The Government of Canada has changed some regulations made in accordance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2019.

The amendments have now appeared in Part II, Volume 154, Number 12 of the Canada Gazette on the recommendation of the Minister of Finance and some of them have come into force already. To make them, the Governor-General has signed the tortuously-named Regulations Amending the Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2019.

The Canadian Government is always updating its anti-money-laundering and anti-terrorist-financing (AML/ATF) regime, which was first established in 2000–1, to please the Financial Action Task Force, the world's anti-money-laundering standard-setter. Since 2016, Canada’s AML/ATF regime has undergone in-depth reviews by Parliament and FATF inspectors. In November 2018, the House of Commons Standing Committee on Finance (FINA) conducted the five-year parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and made 32 recommendations to change it. In 2018 and 2019, a series of expert reports commissioned by the Government of British Columbia dwelt on the usefulness of casinos and real estate to money launderers and in June last year the FATF promulgated standards to "clarify the application" of AML/ATF rules to govern virtual assets and virtual asset service providers.

The amendments to the regulations apply stronger "customer due diligence" (CDD) requirements and beneficial ownership requirements to designated non-financial businesses and professions (DNFBPs such as law firms and actuaries, otherwise known as 'gatekeepers'). They also modify the meaning of the term "business relationship" for the real-estate sector and align CDD measures for casinos and virtual currency recordkeeping obligations with the wishes of the FATF. They also strive to make cross-border currency reports clearer.

The changes in detail

For the purposes of the regulations, a person or entity to which section 5 of the Act (which lists the people and firms whom the Act obliges to do AML policing jobs for the Government) applies is now held to have embarked on a business relationship with a client at the earliest of the following events:

(a) the time when the person or entity opens an account for the client, except in various circumstances;
(b) the second time that the person or entity is required to verify the identity of the client under the regulations;
(c) if the person or entity is a real-estate broker or sales representative or a real-estate developer, the first time that the person or entity is required to verify the identity of the client under the regulations;
(d) if the person or entity is a money service business and the client is an entity, the time when the person or entity signs a service agreement with the client to provide a service; and
(e) if the person or entity is a foreign money service business and the client is an entity in Canada, the time when the person or entity signs a service agreement with the client to provide a service.

Point (c) is especially important. At the moment, the Act compels real estate developers, brokers and sales representatives to fulfil various AML obligations that include sending transaction reports off to FINTRAC, Canada's financial intelligence unit. A real estate firm is said to have established a business relationships with a client once it has conducted two or more transactions or activities for which it has had to verify his identity. Once a business relationship is established, it has to keep records, assess risks and monitor him continually, looking to see if he is a foreign or domestic PEP. The Canadian Government has spotted a gap in this regime: it is common for a criminal to launder his money by conducting only a single transaction and avoiding repeated transactions, thereby flying "under the radar." This gap is not to be closed.

One of the outstanding issues that the amendments have addressed is the “travel rule.” The FATF recommendations require countries to apply the travel rule that currently exists for electronic funds transfers to transfers of virtual currencies. The travel rule is a long-standing CDD requirement for financial institutions which obliges them to log certain information about clients when transferring funds between each other on behalf of their customers.

The amendments are also specifically designed to conform to FATF Recommendation 8 (on not-for-profit organisations) and make DNFBPs (such as the firms of the real-estate sector, that were exempt from obligations to identify the beneficial ownership of various things) do the following:

• determine and verify the identities of the beneficial owners;
• find out whether their customers are politically exposed persons/PEPs, or if they are the members of PEPs' families or their associates; and
• prohibit the opening of accounts or the completion of financial transactions until this-or-that beneficial owner has been identified and his identity verified adequately.

The amendments will therefore also strengthen Canada’s compliance with the FATF standards (R22 and R23) that apply solely to DNFBPs, for which the FATF rated Canada as non-compliant in a "mutual evaluation" report in 2016. In this regard, more onerous tasks regarding CDD and beneficial ownership are on the way.

Indeed, Canada was rated 'NC' for a surprisingly wide variety of other things, namely R12 (PEPs), R15 (new technologies) and R25 (transparency and beneficial ownership of legal arrangements).

Amendments before the amendments

In Canada, the last set of amendments to the regulations (SOR/2019-240) introduced new virtual currency reporting and recordkeeping obligations in line with the FATF's desires, saying that domestic and foreign businesses that are “dealing in virtual currency (VC)” will be considered money services businesses (MSBs). These “dealing in” activities include virtual-currency-exchange services and value-transfer services. As required of all MSBs, persons and entities dealing in VCs now have to fulfil all AML/ATF obligations, running full compliance programmes and registering with FINTRAC. These obligations came into force last month. In addition, any reporting entity in any sector that receives C$10,000 or more in virtual currencies (e.g. receiving deposits or any form of payment) will have recordkeeping, identification and reporting obligations which will come into force in June 2021.