Vol. 141, No. 10 — March 10, 2007

Proceeds of Crime (Money Laundering) and Terrorist Financing Registration Regulations

Statutory authority

Proceeds of Crime (Money Laundering) and Terrorist Financing Act

Sponsoring department

Department of Finance

REGULATORY IMPACT
ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Description

The National Initiative to Combat Money Laundering was launched in 1999 as part of the Government's ongoing effort to combat money laundering in Canada. Following the events of September 11, 2001, the mandate of the initiative was enlarged to include the fight against terrorist financing activities and, since then, it has been referred to as the Anti-Money Laundering and Anti-Terrorist Financing Regime (the Regime). One of the key elements of this Regime is the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act) and its three sets of regulations, which were brought into force between 2001 and 2003.

The Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTF Regulations) implement a portion of Part 1 of the Act by requiring the financial institutions and financial intermediaries that are subject to the Act (see footnote 1) to identify their customers, keep certain records, report large cash transactions and international electronic fund transfers of $10,000 or more to the Financial Transactions and Reports Analysis Centre of Canada (the Centre) and develop an internal compliance regime.

The Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations (PCMLTF Suspicious Transaction Reporting Regulations) implement the remainder of Part 1 of the Act by requiring financial institutions and financial intermediaries to report financial transactions where there are reasonable grounds to suspect that they are related to money laundering or terrorist financing activities.

The Cross-Border Currency and Monetary Instruments Reporting Regulations implement Part 2 of the Act by requiring any person or entity to report to the Canada Border Services Agency importations and exportations of currency or monetary instruments of a value of CAN$10,000 or more.

Since the coming into force of these regulations, the domestic and international context has changed. First, the international standards of the Financial Action Task Force (the Task Force), on which the Canadian anti-money laundering and anti-terrorist financing regime was based in 2000, were revised in 2003 to keep up with new money-laundering and terrorist financing trends and techniques. Canada will be evaluated in 2007 by the Task Force on the extent to which it has implemented these standards. Chapter 2 of the 2004 Report of the Auditor General also outlined several recommendations to improve the Regime, such as the need to review the information the Centre can include in its disclosures to law enforcement agencies and security agencies in order to increase their usefulness. Similar findings were also outlined in the Treasury Board mandated program evaluation report prepared by EKOS Research Associates.

Several of the federal partners to the Regime, such as the Royal Canadian Mounted Police, the Canada Border Services Agency, the Canada Revenue Agency and the Centre have proposed amendments to help them better fulfill their mandate. A few financial institutions and intermediaries have also requested changes to the Regime to allow them to concentrate their efforts in areas where the risk of money laundering or terrorist financing is higher.

In response to these developments, the Department of Finance issued a consultation paper in June 2005 outlining policy proposals to enhance the Regime. These proposals included a new requirement to identify beneficial owners of client entities, enhanced due diligence measures for correspondent banking relationships and politically exposed persons, the obligation to collect information on the beneficiary and originator of electronic funds transfer, new identification measures for non-face-to-face transactions and a new registration scheme for money services businesses. Various groups and organizations have made representations on the proposed changes to the Regime. Since then, the Department of Finance has been in consultations with stakeholders to tailor the requirements to their existing business practices and minimize, to the extent possible, their compliance burden.

In October 2006, the Minister of Finance tabled Bill C-25, which proposed amendments to the Act to expand the customer due diligence and transaction reporting requirements for financial institutions and financial intermediaries, set out a framework for the registration of money services businesses and extend the list of information that the Centre may disclose to law enforcement agencies and intelligence agencies. This bill received Royal Assent in December 2006 but will require the implementation of new regulations to become fully effective.

In order to implement part of the requirements set out in Bill C-25, comply with the new international standards and address the recommendations and comments made by the Auditor General, the EKOS report, the partners to the Regime and stakeholders, amendments to the PCMLTF Regulations and the PCMLTF Suspicious Transaction Reporting Regulations are being proposed. These amendments will enhance existing client identification and transaction reporting requirements and increase the usefulness of the Centre's disclosures to law enforcement agencies. New regulations, the Proceeds of Crime (Money Laundering) and Terrorist Financing Registration Regulations (PCMLTF Registration Regulations) are also being proposed to introduce a registration scheme for money services businesses. These changes will be followed by other sets of amendments to the regulations needed to fully implement the legislation. These amendments will extend the Regime to new professions, such as home builders, British Columbia notaries public and dealers in precious metals and stones, and establish the framework for an administrative monetary penalties scheme.

1. Amendments to the PCMLTF Regulations

Under the proposed amendments, the Canadian customer due diligence standards set out in the PCMLTF Regulations would be strengthened. First, in response to the evolving technologies used to deliver financial products and services, new methods to ascertain the identity of a person in a non-face-to-face environment would be made available to all reporting entities. (see footnote 2) These methods, which have been developed in consultation with stakeholders, include the use of third-party sources such as credit bureaus and agents or mandataries.

Bill C-25 requires reporting entities to conduct an assessment of the money laundering and terrorist financing risks in the course of their business activities. The proposed amendments to the PCMLTF Regulations would build on that obligation by requiring all reporting entities to take reasonable measures, where it is determined that a client represents a higher risk, taking into account the type of customer, the type of product, the delivery channels, geographic location, etc., to conduct ongoing monitoring of the transactions and keep the client information up to date. The risk assessment and the compliance policies and procedures that reporting entities are required by the existing Regulations to implement would have to be reviewed at least every two years.

The proposed amendments to the PCMLTF Regulations would also require all reporting entities to obtain information on their clients whenever they have reasonable grounds to suspect that a transaction or suspicious attempted transaction is linked to money laundering or terrorist financing activities. If the reporting entity had ascertained the identity of the client prior to the suspicion but has doubt about the veracity of the information, they would have to ascertain again the identity of the client. These provisions would not apply if obtaining such information would alert the client that the reporting entity is filing a report. Compliance with these new requirements would be supplemented by the publication of sector-specific guidelines on what constitutes a suspicious attempted transaction.

The proposed Regulations also introduce new product, transaction or activity exemptions to the client identification and record-keeping requirements in low-risk situations. For example, reporting entities would no longer have to ascertain the identity of the members of a group plan if the contributions are made by means of payroll deductions. The existing exemptions would be extended to all reporting sectors to ensure a level playing field. The proposed amendments would also exclude some low-risk activities such as reinsurance and real estate property management.

Some of the proposed amendments to the PCMLTF Regulations would only impact specific reporting entities. For example, the client identification and record-keeping requirements for certain persons and entities would be extended to new activities, such as the receipt of funds by accountants, and deposits of any amounts or sale or purchase of real estate for real estate brokers and agents.

To mitigate the terrorist financing risks associated with electronic fund transfers, money services businesses, financial entities, (see footnote 3) securities dealers and casinos would have to obtain information on the originator and beneficiary of any wire transfer of $1,000 or more and ensure that certain identifying information is transmitted along with the funds.

Under the proposed amendments, some entities would have to take additional steps when entering into a business relationship with an entity. First, financial entities, securities dealers, life insurance companies, life insurance brokers and agents and money services businesses would have to take reasonable measures to obtain information on directors or partners of a corporation or other entity or on persons who own or control 25% or more of that corporation or entity. Financial entities would also have to obtain from foreign financial institutions information and documentation on the nature and the scope of their operations and determine whether these institutions are shell banks before entering into a correspondent banking relationship with them.

Finally, financial entities, securities dealers, life insurance companies, life insurance brokers and agents and money services businesses would have to determine whether account holders or persons sending large electronic fund transfers or making large payments are politically exposed foreign persons and, if so, conduct enhanced scrutiny of such transactions and of their business relationships with such clients.

2. Amendments to the PCMLTF Suspicious Transaction Reporting Regulations

In response to the Auditor General's recommendations, it is proposed to amend the PCMLTF Suspicious Transaction Reporting Regulations to expand the information contained in the Centre's disclosures to law enforcement and intelligence agencies to include the telephone number, type of account, name and address of persons authorized to give instructions on the account, and type of report. The suspicious transaction reporting requirement would also be extended to reporting suspicious attempted transactions.

3. Proceeds of Crime (Money Laundering) and Terrorist Financing Registration Regulations

The recent amendments to the PCMLTF Act set out a framework for the registration of certain designated reporting entities. This scheme is intended to help the Centre ensure compliance in non-regulated sectors such as money services businesses. The proposed amendments would introduce a new set of regulations, the PCMLTF Registration Regulations, which provide clarification on the registration process and on the information that must be provided to the Centre for registration, renewal of registration, changes in registration information and cessation of activities.

Alternatives

As a member of the Task Force, Canada is expected to comply with the 49 revised recommendations of the organization, the international anti-money laundering and anti-terrorist financing standards setting body. Failure to meet these international standards would not only send a negative signal to the international community on Canada's commitment to fight financial crimes but could also have a detrimental impact on the integrity of our financial system and economy.

The Task Force recommendations on money laundering and terrorist financing were designed to apply to any member country and are not necessarily adapted to a member's national context. As a result, Canada has had to adapt some of the measures so they respect its constitutional and legal framework and the privacy rights of Canadians. In order to meet the international standards without diminishing competition in the financial sector and to minimize the compliance burden for reporting entities, the proposed requirements integrate the level of money laundering or terrorist financing risks in Canada with existing business practices in the sectors covered by the Act.

Benefits and costs

The proposed amendments will have various impacts on the partners to the Regime and reporting entities. For instance, the addition of new designated information in the Centre's disclosures to law enforcement agencies can be achieved at virtually no cost, while adding value to the investigations of money laundering and terrorist financing cases. This additional information will not only increase the usefulness of the disclosures in current investigations, but could even trigger new ones. Overall, this policy should enhance Canada's capacity to detect and deter money laundering and terrorist financing activities.

The implementation of enhanced due diligence measures will require financial institutions and intermediaries to devote resources to the development of internal policies and procedures, training of employees, assessment of money laundering and terrorist financing risks and changes to their information-technology systems. They would also have to keep and protect more information on their clients and transactions, which would generate additional costs. The resources that would need to be devoted by each of the entities covered by the Act vary, depending on their size, the volume of financial transactions they carry out and their use of information technologies. It is expected that large entities that have extensive information-technology systems would face the highest costs. However, in some cases, these implementation costs could be partially offset by savings generated by the introduction of new exemptions to client identification and record-keeping requirements where risks of money laundering and terrorist financing are low and do not justify special attention from the private sector.

The introduction of the new customer due diligence measures would also require additional funding for the Centre, which is responsible for ensuring compliance with the requirements under Part 1 of the Act. The Centre would not only have to perform more thorough examinations on the reporting entities, but would also have to produce guidelines on the new obligations and build systems to receive and analyse the additional information that will be reported to the Centre.

Similarly, as the registrar for the registration scheme proposed in PCMLTF Registration Regulations, the Centre will have to develop various application forms, build information-technology systems to run the program and maintain a Web site that will serve as the registry. Since the Centre would not charge any fees for registration, the burden on money services businesses would be restricted to the time required to fill out the registration form and to update this information when changes occur. Budget 2006 provided the Centre with adequate funding needed to implement these changes.

Despite the costs these requirements generate, the enhanced due diligence measures and the money services businesses registration scheme should further deter money laundering and terrorist financing activities, as they will give financial institutions and intermediaries the ability to detect suspicious transactions more easily and allow the Centre to make more information available for money laundering and terrorist financing investigations. These measures, which will bring Canada's regime in line with the international standards, should also send a positive signal to the international community that Canada is at the forefront of the fight against money laundering and terrorist financing and, hence, maintain the credibility and soundness of our financial system.

Consultation

The Department of Finance released a consultation paper on June 30, 2005, entitled Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime. This document presented a series of proposed changes to the Act and its regulations. Stakeholders and partners to the Regime were invited to submit their comments on the paper and more than 50 stakeholders provided written submissions. These submissions came from various groups including individuals, financial sector business associations, financial institutions, professional associations, law enforcement agencies and provincial ministries and agencies.

Overall, stakeholders and law enforcement agencies welcomed the addition of new designated information in the Centre's disclosures and the implementation of a registration scheme for money services businesses. However, the financial sector raised concerns about the compliance burden associated with some of the new customer due diligence requirements. Certain industry groups and associations had asked for more flexibility in the new client identification methods for non-face-to-face situations, the enhanced due diligence measures for politically exposed persons, the obligation to obtain information on the beneficial owners of corporations and other entities and the requirement to keep client information up to date.

Since the publication of the consultation paper, the Department of Finance has consulted extensively with stakeholders to discuss their written comments and find ways to adapt the proposed amendments to their current business practices and the risks of money laundering or terrorist financing activities within their sectors. Following these discussions, many of the proposed measures were adapted to minimize the compliance burden. For example, the requirement to verify the identity of the directors, partners or owners of a client entity has been restricted to situations where the client opens an account, enters into a service agreement with a money services business or purchases a life insurance policy or annuity. Likewise, the requirement to conduct enhanced customer due diligence on politically exposed persons has been limited to politically exposed foreign persons who open an account or conduct a high-risk transaction. The list of client identification and record-keeping exemptions for certain low-risk products has been expanded to new clients and products, while certain existing exemptions have been extended to all reporting sectors.

Finally, a series of meetings were held with federal agencies involved in law enforcement or financial sector regulation such as the Office of the Superintendent of Financial Institutions and the Royal Canadian Mounted Police to ensure that the proposed regulations would be consistent with existing supervisory standards and would assist criminal investigations. The comments gathered during those meetings are also reflected in the proposed policies. Following the pre-publication of the proposed Regulations, the Department of Finance will continue to consult with stakeholders in order to address any potential concerns.

Compliance and enforcement

The Centre is responsible for ensuring compliance with Part 1 of the Act and its related regulations. The Centre sends compliance questionnaires to persons or entities that are subject to the Act to better assess the compliance risks and conducts on-site examinations. It also has the capacity to enter into information-sharing agreements with industry regulators to reduce the number of compliance examinations on all reporting entities.

The proposed regulations would impose new compliance obligations on the sector. In recognition of these new responsibilities, Budget 2006 allocated additional funding to assist the Centre implementing the new requirements.

Reporting entities that do not comply with the Act and its regulations are currently subject to criminal penalties and, depending on the offence, convictions that could result in up to five years imprisonment, a fine of up to $500,000, or both.

Contact

Diane Lafleur, Director, Financial Sector Division, Department of Finance, 140 O'Connor Street, Ottawa, Ontario K1A 0G5, 613-992-5885 (telephone), 613-943-8436 (fax), fcs-scf@fin.gc.ca (email).

PROPOSED REGULATORY TEXT

Notice is hereby given that the Governor in Council, pursuant to subsection 73(1) (see footnote a) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (see footnote b), proposes to make the annexed Proceeds of Crime (Money Laundering) and Terrorist Financing Registration Regulations.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Chief, Financial Crimes Section — Domestic, Financial Sector Division, Department of Finance, L'Esplanade Laurier, 140 O'Connor Street, 20th Floor, East Tower, Ottawa, Ontario K1A 0G5 (tel.: 613-992-0553; facsimile: 613-943-8436; e-mail: fcs-scf@fin.gc.ca).

Ottawa, February 28, 2007

MARY O'NEILL
Assistant Clerk of the Privy Council

PROCEEDS OF CRIME (MONEY LAUNDERING) AND
TERRORIST FINANCING REGISTRATION REGULATIONS

INTERPRETATION

1. The following definitions apply in these Regulations.

"Act" means the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. (Loi)

"money services business" means a person or entity referred to in paragraph 5(h) of the Act. (entreprise de transfert de fonds ou de vente de titres négociables)

2. For the purpose of subsection 54.1(3) of the Act, "identifying information" means the information set out in Part A and items 1 to 3 of Part C of Schedule 1 and the date of revocation or expiration of the registration of a person or entity, if any.

PRESCRIBED ENTITIES NOT ELIGIBLE FOR REGISTRATION

3. (1) An entity that is a corporation is not eligible for registration with the Centre if the chief executive officer, the president or any director of that entity or any person or entity that owns or controls, directly or indirectly, 20 per cent or more of the shares of that entity is a person or entity referred to in any of paragraphs 11.11(1)(a) to (d) of the Act.

(2) An entity that is not a corporation is not eligible for registration with the Centre if the chief executive officer, the president or any director of that entity or any person or entity that owns or controls, directly or indirectly, 20 per cent or more of that entity is a person or entity referred to in any of paragraphs 11.11(1)(a) to (d) of the Act.

APPLICATIONS, NOTIFICATIONS, CLARIFICATIONS
AND SUPPLEMENTARY INFORMATION

4. The following information and documents must be submitted to the Centre by an applicant or a registered person or entity, as the case may be, in electronic form if they have the technical capability to do so and in paper form if they do not:

(a) an application for registration referred to in section 11.12 of the Act;

(b) a notification, for the purpose of section 11.13 of the Act, of a change to the information provided in an application referred to in paragraph (a) or (e);

(c) a notification, for the purpose of section 11.13 of the Act, of newly obtained information;

(d) a clarification requested by the Centre under section 11.14 or 11.17 of the Act;

(e) an application to renew registration for the purpose of section 11.19 of the Act; and

(f) a notification of the cessation of an activity for the purpose of section 11.2 of the Act.

5. An application referred to in paragraph 4(a) or (e), a notification referred to in paragraph 4(b) or (c) and a clarification referred to in paragraph 4(d) must contain the applicable information set out in Schedule 1.

6. A notification referred to in paragraph 4(f) must contain the applicable information set out in Schedule 2.

COMING INTO FORCE

7. These Regulations come into force on the day on which they are registered.

SCHEDULE 1
(Sections 2 and 5)

PRESCRIBED INFORMATION TO BE INCLUDED IN
APPLICATION FOR REGISTRATION OR RENEWAL OF REGISTRATION, NOTIFICATION OF CHANGES TO INFORMATION IN EXISTING APPLICATION, NOTIFICATION OF NEWLY OBTAINED INFORMATION AND CLARIFICATION OF INFORMATION IN EXISTING APPLICATION

PART A — Identifying Information on Person or Entity that is the Applicant

PART B — Business Information on Person or Entity that is the Applicant

PART C — Information to Be Provided by Applicant as of the First Day of the Calendar Quarter on Its Agents, Mandataries or Branches

PART D — Statement of Eligibility for Registration

SCHEDULE 2
(Section 6)

CESSATION OF ACTIVITY BY REGISTERED PERSON OR ENTITY

[10-1-o]

Footnote 1

The financial institutions and financial intermediaries that are subject to the Act include banks, cooperative credit societies, savings and credit unions, caisses populaires, life insurance companies, life insurance brokers or agents, trust and loans companies, securities dealers, money services businesses (including foreign exchange dealers), casinos, real estate brokers or sales representatives, accountants and accounting firms and certain departments and agents of Her Majesty in right of Canada or a province.

Footnote 2

Reporting entities include all financial institutions and financial intermediaries subject to the Act.

Footnote 3

Under the PCMLTF Regulations, the term 'financial entity' refers to a bank, credit union, cooperative, caisse populaire, cooperative association, trust and loan company and any department or agent of Her Majesty in right of Canada or of a province that accepts deposits in the course of providing financial services to the public.

Footnote a

S.C. 2006, c. 12, s. 39

Footnote b

S.C. 2000, c. 17; S.C. 2001, c. 41, s. 48

NOTICE:
The format of the electronic version of this issue of the Canada Gazette was modified in order to be compatible with hypertext language (HTML). Its content is very similar except for the footnotes, the symbols and the tables.

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