Consultation Launched On Changes To Canada's AML/ATF Regime - Money Laundering

Background

On June 7, 2023, the federal government published a paper seeking public consultation on potential changes to Canada's anti-money laundering and anti-terrorist financing ("AML/ATF") regime, with the deadline for comments closing on August 1, 2023. Canada's AML/ATF regime is established under several statutes, including the Proceeds of Crime (Money Laundering) and Terrorist Financing Act ("PCMLTFA"), its associated regulations, and the Criminal Code. As required every five years, a committee of Parliament will conduct a review of the PCMLTFA this year, which this consultation aims to support.

The 2018 review of the PCMLTFA concluded with 32 recommendations aimed at improving Canada's AML/ATF regime. Many of those recommendations have been addressed. Other recommendations, such as enabling the private sector to share AML/ATF related information, incorporating luxury goods and white-label automated teller machines under the PCMLTFA, and creating a framework for geographic and sectoral targeting orders, were set aside for further analysis and are considered in the recent consultation paper. Many of the proposals in the new paper, set out below, also respond to the findings the Cullen Commission set out in its final report.

The federal government paper acknowledges that despite efforts, "achieving operational effectiveness remains a persistent challenge" and "expert reports have highlighted challenges in the ability of Canada's AML/ATF Regime to use financial intelligence, ensure transparency of legal persons and arrangements, successfully investigate and prosecute money laundering, and deprive criminals of the proceeds of crime." The planned and possible solutions discussed in the paper are diverse and ambitious, and they include the introduction of a new agency, several substantive legislative changes, and many more discrete regulatory and operational adjustments.

The consultation paper also focuses considerable attention on the risks posed by virtual currency and digital assets, and includes four questions relating to the application of AML/ATF obligations to this sector, including new financial technologies such as mixers, decentralized finance and non-fungible tokens.

Measures to Increase Operational Effectiveness

Canada Financial Crimes Agency

In light of low and declining rates of money laundering investigations and prosecutions, the federal government committed in Budget 2023 to create a new, dedicated lead enforcement agency called the Canada Financial Crimes Agency ("CFCA"). A core consideration in the creation of the CFCA is the scope of its mandate, including the crimes or threats it will focus on, such as combatting fraud, sanctions evasion, fiscal crime (i.e. tax evasion), etc. The consultation paper seeks feedback on the mandate of the CFCA, among other questions on the core activities and functions of the CFCA.

Information Sharing

Building on a recommendation set out in the final report of the Cullen Commission, the consultation paper seeks feedback on various proposals to increase information sharing between private entities, private and public entities, FINTRAC and its reporting entities, and among public entities, in light of the privacy related concerns with such proposals. These issues raise legal as well operational questions, given privacy protections under the Charter, the Privacy Act, and the Personal Information Protection and Electronic Documents Act. Notably, the paper raises the possibility of a national database of political exposed persons, both domestic and foreign.

PCMLTFA Legislative and Regulatory Framework

Scope and Obligations of AML/ATF Framework

Review Existing Reporting Entities

Accountants: the consultation paper asks whether the definition of "accountant" should be expanded to include uncertified accountants who perform the triggering activities under the PCMLTFA, which currently defines an accountant as a "chartered accountant, a certified general accountant, a certified management accountant or, if applicable, a chartered professional accountant".
Casinos: in light of new forms of legal wagering, such as single-event sports betting and the introduction of provincially regulated iGaming, the consultation paper asks whether the PCMLTFA definition of "casino" should be revised to one that is more activity-based.
Dealers in precious metals and stones: the consultation paper asks whether the $10,000 triggering threshold to be considered a dealer under the PCMLTFA should be lowered or removed to cover a broader set of transactions and entities, and whether coverage should be expanded to include precious metals and stones sold at auction.
Payment service providers ("PSPs"): given that many entities which perform payment services are captured by both the PCMLTFA as money services businesses ("MSBs"), and under the new Retail Payments Activities Act as PSPs, the consultation paper asks whether MSBs and PSPs should be differentiated under the PCMLTFA and have separate AML/ATF requirements that account for different risks, with the objective of reducing administrative burden and streamlining obligations.

Expanding AML/ATF Coverage in the Real Estate Sector

With the Canadian real estate market having been identified as a sector highly vulnerable to money laundering, the consultation paper seeks feedback on whether the AML/ATF framework should be expanded to include the following as reporting entities: (i) for-sale-by-owner companies and real estate auction platforms, (ii) building supply and renovation companies, and (iii) title insurers and mortgage insurers. The consultation paper also asks if it should be obligatory for real estate representatives under the PCMLTFA to identify unrepresented parties and conduct third-party determinations in real estate transactions involving unrepresented parties.

Expanding Regime Scope to Other New Sectors

The consultation paper seeks feedback on whether the AML/ATF framework should be expanded to include the following as reporting entities:

High-value goods: high-value goods such as automobiles, yachts, aircraft, art, and other luxury products can be exploited for money laundering and are desirable to criminals both as a store of value for the proceeds of crime and for personal enjoyment.
Bulk cash: the consultation paper asks whether large cash reporting requirements should be extended to all businesses in Canada, not just reporting entities, and whether there should be prohibitions on cash purchases over a certain threshold.
Company service providers: these include businesses that provide incorporation services to the public and guide individuals in forming a corporation, which can be at risk of misuse for money laundering purposes when used to help individuals set up shell corporations to obscure ownership of assets and properties.
White label automated teller machines ("WLATMs"): this sector is vulnerable as WLATMs may be owned and operated by criminals who can load them with large amounts of illicit proceeds. Companies owning and loading WLATMs for themselves or for other legitimate businesses may also be criminally controlled.
Factoring companies: these companies allow a variety of payment methods such as cash, electronic funds transfers, money orders and cheques, which may be susceptible to money laundering; factoring services can also be used by import and export companies, which can expose them to trade-based money laundering risks.
Financial Crown corporations: currently most Crown corporations do not have formal AML/ATF mandates, aside from those with activities specifically captured by the PCMLTFA.

Streamlining Regulatory Requirements

The consultation paper seeks feedback on streamlining certain regulatory requirements including, for example, clarifying when a business relationship is considered to have ended, to help relieve reporting entities of their obligation for ongoing monitoring of a business relationship that no longer exists. The paper also considers that specific triggers and monetary thresholds applicable to certain sectors may have become outdated over time, and seeks comments.

Regulatory Compliance Framework

Modernizing Compliance Tools

Compliance program review: the consultation paper asks whether the PCMLTFA should be amended to allow FINTRAC, in circumstances of urgent or significant non-compliance, to direct reporting entities to undertake a review of their compliance program by an independent external or internal reviewer and share the results with FINTRAC.
Compliance officer: the consultation paper asks whether the PCMLTFA should be amended to specify the knowledge and competencies required of a qualified compliance officer.
Recording: the consultation paper asks whether the PCMLTFA should be amended to allow FINTRAC to use audio and video recording during compliance examinations to improve the efficiency of the process.
Publicizing violations and penalties: the consultation paper asks whether the PCMLTFA should be amended to expand the details that FINTRAC publishes in respect of violations and administrative monetary penalties ("AMPs") imposed.
Issuing AMPs against individuals: the consultation paper asks whether the PCMLTFA should be amended to allow FINTRAC the ability to levy AMPs against directors, officers and agents within an entity for certain exceptional violations; currently an individual may only be held liable where a criminal offence for non-compliance is committed.

Effective Oversight and Reporting Framework

False information offence: the consultation paper asks whether the PCMLTFA should be amended to create an offence against reporting entities for knowingly providing false or misleading information, or omitting information, to FINTRAC.
Reporting framework: given the regulatory burden on industry and the large volume of mandatory reports filed, such as suspicious transaction reports and large cash transaction reports, the consultation paper seeks feedback on any clarifications to the regime or changes to reporting timelines.
MSB and foreign MSB registration framework: the consultation paper explores options to address non-compliance in the sector, including vetting MSB applicants for compliance readiness prior to registration, and revoking registration when a MSB fails to comply with an enforcement measure, such as payment of an AMP.
Universal registration for all reporting entities: the consultation paper asks whether all reporting entities should be required to register with FINTRAC, a requirement that currently only applies to MSBs.
Exemptive relief for testing new technologies: the consultation paper asks whether the PCMLTFA should be amended to allow FINTRAC to provide short-term exemptive relief to reporting entities to allow testing of new technologies and methods to comply with AML/ATF obligations.
De-risking: the federal government has observed that some financial institutions have been opting to terminate banking relationships with clients in particular sectors, whom they collectively perceive to be high risk, rather than managing risk in line with a risk-based approach, known as de-risking. The consultation paper seeks to explore the causes behind de-risking and any actions that should be taken.

Additional Preventive and Risk Mitigation Measures

Geographic and sectoral targeting orders: such orders could foster a risk-based approach by allowing the Department of Finance or FINTRAC to enact temporary enhanced obligations targeted at businesses in geographic areas or sectors deemed to be of significant risk.
Source of wealth/funds determinations: the consultation paper considers whether all reporting entities should be required to take reasonable measures to establish the source of wealth of an individual when conducting a financial transaction over a certain threshold.
Restricting third-party cash deposits: an example of third-party cash deposits being used for money laundering purposes entails the interception of legitimate funds through corrupt MSBs, and then depositing illicit cash into the accounts of individuals and businesses who are expecting inward remittances. Account holders are often unaware of the illicit source of funds as they are expecting the transfer of funds into their account from another country.

Virtual Currency, Digital Assets and Technology-Enabled Finance

PCMLTFA Changes

The consultation paper notes the inherent risks posed by virtual currencies, given their ease of access, anonymity, transferability outside of traditionally regulated sectors, and their use in cybercrime. Currently businesses that deal in virtual currencies, including the exchange and transfer of virtual currencies, are required to register with FINTRAC as MSBs, and Budget 2023 announced the government's intention to criminalize the operation of unregistered MSBs. The paper lists the following examples of new technologies for which money laundering and terrorist financing risks continue to evolve:

Crypto-mixers / crypto-tumblers: online services that mix virtual currencies from a variety of sources to obfuscate the chain of transactions from sender to receiver and enhance anonymity.
Decentralized finance (DeFi): DeFi commonly refers to the provision of financial products and services that use distributed ledger technology to disintermediate and decentralize legacy ecosystems by eliminating the need for some traditional financial intermediaries and centralized institutions.
Non-fungible tokens (NFTs): unique digital assets that are not interchangeable and are generally used as collectibles rather than for payment or investment purposes, and are frequently purchased using virtual currencies.
Metaverse: generally refers to a virtual reality accessed through the internet that allows users to interact digitally, including transacting with virtual currencies and digital assets.
Fintech: Fintech companies provide technology-enabled financial services, such as depositing cheques, offering credit, transferring money, hosting interest paying savings accounts, and paying bills.
Privacy-enhancing coins: a type of virtual asset that seeks to provide users greater anonymity than other types of virtual assets (such as Bitcoin or Ethereum).
Tokenized assets: digital representations of ownership in real-world assets, such as real estate, art, commodities, stocks, and securities, that are traded on blockchain-based platforms.

The consultation paper asks about (i) risks posed by new financial technologies that are insufficiently covered by the AML/ATF framework, (ii) whether AML/ATF requirements should be extended to fintechs that are currently not regulated, (iii) whether reporting entities should be prohibited from transferring virtual currencies to and from crypto-mixers/crypto-tumblers that are not registered with FINTRAC, and (iv) how AML/ATF obligations for this sector can be crafted to be technologically neutral, among other questions.

Criminal Code and Canada Evidence Act Changes

The consultation paper asks whether the Criminal Code should be amended to better enable the seizure of digital assets including cryptocurrency, whether there is a need to amend the Canada Evidence Act to provide for the admissibility of blockchain data as evidence, and whether the Canada Evidence Act should be amended so that the authenticity of records created using blockchain technology may be presumed, among other reforms.

Criminal Justice Measures

Expansion of the offence of laundering proceeds of crime: "third party money laundering" is used to describe the laundering of proceeds of crime as a service and for a fee, and where the launderer is generally not involved in the commission of the predicate offence. The paper requests feedback on whether the offence of laundering proceeds of crime under s. 462.31 of the Criminal Code should be amended to better address third-party money laundering. It is unclear whether an amendment of the Criminal Code is necessary, or the best way, to achieve the stated goal. In our view, the limited impact of prior amendments to s. 462.31 reflects the need for enhanced sophistication, initiative and coordination on the part of authorities, all of which may be attainable through the introduction of a strong new agency (discussed above).
Offences for other economically-motivated crime: while activities associated with "phishing" and "spoofing" are illegal in Canada under existing law, the consultation paper questions whether there might be a benefit from enacting additional criminal offences relating to these activities, including scenarios where fraudsters aim to obtain personal information from individuals through telephone, text or online means.
Sentencing for laundering proceeds of crime: the penalty for laundering proceeds of crime is a maximum of 10 years' imprisonment when prosecuted on indictment, or up to two years on summary conviction. The consultation paper seeks views on sentencing reforms given suggestions that deterrence is insufficient and there is little incentive to investigate and prosecute money laundering offences because they only result in "short" incarceration served concurrently with the sentence for the predicate offence.
Access to subscriber information under the Criminal Code: as a result of jurisprudence, such as the Supreme Court of Canada's 2014 decision in v. Spencer, police are subject to constitutional restrictions with respect to how they may seek to access to information about subscribers such as name, address, phone number, and account identifiers like an IP address. The consultation paper asks whether legislative solutions should be explored to address concerns raised by law enforcement, including Criminal Code provisions relating specifically to subscriber information and improved turnaround times in obtaining warrants. It is unclear whether the government is considering tweaks or major changes that may lead to Charter challenges, based on existing Supreme Court decisions.
Electronic devices: the consultation paper asks whether there should be amendments to the Criminal Code to address searches of persons for mobile devices during the execution of a general warrant, and to address solicitor-client privilege concerns in the context of electronic devices. These are important, sensitive issues, particularly having regard to evolving technologies and privacy concerns.
Pre-trial seizure and restraint of property associated with crime: the consultation paper seeks views on approaches to enhance the pre-trial preservation of proceeds of crime for possible forfeiture under the Criminal Code, given the importance of early seizure and restraint powers in achieving better outcomes for the recovery of proceeds of crime.
Criminal forfeiture: criminal forfeiture is described as an important aspect of the government's efforts against money laundering and organized crime, as it seeks to ensure that "crime doesn't pay". The consultation paper seeks views on how to better expand the scope of use of this tool.
Intelligence and evidence: the consultation paper seeks views on how the Canada Evidence Act's framework governing the protection and use of sensitive intelligence and information during court proceedings in relation to money laundering and terrorist financing could be improved.
Criminal jurisdiction: the consultation paper seeks feedback on whether there should be reforms relating to the territorial connection / subject matter jurisdiction required for the offence of laundering proceeds of crime (under s. 462.31 of the Criminal Code), without being specific about the reforms under consideration. The paper also asks whether provisions governing production orders (in effect summonses for records served on non-targets) should be clarified where the respondent's presence in Canada is digital or primarily digital.
Keep open accounts under investigation: the consultation paper seeks views on implementing a formal "keep open" regime because financial institutions may close an account upon becoming aware the account holder is the subject of an investigation, which may inadvertently disrupt an investigation by prematurely ending a potential ongoing source of information.

The paper also includes a number of technical proposals related to collecting additional beneficial ownership information, removing the requirement to verify the identity of up to three authorized signers on business accounts, and adding exceptions for reporting large virtual currency transactions to FINTRAC, among others.

Stakeholders interested in commenting on the proposals set out on in the consultation paper may do so until August 1, 2023.

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Canada: Consultation Launched On Changes To Canada's AML/ATF Regime