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February 7, 2012
Department of Finance initiates consultations on strengthening AML/ATF regime

Stuart S. Carruthers and Alex Colangelo

Introduction
Late last year, the Department of Finance released a consultation paper seeking views on measures to further strengthen the Canadian anti-money laundering (AML) and anti-terrorist financing (ATF) regime. The consultation process is taking place in advance of a Parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) to be undertaken this year, as required under that Act. Under the PCMLTFA, financial institutions, life insurance companies, brokers and agents and securities dealers, among others (commonly referred to as "reporting entities") are required to comply with certain client identification, record-keeping and reporting requirements.

The Department of Finance is accepting comments on the consultation paper until March 1, 2012. The consultation paper follows the initiation of a consultation process in November 2011 regarding proposed changes to the Regulations under the PCMLFTA (the PCMLTFR) also intended to strengthen Canada's AML/ATF regime (the November proposals). Comments on the November proposals closed in December 2011 and the responses received are posted on the website of the Department of Finance.

December Consultation
Overall, the proposed changes would meaningfully expand certain obligations to which reporting entities are subject. Specifically, the consultation paper proposes measures to, among other things (i) strengthen customer due diligence standards; (ii) improve compliance, monitoring and enforcement; and (iii) strengthen information sharing between various law enforcement and other government agencies. Taken together, the proposed measures may prove particularly onerous for smaller reporting entities with less sophisticated compliance programs. However, as the Department of Finance noted, it "recognizes that measures to enhance Canada's AML/ATF legislative framework should not place an undue burden on reporting entities, which are on the front lines of the fight against money laundering and terrorist financing. Full consideration will be given to the input and comments received, including in relation to potential compliance challenges that reporting entities could face as a result of the proposals contained in this paper and the timing of possible implementation."

Strengthening Due Diligence Standards

In addition to the November proposals, described more fully below, the consultation paper contemplates a number of amendments to the current AML/ATF regime to strengthen due diligence standards. Provisions of the PCMLTFA/PCMLFTR up for review include (i) the exemptions from customer due diligence and record-keeping in circumstances of "introduced business" (client business referred from one reporting entity to another reporting entity); (ii) the non-face-to-face identification requirements for credit card companies; (iii) the requirements that a handwritten signature card or electronic image of a handwritten signature be maintained by reporting entities when accounts are opened; and (iv) the provisions regarding politically exposed foreign persons (including those applicable to life insurance companies, brokers and agents at the time of opening investment or loan accounts). The paper also considers the possibility of extending current "low risk" exemptions to all corporations that trade on Canadian or other designated stock exchanges, as well as amending the PCMLTFA to provide that any document used as proof of the existence of a corporation be no more than one year old.

Closing the Gaps

Currently, reporting entities are required to report, to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), any electronic funds transfers (EFTs) of $10,000 or more entering or leaving Canada. As a result of a concern that smaller amounts of money could be used in terrorist financing, the consultation paper suggests eliminating the EFT threshold and requiring that all border-crossing EFTs be reported.

In addition, citing the fact that prepaid access cards and similar devices are sold by a wide range of businesses, not all of which are subject to reporting requirements, the consultation paper also considers expanding the definition of monetary instrument for the purposes of cross-border reporting to include prepaid access and extending consumer due diligence measures to prepaid access devices.

Of particular interest to the life insurance industry, the consultation paper questions whether current requirements adequately address the money laundering risks of the financial products commonly provided by that industry. Currently, life insurance companies, brokers and agents are required to identify their customers, keep certain records and report to FINTRAC with respect to cash transactions of $10,000 or more. Further, client identification and record-keeping requirements are imposed for purchases, regardless of the means of payment, of an immediate or deferred annuity or a life insurance policy for which a client may pay $10,000 or more over the duration of the annuity or policy.

The consultation paper contemplates expanding the client identification and record-keeping requirements applicable to life insurance companies, insurance brokers and agents beyond the purchase of specified annuities and life insurance policies. Under the proposals, the $10,000 threshold for the cost of an annuity or policy would be eliminated, and client identification and record-keeping requirements would apply to transactions and account openings for investment and loan products that are not currently captured under the PCMLTFR. If implemented, the proposed changes would result in the requirements applicable to the life insurance industry being comparable to those currently imposed on other financial entities and securities dealers conducting similar transactions. Large cash transaction reporting in the life insurance sector may also be expanded by limiting current exemptions only to those transactions where the origin of funds can be easily identified and determined to be of low risk for money laundering.

Improving Compliance, Monitoring and Enforcement

The consultation paper also proposes changes to a number of compliance and monitoring requirements. Of particular note, the consultation paper discusses further promoting compliance with the PCMLFTA/PCMLTFR by (i) permitting FINTRAC to direct a reporting entity to file a missing report and impose additional penalties where an entity has failed to report; (ii) requiring entities to document reasonable measures taken to obtain information when performing due diligence; and (iii) providing border officers with the authority to question passengers arriving in or departing from Canada with regard to PCMLTFA compliance.

Strengthening Information Sharing

The consultation paper also indicates that the Government is also considering expanding the ability of FINTRAC to share information with law enforcement and intelligence agencies. This would potentially include expanding the type of information that could be shared between agencies and allowing FINTRAC to provide disclosures to the Canada Border Services Agency in certain circumstances.

Countermeasures

Changes are also being considered to provide clarity regarding the application of the Minister of Finance's authority, pursuant to recent amendments to the PCMLTFA, to issue directives requiring reporting entities to take countermeasures in respect of transactions originating from or destined to designated foreign jurisdictions and entities.

As noted above, comments on the consultation paper are being accepted until March 1, 2012.

November Proposals
The November proposals seek to address deficiencies in the customer due diligence provisions under the PCMLFTR in order to better enable reporting entities to identify transactions and activities that are at greater risk for money laundering or terrorist financing. According to the Department of Finance, the November proposals would improve Canada's compliance with the international Financial Action Task Force's 40+9 recommendations, including particularly Recommendation 5, which governs customer identification. As noted above, comments on the November proposals closed in December, 2011. Many of the concepts and terms used in the November proposals are quite vague and open to interpretation, and many commenters noted that significantly greater detail and precision will be required before meaningful consultation can occur. In addition, many commenters noted that the November proposals appeared to contemplate an undesirable or even unworkable shift away from risk based approaches to AML/AMF compliance toward blanket-type approaches.

Recommendation 5

The FATF's Recommendation 5 sets out essential criteria with respect to customer due diligence and record-keeping. Among other things, it: (i) states that financial institutions should not be permitted to keep anonymous accounts or accounts in fictitious names; (ii) describes the circumstances under which financial institutions should be required to undertake customer due diligence measures and (iii) describes the required nature of such measures.

In February 2008, the FATF had released a report evaluating Canada's compliance with the 40+9 recommendations. While the report found Canada to be in compliance or partial compliance with respect to a number of the recommendations, Canada ultimately received a rating of "non-compliant" with respect to Recommendation 5. Specifically, the report characterized customer identification measures as being insufficient to meet FATF standards.

Among other things, the report noted that, under Canada's AML/ATF regime (i) there was no requirement to carry out customer due diligence measures where there was a suspicion of money laundering or terrorist financing, or when financial institutions had doubts regarding the adequacy of previously obtained customer due diligence data; (ii) customer identification measures for natural persons were insufficient, especially with respect to business relationships that were not face-to-face; and (iii) there were no requirements to perform enhanced due diligence for higher risk categories of customer, business relationship or transaction.

Proposed Changes

"Business Relationships"

The November proposals would extend certain AML/ATF obligations, currently applicable to account openings and prescribed financial transactions, to "business relationships". Business relationships would include any financial relationship established to provide financial activities or transactions. A business relationship between a reporting entity and client would also be deemed when a reporting entity conducts any financial activity or transaction in respect of which it is required to keep a record under the PCMLTFR. Reporting entities would then have obligations to monitor such relationships on an ongoing basis and apply enhanced customer due diligence measures in respect of high risk business relationships, as described below.

Strengthening Customer Due Diligence Measures

The PCMLTFR currently requires that reporting entities take reasonable measures to ascertain the identity of customers conducting financial transactions in respect of which there are reasonable grounds to suspect money laundering or terrorist financing. The regulations, however, also provide a number of exceptions to the requirements for low risk transactions and activities, and do not specify whether the exemptions take precedence where money laundering or terrorist financing are suspected.

The November proposals would clarify that reporting entities are required to take reasonable measures to ascertain the identity of customers conducing financial transactions that raise a suspicion of money laundering or terrorist financing, regardless of whether a blanket exception would otherwise apply. The PCMLTFR would also be amended to clarify that reporting entities are required to take reasonable measures to ascertain the identity of individuals who attempt to conduct a transaction that gives rise to a suspicion of money laundering or terrorist financing.

Expanding the Scope of Certain Customer Due Diligence Obligations

The November proposals would extend the beneficial ownership provisions of the PCMLTFR, which require reporting entities to take reasonable measures to obtain certain information regarding beneficial owners when confirming the existence of a client. Specifically, the obligation would become mandatory (rather than simply requiring reasonable measures), reporting entities would be required to take reasonable measures to "ascertain" (the meaning of which is not clear, but which is likely intended to mean "verify" or "validate") the beneficial ownership information obtained, and clarification would be made that reporting entities would be required to obtain and take reasonable measures to "ascertain" beneficial ownership of trusts with which they conduct designated financial transactions. Records would also have to be kept regarding the steps taken to ascertain the beneficial ownership information.

While the PCMLTFR currently requires reporting entities to conduct ongoing monitoring of customers' activities and financial transactions in high risk situations, the November proposals would extend ongoing monitoring obligations to all clients and activities to which the regulations apply. Further, the PCMLTFR would provide that ongoing monitoring should be conducted in respect of the business relationship with a client. A reporting entity would also be required to keep a record that sets out the purpose and intended nature of its business relationship with its customer.

The November proposals would also require enhanced customer due diligence measures in situations where a client, activity or business relationship has been deemed to be at high risk of money laundering or terrorist financing as a result of ongoing monitoring. Such measures would include enhanced measures to ascertain the identity of any person or confirm the existence of any corporation or entity, enhanced measures to keep client identification information up to date, and measures to conduct enhanced ongoing monitoring of business relationships for the purpose of detecting suspicious transactions.



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