Canada Gazette, Part I, Volume 146, Number 41: Regulations Amending the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations

October 13, 2012

Statutory authority

Proceeds of Crime (Money Laundering) and Terrorist Financing Act

Sponsoring department

Department of Finance

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Background

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) is the basis of Canada’s anti-money laundering and anti-terrorist financing (AML/ATF) regime. The PCMLTFA 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 PCMLTFA sets out obligations in the following four categories: customer identification, record keeping, internal compliance, and a mandatory system for reporting suspicious financial transactions and certain other prescribed transactions. The Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR) provide additional clarification to reporting entities as to the situations in which the obligations set out in the PCMLTFA apply and how those obligations should be implemented.

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is Canada’s financial intelligence unit. FINTRAC’s responsibilities include the overall supervision of reporting entities to determine compliance with the PCMLTFA. Alongside FINTRAC is the Office of the Superintendent of Financial Institutions (OSFI), which is responsible for administering the federal financial institutions 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 AML/ATF set of controls and OSFI plays a key role in assessing federally regulated financial institutions from an AML/ATF compliance perspective. The Superintendent is solely responsible for exercising OSFI’s authorities under federal legislation, and similar to FINTRAC, monitors compliance by requiring information from federally regulated financial institutions, conducting audits and annual exams.

Specifically in relation to customer identification, reporting entities must know their customers. Reporting entities should be able to identify a client, understand the client’s background, occupation and how the client intends to use its relationship with the reporting entity, and monitor that client’s activities, in order to be in a position to identify transactions that are suspicious and report them to FINTRAC. These activities are commonly known as “customer due diligence” (CDD). The PCMLTFA provides that reporting entities are required to undertake CDD activities only when they conduct prescribed transactions or activities. For instance, financial institutions must conduct CDD when opening an account, while money services businesses must do so only in respect of transactions above a prescribed threshold. The prescribed transactions and activities to which CDD obligations apply differ from sector to sector. The PCMLTFR provide details on how to implement the obligations introduced through the PCMLTFA.

The Financial Action Task Force (FATF) is the international standard setting body for AML/ATF activities, of which Canada is a founding member. The FATF’s 40 Recommendations are international standards that member countries have agreed to adopt to fight money laundering and terrorist financing (ML/TF). Recommendation 5, recently reformulated as Recommendation 10, is one of the FATF’s six core Recommendations, which are the object of particular attention internationally. It requires member countries to implement measures to ensure that financial institutions and intermediaries are adequately able to identify their customers, to understand their activities, and to conduct ongoing scrutiny of customers’ activities. In its 2008 evaluation of Canada, the FATF identified a number of deficiencies in the customer identification and due diligence provisions of the PCMLTFR (i.e. the CDD provisions described above), and Canada was found to be non-compliant with FATF Recommendation 5. As a result, Canada is on the FATF’s regular follow-up process. This is considered the first step in a graduated process of disciplinary action to encourage countries to improve their regimes and compliance with the FATF standards.

Issues and objectives

The FATF has begun increasing pressure on Canada to improve its compliance with Recommendation 5. Failure to do so could mean Canada is moved to the enhanced follow-up process, where it would face enhanced reporting requirements and could be subject to a series of further measures with increasing levels of severity. In order to meet international commitments, be removed from the FATF’s follow-up list, and not be moved to the enhanced follow-up process, Canada must demonstrate that it has made sufficient progress on Recommendation 5.

The deficiencies identified by the FATF result from drafting ambiguities in existing provisions of the PCMLTFR. The FATF requires that all obligations under Recommendation 5 must be explicitly stated, and in detail, in law or regulation. In order to ensure that reporting entities clearly understand their CDD obligations, improve Canada’s compliance with Recommendation 5, and promote the continuing strength of Canada’s AML/ATF regime, amendments to the PCMLTFR are necessary.

Description

The following clarifications to the CDD provisions of the PCMLTFR are proposed:

  • — The term “business relationship” would be defined in the PCMLTFR. The PCMLTFR would also be amended to clarify that, in order to meet their obligations under the PCMLTFA to identify and report suspicious transactions, reporting entities should conduct ongoing monitoring of business relationships with clients, using a risk-based approach, and should obtain information on the purpose of a business relationship when entering into a business relationship with a client.
  • — The circumstances in which reporting entities should take enhanced CDD measures in respect of high-risk customers, activities or transactions would be clarified to clearly indicate that enhanced measures should be taken in respect of all high-risk clients and activities, and a list of enhanced measures from which reporting entities could choose would be added. The measures would include keeping client information up to date and conducting enhanced ongoing monitoring.
  • — The PCMLTFR requires certain reporting entities to obtain identification information, in designated circumstances, from all persons who own 25% or more of a corporation or entity. The proposed amendments would specifically clarify that those reporting entities should also obtain documentary evidence from the client that confirms the beneficial ownership information that they have obtained.
  • — Finally, the PCMLTFR would be amended to clarify that no exceptions exist to reporting entities’ current obligation to conduct CDD measures in respect of any transaction or activity which gives rise to a suspicion of ML/TF.

Consultation

In November 2011, the Department of Finance released a public consultation paper that described proposed amendments to Canada’s CDD provisions. Comments were accepted until December 16, 2011, and 41 responses were received. The Department of Finance conducted a series of follow-up discussions with individual stakeholders and stakeholder associations in order to discuss and assess comments in detail.

Stakeholders demonstrated an interest in ensuring that the scope and application of the proposed amendments be clearly set out and, in particular, that any new regulatory provisions be implemented using the risk-based approach already present in the PCMLTFR. Similarly, stakeholders sought clarification that the proposed amendments would not narrow or eliminate the CDD record-keeping exemptions that currently exist in the PCMLTFR. Finally, stakeholders requested clear supporting guidance materials to provide additional detail in respect of the implementation of the new provisions.

The Government has modified the initial proposed regulatory amendments to take into account various stakeholder comments. The amended proposals are reflected in the attached draft Regulations.

“One-for-One” Rule

The “One-for-One” Rule does not apply to this proposal. The proposed amendments do not introduce any new administrative burden on reporting entities, as they simply resolve ambiguities in the PCMLTFR in order to align Canada’s AML/ATF regime more closely with the FATF 40 Recommendations.

Small business lens

The small business lens does not apply to this proposal, as there are insignificant costs to small business, and small businesses would not be disproportionately affected by the proposed amendments.

Rationale

Amendments to the PCMLTFR are necessary in order to improve Canada’s compliance with FATF Recommendation 5. Canada has made a political commitment to implement the FATF’s standards and to be assessed by the FATF. Failure to make the necessary amendments means that Canada could be moved to the FATF’s enhanced follow-up process, where it could be subject to enhanced measures as a result of deficiencies identified in its AML/ATF regime.

Implementation, enforcement and service standards

The proposed regulatory amendments would come into force one year after final publication in the Canada Gazette. The Government is seeking comments as to the appropriateness of this timeframe.

Upon coming into force of the proposed regulatory amendments, FINTRAC and OSFI would provide updated guidance.

Contact

All inquiries and comments are to be forwarded to

Leah Anderson
Director
Financial Sector Division
Financial Sector Policy Branch
Department of Finance
140 O’Connor Street
Ottawa, Ontario
K1A 0G5
Email: Leah.Anderson@fin.gc.ca

PROPOSED REGULATORY TEXT

Notice is given that the Governor in Council, pursuant to section 73 (see footnote a) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (see footnote b), proposes to make the annexed Regulations Amending the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part Ⅰ, and the date of publication of this notice, and be addressed to Leah Anderson, Director, Financial Sector Division, Financial Sector Policy Branch, Department of Finance Canada, Ottawa, Ontario K1A 0G5 (tel.: 613-992-6516, fax: 613-943-8436, email: Leah.Anderson@fin.gc.ca).

Ottawa, October 4, 2012

JURICA ČAPKUN
Assistant Clerk of the Privy Council

REGULATIONS AMENDING THE PROCEEDS OF CRIME (MONEY LAUNDERING) AND TERRORIST FINANCING REGULATIONS

AMENDMENTS

1. Subsection 1(2) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (see footnote 1) is amended by adding the following in alphabetical order:

“business relationship” means any relationship with a client, established by a person or entity to which section 5 of the Act applies, to conduct financial transactions or provide services related to those transactions and, as the case may be,

  • (a) if the client holds one or more accounts with that person or entity, all transactions and activities relating to those accounts; or
  • (b) if the client does not hold an account, only those transactions and activities in respect of which that person or entity is required to ascertain the identity of a person or confirm the existence of an entity under these Regulations.

It does not include any transaction or activity to which paragraphs 62(1)(a), (c) and (d) and subsections 62(2) to (4) of these Regulations apply. (relation d’affaires)

“ongoing monitoring” means monitoring on a periodic basis based on the risk assessment undertaken in accordance with subsection 9.6(2) of the Act and subsection 71(1) of these Regulations, by a person or entity to which section 5 of the Act applies of their business relationship with a client for the purpose of

  • (a) detecting any transactions that are required to be reported in accordance with section 7 of the Act;
  • (b) keeping client identification information and the information referred to in section 11.1 up to date;
  • (c) reassessing the level of risk associated with the client’s transactions and activities; and
  • (d) determining whether transactions or activities are consistent with the information obtained about their client, including the risk assessment of the client. (contrôle continu)

2. Section 1.2 of the Regulations is replaced by the following:

1.2 Sections 11.1, 12, 13, 14, 14.1, 15.1, 52.1, 53.1, 54, 54.1, 54.2 and 54.3 do not apply in respect of the credit card acquiring activities of a financial entity.

3. Section 11.1 of the Regulations is replaced by the following:

11.1 (1) Every financial entity or securities dealer that is required to confirm the existence of an entity in accordance with these Regulations when it opens an account in respect of that entity, every life insurance company, life insurance broker or agent or legal counsel or legal firm that is required to confirm the existence of an entity in accordance with these Regulations and every money services business that is required to confirm the existence of an entity in accordance with these Regulations when it enters into an ongoing electronic funds transfer, fund remittance or foreign exchange service agreement with that entity, or a service agreement for the issuance or redemption of money orders, traveller’s cheques or other similar negotiable instruments, shall, at the time the existence of the entity is confirmed, obtain the following information:

  • (a) in the case of a corporation, the names of all directors of the corporation and the names and addresses of all persons who own or control, directly or indirectly, 25 per cent or more of the shares of the corporation;
  • (b) in the case of a trust, the names and addresses of all trustees and all known beneficiaries and settlors of the trust;
  • (c) in the case of an entity other than a corporation or trust, the names and addresses of all persons who own or control, directly or indirectly, 25 per cent or more of the entity; and
  • (d) in all cases, information establishing the ownership, control and structure of the entity.

(2) Every person or entity that is subject to subsection (1) shall take reasonable measures to confirm the accuracy of the information obtained under that subsection.

(3) The person or entity shall keep a record that sets out the information obtained and the measures taken to confirm the accuracy of that information.

(4) If the person or entity is not able to obtain the information referred to in subsection (1) or to confirm that information in accordance with subsection (2), the person or entity shall

  • (a) take reasonable measures to ascertain the identity of the most senior managing officer of the entity; and
  • (b) treat that entity as high risk for the purpose of subsection 9.6(3) of the Act and apply the prescribed special measures in accordance with section 71.1 of these Regulations.

(5) If the entity, the existence of which is being confirmed by a person or entity under subsection (1), is a not-for-profit organization, the person or entity shall determine, and keep a record that sets out, whether that entity is

  • (a) a charity registered with the Canada Revenue Agency under the Income Tax Act; or
  • (b) an organization, other than one referred to in paragraph (a), that solicits charitable donations from the public.

4. The Regulations are amended by adding the following after section 52:

REPORTING OF FINANCIAL TRANSACTIONS AND RECORD KEEPING

52.1 Every person or entity that enters into a business relationship under these Regulations shall keep a record that sets out the purpose and intended nature of the business relationship.

5. Subsection 53.1(1) of the Regulations is replaced by the following:

53.1 (1) Except if identity has been previously ascertained as required by these Regulations, every person or entity that is subject to these Regulations shall take reasonable measures to ascertain, in accordance with subsection 64(1), the identity of every person with whom the person or entity conducts or attempts to conduct a transaction that is required to be reported to the Centre under section 7 of the Act.

6. The Regulations are amended by adding the following after section 54.2:

54.3 Any financial entity that is required to ascertain the identity of any person or confirm the existence of any entity in accordance with section 54 or 54.1 shall

  • (a) conduct ongoing monitoring of its business relationship with that person or entity; and
  • (b) keep a record of the measures taken and the information obtained under paragraph (a).

54.4 If, as a result of its ongoing monitoring of a business relationship under paragraph 54.3(a), the financial entity considers that the risk of a money laundering offence or terrorist activity financing offence is high, it shall treat that person or entity as high risk for the purpose of subsection 9.6(3) of the Act and apply the prescribed special measures in accordance with section 71.1 of these Regulations.

7. Section 56.2 of the Regulations is replaced by the following:

56.2 Sections 56, 56.1, 56.3 and 56.4 do not apply to a life insurance company or a life insurance broker or agent when they are dealing in reinsurance.

56.3 Any life insurance company or life insurance broker or agent that is required to ascertain the identity of any person or confirm the existence of any entity in accordance with section 56 shall

  • (a) conduct ongoing monitoring of its business relationship with that person or entity; and
  • (b) keep a record of the measures taken and the information obtained under paragraph (a).

56.4 If, as a result of its ongoing monitoring of a business relationship under paragraph 56.3(a), the life insurance company or life insurance broker or agent considers that the risk of a money laundering offence or terrorist activity financing offence is high, it shall treat that person or entity as high risk for the purpose of subsection 9.6(3) of the Act and apply the prescribed special measures in accordance with section 71.1 of these Regulations.

8. The Regulations are amended by adding the following after section 57.1:

57.2 Any securities dealer that is required to ascertain the identity of any person or confirm the existence of any entity in accordance with section 57 shall

  • (a) conduct ongoing monitoring of its business relationship with that person or entity; and
  • (b) keep a record of the measures taken and the information obtained under paragraph (a).

57.3 If, as a result of its ongoing monitoring of a business relationship under paragraph 57.2(a), the securities dealer considers that the risk of a money laundering offence or terrorist activity financing offence is high, it shall treat that person or entity as high risk for the purpose of subsection 9.6(3) of the Act and apply the prescribed special measures in accordance with section 71.1 of these Regulations.

9. The Regulations are amended by adding the following after section 59:

59.01 Any money services business that is required to ascertain the identity of any person or confirm the existence of any entity in accordance with section 59 shall

  • (a) conduct ongoing monitoring of its business relationship with that person or entity; and
  • (b) keep a record of the measures taken and the information obtained under paragraph (a).

59.02 If, as a result of its ongoing monitoring of a business relationship under paragraph 59.01(a), the money service business considers that the risk of a money laundering offence or terrorist activity financing offence is high, it shall treat that person or entity as high risk for the purpose of subsection 9.6(3) of the Act and apply the prescribed special measures in accordance with section 71.1 of these Regulations.

10. The Regulations are amended by adding the following after section 59.1:

59.11 Any accountant or accounting firm that is required to ascertain the identity of any person or confirm the existence of any entity in accordance with section 59.1 shall

  • (a) conduct ongoing monitoring of its business relationship with that person or entity; and
  • (b) keep a record of the measures taken and the information obtained under paragraph (a).

59.12 If, as a result of its ongoing monitoring of a business relationship under paragraph 59.11(a), the accountant or accounting firm considers that the risk of a money laundering offence or terrorist activity financing offence is high, it shall treat that person or entity as high risk for the purpose of subsection 9.6(3) of the Act and apply the prescribed special measures in accordance with section 71.1 of these Regulations.

11. The Regulations are amended by adding the following after section 59.2:

59.21 Any real estate broker or sales representative that is required to ascertain the identity of any person or confirm the existence of any entity in accordance with section 59.2 shall

  • (a) conduct ongoing monitoring of its business relationship with that person or entity; and
  • (b) keep a record of the measures taken and the information obtained under paragraph (a).

59.22 If, as a result of its ongoing monitoring of a business relationship under paragraph 59.21(a), the real estate broker or sales representative considers that the risk of a money laundering offence or terrorist activity financing offence is high, it shall treat that person or entity as high risk for the purpose of subsection 9.6(3) of the Act and apply the prescribed special measures in accordance with section 71.1 of these Regulations.

12. The Regulations are amended by adding the following after section 59.3:

59.31 Any British Columbia notary public or British Columbia notary corporation that is required to ascertain the identity of any person or confirm the existence of any entity in accordance with section 59.3 shall

  • (a) conduct ongoing monitoring of its business relationship with that person or entity; and
  • (b) keep a record of the measures taken and the information obtained under paragraph (a).

59.32 If, as a result of its ongoing monitoring of a business relationship under paragraph 59.31(a), the British Columbia notary public or British Columbia notary corporation considers that the risk of a money laundering offence or terrorist activity financing offence is high, it shall treat that person or entity as high risk for the purpose of subsection 9.6(3) of the Act and apply the prescribed special measures in accordance with section 71.1 of these Regulations.

13. The Regulations are amended by adding the following after section 59.4:

59.41 Any legal counsel or legal firm that is required to ascertain the identity of any person or confirm the existence of any entity in accordance with section 59.4 shall

  • (a) conduct ongoing monitoring of its business relationship with that person or entity; and
  • (b) keep a record of the measures taken and the information obtained under paragraph (a).

59.42 If, as a result of its ongoing monitoring of a business relationship under paragraph 59.41(a), the legal counsel or legal firm considers that the risk of a money laundering offence or terrorist activity financing offence is high, it shall treat that person or entity as high risk for the purpose of subsection 9.6(3) of the Act and apply the prescribed special measures in accordance with section 71.1 of these Regulations.

14. The Regulations are amended by adding the following after section 59.5:

59.51 Any real estate developer that is required to ascertain the identity of any person or confirm the existence of any entity in accordance with section 59.5 shall

  • (a) conduct ongoing monitoring of its business relationship with that person or entity; and
  • (b) keep a record of the measures taken and the information obtained under paragraph (a).

59.52 If, as a result of its ongoing monitoring of a business relationship under paragraph 59.51(a), the real estate developer considers that the risk of a money laundering offence or terrorist activity financing offence is high, it shall treat that person or entity as high risk for the purpose of subsection 9.6(3) of the Act and apply the prescribed special measures in accordance with section 71.1 of these Regulations.

15. The Regulations are amended by adding the following after section 60:

60.1 Any casino that is required to ascertain the identity of any person or confirm the existence of any entity in accordance with section 60 shall

  • (a) conduct ongoing monitoring of its business relationship with that person or entity; and
  • (b) keep a record of the measures taken and the information obtained under paragraph (a).

60.2 If, as a result of its ongoing monitoring of a business relationship under paragraph 60.1(a), the casino considers that the risk of a money laundering offence or terrorist activity financing offence is high, it shall treat that person or entity as high risk for the purpose of subsection 9.6(3) of the Act and apply the prescribed special measures in accordance with section 71.1 of these Regulations.

16. The Regulations are amended by adding the following after section 61:

61.1 Any department or agent of Her Majesty in right of Canada or of a province that engages in an activity referred to in section 46 that is required to ascertain the identity of any person or confirm the existence of any entity in accordance with section 61 shall

  • (a) conduct ongoing monitoring of its business relationship with that person or entity; and
  • (b) keep a record of the measures taken and the information obtained under paragraph (a).

61.2 If, as a result of its ongoing monitoring of a business relationship under paragraph 61.1(a), the department or agent of Her Majesty in right of Canada or of a province that engages in an activity referred to in section 46 considers that the risk of a money laundering offence or terrorist activity financing offence is high, it shall treat that person or entity as high risk for the purpose of subsection 9.6(3) of the Act and apply the prescribed special measures in accordance with section 71.1 of these Regulations.

17. Section 62 of the Regulations is amended by adding the following after subsection (4):

(5) Subsections (1) to (3) do not apply if the person or entity is required to take reasonable measures to ascertain the identity of a person in accordance with section 53.1.

18. Paragraphs 71.1(a) to (c) of the Regulations are replaced by the following:

  • (a) taking enhanced measures based on the risk assessment undertaken in accordance with subsection 9.6(2) of the Act to ascertain the identity of any person or confirm the existence of any entity in addition to the measures required in sections 54, 54.1, 55, 56, 57, 59, 59.1, subsection 59.2(1), section 59.3, subsection 59.4(1), sections 59.5, 60 and 61; and
  • (b) taking any other enhanced measure to mitigate the risks identified in accordance with subsection 9.6(3) of the Act, including,
    • (i) keeping client identification information and the information referred to in section 11.1 up to date, and
    • (ii) in addition to the measures required in sections 54.3, 56.3, 57.2, 59.01, 59.11, 59.21, 59.31, 59.41, 59.51, 60.1 and 61.1, conducting ongoing monitoring of business relationships for the purpose of detecting transactions that are required to be reported to the Centre under section 7 of the Act.

COMING INTO FORCE

19. These Regulations come into force on the day on which they are registered.

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