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First AML Compliance Effectiveness Review Timing

As a company that gets to work with a lot of startups, and existing companies entering the Canadian market, we get to help folks understand the regulatory landscape in Canada. One of the required elements of a Canadian compliance program is an AML Compliance Effectiveness Review. These reviews must be completed every two years at a minimum. You can think of it like an audit, but for compliance.

The purpose of an effectiveness review is to determine whether your AML compliance program has gaps or weaknesses that may prevent your business from effectively preventing, detecting and deterring money laundering and terrorist financing. Recently, we have seen an increased focus on Effectiveness Reviews during FINTRAC examinations. Specifically, on whether the review really tested the effectiveness of the compliance program as a whole (not just what you say you’re doing, but also what you’re actually doing). This has led to FINTRAC examiners requesting the working papers for completed effectiveness reviews where the report did not clearly describe how the effectiveness was tested and assessed. This is the main reason Outlier has started providing our working papers with the final report. This also provides a pretty good reference point for making sure you are meeting your regulatory expectations.

First Time for Everything

In previous engagements, Outlier has operated on the theory that the clock for when your first review was due stemmed from the MSB’s FINTRAC registration date. However, we were incorrect. It wasn’t until a recent conversation where the registration date preceded any customer transactions by six months, that really spurred on an official clarification from the regulator. The trigger for the 2-year clock to start ticking is not registration but “a registered MSB is required to create a compliance program once it engages in one or more of the MSB-related activities.” This means that the clock starts ticking after the MSB has conducted their first transaction.

Here is a PDF version of the policy interpretation we received from FINTRAC that you can keep for your records.

Potential Corrections

If we have completed a review for you in the past that has a commencement date prior to your first customer transaction, please feel free to reach out so we can amend your report to the proper date.

Upcoming Effectiveness Reviews

While this article talks about your first review, you must also be sure to initiate all subsequent reviews within 2 years of the start date of your previous review. Please note that this is based on the previous commencement date, not the date of completion or issuance of the final report.

Need a Hand?

If you are looking for an idea of pricing for an upcoming review or have questions about a review that is currently underway, please feel free to contact us.

FINTRAC MSB Registration Expired?!?

FINTRAC Registration

Over the past few months, we have heard from several money services businesses (MSBs) that have experienced issues in renewing their MSB registrations with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). In most cases, these issues are easily resolved. However, if MSB registration issues are not addressed promptly, administrative monetary penalties (AMPs) or criminal charges may ensue.

It is likely that registration-related issues have become more common as FINTRAC is increasingly requesting additional information or clarifications from MSBs as part of the initial registration and registration renewal process. These requests are sent via email to the contact person listed in the MSB registration form.

Check Your MSB registration Status

You can view the status of your MSB registration by searching for your business on the public MSB registry. While this article is about the MSB registration status, anytime you are on this page, it is a useful practice to check to ensure that all of the information is up to date. There are several possible options for the “Registration status of MSB” field:

Registered: this is the status that is displayed for active MSBs. The detailed view will also show the expiry date of the registration.

Ceased: this status is displayed when an MSB has cancelled their registration (e.g. because the business is no longer conducting MSB activity or is only performing MSB activity as the agent of another MSB).

Expired: this status is displayed when an MSB has not submitted an MSB registration renewal on time, has not responded to requests for information from FINTRAC, or has not provided sufficient information to FINTRAC to complete the renewal process.

Revoked: this status indicates that FINTRAC has revoked an MSB’s registration.

If the Expiry Date is Coming Up Soon

If you notice that your MSB’s registration is expiring soon, there are several steps that you should take proactively. First, make sure that you have your login credentials and access FINTRAC’s secure MSB Registration portal. On the left-hand side of the screen, you may see an option to submit your renewal application. If this option is not yet present, it is still a useful practice to select “view completed form” and review the MSB information to ensure that everything is up to date. If there is anything that needs to be updated, you can update the form (information must be updated within 30 days of any changes; do not wait for the renewal date to make updates).

If the renewal can be processed at this time, make sure that you take the time to look at all data fields. Are these fields complete and accurate? Does the information related to the MSB’s beneficial ownership match what will be found in any corporate registries (if not, additional information and/or correction may be required before the registration can be processed). FINTRAC may request additional information by email, and your registration will not be renewed until these queries have been satisfied.

If the Registration is Expired

If you notice that your registration has expired, you should immediately access FINTRAC’s secure MSB Registration portal to renew it. It may be that you have simply missed a deadline, or that you did not notice an error message or request for additional information from FINTRAC. Whatever the cause, you should work to resolve the issue and renew the registration as soon as possible.

If you are not able to renew the registration, contact FINTRAC immediately by emailing guidelines-lignesdirectrices@fintrac-canafe.gc.ca and MSBRegistration@fintrac-canafe.gc.ca immediately with the subject line “URGENT – MSB Renewal Issue – Renewal Date Passed”.

  • In the body of the email, let them know:
  • The company name and MSB number
  • That you have been attempting to renew the MSB registration
  • If you have responded to any requests for additional information, the details of these correspondences (attach copies if possible)
  • Ask what information is needed at this stage to renew the MSB registration

Keep a copy of this and all communications with FINTRAC.

You may also want to consider making a voluntary self-declaration of non-compliance (VSDONC) to FINTRAC. For help with disclosures, check out our previous blog post.

If you receive a “Notice of Violation”

Where an MSB registration is expired, and the MSB continues to perform MSB activities (other than as an agent for another MSB), a penalty may be assessed, and a “Notice of Violation” may be issued. At this stage, a law firm should be engaged (we’re happy to recommend competent firms if this is something that you need). There are specific and relatively short timeframes for all response steps, and this should be treated as urgent.

We’re here to help.

If you are not sure what to do next or need assistance with compliance, please get in touch.

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.

Fraud & Reasonable Grounds to Suspect

One of the themes that was prevalent in Canadian AML for 2021 was the relatively low bar represented by “reasonable grounds to suspect” (RGS) and the types of transactions for which FINTRAC expected suspicious transaction reports (STRs) to be filed. One of our astute colleagues worked with us to craft some specific scenarios (the full version, including FINTRAC’s response, can be viewed here), and FINTRAC’s response seems to confirm a significant shift in position from previous discussions. Specifically, STRs are expected in cases of fraud, including cases in which the reporting entity’s client is believed to be the victim of fraud.

Here is a scenario that we asked about:

Scenario 2

A client reaches out to notify us that they sent the virtual currency to another party who promised them a generous short-term return. The client never received the promised funds and believes they have been defrauded. We review the customer account activity and do not find any anomalous activity either prior to or after the client sent the virtual currency to the wallet provided by the fraudster. The client appears to have sent their own funds to the fraudster and there is no account activity corresponding to any irregular transactions, including money mule indicators. Our client is simply a victim of fraud.

Based on strictly these facts, context and indicators, we have not reached reasonable grounds to suspect any money laundering or terrorist financing offences by our client. There may be downstream suspicion related to the wallet where the fraudulently obtained funds were sent but we do not have any suspicion based solely on our client’s transactions which include the transmission of virtual currency to that other wallet. We do not have any information or suspicion related to the other wallet except for the knowledge that our client’s virtual currency was sent to it.

Given the above, we believe no STR would be required. Could you please confirm our position? If the position taken here does not seem correct, please provide an underlying rationale.

And an excerpt from FINTRAC’s response:

In scenario 2, an STR should be submitted if the reporting entity reached reasonable grounds to suspect that the transaction or attempted transaction is related to fraud.

Not Just for Virtual Currency

While the scenario that we’ve provided is specific to virtual currency, the implications of this policy interpretation are not limited to transactions that involve virtual currencies. Every reporting entity type will deal with suspected and confirmed cases of fraud that touch their business models.

Why Does It Matter

To really get to why this matters so much, we need to first look at the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), which is where the requirement is first defined in Section 7:

Transactions if reasonable grounds to suspect

7 Subject to section 10.1, every person or entity referred to in section 5 shall, in accordance with the regulations, report to the Centre every financial transaction that occurs or that is attempted in the course of their activities and in respect of which there are reasonable grounds to suspect that

(a) the transaction is related to the commission or the attempted commission of a money laundering offence; or

(b) the transaction is related to the commission or the attempted commission of a terrorist activity financing offence.

This is important as the provision of the PCMLTFA (the section number) is what’s listed in the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations, where potential penalties are defined. Violations of Section 7 of the PCMLTFA are considered “very serious”. In turn, a “very serious” violation can lead to a penalty of up to $500,000 – for each instance.

If you’re a quantitative type quietly working out the rough number of fraud cases that your reporting entity has had recently, multiplying by $500,000, and feeling a bit nervous, you are not alone.

What’s Next?

While guidance and policy interpretations do not carry the force of law, this is often a distinction without a difference. Might a reporting entity take an appeal to federal court and win? Perhaps…though under the existing rules, that reporting entity’s name will be published (required where the violation is considered to be “very serious”), which for some reporting entities would have significant consequences, including the loss of vital banking partner relationships. Further, the cost of competent representation in a federal appeal process is well beyond the means of most small and mid-sized reporting entities.

Industry associations will, no doubt, continue to lead important conversations with FINTRAC and seek clarification for their members.

In the meantime, for most Canadian reporting entities, the most pragmatic decision will likely be to devise internal guidelines that include reporting STRs related to fraud cases.

Need a Hand?

If you want to make updates to your compliance program to reflect this new policy interpretation, or assistance with Canadian AML generally, please contact us.

Don’t Share STRs or STR Data

Recently the Compliance Officer from a small reporting entity reached out to me to ask an uncomfortable question: should they provide copies of the Suspicious Transaction Reports (STRs) that they had filed with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to their financial services providers such as a credit union or bank?

This was a difficult situation for the reporting entity’s Compliance Officer because they were afraid of pushing back too much with the financial services provider. Like most non-bank reporting entities, they rely heavily on the services provided by the bank in order to be able to operate their business. Financial service providers, such as banks and credit unions, have the ability to close the accounts of businesses in Canada (often called de-risking), and it can be difficult for some types of reporting entities to establish new banking or payments relationships. The financial services provider in this situation has significantly more power than the reporting entity that is dependent on them.

My gut reaction was that the reporting entity should not disclose the contents of their STR reports, or provide copies. In Canadian legislation, disclosing the fact that an STR was made, or disclosing the contents of such a report, with the intent to “prejudice a criminal investigation” can be punishable as a criminal offence, with penalties of up to 2 years imprisonment (this is also known as “tipping off”). While there did not appear to be any intent to prejudice a criminal investigation in this case, it still seemed like a bad idea. I did a quick check-in with fellow AML geeks on LinkedIn. There are some great comments here, and I had a number of conversations in DMs and by phone. No one seemed to think that the reporting entity should be providing copies of STRs.

The question then became how to best empower the reporting entity to push back effectively. I submitted the following request to FINTRAC and to the Office of the Privacy Commissioner (OPC), both of which have mechanisms to allow Canadians and Canadian companies to ask the regulators to opine on matters free of charge:

One of our clients, a Canadian Money services business (MSB) has been asked by their financial services provider (bank/credit union) to provide copies of the suspicious transaction reports (STRs) and Attempted Suspicious Transaction Reports (ASTRs) that have been filed with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) on an ongoing basis. This struck us as being an overreach in terms of the information that should be disclosed to a service provider, and we are reaching out for an opinion on the appropriateness of these requests.

The financial service provider appears to be of the opinion that this is a reasonable request, and that they may close the MSB’s bank account if the STRs and ASTRs are not provided by the MSB.

I let both FINTRAC and OPC know that I had submitted requests to both. So far, only FINTRAC has responded. Their response is below in full (TL:DR: reporting entities should not share copies of STRs reported to FINTRAC).

Thank you for contacting the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), Canada’s independent agency responsible for the receipt, analysis, assessment and disclosure of information in order to assist in the detection, prevention and deterrence of money laundering and the financing of terrorist activities in Canada and abroad.

I am writing further to your email of July 16th, 2020, wherein you requested clarification regarding the sharing of suspicious transaction reports (STRs) submitted to FINTRAC.

As you know, section 8 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) states that no person or entity shall disclose that they have made, are making, or will make a report under section 7, or disclose the contents of such a report, with the intent to prejudice a criminal investigation, whether or not a criminal investigation has begun.

The PCMLTFA sets out a regime in which the information contained in financial transaction reports sent to FINTRAC (including STRs) is protected from disclosure except in very limited circumstances. The Act also includes specific provisions aimed at protecting the personal information under FINTRAC’s control. For example, as you may be aware, the PCMLTFA is founded on a prohibition on disclosure (s. 55(1), PCMLTFA). Any disclosure of information or intelligence by FINTRAC must fall under one of the exceptions to this prohibition. Outside of these exceptions, FINTRAC is prohibited from disclosing the contents of financial transaction reports, or even acknowledging their existence.

While reporting entities (REs) are not subject to the same prohibitions, FINTRAC strongly believes that STRs should be regarded as highly sensitive documents, given the role FINTRAC plays in the fight against money laundering (ML) and terrorist activity financing (TF) in Canada, and the fact that STRs are a key source of FINTRAC’s intelligence holdings. From FINTRAC’s perspective, it is not in the public interest for REs to disclose financial transaction reports and the information contained therein. Even beyond this, the collection or disclosure of financial transaction reports, including STRs, without a valid purpose and authority, may infringe on legislated privacy protection obligations. Almost all information within financial transaction reports is personal information about an identifiable individual and is considered financial intelligence by

FINTRAC, collected for the sole purpose of reporting to FINTRAC. The potential harm that could occur from the disclosure of the information in these financial transactions reports is great, and includes compromising: (1) police and national security investigations that are both ongoing or could be undertaken in the future; (2) sources of the information/intelligence within the reports, placing those sources at risk of retaliation; and (3) FINTRAC’s compliance activities, given that data provided by REs is always provided in confidence and that confidence is expected to be maintained by all parties. FINTRAC relies on the information included within STRs to support disclosure of financial intelligence to police and other law enforcement and national security organizations, in the interest of detecting, preventing and deterring ML and TF.

Therefore, while your client (MSB) is not prohibited from sharing the STRs it has submitted to FINTRAC with its service provider (Bank/CU), unless it is with the intent to prejudice a criminal investigation, strong consideration should be given to the above.

If you would like a PDF copy of the complete question and policy position for your due diligence files, or to provide to an external party that is requesting copies of your STRs, or information about their content, you can download it here.

Response from FINTRAC – Re_ Sharing Copies of STRs_ASTRs

A version of this Q&A is also now posted on FINTRAC’s website (PI-10662).

The response from OPC, in contrast, was underwhelming. In essence, they will investigate specific complaints, but they will not issue advanced rulings. That said, if any service provider is insisting that copies of STRs must be shared with them, a complaint to the OPC may be an option.

Response from the Office of the Privacy Commissioner of Canada – INFO-084075

Need a hand?

If you have AML or privacy-related questions, we can help. You can get in touch using our online form, by emailing info@outliercanada.com, or by calling us toll-free at 1-844-919-1623.

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.

The Iran Ministerial Directive’s Impact

Quick Overview

On July 25, 2020, a new Ministerial Directive (MD) was published in the Canada Gazette by the Minister of Finance on financial transactions associated with the Islamic Republic of Iran.  On July 27, 2020, FINTRAC issued guidance on how to incorporate the MD into your anti-money laundering (AML) program, along with some indicators for determining if a transaction is associated with Iran. This MD requires that every transaction originating from or bound for Iran be treated as high risk, regardless of the amount. This includes identifying every client, performing customer due diligence, and recording certain information. It is vital that your AML compliance program documentation contains internal processes related to MDs, even if you do not conduct transactions with Iran (or North Korea, based on the previous MD issued December 9, 2017).

What is a Ministerial Directive?

MDs are specific requirements imposed by the Minister of Finance that are meant to mitigate risks associated with activities that pose elevated risk and safeguard the integrity of Canada’s financial system. To date, these areas of elevated risk have been identified by the Financial Action Task Force (FATF) as posing strategic deficiencies with regards to international standards for anti-money laundering and counter terrorist financing.

What does this Ministerial Directive require?

The guidance from FINTRAC states that every bank, credit union, financial services cooperative, caisse populaire, authorized foreign bank and Money Services Business (MSB) must:

  • Treat every financial transaction originating from or bound for Iran, regardless of its amount, as a high-risk transaction;
  • Verify the identity of any client (person or entity) requesting or benefiting from such a transaction;
  • Exercise customer due diligence, including ascertaining the source of funds in any such transaction, the purpose of the transaction and, where appropriate, the beneficial ownership or control of any entity requesting or benefiting from the transaction;
  • Keep and retain a record of any such transaction;
  • Determine whether there are reasonable grounds to suspect the commission or attempted commission of a money laundering or terrorist financing offence and report all suspicious transactions to FINTRAC;
  • Reporting all other reportable transactions (if applicable).

To be clear, this MD does not apply to transactions where there is no suspicion or explicit connection with Iran and there is no evidence of the transaction originating from or being bound for Iran. A couple of examples were provided in the FINTRAC Guidance:

  • A client who has previously sent funds to Iran requests an outgoing EFT, where the transaction details do not suggest that this transaction is bound for Iran and you are unable to obtain further details about the transaction destination; or
  • The client’s identification information is the only suggestion of a connection to Iran (for example, a transaction where the conductor’s identification document is an Iranian passport).

What does it mean to you?

It is important to understand that even if your business does not facilitate transactions involving Iran, it is expected that you have a process in place for adhering to MDs, including how the Compliance Officer stays up to date. Within your AML compliance program documentation, you need to have a section that talks about MDs generally, plus specific procedures related to handling the current MDs (transactions involving Iran and North Korea). In the FINTRAC guidance related to this MD, it states that during an examination, FINTRAC will assess your compliance with MDs and failures to do so are considered very serious and may result in a penalty.

What now?

In order to ensure familiarity for anyone who interacts with customers and their transactions, the list of FINTRAC’s indicators should be communicated immediately.  Furthermore, the indicators should also be included in your procedure manuals and annual AML compliance training topics, allowing easy access to the information. Documenting the information and related processes for MDs is very important so you can demonstrate to FINTRAC your adherence to the requirements during an examination.

Need a hand?

We’ve made it easier for you to integrate this content into your program by putting the information into a Word document for you. If you aren’t sure what to do with this information and would like some assistance, please feel free to contact us.

Amended AML Regulations June 10, 2020 – Redlined Versions

The following red-lined versions have been created to reflect final amendments to Canadian anti-money laundering (AML) laws & regulations published in the Canada Gazette on June 10, 2020.  Amendments to the Cross-border Currency and Monetary Instruments Reporting Regulations will come into force on June 1, 2020. All other amendments will come into force on June 1, 2021. We have created industry specific blogs to make understanding the changes easier, which are located here.

Redlined versions of all the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations are listed below for download.

These documents are not official versions of the regulations. Official versions can be found on the Government of Canada’s Justice Laws Website.

Regulations Amending the Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act

Please click the link below for downloadable PDF file.

Regulations Amending the Regulations Amending Certain Regulations Made Under the Proceeds of Crime July 2019 – Redlined_June 2020

Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations

Please click the links below for downloadable pdf files.
PCMLTF_July_2019_Redlined_Full_July_2019 – Redlined_June 2020

Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations

Please click the links below for downloadable pdf files.
PCMLTF_Suspicious_Transaction_Reporting_Regulations_July_2019 – Redlined_June 2020

Proceeds of Crime (Money Laundering) and Terrorist Financing Registration Regulations

Please click the link below for a downloadable PDF file.
PCMLTF_Registration_Regulations_July_2019 – Redlined_June 2020

Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations

Please click the link below for a downloadable pdf file.
PCMLTF_Administrative_Monetary_Penalties_Regulations_July_2019 – Redlined_June 2020

Proceeds of Crime (Money Laundering) and Terrorist Financing Cross-Border Currency and Monetary Instruments Reporting Regulations

Please click the link below for a downloadable pdf file.
PCMLTF_Cross-Border_Currency_and_Monetary_Instruments_Reporting_Regulations_July_2019 – Redlined_June 2020

Need a Hand?

Whether you need to figure out if you’re a dealer in virtual currency, to put a compliance program in place, or to evaluate your existing compliance program, we can help. You can get in touch using our online form, by emailing info@outliercanada.com, or by calling us toll-free at 1-844-919-1623.

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!

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