On April 21, 2023, the Canadian government introduced the Notice of Ways and Means Motion to implement certain provisions of the 2023 federal budget. As we noted earlier this month, certain changes were proposed to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) (see our Blakes Bulletin: 2023 Federal Budget: Impact on Canada’s Anti-Money Laundering Regime). An overview of the more significant changes follows.
The PCMLTFA currently requires regulated entities to report matches with terrorist sanctions lists under the Criminal Code and under the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The amended PCMLTFA will also require regulated entities to report to FINTRAC where a reporting obligation arises under the Special Economic Measures Act as well as under the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law). This change will require all regulated entities to update their compliance policies to reflect this new reporting protocol.
MONEY SERVICES BUSINESSES (MSBs)
Consistent with the recommendations of the Cullen Commission, the amendments to the PCMLTFA impose due diligence requirements on domestic MSBs that retain agents as part of their business models. This includes a type of “know your agent” requirement for domestic MSBs.
Specifically, the PCMLTFA currently provides that an MSB will not be allowed to be registered under the PCMLTFA if it or any of its controlling parties or senior management have been convicted of certain types of offences in Canada or elsewhere. The same prohibitions will now apply to any agents that a domestic MSB wishes to appoint.
As such, the PCMLTFA will require domestic MSBs to perform due diligence on their agents to ensure, among other things, that no agents that are retained by them have committed certain designated offences, including that:
(i) they are not subject to Canadian sanctions;
(ii) they have not been convicted of a money laundering or terrorist financing activity offence in Canada or elsewhere;
(iii) they have not been convicted in respect of certain drug-trafficking-related offences; and
(iv) they have no directors, officers or controlling shareholders (20%) that have been convicted of an offence under the PCMLTFA or a similar statute in another jurisdiction.
In addition to the foregoing, the PCMLTFA will require MSBs to undertake a criminal record check of their agents issued by a “competent authority” in the jurisdiction in which the person resides. For an agent who is an individual, the MSB must obtain the record of that individual. For an agent that is an entity, the MSB must obtain the records of the chief executive officer, the president, the directors and each person who owns or controls, directly or indirectly, 20% or more of the entity. The obligation to confirm that the agent has not committed a designated offence and to obtain a criminal record check arises before an MSB onboards an agent and every two years thereafter.
This change will require MSBs to update their policies and procedures and amend their processes to address these requirements. It will also require MSBs to obtain significant amounts of information about their existing agent relationships and the corporate structure of their agents going forward. For large corporate agents, this can be a significant undertaking. One would hope that the regulations will have a carve-out for public bodies, public corporations and regulated financial institutions that act as agents to MSBs.
MSBs will have to undertake the requisite due diligence and obtain criminal record checks on agents that they have already onboarded, as well as on those agents’ directors, officers and beneficial owners. MSBs will have two years from the date these amendments come into force to obtain information and documentation on their existing agent relationships.
In addition to the foregoing, as is the case with foreign MSBs, domestic MSBs will now be required to submit copies of their criminal records (or lack thereof) as part of the registration process. For corporate applicants, this includes criminal record checks on the chief executive officer, the president, the directors and each person who owns or controls, directly or indirectly, 20% or more of the entity or the shares of the entity. The PCMLTFA also contemplates additional information to be submitted about an entity applicant’s incorporation or formation. This will be set out in the accompanying regulations.
The amendments to the PCMLTFA also provide FINTRAC with the right to revoke an MSB’s registration where the MSB does not cooperate with FINTRAC and provide any information or records requested or access to the facilities where the MSB maintains the records.
The PCMLTFA provides a process for MSBs to appeal to the Federal Court where their MSB application is denied or where their registration is revoked. The PCMLTFA requires the court to take every reasonable precaution, including, when appropriate, conducting hearings in private to avoid public disclosure of the matter. An amendment contemplated to the PCMLTFA now provides that that the Court is not required to take those precautions regarding the applicant’s name. It is clear, therefore, that where an applicant’s MSB licence is refused or revoked, FINTRAC would like that information to be made public.
The PCMLTFA will have additional penalties for an MSB that knowingly engages in MSB activity and is not registered. Fines for this offence can be up to C$500,000 and carry up to a five-year term of imprisonment.
The PCMLTFA currently provides for the ability of the Minister to issue written directives regarding financial transactions originating from, or bound to, any foreign state where there is a call to action by an international organization of which Canada is a member or where the Minister believes the anti-money laundering or anti-terrorist financing measures are insufficient and therefore could have an adverse impact on the integrity of Canada’s financial system. To date, two such directives have been issued: one in respect of North Korea and one in respect of Iran.
The amendments to the PCMLTFA will now also allow the Minister to issue directives where there is a risk that a foreign state, a foreign entity or a person or regulated entity under the PCMLTFA may be facilitating the financing of threats to the security of Canada and, as a result, the Minister believes that there could be an adverse impact on the integrity of the Canadian financial system or a reputational risk to that system. It will be interesting to see what directives are issued as a result of these new grounds.
As noted in the 2023 federal budget, the PCMLTFA will now contain whistleblowing protection for the employees of a regulated entity. The PCMLTFA will provide that an employer will be guilty of an offence if they take or threaten to take a disciplinary measure against an employee (including demotion or termination) to try to prevent the employee from complying with an obligation under the PCMLTFA (filing a suspicious transaction report) or with the intent to retaliate against the employee because they did so.
A violation of this provision carries a possible penalty of imprisonment for up to five years.
As is the case with anti-money laundering legislation in other jurisdictions, the PCMLTFA now adds structuring as an offence. The PCMLTFA provides that it is an offence where a person “directly or indirectly undertakes, or attempts to undertake, a structured financial transaction.” The PCMLTFA defines a structured financial transaction as a series of financial transactions that:
(a) cause a regulated entity to be in receipt of cash or virtual currency or involve the initiation of an international electronic funds transfer;
(b) would, if they occurred as a single financial transaction, require a person or entity referred to report to FINTRAC (C$10,000 plus); and
(c) are undertaken with the intent that a regulated entity will not have to report the transaction to FINTRAC.
There are a few things that can be gleaned from the foregoing. First, the structuring provisions are focused on EFT and large cash transaction reporting. Regulated entities that keep their limits below C$1,000 for identity verification purposes will therefore not be impacted by this. Second, there is an intent requirement. In other words, the transaction must be structured with the intent to avoid the reporting requirement, and it must be done in a “series of transactions.” As such, this should not impact regulated entities that impose transaction dollar limits.
A person found guilty of a structuring offence can be subject to a fine or imprisonment for a term of up to five years.
Other amendments contemplated include more generous provisions for the sharing of FINTRAC information among different governmental departments. This includes sharing information with the Department of Finance for the purposes of granting, revoking, suspending or amending approvals under the Retail Payment Activities Act.
FINTRAC will also be authorized to conduct research not only into matters relating to deterring money laundering and the financing of terrorist activities but also to the financing of threats to the security of Canada. This comes up in a few amendments to the PCMLTFA and as such, will likely be a new focus for FINTRAC and regulated entities.
For more information, please contact:
Jacqueline D. Shinfield +1-416-863-3290
or any other member of our Financial Services Regulatory group.