As noted in our June, 2023 bulletin article, the Department of Finance Canada is considering sweeping amendments to Canada's anti-money laundering and anti-terrorist financing regime (AML/ATF regime) primarily contained in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and the Criminal Code. Even prior to the latest consultation, there have long been signals that mortgage lending entities would become subject to the regime.
Changes have now been introduced to bring entities involved in mortgage lending into the AML/ATF regime by considering them "reporting entities". Once in force entities involved in the mortgage lending process will need to meet AML/ATF obligations. These entities include brokers involved in mortgage origination, lenders who underwrite loans or supply funds, and administrators who service loans.
In response to comments on prior consultations, additional clarity was provided to the definition of mortgage lending entities so that only mortgage lending activities for business purposes are covered by the regulations. The definitions in the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations will be amended to include the following definitions:
"mortgage administrator" means a person or entity, other than a financial entity, that is engaged in the business of servicing mortgage agreements on real property or hypothec agreements on immovables on behalf of a lender;
"mortgage broker" means a person or entity that is authorized under provincial legislation to act as an intermediary between a lender and a borrower with respect to loans secured by mortgages on real property or hypothecs on immovables; and
"mortgage lender" means a person or entity, other than a financial entity, that is engaged in the business of providing loans secured by mortgages on real property or hypothecs on immovables.
The new AML/ATF obligations include:
- A requirement to development a compliance program;
- Customer due diligence measures such as identify verification and beneficial ownership identification;
- Record keeping;
- Transaction reporting, including suspicious transaction and terrorist property reports; and
- Following ministerial directives when funds are moved from or to certain countries.
Penalties for violations (in the form of administrative monetary penalties) will range up to $1000 for minor violations, up to $100,000 for a serious violation and up to $500,000 for a very serious violation (up to $100,000 if an individual).
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) has also released guidance to assist those in the mortgage lending business to comply with their obligations.
As an example, the guidance expands on what elements are expected to be included in a compliance regime:
- The appointment of a compliance officer;
- Written policies and procedures;
- A risk assessment to document the risk of a money laundering or terrorist activity financing offence;
- A written, ongoing training program for employees;
- Documentation for ongoing compliance training program; and
- Documentation of a plan to review the compliance program to test its effectiveness at least every two year (the two-year AML effectiveness review).
The record-keeping obligations as outlined in the guidance are quite extensive, and would include:
- Large cash and virtual currency transaction records;
- Receipt of funds records;
- Mortgage loan records, including information on the financial capacity of the client, the terms of the loan, the nature of the client's principal business/occupation, and the name/address of their business;
- Beneficial ownership records;
- Politically exposed persons records;
- Client ID;
- Records relating to business relationships; and
- Third party determination records.
Records must be kept for at least five years. FINTRAC is authorized to conduct compliance examinations (i.e. audits) to assess if a reporting entity is meeting its requirements under the law.
Currently, reporting entities such as investment dealers and advisers are also required, among other things, to document a review of their AML/ATF compliance program to test its effectiveness every two years. AUM Law performs many such reviews for registrant clients and is well positioned to do so in future for mortgage lenders. We can also assist with the creation of the necessary policies and procedures and with reporting requirements.
These and other amendments to the regulations under the PCMLTFA itself will come into force 12 months after final publication, being October 11, 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
