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Effectiveness Reviews for Dealers in Virtual Currency

Effective June 1, 2020, dealers in Virtual Currency activities were considered as Money Services Businesses (MSBs) and as such, must comply with MSB obligations under amendments made to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). One obligation is to have an AML effectiveness review at least once every two years. MSBs must start their effectiveness review no later than two years from the start of their previous review or in the case of dealers in Virtual Currency, no later than June 1, 2022, the date they were considered to be MSBs under law.

Such reviews must test your compliance program and effectiveness of your operations. Our reviews follow a similar format to examinations conducted by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), which you can read more about in a previous Blog Post.

We’re Here To Help

If you have not yet engaged or commenced your review, there are still a couple of weeks to be compliant. If you would like to engage Outlier to conduct your AML Compliance Effectiveness Review or have questions regarding this obligation, please get in touch.

Amendments To The Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations – 2022

Background

On April 27, 2022 amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations were published in the Canada Gazette. To make reading these changes a little easier, we (thanks Rodney) have created a redlined version of the regulations, with new content showing as tracked changes, which can be found here.

The Regulatory Impact Statement for these changes state the following:

Crowdfunding platforms and some payment service providers are not currently covered by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act) and therefore have no money laundering and terrorist financing obligations under federal statute. This lack of oversight presents a serious and immediate risk to the security of Canadians and to the Canadian economy. This risk was highlighted in early 2022, when illegal blockades took place across Canada that were financed, in part, through crowdfunding platforms and payment service providers. Allowing these gaps to continue represents a risk to the integrity and stability of the financial sector and the broader economy, as well as a reputational risk for Canada.

Amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, and consequential amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations, will help prevent the financing of illegal activities through these types of financial services.

What’s Changed?

The changes are substantial and sudden. They will affect many companies that have not been previously under the purview of AML regulation in Canada. These changes are effective immediately and there is no comment period, which is not the norm for such changes.

To help digest these changes, we have summarized what we feel are the most important changes below:

The definition for an electronic funds transfer has been removed and the corresponding section within the body of the regulations was amended. Previous exemptions related to remitting or transmitting from one person or entity to another by Credit or Debit Card, or Prepaid Payment Product if the beneficiary has an agreement with the payment service provider that permits payment for the provision of goods and services, has been revoked for money services businesses, which as we mentioned now includes Payment Service Providers.

The definitions section was amended by adding the following:

  • crowdfunding platform means a website or an application or other software that is used to raise funds or virtual currency through donations. (plateforme de sociofinancement)
  • crowdfunding platform services means the provision and maintenance of a crowdfunding platform for use by other persons or entities to raise funds or virtual currency for themselves or for persons or entities specified by them.

With these changes, crowdfunding platforms and payment service providers will now be subject to existing money services businesses requirements. These obligations include:

  • Registration with FINTRAC;
  • Developing a compliance program;
  • Customer identification and due diligence;
  • Transaction monitoring and customer risk scoring;
  • Reporting certain transactions to regulators and government agencies;
  • Complying with Ministerial Directives; and
  • Keeping records.

Specific to record keeping, crowdfunding platforms that provide services to persons or entities in Canada where a person donates an amount of CAD 1,000 or more in funds or virtual currency will need to:

(a) keep an information record in respect of the person or entity to which they provide those services;

(b) keep a record of the purpose for which the funds or virtual currency are being raised; and

(c) if the person or entity for which the funds or virtual currency are being raised is different from the person or entity referred to in paragraph (a),

      1. keep a record of their name, and
      2. take reasonable measures to obtain their address, the nature of their principal business or their occupation and, in the case of a person, their date of birth, and keep a record of the information obtained.

What Next?

Due to these changes, FINTRAC will need to revise its interpretation of existing requirements to include crowdfunding platforms and payment service providers. There is no set date for when we can expect guidance from FINTRAC. Additionally, various FINTRAC policy interpretations will no longer be able to be relied upon (i.e. policy interpretations related to merchant services as well as payment processing for utility bills, mortgage and rent, payroll, and tuition being exempt from AML obligations). The hope is FINTRAC will issue new policy interpretations, but for now the industry is left with many questions.

We’re Here To Help

If you would like assistance in understanding what these changes mean to your business, or if you need help in creating or updating your compliance program and processes, please get in touch.

Proliferation Financing

 

 

 

 

What is it, and why should AML compliance professionals be paying attention?

If you’ve looked at the Financial Action Task Force (FATF)’s recommendations recently, you’ve no doubt noticed that there are now three big topics on the covering page:

  • Money laundering,
  • Terrorist financing, and
  • Proliferation.

The last of these has received considerably less attention until recently, and in many cases, it may not be explicitly included in either jurisdiction-specific legislation or compliance programs. While some elements of proliferation are generally included (for instance, it is rare to see a compliance program that does not address sanctions-related list screening), there is often little if any consideration given to risks such as sanctions evasion or the non-implementation of sanctions.

According to the FATF, weapons of mass destruction (WMD) proliferation refers to the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling or use of nuclear, chemical or biological weapons and their means of delivery and related materials (including both dual-use technologies and dual use goods used for non-legitimate purposes). The financing of proliferation refers to the risk of raising, moving, or making available funds, other assets or other economic resources, or financing, in whole or in part, to persons or entities for purposes of WMD proliferation, including the proliferation of their means of delivery or related materials (including both dual-use technologies and dual-use goods for non-legitimate purposes). There are targeted financial sanctions intended to prevent specific jurisdictions, organizations, and persons from participating in any proliferation-related activities.

In Canada, reporting entities have strict obligations to comply with sanctions requirements.

Similarly, terrorists and terrorist groups are often subject to financial sanctions and prohibitions. All accounts and transactions are scanned against listed persons and entities. In the case that we have property (including money and investments) in our possession that belongs to a listed person or entity, it must be frozen and reported immediately.

Recommendation 1 requires countries and private sector entities to identify, assess, and understand “proliferation financing risks”. In the context of Recommendation 1, “proliferation financing risk” refers strictly and only to the potential breach, non-implementation or evasion of the targeted financial obligations referred to in Recommendation 7. These R.7 obligations apply to two country-specific regimes for the Democratic People’s Republic of Korea (DPRK) and Iran, require countries to freeze without delay the funds or other assets of, and to ensure that no funds and other assets are made available, directly or indirectly to or for the benefit of (a) any person or entity designated by the United Nations (UN), (b) persons and entities acting on their behalf or at their direction, (c) those owned or controlled by them. The full text of Recommendations 1 and 7 is set out at Annex A.

Canadian reporting entities will be familiar with Ministerial Directives related to North Korea and Iran that impose additional requirements, as well as providing indicators of activity related to these jurisdictions. While we may not be used to thinking about these requirements as being controls related to proliferation financing risk, this is exactly what they are. We may also fail to consider how they fit into our overall compliance regimes.

Proliferation Financing Trends and Typologies

It is not enough to simply say that your business does not deal with these jurisdictions directly. In many cases, funds are not actually repatriated to these jurisdictions but are held in other countries. For instance, identified state-sponsored North Korean hacking groups have moved stolen funds and virtual currencies through the Philippines, Macau, and China. In addition, actors intending to circumvent sanctions are known to be relatively proficient in using false and manufactured identities, as well as well as organizational structures intended to obfuscate true beneficial ownership. In the FATF’s webinar on proliferation financing, the global watchdog noted that proliferation financing may be one of the most challenging threats to detect in action, due to its complex nature.

Helpful Resources

Late in 2021, the FATF conducted an excellent webinar on proliferation financing risk assessment and mitigation, which has now been posted publicly. This presentation includes an excellent high-level overview, as well as detailed discussions of the trends and typologies that are relevant today.

It can be useful to review the aspects of the FATF’s recommendations that refer to proliferation.

There is additional guidance from the FATF on proliferation financing risk assessment and mitigation. This is a detailed document focused entirely on proliferation financing, and the FATF’s expectations.

The UK has conducted a national level assessment of proliferation financing risk. This includes a number of relevant case studies and typologies. If you want the sense of it, but are short on time, our friend Dev Odedra has published a summary.

Manchester CF has launched a proliferation financing training module as part of the Financial Intelligence Specialist (FIS) designation, offered in conjunction with the University of Newhaven.

Need a Hand?

If you want to get ahead of the curve by having a conversation about proliferation financing risk and potential impacts to your compliance program, please contact us.

FINTRAC Examinations for the Real Estate Sector

We often hear friends and clients in the real estate sector say they are unsure what to expect if (and when) the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) notifies them of an examination. This article is meant to provide guidance on what to expect and how to ensure a smooth review.

Background

In 2019–20, FINTRAC conducted 399 compliance examinations, of which 146 were focused on the real estate sector [1]. The real estate sector has been the main focus for FINTRAC examinations since 2017 due to the growing concern of money laundering taking place in the Vancouver, Toronto and Montreal real estate market.

For the purpose of assessing compliance, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act gives FINTRAC the authority to inquire into the business of any regulated entity.

FINTRAC examinations are reviews of your compliance program (what you say you are doing to stay in compliance) and your operations (what you’re actually doing to stay in compliance). These exams can take place at any time and should not be confused with your obligation to have an AML Effectiveness Review at least once every two years. FINTRAC examinations can take place in-person onsite at your office, at a FINTRAC office, or over the phone. FINTRAC will provide advance notice of an examination, which is scheduled by telephone and confirmed by letter [2]. Note, due to the COVID-19 pandemic, FINTRAC is not currently conducting onsite examinations [3].

I Have Received Notice of an Exam. Now What?

FINTRAC will request documentation, including your compliance policies and procedures, assessment of risks of money laundering and terrorist financing, measures to mitigate high risks, samples of transaction documentation, and other documents be summitted to them. Based on FINTRAC’s areas of review, the below is a sample list of what you can expect to provide. We have also created a more detailed version of the list which you can find here.

  • Most recent version of compliance policies and procedures;
  • Most recent version of your documented risk assessment;
  • Copy of the last two documented internal and/or external reviews of your compliance program (this may include the reviewer’s working papers as well);
  • Training program and records;
  • Organizational Chart;
  • Financial Statements;
  • Number of full-time and part-time employees/sales representative;
  • All suspicious and attempted suspicious transaction records;
  • A list of all closed deals related to the sale/purchase of real estate;
  • In-Trust bank account records; and
  • Large cash transaction records.

You will generally have 30 days to provide all requested documentation to FINTRAC. It’s a good idea to read through the request carefully before you begin your preparation.

Whether you are submitting your materials on paper or in electronic format, it is a good idea to create folders or cover pages for each item that FINTRAC has requested. This creates separate sections for each item and helps you to stay organized. A missed item usually can’t be submitted once the deadline has passed, and can result in deficiencies. We’ve created a sample format for your submission package that you can download for free here.

The Exam

Whether the FINTRAC exam is in-person, at their office or over the phone, they follow very similar formats. The key difference is the regulator’s ability to request additional operational data during onsite examinations.

It is ok for you to take notes throughout the examination process (and we recommend that you do). You are permitted to have a lawyer, consultant or other representative with you (if you do, FINTRAC will request that you complete the Authorized Representative Form in advance). While your representative cannot generally answer questions on your behalf, they can prompt you if you are nervous or stuck, and help you to understand what is being asked of you if it is not clear.

The Introduction

The examiner will provide a brief overview of the examination process as a formal opening to the examination. At the end of this introduction, the examiner will ask if you have any questions. At this point, it can be useful to provide a very brief (five minutes maximum) overview of your business.

Your introduction should reflect the materials that you have already submitted to FINTRAC (which ideally included an opening letter that described anything about the business that would not be readily apparent to the examiner, or anything that you believe could be misunderstood). Key facts about your business include:

  • Your corporate structure and ownership;
  • The types of products and services that are offered/types of transactions that are conducted;
  • Where your offices, agents and customers are located;
  • How you connect with your customers; and
  • Anything significant that has changed since your last FINTRAC examination.

This overview should be simple and brief.  At this point, the examination will then begin. At the end of each section, the examiner will ask if you have any questions and let you know whether there are any deficiencies.

Compliance Policies & Procedures

During this part, FINTRAC will ask questions about the policy and procedure documents that you have provided in advance of the examination. There are a few standard questions that are generally asked:

  • Who wrote the policies and procedures?
  • Were the versions submitted to FINTRAC the most recent versions?
  • When were they last updated?
  • When and how do you identify your customers?
  • How do you ensure that identification is up to date?
  • How do you monitor transactions?
  • How do you recognize, document and monitor “business relationships” (note: this is any time that you have either an ongoing service agreement with a customer and/or your customer has performed two or more transactions that require identification [4]).
  • What are indicators of a suspicious transaction?
  • The examiner will also ask a number of questions based on the documents that you have submitted, including questions about compliance-related processes.

Risk Assessment

During this part, FINTRAC will focus on your Risk Based Approach, asking specific questions about the Risk Assessment and related documents that you have provided in advance of your examination. Again, there are some common questions that are asked:

  • Do you have any high risk customers or business relationships?
  • What factors do you consider in determining that a customer or business relationship is high risk?
  • How are customer due diligence and enhanced due diligence different (both generally, and in your processes and documentation)?

Most additional questions will be related to risk management processes. For example, it has been common in the last few months for examiners to ask if a customer or transaction could be rejected (“Yes, if it was outside of our risk tolerance”).

This may also lead to questions about whether or not an Attempted Suspicious Transaction Report (ASTR) or Suspicious Transaction Report (STR) was filed. If there were reasonable grounds to suspect money laundering or terrorist financing, the answer should be yes. If not, you should explicitly say “There were not reasonable grounds to believe that this event was related to money laundering or terrorist financing”, then provide an explanation.

Operational Compliance & Reporting

During this part, the examiner will ask questions about specific transactions/deals. Some of the cases that you must be ready to explain are:

  • A transaction matches an indicator of potentially suspicious activity (if there were reasonable grounds to suspect money laundering or terrorist financing, the answer should be that you filed an STR, if not, you should explicitly say that “there were not reasonable grounds to believe that this event was related to money laundering or terrorist financing”, then provide an explanation);
  • Questions related to receipt of funds and large cash transactions; and
  • Business relationships and ongoing monitoring (in particular, if this did not occur earlier in the examination).

During a desk examination, the examiners typically do not request additional materials.

During onsite examinations, it has become commonplace for examiners to request additional materials. These are generally related to:

  • Business relationships;
  • Ongoing monitoring (including the monitoring of business relationships);
  • High risk customers;
  • Enhanced due diligence; and
  • Other risk-based processes.

Be clear with the examiner about what can be extracted easily from your IT systems, and in the case that data cannot be extracted easily, be prepared to show the examiner an example (or several). If your system has an “auditor access” feature (generally read-only access with search capability), it can be useful to set this up in advance of the onsite visit.

Exit Interview

Congratulations – you’ve made it to the finish line!

At this point, the examiner will sum up the findings (if there are any), and read a standard disclosure statement. For most of us, the disclosure statement is terrifying, as it talks about penalties. This is standard process – do not be alarmed. When the examiner has finished, you may ask if a penalty is being recommended (if you’re a worrier, please do this). Not all FINTRAC examiners will provide guidance at this stage, but it doesn’t hurt to ask.

After the Exit Interview

After the examination and exit interview, generally within 30 days, you will receive a formal letter that details FINTRAC’s findings. The letter will state either of these possibilities:

  • No further compliance or enforcement action;
  • Possible follow-up compliance action; or
  • A recommendation for an enforcement action, such as an administrative monetary penalty (AMP).

In the case that there is an AMP imposed, we recommend taking action as soon as possible. In most cases, FINTRAC does not require real estate brokers and sales representatives to submit an action plan.

We’re Here To Help

If you need assistance preparing for a FINTRAC exam or have any compliance questions in general, please contact us.

 

 

[1] https://www.fintrac-canafe.gc.ca/publications/ar/2020/1-eng

[2] FINTRAC considers the date on which you are advised of an examination, which is typically done by phone, to be the start of the compliance examination process.

[3] https://www.fintrac-canafe.gc.ca/covid19/covid-2020-07-27-eng

[4] Effective June 1, 2021 a business relationship will be defined as either entering into an ongoing service agreement with a customer and/or your customer has performed one or more transactions that require identification.

Amending the Amendments! 2020 AML Changes for Real Estate

Background

Back on July 10, 2019, the highly anticipated final version of the amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its enacted regulations were published. However, on June 10, 2020, further amendments to those amended regulations were published in the Canada Gazette. To make reading these changes a little easier, we have created a redlined version of the regulations, with new content showing as tracked changes, which can be found here.

The purpose of this round of amendments is to better align measures with international standards and level the playing field across reporting entities by applying stronger customer due diligence requirements and beneficial ownership requirements to designated non-financial businesses and professions (DNFBPs). The amendments come into force on June 1, 2021.

We have summarized the changes that will have an impact on real estate developers, brokers, and sales representatives below.

Business Relationship

One of the most significant proposed changes for real estate developers, brokers, and sales representatives is related to the definition of a business relationship. Currently, a business relationship is defined as:

If a person or entity does not have an account with you, a business relationship is formed once you have conducted two transactions or activities for which you have to:

  • verify the identity of the individual; or
  • confirm the existence of the entity.

The amendments change the definition for real estate developers, brokers, and sales representatives to the first time that the person or entity is required to verify the identity of the client.

For business relationships, a reporting entity must:

  • keep a record of the purpose and intended nature of the business relationship;
  • conduct ongoing monitoring of your business relationship with your client to:
    • detect any transactions that need to be reported as suspicious;
    • keep client identification and beneficial ownership information, as well as the purpose and intended nature records, up-to-date;
    • reassess your client’s risk level based on their transactions and activities; and
    • determine if the transactions and activities are consistent with what you know about your client;
  • keep a record of the measures you take to monitor your business relationships and the information you obtain as a result.

 This change in definition also means that ongoing monitoring must be applied for the following purposes:

  1. detecting any transactions that are required to be reported;
  2. keeping client identification information and the information up to date;
  3. reassessing the level of risk associated with the client’s transactions/activities; and
  4. determining whether transactions or activities are consistent with the information obtained about their client, including the risk assessment of the client.

PEP

The amendments will require real estate developers, brokers, and sales representatives to make a Politically exposed persons (PEP) determination when they enter into a business relationship (as defined above) with a client.

In addition, they will also be required to take reasonable measures to determine whether a client from whom they receive an amount of CAD 100,000 or more is a PEP.

If a positive determination is made, the following records must be kept:

  1. the office or position, and the organization or institution, in respect of which the person is determined to be a politically exposed foreign person, a politically exposed domestic person or a head of an international organization, or a family member of, or a person who is closely associated with, one of those persons;
  2. the date of the determination; and
  3. the source, if known, of the person’s wealth.

Beneficial Ownership

The amendments will require real estate developers, brokers, and sales representatives to comply with existing beneficial ownership requirements that apply to other reporting entities.

This means when identifying an entity, a reporting entity needs to collect the following information for all Directors and individuals who own or control, directly or indirectly, 25% or more of the organization:

  • Their full legal name;
  • Their full home address; and
  • Information establishing the ownership, control, and structure of the entity.

A record of the reasonable measures to confirm the accuracy of the information, when it is first obtained and in the course of ongoing monitoring of business relationships, must be retained.

We’re Here To Help

If you would like assistance in updating your compliance program and processes, or have any questions related to the changes, please get in touch!

Regulations for Dealers in Virtual Currency – June 2020

Effective June 1, 2020, entities engaged in Virtual Currency activities are considered as Money Services Businesses (MSBs), and are required to register with FINTRAC and comply with MSB obligations under amendments made to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) that were released on July 19, 2019. Those amendments also require, as of June 1, 2021, reporting large virtual currency transactions. The Department of Finance has since made further amendments to those amended regulations, published in the Canada Gazette on June 10, 2020.

To make reading these changes a little easier, we have created a redlined version of the regulations, with the most recent changes showing as tracked changes, which can be found here.

Dealers in Virtual Currency

It’s important to start by understanding what’s being regulated. This is best done by considering some of the definitions that have been added to the regulation.

fiat currency means a currency that is issued by a country and is designated as legal tender in that country. (monnaie fiduciaire)

funds means

(a) cash and other fiat currencies, and securities, negotiable instruments or other financial instruments that indicate a title or right to or interest in them; or

(b) a private key of a cryptographic system that enables a person or entity to have access to a fiat currency other than cash.

For greater certainty, it does not include virtual currency. (fonds)

virtual currency means

(a) a digital representation of value that can be used for payment or investment purposes that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or

(b) a private key of a cryptographic system that enables a person or entity to have access to a digital representation f value referred to in paragraph (a). (monnaie virtuelle)

virtual currency exchange transaction means an exchange, at the request of another person or entity, of virtual currency for funds, funds for virtual currency or one virtual currency for another. (opération de change en monnaie virtuelle)

In terms of who will be regulated, businesses (whether or not the business is incorporated) that conduct transactions on behalf of their customers, including:

  • Exchanging digital currencies for fiat currencies; and
  • Exchanging between virtual currencies.

Current Obligations

Client Identification:

Dealers in Virtual Currency must identify individuals and confirm the existence of entities when they:

  • Remit or transmit funds (see definition above) of $1,000 or more at the request of a customer;
  • Conduct a foreign exchange transaction of $3,000 or more;
  • Enter into an ongoing service agreement with a customer (conduct transactions for a customer that is an entity);
  • Conduct a large cash transaction; and
  • Must take reasonable measures to identify individuals who conduct or attempt to conduct a suspicious transaction.

As of June 2021, there will be an additional requirement to identify virtual currency exchange transactions valued at CAD 1,000. This will include exchanging fiat and virtual currency, as well as exchanges between virtual currencies.

Information on acceptable methods to identify clients can be found on FINTRAC’s website. 

Reporting:

For reporting, there are two important dates. By June 1, 2020, dealers in virtual currency will need to report the same types of transactions that MSBs are currently required to report. These are:

  • Electronic Funds Transfers: if you send or receive international electronic funds transfers (EFTs), including wires, valued at CAD 10,000 or more, by or on behalf of the same customer, it must be reported to FINTRAC within 5 working days.
  • Large Cash Transactions: if you receive cash (this means fiat in the form of bills and/or coins) valued at CAD 10,000 or more in the same 24-hour period, by or on behalf of the same customer, it must be reported to FINTRAC within 15 calendar days.
  • Suspicious Transactions: if there are “reasonable grounds to suspect” that a completed attempted transaction is related to money laundering or terrorist financing, it must be reported to FINTRAC “as soon as practicable” of the discovery of a fact that led you to determine that the transaction was suspicious.

FINTRAC defines “as soon as practicable” in its Glossary as follows:

A time period that falls in-between immediately and as soon as possible within which a suspicious transaction report (STR) be submitted to FINTRAC. In this context, the report must be completed promptly, taking into account the facts and circumstances of the situation. While some amount of delay is permitted, it must have a reasonable explanation. The completion and submission of the report should take priority over other tasks.

FINTRAC has released more specific guidance on what “measures” enable reporting entities to have “reasonable grounds to suspect”.

More information on suspicious transaction reporting can be found on FINTRAC’s website.

  • Terrorist Property: if you’re in possession of property (which includes funds and virtual currency) that belong to a terrorist or terrorist group, it must be reported without delay, and the property must be frozen. In addition to reporting to FINTRAC, these reports are also sent to the CSIS and RCMP – by fax. In order to know if customers fall into this category, it is important to screen against the United Nations Security Council consolidated list. We’ve worked with some friends on a tool to make this easier, which you can try here (use the code Free100 for a free trial).

If you are required to report transactions valued at CAD 10,000 or more in a 24-hour period, you must have a mechanism in place to detect reportable transactions which is described in your compliance documentation.

By June 1, 2021, a new report will be introduced:

  • Large Virtual Currency Transactions: if you receive virtual currency valued at CAD 10,000 or more in the same 24-hour period, by or on behalf of the same customer, it must be reported to FINTRAC within 5 working days.

Amendments to the Amendments

The amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) that were published in the Canada Gazette on June 10, 2020 create the following obligations for dealers in Virtual Currency:

Travel Rule

One of the most significant changes that will impact Virtual Currency Dealers as MSBs relates to a new requirement for records to be kept on all virtual currency transfers of CAD 1,000 or more.

The record must contain the following:

  1. include with the transfer, the name, address and, if any, the account number or other reference number of both the person or entity that requested the transfer and the beneficiary; and
  2. take reasonable measures to ensure that any transfer received includes the information referred to in paragraph (a) above.

Where the information required was not obtained, MSBs must have written risk-based policies and procedures for determining if the transaction should be suspended, rejected, or if another follow-up measure should be taken.

PEP

In addition to the existing requirement for MSBs to take reasonable measures to determine whether a client from whom they receive an amount of CAD 100,000 or more is a Politically exposed person (PEP), the amendments will require MSBs to make a PEP determination when they establish a business relationship with a client.

A reminder that a business relationship is defined as:

If a person or entity does not have an account with you, a business relationship is formed once you have conducted two transactions or activities for which you have to:

  • verify the identity of the individual; or
  • confirm the existence of the entity.

MSBs will also periodically need to take reasonable measures to determine whether a person with whom they have a business relationship is a PEP. We will have to await guidance from FINTRAC on this, but our guess is the frequency for determination will align to the frequency for customer information and identification updates.

Given the definition of a business relationship, we do not expect this requirement to be overly burdensome. If you currently conduct list screening, PEP screening could easily be added to that process. You are also able to ask the customer directly, while presenting the definition of a PEP, and record their response.

If a positive determination is made, the following records must be kept:

  1. the office or position, and the organization or institution, in respect of which the person is determined to be a politically exposed foreign person, a politically exposed domestic person or a head of an international organization, or a family member of, or a person who is closely associated with, one of those persons;
  2. the date of the determination
  3. the source, if known, of the person’s wealth;
  4. the risk rating; and
  5. the name of the member of senior management who reviewed the client, and the date the client was approved.

Other Relevant Blog Posts for Dealers in Virtual Currency

What’s happening in the VC community? 

Messaging Standard Overview

In October 2018, the Financial Action Task Force (FATF) adopted changes to its Recommendations to explicitly clarify that they apply to financial activities involving virtual assets (VA), effectively expanding the scope of the Recommendations to apply to virtual asset service providers (VASPs) and other obliged entities that engage in or provide covered VA activities.

“There exists a need for VASPs to adopt uniform approaches and establish common standards to enable them to meet their obligations resulting from the FATF Recommendations as they apply to affected entities”.

The implementation of obligations such as the travel rule for virtual currency transactions, in the majority of cases, would require an accompanying technology. To tackle issues such as this, a cross-industry, cross-sectoral joint working group of technical experts was formed in December 2019 and a new technical standard developed by the group.  The Joint Working Group on interVASP Messaging Standards (JWG) was established  by three leading international industry associations representing VASPs:
Chamber of Digital Commerce
Global Digital Finance
International Digital Asset Exchange Association 

We will have to wait for FINTRAC guidance to see if such a standard is provided as an example.

More information on the working group can be found here.

To download a copy of the standard anonymously, use this link:

DOWNLOAD THE STANDARD

We’re Here To Help

If you would like assistance in updating your compliance program and processes, or have any questions related to the changes, please get in touch!

Amending the Amendments! 2020 AML Changes for MSBs

Background

Back on July 10, 2019, the highly anticipated final version of the amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its enacted regulations were published. However, on June 10, 2020, further amendments to those amended regulations were published in the Canada Gazette. To make reading these changes a little easier, we have created a redlined version of the regulations, with new content showing as tracked changes, which can be found here.

The purpose of this round of amendments is to better align measures with international standards and level the playing field across reporting entities by applying stronger customer due diligence requirements and beneficial ownership requirements to designated non-financial businesses and professions (DNFBPs). The amendments come into force on June 1, 2021.

We have summarized the changes that will have an impact on Money Services Businesses (MSB)s below.

Travel Rule

One of the most significant changes that will impact MSBs and Foreign Money Services Businesses (FMSB)s relates to a new requirement for records to be kept on all virtual currency transfers of CAD 1,000 or more.

The record must contain the following:

  1. include with the transfer, the name, address and, if any, the account number or other reference number of both the person or entity that requested the transfer and the beneficiary; and
  2. take reasonable measures to ensure that any transfer received includes the information referred to in paragraph (a) above.

Where the information required was not obtained, MSBs and FMSBs must have written risk-based policies and procedures for determining if the transaction should be suspended, rejected or if another follow-up measure should be taken.

PEP

In addition to the existing requirement for MSBs and FMSBs to take reasonable measures to determine whether a client from whom they receive an amount of CAD 100,000 or more is a Politically exposed person (PEP), the amendments will require MSBs and FMSBs to make a PEP determination when they establish a business relationship with a client.

A reminder that a business relationship is defined as:

If a person or entity does not have an account with you, a business relationship is formed once you have conducted two transactions or activities for which you have to:

  • verify the identity of the individual; or
  • confirm the existence of the entity.

MSBs and FMSBs will also periodically need to take reasonable measures to determine whether a person with whom they have a business relationship is a PEP. We will have to await guidance from FINTRAC on this, but our guess is the frequency for determination will align to the frequency for customer information and identification updates.

Given the definition of a business relationship, we do not expect this requirement to be overly burdensome. If you currently conduct list screening, PEP screening could easily be added to that process. You are also able to ask the customer directly, while presenting the definition of a PEP, and record their response.

If a positive determination is made, the following records must be kept:

  1. the office or position, and the organization or institution, in respect of which the person is determined to be a politically exposed foreign person, a politically exposed domestic person or a head of an international organization, or a family member of, or a person who is closely associated with, one of those persons;
  2. the date of the determination; and
  3. the source, if known, of the person’s wealth.

We’re Here To Help

If you would like assistance in updating your compliance program and processes, or have any questions related to the changes, please get in touch!

Amending the Amendments! 2020 AML Changes for Jewellers

Background

Back on July 10, 2019, the highly anticipated final version of the amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its enacted regulations were published. However, on June 10, 2020, further amendments to those amended regulations were published in the Canada Gazette. To make reading these changes a little easier, we have created a redlined version of the regulations, with new content showing as tracked changes, which can be found here.

The purpose of this round of amendments is to better align measures with international standards and level the playing field across reporting entities by applying stronger customer due diligence requirements and beneficial ownership requirements to designated non-financial businesses and professions (DNFBPs). The amendments come into force on June 1, 2021.

We have summarized the changes that will have an impact on Dealers in Precious Metals and Stones (DPMS) below.

PEP

The amendments will require DPMSs to make a Politically exposed persons (PEP) determination when they enter into a business relationship with a client. In addition, they will also be required to take reasonable measures to determine whether a client from whom they receive an amount of CAD 100,000 or more is a PEP.

A reminder that a business relationship is defined as:

If a person or entity does not have an account with you, a business relationship is formed once you have conducted two transactions or activities for which you have to:

  • verify the identity of the individual; or
  • confirm the existence of the entity.

Given the definition of a business relationship, we do not expect this requirement to be overly burdensome. If you currently conduct list screening, PEP screening could easily be added to that process.

If a positive determination is made, the following records must be kept:

  1. the office or position, and the organization or institution, in respect of which the person is determined to be a politically exposed foreign person, a politically exposed domestic person or a head of an international organization, or a family member of, or a person who is closely associated with, one of those persons;
  2. the date of the determination; and
  3. the source, if known, of the person’s wealth.

Beneficial Ownership

The amendments will require DPMSs to comply with existing beneficial ownership requirements that apply to other reporting entities.

This means when identifying an entity, a reporting entity needs to collect the following information for all Directors and individuals who own or control, directly or indirectly, 25% or more of the organization:

  • Their full legal name;
  • Their full home address; and
  • Information establishing the ownership, control, and structure of the entity.

A record of the reasonable measures to confirm the accuracy of the information, when it is first obtained and in the course of ongoing monitoring of business relationships, must be retained.

We’re Here To Help

If you would like assistance in updating your compliance program and processes, or have any questions related to the changes, please get in touch!

Are You a Foreign Money Services Business?

Background

On July 10, 2019 amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its enacted regulations were released in the Canada Gazette. The amendments require entities that conduct MSB activities from outside of Canada, directed towards Canadians, to be considered Foreign Money Services Businesses (FMSBs) and therefore comply with Canadian AML obligations.  Foreign MSBs must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and become compliant by June 1, 2020. Check out our blog post to see what your full requirements are.

What Is A Money Services Business?

You are considered an MSB in Canada if your business offers any of the following services:

  • Foreign exchange dealing;
  • Remitting or transmitting funds;
  • Issuing or redeeming money orders, traveller’s cheques and other negotiable instruments; or
  • Dealing in virtual currencies.

What Is A Foreign Money Services Business?

You are considered an FMSB if all of the following criteria applies to your business:

  • The person or entity is engaged in the business of providing at least one money services business (MSB) service;
  • The person or entity does not have a place of business in Canada;
  • The person or entity directs its MSB services at persons or entities in Canada; and
  • They provide these services to clients in Canada. 

For further clarity, you must direct services at persons or entities located in Canada. FINTRAC clarifies that directing services means that the services offered takes into consideration a Canadian audience. For example, if marketing or advertising materials are used with the intent to promote services and to acquire business from persons or entities in Canada. Where a business advertises online, but may not specifically exclude Canadian IP addresses, this fact on its own would not constitute directing services at persons or entities in Canada.

A business would be seen as directing services at persons or entities in Canada if at least one of the following applies:

  • The business’s marketing or advertising is directed at persons or entities located in Canada; 
  • The business operates a “.ca” domain name; or
  • The business is listed in a Canadian business directory.

Note that additional criteria may be considered when determining whether you are directing services at persons or entities in Canada. Examples of the additional criteria that may be considered is outlined in FINTRAC’s FMSB Annex 1.

We’re Here To Help

If you are, or think you may be, a foreign MSB and have any questions related to your compliance obligations in Canada, please get in touch!

Amending the Amendments!

Background

Back on July 10, 2019, the highly anticipated final version of the amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its enacted regulations were published. However, on February 15, 2020, further proposed amendments to those amended regulations was published in the Canada Gazette. To make reading these changes a little easier, we have created a redlined version of the regulations, with new content showing as tracked changes, which can be found here.

The Regulatory Impact Statement for this round of proposed changes states the following: “The proposed amendments to the regulations would strengthen Canada’s AML/ATF Regime, align measures with international standards and level the playing field across reporting entities by applying stronger customer due diligence requirements and beneficial ownership requirements to designated non-financial businesses and professions (DNFBPs); modifying the definition of business relationship for the real estate sector; aligning customer due diligence measures for casinos with international standards; aligning virtual currency record-keeping obligations with international standards; clarifying the cross-border currency reporting program; clarifying a number of existing requirements; and making minor technical amendments”. The proposed amendments are expected to come into force on June 1, 2021.

As with all proposed changes, there is a comment period. This comment period is much shorter than the last one, at only 30 days. For anyone interested in commenting on the proposed changes, comments are to be addressed to Lynn Hemmings, Director General, Financial Crimes and Security Division, Financial Sector Policy Branch, Department of Finance, 90 Elgin Street, Ottawa, Ontario K1A 0G5 or email: fin.fc-cf.fin@canada.ca.

While these are proposed changes, guidance from FINTRAC related to the amendments to regulation would hopefully be seen ahead of the coming into force dates of the final version.

We have summarized what this could mean for your business below.

Money Services Businesses

PEP

The most significant proposed change for Money Services Businesses (MSB)s is related to Politically exposed persons (PEP) determinations. Currently, a PEP determination must be made for international EFTs of CAD 100,000 or more. The proposed regulations will require MSBs to make a PEP determination when the MSB enters into a business relationship with a person.

If you currently conduct list screening, PEP screening could easily be added to that process.

Dealers in Virtual Currency

Travel Rule

For dealers in virtual currency, there is an additional proposed requirement on top of the requirements that were published in the last round of AML changes.  The proposed amendments add the requirement for records to be kept for virtual currency transfers of CAD 1,000 or more.

The record must contain the following:

  1. include with the transfer, the name, address and, if any, the account number or other reference number of both the person or entity that requested the transfer and the beneficiary; and
  2. take reasonable measures to ensure that any transfer received includes the information referred to in paragraph (a) above.

If the information required is not obtained, a determination of whether the transaction should be suspended or rejected will need to be made.

Given the nature of virtual currency transfers, it will be interesting to see how this requirement plays out, as currently, there are no technology solutions (that we are aware of) that would solve for this.

A reminder that dealers in virtual currency will be considered MSBs as of June 1, 2020. Check out our blog post for a full list of regulatory requirements related to dealers in virtual currency.

Real Estate

Business Relationship

One of the most significant proposed changes for real estate developers, brokers and sale representatives is related to the definition of a business relationship. Currently, a business relationship is defined as:

If a person or entity does not have an account with you, a business relationship is formed once you have conducted two transactions or activities for which you have to:

  • verify the identity of the individual; or
  • confirm the existence of the entity.

The proposed amendments will change that definition for real estate developers, brokers and sale representatives to only one transaction.

For business relationships, a reporting entity must:

  • keep a record of the purpose and intended nature of the business relationship;
  • conduct ongoing monitoring of your business relationship with your client to:
    • detect any transactions that need to be reported as suspicious;
    • keep client identification and beneficial ownership information, as well as the purpose and intended nature records, up-to-date;
    • reassess your clients risk level based on their transactions and activities; and
    • determine if the transactions and activities are consistent with what you know about your client;
  • keep a record of the measures you take to monitor your business relationships and the information you obtain as a result.

We will have to wait for guidance to see how ongoing monitoring obligations applies to the real estate sector if this change takes effect.

PEP

The proposed amendments will require real estate developers, brokers and sale representatives to make a Politically exposed persons (PEP) determination when they enter into a business relationship (as defined above) with a client. In addition, they will also be required to take reasonable measures to determine whether a client from whom they receive an amount of CAD 100,000 or more is a PEP.

Beneficial Ownership

The proposed amendments will require real estate developers, brokers and sale representatives to comply with existing beneficial ownership requirements that apply to other reporting entities.

This means when identifying an entity, a reporting entity needs to collect the following for all Directors and individuals who own or control, directly or indirectly, 25% or more of the organization:

  • Their full legal name;
  • Their full home address; and
  • Their role and/or ownership stake in the organization.

Given the obligation is to obtain, rather than verify, such information, we do not expect this requirement to be overly burdensome for the real estate sector.

Dealers in Precious Metals and Stones

PEP

Dealers in Precious Metals and Stones (DPMS)s will be required to make a PEP determination when they enter into a business relationship with a client. In addition, a DPMS will be required to take reasonable measures to determine whether a person from whom they receive an amount of CAD 100,000 or more is a PEP.

A reminder that a business relationship is defined as:

If a person or entity does not have an account with you, a business relationship is formed once you have conducted two transactions or activities for which you have to:

  • verify the identity of the individual; or
  • confirm the existence of the entity.

Given the definition of a business relationship, we do not expect this requirement to be overly burdensome. If you currently conduct list screening, PEP screening could easily be added to that process.

Beneficial Ownership

The proposed amendments will required DPMSs to comply with existing beneficial ownership requirements that apply to other reporting entities.

This means when identifying an entity, a reporting entity needs to collect the following for all Directors and individuals who own or control, directly or indirectly, 25% or more of the organization:

  • Their full legal name;
  • Their full home address; and
  • Their role and/or ownership stake in the organization.

Given the obligation is to obtain, rather than verify, such information, we do not expect this requirement to be overly burdensome for the DPMS sector.

We’re Here To Help

If you would like assistance in updating your compliance program and processes, or have any questions related to the changes, please get in touch!

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