Canada’s tough stance on dirty money

New anti-money laundering regulations introduced to demonstrate Canada’s tough stance on dirty money to international authorities will require reporting entities to spend more money, resources, and time to be in compliance, according to experts.

Published in mid-February in its final form in the Canada Gazette, the amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Act) are meant to address several key failings identified by the Financial Action Task Force (FATF), an international body established in 1989 that sets standards for anti-money laundering (AML) and anti-terrorist financing (ATF) activities. In 2008, FATF found that Canada, a founding member, was “non-compliant” on preventative measures such as customer identification and due diligence to combat money laundering.

“It would probably embarrass our government if we did not comply with FATF because we have a government that certainly holds itself out as a country with a modern AML and ATF legislative regime that is at the forefront so our government would not want to be seen as having deficiencies – it could hurt Canada’s reputation,” noted Peter Aziz, an expert in regulatory compliance in the financial services and payments industry with Torys LLP.

Under Canadian anti-money laundering legislation reporting entities have a series of obligations they must fulfil: they must identify customers, keep records of their customers and their transactions, ensure they have internal compliance procedures in place, and report transactions that are suspicious or transactions that meet certain conditions even though there is no express obligation to monitor accounts for suspicious activities. “Because it was always sort of implicitly in the legislation that you have to report suspicious transactions, you have to monitor to determine what is and what is not suspicious even there was never an express legislation to monitor,” explained Jacqueline Shinfield, a lawyer with Blake, Cassels & Graydon LLP specializing in regulatory compliance in the retail financial services and payments industry.

But as of next year, once the amendments come into force, that will change. The new regulations introduce the concept of a “business relationship,” and provide that once a business relationship is established regulated entities will be required to conduct on-going monitoring of business relationships with clients, using a risk-based approach. The new regulations define what it is that they want reporting entities to monitor, and for large institutions they expect monitoring to be done on a consolidated basis across all products, notes Shinfield.

For many reporting entities that will prove to be an onerous requirement, says Matthew McGuire, an anti-money laundering expert. There are an estimated 300,000 reporting entities in Canada, ranging from financial institutions to life insurance companies to real estate agents brokers and developers to casinos. Even accountants and accounting firms as well as lawyers are captured by the legislation.

“Most large financial institutions will have the capability to look across an entire client relationship at a glance but in less sophisticated environments – a real estate dealer or for money services business – trying to consolidate across activity by clients becomes more difficult,” explained McGuire. “And much more difficult becomes on-going monitoring of all clients regardless of risk – that is probably the most significant thing about this legislative change. That’s a huge obligation.”

money-laundering-scheme-bigSince not all reporting entities have sophisticated monitoring systems in place, it will oblige many to invest money and time to acquire and implement automated transaction monitoring systems, says McGuire. “Let’s think about it – do all reporting entities all have the tools in hand to be able to program and understand what rules they should be running in terms of ongoing monitoring?” asks McGuire rhetorically.

Besides compelling regulated entities to now keep up-do-date records with respect to the purpose and nature of the business relationship of their clients, the new regulations will also require reporting entities to obtain identification information under certain circumstances from all persons who own 25 per cent or more of a corporation or entity. Under legislation currently in force financial entities have an obligation to obtain so-called “beneficial ownership,” that is, collect information about all directors and natural persons owning or controlling — according to prescribed percentages — the corporation and entity. The amendments specifically clarify that those reporting entities should also obtain documentary evidence from the client that confirms the beneficial information that they have obtained.

“These amendments actually do add additional obligations that are a bit different from before,” says Kashif Zaman, a partner with Osler, Hoskin & Harcourt LLP. “”Before the customer identification requirements and the customer due diligence was conducted typically at the front end, when the business relationship was established. These new obligations will require reporting entities to actually take a more serious look at the documents and client information to make sure they can assess them properly” instead of simply checking off boxes in intake forms.

FintracQuestions still linger over the reach of the new amendments. Many experts in the field are counting on the Financial Transactions and Reports Analysis Centre (FINTRAC), Canada’s financial intelligence unit created in 2000 that operates within the ambit of the Act, and the Office of the Superintendent of Financial Institutions to provide updated guidance before end of year.

“Guidance is needed because the wording of the legislation is drafted broadly,” said Zaman. “Ongoing monitoring is defined very broadly. What are their expectations? So different stakeholders will have different concerns depending on their business. The guidelines will provide their expectations as to what they want industry players to be thinking about.”

McGuire has a harsher assessment. “We have woefully inadequate risk-based guidance,” said McGuire. “Like FATF points out, we should put out a threat assessment so that the players understand the money laundering environment they operate in. That should be the cornerstone of program in the country, and it doesn’t exist. Then the guidance on how to tactically implement risk-based approach under these new standards.”

Reporting entities, however, are bracing for more changes. A consultation paper entitled “Strengthening Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime” drafted on December 2011 by the Department of Finance is currently being reviewed by the Senate. “What I think may be challenging is implementing these new changes which will take systems and resources, and then in a likely very short period thereafter having a complete second set of amendments as well,” said Shinfield.

In the meantime Shinfield recommends that reporting entities amend and update their anti-money laundering policies, change and update their intake forms to ensure that proper information is requested of clients, update their systems, and ensure that ongoing monitoring is performed that addresses the provisions of the Act.

Quebec first province to regulate money-services industry

A recently passed bill that made Quebec the first province to regulate the money-services industry has elicited mixed reactions, drawing praise by some who see it as a blessing for legitimate small businesses catering to ethnic communities, unease by others who are concerned about the potential broad reach of the law, and baffled some legal observers who wonder why the provincial government appears to be duplicating an already existing federal law.

Touted as part of an offensive against money laundering and tax evasion schemes, the Money-Services Businesses Act (Act) introduces a licensing regime for money-services businesses that will be administered and enforced by the Autorité des marchés financiers (AMF), Quebec’s securities regulator.

Under the Act, entities or persons operating automated teller machines or offering such services as currency exchange, funds transfer, the issue or redemption of travelers’ cheques, money orders or bank drafts, or cheque cashing, must obtain a licence from the AMF. They must also disclose information about their directors, officers and associates as well as certain types of lenders they deal with.

The Act does not apply to entities, such as banks, already governed by other specified legislation. But it does apply to both Quebec-based money-services businesses and money-services businesses that are either not constituted under Quebec legislation or do not have their headquarters or establishment in the province but who offers services in Quebec, including money services through the Internet.

“This legislation is a blessing for legitimate small businesses,” remarked Terry Didus, a banking and finance lawyer with Heenan Blaikie in Montreal. “One of the consequences of being in the money-services business, and being unregulated, is that it is extremely difficult for those small businesses to get Canadian banks to agree to provide banking services. There will be more paperwork and reporting but it will make their life easier.”

Not all business share this view, particularly since the regulations are not yet finalized. Though the legislative process, from the introduction of Bill 128 to consultations to a detailed study by the National Assembly’s Committee on Public Finance to its adoption, took an astonishingly short period of time, a mere month, the regulations are only now being written by the AMF. “The devil is in the details,” said Martine Hébert, vice-president of the Canadian Federation of Independent Business(CFIB), Quebec. The CFIB is concerned that regulatory compliance may be far too burdensome and expensive for small business that simply host automated teller machines as a value-added service for their clients.

“Even if you subscribe to the objectives behind the law, it is how it is going to be done that is of concern to us,” said Hébert. “We’re worried about the regulations, and what will it do, what shape it will take and how it will affect our members.”

The scope of the regulations is also a source of preoccupation for Western Union Financial Services (Canada) Inc. Though not opposed to the new Act nor to its regulatory framework, Western Union is however keen on receiving more clarity, said Derek McMillan, the director of anti-money laundering compliance for Western Union Canada.

“There are a lot of things we don’t know yet,” said McMillan. “When the Act first came out, it seemed to suggest that identification on people transmitting funds would be required for every transaction. However, that is left to the regulation. That is one example of what it is that is going to be required.”

Western Union Canada, like others, are also worried about how the Act will mesh with the federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act, given that it seems to cover the same ground. It remains to be seen whether the regulations the AMF will propose will streamline administrative and compliance requirements with the federal authorities, says Jaime Brown, Western Union Canada’s assistant general counsel. “There are some record-keeping and recording requirements in the Quebec Act that we’re not sure how they mesh with our federal obligations,” noted Brown. “We want to make sure that the discrepancies between the new legislation in Quebec and some of the federal compliance obligations are resolved.”

Alix d’Anglejan-Chatillon, a partner in the Montréal office of Stikeman Elliott LLP, believes that the regulations will need to underscore the differences between the two pieces of legislation because as it stands the Act is “problematic,” if only because “you’ve got two overlapping sets of rules” that are regulating the same industry. D’Anglejan-Chatillon suspects that the Quebec government moved at lightning speed to adopt the law in order to assert its jurisdiction.

“The underlying impetus for passing the legislation so quickly is perhaps the political desire to be seen as really combating tax evasion and money laundering at a provincial level,” said d’Anglejan-Chatillon, who practices principally in the areas of investment management, the regulation of capital markets and derivatives.

That is something that worries John Teolis, a partner in the Financial Services Group with Blake, Cassels & Graydon LLP. Noting that regulation is “very costly,” Teolis wonders whether Quebec’s efforts to regulate the money-services industry will be emulated by other provinces and lead to a situation “like our securities legislation where we have provinces occupying the field and requiring one to deal with individual provinces as opposed to the federal government.”

Teolis is also uncomfortable over the reach and scope of the AMF’s powers. The Act, he points out, has provisions that provide and allow for sharing of information between the AMF, the Quebec tax department and law enforcement agencies, particularly with respect to licensing decisions. Indeed, the Act gives the provincial police force the power to issue security clearance reports which the AMF will use to decide whether or not to issue a licence.

“It’s very broad,” said Teolis. “You always worry when agencies have very, very  strong investigative powers, and what they do with that information. So there is some concern.”