A consultative paper, released in February, has broad implications for Canada's anti-money laundering and anti-terrorist financing (AML/ATF) regime.

The paper, entitled "Reviewing Canada's Anti-Money Laundering and Anti-Terrorist Financing regime," has its origin in a number of factors, including the requirement in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PCMLTFA) that the Government should review the administration and operation of the Act every five years. Other factors are the Financial Action Task Force's review of Canada's AML/ATF regime, which the global standard-setter published in 2016, and the Government's "Assessment of Inherent Risks of Money Laundering and Terrorist Financing," published in 2015.

The proposals contained in the paper are diverse and far-reaching. Some seek to extend the reach of Canada's AML/ATF regime. Others aim to reduce the burden of this regime on reporting entities. Some of the more noteworthy proposals are:

• new requirements to enable authorities to access and receive accurate, up-to-date beneficial corporate ownership information.
• an expansion of Canada's AML/ATF regime to new parties, including: (i) mortgage insurers, land registries and title insurance companies; (ii) non-federally regulated mortgage lenders; (iii) unregulated financing, leasing and factoring businesses; (iv) dealers in high-value goods; and (v) regulatory 'sandbox' for fintech companies that could exempt them from some regulations.

The oaper is divided into five chapters, each of which is summarized below. Comments on the paper are to be provided by April 30, 2018.

Chapter 1 - Legislative and regulatory gaps

Beneficial ownership

In the wake of the release of the Panama Papers and the Bahamas Leaks of 2016 and the Paradise Papers of 2017, the issue of disclosures to the authorities about corporate beneficial ownership has been prominent. At present, Canada does not have a central registry which identifies corporate beneficial ownership. Although corporate reporting is required at both the federal and provincial levels, the information that firms have to provide is not standardised. There is therefore much duplication of effort when reporting entities try to comply with the rules that relate to beneficial ownership.

The Department of Finance is asking interested parties how it should improve disclosures relating to corporate ownership. The paper contemplates mechanisms that might make it easier for the authorities to find information by authorities while still allowing companies to do business in Canada easily. It contains, for example, different models for registries of beneficial ownership.

The Act's extension into highly risky areas

The department is thinking of extending the AML/ATF regime to force more types of business to send reports about any suspicions they may have about whether their customers are trying to launder money to FINTRAC, the Canadian financial intelligence unit.

At present, only four types of business in (financial entities, securities dealers, money service businesses and life insurance companies) have reporting obligations that relate to 'politically exposed persons' (PEPs) and heads of international organisations (HIOs). The department wants to extend its requirements that relate to PEPs, HIOs and beneficial owners to designated non-financial businesses and professions (DNFBPs, a FATF term that generally refers to 'gatekeepers' to the financial system who are not lawyers. The paper also calls on Parliament to change the way the Act defines HIOs and PEPs, and to apply to beneficial owners all the controls that now apply to PEPs.

The consultative paper contemplates the extension of the AML/ATF regime to white-label ATMs, i.e. automated teller machines/cash dispensers that do not bear bank logos. Anyone can own such ATMs and load them up with large amounts of cash, so anyone can use them to launder dirty money. Quebec is ahead of the field in the regulation of these.

Real estate brokers, sales representatives and developers are currently subject to the PCMLTFA, but other real estate entities such as mortgage insurers, land registries and title insurance companies are not. These entities are uniquely positioned to obtain and report information that might uncover money laundering and terrorist finance and so the paper says that they should also be subject to the PCMLTFA.

The paper proposes that non-federally regulated mortgage lenders should also come within the purview of the AML/ATF regime. These firms include mortgage finance companies, real-estate investment trusts, mortgage investment corporations, mutual fund trusts, syndicated mortgages and individual (HNW) private lenders.

DNFBPs already have to tell FINTRAC about any suspicions they might have that involve financial transactions. The authors of the paper want to extend this to other high-risk activities, including the creation, operation or management of legal persons or arrangements and the management of client funds, securities or other assets.

The Department of Finance is thinking of asking Parliament to introduce a new criminal offence to prohibit reporting entities from structuring transactions by 'smurfing' (structuring a transaction by distilling it into smaller transactions to avoid financial transaction reporting).

According to the PCMLTFA, firms have to keep records and identify clients when financial transactions reach specified financial thresholds, which can vary. As some people worry that such variance can create a barrier to compliance, the department is mulling over the idea of introducing a standard financial threshold.

The paper considers broadening the reach of the regime to oblige the financing, leasing and factoring sectors to send in reports. These industries were identified as a particular money laundering risk in the Government's aforementioned AML assessment of 2015.

In addition, the paper contemplates the subjection of the following to the PCMLTFA:

• businesses and professionals who provide services related to the formation and administration of companies, perhaps acting as directors or nominees of companies, managing HNWs' financial affairs and preparing annual corporate and tax returns;
• pari-mutuel betting and horse racing;
• armoured cars;
• dealers in goods of high value such as yachts, automobiles and art; and
• jewelry auction houses.

Chapter 2 - The exchange of information

This chapter highlights the tension between combatting money laundering and terrorist financing, on the one hand, and privacy, on the other.

The department is asking for suggestions to do with improvemnts to the ways in which people share information about money laundering. It wants FINTRAC to disclose various types of information to the Competition Bureau and Revenu Quebec, it wants to see the public and private sectors sharing more information on the subject, and thinks that Canada should be better able to provide other countries with mutual legal assistance in relation to money laundering, terrorist financing, and indeed other crimes, especially with respect to requests for digital evidence.

Chapter 3 - Intelligence, enforcement and the war on cash

This chapter deals with Canada's need to improve the ways in which its officials enforce the law and the volume of intelligence that they can process can do in the face of changing circumstances, including technological advancements.

Electronic fund transfers of more than C$10,000 (US$7,629) have to be reported to FINTRAC when clients initiate them. An EFT is not, however, captured when it passes through a Canadian financial entity that is neither the sender nor the ultimate recipient. An example of this is an EFT that originates through a correspondent banking relationship. There are other types of transfer that relate to new and evolving payment methods - e.g. letters of credit and finance, trade, precious metals and securities - that are not subject to the reporting regime. The Department of Finance would like FINTRAC to receive information about these things because it believes that it will help it spot money-laundering or terrorist-financing transactions.

Bulk cash smuggling is another worry for the department. Criminals use cash, especially in large denominations, a good deal; it was for this reason that Canada stopped producing $1,000 banknotes in 2000. The paper discusses the outlawing of large denominations (this desire was subsequently mentioned in the 2018 Federal Budget). The department is wondering whether it should limit the amount of cash an individual can carry in Canada without a legitimate purpose, whether Canada should establish a business registry for people who deal in high volumes of cash, and whether there should be a limit on the amount of cash a business might accept.

The paper considers the introduction of geographic targeting orders. These, its authors hope, might allow the Government to keep an exceptionally close eye on people and companies in this-or-that geographic area in respect of certain specified transactions. It adds: "Geographic targeting orders have been used extensively in the United States to target real estate and other transactions for high-value goods. Geographic areas are generally targeted because they are popular destinations for luxury goods and real estate. They may have a higher than average percentage of bulk cash transactions or [they may be] the focus of heightened attention by law enforcement."

The paper seeks views about how the Government should cope with money laundering and terrorist finance at the border. It contemplates: (i) the extension of cross-border reporting requirements (which already apply to currency and monetary instruments) to diamonds, gold, precious metals and prepaid payment products; (ii) more dolorous penalties for failure to declare currency and monetary instruments; and (iii) trade fraud (known everywhere else as trade-based money laundering), which need not concern us here.

Chapter 4 - Supervision and modern technology

This chapter discusses various ways in which the AML/ATF regime and its supervision should change, according to the department.

The paper acknowledges the problems that MSBs (money-service businesses, i.e. cheque cashers, money transmitters and bureaux de change) have in maintaining bank accounts with financial institutions because of the trend towards 'de-risking.' The paper states that springs from the perception among governments - and therefore among banks - that MSBs are inherently highly risky and the mistaken belief that a financial institution must "know its customer's customer." The department acknowledges this problem but proffers no solution.

The paper states that FINTRAC has found that MSB registration applications and procedures could be improved upon. The AML/ATF regime still relies extensively on physical documents for the purpose of identification. As financial technology (blockchain, biometrics, etc.) continues to progress, the department believes that the national AML regime should take stock of it. With this in mind, to foster innovation and to encourage fintech start-ups, it is thinking of allowing "forms of exemptive relief and administrative forbearance" for new companies which might otherwise find themselves ensnared in the AML/ATF regime if they qualify as MSBs. It also calls for greater support for informants and telltales.

The Paper also consider a change of policy surrounding 'public naming,' confidentiality in court proceedings and the way in which the authorities work out the right Administrative Monetary Penalties (AMPs) to impose on commercial clients that fail to provide the right information, etc. FINTRAC is unable to publicise certain information relating to an AMP once all proceedings have ended; the department thinks that this might incentivise some firms to engage in protracted litigation, and that there is something inherently wrong with this. It therefore wants Parliament to give FINTRAC a discretionary power (subject to certain conditions) to publicise a person's or entity's identity during the proceedings without incurring any civil liability. In the context of this proposal it is worth bearing in mind the criticism FINTRAC received for its decision in 2016 to fine a Canadian bank without naming it. Additionally, the Paper appears to suggest that parties involved in the AMP appeal process should no longer be able to apply for confidentiality orders. Finally, the paper beseeches FINTRAC to develop a formula to help it calculate monetary penalties and to reveal it to the public.

Chapter 5 - Miscellaneous

The paper suggests other improvements to the administration and operation of the PCMLTFA and its regulations. It is examining issues that relate to:

• the electronic reporting of cross-border movements of currency and monetary instruments;
• clearer wording for the "travel rule", found in s9.5 PCMLTFA, which requires reporting entities to include certain information with electronic fund transfers and take reasonable measures to ensure that any transfer to a reporting entity includes this information;
• whether or not reporting entities ought to mitigate risks that they have not classified as high; and
• the alignment of Canada's correspondent banking relationship ruless with the wishes of the FATF.

* Koker Christensen can be reached on +1 416 868 3495 or at kchristensen@fasken.com; Laura Konkel can be reached on +1 416 943 8920 or at lkonkel@fasken.com