Late last week, Canadian Bill C-31 received royal assent (meaning that it has been approved and will become Canadian law). The bill covered many areas, one of which was anti money laundering (AML) and counter terrorist financing (CTF) requirements for Canadian businesses. This included adding “dealers in digital currency” to the definition of money services businesses (MSBs).
It’s not yet clear when these changes will come into force, but we expect that there will be a period of at least six months before businesses need to be compliant. You can read the final version of the bill here. In the mean time, we expect to see a consultation paper and draft regulations before final regulations are released. The law will not come into effect until final regulations are released, and the regulations will clarify exactly what dealers in digital currency need to do to comply.
For businesses that operate in Canada or have Canadian customers (customers that are served in Canada – including via the web), this will mean registering with government agencies as an MSB, maintaining an AML and CTF compliance program, being compliant with the laws (which includes keeping records and identifying customers and reporting certain types of transactions), answering to the regulators and disclosing certain information to financial service providers.
Who Is a Dealer In Digital Currency?
Bill C-31 did not define dealers in digital currency. Instead, the bill states that the definition will be included in the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (Regulations). Generally speaking, being a dealer in any type of good or service implies that you are selling something for profit. The proposed definition is likely to appear in the initial consultation paper (expected this summer) as well as the draft version of the regulations.
It’s important to note that if you are dealing in digital currency today, but not engaging in any other MSB activities, you’re still not considered an MSB and you don’t have compliance obligations (yet).
MSB Registration
Dealers in digital currency will need to register as MSBs. Anyone dealing with customers in Canada will need to register as an MSB with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The process involves contacting FINTRAC to provide initial information and gaining access to the MSB registration site. There will be a number of questions about the owners of the business, senior officers, banking relationships and projected revenues. While the process is not costly, it can take time (in particular if the regulator requires clarification).
MSBs serving customers in the province of Quebec are also required to be licensed with the Authorite des Marches Financiers (AMF). Licensing related fees range from about CAD 607 to CAD 2428, excluding additional fees of CAD 202 per automated teller machine (ATM) operated in Quebec. You can learn more about the Quebec licensing process here.
Dealers in digital currency will not be able to register as MSBs at this time, but should expect to do so once the final regulations have been issued. The registration processes can take time, and it’s useful for businesses to start the process as early as possible in order to avoid being off side with the law.
Compliance Programs
AML and CTF Compliance Programs generally have five elements:
- A Compliance Officer (the person who oversees compliance for the organization),
- Policies and Procedures (documents that describe what you’re doing to comply),
- A Risk Assessment (a document that describes the risk that your business could be used to launder money or finance terrorism, and the controls that you have in place to prevent this from happening),
- Training (this is delivered at least annually to all staff that deal with customers or transactions), and
- Effectiveness Reviews (like an audit for compliance, these are completed at least every two years).
Some dealers in digital currency may already have voluntary compliance programs in place. These programs will most likely need to be updated when the final regulations are published.
Operational Compliance
In addition to having a documented AML & CTF compliance program, there are certain things that MSBs need to do in order to comply with the law. Currently, these include identifying customers when the MSB:
- receives the equivalent of CAD 10,000 or more in cash,
- sells or cashes $3,000 or more of traveller’s cheques, money orders, or anything similar instruments,
- exchanges currency of $3,000 or more for another currency,
- sends or receives international money transfers of $1,000 or more, and/or
- suspects that a transaction, or an attempted transaction, of any amount, is related to a money laundering offence or a terrorist financing offence.
Identification in this case is tightly defined as either the MSB or it’s representative looking at an original, valid (not expired) piece of government issued identification in person (via Skype or webcam doesn’t count) or using specific methods described in the Regulations.
MSBs are also required to keep specific types of records for at least five years, including customer and transactions records. All records must be stored in such a way that they can be quickly retrieved if the regulator requires them (generally within 30 days of the date that the regulator makes the request). In addition, MSBs are required to report certain transactions to FINTRAC and other agencies within set timeframes.
Like having a compliance program in place, these requirements don’t apply to dealers in digital currency yet, but it’s helpful for business owners to start thinking about the types of changes that may need to be made to IT systems and processes once regulations are released.
Penalties
The penalties for non-compliance can be significant, and may include either civil penalties, criminal penalties or both. For instance, failure to report suspicious transactions can result in penalties up to CAD 2 million and/or 5 years imprisonment.
In addition, FINTRAC may publish penalties on its website. While monetary penalties can be substantial, it is the publication of these penalties that can ultimately be more damaging to businesses. Few banks or other financial service providers are willing to work with organizations that have published violations for non-compliance.
What’s Next For You?
If your business is likely to be considered a dealer in digital currencies, you will have an opportunity later this year to comment on the consultation papers and draft regulations. It is unlikely that the sector will remain unregulated in Canada for long, but you will have an opportunity to voice your opinion about the proposed changes.
In the mean time, it’s time to start thinking about what you’ll need to do in order to be compliant. Who will your Compliance Officer be? What changes will you need to make to your documents, systems and processes? Although there are certain things that you won’t be able to do quite yet, you can organize your resources to be ready later this year.
If you’re concerned about the next steps and need a hand, please feel free to contact us anytime. Conversation are always free, and if you choose to hire us for a project, we do accept payment in bitcoin.
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