Additional Amendments to the Amending Regulations to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act Regulations Issued
On June 10, 2020, “regulations amending the regulations amending certain regulations” made under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCMLTFA”) were registered in the Canada Gazette. The new regulations (the “Regulations”) make a number of amendments to prior amendments (the “Draft Amending Regulations”) to the existing regulations under the PCMLTFA, which were published on February 15, 2020. Our prior summary of the Draft Amending Regulations can be viewed here.
Draft Amending Regulations
The Draft Amending Regulations included a number of amendments which expanded the obligations applicable to designated non-financial businesses and professions (“DNFBPs”), namely (i) casinos, (ii) dealers in precious metals and stones (DPMS), (iii) real estate brokers, sales representatives and developers, (iv) accountants and accounting firms, (v) British Columbia notaries and (vi) agents of the Crown, such as the requirement to ascertain beneficial ownership and the requirement to determine whether customers are politically exposed persons (“PEPs”). Additional obligations were also proposed for casinos and real estate developers, brokers and sales representatives.
Changes to Draft Amending Regulations
A “business relationship” is a relationship established between a FINTRAC reporting entity and a client, whereby the reporting entity conducts financial transactions or provides services related to those transactions. Financial entities and securities dealers commented that the Draft Amending Regulations could be interpreted as removing certain exemptions from forming a business relationship, and recommended reinstating the explicit exemptions from forming a business relationship when opening certain low-risk accounts.
Resulting change – as the policy intent is to continue exempting low-risk accounts from the formation of a business relationship, exceptions which were previously included in the definition of business relationship have been reinstated for certainty. For example, the Regulations now explicitly state that sales of certain group life insurance policies are exempt from forming a business relationship. The Regulatory Impact Assessment to the Regulations states that this revision is not intended to constitute a change in policy but rather a clarification to address a drafting point.
Financial entities and securities dealers commented, that:
While financial institutions were previously required to keep records on who has been authorized access to a business’ bank account, these record-keeping requirements were not equally applicable to financial entities and securities dealers under the Draft Amending Regulations.
Under the Draft Amending Regulations, the verification of identity in respect of a credit card or a prepaid payment product account, as well as its timing, was inconsistently applied between similar products. The Draft Amending Regulations required that identity be verified when a credit card is issued, while the requirement for identity verification for prepaid payment products was tied to activation. This was inconsistent as there could be a lag between when a credit card is issued versus when it is activated.
Resulting change – The Regulations now provide that securities dealers will have to keep records of no more than three persons, as opposed to all persons, authorized to access a business account, consistent with the requirement for financial entities. The Regulations have been modified to be consistent across similar products. The Regulations also now require identity verification once a credit card is activated, instead of when it is issued, to match the requirements for prepaid payment product accounts.
Previously, the PCMLTFA and its regulations only required that financial entities, securities dealers, money services businesses (“MSBs”) and life insurance companies to determine whether their customers are PEPs; the Draft Amending Regulations proposed expanding these obligations to DNFBPs. Casinos commented that PEP determination could be burdensome to casinos as it is time-consuming and considered intrusive by patrons, considering the required inquiries on family and close associates of PEPs. The identification of a PEP’s family members and close associates could be time-consuming at a gaming establishment during account opening and may encourage patrons to stop making accounts due to the intrusive nature of the inquiries.
Resulting change – the Regulatory Impact Assessment to the Regulations noted that it is critical to consider family members or close associates of PEPs, as it is an established trend that criminals will distance themselves from proceeds of crime until the proceeds have been laundered. Family members or other personal relationships are frequently relied on to conduct transactions on behalf of criminals in order to create this distance. As a result, while the PEP requirements could not be relaxed due to the FATF Standards – the internationally endorsed AML/ATF standards established by the Financial Action Task Force – and the money laundering risks posed by casinos, the same exemptions that apply to financial entities will be extended to DNFBPs, MSBs and casinos. Under these exemptions, reporting entities do not have to conduct a PEP determination for certain low-risk entities and accounts (such as a corporation or trust that has minimum net assets of $75 million and whose shares or units are traded on a Canadian stock exchange, which is unlikely to be a PEP).
Coming into Force
The Regulations came into force on May 20, 2020.
June 1, 2020 Amendments
As well, certain prior amendments (see our summary here) to the regulations under the PCMLTFA came into force on June 1, 2020. These amendments, among other things, introduced new obligations for domestic and foreign businesses that “deal in virtual currency”. As required of MSBs, persons and entities dealing in virtual currency will need to fulfill certain AML/ATF obligations, including implementing a full compliance program and registering with FINTRAC. As well, foreign MSBs will be required to fulfill similar obligations to domestic MSBs, for example, registering with FINTRAC, exercising customer due diligence, reporting transactions and keeping records for the same activities. Finally, the “travel rule” also as of June 1 applies to businesses dealing in virtual currency in Canada, consistent with the 2019 FATF guidance on virtual assets.