On November 7, 2011, the Department of Finance released a consultation paper on proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the “Regulations”).
Part of the stated rationale for the proposed amendments is to make Canada compliant with Recommendation 5 of the FATF 40 + 9 Recommendations. Under the last Mutual Evaluation of Canada performed by the FATF, Canada was found to be non-compliant in several areas. The non-compliance was largely directed at the lack of enforcement and prosecution of Canada’s AML laws, and the lack of resources devoted to education, enforcement and prosecution in Canada.
1. The proposals apply to all reporting entities in Canada
The proposals, if implemented, would apply to all reporting entities in Canada and not just financial institutions. As a result, all of the following would be affected – money services businesses, casinos, financial institutions, real estate brokers, notaries, accountants, life insurance brokers, securities brokers and dealers in precious stones and metals.
2. The proposals would expand reporting requirements to include the reporting of “business relationships”
Under the proposals, any relationship between a reporting entity and a client whereby the reporting entity provides services in which there are financial activities or financial transactions will become a “business relationship” and thereby subject to reporting. The reporting obligation would only arise after a qualified, or deemed transaction completed. Reporting entities would be required to conduct AML monitoring on all of the business relationships going forward, not just when an activity is determined to be high risk.
Under the current state of affairs, reporting entities have reporting and record-keeping obligations when new accounts are opened and when certain financial transactions occur. Under the proposals, the obligations under the legislation will apply to business relationships irrespective of whether the reporting entity has an account with a client or has conducted a reportable transaction.
3. The proposals eliminate the reporting exemption for known clients
Under the proposals, reporting entities will be required to ascertain the identity of clients who conduct, or attempt to conduct, transactions that give rise to a suspicion of money laundering or terrorist financing in all cases.
Currently, §62 of the Regulations exempt reporting entities from the requirement to ascertain the identity of clients if the reporting entity previously ascertained their identity.
It is not clear whether the proposals will also relax the suspicious transaction reporting threshold.
Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “Act”), reporting entities are only required to report financial transactions that occur or are attempted in the normal course of their activities if there are reasonable grounds to suspect that the transaction is related to a money laundering or terrorist financial offence under the Criminal Code of Canada. If the reporting entity does not have reasonable grounds to suspect that the transaction is related to the offence, it is not required to report. The proposals expressly refer to the lesser standard of “giving rise to a suspicion” as the threshold criteria to trigger the reporting requirement and as a result, the Minister of Finance may be contemplating reducing the reporting threshold.
4. The proposals would expand the requirement to obtain beneficial ownership information
Under the proposals, reporting entities would be required to ascertain beneficial ownership information when dealing with clients who are corporations, corporate entities or trusts and to record the steps taken to verify beneficial ownership. The proposals define beneficial owners as directors of corporations and persons who own or control 25% or more of a corporation or entity, whether directly or indirectly.
There are some issues with this amendment, particularly with respect to the narrow interpretation of a beneficial owner. Beneficial ownership is a fairly well-understood concept in corporate law and does not include directors of a corporation, and nor is it limited to persons or entities who control 25% or more of an entity, although such persons could beneficially own or control a corporate entity.
Beneficial ownership is a common law concept used to distinguish rights held by persons with a beneficial interest in property from those who hold those interests legally (i.e., in name only). With respect to ownership (or shares) of an entity, shareholders may hold shares legally or beneficially (as a nominee shareholder). Based on Canada’s corporate and securities law regime, it is impossible for reporting entities to obtain information on the beneficial ownership of corporations, trusts or other corporate entities. As a result, it will be difficult to see how this proposal can be implemented effectively.
5. The proposals would required more due diligence for high risk clients or activities
Under the proposals, reporting entities would be required to draft and implement policies and procedures for increased (or enhanced) client identity and verification measures for high risk clients or transactions, or now “business relationships” that are high risk. The procedures would have to include steps to continue to monitor the client and their transactions to detect suspicious transactions and to keep the client identification information up to date.
6. The proposals do not address Trust and Company Service Providers
Interestingly, the proposals fail to include the requirement in FATF Recommendation 5 that trust and company service providers be included as reporting entities and thereby, be subject to the Act and Regulations.
Recommendation 5 requires that certain groups (called reporting entities in Canada) be required to comply with the FATF requirements and chief among those groups is “designated non-financial businesses or professions” which includes trust and company service providers when they:
- act as incorporation agents;
- act as corporate directors or corporate secretaries, partners of corporations;
- act as the R & R for corporations or partnerships (R & R is the registered and records office of a corporate entity);
- act as a trustee for a trust; or
- act as a nominee shareholder.