Canadian AML Proposals Would Require Overhaul of Compliance Processes: Sources

By Daniel Bethencourt

Financial firms in Canada will have to report suspicious activity by tighter deadlines, track funds from politically exposed persons and navigate a host of recordkeeping adjustments under current proposals to alter enforcement of the country’s foundational anti-money laundering law.

In a June 9 statement, Canada’s Department of Finance outlined more than a dozen planned revisions to regulations tied to the country’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Some of the changes are intended to close gaps cited by the Financial Action Task Force in a 2016 evaluation.

The latest review singled out Canada’s limited collection of corporate ownership data and absence of anti-money laundering rules for attorneys, notaries and other designated nonfinancial businesses and professions, and directed the country to file annual reports on its efforts to address those and other AML gaps as part of an “enhanced follow-up process.”

The latest round of proposed revisions comes four months after Canadian regulators solicited input on more than 20 possible areas of modification to the country’s AML law, though that process, triggered by a five-year review protocol, is unrelated.

Taken as a whole, the revisions reflect an effort by the Financial Transactions and Reports Analysis Centre of Canada, or Fintrac, to collect more intelligence from the private sector, Jackie Shinfield, a Toronto-based partner with Blake, Cassels & Graydon LLP, said.

“In Canada it’s hard to get data from a lot of sources, so they’re trying to put a lot of obligations on the banks to collect it,” Shinfield said.

New entities

One of the most prominent proposals pitched this month would extend AML regulation and government supervision to cryptocurrency firms and foreign-based money services businesses.

Cryptocurrency exchanges would have to register as MSBs, implement compliance programs and report certain transactions over CA$10,000, or $7,500 in U.S. dollars, while foreign MSBs without a brick-and-mortar presence in Canada but serving clients in the country would have to observe the same AML rules as their domestic counterparts.

Most cryptocurrency firms have no specific licensing regime or AML requirements to follow, while others must already register as MSBs because they conduct a small quantity of foreign exchange transactions.

Cryptocurrency firms registered as MSBs stand a greater chance of securing banking services critical to their operations, according to Matthew McGuire, a Toronto-based AML consultant.

Foreign MSBs for their part may face a stiff challenge in adjusting to Canadian regulations, which carry strict protocols for identification and require all suspicious transactions reported regardless of their value.

Smaller window

Another proposal pitched this month by the Department of Finance would bring forward the deadline at which banks and other financial institutions in Canada must complete their reviews of flagged transactions from 30 days to just three days.

Regulators argue that the shortened time frame would only serve to align the official standard with that already used in practice by the financial services industry, but, according to Shinfield, the current language of the proposal lacks clarity.

An official summary of the proposed revision indicates that the window to file suspicious activity reports would open only after an institution completes its analysis of the transaction in question, but the text suggests that the three-day clock starts sooner—when a firm “took measures to establish reasonable grounds” of suspicious activity.

A three-day window would pose serious challenges for those institutions that have implemented a multi-tiered process for reviewing flagged transactions and reporting those that qualify as suspicious, Shinfield said.

Another significant, perhaps more-welcome proposal rolled out this month would allow financial institutions to collect digital documents rather than hard-copy originals during the customer onboarding process, so long as the digital copies are “original, valid and current.”

The proposal would complement the Department of Finance’s decision two years ago to simplify the previous patchwork of options for obtaining identification down to two primary methods: collecting original documents from clients in person, or using one of two government-endorsed vendors to run credit checks on them.

A third, “dual option” combines those two procedures, which took effect in January after a delay of several months.

The identification-related proposals would provide relief to Canadians living at great distances from any bank branch, Nicolas Choules-Burbidge, former head of AML for the Office of the Superintendent of Financial Institutions, or OSFI, said.

Other changes would see banks taking “reasonable measures” to understand a politically exposed person’s source of funds, including by determining whether those assets are “reasonable and consistent” with the explanation given by the client.

Those requirements would complement expectations that banks onboarding politically exposed persons obtain a senior manager’s approval, assess the risks those clients carry, monitor their transactions accordingly and keep know-your-customer information current.

Another change would recategorize prepaid cards and other stored value instruments as bank accounts that require due diligence and monitoring by the banks that issue them.

The revisions—which, if adopted, would take effect one year after their finalization—may constrain Fintrac if additional resources are not allocated to the agency.

In April, the Department of Finance disclosed plans to allocate roughly CA$52 million in the budgetary year spanning 2018 and 2019 to Fintrac and task 233 full-time staff with AML and financial intelligence-related responsibilities.

However, by 2020, when the proposed revisions are more likely to have taken effect, those figures are slated to drop to CA$49 million and 219 staff.

Institutions and other interested parties have until early September to comment on the proposed amendments.

Regulators may extend the timeline in the event of strong pushback from the banking industry, Choules-Burbidge said.

A spokesperson for the Department Finance did not provide comment by press time.

Topics : Anti-money laundering , Counterterrorist Financing
Source: Canada
Document Date: June 29, 2018