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Canada’s imposition of anti-money laundering rules on new sectors of the economy and tougher vetting procedures for correspondent clients will reinforce the country’s framework against illicit finance in advance of broader, more ambitious reforms, analysts told ACAMS moneylaundering.com.

On Oct. 11, Canada’s Finance Department finalized 82 pages of regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, or PCMLTFA, requiring armored car services and private mortgage lenders to implement AML programs and report suspicious payments, and banks to toughen their vetting and monitoring of correspondent clients.

“We’ve been talking about these [reforms] for years,” Denis Meunier, former deputy director of the Financial Transactions and Reports Analysis Centre of Canada, also known as Fintrac, told ACAMS moneylaundering.com. “This should tighten the gaps.”

Other proposals, one of which would establish a new Financial Crime Agency to investigate money laundering schemes and other instances of illicit finance that show a high degree of sophistication, face a longer deliberative process.

“My gut feeling is … there will be another regulatory package coming out which will be more far reaching,” said Nicolas Choules-Burbidge, former senior director of the Office of the Superintendent of Financial Institutions, or OFSI, told moneylaundering.com.

Meanwhile, legislation that would establish a publicly accessible, federal database of beneficial owners in Canada awaits final approval from the country’s Senate.

“From what we’ve heard, they’re working towards having it launch pretty soon after this becomes law,” Noah Arshinoff, interim executive director of Transparency International Canada, told moneylaundering.com.

Private mortgages

Banks in Canada must screen borrowers for anti-money laundering purposes and determine their sources of funds.

But the same does not apply to private mortgage lenders, which, according to Ontario’s Financial Services Regulatory Authority, accounted for more than $22 billion of mortgages in the province in 2021, up from $13 billion in 2021.

Critics have long contended that the dearth of anti-money laundering rules amplifies the risk of private mortgage lenders in Canada inadvertently fueling illicit finance by accepting illicit proceeds as down payments for properties in Canada or as repayments of loans.

The final regulations therefore aim to bring “entities of all sizes involved in the mortgage lending process” into the fold of the PCMLTFA by October of next year, including all “brokers responsible for mortgage origination, lenders responsible for underwriting the loan and administrators responsible for servicing the loan.”

In most cases, private mortgage originators that require loans themselves to operate must already demonstrate effective AML programs to the banks that provide them financing, said Matthew McGuire, an anti-money laundering consultant in Toronto.

However, given Fintrac’s scant capacity for supervision and enforcement, originators financed by private investors and other unregulated pools of assets may still be free to disregard the new requirements with little fear of any consequences, said McGuire.

“I am not a fan of adding more administrative responsibility to a regime that already has tons of intelligence and no enforcement,” said McGuire. “It just creates more data that doesn’t go anywhere.”

Correspondents

Banks for their part must not only continue verifying that their foreign correspondent banks have sufficient AML policies in place but, beginning next year, they must also formally assess—and regularly reassess—the financial crime-related risks those clients present and the quality of AML supervision in their jurisdictions.

The new requirements will take effect next October, eight years after the Financial Action Task Force cited Canada’s minimal requirements for correspondent relationships as a serious deficiency.

“OSFI and Fintrac have identified instances where Canadian financial entities do not take sufficient measures commensurate with the level of risk of the correspondent … relationship,” the Finance Department found. “In these instances, the regulators were unable to compel the … entities to take corrective measures because no corresponding obligations existed in regulations.”

In one glaring example, TD Bank admitted no wrongdoing in settling a lawsuit filed by victims of convicted Ponzi schemer Allen Stanford for $1.2 billion despite providing correspondent services to Stanford International Bank, his now-defunct lender in Antigua, and handling their stolen funds.

“What that case showed was the ignoring of red flags,” said Choules-Burbidge, who worked as a consultant on the case. “They [TD Bank] asked some questions, but nowhere near the level of diligence that was required.”

Armored cars

Armored car companies in Canada not only collect and move bulk cash between businesses and banks, but also increasingly operate like banks and other traditional financial institutions by pooling funds from various customers and wiring them to their accounts.

“The ability for funds to be collected, pooled into the account of the armored car company and wired out to customer accounts makes reconciliation and identification of the origin of funds challenging, and allows for a degree of anonymity in transactions,” the Finance Department warned.

Lawmakers responded to the armored car industry’s new, increasingly prevalent model of doing business in June 2021 by bringing them under the scope of the PCMLTFA. Armored car companies must now build AML programs and begin reporting suspicious activity in July of next year pursuant to the regulations published this month.

“The reporting obligations will better situate authorities to trace transactions involving armored car companies to their point of origin, particularly when cash-intensive businesses or white-labeled ATMs are involved,” the Finance Department stated.

While no cases of abuse have surfaced publicly in Canada, the U.S. has seen armored car services used in financial crimes, and began imposing enhanced reporting requirements on couriers transporting more than $10,000 of cash across the border with Mexico in 2014.

Canada’s new rules exempt armored car services from having to report certain, inherently low-risk activities, such as the transportation of currency between regulated financial institutions.

“It’s pretty obvious that the risk is quite low if you’re transporting money from the Bank of Canada to a reporting entity like a bank,” Meunier, the former Fintrac official, now an AML consultant, told moneylaundering.com.

Contact Fred Williams at fwilliams@acams.org