On March 28, 2023, the federal government released its 2023 budget (Budget) proposing significant changes to Canada’s anti-money laundering regime under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).
Simultaneously, the Department of Finance also released:
An Updated Assessment of the Inherent Risks of Money Laundering and Terrorist Financing in Canada (Inherent Risk Assessment)
A Report on Measurement Framework in respect of Canada’s Anti-Money Laundering and Terrorist Financing Regime
Canada’s Anti-Money Laundering and Anti-Terrorism Financing Regime Strategy 2023-2026 (Regime Strategy)
There is a lot to unpackage from the combination of these materials.
Budget 2023 provides for further amendments to the PCMLTFA (and the Criminal Code) to strengthen the investigative, enforcement and information sharing tools of Canada’s anti-money laundering (AML) and anti-terrorist financing (ATF) regime. The following is in respect of the impact of these changes to regulated entities:
Structuring. Consistent with AML legislation in other jurisdictions, a new offence for structuring financial transactions to avoid reporting to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) will be implemented. This will likely require regulated entities to implement controls to look for structuring behaviour to the extent that they are not already doing so. In 2018, consideration was given to adding structuring as an offence of the PCMLTFA. At that time, the requirement was recommended to have two prongs:
It would be a criminal offence for a person or entity to structure transactions to avoid regulatory reporting.
More importantly to regulated entities, it was contemplated that there would be a prohibition against reporting entities structuring their business models and delivery channels so that transactions could be structured by clients to avoid reporting requirements.
This latter prohibition would appear to require regulated entities to configure their systems so that clients are in fact prohibited from being able to structure transactions, which on its face would appear to be a very onerous task. Once the proposed amendments to the PCMLTFA are released, the scope of the structuring provisions will become clearer.
Criminal Record Checks. The PCMLTFA will be amended to require those engaged in the money services businesses (likely beneficial owners and senior officers) to undergo criminal-record checks prior to being accepted for registration. This was a recommendation of the Cullen Commission.
Unregistered Money Services Businesses (MSB). Changes will be made to legislation to criminalize the operation of unregistered money services businesses. Given the changing interpretation of which type of activity is characterized as MSB activity, the criminalization would likely apply only to those MSBs that are blatantly ignoring the regime.
Whistleblowing. The regime will be updated to provide whistleblowing protections for employees who report information to FINTRAC. Whistleblowing as a compliance tool is being used more frequently in Canada, most recently under changes made to the Bank Act.
Sanctions Reporting. The Budget contemplates making changes so that the financial sector reports sanctions-related information to FINTRAC. Currently, sanctions information is reported to the RCMP and CSIS. Having FINTRAC involved in sanctions compliance is, in our view, a significant development and has the potential to change the current regulatory approach to compliance with respect to Canadian sanctions that are enforced only in the most egregious of circumstances.
As most involved in the AML eco-system are aware, the lack of beneficial ownership transparency of private corporations has always been viewed as a high-risk factor for money laundering given that corporations can be used to conceal the true ownership of property, businesses and other valuable assets.
To partially address these risks, amendments were made to the Canada Business Corporations Act (CBCA) in 2022 requiring corporations to keep records of persons with “significant control.” In the Budget, the government introduces further amendments to the CBCA and the PCMLTFA to implement a publicly accessible beneficial ownership registry. The changes to the PCMLTFA will likely be significant for regulated entities given the nature of changes made.
In that regard, the proposed amendment to the PCMLTFA in respect of the beneficial ownership registry is found in the regulation-making power. A new regulation-making power was added that allows for the making of regulations “respecting the verification of the identity of persons and entities referred to in section 6.1 and requiring the reporting to government institutions or agencies of any discrepancies in information on the beneficial ownership or control of an entity arising out of that verification.”
Section 6.1 of the PCMLTFA requires regulated entities to verify the identity of persons in accordance with the regulations. This new regulation-making power, therefore, contemplates the requirement for regulated entities to report to the government in the event they identify any differences between beneficial ownership information provided by a client and beneficial ownership information contained in the registry. Given how this regulation-making power is drafted, a few things can be gleamed:
Because there is a requirement for regulated entities to report any discrepancies in the beneficial ownership information registry, the implication is that regulated entities cannot rely on the registry as the sole source of truth when confirming beneficial ownership. Instead, they will be required, as is currently the case, to make beneficial ownership inquiries of their clients.
Regulated entities will, in effect, be responsible for ensuring the registry is up to date by being required to update government agencies when they see any irregularities. As such, the currency and accuracy of the registry will become something for which regulated entities will bear responsibility.
The Inherent Risk Assessment
Canada’s Inherent Risk Assessment has not been updated since 2015 when the first version was originally released. The Inherent Risk Assessment looks at Canada’s vulnerabilities to money laundering and terrorist financing for various sectors and financial products. The information in the Inherent Risk Assessment is informative and important. From a regulated entity perspective, the Inherent Risk Assessment “provides critical risk information to the public and in particular, to over 24,000 regulated entities … that have reporting obligations under the [PCMLTFA] whose understanding of inherent, foundational money laundering and terrorist financing risks is vital in applying preventative measures and controls to effectively mitigate these risks.”
The foregoing clarifies the regulatory expectation that regulated entities under the PCMLTFA not only review and familiarize themselves with these inherent risks, but also build their systems and controls to monitor these risks. In that regard, in FINTRAC’s assessment manual (regarding regulatory examinations), FINTRAC notes that they focus their examinations on areas that a business may be vulnerable to money laundering and terrorist financing risks. They go on to provide the following:
"When determining the risks your business may be exposed to, we rely on our experience, knowledge, training, and professional judgment. We take into account relevant information from FINTRAC publications and guidance. We may also take into consideration relevant information taken from publicly available reports and publications issued by well-known credible sources on money laundering and terrorist activity financing.”
As such, it is clear that FINTRAC will expect regulated entities to take the contents of the Inherent Risk Assessment into account as part of keeping their AML programs current and up to date.
Legislative Review of the PCMLTFA
The Budget confirms the public review of the PCMLTFA that is scheduled for 2023. In the Budget, the government notes that it will examine the potential need for new measures, including reviewing the remaining recommendations from the Cullen Commission. Some of the Cullen Commission recommendations are already being implemented under the PCMLTFA, including the regulation of mortgage brokers and criminal-record checks for MSBs.
Other recommendations include large cash transaction reporting for the luxury goods sector, the use of unexplained wealth orders (currently under consideration in British Columbia) and regulation of private lenders. The Regime Strategy (discussed below) notes that the review will provide an opportunity to keep the AML regime current in response to market developments.
The Regime Strategy
The Regime Strategy provides the government’s plan to address gaps in Canada’s AML framework for the period from 2023–2026, noting that a key consideration is the appropriate level of regulatory burden on regulated entities.
Priority actions for the government include the establishment of a new Canadian Financial Crimes Agency to bolster Canada’s ability to quickly respond to complex financial crime cases. The Regime Strategy also notes that in order to support the prosecution of non-compliance charges under the PCMLTFA, FINTRAC will work to increase the awareness of non-compliance investigations and work with the public prosecution department regarding the investigation and prosecution of non-compliance charges under the PCMLTFA. This likely refers to the criminalization of the non-registered MSBs.
The Regime Strategy also speaks to improving Canada’s AML regime, including by addressing, among other things, weaknesses in information sharing and gaps in coverage in respect of non-profits and registered charities. In addition, the Regime Strategy notes that the Department of Finance will continue to address and mitigate risks of new technologies associated with virtual assets such as Decentralized Finance and enhanced privacy cryptocurrencies. Currently, the PCMLTFA regulates virtual currency as opposed to virtual assets.
As money laundering and terrorist financing methods continue to evolve, the regulatory environment needs to keep pace. As such, given the foregoing, it is clear that there will be more changes coming to the PCMLTFA. Stay tuned.
For more information, please contact:
Jacqueline D. Shinfield +1-416-863-3290
or any member of the Financial Services Regulatory group.
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