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Proposed AML Updates for Credit Unions (2018)

Today’s guest blogger is Jonathan Krumins, Vice-President, AML Risk & Compliance, at vCAMLO Solutions Inc. vCAMLO provides anti money laundering (AML) and counter terrorist financing (CTF) support to Canadian credit unions. You can learn more about vCAMLO at www.vcamlo.ca.

Background

On June 9, 2018, draft amendments to Canada’s AML regulations, including the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR) were published in the Canada Gazette.

These changes are not yet in force, and are open to public comment until September 9, 2018.

They will come into effect 12 months after the finalized amendments are published (date to be determined).

The proposed changes are based on requirements set out by the Financial Action Task Force (FATF), an inter-governmental body that sets out international standards for combating money laundering and terrorist financing, as well as from certain amendments made to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) made through the Economic Action Plan 2014 Act, No. 1 and the Budget Implementation Act, 2017, No. 1.

From a practical standpoint, you should consider what changes will be required to your record keeping, reporting processes, and IT systems once the amendments come into effect, and what resources would be required. It would be prudent to discuss this with your board of directors as well. While it can be useful to start allocating resources (particularly if your IT systems need to be updated), it makes sense to wait until the final version of the changes has been published.

If you have thoughts on the proposed changes, you should consider submitting these either directly to the Ministry of Finance, or through your Credit Union Central.

Why Do These Changes Matter to Credit Unions?

The proposed changes will have a direct impact on a Credit Union’s AML obligations, including reporting, record keeping, and member identification. They will require additional training of staff, changes to record keeping and Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) reporting processes. They will likely require changes in your IT systems to ensure that all necessary information is available to be included in FINTRAC reports, particularly those involving online transactions.

FINTRAC Reporting

This round of changes to AML regulations has a much greater focus on reporting, including shorter a deadline for reporting STRs, changes to the contents of the reports themselves changes to calculation of 24 hour large cash reports, and the introduction of new reporting requirements for transactions involving virtual currencies such as bitcoin.

STR Filing

The proposed changes will shorten considerably the filing period for a Suspicious Transaction Report. The current filing deadline for STRs is within 30 days:

“after the day on which the person or entity or any of their employees or officers detects a fact respecting a financial transaction or an attempted financial transaction that constitutes reasonable grounds to suspect that the transaction or attempted transaction is related to the commission of a money laundering offence or a terrorist activity financing offence.”

This will be changed to a new standard of 3 days:

“3 days after the day on which the reporting entity completes the analysis that establishes that there are reasonable grounds to suspect that the transaction was related to the commission of a money laundering or terrorist activity financing offence”

Report Contents

Many additional pieces of information will be required to be collected and submitted to FINTRAC. You should begin to evaluate where this information is stored (ex: banking system, other databases such as lending software, reports provided by your banking system provider or Credit Union Central, or paper file).

A comparison of current and proposed FINTRAC report fields can be found here: Download Table

These changes include information that was not previously required to be collected by credit unions, such as:

  • “Purpose of transaction” (for LCTRs),
  • “Purpose of electronic funds transfer” (for EFTRs), and
  • Source of cash or source of funds.

For transactions that are performed online, additional fields will be required in EFTRs and STRs:

  • Type of device used by person who makes request online,
  • Number that identifies device,
  • Internet Protocol address used by device [mandatory field],
  • Person’s user name, and
  • Date and time of person’s online session in which request is made [mandatory field].

Additional “Know Your Client” information will be required in all reports (if on file). A selection follows:

  • Personal accounts: reports will include fields for alias, e-mail address, and name, address and phone number for the member’s employer.
  • Business accounts: reports will include fields for type and number of document or information used to identify an entity, information respecting ownership, control and structure of the entity, name of each beneficial owner, name, address, e-mail address and phone number for each director.
  • Trust accounts: reports will include fields for name, address, e-mail address and phone number of each trustee, name and address of each settlor of trust, name, address, e-mail address, and telephone number of each beneficiary of trust.

The 24-Hour Rule

The formula for calculating 24 hour reports for Large Cash Transaction Reports is being changed. If you use software to automatically detect these types of transactions, you should begin discussions with your IT department or software provider to determine the time and resources that would be required to update the detection process.

Currently, a Large Cash Transaction Report must be submitted either for single transactions of $10,000 (or more) or for multiple transactions of less than $10,000 each that add up to $10,000 or more in a 24 hour period. This can result in situations where 2 reports are filed for transactions taking place in a 24 hour period.

For example:

 

Cash deposit of $12,000 cash – LCTR #1 for $12,000

Cash deposits of $5,000 and $6,000 cash – LCTR #2 for $11,000

The new calculation will consider all cash deposits that add up to $10,000 or more in a 24 hour period to be included in a single report.

 

Using the same example above, under the new rules we would have:

Cash deposits of $12,000, $5,000 and $6,000 – Single LCTR for $23,000

Virtual Currency Reporting

If you offer (or plan to offer) accounts that hold virtual currencies such as bitcoin, you will be required to report the receipt or the sending of amounts of $10,000 or more in a virtual currency to FINTRAC in two new report types; “Report with Respect to Receipt of Virtual Currency” and “Report with Respect to Transfer of Virtual Currency.”

Third Party Determinations

Similar to the existing requirement to conduct a Third Party Determination during an LCTR, you will need to make a similar determination when you are required to report an incoming Electronic Funds Transfer or Receipt of Virtual Currency.

If you have separate fraud and AML teams, it may be worth considering whether or not the AML team should alert the fraud team to third parties, particularly where these don’t make sense, or where it appears that your member may be a victim of fraud.

Training Program

The amended regulations have introduced a requirement to institute and document a plan for ongoing compliance training. This differs from the current requirement to develop and maintain a written training program.

In practice, this means that in addition to documenting all of the training that has already been completed, you will need to clearly document future training plans.

Risk Assessment Updates

One of the deficiencies identified in the Financial Action Task Force (FATF) review of Canada was not having a requirement to assess new technologies before their launch. A proposed amendment would require credit unions to assess the risk related to assess the risk of products and their delivery channels, as well as the risk associated with the use of new technologies, prior to their launch.

This has been a best practice since the requirement to conduct a risk assessment came into force, but this change would make this a formal requirement. This may require closer cooperation between compliance officers and other teams involved in the development of new products or services.

Identification Methods

The range of identification methods that can be used will be broadened. This is good news, especially for credit unions that are using non-face-to-face identification methods.

Currently, there is a requirement that when members are identified using the dual process method, the document and/or data that you collect is in its “original” format. This has been interpreted to mean that if the member receives a utility bill in the mail, they must send you the original paper (not scanned or copied) document. The word “original” will be replaced with “authentic” (meaning that so long as you believe that the utility bill is a real utility bill for that person, it doesn’t need to be the same piece of paper that they received in the mail).

In addition, there are provisions that would allow a credit union to rely on the identification conducted previously by other reporting entities. If this method is used to identify a member, the credit union must immediately obtain the identification information from the other reporting entity and have a written agreement in place requiring the entity doing the identification to provide the identification verification within 3 days of the request.

Public Comments

Public comments about the proposed changes will be accepted by the Ministry of Finance until September 9, 2018. They must be submitted in writing, as follows:

Attention: Lisa Pezzack

Director General, Financial Systems Division

Department of Finance

90 Elgin Street

Ottawa, Ontario, K1A 0G5

Email: fin.fc-cf.fin@canada.ca

If you have thoughts on the proposed changes, you should consider submitting these either directly to the Ministry of Finance, or through your Credit Union Central.

Need a Hand?

If you would like someone to look over your submission before you make comments to the Department of Finance, you can get in touch with us free of charge. We will look over your submission and make suggestions, without any cost to you. If you need a hand, please feel free to contact vCAMLO or Outlier.

 

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