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Don’t Panic: June 2018 AML Update for DPMSs

As you may have heard, in 2018 the Department of Finance released draft updates to Canada’s anti-money laundering (AML) and counter terrorist financing (CTF) legislation. If you’re the type that likes to read the original legislative text, you can find it here.

For the rest of us, we’ve summarized the proposed updates and what they might mean for your business below.

Why is it a draft?

Publishing proposed amendments as a draft provides reporting entities like dealers in precious metals and stones (DPMSs), our industry associations like the Canadian Jewellers Association (CJA) and members of the general public, the opportunity to read the draft and suggest changes. There is a 90-day window from the original June 9th, 2018 publication date during which comments are accepted (meaning that comments should be submitted to the Department of Finance by early September).

After this, the Department of Finance will take the comments, synthesize them, request additional clarification where needed, and draft a final version of the amendments. The final version is likely to look fairly similar to the draft, with some changes. From the date that the final version is published, we expect that reporting entities will have 12 months to adjust their compliance programs and operations.

Practically speaking, this means that you should start thinking about what this means to you and your business now. However, while it can be useful to start teeing up resources (especially if you think that your IT systems need to be updated), it often makes sense to wait until the final version has been published to make changes. If you have thoughts on the proposed changes, it also means that you should consider submitting these, either independently or through an industry association. CJA members should contact Carla Adams (carla@canadianjewellers.com).

What does it mean for my business?

While there are quite a number of proposed changes (the draft is about 200 pages in length), some are likely to have more of an impact on DPMSs than others. We’ve summarized the changes that we expect to have the most impact here.

Large Virtual Currency Transaction Reporting

If you accept payments using virtual currencies like bitcoin, these will be treated similarly to cash payments. For any payments valued at CAD 10,000 or more made by or on behalf of the same person or entity in a 24-hour period, you will need to identify the customer and submit a report to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

Non-Face-To-Face Customer Identification

Currently, there is a requirement that when customers 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 customer 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 reporting entities to rely on the identification conducted previously by other reporting entities. If this method is used to identify a customer, the reporting entity 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.

Suspicious Transaction Reporting

Currently, if a reporting entity has reasonable grounds to suspect that a transaction or requested transaction is related to money laundering or terrorist financing, a report must be submitted to FINTRAC within 30 days of the date that a fact was discovered that caused the suspicion. This was changed in the last round of amendments that came into force last year, and the proposed new wording would be another significant change:

The person or entity shall send the report to the Centre within three days after the day on which measures taken by them enable them to establish that there are 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 means that a report would be due three days after the reporting entity conducts an investigation or does something else that allows them to reach the conclusion that there are reasonable grounds to suspect.

Information Included In Reports to FINTRAC

Certain information is required in reports to FINTRAC. Even where information is marked as being optional, if a reporting entity has the information, it becomes mandatory to include it. Some of the additional proposed data fields are:

  • every reference number that is connected to the transaction,
  • every other known detail that identifies the receipt (of cash for large cash transactions),
  • type of device used by person who makes request online,
  • number that identifies device,
  • internet protocol address (IP address) used by device,
  • person’s user name, and
  • date and time of person’s online session in which request is made.

These fields may require significantly more data to be included in reports, especially for transactions that are conducted online.

New Products & Delivery Channels

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 all reporting entities 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.

Defining a DPMS

The proposed amendments would change the definition of a DPMS slightly to read:

(1) A dealer in precious metals and precious stones, other than a department or an agent or mandatary of Her Majesty in right of Canada or of a province, that buys or sells precious metals, precious stones or jewellery for an amount of $10,000 or more is engaged in an activity for the purposes of paragraph 5(i) of the Act. A department or an agent or mandatary of Her Majesty in right of Canada or of a province carries out an activity for the purposes of paragraph 5(l) of the Act when they sell precious metals to the public for an amount of $10,000 or more.

(2) The activities referred to in subsection (1) do not include a purchase or sale that is carried out in the course of or in connection with manufacturing a product that contains precious metals or precious stones, extracting precious metals or precious stones from a mine or polishing or cutting precious stones.

(3) For greater certainty, the activities referred to in subsection (1) include the sale of precious metals, precious stones or jewellery that are left on consignment with a dealer in precious metals and precious stones. Goods left with an auctioneer for sale at auction are not considered to be left on consignment.

Neither the PCMLTFA nor the Regulations define consignment. This may need to be addressed, as the understanding of the term can vary.

Exempt Low Risk Activities

Certain activities are currently exempt from the DPMS designation, including manufacturing jewellery, extracting precious metals or precious stones from a mine, and cutting or polishing precious stones. The exempt activities would be expanded to capture other types of manufacturing processes that may also involve the use or consumption of precious metals and stones (e.g. diamonds used to manufacture drill bits). This is described as being consistent with the original policy intent.

What’s next?

If you would like to make a comment about the proposed changes to the Department of Finance during the comment period (which closes in early September), the contact person is:

Lynn Hemmings

Acting Director General

Financial Systems Division

Financial Sector Policy Branch

Department of Finance

90 Elgin Street

Ottawa, Ontario

K1A 0G5

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

If you would like to submit comments via an industry association, and you are a member of CJA, please contact carla@canadianjewellers.com.

If you have questions about AML & CTF compliance generally, please feel free to contact us.

Proposed AML Amendments & Credit Unions

Jon 1Today’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 July 4, 2015, draft amendments to 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 4, 2015. 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. For this reason, we expect the final version of these amendments to be similar to the draft text.

2015 Proposed PCMLTFR Amendments and Credit Union Specific Analysis (Line By Line)

Why Do These Changes Matter to Credit Unions?

The proposed changes will have a direct impact on a Credit Union’s AML obligations, including record keeping, member identification and ongoing monitoring requirements. Some of the more significant changes include new member identification methods, expanded definitions (and requirements) for Politically Exposed Persons, and new record keeping requirements for “reasonable measures” taken.

New Member Identification Methods          

IdentificationThe draft regulations will require identification documents to contain a member’s name and photograph. This will exclude SIN cards and birth certificates as acceptable identification documents, and may pose an issue when identifying seniors whose passport or driver’s license has long since expired.

The amendments also provide a number of new identification methods that can be used to identify members both face-to-face and non-face to face. These new methods are an improvement on existing rules, which are currently more restrictive.

For example, a Canadian credit file meeting certain criteria could now be used to identify a member. Many credit unions perform credit checks as part of their account opening process, so this could be used in place of government-issued identification in certain circumstances, or would allow simple non-face to face identification.

Also added is the ability to rely on information from “a reliable source” (yet to be determined, but likely online databases and other web-based resources), and information confirming that an individual has a deposit account, credit card or other loan account with another credit union, bank or caisse populaire. A credit union will also be able to accept identification performed by another credit union.

Politically Exposed Persons

PEFP silhouette 1The proposed regulations have added new categories of Politically Exposed Persons (PEPs), as follows:

  • Close associates of Politically Exposed Foreign Persons (PEFPs)
  • Politically Exposed Domestic Persons (PEDPs), their family members and close associates
  • Heads of International Organizations (HIOs), their family members and close associates

Given that the list (contained in bill C-31) of qualifying positions for PEDPs includes mayors, it is likely that many if not most credit unions will have members classified as PEDPs. The draft regulations mitigate this somewhat by adding a prescribed period of 20 years to the definition of a PEDP.

Additionally, required measures for PEPs such as determining the source of funds, obtaining senior management authorization to keep an account open, and performing enhanced monitoring will only apply to PEDPs and HIOs (and their family members and close associates) who have been determined to be high risk. Despite these exceptions, identifying and documenting these new categories of PEP will add to credit unions’ compliance obligations.

Reasonable Measures

Many AML record keeping, reporting and determination requirements rely on “reasonable measures” to be taken by financial institutions. For example, in a Large Cash Transaction Report, certain information about the conductor of the transaction, such as their country of residence, their home and business telephone numbers are not mandatory, but reasonable efforts must be made to obtain the information, and if you have it on file, it must be included in the report. The proposed changes will mean that whenever you take “reasonable measures”, and the measures taken are unsuccessful, you will then need to keep a record describing what the measures were and the reason they were unsuccessful. This will require additional work and record keeping for categories such as FINTRAC reporting, PEP determinations and correspondent banking relationships, among others.

Public Comments

Public comments about the proposed changes will be accepted by the Ministry of Finance until September 4, 2015. They must be submitted in writing, as follows:

Mail       Attention: Lisa Pezzack

Director, Financial Systems Division

Department of Finance

90 Elgin Street

Ottawa, Ontario, K1A 0G5

Email: fcs-scf@fin.gc.ca

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.

AML Regulation Updates & Digital Currency

Amber AML Program_2On July 4th, 2015, draft amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations were published in the Canada Gazette. These updates are intended to, among other things, strengthen Canada’s anti-money laundering (AML) regime and address certain technical issues. The draft does expand the definition of a money services business (MSB) to include “dealers in digital currency,” but digital currency businesses may still consider submitting comments related to the draft, as the consultation period of 60 days is open to the public.

This round of amendments didn’t include ‘dealers in digital currency’ – so why should you comment?

While dealers in digital currency are not yet regulated as MSBs, it is reasonable to expect that this is the direction Canada is taking based on Bill C-31, which was passed last year. This means that the regulations could apply to digital currency businesses in the near future. The 60-day comment period is likely to be the only public comment period before a final version of the amended regulations is published.

One of the most significant changes in the current draft relates to customer identification. The current customer identification methods for non-face-to-face customers (which apply to all online MSB customers) are complicated and heavily reliant on an individual having at least six months of Canadian credit history (you can learn more here). The proposed amendments have the potential to broaden the range of available sources to include sources other than credit reporting bureaus.

Digital currency businesses should consider commenting on these amendments. While we at Outlier consider the changes to be positive overall, we’re aware that there are many identification solutions on the market (many of which don’t meet the current Canadian identification requirements). This has caused more than a few headaches for businesses that operate online. While the proposed changes may alleviate some of the current pain points, businesses should consider how these fit with your business model and service providers.

Customer Identification Measures

In the text below, the text that is struck through includes proposed deletions, while the green text includes proposed additions. You can also see a full marked-up version of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations here.

MEASURES FOR ASCERTAINING IDENTITY

  1. (1) In the cases referred to in sections 53, 53.1, 54, paragraph 54.1(a) and sections 55, 56, 57, 59, 59.1, 59.2, 59.3, 59.4, 59.5, 60 and 61, a person’s the identity of a person shall is to be ascertained, at the time referred to in subsection (2) and in accordance with subsection (3), in the following manner:

(a) By referring to the person’s birth certificate, driver’s licence, provincial health insurance card (if such use of the card is not prohibited by the applicable provincial law), passport or other similar document; or

(a) By referring to identification document that contains their name and photograph and that is issued by the federal government or a provincial government or by a foreign government other than a municipal government, and by verifying that the name and photograph are those of the person;

(b) if the person is not physically present when the account is opened, the credit card application is submitted, the trust is established, the client information record is created or the transaction is conducted,

(i) by obtaining the person’s name, address and date of birth and

(A) confirming that one of the following entities has identified the person in accordance with paragraph (a), namely,

(I) an entity, referred to in any of paragraphs 5(a) to (g) of the Act, that is affiliated with the entity ascertaining the identity of the person,

(II) an entity that carries on activities outside Canada similar to the activities of a person or entity referred to in any of paragraphs 5(a) to (g) of the Act and that is affiliated with the entity ascertaining the identity of the person, or

(III) an entity that is subject to the Act and is a member of the same association as the entity ascertaining the identity of the person, and

(B) verifying that the name, address and date of birth in the record kept by that affiliated entity or that entity that is a member of the same association corresponds to the information provided in accordance with these Regulations by the person, or

(ii) subject to subsection (1.3), by using one of the following combinations of the identification methods set out in Part A of Schedule 7, namely,

(A) methods 1 and 3,

(B) methods 1 and 4,

(C) methods 1 and 5,

 (D) methods 2 and 3,

(E) methods 2 and 4,

 (F) methods 2 and 5,

(G) methods 3 and 4, or

(H) methods 3 and 5.

 (b) by referring to information concerning them that is received by the     person or entity that is ascertaining their identity on request from a federal or provincial government body — or a body that is acting as the agent or mandatary of such a body — that is authorized in Canada to ascertain the identity of persons, and by verifying that either the name and address or the name and date of birth contained in the information are those of the person;

(c) by referring to information that is contained in the person’s credit file — if that file is located in Canada and has been in existence for at least      three years — and by verifying that the name, address and date of birth   contained in the credit file are those of the person;

(d) by doing any two of the following:

(i) referring to information from a reliable source that contains their name and address, and verifying that the name and address are those of the person,

(ii) referring to information from a reliable source that contains their name and date of birth, and verifying that the name and date of birth are those of the person, or

(iii) referring to information that contains their name and confirms that they have a deposit account or a credit card or other loan account with a financial entity, and verifying that information; or

(e) by confirming that one of the following entities previously ascertained their identity in accordance with any of paragraphs (a) to (d), and by verifying that the name, address and date of birth contained in the entity’s record are those of the person:

(i) an entity that is referred to in any of paragraphs 5(a) to (g) of the Act and that is affiliated with the entity that is ascertaining the person’s identity, 

(ii) an entity that carries on activities outside Canada similar to the activities of a person or entity referred to in any of paragraphs 5(a) to (g) of the Act and that is affiliated with the entity that is ascertaining the person’s identity, or

(iii) a financial entity that is subject to the Act and that is a member of the same financial services cooperative or credit union central as the entity that is ascertaining the person’s identity.

(1.1) In the case referred to in paragraph 54.1(a), the identity of a person shall be ascertained by a person or entity, at the time referred to in subsection (2) and in accordance with subsection (3),

(a) by referring to the person’s birth certificate, driver’s licence, provincial health insurance card (if such use of the card is not prohibited by the applicable provincial law), passport or other similar document; or

(b) where the person is not physically present when the credit card application is submitted,

(i) by obtaining the person’s name, address and date of birth and

(A) confirming that one of the following entities has identified the person in accordance with paragraph (a), namely,

(I) an entity, referred to in any of paragraphs 5(a) to (g) of the Act, that is affiliated with the entity ascertaining the identity of the person,

(II) an entity that carries on activities outside Canada similar to the activities of a person or entity referred to in any of paragraphs 5(a) to(g) of the Act and that is affiliated with the entity ascertaining the identity of the person, or

(III) an entity that is subject to the Act and is a member of the same association as the entity ascertaining the identity of the person, and

(B) verifying that the name, address and date of birth in the record kept by that affiliated entity or that entity that is a member of the same association corresponds to the information provided in accordance with these Regulations by the person,

(ii) subject to subsection (1.3), by using a combination of any two identification methods referred to in either Part A or Part B of Schedule 7, or

(iii) subject to subsection (1.3), where the person has no credit history in Canada and the credit limit on the card is not more than $1,500, by using combination of any two identification methods referred to in any of Parts A, B and C of Schedule 7.

(1.1) For the purposes of subparagraphs (1)(d)(i) to (iii), the information that is referred to must be from different sources, and the person whose identity is being ascertained and the person or entity that is ascertaining their identity cannot be a source.

(1.2) for the purposes of paragraphs (1)(b)(i) and (1.1)(b)(i), an entity is affiliated with another entity if one of them is wholly owned by the other or both are wholly owned by the same entity.

(1.2) The person or entity that is ascertaining the identity of a person who is at least 12 years of age but not more than 15 years of age may refer under subparagraph (1)(d)(i) to information that contains the name and address of one of the person’s parents or their guardian or tutor in order to verify that the address is that of the person.

(1.21) For the purposes of subparagraphs (1)(b)(i) and (1.1)(b)(i),

(a) a financial services cooperative and each of its members that is a financial entity are considered to be members of the same association; and

(b) a credit union central and each of its members that is a financial entity are considered to be members of the same association.

(1.3) A combination of methods referred to in sub-paragraph (1)(b)(ii) or (1.1)(b)(ii) or (iii) shall not be relied on by a person or entity to ascertain the identity of a person unless

(a) the information obtained in respect of that person from each of the two applicable identification methods is determined by the person or entity to be consistent; and

(b) the information referred to in paragraph (a) is determined by the person or entity to be consistent with the information in respect of that person, if any, that is contained in a record kept by the person or entity under these Regulations.

(1.3) If a document is used to ascertain identity under subsection (1), it must be original, valid and current. Other information that is used for that purpose must be valid and current and must not include an electronic image of a document.

(2) The identity shall be ascertained

(a) in the cases referred to in paragraph 54(1)(a) and subsection 57(1), and paragraph 60(a), before any transaction other than an initial deposit is carried out on an account;

(b) in the cases referred to in section 53, paragraph 54(1)(b), subsection 59(1) and paragraphs 59.3(a), 59.4(1)(a), 59.5(a), 60(b) and 61(b), at the time of the transaction;

(b.1) in the case referred to in section 53.1, before the transaction is reported as required under section 7 of the Act;

(b.2) in the case referred to in paragraph 54.1 (a), before any credit card is activated;

(c) in the cases referred to in paragraphs 55(a), (d) and (e), within 15 days after the trust company becomes the trustee;

(d) in the cases referred to in subsection 56(1) and paragraph 61(a), within 30 days after the client information record is created;

(e) in the cases referred to in paragraphs 59.1(a) and 59.2(1)(a), at the time of the transaction; and

(e.1) in the case referred to in paragraph 60(a), before any funds are disbursed; and

(f) in the case referred to in subsection 62(3), at the time a contribution in respect of an individual member of the group plan is made to the plan, if

(i) the member’s contribution is not made as described in paragraph 62(3)(a), or

(ii) the existence of the plan sponsor has not been confirmed in accordance with section 65 or 66.

(3) Unless otherwise specified in these Regulations, only original documents that are valid and have not expired may be referred to for the purpose of ascertaining identity in accordance with paragraph (1)(a) or (1.1)(a).

64.1 (1) A person or entity that is required to take measures to ascertain a person’s identity under subsection 64(1) or (1.1) may rely on an agent or mandatary to take the identification those measures described in that subsection only if that person or entity has entered into an agreement or arrangement, in writing, with that agent or mandatary for the purposes of ascertaining identity.

(2) A person or entity that enters into an agreement or arrangement referred to in subsection (1) must obtain from the agent or mandatary the customer information obtained by the agent or mandatary under that agreement or arrangement.

(2) The person or entity may rely on measures that were previously taken by an agent or mandatary to ascertain the person’s identity if the agent or mandatary was, at the time they took the measures,

(a) acting in their own capacity, whether or not they were required to take the measures under these Regulations; or

(b) acting as an agent or mandatary under a written agreement or arrangement — entered into with another person or entity that is required to take measures to ascertain a person’s identity — for the purposes of ascertaining identity under subsection 64(1).

(3) In order to rely on measures taken by an agent or mandatary under subsection (1) or (2), the person or entity shall

(a) have entered into a written agreement or arrangement with the agent or mandatary for the purposes of ascertaining a person’s identity under subsection 64(1);

(b) obtain from the agent or mandatary all of the information that the agent or mandatary used to ascertain the person’s identity; and

(c) be satisfied that the information is valid and current and that the agent or mandatary ascertained the person’s identity in the manner described in any of paragraphs 64(1)(a) to (d).

64.2 Every person or entity that is required under these Regulations to ascertain a person’s identity in connection with a record that the person or entity has created and is required to keep under these Regulations — or in connection with a transaction that they have carried out and in respect of which they are required to keep a record under these Regulations or under section 12.1 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations — shall set out on or in, or include with, that record the person’s name and the following information:

(a) if the person or entity referred to an identification document under paragraph 64(1)(a), the type of document referred to, its reference number and the issuing authority and, if available, the place it was issued and its expiry date; 

(b) if the person or entity referred to information under paragraph 64(1)(b), the source of the information, the type of information referred to, a reference number associated with the information and the date on which the person or entity verified the information;

(c) if the person or entity referred to information under paragraph 64(1)(c), the source of the information, the reference number associated with the search of the credit file and the date on which the person or entity verified the information;

(d) if the person or entity referred to information under paragraph 64(1)(d), the source of the information, the type of information referred to and the account number contained in it — or if there is no account number contained in it, a reference number associated with the information — and the date on which the person or entity verified the information; or

(e) if the person or entity confirmed under paragraph 64(1)(e) that another entity had previously ascertained the person’s identity, the name   of that entity, the manner in which it previously ascertained the person’s identity under any of paragraphs 64(1)(a) to (d), the applicable information set out in one of paragraphs (a) to (d) of this section that is associated with that manner of ascertaining identity and the date on             which the person or entity verified the information.

Submit comments by September 12, 2015

Comments must be submitted in writing during the comment period, either by email or snail mail:

Snail Mail:

Lisa Pezzack, Director Financial Systems Division,

Financial Sector Policy Branch Department of Finance

90 Elgin Street Ottawa, Ontario K1A 0G5

Email:

fcs-scf@fin.gc.ca

Need a Hand?

At Outlier, we believe that it is important to participate in decisions that affect you and your business.  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 us.

 

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