On October 13, 2012, the Department of Finance (DOF) released proposed amendments to the Regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act ("PCMLTFA") ("Amendments"). The DOF’s stated goal of the Amendments is to improve Canada’s compliance with the Financial Action Task Force’s (FATF) Recommendation 5 (recently reformulated as Recommendation 10), which deals with customer due diligence (CDD).
The PCMLTFA is the basis for Canada’s anti-money money laundering (AML) and anti-terrorist financing (ATF) regime and applies to designated reporting entities (including Schedule I and II banks, foreign bank branches, trust companies and insurance companies). It establishes four categories of obligations: customer identification, record keeping, internal compliance, and a mandatory system for reporting suspicious financial transactions and other prescribed transactions.
The FATF is the international standard-setting body for AML/ATF activities, of which Canada is a founding member. Recommendation 5 requires member countries to implement measures to ensure that financial institutions and intermediaries can adequately identify their customers, understand their activities, and conduct ongoing scrutiny of customers’ activities.
The Amendments propose the following clarifications to the CDD provisions of the PCMLTFA, and are expected to come into force one year after final publication in the Canada Gazette. Once finalized, regulated entities will need to update their anti-money laundering policies and procedures, financial product documentation and privacy policies to comply accordingly.
The Amendments would formally define the term “business relationship” to include any relationship established between a person or entity regulated under the PCMLTFA and a client to conduct either financial transactions or provide services related to those transactions and (a) if the client holds one or more accounts with the regulated entity, all transactions relating to those accounts; or (b) if the client does not hold an account with the regulated entity, only those transactions and activities in respect of which the regulated entity is required to ascertain the identity of a person or confirm the existence of an entity under the Regulations.
The Amendments would specify that, in order to meet their obligations under the PCMLTFA to identify and report suspicious transactions, reporting entities should conduct ongoing monitoring of business relationships with clients, based on a risk assessment, and should obtain information on the purpose of a business relationship when entering into a business relationship with a client.
"Ongoing monitoring" would be defined to mean periodic monitoring of a business relationship, based on a risk assessment, for the purpose of detecting suspicious transactions required to be reported under the PCMLTFA; keeping client identification and beneficial ownership information up to date; reassessing the level of risk associated with the client’s transactions and activities; and determining whether transactions or activities are consistent with information, including the risk assessment, obtained about the client.
Enhanced Customer Due Diligence (CDD)
The Amendments would specify that enhanced CDD measures should be taken in respect of all high-risk clients and activities, and include keeping client information up to date and conducting enhanced ongoing monitoring.
The Amendments would also require certain reporting entities to obtain identification information, in designated circumstances, from all persons who own 25% or more of a corporation or entity. Those reporting entities would also be expected to collect documentary evidence from the client that confirms the beneficial ownership information that they have obtained.
Finally, the Amendments would clarify that no exceptions exist to reporting entities’ current CDD obligation regarding any transaction or activity which gives rise to a suspicion of money laundering or terrorist financing.