SOR/2016-153: Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2016
REGISTRATION OF FEDERAL REGULATION - VIA OIC DATABASE, PRIOR TO PART II OF THE GAZETTE
June 17, 2016
REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the Regulations.) Issues Canada’s anti-money laundering and anti-terrorist financing regime has been subject to a range of domestic and international reviews and evaluations in recent years. The Department of Finance (the Department) also undertook consultations with private and public stakeholders. Through these activities, a nu... (Click for more)
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Published on June 17, 2016
SOR/2016-153: Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2016
REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the Regulations.) Issues Canada’s anti-money laundering and anti-terrorist financing regime has been subject to a range of domestic and international reviews and evaluations in recent years. The Department of Finance (the Department) also undertook consultations with private and public stakeholders. Through these activities, a number of statutory and regulatory amendments were identified to strengthen Canada’s anti-money laundering and anti-terrorist financing regime and to improve Canada’s compliance with international standards. Consequently, the Government introduced legislative amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act) through the Economic Action Plan 2014 Act, No. 1. The Regulations introduce a number of regulatory amendments that are needed to enact some of these legislative amendments as well as other standalone regulatory measures. As a founding member of the Financial Action Task Force, Canada made a political commitment to implement its recommendations that set international standards to combat money laundering and terrorist financing. Canada’s anti-money laundering and anti-terrorist financing regime will be subject to a mutual evaluation by the Financial Action Task Force in 2015–2016. Some of the amendments would improve compliance with these international standards. Background Canada’s anti-money laundering and anti-terrorist financing regime is a horizontal initiative composed of 11 federal departments and agencies (both funded and non-funded). It was formally established in 2000 as part of the government’s ongoing effort to combat money laundering in Canada, and in 2001, was expanded to include measures to fight terrorist financing. The core elements of the regime are set out in the Act. The Act applies to designated financial and non-financial entities (known as “reporting entities”), that provide access to the financial system and may therefore be susceptible to abuse by criminals seeking to integrate the proceeds of their crimes into the legitimate economy. The Act sets out obligations that broadly fall into the following four categories: record-keeping; verification of identity of designated persons; reporting of suspicious and other prescribed financial transactions; and the establishment and implementation of an internal compliance regime. The Act also establishes the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), Canada’s financial intelligence unit and the regulator responsible for administering and enforcing the Act. FINTRAC’s responsibilities include the overall supervision of reporting entities to determine compliance with the Act. Reporting entities are required under the Act to comply with FINTRAC information demands and to give all reasonable assistance when FINTRAC carries out its compliance responsibilities. Alongside FINTRAC is the Office of the Superintendent of Financial Institutions (OSFI) which derives its powers from, and is responsible for, administering federal financial institution statutes. OSFI oversees federally regulated financial institutions to ensure that they are compliant with governing laws and supervisory requirements, and in sound financial condition. One of the key elements of a sound financial institution is an effective and comprehensive set of anti-money laundering and anti-terrorist financing controls. OSFI complements the work of FINTRAC by monitoring compliance with its prudential expectations, requiring information from financial institutions, conducting audits and annual exams. In addition, OSFI exercises remedial powers in regard to financial institutions’ safety and soundness. Canada’s regime is consistent with international standards set by the Financial Action Task Force. The Financial Action Task Force is the key intergovernmental body whose purpose is the development and promotion of policies, both at the national and international levels, to combat money laundering and terrorist financing. The Financial Action Task Force updated its recommendations in February 2012, enhancing international standards in various areas such as with respect to dealing with politically exposed persons. (see footnote 5) Although the recommendations of the Financial Action Task Force are not legally binding, as a member, Canada committed to implement them and to submit to a peer evaluation of their effective implementation. Not meeting the commitment could lead to number of sanctions including enhanced scrutiny measures to public listing and, in the extreme, suspension of membership from the Financial Action Task Force. Further, non-compliance could cause serious reputational harm to Canada’s financial sector and subject Canadian financial institutions to increased regulatory burden when dealing with foreign counterparties or when doing business overseas. Canada’s last mutual evaluation by the Financial Action Task Force was in 2007–2008. The next mutual evaluation will take place over 2015–2016, this time in reference to the Financial Action Task Force’s revised recommendations. Objectives The regulatory amendments update and strengthen the legislation to combat money laundering and terrorist financing activities; strengthen customer due diligence requirements; close gaps in Canada’s regime; improve compliance, monitoring and enforcement efforts; strengthen information sharing in the regime; and address technical issues. Description The following suite of regulatory amendments is part of the Government of Canada’s efforts to strengthen Canada’s anti-money laundering and anti-terrorist financing regime. The amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations update customer due diligence requirements for dealing with politically exposed persons. One amendment prescribes the circumstances under which a reporting entity must make a determination that a client is a domestic politically exposed person or the head of an international organization, or a close associate or family member of such a person, and the measures to be taken as a result (such as obtaining information on source of funds and senior management approval to keep an account open). The prescribed circumstances include account openings and, where no account exists, very large specified transactions that are deemed to be of higher potential risk, such as lump-sum payments of $100,000 or more for the purchase of life insurance policies or annuities. The Regulations currently contain requirements with respect to politically exposed foreign persons. One amendment requires reporting entities to periodically determine whether existing account holders are politically exposed foreign persons, where such a determination has not already been made. This amendment will align with the design of the new measures for politically exposed domestic persons and heads of international organizations. An amendment would extend the time within which a reporting entity must make a determination that a client is a politically exposed foreign person from 14 days to 30 days. This amendment will align with the design of the new measures for politically exposed domestic persons and heads of international organizations. The amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations clarify the type of customer information that reporting entities must obtain and keep as part of the customer due diligence process. An amendment would clarify the records that must be kept with respect to a client’s credit file (i.e. a file related to a lending product). The existing wording in the Regulations could be interpreted narrowly. The Regulations currently define the term “client credit file” as containing specific types of information, some of which may not be applicable to certain types of credit arrangements. In the past, this has led to some reporting entities interpreting that in cases where only certain information listed in the definition of a “credit file” is available (i.e. the file is incomplete), there is no obligation to maintain any of the information nor provide it to FINTRAC in an examination. The amendment is needed to ensure there is a positive obligation for reporting entities to collect specific information that must be included in a credit file, which would have to be provided to FINTRAC if asked in a compliance examination. Specifically, the amendment would repeal the defined term “client credit file” and instead list the relevant types of information that must be maintained, when they are relevant to the client credit arrangement under consideration. An amendment would update the existing list of methods that reporting entities must use to verify the identity of their clients. The new methods would be more flexible and allow for a broader range of reliable and independent sources to be used. In particular, the amendment would identify the specific types of sources that are deemed reliable enough to be used on a standalone basis (e.g. government-issued photo identification documents), and broadly allow other types of sources that are reliable and independent to be referred to on a dual-method basis (i.e. in combination). Since the latter category is not prescriptive, it will provide flexibility for reporting entities to consider various sources that are not currently accepted (e.g. a notice of assessment issued by the Canada Revenue Agency). FINTRAC would provide guidance on the methods that could be considered under these new provisions. An amendment would expand the definition of a signature to more broadly include electronic signatures, which would facilitate account openings in a non-face-to-face environment. The amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations would limit the duplication of identity verification efforts. An amendment would extend the existing exemption from ascertaining the identity of a client where the client is recognized by voice (e.g. phone) or sight (e.g. in person or over video conferencing) to more broadly capture other forms of recognition (such as digitally, where a client logs in online). An amendment would clarify that a reporting entity that relies on an agent (e.g. deposit broker) to verify client identity on its behalf could use identification measures that were previously undertaken by that agent on behalf of another reporting entity or itself with respect to the same client. This would only apply where the client’s identity was both ascertained in accordance with the requirements of the Act and the identification document remains unexpired and valid. The amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations would close gaps in Canada’s anti-money laundering and anti-terrorist financing (AML/ATF) regime. Paragraph 71(c) of the Regulations lists the elements that should be considered in a reporting entity’s risk assessment. An amendment would add an element to this list that requires reporting entities to assess and document risks posed by the impacts of new developments and technologies on the existing risk assessment criteria (business relationships, products, delivery channels or geographic locations). This would ensure Canada’s anti-money laundering and anti-terrorist financing regime is consistent with Financial Action Task Force’s recommendation 15 on the risks of new technologies. (see footnote 6) An amendment would clarify reporting obligations to improve the financial intelligence that FINTRAC receives. In particular, it would repeal exemptions for reporting cash transactions of $10,000 or more in the life insurance sector for product purchases where the source of funds is not easily identifiable. The amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations would improve compliance, monitoring and enforcement efforts. An amendment would require reporting entities to keep a record of any “reasonable measures” they have taken (as required under the Act), in cases where they were unable to ascertain, establish or determine the information specified. Since 2008, FINTRAC can impose administrative monetary penalties (AMPs) when reporting entities fail to comply with their obligations. An amendment would update the existing list of provisions for which FINTRAC can issue an AMP to ensure that new or modified requirements that were passed through Economic Action Plan 2014 Act, No. 1, and other requirements that came into force in February 2014, have a corresponding AMP related to them. For example, reporting entities have traditionally been prohibited from entering into a correspondent banking relationship with a shell bank, but this prohibition was expanded in the Economic Action Plan 2014 Act, No. 1 to more comprehensively prohibit them from “having” such a relationship. Since the existent AMP description reflects the former prohibition, it is being updated to more accurately reflect the revised prohibition. The amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations would strengthen information sharing in the regime. They would repeal any identifying information of reporting entity employees from the reporting form schedules; require reporting entities in a financial conglomerate to, as part of their compliance programs, take into consideration the risks resulting from the activities of their affiliates; and expand the designated information that FINTRAC can disclose to disclosure recipients, once relevant thresholds are met, to include information about references that were used to ascertain the identity of an individual (such as type of source, a reference number, place of issue and expiry date of relevant documents). FINTRAC’s disclosure recipients include law enforcement, intelligence, and foreign bodies. An amendment to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations would clarify that where a securities dealer is a reporting entity under the Act, any brokers employed by that securities dealer would not be considered reporting entities in their own right. As a result, though the brokers would be required to abide by the compliance program of their securities dealer employer, they would not be required to maintain their own compliance program. In addition, various amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations would address technical issues that have been identified through regime reviews and stakeholder comments. For example, an amendment would ensure the existing definition of “casino” is updated to align with a legislative amendment in the Economic Action Plan 2014 Act, No. 1 that clarified the types of entities that are subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act when they conduct and manage a lottery scheme or game; an amendment would update the circumstances under which an entity is considered to be affiliated with another entity to align with a similar legislative amendment that was made in the Economic Action Plan Act 2014 Act, No. 1; an amendment would replace the existing French term for money services business with an updated term (i.e. “entreprise de transfert de fonds ou de vente de titres négociables” with “entreprise de services monétaires”). The existing term creates confusion as it is not commonly used by stakeholders and it fails to encompass foreign currency exchange and virtual currency dealing; an amendment would correct an inaccurate reference to the title of a Quebec law in the “Financial services cooperative” definition; an amendment would update the definition of public body to correct a divergence between the English and French versions and provide greater certainty for the purposes of the Act that cities, towns and other municipal districts are only included in the definition of “public body” when they are located in Canada; an amendment would update the provision dealing with foreign currency conversion to ensure it is done “using” an exchange rate rather than “based” on an exchange rate, to ensure other factors are being considered when converting currency; and an amendment would update the definition of “funds” to better align the concept of entitlement as referenced under the Civil Code. “One-for-One” Rule The amendments to the Regulations are considered to be an “IN” under the “One-for-One” Rule. Cumulatively, the total “IN” is estimated to be $61,858, or $154 in administrative costs per business. The additional burden may stem from the cost of providing additional documentation to FINTRAC during an examination related to politically exposed domestic persons and heads of international organizations. However, since these requirements build on the existent obligations with regards to politically exposed foreign persons, reporting entities should already have administrative processes in place to include this type of information in client records and provide it to FINTRAC during an examination. Therefore, this has been projected to not exceed a half day (four hours) of preparation by reporting entities (e.g. pulling the additional records). All other additional burden has been assessed as compliance burden and discussed in the following section. Only the costs of complying with the minimum requirements contained in the amendments have been assessed. However, reporting entities may choose to adopt more comprehensive procedures to fulfil their obligations, such as where required by a prudential regulator or where the entity chooses to implement more robust risk mitigation strategies (e.g. subscribing to external databases which provide lists and profiles of heightened risk individuals and entities as opposed to relying on clients to self-identify themselves when asked a question). This would be a choice made by individual businesses and not a requirement contained in the Regulations. Small business lens The costs associated with these amendments are less than $1 million annually; consequently, the small business lens would not apply. More specifically, the amendments are estimated, cumulatively, to impose a cost of $739,208 on all businesses (both compliance and administrative costs). The measures which are expected to be burden-imposing introduce new requirements related to determining whether a client is a politically exposed domestic person, a head of an international organization, or a family member or close associate of such persons, or a close associate of a politically exposed foreign person. Most of the burden is related to compliance, stemming from the necessity of the reporting entities to adapt their procedures and policies. However, these requirements build on existent requirements with regards to politically exposed foreign persons, and will therefore necessitate only minor modifications to reporting entities’ current procedures and policies, resulting in relatively small incremental compliance costs. The reporting entities are expected to comply with the new obligations by making minor adjustments to their existent procedures and policies. For example, this may entail modifying their existent account opening application forms to add a question with respect to a client’s status as a politically exposed domestic person or head of an international organization. Additionally, reporting entities would be expected to incorporate updates stemming from the implementation of these measures into their regularly scheduled cycles to update policies and procedures and information technology systems. The scope of amendments that would impose requirements to determine the close associates of a politically exposed domestic person or the head of an international organization was reduced following consultations with reporting entities. It was identified that, as originally proposed, the amendments would impose significant burden, which in particular would have been difficult for small businesses as many of their operations are manual in nature. Therefore, the measure was redesigned with the aim to make it less burdensome, especially for small businesses. Under the original proposal, reporting entities would have been required to make a determination as to whether or not a client is closely associated with a politically exposed domestic person or a head of an international organization at the outset of a business relationship as well as throughout the relationship with a client. However, reporting entities indicated that making such a determination at the outset of a business relationship would be difficult given the limited information available upfront regarding client associations. To assuage that concern, the measure has been redrafted to require that reporting entities make the determination only under certain trigger circumstances (e.g. very large specified transactions that are deemed to be of higher potential risk, such as lump-sum payments of $100,000 or more for the purchase of life insurance policies or annuities), or when they have suspicions that a client is a close associate. Based on its initial design, and jointly with other requirements to determine politically exposed domestic persons or heads of international organizations, the measure would have had an annualized average cost of $587,720, as opposed to the estimated cost of the current design of $317,110. Need for training and policy/procedure updates It should be noted that, to ensure compliance with the Regulations, the Regulations contain a requirement for reporting entities to develop and maintain a written ongoing compliance and training program for persons authorized to act on their behalf. The Regulations also contain a requirement for compliance procedures and policies to be kept up to date. These requirements should allow the reporting entities to incorporate any necessary training or policy/procedure updates stemming from the implementation of the measures into the existent training and systems update cycles. Accordingly, no cost was attributed to the need for training resulting from the new requirements. Measures relieving compliance burden Many of the amendments would decrease the burden of compliance with the Regulations for all reporting entities. For example, an amendment would extend the time period reporting entities have for making a politically exposed foreign persons determination from 14 days to 30 days. This would assist reporting entities by giving them more time to meet the obligation. An amendment would update identification methods and provide increased flexibility for reporting entities to meet their identification verification requirements by allowing a broader range of reliable and independent sources to be used. An amendment would expand the definition of a signature (which was limited to handwritten forms) to broadly include any type of signature in electronic form. This would provide increased flexibility for reporting entities to meet their identification verification requirements and would facilitate account openings through online channels. An amendment would expand the circumstances where a reporting entity can rely on customer identification that has been performed by an agent on its behalf. This measure will assist both agents that work on behalf of multiple reporting entities (such as a deposit broker) as well as circumstances where a reporting entity is purchasing an asset portfolio of another reporting entity. An amendment would expand the application of exemptions from ascertaining the identity of a client where that client is recognized by voice or sight (e.g. in person or over the phone) to capture recognition that may occur digitally (such as by logging in online to an existing profile). This measure assists entities that are transaction based by supporting online financial service delivery. Consultation The Department of Finance publicly released a formal consultation paper in December 2011, followed by more targeted discussion papers in spring 2013, and informal discussions with a number of stakeholders over fall 2014 and winter 2015. In general, reporting entities are supportive of the intent behind the amendments, even if they expressed some concern with respect to implementation costs (e.g. for updating their procedures, policies and systems and training their staff). A number of the amendments are included as a response to the feedback received from the stakeholders during the consultation process. For example, the following measures are being introduced as a result of concerns raised by the stakeholders in the context of trying to expand their online financial services offerings: updating identification methods and signature requirements in order to facilitate compliance with related anti-money laundering and anti-terrorist financing obligations in an online environment; and expanding the exceptions to the identity verification requirements to include circumstances where an individual who has already been identified, can be recognized in a “non-face-to-face” manner. This would aid transaction-based reporting entities that are moving to an account based structure in an online setting. Another amendment would address concerns raised with respect to duplication of identity verification efforts. This would involve updating the agency requirements to more easily allow a reporting entity to rely on customer due-diligence efforts previously performed by an agent (e.g. a deposit broker) with respect to the same client. The measures which are expected to be burden-imposing have, for the most part, received a neutral reaction, since the Regulations also provides offsetting burden relief where possible. However, as discussed in the small business lens section above, the amendment that would impose requirements to determine the close associates of a politically exposed domestic person or the head of an international organization was reduced in scope in order to make it less burdensome, following feedback from the reporting entities. Publication in the Canada Gazette, Part I — feedback and response The Regulations were published on July 4, 2015, in the Canada Gazette, Part I, followed by a 60-day comment period. The Department received 20 submissions from stakeholders, including one letter writing campaign (consisting of approximately 175 form letters) regarding the new identification methods (see below for details). The Department has also undertaken considerable discussions with the private sector through face-to-face meetings and outreach at numerous industry conferences. Overall, stakeholders were supportive of the new measures being introduced. In particular, stakeholders expressed appreciation for the greater flexibility provided with respect to identification requirements and flexibility to include electronic signatures. Stakeholder comments and concerns that were raised during the prepublication comment period focused on four key areas. These included updating identification requirements; requirements when dealing with foreign and domestic politically exposed persons, heads of international organizations and close associates of such persons; recording reasonable measures; and coming into force date. Some of the comments received sought further clarification on the meaning of certain regulatory requirements, and how to interpret certain definitions. The Department provided additional clarity to individual stakeholders, and is summarized below. The Department has also received comments regarding the “One-for-One” Rule and small business lens calculations; the comments were minor and are also addressed below. Updating identification methods: This measure replaces the existing types of customer identification methods that may be used to verify customer identity with a new range of burden-relieving measures that could be used as either a single method or a dual method basis. Stakeholders were very supportive of the new policy and flexible options when identifying clients. The primary issue identified by stakeholders is the need for clarity around interpretation of the new identification requirements, including terms such as “electronic image,” “reliable,” “verify” and the minimum length of time a credit file has existed so that it may be used as a single form of identification. Some of the stakeholder comments that focused on interpretation will be briefly addressed here, and greater clarity will be provided through upcoming FINTRAC guidance (which can be found on FINTRAC’s Web site). This section will also address other stakeholder comments regarding the new identification requirements. a. Stakeholders asked for clarification on the term “verifying,” when ascertaining identity. While FINTRAC will address this in their guidance, it is worth noting that no additional information gathering or additional outreach is expected under the Regulations. The action of “verifying” can simply mean “comparing” different pieces of identification documents. b. Some stakeholders were concerned that they would be required to re-identify clients who have been identified under the former identification methods. This was also the subject of the letter writing campaign. The new identification requirements are not retroactive. Change: Furthermore, the Regulations will now allow the new identification requirements to be used immediately while still allowing the old identification requirements to be used for a period of 12 months. c. The new identification requirements state that reporting entities choose to rely on the dual identification method, and that the information must come from “different sources.” Stakeholders expressed confusion regarding what is meant by “different sources.” Information from different sources could mean information from two different trade lines (e.g. a utility company bill and a credit card) or from two credit bureaus. In addition, two sources within the same credit bureau report could be acceptable as long as they are distinguishable and record-keeping obligations are met. d. Stakeholders wrote in with concerns that a valid and current identification document might not be accessible to seniors or students. The new identification methods, however, offer a wider range of ID options to facilitate student, senior identification (e.g. a utility company bill or a credit file). There was also concern that requiring a photo identification document will contradict the Access to Basic Banking Regulations, as financial institutions are required to open a bank account under these Regulations for those persons with birth certificate and social insurance number cards. Change: To address these concerns, the Regulations have been amended to allow banks to be compliant with the Act when they open accounts following identification methods under the Access to Basic Banking Regulations. e. Stakeholders were concerned that there would be confusion between “issuing authority” and “place of issue,” two terms introduced in the new ascertaining identity section of the Regulations. Change: An amendment is being introduced which will replace “issuing place and issuing authority” with “issuing jurisdiction” (e.g. country, state, province, municipality), as per stakeholder suggestions. Politically exposed persons: This measure supports legislative provisions already in the Act to detail requirements when dealing with foreign and domestic politically exposed persons, heads of international organizations and close associates of such persons. a. Stakeholders were generally understanding and supportive of this measure; however, this was a widely commented on area that had stakeholders concerned about the significance of the new burden being imposed and clarity on defining certain terms including the length of time that domestic politically exposed persons retain their status. In particular, most stakeholders found the 20-year timeframe for domestic politically exposed persons to retain their status as too long and burdensome. Due to the nature of some comments, which focused broadly on definitional and interpretation questions, FINTRAC will address these through guidance. Change: In response to the comments, the time period has been adjusted down to five years which will provide an appropriate balance between the length of time a domestic politically exposed person may continue to have some influence and reducing the potential regulatory burden. This will reduce the time period that reporting entities must monitor and keep records for domestic politically exposed persons. b. Stakeholders expressed confusion with the meaning of the term “close associate.” Close associate has been defined in the legislation as a personal or business relationship. FINTRAC guidance will expand further on this definition. c. Stakeholders asked for clarity in defining the terms “periodic basis” and “reasonable measures” in relation to screening for politically exposed persons. FINTRAC will provide additional guidance; however, politically exposed persons monitoring will not be retroactive, but must be included as part of ongoing monitoring performed by the reporting entities. Recording reasonable measures: Certain obligations require reporting entities to undertake reasonable measures to ascertain, establish or determine information specified (e.g. when determining a third party to a transaction or when determining the status of a client as a politically exposed person) and to keep a record of that information. This amendment requires reporting entities to record instances where they have taken reasonable measures, but those measures were unsuccessful at ascertaining, establishing or determining the information specified. This amendment generated a number of responses from stakeholders that were unsupportive. The source of concern from stakeholders was primarily around the definition of what are “reasonable measures” along with the potential burden of additional record-keeping requirements. However, this amendment strengthens FINTRAC’s compliance function by ensuring that reporting entities are accountable for the measures they take to ascertain, establish or determine specific client information. While it is being characterized by reporting entities as creating an additional record-keeping requirement, it is an amendment to an existing requirement. While the Department acknowledges that there will be some incremental additional burden on reporting entities, the impact will be moderated and flexibility granted through a 12-month delay of the coming-into-force provisions will provide an opportunity for stakeholders to integrate the changes into regular system updates and training programs. Coming into force: During initial consultations on the regulatory changes, some stakeholders asked if we would consider immediate coming into force for certain provisions, while others were to be delayed to allow industry to adapt to the changes. During the prepublication comment period, stakeholders noted that when it came to identification requirements and the casino amendments, at least a one-year delay in the coming into force of the specific related provisions of the Regulations would be required to implement information technology and other system upgrades. Change: The Regulations are being amended to introduce a 12-month delay of coming into force. Other changes introduced as a result of stakeholder feedback: An amendment to the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations raised some concerns amongst stakeholders. This amendment would have changed the threshold when a suspicious transaction must be submitted to FINTRAC, from “could reasonably be expected” to suspect that the transaction or attempted transaction is related to the commission of a money laundering offence or a terrorist activity financing offence, to “could reasonably be expected to raise reasonable grounds.” Stakeholders were concerned that the new wording would lower the reporting threshold and consequently lead to “over reporting.” Change: In response to the feedback, the wording in the Regulations has reverted back to the original text, which is “constitutes reasonable grounds.” Comments regarding the “One-for-One” Rule and small business lens calculations The Department received three letters commenting on the Department’s “One- for-One” Rule and small business lens calculations; one from the Credit Union Central of Canada, one from the Investment Funds Institute of Canada, and one from the Canadian Real Estate Association. All three organizations represent small businesses, which are more likely to be impacted by the potential burden imposed by the Regulations. These stakeholders were very supportive of the fact that the Government of Canada is cognizant of the level of regulatory burden associated with these Regulations; however, they expressed concern with the numbers reported in the Regulatory Impact Analysis Statement, in that the numbers understated the actual financial impact that will be borne by the reporting entities. Some of the measures introduced in the Regulations will impose burden on the reporting entities; however, to clarify, only the costs of complying with the minimum requirements contained in the amendments have been assessed. Reporting entities may choose to adopt more comprehensive procedures to fulfil their obligations, such as where required by a prudential regulator, or where the entity chooses to implement more robust risk mitigation strategies. This would be a choice made by individual businesses and not a requirement contained in the Regulations. Initiatives like revisions to computer systems and staff training should be rolled into existent maintenance and training schedules already mandated by the Regulations. Furthermore, the burden-imposing measures will not impact all reporting entities equally; therefore, only impacted sectors of reporting entities were assessed for the additional burden. Rationale The amendments to the Regulations are needed to update and strengthen the legislation to combat money laundering and terrorist financing activities. Money laundering and terrorist financing are a threat to the integrity of the financial system and the security and safety of Canadians at home and abroad. Money laundering supports and perpetuates criminal activity by legitimizing proceeds of crime. It can help criminals to harness more economic and social power, creating the right incentives for criminals to engage in more criminal activity. Terrorist financing can pose a serious national security threat to Canada and to Canadian interests domestically and internationally. Terrorist financing supports and sustains the activities of domestic and international terrorists that can result in terrorist attacks in Canada or abroad, causing destruction and loss of life. Furthermore, the economic consequences to Canada of terrorist financing can be significant if the funds raised are used to carry out a terrorist attack in Canada or against Canada’s interests abroad. Strong measures help to deter money laundering and terrorist financing by ensuring that entities that provide access to the financial system know their customers and are vigilant. Additionally, records kept by reporting entities, as required by the Act and its Regulations, are available for law enforcement (upon procurement of a proper warrant) when investigating money laundering and terrorist financing offences. Such information could assist in the investigation, apprehension, and prosecution of money launderers and terrorist financiers. The regulatory amendments would strengthen Canada’s anti-money laundering and anti-terrorist financing regime and improve its effectiveness by improving customer due diligence standards; closing gaps; improving compliance, monitoring and enforcement; and strengthening information sharing. These measures will contribute to protecting the security of Canada’s financial sector and the robustness of the anti-money laundering and anti-terrorist financing regime. The Regulations would also improve compliance with the international recommendations of the Financial Action Task Force. Meeting these standards improves the integrity of the global anti-money laundering and anti-terrorist financing framework, positively impacts Canada’s international reputation, and can lead to regulatory efficiencies with other countries’ anti-money laundering and anti-terrorist financing regimes, making it easier for Canadian businesses to operate internationally. Other jurisdictions’ perception of Canada has tangible impacts for Canadian businesses. If Canada is not aligned with the Financial Action Task Force recommendations or is perceived by its international peers as making insufficient progress on its anti-money laundering and anti-terrorist financing regime generally, there could be negative reputational consequences for Canada’s financial sector, as well as increased costs for Canadian financial institutions. It is expected that businesses would face some administrative and compliance costs as a consequence of the amendments. The new requirements introduced by some of the amendments would necessitate modification to reporting entities’ policies and systems. However, these changes would only be incremental in nature as they expand on the existent obligations contained in the Act and Regulations as opposed to introducing a new category of requirements. Some of the amendments are meant to address challenges that reporting entities are facing with respect to meeting the obligations in an online environment and are therefore meant to be burden relieving. Others are in line with procedures that many reporting entities are already undertaking and with regulators’ expectations when monitoring compliance. Other amendments are necessary to enact certain legislative amendments introduced through the Economic Action Plan 2014 Act, No. 1, and are therefore anticipated by the industry. Implementation, enforcement and service standards FINTRAC will be updating its guidance to set out its expectations for how obligations are to be met as well as undertake possible outreach activities to ensure reporting entities are aware of the new obligations. FINTRAC would be responsible for enforcing the obligations and would scope them into their compliance examinations and processes. Should non-compliance be identified, FINTRAC could impose AMPs or take other enforcement actions. Measures that provide more flexibility for reporting entities to fulfill their existing obligations (e.g. updated identification methods and requirements for maintaining a record of a signature) or those that are internal to government would come into force on the day they are published in the Canada Gazette, Part II. Measures that will require reporting entities to fulfill new requirements (e.g. with respect to politically exposed domestic persons and heads of international organizations) would come into force one year after registration. Contact Lisa Pezzack Director Financial Systems Division Financial Sector Policy Branch Department of Finance 90 Elgin Street Ottawa, Ontario K1A 0G5 Email: [email protected] Footnote a S.C. 2014, c. 20, ss. 294(2), (4) and (6) Footnote b 2006, c. 12, s. 40 Footnote c S.C. 2000, c. 17 Footnote 1 SOR/2001-317; SOR/2002-185, s. 1 Footnote 2 SOR/2002-184 Footnote 3 SOR/2007-121 Footnote 4 SOR/2007-292 Footnote 5 Politically exposed persons are persons who are, or have been, entrusted with prominent public functions, such as heads of state; senior politicians; senior government, judicial or militant officials; senior executives of state-owned corporations; and important political party officials. As a result of their prominent and influential positions, and their increased opportunities to influence activities involving large financial sums, politically exposed persons have a potential to be of higher risk of undertaking money laundering or terrorist financing activities. Footnote 6 Financial Action Task Force’s recommendation 15 with respect to new technologies reads as follows: “Countries and financial institutions should identify and assess the money laundering or terrorist financing risks that may arise in relation to (a) the development of new products and new business practices, including new delivery mechanisms, and (b) the use of new or developing technologies for both new and pre-existing products. In the case of financial institutions, such a risk assessment should take place prior to the launch of the new products, business practices or the use of new or developing technologies. They should take appropriate measures to manage and mitigate those risks.”
This Bill does not amend any statutes.
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