On July 10, 2019, Canada's Department of Finance published comprehensive amendments (the "New Regulations") to the regulations (the "Current Regulations") made under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "Act"). The New Regulations are designed to strengthen Canada's anti-money laundering and anti-terrorist financing regime and improve compliance with the international standards set by the Financial Action Task Force (the "FATF"), the intergovernmental body that sets standards and promotes effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist activity financing and other related threats to the integrity of the international financial system.
This article, which is part of an ongoing series discussing changes to Canada's anti-money laundering regime, examines significant amendments to the record-keeping requirements under the New Regulations. Previous articles provided an overview of the New Regulations as well as an analysis of the new reporting entities or "REs" captured under the Act.
Significant amendments to the current record-keeping requirements created by the New Regulations include:
- Virtual Currency Transaction Records;
- Prepaid Product Accounts Records; and
- a general expansion in the amount of information an RE must record.
Large virtual currency transaction records
A "large virtual currency transaction" is a transaction where virtual currency valued at $10,000 or more is received in the same 24-hour period from a person or entity (except another financial entity or public body). Under the New Regulations, these transactions must be reported to FINTRAC within 5 working days.
In addition, a "large virtual currency transaction record" must be kept which contains the prescribed information under the New Regulations and mirrors the information requirements under the Current Regulations for large cash transactions reports.
The prescribed information for a large virtual currency transaction record includes:
(a) the date of the receipt;
(b) if the amount is received for deposit into an account, the name of each account holder;
(c) the name and address of every other person or entity that is involved in the transaction, the nature of their principal business or their occupation and, in the case of a person, their date of birth;
(d) the type and amount of each virtual currency involved in the receipt;
(e) the exchange rates used and their source;
(f) the number of every other account that is affected by the transaction, the type of account and the name of each account holder;
(g) every reference number that is connected to the transaction and has a function equivalent to that of an account number;
(h) every transaction identifier, including the sending and receiving addresses; and
(i) if the amount is received by a dealer in precious metals and precious stones for the sale of precious metals, precious stones or jewellery;
(i) the type of precious metals, precious stones or jewellery;
(ii) the value of the precious metals, precious stones or jewellery, if different from the amount of virtual currency received, and
(iii) the wholesale value of the precious metals, precious stones or jewellery.
REs will also be required to keep records where virtual currency is exchanged, at the request of another person or entity, for funds or where funds are exchanged into virtual currency.
"Funds" is defined to mean: (a) cash and other fiat currencies, and securities, negotiable instruments or other financial instruments that indicate a title or right to or interest in them; or (b) a private key of a cryptographic system that enables a person or entity to have access to a fiat currency other than cash. For greater certainty, it does not include virtual currency.
Who is Required to Keep a Large Virtual Currency Transaction Record?
- A Financial Entity;
- A Life Insurance Company or Life Insurance Broker or Agent;
- A Securities Dealer;
- A MSB;
- A Foreign MSB;
- An Accountant or Accounting Firm;
- A Real Estate Broker;
- A Real Estate Developer;
- A Dealer in Precious Metals And Precious Stones;
- A Casino; and
- A Department or an Agent of Her Majesty in Right Of Canada or An Agent or Mandatary of Her Majesty In Right of A Province.
Example in the New Regulations with respect to Financial Entities
A financial entity shall keep a large virtual currency transaction record in respect of every amount of $10,000 or more in virtual currency that it receives from a person or entity in a single transaction, unless the amount is received from another financial entity or a public body or from a person who is acting on behalf of a client that is a financial entity or public body.
The definition of "financial entity" under New Regulations is:
(a) an entity that is referred to in any of paragraphs 5(a) [banks], (b) [credit unions] and (d) [trust companies] to (f) [provincial loan companies] of the Act;
(b) a financial services cooperative;
(c) a life insurance company, or an entity that is a life insurance broker or agent, in respect of loans or prepaid payment products that it offers to the public and accounts that it maintains with respect to those loans or prepaid payment products, other than
(i) loans that are made by the insurer to a policy holder if the insured person has a terminal illness that significantly reduces their life expectancy and the loan is secured by the value of an insurance policy;
(ii) loans that are made by the insurer to the policy holder for the sole purpose of funding the life insurance policy; and
(iii) advance payments to which the policy holder is entitled that are made to them by the insurer;
(d) a credit union central when it offers financial services to a person, or to an entity that is not a member of that credit union central; and
(e) a department, or an entity that is an agent of Her Majesty in right of Canada or an agent or mandatary of Her Majesty in right of a province, when it carries out an activity referred to in section 76.
Prepaid Payment Account
The New Regulations also bring Prepaid Payment Cards and similar general purpose "open-loop" prepaid payment products, which are issued by financial entities and life insurance companies, within the scope of the Act. The payment products which are affected by the New Regulations are those that permit a balance of $1,000 or more, or transactions exceeding $1,000 within 24-hours. The requirements with respect to these payment products under the New Regulations parallel those that apply to regular bank accounts and include record-keeping, reporting and client identity requirements, as well as politically exposed person (PEP) determination requirements. Issuers of closed-loop payment products, the use of which is restricted to a particular merchant or group of merchants, such as a shopping-centre gift card, are outside the scope of this new requirement, as are cards that are part of a corporate retail rebate program, or that can only be funded or reloaded by a public body or a registered charity for the purposes of humanitarian aid relief.
The new requirements apply only to financial entities and life insurance companies that issue prepaid products. However, considering how these programs function in the retail world, they will likely have a ripple effect on "down-the-chain" participants who accept this type of payment method.
Section 14 of the New Regulations provides that a RE will keep records in respect of every prepaid payment product account that it opens and of every transaction that is using a prepaid payment product that is connected to that account.
Required records are substantially the same as for bank accounts and include record-keeping, client identity and PEP determination requirements.
Prepaid Payment Product is defined under the New Regulations as:
a product that is issued by a financial entity and that enables a person or entity to engage in a transaction by giving them electronic access to funds or virtual currency paid to a prepaid payment product account held with the financial entity in advance of the transaction. It excludes a product that
(a) enables a person or entity to access a credit or debit account or one that is issued for use only with particular merchants; or
(b) is issued for single use for the purposes of a retail rebate program.
Prepaid Payment Product Account is defined under the New Regulations as:
an account — other than an account to which only a public body or, if doing so for the purposes of humanitarian aid, a registered charity as defined in subsection 248(1) of the Income Tax Act, can add funds or virtual currency — that is connected to a prepaid payment product and that permits
(a) funds or virtual currency that total $1,000 or more to be added to the account within a 24-hour period; or
(b) a balance of funds or virtual currency of $1,000 or more to be maintained.
Expanded record keeping requirements in general
Generally speaking, the New Regulations significantly increase the amount of information reporting entities must record.
For example, section 36 of the New Regulations expand the record keeping requirements applicable to money service businesses in terms of both the information required to be collected and the activities in respect of which recordkeeping is required. See the blackline below which demonstrates the change in the information that money services businesses must record where a money services business receives an amount of $3,000 or more:
where it receivesif they receive an amount of $3,000 or
more from a person or from an entity — other than a
financial entity inor a person who is acting on behalf
of a client that is a financial entity — as
consideration offor the issuance of traveller's cheques,
money orders or other similar negotiable instruments, a
the amount received, the date it was
received,of the receipt,
(ii) of the person's or entity's name
address and, the nature of their principal business or
their occupation and, in the case of a person, their date of
(iii) of the
person who in fact gave the amount
(iv) indicating whether the amount received
cash, cheques, traveller's cheques, money orders or other
similar negotiable instrumentsfunds or virtual currency and the
type and amount of each type of funds and each of the virtual
(v) of the number of every account that is affected by the transaction, the type of account and the name of each account holder,
(vi) of every reference number that is connected to the transaction and has a function equivalent to that of an account number, and
(vii) if the amount received is in virtual currency, of every transaction identifier, including the sending and receiving addresses;
Reducing the regulatory burden
Other changes to be ushered in by the New Regulations will have the effect of lessening or reducing the current or proposed requirements under the Act.
For example, following industry feedback, certain amendments to the Regulations which had become effective in 2017, and required reporting entities to keep a record of any "reasonable measures" they had taken in cases where they were unsuccessful in meeting certain obligations to obtain information, (such as making a determination as to whether a client is a Politically Exposed Person), will be repealed.
The New Regulations also amend the provisions relating to accountants to clarify that accountants who are authorized to provide bankruptcy services or act as insolvency practitioners will not be captured by the Act's record keeping and identity verification requirements when they undertake activities such as receiving or paying funds and purchasing or selling securities, real properties or business assets on behalf of their clients.
Suspicious transactions reports
The deadline for filing suspicious transaction reports ("STRs") has been changed to "as soon as practicable" after the MSB has taken measures to establish reasonable grounds of suspicion, which is a welcome change from the Current Regulations and is, in fact, the widely-adopted practice of many REs. The timing for which REs are required to report suspicious activity will be changed from within 30 days from the time that a reporting entity "first detects a fact that constitutes reasonable grounds to suspect" to "as soon as practicable after they have taken measures that enable them to establish that there are reasonable grounds to suspect that the transaction or attempted transaction is related to the commission of a money laundering offence or a terrorist activity financing offence."
Therefore, after taking certain measures (such as conducting an assessment of the transaction) to establish that there are reasonable grounds to suspect that the transaction is related to the commission or attempted commission of a money laundering or terrorist activity financing offence, the suspicious transaction report must be submitted to FINTRAC as soon as practicable.
The next article in the series will discuss electronic funds transfers ("EFTs") and the single transaction rule. Of note, the New Regulations are set to change the definition of an EFT as well as the reporting responsibility for EFTs and the application of the 24-hour rules, in particular with respect to casino disbursement and receipt of virtual currency.
Co Author by Rachel Kurtzer (Articled Student)
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.