July 27, 2015
Following domestic and international evaluations of Canada’s anti-money laundering and terrorist financing regime, and in preparation for the upcoming mutual evaluation by the Financial Action Task Force (FATF), proposed amendments to Canada’s Proceeds of Crime and Terrorist Financing Act were recently published in the July 4, 2015 Canada Gazette.
These statutory and regulatory amendments were drafted to strengthen Canada’s anti-money laundering and terrorist financing program and ensure compliance with international standards. The main objectives, among many, of the amendments are to update and strengthen customer due diligence requirements, improve compliance, monitoring and enforcement efforts, and address technical issues.
The following summary highlights the most significant proposed amendments.
Politically Exposed Persons
- In addition to identifying politically exposed foreign persons (PEFPs), reporting entities will also be required to determine if a client is a domestic politically exposed person (or the head of an international organization, close associate or family member of such person upon defined triggering events) and apply the prescribed measures;
- Reporting entities will be required to periodically review their entire client base, regardless of risk rating, to determine if existing account holders are politically exposed persons (PEPs); and
- The period of time to make a determination that a client is a PEP will be extended from 14 to 30 days.
Customer Due Diligence Information
- With respect to the records that must be kept for lending products, the term “client credit file” will be repealed and the regulation will instead list the types of information to be maintained and made available to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) in an examination. This information includes a record of the client’s financial capacity, the terms of the credit arrangement, and the address of their business or place of work; and
- The definition of a signature will be expanded to include electronic signature to facilitate account opening in a non-face-to-face environment.
Client Identification Verification
- The list of acceptable methods to verify client identity has been revised and the amendments identify the new specific sources to be used on a stand-alone basis, as well as other sources that can be used on a dual-method basis. One of the noteworthy changes for face-to-face identification specifies that when referring to a government- issued document, the document must contain the name and a photograph of the person. Furthermore, the reporting entity is required to verify that the name and photograph are those of that person. Reporting entities should consult this section of the amendments carefully to determine how the new permitted methods affect their current practices;
- The exemption from ascertaining the identity of a client will be extended to apply when the client is recognized by voice (over the telephone), by sight (in person or video conferencing) or digitally when a client logs in online; and
- Where reporting entities rely on an agent to verify a client’s identity, they will be able to use identification measures previously undertaken for another reporting entity (or itself) with respect to the same client as long as the measures were in accordance with the regulations, and the identification document is unexpired and valid.
AML Risk Assessment
- Reporting entities will be required to assess the risks of new technologies as part of their risk assessment criteria, which currently includes business relationships, products, delivery channels and geographies; and
- Entities in a financial conglomerate will have to consider the risks of their affiliates’ activities as part of their compliance programs.
- The exemption regarding reporting cash transactions of $10,000 or more by life insurance companies (for product purchases where the source of funds is not easily identifiable), is being repealed; and
- Reporting entities will be required to keep a record of any “reasonable measures” they have taken in cases where they were unable to ascertain the information specified.
Other amendments have been proposed to further clarify terms and definitions, provide context regarding prescribed measures and broaden the scope of applicability by repealing certain exemptions. For example, the definition of “casino” has been updated to be aligned with the types of entities that are subject to the Proceeds of Crime and Terrorist Financing Act when they conduct and manage a lottery scheme or game.
The cost of implementing these new amendments for reporting entities are mostly associated with the need to enhance compliance policies, procedures and systems. The measures that are expected to pose the most significant burden are related to the amendments introducing the requirements to identify foreign and domestic PEPs on an ongoing basis.
It should be noted that reporting entities are expected to maintain an adequate, written regulatory compliance management program, which should include change management. The change management process should facilitate the implementation of these new regulations. A training program should also be in place into which the newly amended regulations should be incorporated.
Coming into Force
The measures that provide more flexibility, such as the updated identification methods and the requirements for maintaining client signatures, will come into force immediately on the day they are published in the Gazette Part II. This is expected to occur shortly after the 60-day comment period closes.
Measures that will require reporting entities to fulfill new requirements, such as those with respect to PEPs, will come into effect one year after publication.