Written by Lincoln Caylor, Nathan J. Shaheen, Jessica B. Horwitz, Sakina Babwani
In recent years, Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its regulations have been amended with a view to strengthening Canada’s anti-money laundering (AML) regime. On June 1, 2021, additional amendments aimed at further strengthening that regime came into force, as did related guidance from the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
The latest PCMLTFA amendments include both rules for specific sectors such as accounting firms, dealers in precious metals and stones, money service businesses and securities dealers (among various others), and rules of general application to all persons and entities in business sectors subject to the PCMLTFA (i.e., all “reporting entities”). While the latest PCMLTFA amendments are detailed and extensive, in this insight we summarize certain notable changes to both the sector-specific rules and rules of general application.
The June 1, 2021 amendments to the PCMLTFA include various amendments particular to reporting entities doing business in specific sectors. The types of business in which a person or entity can be engaged to qualify as a “reporting entity” is enumerated in the PCMLTFA and its regulations. However, not all reporting entities are created equal—reporting entities are subject to different rules depending on the business sector. In addition to amendments relating to reporting entities that are financial firms and government-related business, there have been sector-specific amendments applicable to certain types non-financial businesses including, but not limited to, those discussed below. Businesses that operate in these sectors should be aware of how AML rules apply to their operations, the circumstances in which enhanced counterparty due diligence requirements or government reporting obligations can be triggered.
Accountants and Accounting Firms
Section 4.1 of the PCMLTFA defines when a person or entity is considered to have entered into a business relationship. FINTRAC’s new guidelines effective June 1, 2021, explain how these definitions apply to specific sectors. With respect to an accountant or accounting firm, it enters into a “business relationship” for AML compliance purposes with a client the second time the accountant or accounting firm is required to verify the client’s identity, within a five-year period. The revised definition is significant as it triggers obligations regarding ascertaining beneficial ownership, ongoing monitoring of “KYC” (know your counterparty) due diligence information and screening transactions for involvement by politically exposed persons (PEPs) and heads of international organizations (HIOs).
For instance, accountants and accounting firms now have obligations to “take reasonable measures to determine” whether they are entering into business relationships with PEPs, HIOs, family members or close associates. In the event of such business relationships, accountants and accounting firms must also take reasonable measures to establish source of wealth and take enhanced risk mitigation measures. The amendments also impose transaction-specific screening requirements relating to PEPs and HIOs when a transaction involves a payment (or series of payments) in cash or cryptocurrency with a value of C$100,000 or more, or when information arises that constitutes reasonable grounds to suspect a PEP or HIO is involved. Notably, the new amendments exempt accountants and accounting firms acting as authorized bankruptcy trustees or insolvency practitioners, who will no longer be considered reporting entities.
Dealers in Precious Metals and Stones
Under the PCMLTFA, a dealer in precious metals and stones (DPMS) is an individual or an entity that buys or sells precious metals (gold, silver, palladium or platinum in the form of coins, bars, ingots or granules or in any other similar form), precious stones (diamonds, sapphires, emeralds, tanzanite, rubies or alexandrite) or jewelry (made of gold, silver, palladium, platinum, pearls or precious stones) in the course of its business activities.
Product manufacturers who purchase or sell precious metals or stones in connection with their manufacturing activities are not considered DPMS and are exempt from the PCMLTFA. However, this exemption only applies to the operating entity that is actually performing the extractive activities—sales of precious metals or stones by a trading arm affiliate of a mining company, for example, would not qualify for this exemption and may be subject to the AML compliance requirements under the PCMLTFA.
In practice, many money transactions by DPMS may be exempt from counterparty identity verification obligations under the PCMLTFA in cases where payments flow through a financial institution that is a reporting entity under the PCMLTFA. Compliance obligations and risks are highest in transactions that involve payments in cash or cryptocurrencies. However, identity collection (KYC), recordkeeping and other due diligence and monitoring requirements may still apply even if the identity does not need to be verified in all cases. It is important that DPMS be aware of the specific circumstances in which obligations do and do not apply to be able to navigate compliance effectively and avoid inadvertent violations of AML laws. DPMS are considered to have entered into a business relationship—which, as noted above, triggers enhanced counterparty due diligence obligations such as PEPs and HIO screening, ongoing monitoring and confirming the source of funds—the second time the DPMS is required to verify a client’s identity within a five-year period. DPMS are also subject to that the AML requirements that apply generally to all reporting entity sectors, including in respect of recordkeeping, screening of PEPs and HIOs and KYC requirements.
Money Services Businesses
Money services businesses are businesses that provide services related to foreign exchange dealing, international funds remittances (including informal networks such as hawala broker systems), issuing or redeeming money orders, traveller's cheques or other similar negotiable instruments (but not including cheques payable to a named person or entity) and dealing in virtual currencies (cryptocurrencies). While previously only domestic money services business (MSBs) were required to comply with all obligations under the PCMLTFA, the new amendments extend this requirement to foreign money services businesses (FMSBs). As of June 1, 2021, the obligations of MSBs and FMSBs under the PCMLTFA are largely the same.
FMSBs and MSBs are considered to have entered into a business relationship the second time that a client’s identity is required to be verified within a five-year period, or upon entering into a service agreement with an entity (MSBs only) or an entity in Canada (FMSBs only) relating to money services activities: (i) foreign exchange dealing; (ii) remitting or transmitting funds; (iii) issuing or redeeming money orders, traveler’s cheques or other similar negotiable instruments except for cheques payable to a named person or entity; or (iv) dealing in virtual currencies.
MSBs and FMSBs must also closely adhere to the regulatory requirements relating to ascertaining beneficial ownership, ongoing monitoring, screening for PEPs and HIOs and KYC and recordkeeping requirements, and understand the circumstances in which these requirements apply. In addition, MSBs and FMSBs must also comply with the travel rule requirements to ensure that specific details are included with the information sent or received in an electronic funds transfer or a virtual currency transfer.
A securities dealer is now considered to have entered into a business relationship when it opens an account, except under certain enumerated circumstances, or if the person does not hold an account, the second time that the client engages in a transaction for which the securities dealer is required to verify the counterparty’s identity within a five-year period. In line with the obligations imposed on other reporting entities, securities dealers must also closely adhere to the regulatory requirements relating to ascertaining beneficial ownership, ongoing monitoring, screening for PEPs and HIOs, and KYC and recordkeeping requirements, in transactions where these requirements apply.
Amendments of General Application
The June 1, 2021 amendments to the PCMLTFA and its regulations also include various updates to rules of general application to all reporting entities.
Beneficial Ownership Requirements
All reporting entities are now required to ensure beneficial ownership information is updated on an ongoing basis. This requirement no longer applies only to high-risk clients. Beneficial ownership of privately owned counterparties may be difficult for reporting entities to independently ascertain. While “reasonable measures” are necessarily context-specific, options may include asking the entity to provide this information in writing and include supporting official documentation if available, and where appropriate, consulting commercially available subscription-based beneficial ownership intelligence reporting services.
FINTRAC guidance suggests that when keeping records of clients, one should be as descriptive as possible with respect to the nature of the principal business or occupation of the client as that will help determine whether a transaction or activity is consistent with what would be expected for that client. Where the reporting entity is unable to obtain beneficial ownership information or confirm the accuracy of that information, it must instead take reasonable measures to verify the identity of the entity’s CEO.
The new amendments also introduce specialized recordkeeping requirements for entities that are widely-held or publicly-traded trusts. However, if a reporting entity is a financial entity, beneficial ownership requirements do not apply to activities with respect to processing payments by prepaid payment products for a merchant. Further, when reporting entities are required to verify a counterparty's identity, they must now, as proof of corporate existence, obtain the company’s certificate of corporate status that is either most recent or no less than a year old.
Politically Exposed Persons and Heads of International Organizations
As described above, screening requirements for PEPs and HIOs have now been extended to all reporting entities sectors, although the types of transactions in which this screening must be performed is different for different types of reporting entities. Generally speaking, the changes that apply to all reporting entity sectors includes the revised duration of a person’s status as a PEP, HIO, family member or close associate. The updated regulations specify that a person ceases to be a domestic PEP five years after leaving office or five years after they are deceased. Similarly, a person ceases to be an HIO five years after they are no longer an HIO or five years after they are deceased. The definition of family member now also includes ex-spouses. FINTRAC’s new guidance also includes sector-specific information summaries regarding screening and monitoring obligations under the new regulations.
Virtual Currency Transactions
With the rise of cryptocurrencies such as bitcoin and others, the recent amendments specifically target virtual currency transactions as an area that has contributed to a rise in money laundering activity in recent years. All reporting entities are now subject to KYC, identity verification, screening and reporting obligations in respect of certain types of virtual currency transactions. In particular, all reporting entities must now file large virtual currency transaction reports (LVCTRs) in prescribed circumstances, including when the reporting entity receives virtual currency within 24 hours that can be exchanged for $10,000 in cash or more in a single transaction or across multiple transactions that total $10,000 or more. The report to FINTRAC must include the identity of the person from whom the amount was received and various other prescribed information.
There are also some exceptions. LVCTRs are not required when the beneficiary of a transaction is a public body, a very large corporation that has $75 million or more on its most recent audited balance sheet or is publicly traded on the exchange of FATF country, or is the administrator of a regulated public fund. This exception does not apply to reporting rules generally and, as such, if one or more of the amounts is individually equivalent to $10,000 or more, then that transaction must still be reported to FINTRAC.
A third party is the person or entity that instructs another person or entity to conduct a transaction or activity on their behalf. As such, the third party is the instructing party to the transaction or activity, and is also understood to be the “on behalf of” party. The new third-party determination rules require reporting entities to take reasonable measures to determine whether a third party is involved in certain transactions, including large cash transactions and large virtual currency transactions. Reporting entities must also comply with additional recordkeeping requirements when third-party determinations cannot be made, but the reporting entity has reasonable grounds to suspect the involvement of a third party. There are, however, various exemptions to the third-party determination rules.
This article highlights some of the notable amendments to Canada’s anti-money laundering regime that were introduced on June 1, 2021, but is not exhaustive. The requirements arising from the amendments and FINTRAC’s updated guidance will impact both specific sectors and reporting entities at large. The precise application of Canada’s anti-money laundering regime to individuals and entities operating both within and outside of Canada will continue to depend on their particular facts and circumstances, as well as any further amendments, guidance or interpretation of the Canadian regime.