Sweeping changes proposed for Canada's anti-money laundering regime

In accordance with the commitment to a strong Anti-Money Laundering and Anti-Terrorist Financing Regime (“AML Regime”) to combat financial crime, the Department of Finance Canada has released a public consultation containing numerous proposals to strengthen the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTF Act). The proposals discuss the expansion of reporting entities, activities, and transactions caught ‎by the PCMLTF Act, including further changes to the real estate sector and the addition of certain luxury goods vendors.‎

The government is accepting submissions to this consultation until August 1, 2023. Comments and feedback can be emailed to fcs-scf@fin.gc.ca with the subject line, “Consultation Submission.”

This Finance Alert focuses on the proposed changes to expand the scope of the PCMLTF Act and to ‎increase the oversight of Financial Transactions and Reports Analysis Centre (FINTRAC) into ‎many areas.

PCMLTF Act legislative and regulatory framework

The consultation paper reviews the current legislative and regulatory framework, and proposes ways to enhance its scope and obligations, namely for the PCMLTF Act, to ensure money laundering and terrorist financing in the private sector is captured. Below are the proposals to the current framework.

Expanding the AML regime scope for existing reporting entities

The consultation contemplates expanding or altering the scope of existing reporting entities, including the following:

• Expanding the definition of accountant to include uncertified accountants who perform triggering activities on behalf of the client under the PCMLTF Act, such as the receipt, payment, or transfer of funds or virtual currency.
• Altering the definition of casino to reflect the evolution of new forms of legal wagering, such as single-event sports betting and the introduction of provincially regulated digital gaming.
• Lowering the threshold from $10,000 which triggers the PCMLTF Act obligations for the purchase and sale by dealers in precious metals and stones. The current threshold may allow some merchants to money launder, where they do not meet the threshold limit, but still transact in substantial amounts.
• Considering whether payment service providers (PSPs) should be differentiated from money services businesses (MSBs) under the PCMLTF Act. Likewise, whether they should have different AML regulatory requirements to account for different risks.‎
• Ensuring that the AML risks associated with new financial technologies, such as virtual currency, digital assets, and technology-enabled finance, are sufficiently covered and mitigated by AML framework. ‎Examples of such technologies include crypto-mixers/crypto-tumblers, decentralized finance, non-fungible tokens, the metaverse, fintech, privacy-enhancing coins, and tokenized assets.

Expanding the AML regime scope for the real estate sector

The consultation paper suggests expanding the scope of the current AML framework in the real estate sector to include:

• Sale-by-owner and real estate auction ‎platforms to be reporting entities under the PCMLTF Act and its Regulations.
• Requiring real estate entities to identify and verify the identities of unrepresented parties (not just take reasonable measures to do so), and ensuring third-parties are making the identifications to better detect and deter parties.
• Building supply and renovation companies to be included under the PCMLTF Act and its Regulations. ‎
• Title insurers and mortgage insurers to be covered under the AML framework.

Expanding the AML regime scope to additional sectors

The consultation paper proposes expanding the scope of the current AML framework to new sectors, including:

• High-value goods, such as automobiles, yachts, aircraft, art, and other luxury products;‎
• Large cash transactions that occur between businesses not currently covered under the PCMLTF Act;
• Company service providers that provide incorporation services to the public;
• White label automated teller machines that provide cash withdrawal services;
• Factoring companies that supply short-term loans or upfront payment for the accounts receivable of another business to address their cash-flow needs; and
• Federal financial Crown corporations that are engaged in financial activities (such as the Bank of Canada).

Ensuring compliance with the regulatory framework

FINTRAC’s mandate is to ensure that reporting entities comply with the PCMLTF Act and its Regulations. To assist with this mandate, the PCMLTF Act provides FINTRAC with certain powers so it may examine reporting entities for compliance. The below proposals suggest ways to enhance FINTRAC’s supervisory capabilities for ensuring compliance with the PCMLTF Act.

Modernizing compliance tools

• Compliance review program: where there is urgent or significant non-compliance, allowing ‎FINTRAC to direct reporting entities to undertake a review of their compliance program ‎by an independent external or internal reviewer to help improve compliance and reduce ‎risks. ‎
• Compliance officer: the attributes and regulatory expectations of a qualified FINTRAC ‎compliance officer should be defined. ‎
• Recording: where only one FINTRAC compliance officer is conducting the examination and ‎taking notes (often seen with smaller businesses), the FINTRAC officer should have ‎access to audio and video recording technologies, where there are appropriate ‎‎safeguards and with the participants’ consent.‎
• Publicizing violations and penalties: the descriptions published by FINTRAC of violations ‎and administrative monetary penalties (AMPs) imposed should be more detailed to better ‎educate ‎reporting entities and the public about FINTRAC’s compliance and enforcement ‎‎activities, and increase FINTRAC’s transparency and deterrence capability.
• Issuing administrative penalties against individuals: in exceptional cases where a director, ‎officer, or agent of an entity is found to have committed a violation, FINTRAC should be granted ‎the ability to levy AMPs against the individual. Individuals can already be found liable for criminal ‎offences. ‎

Effective oversight and reporting framework

• False information offence: for reporting entities outside of the context of registering ‎MSB/foreign MSB (as this offence already exists in the PCMLTF Act framework), an ‎offence should be created for intentionally providing false or misleading information, or ‎withholding information that should be provided to FINTRAC and that may lead to ‎criminal activity. ‎
• Reporting framework: the reporting framework should be altered so that a non-monetary ‎threshold for suspicious transactions is used. This is more flexible to cover transactions ‎that are suspicious for reasons other than the amount of money involved. ‎
• MSB and foreign MSB registration framework: this framework should be strengthened to ‎better protect against and identify non-‎compliant and ineligible actors, and to deny these ‎registrations when necessary. ‎
• Universal registration requirements for all reporting entities would help provide a more ‎accurate picture of the reporting entity population. ‎
• Exemptive relief for testing new technologies: exempting reporting entities who are ‎testing new technologies of complying with AML obligations may enhance ‎administrative flexibility while still preserving the integrity of the AML Regime. ‎
• De-risking: “de-risking” is a practice where some financial ‎institutions opt to terminate their business relationships with clients in particular sectors ‎that the institution perceives to be high risk. This is as opposed to the financial institution ‎managing the risk in line with a risk-based approach. The government is seeking views on what ‎businesses and sectors in Canada are affected by “de-risking,” as well as whether any action ‎should be taken.‎

Additional preventative and risk mitigation measures

• Requiring all reporting entities to take reasonable measures to establish the source of an individual’s wealth when engaging in financial transactions or transfers above a certain threshold.
• Restricting or prohibiting third parties from depositing cash into personal bank accounts.

Conclusion

The consultation paper proposes to expand the reporting sectors, activities, and transactions currently under the PCMLTF Act, including to areas not at all covered by the Act at present. The proposals reflect the government’s continuous objective of maintaining a strong AML Regime to combat crime, while also respecting citizens’ rights, including the right to privacy.

The consultation was done in support of the Parliamentary Review to be conducted by a Committee of Parliament this year that will inform future policy measures to strengthen Canada’s AML Regime.

For further information on how these proposals may impact you, please speak with one of our ‎Financial Services group team members. ‎