Background
February seems to be the month for proposed legislative changes.
On February 18, 2023, draft amendments to the regulations under the Proceeds of Crime Money Laundering and Terrorist Financing Act (PCMLTFA), and a net-new draft regulation, were published in the Canada Gazette. If you’re the type that likes to read original legislative text, you can find it here. We (thanks Rodney) also created a redlined version of the regulations, with new content showing as tracked changes, which can be found here.
These changes are meant to renew and improve Canada’s anti-money laundering (AML) and Counter Terrorist Financing (CTF) regime, adapting to new money laundering (ML) and terrorist financing (TF) risk. One of the most significant changes, in our opinion, is the introduction of two new regulated entity types, mortgage lenders and armoured car companies.
Currently, mortgages issued by financial entities are captured under the PCMLTFA but these amendments would make all entities involved in the mortgage lending process (brokers responsible for mortgage origination, lenders responsible for underwriting the loan, and administrators responsible for servicing the loan) reporting entities. The intent here is to level the playing field between regulated and unregulated mortgage lenders, and to deter misuse of the sector for illicit activities.
While the activity of transportation is not currently supervised for AML purposes per se, armoured car carriers provide services largely to regulated entities. Given the flow of funds that is typically seen in this sector, reconciliation and identification of the origin of funds can sometimes be challenging, and allows funds to move with some degree of anonymity, which is an ML/TF vulnerability.
The draft regulations also introduce new requirements for correspondent banking relationships, and additional requirements related to the Money Services Business (MSB) registration. There are also some technical amendments related to existing reporting requirements and changes related to Administrative Monetary Penalties (AMPs).
Lastly, a new regulation would introduce a prescribed formula for the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to assess the expenses it incurs in the administration of the PCMLTFA against reporting entities. Such models are seen from other regulators, such as the Office of the Superintendent of Financial Institutions (OSFI) and the Financial Consumer Agency of Canada (FCAC). Currently, FINTRAC is funded through appropriations.
In the following sections, we have summarized what we feel are the most important requirements to note.
Armoured Car Companies
The proposed changes would require a company that engages in “transporting currency or money orders, traveller’s cheques or other similar negotiable instruments” (except for cheques payable to a named person or entity) to be considered an MSB. As such, the following obligations will have to be met:
- Development of a compliance program;
- Maintaining an up-to-date MSB registration with FINTRAC;
- Conducting compliance effectiveness reviews;
- Reporting certain transactions;
- Identifying customers;
- Record keeping;
- Risk ranking customers and business relationships;
- Conducting transaction monitoring and list screening;
- Conducting enhanced due diligence and transaction monitoring for high-risk customers and business relationships; and
- Follow ministerial directives and transaction restrictions.
One record keeping obligation to note, which is new for armoured car companies, is the requirement to record the following information when transporting CAD 1,000 or more of cash or virtual currency, or CAD 3,000 or more in money orders or similar negotiable instruments:
- The date and location of collection and delivery;
- The type and amount of cash, virtual currency or negotiable instrument transported;
- The name and address of the person or entity that made the request, the nature of their principal business/occupation and, in the case of an individual, their date of birth;
- The name and address, if known, of each beneficiary;
- The number of every account affected by the transport, the type of account, and the name of the account holder;
- Every reference number that is connected to the transport, and has a function; equivalent to that of an account number; and
- The method of remittance.
An additional requirement that will apply to armoured car companies is in relation to PEP determinations (existing PEP requirements for MSBs still apply). Specifically, a PEP determination is required whenever a person requests that the MSB transport more than CAD 100,000 in cash or virtual currency, or in an amount that is not declared.
Under the proposed regulations, there are some exemptions for reporting that are noteworthy. Large Cash and Large Virtual Currency reporting requirements will not apply where there is an agreement of transportation between:
- The Bank of Canada and a person or entity in Canada;
- Two financial entities;
- Two places of business of the same person or entity; or
- Canadian currency coins for purposes of delivery under the Royal Canadian Mint.
It is noteworthy, based on the definition, that there may be more than just armoured car companies that are captured under these new requirements. This will be clarified in guidance from FINTRAC that will follow publication of the legislation.
The requirements applicable to armoured car companies will come into force eight months after final publication in the Canada Gazette.
Mortgage Lending
The proposed regulations would require mortgage lenders, brokers, and administrators (mortgage participants) to put in place compliance regimes, similar to that of other regulated entities, which include the following:
- Development of a compliance program;
- Conducting compliance effectiveness reviews;
- Reporting certain transactions;
- Identifying customers;
- Keeping records;
- Risk ranking customers and business relationships;
- Conducting transaction monitoring and list screening;
- Conducting enhanced due diligence and transaction monitoring for high-risk customers and business relationships; and
- Follow ministerial directives and transaction restrictions.
It is noteworthy, that many mortgage brokers already have existing voluntary AML compliance programs and already apply AML measures. This is in part due to various securities regulations and lending partners.
The requirements applicable to mortgage lending will come into force six months after final publication in the Canada Gazette.
Cost Recovery
As part of this round of regulatory changes, there is a net-new regulation, the Financial Transactions and Reports Analysis Centre of Canada Assessment of Expenses Regulations. This regulation will allow FINTRAC to pass on expenses, to reporting entities, that it incurs in the administration of the PCMLTFA. Only the following prescribed entity types are affected by this:
- Banks and authorized foreign banks;
- Life insurance companies;
- Trust and loan corporations; and
- Every entity that made more than 500 threshold reports during the previous fiscal year.
The regulations provide a formula that FINTRAC would use to calculate the assessment amounts payable by reporting entities on the basis of their annual asset value, and the volume of all threshold transaction reports submitted. For clarity, threshold transaction reports include Large Cash Transaction Reports (LCTRs), Large Virtual Currency Transaction Reports (LVCTRs), Electronic Funds Transfer Reports (EFTRs), and Casino Disbursement Reports (CDRs).
The requirement would come into force on April 1, 2024. This means FINTRAC would commence recovering costs from the 2024-2025 fiscal year and forward.
Other Changes
Enhancing MSB registration
Under the proposed amendments, as part of MSB registration, MSBs would now need to include the telephone numbers and email addresses of its president, directors and every person who owns or controls 20% or more of the MSB. This is in addition to current required information. Additionally, the number of the MSB’s agents, mandataries and branches in each country will be added (currently, only those within Canada are required).
This requirement will come into force twelve months after final publication in the Canada Gazette.
Streamlining requirements for sending AMPs
Under the proposed amendments, FINTRAC would be allowed to serve a reporting entity solely by electronic means when issuing an AMP. Currently, FINTRAC would also have to send an additional copy by registered mail.
This requirement would come into force on registration.
What Next?
There is a 30 day comment period (ending March 20, 2023) for the proposed regulations. It is strongly recommended that industry, and potentially impacted companies, review carefully and provide feedback. Comments can be submitted online via the commenting feature after each section of the proposed changes, or via email directly to Julien Brazeau, Associate Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance, 90 Elgin Street, Ottawa, Ontario K1A 0G5.
We’re Here To Help
If you have questions related to the proposed changes, or need help starting to plan, you can get in touch using the online form on our website, by emailing us directly at info@outliercanada.com, or by calling us toll-free at 1-844-919-1623.
Currently, the reporting obligation of the outgoing EFT would fall to the bank in Canada. With the draft updates, the reporting obligation would now fall to the MSB in Canada, because they have the relationship with the customer initiating the transaction.