Is Canada rising to the challenge? Responding to calls for more effective financial crime prevention and enforcement – Lexology

As we have observed in a number of our prior posts (e.g., our post illustrating Canadas drop from the top 10 least corrupt countries in Transparency Internationals 2020 Annual Corruption Perceptions Index), Canada has been the subject of criticism for what is perceived as lax prevention of financial/white collar wrongdoing and enforcement of related prohibitions. As we have also reported, over the past number of years, the Canadian government has introduced a number of pertinent initiatives to address these criticisms. For example, there has been increasing emphasis on money laundering recently, and Budget 2021 released April 19, 2021 by the Government of Canada announced the implementation of a beneficial ownership registry for corporations in Canada.

Most significantly, a number of amendments to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) were published in the Canada Gazette in 2019 and 2020, the bulk of which will come into force on June 1, 2021 (the Amendments). Taken together, these Amendments effect a sizeable overhaul of the anti-money laundering and terrorist financing (AML/ATF) regulatory landscape in Canada. In anticipation, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) issued new guidance in February and March of 2021 in key areas to assist reporting entities with complying with their new AML/ATF obligations. FINTRAC subsequently issued additional guidance on May 4, 2021. Given the scope and scale of these changes, FINTRAC has indicated that it will exercise an amount of discretion as it assesses compliance with the new and updated obligations under the Amendments. FINTRAC has, however, previously indicated that it does expect to enforce the new virtual currency obligations when the Amendments come into force; unless FINTRAC provides otherwise in the coming days, reporting entities should expect FINTRAC to enforce all virtual currency rules as of June 1st.

To assist individuals and businesses in navigating this regulatory overhaul, Osler has prepared a Client Guide to the changes effective on June 1 that will be of most interest to entities with obligations under the PCMLTFA (reporting entities). Our Client Guide, which was initially published April 30th, has been updated to include the additional guidance issued May 4th.

Please see here to access the Client Guide.

Below, we summarize key additions coming out of the May 4th guidance, which includes third-party identification requirements, identification methods, the travel rule, the 24-hour rule and prepaid payment products and accounts. Additional information, which includes wide-ranging updates to requirements across reporting entities obligations under the PCMLTFA, can be found in the Guide.

Third-party identification

The updated guidance describes the new third-party determination and recordkeeping requirements for large virtual currency transactions, as well as the new recordkeeping requirements that reporting entities must adhere to when third-party determinations cannot be made. The updated guidance also introduces new exemptions for financial entities, securities dealers, casinos, and life insurance companies and specifically provides that third-party determinations do not need to be made with respect to prepaid payment products for a merchant.

Identification methods for individuals and entities

The updated guidance largely contains minor changes to the prior guidance, although the format has been restructured, with several notable differences. Among other changes, the guidance introduces the reliance method for identifying both individuals and entities, which allows a reporting entity to rely on measures previously taken by another reporting entity or a foreign affiliate of a reporting entity. Although this method has been permitted under the regulations to the PCMLTFA for years, it did not previously appear in any FINTRAC guidance. The guidance also reflects the Amendments addition of the simplified identification process for entity verification, which may be used only by certain prescribed reporting entities. This method allows those prescribed entities to use a simplified process to verify other prescribed entities.

Travel rule

The new guidance from FINTRAC clarifies the travel rule requirements introduced under the Amendments. The travel rule applies only to financial entities, money services businesses, foreign money services businesses and casinos, and requires that each of these entities provide certain information when initiating electronic funds transfers or virtual currency transfers (casinos are not subject to the virtual currency requirements in the guidance). When receiving these types of transactions, reasonable measures must be taken to obtain the travel rule information. If one of these entities acts as a transfer intermediary, the travel rule prohibits the removal of the travel rule information before the transfer is sent.

24-hour rule

The updated 24-hour rule guidance issued on May 4th will only apply to large virtual currency reporting when it comes into effect on June 1st separate guidance will eventually be issued for large cash transactions, electronic funds transfers and casino disbursements. Until specific guidance for large cash transactions, electronic funds transfers and casino disbursements is issued, the prior guidance should be followed for these transaction types.

The updated guidance clarifies that the 24-hour window is static. Reporting entities can establish different static 24-hour windows for different business lines or for different types of reports, so long as the windows are consistent and reported to FINTRAC.

The updated guidance also sets out an exception to the 24-hour rule when the beneficiary of the transactions is a public body, a very large corporation, or an administrator of a regulated pension fund. However, this is not an exception to the reporting rules generally: if a public body, very large corporation or pension fund administrator is the beneficiary of any single transaction equivalent to $10,000 or more, that transaction must still be reported to FINTRAC.

Prepaid payment products and accounts

The new guidance on prepaid payment products and accounts contains definitions and obligations that reflect the Amendments, including the definition of prepaid payment account as an account connected to a prepaid payment product permitting funds or virtual currency totaling $1,000 or more to be added to the account within a 24-hour period, or that allow a balance of funds or virtual currency in the amount of $1,000 or more to be maintained in the account, excluding products that enable access to a credit or debit account or those products issued for use with a particular merchant or for a retail rebate program. The guidance further clarifies that prepaid payment product accounts do not include accounts that only a public body or registered charity acting for humanitarian purposes can add funds or virtual currency to. Prepaid payment product accounts are subject to account opening obligations and transaction obligations just like other types of accounts.

Businesses and individuals subject to obligations under the PCMLTFA need to be aware of the risks associated with increasing enforcement scrutiny of financial transactions, the preventative steps that regulators and enforcement agencies expect be taken, and the legal and reputational risks associated with failures to comply. A more in-depth summary of key changes and new obligations found in each of the May 4th FINTRAC guidance documents can now be found in the Client Guide along with other important changes due to come into effect on June 1st.

Please note that the Guide does not identify every change coming into force on June 1st. The focus of the Guide is rather on those changes that will be most important to entities with obligations under the PCMLTFA.

The rest is here:

Is Canada rising to the challenge? Responding to calls for more effective financial crime prevention and enforcement - Lexology