IMPACT ANALYSIS: Proposed amendments to Canada’s AML/CTF regime impose new obligations for many

The Canadian government’s proposed amendments to its main anti-money laundering law introduce significant changes to compliance obligations for businesses and seek to bring the country’s regime closer to international standards. Under the amendments proposed earlier this month, firms subject to reporting requirements to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) will have to contend with more stringent and burdensome reporting requirements and recordkeeping obligations.

The proposed rules also introduce new obligations for businesses that deal in virtual currencies and for life insurers. Background Canada’s AML/CTF regime has come under fire from industry organizations and regulators in recent years. Canada has faced pressure to strengthen rules around the disclosure of beneficial ownership, step up enforcement and modernize the regime to accommodate the growing number of businesses that deal in virtual currency. The global Financial Action Task Force (FATF) has been vocal in expressing its concerns over whether Canada’s AML/CTF regime is effective in deterring financial crime.

As an intergovernmental body, FATF is regarded as an international standard-setter and conducts evaluations in participating jurisdictions around the world. While recommendations made by FATF in its evaluations are not legally binding, member countries are obligated to implement recommendations made by the organization. An evaluation conducted by FATF in 2015-2016 identified a number of deficiencies in Canada’s AML/CTF regime. One of the biggest concerns it raised was compliance with customer due diligence requirements, particularly practices around verifying true identities of clients, identifying beneficial ownership of trusts and identifying beneficiaries of life insurance payouts.

FATF also cited a lack of oversight of businesses dealing in virtual currency, an area considered to be vulnerable to money laundering risks. Closing the gap with FATF recommendations The proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) aim to bring Canada’s AML/CTF regime in line with FATF recommendations. They introduce significant compliance changes or new reporting obligations altogether for FINTRAC reporting entities, especially financial institutions. The revised rules shorten the time frame for filing suspicious transaction reports. FINTRAC reporting entities are currently required to submit a suspicious transaction report within 30 days from the time the firm first has reasonable grounds to suspect that a transaction violates the PCMLTFA.

Under the proposed amendments, FINTRAC reporting entities would be required to file a suspicious transaction report within three days. Most firms under FINTRAC’s oversight can expect more burdensome record-keeping requirements under the revised PCMLTFA. Financial institutions will be subject to addition requirements to maintain account applications as well as more detailed records regarding deposit slips, credit card accounts and redemption of money orders exceeding C$3, 000. Know-Your-Client practices and identity verification are other areas where noteworthy changes have been proposed. The proposed amendments now permit electronic presentation of identification, provided that it can be authenticated.

The revised rules also touch on the issue of beneficial ownership, which has been an area of Canada’s AML/CTF regime that has been subject to much criticism. The proposed amendments to the PCMLTFA will require FINTRAC reporting entities to provide more information to regulators in respect of beneficiaries of trusts. A requirement to keep beneficial ownership information accurate and continuously up-to-date will also be imposed. Under the revised PCMLTFA businesses that deal in virtual currencies will be considered money services businesses (MSBs), subject to the full gambit of reporting and regulatory compliance requirements for transfers of any amount equivalent to C$10, 000 or more in virtual currency. Virtual currency MSBs will also be subject to record-keeping requirements where electronic transfers of C$1,000 or more in virtual currency are made. While these requirements already apply to financial entities and traditional MSBs, they may be uncharted territory for MSBs that deal in virtual currency.

If enacted in their current form, the proposed amendments will introduce new AML reporting obligations for the life insurance sector. Presently, life insurers are only subject to reporting obligations for life insurance and annuity products. The proposed amendments seek to subject life insurers to the same standard of reporting as financial entities where loans or pre-paid products are offered to retail consumers. In addition to reporting, life insurers will also be subject to the same regulatory compliance obligations under the PCMLTFA as well. Compliance considerations Under the proposed amendments to the PCMLTFA, financial institutions will need to grapple with more stringent beneficial ownership reporting requirements amidst a challenging regulatory landscape, particularly where trusts are concerned. Presently, trusts in Canada are not require to register or file evidence of their existence.

They do not have to keep a record of beneficial ownership or disclose that they are acting on behalf of other entities when interacting with banks. As a result, financial institutions often struggle to obtain information that is accurate and up-to-date on beneficial ownership of trusts. While FATF and other entities such as Transparency International Canada have called on the Canadian government to establish mandatory beneficial ownership disclosure rules and public registries for private companies and trusts, the present regulatory landscape still lacks such transparency. Adding to the challenge is revised wording in the PCMLTFA on the requirement that firms take reasonable measures to fulfill their regulatory obligations, including reporting on beneficial ownership information. Under the proposed amendments, firms will be required evidence and maintain records of the reasonable measures they have taken to fulfill their obligations under the PCMLTFA. In terms of reporting on beneficial ownership, firms may find that they will need to allocate more resources to creating and maintaining documentation that details all the measures they have taken to try and verify beneficial ownership, particularly where trusts are concerned. The added obligation to ensure that records on beneficial ownership of trusts are up-to-date means that firms will likely have to implement policies and procedures to monitor beneficial ownership information on a routine basis. This new requirement is expected to impose a significant burden on FINTRAC reporting entities. While the requirements for client identification have been adjust to permit electronic documentations, FINTRAC reporting entities still bear the responsibility of ensuring that electronic documents are authentic. Firms that wish to start using electronic documentation as part of their KYC regimes will have to implement policies and procedures to verify electronic documentation, as well as recordkeeping practices to evidence these verification efforts. Overall the proposed amendments to the PCMLTFA are a step forward in bringing Canada’s AML/CTF regime in line with FATF recommendations and international standards. However, policymakers still have some work to do, particularly in the area of disclosure of beneficial ownership. As such, firms need to brace for another wave of regulatory change after the dust settles from this most recent rewrite of the PCMLTFA.

Produced by Thomson Reuters Accelus Regulatory Intelligence 26-Jun-2018

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