Expanding Canada's AML/TF framework – New regulatory requirements for factoring companies

In response to the need to continuously update Canada’s anti-money laundering (“AML”) and anti-terrorist financing (“ATF”) regimes, the Government of Canada has announced its intention to expand the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCMLTFA”).

The proposed amendments to the PCMLTFA include six key measures designed to strengthen Canada’s efforts to combat money laundering and terrorist financing. These measures target specific sectors, enhance existing regulations, and ensure compliance with international standards. In particular, the fourth measure is intended to introduce AML and ATF regulatory requirements for factoring companies. This expansion aims to address risks related to financial crime in the factoring industry and align Canada's regulatory framework with international standards.

Factoring and AML Risk

Factoring is a business-to-business financial service where companies sell their accounts receivable (i.e., invoices) to factoring companies at a discount in exchange for immediate cash. This allows businesses to access liquidity without waiting for the payment terms of their invoices to be fulfilled. While factoring is the primary line of business for most factoring companies, many large, federally regulated banks also provide factoring services, contributing significantly to the overall volume of such transactions in Canada. Factoring companies have been identified as inherently vulnerable to money laundering, particularly through schemes such as trade-based money laundering and commercial fraud.

Moreover, these proposed amendments have been highlighted as being necessary to ensure Canada complies with international standards, such as those promulgated by the Financial Action Task Force (the “FATF”). FATF standards mandate that factoring companies be subject to AML and ATF controls. In its 2016 mutual evaluation of Canada, FATF identified the absence of requirements for factoring companies as a significant gap in Canada's AML and ATF framework.

While the proposed amendments define a "factor" as a person or entity engaged in the business of factoring, the term "factoring" itself is not explicitly defined. As a result, it remains unclear whether parties involved in various forms of receivables financing may be subject to the new provisions targeting factoring companies.

Proposed amendments to the regulations

The proposed amendments would prescribe factoring companies as reporting entities under the PCMLTFA. As such, factoring companies would be subject to a range of new regulatory obligations, including:

• Record keeping: Factoring companies would be required to maintain detailed records of transactions, including payments made to clients for the purchase of invoices and receipts for payments of $3,000 or more from invoice payers.
• Know-your-client: Factoring companies would need to verify the identity of every party involved in a factoring agreement, ensuring that they know their clients and understand the nature of the business relationships.
• Transaction reporting: Factoring companies would be required to report suspicious transactions to the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”), especially those linked to potential money laundering, terrorist financing, or sanctions evasion.
• Compliance program: Factoring companies would need to implement a comprehensive compliance program to ensure adherence to these regulatory obligations.

The proposed $3,000 threshold for record-keeping aligns with existing regulations under Canada’s AML and ATF framework, ensuring consistency with circumstances that represent a similar money-laundering risk. The proposed amendments would also include an exemption for large, publicly traded corporations, as these entities are considered low risk for money laundering and terrorist financing due to their transparency and scale.

The proposed regulations on factoring companies would come into force on October 1, 2025. Industry participants are encouraged to submit comments before the consultation period ends on December 30, 2024.

The broader impact

The expansion of Canada’s AML and ATF Regime to cover factoring companies aims to reduce the risks of money laundering and terrorist financing across sectors that provide financial services. By including factoring companies in the regulatory framework, Canada will close existing loopholes, improve the ability of authorities to track illicit financial activities, and strengthen compliance with FATF standards.

This initiative also creates a more level playing field for all businesses involved in financial services, ensuring that factoring companies meet the same regulatory standards as other financial institutions, thus contributing to the overall integrity and security of Canada’s financial system.

For more information, businesses engaged in factoring should review the proposed amendments and ensure they are preparing to meet the new compliance requirements once they come into effect. If you feel your business may be impacted, please contact a member of our Financial Services or Compliance teams for assistance.