Proposed Updates to Canada’s Anti-Money Laundering and Terrorist Financing Regime

ELI Canada

Canada has long recognized the importance of a robust regulatory framework to combat AML/ATF. With the rapid evolution of financial crimes and increasing global scrutiny, the country’s regulatory system continually adapts to address new threats and align with international standards. The federal government’s 2023 Budget and recent proposals from the Department of Finance Canada (Finance Canada) signal significant updates to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and related regulations. This article provides an in-depth look at the key proposed updates, which encompass mortgage lenders, armored car companies, penalties for cross-border cash violations, and more.

Expanded Scope: New Obligations for Mortgage Lenders

Historically, the PCMLTFA’s requirements have primarily applied to banks and other traditional financial institutions. However, as alternative lenders and non-bank financial institutions grow, so does the risk of financial crime within these sectors. To address this, Finance Canada has proposed to include mortgage lenders, administrators, and brokers as regulated entities under the PCMLTFA.

Key obligations for mortgage-related entities will include next-mentioned.

  1. Compliance Programs: Establishing and maintaining AML/ATF-compliance programs.
  2. Transaction Reporting: Reporting large cash and virtual currency transactions of $10,000 or more, along with any suspicious transactions, to FINTRAC.
  3. Client Identification and Record-Keeping: Verifying client identities and retaining records for received funds.
  4. PEP Screening: Identifying whether clients are politically exposed persons (PEPs), their family members, or associates, which requires additional scrutiny and record-keeping.

These measures aim to close regulatory gaps and ensure that mortgage professionals adopt the same rigorous standards as traditional financial institutions.

New Compliance Requirements for Armored Car Companies

Armored car services have historically operated outside the core financial regulatory framework, but given their role in transporting large sums of cash and negotiable instruments, they have increasingly become a target for money laundering activities. As part of the proposed amendments, armored car companies will be subject to new compliance requirements.

New obligations for armored car companies include next-mentioned.

  1. AML-Program Development: Implementing a comprehensive AML program with procedures for customer due diligence and transaction monitoring.
  2. CDD: Conducting identity verification and beneficial ownership checks.
  3. Transaction Reporting: Reporting large cash transactions and suspicious activities to FINTRAC.
  4. Adhering to Ministerial Directives: Following directives related to transactions involving certain countries known for financial crimes.

These requirements will be effective six months after their publication, providing armored car companies time to develop the necessary compliance programs and prepare their staff.

Strengthened Regulations for Correspondent Banking Relationships

Correspondent banking, which involves one financial institution providing services to another, is often high-risk due to potential exposure to foreign financial institutions with limited AML controls. To address this risk, Canadian financial institutions will be required to conduct ongoing due diligence on correspondent banking relationships.

Key compliance measures for financial institutions include:

  • reputation assessment: Evaluating the reputation of the foreign financial institution prior to establishing a correspondent banking relationship;
  • risk assessment: Performing risk assessments and monitoring the ongoing status of correspondent banks;
  • enhanced monitoring: Implementing ongoing monitoring measures to detect suspicious activities in correspondent accounts.

By aligning Canadian standards with international recommendations, these changes aim to bolster transparency and prevent the abuse of correspondent banking for money laundering or terrorist financing purposes.

Increased Penalties for Undeclared Cross-Border Cash

A common technique in money laundering involves transferring large amounts of cash across borders to conceal its origins. Under current laws, individuals or entities must declare any currency or monetary instruments valued at $10,000 or more when crossing Canadian borders. To deter non-compliance, Finance Canada has proposed to increase penalties for undeclared cross-border cash.

The proposed penalty structure is as follows.

  1. 5% of undeclared funds (up to $2,500) for first-time offenders who voluntarily disclose the funds and where the funds were not concealed.
  2. 25% of undeclared funds for offenders who attempt to conceal funds or provide false declarations.
  3. 50% of undeclared funds for offenders who conceal the funds in hidden compartments or have a prior history of offenses.

These revised penalties, which will take effect upon registration, are designed to create a strong deterrent against the illicit movement of cash and reduce opportunities for financial crime.

Enhanced Money Service Business (MSB) Registration Requirements

Money service businesses (MSBs), which include currency exchanges and money transfer companies, play a significant role in Canada’s financial system but are susceptible to misuse by criminals. Under the proposed amendments, MSBs will need to provide additional information during registration with FINTRAC.

The updated registration requirements will include next-mentioned.

  1. Disclosure of Leadership: Contact information for the CEO, president, directors, and any individual with 20% or more ownership.
  2. Details on Agents and Branches: Information about agents, mandataries, and the number of branches in each country.

By increasing transparency in MSB registration, these updates are intended to strengthen FINTRAC’s ability to assess the risks associated with each MSB applicant and ensure the integrity of Canada’s financial system.

Introduction of Cost Recovery Framework for FINTRAC

To support its expanding supervisory mandate, Finance Canada has proposed the Financial Transactions and Reports Analysis Centre of Canada Assessment of Expenses Regulations (Assessment Regulations). This new framework will allow FINTRAC to recover a portion of its supervision costs from specific entities that it regulates, including banks, life insurance companies, and foreign financial institutions.

The cost recovery framework will:

  • distribute supervision costs: Charge fees based on the extent of FINTRAC’s supervisory work for each entity;
  • fund FINTRAC operations: Allow FINTRAC to continue and expand its AML/ATF oversight activities.

This new framework, if approved, will take effect on April 1, 2024, marking a shift towards shared responsibility in funding AML/ATF oversight.

Updated Risk Assessment for Money Laundering and Terrorist Financing in Canada

In March 2023, Finance Canada released an Updated Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada, which provides insights into the vulnerabilities and threats facing various industries. The report highlights industries that may be at high risk but are currently unregulated under the PCMLTFA.

Notable risk findings include next-mentioned.

  1. Concealed Beneficial Ownership: Corporations, partnerships, and express trusts are vulnerable due to potential concealment of beneficial ownership information.
  2. Trade-Based Businesses: Sectors such as import/export companies, freight forwarders, and custom brokers were identified as high-risk for trade-based money laundering.

The report underscores the need for increased transparency and stronger controls, particularly around beneficial ownership. It also suggests that unregulated high-risk sectors may face future regulation to mitigate their risk exposure.

With over 24,000 Canadian financial institutions and businesses regulated under the PCMLTFA, Canada’s AML/ATF regime continues to evolve. The proposed updates reflect the federal government’s commitment to modernizing financial crime legislation, enhancing transparency, and ensuring that all entities involved in high-risk financial activities uphold stringent compliance standards. Businesses in regulated sectors should monitor these developments closely, update their AML/ATF policies, and prepare for the possibility of additional compliance obligations. Meanwhile, unregulated entities in high-risk sectors may wish to begin assessing their own exposure to financial crime risks as the regulatory landscape continues to evolve.

These regulatory updates highlight Canada’s proactive approach to combating financial crime and ensuring that its financial ecosystem remains secure, transparent, and resilient.

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