Persons (PEPs), Head of International Organizations (HIOs) and Beneficial Ownership - At present, only four reporting entity sectors in Canada have reporting obligations relating to PEPs and HIOs (financial entities, securities dealers, money service businesses and life insurance companies). The Department is considering whether it should expand the requirements relating to PEPs, HIOs and beneficial ownership to designated non-financial businesses and professions. The Paper also proposes changes to the definition of HIOs and PEPs, and requiring PEP determination in respect of beneficial owners.
White Label ATMs - The Paper contemplates extending the AML/ATF regime to white label ATMs. Privately-owned ATMs may be vulnerable to money laundering and terrorist financing abuse because they can be owned by anyone and can be loaded with large amounts of cash. In 2012, Quebec became the first Canadian province to strengthen the regulation of privately-owned automated teller machines.
Real Estate Sector - Real estate brokers, sales representatives and developers are currently covered under the PCMLTFA. However, other real estate entities such as mortgage insurers, land registries and title insurance companies are not. These entities are uniquely positioned to obtain and report information which directly relates to both money laundering and terrorist financing, and so the Paper proposes that they should also be subject to the PCMLTFA.
Non-federally regulated mortgage lenders - The Paper proposes that non-federally regulated mortgage lenders should also be included under the purview of the AML/ATF regime. These include mortgage finance companies, real estate investment trusts, mortgage investment corporations, mutual fund trusts, syndicated mortgages and individual private lenders.
Designated Non-Financial Businesses and Professions - Currently, designated non-financial businesses and professions such as accountants and accounting firms are covered for activities that involve financial transactions. The Paper considers expanding the scope of activities to be encompassed under the PCMLTFA to cover other high-risk activities, including the creation, operation or management of legal persons or arrangements and the management of client funds, securities or other assets.
Prohibiting the Structuring of Transactions to Avoid Reporting - The Department is considering introducing a new criminal offence which would prohibit reporting entities from structuring transactions by "smurfing" (structuring a transaction by distilling it into smaller transactions to avoid financial transaction reporting).
Standardize Record Keeping and Client Identification - Pursuant to the PCMLTFA, record keeping and client identification requirements are triggered when financial transactions reach specified financial thresholds, which can vary. In light of concerns that this variance can create a barrier to compliance, the Department is examining whether a standardized financial threshold should be established.
Finance, Lease and Factoring Companies - The Paper considers broadening the scope of the regime to ensure that the financing, leasing and factoring sectors are covered by the PCMLTFA. These industries were identified as a particular money laundering risk in the Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada.
Other sectors proposed to be made subject to the PCMLTFA - In addition, the Paper contemplates making the following subject to the PCMLTFA:
- businesses and professionals who provide services related to the formation and administration of companies, including acting as a director or nominee of a company, managing financial affairs and preparing annual corporate and tax filings;
- pari-mutuel betting and horse racing;
- armoured cars;
- dealers in high-value goods such as yachts, automobiles and art; and
- jewelry auction houses.
Chapter 2 - Enhancing the Exchange of Information While Protecting Canadians' Rights
This chapter highlights the tension between combatting money laundering and terrorist financing, on the one hand, and privacy, on the other.
The Department is requesting suggestions for improving information sharing. Specific proposals include providing for disclosures by FINTRAC to the Competition Bureau and Revenu Quebec, increasing information sharing capabilities between the public/private sectors, and strengthening Canada's ability to provide mutual legal assistance to other countries in relation to money laundering, terrorist financing, and other criminal matters, particularly with respect to requests for digital evidence.
Chapter 3 - Strengthening Intelligence Capacity and Enforcement
This chapter addresses the need to strengthen intelligence capacity and enforcement to respond to changing circumstances, including technological advancements.
Electronic Funds Transfers (EFTs) - Under the PCMLTFA, EFTs over $10,000 are reported to FINTRAC when they are initiated by a client. EFTs are not captured when they pass through a Canadian financial entity which is not the sending nor the recipient destination. This results in a gap in the information which FINTRAC receives and prevents it from identifying potential money laundering or terrorist financing transactions.
Bulk Cash - Cash is widely used by criminals, with large denominations being a particular issue. It was for this reason that Canada stopped producing $1,000 banknotes in 2000. The Paper discusses removing legal tender status for large denominations (this item was subsequently included in the 2018 Federal Budget). The Department is considering whether it should limit the amount of cash an individual can carry in Canada without a legitimate purpose, whether Canada should establish a business registry for persons who deal in high volumes of cash, and whether there should be a limit on the amount of cash a business could accept and/or report on.
Geographic Targeting Orders - Geographic targeting orders establish obligations for individuals and companies that exist within a geographic area to face heightened scrutiny in respect of specified transactions on the basis of higher money laundering and terrorist financing risk. Currently, the PCMLTFA does not provide for geographic targeting orders; however the Paper considers their possible introduction.
Border Enforcement - The Paper seeks views on how to address the money laundering and terrorist financing vulnerabilities at the border. Specific items discussed are: (1) possibly expanding cross-border currency and monetary instrument reporting requirements to extend to other instruments such as diamonds, gold, precious metals and prepaid payment products; (2) whether the penalties currently associated with failing to declare currency and monetary instruments are sufficiently high to serve as an effective deterrent; and (3) trade fraud.
Chapter 4 - Modernizing the Framework and its Supervision
This chapter discusses various ways in which the AML/ATF regime and its supervision should be modernized.
MSB de-risking - The Paper acknowledges the challenges that MSBs have maintaining bank accounts with financial institutions because of the trend towards de-risking. The Paper states that this reflects the perception that MSBs are inherently high-risk and the mistaken belief that a financial institution must "know your customer's customer". While this issue is acknowledged, there is no specific proposal to address it.
Strengthening MSB Registration - The Paper states that FINTRAC has found that MSB registration applications and procedures could be improved upon.
Enhancing and Strengthening Identification Methods - While permitted identity verification methods have expanded, the AML/ATF regime still currently places extensive reliance on physical identification documents. As financial technology solutions continue to progress (blockchain, biometrics, etc.), the framework must accommodate cutting-edge and secure methods for conducting know-your-client procedures.
Regulatory "sandbox" for fintech companies - To foster innovation and to encourage start-up development in the fintech sector, the Department is considering whether to allow forms of exemptive relief and administrative forbearance for emerging technology companies (which may, for example, be caught by the AML/ATF regime if they fall within the MSB definition).
Whistleblowing - The AML/ATF regime currently has an existing whistleblowing framework. However, the Paper highlights that the whistleblowing program could be strengthened.
Administrative Monetary Penalties (AMP) - The Paper also considers changing policies surrounding public naming, confidentiality in court proceedings and the AMP calculations. Currently, FINTRAC is unable to make public certain information relating to an AMP once all proceedings have ended. This dilutes the deterrence effect and potentially creates an incentive to engage in protracted litigation. The Paper recommends that FINTRAC should be provided with a discretionary power which would enable it to publicly name a person or entity, during the proceedings, subject to certain conditions. In the context of this proposal it is worth bearing in mind the criticism FINTRAC received for its decision in 2016 to fine a Canadian bank without naming it. Additionally, the Paper appears to suggest that parties involved in the AMP appeal process should no longer be able to apply for confidentiality orders. Finally, the Paper recommends that FINTRAC develop a transparent formula which should be employed to calculate monetary penalties. This would provide increased clarity in the AMP process.
Chapter 5 - Administrative Definitions and Provisions
The Paper identifies technical amendments that would improve the administration and operation of the PCMLTFA and its regulations. In particular, the Department is examining issues relating to:
- electronic reporting of cross-border movements of currency and monetary instruments;
- clarifying the "travel rule", which requires reporting entities to include certain information with electronic fund transfers and take reasonable measures to ensure any transfer to a reporting entity includes this information;
- requiring reporting entities to mitigate risks that are not assessed as high; and
- potentially aligning correspondent banking relationship requirements with international standards.