On November 7, 2011, the Canadian federal government released a consultation paper proposing certain amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and related regulations (AML Legislation). The full text of the consultation paper is available at www.fin.gc.ca. The deadline for submitting comments on the proposed amendments is December 16, 2011.
The government's stated purpose for proposing these amendments is to strengthen Canada's Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) regime and to improve Canada's compliance with the proposals of the Financial Action Task Force (FATF), an international intergovernmental organization established by the G7, and in particular their 40 + 9 Recommendations on money laundering and terrorist financing.
The FATF's 40 Recommendations on Money Laundering and 9 Special Recommendations on Terrorist Financing are international AML/ATF standards that member countries, including Canada, have agreed to implement. The FATF identifies six of its 40 + 9 Recommendations as core recommendations, with which member countries are to be largely or fully compliant. Recommendation 5 is a core recommendation. It states that member countries should implement measures to ensure that financial institutions are adequately able to identify their customers when establishing business relations or carrying out occasional transactions. The FATF reported on its Mutual Evaluation of Canada's AML/ATF regime in February 2008. As a result of that evaluation, Canada received a rating of Non-Compliant in respect of Recommendation 5.
The proposed amendments are intended to address this rating of Non-Compliance, and fall into three categories: (1) extending AML/ATF obligations to "business relationships"; (2) expanding the range of activities in respect of which customer due diligence measures are required; and (3) expanding the scope of certain customer due diligence obligations.
Business Relationships
Persons and entities subject to the AML Legislation (also known as "reporting entities") are currently subject to various AML/ATF obligations when opening an account or when conducting various prescribed financial transactions above a designated threshold. FATF Recommendation 5 requires that reporting entities be able to adequately identify their customers and that customer due diligence (CDD) measures must be performed in respect of business relationships and occasional transactions. The AML Legislation currently does not extend AML/ATF obligations to business relationships. Rather, the AML Legislation applies only to account openings and occasional financial transactions.
Under current AML Legislation, when reporting entities conduct designated account openings and financial transactions, they are required to ascertain the identity of the person opening the account or conducting the transaction, keep prescribed records, and report suspicious and certain prescribed financial transactions. The government does not propose to alter these existing provisions. However, the government is proposing that when a reporting entity conducts an account opening or financial transaction in respect of which a record is required to be kept under the AML Legislation, it will be deemed that that reporting entity has entered into a "business relationship" with the customer in question. From that point forward, wherever an obligation (as discussed below) under the AML Legislation applies to "business relationships," that reporting entity will be required to apply that obligation to the entirety of its relevant financial activities with the customer, and not just to those designated financial activities and transactions that are explicitly covered by the AML Legislation.
Expanding the Range of Activities in respect of which CDD Measures are Required
Under the current AML Legislation, reporting entities are generally required to ascertain customer identity when opening prescribed accounts and conducting financial transactions above a designated threshold. Notwithstanding this general principle, the AML Legislation also provides exceptions for a number of prescribed financial transactions and activities from such obligations, on the grounds that those transactions and activities have been determined to be at low risk for money laundering or terrorist financing.
The AML Legislation also provides that reporting entities must take reasonable measures to ascertain the identity of customers when they conduct any financial transaction in respect of which there are reasonable grounds to suspect money laundering or terrorist financing. This requirement does not explicitly specify whether the obligation to take reasonable measures to conduct CDD measures in respect of suspicious transactions overrides the exemption on CDD in respect of designated low risk financial transactions. The proposed amendments will clarify that reporting entities are required to take reasonable measures to ascertain the identity of customers who conduct any financial transaction that gives rise to a suspicion of money-laundering or terrorist financing, regardless of whether such a transaction is subject to a prescribed exception under the AML Legislation. The amendments will also clarify that this obligation to take reasonable measures to ascertain the identity of customers would also apply to "attempted" suspicious transactions.
Expanding the Scope of Certain CDD Obligations
Beneficial Ownership Information
The current AML Legislation provides that, when confirming the existence of a client that is a corporation or an entity, reporting entities are required to take reasonable measures to obtain the name and occupation of all directors of the corporation and the name, address and occupation of all persons who own or control, directly or indirectly, 25% or more of the corporation or entity. This information is otherwise known as "beneficial ownership information." This provision is designed to require reporting entities to understand the beneficial ownership structure (where applicable) of the party conducting a financial transaction, in order to better understand the client and the transaction itself.
The following changes are proposed in connection with ascertaining the beneficial ownership information: (a) the obligation to obtain beneficial ownership information will become a mandatory one (currently, reporting entities are only required to take "reasonable measures" to obtain such information); (b) reporting entities will be further required to take reasonable measures to ascertain the beneficial ownership information obtained; and (c) the AML Legislation will clarify that reporting entities will be required to obtain and take reasonable measures to ascertain beneficial ownership of trusts (including names of identifiable beneficiaries, settlors and trustees) with whom they conduct designated financial transactions.
Extend Ongoing Monitoring Obligations to all Risk Levels and Business Relationships
Currently, the AML Legislation requires reporting entities to conduct ongoing monitoring of customers' activities and financial transactions only in situations that have been identified as "high risk" for money laundering or terrorist financing. In addition, these obligations do not apply equally to all reporting sectors. The following two changes are proposed to the ongoing monitoring provisions of the AML Legislation: (a) extend reporting entities' obligations to conduct ongoing monitoring of clients to all clients and activities to which the AML Legislation applies, not just those which have been assessed as high risk; and (b) specify that reporting entities should conduct ongoing monitoring activities in respect of the business relationship with a client.
These changes would broaden the scope of client activities that reporting entities could have reference to when monitoring and assessing client risk. The government has stated that by permitting reporting entities to look at the overall business relationship with a client, reporting entities will be able to assess risk based on the entirety of a client's actions. This will improve the quality of the resulting risk assessments, as well as improve reporting entities' ability to comply with the resulting obligations under the AML Legislation.
Purpose and Nature of a Business Relationship
Currently, the AML Legislation provides that when conducting CDD in respect of an account opening or a prescribed financial transaction above a designated threshold, reporting entities are required to keep a record of the intended use of the account or the purpose of the transaction. The proposed amendments will require reporting entities to keep a record of the purpose and intended nature of a business relationship with a client.
Clarify and Expand the Application of Enhanced CDD Measures
The current AML Legislation requires that where, as the result of a risk assessment, a reporting entity determines that a client, transaction or activity is of high risk for money laundering or terrorist financing, it must take reasonable measures to keep client identification information up to date, conduct ongoing monitoring of financial transactions, and take any other measures to mitigate the risks identified. These requirements are collectively known as "enhanced CDD measures".
The following amendments are proposed to the enhanced CDD provisions of the AML Legislation: (a) extend the obligation to implement enhanced CDD to include circumstances in which a client, activity or business relationship has been deemed to be at high risk of money laundering or terrorist financing as the result of ongoing monitoring; (b) make the obligation to conduct enhanced CDD measures mandatory, rather than the current requirement that reporting entities take reasonable measures to implement such measures; and (c) amend the enhanced CDD provisions to clarify that the measures to be taken: (i) must be enhanced and go beyond the scope of measures taken in respect of low or medium risk clients, activities or business relationships; and (ii) must be commensurate with the risk identified and with the activities and business practices of the reporting sector in question.
The proposed enhanced measures to be taken would include taking: (a) enhanced measures to ascertain the identity of any person or confirm the existence of any corporation or entity; (b) enhanced measures to keep client identification information up to date; and (c) measures to conduct enhanced ongoing monitoring of business relationships for the purpose of detecting suspicious transactions.
Consistent with making other provisions of the AML Legislation apply to "business relationships" (as discussed above), enhanced CDD measures will be specifically extended to apply to business relationships (currently, enhanced CDD measures are only required for financial transactions that are expressly subject to obligations under the AML Legislation). This is designed to ensure that customers that have been identified as high risk for money laundering or terrorist financing will be subject to enhanced CDD in respect of the totality of their relationship with the reporting entity.
Stephen Clark's practice focuses on financial institutions and corporate finance. Kashif Zaman is a partner in the firm's Financial Institutions Group.
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