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Canada underwent its 4th Round Mutual Evaluation process in November 2015, an examination conducted by the Financial Action Task Force (FATF) and the International Monetary Fund (IMF). Regulatory updates are often expected around this process to fill in gaps and improve compliance with international standards and Canada was no exception to the process.
The federal Department of Finance developed regulatory amendments to meet international expectations, industry requirements and maintain regulations that speak to current technologies and ways of doing business. Consultations with the public and private sectors on the draft regulations did result in some meaningful changes in the published version of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) regulations but the process was slow. The draft amendments were released on July, 4 2015 but only finalized a year later after a series of delays, including vocal feedback on some of the proposals.
This bulletin focuses on the big picture and larger burden items rather than detailing changes touching at least 125 sections of the regulations.
New Online ID Methods Not So Easy
Identification methods and recordkeeping measures have been revamped from the current, conservative and predominantly face-to-face based methods to more liberal and flexible options. The options will somewhat satisfy the large number of online, app-based service providers. However, many of the document options may still not translate well to the online world. Careful consideration should be taken when determining the “easy route” of implementing the dual process (whether in person or not) to consider the risk of the channel and the veracity of the ID measures taken. It is recommended to maintain the conservative view where possible to minimize the risks of money laundering as well as fraud. Don’t be fooled by the opportunity to implement the new ID methods immediately. Subtle changes in required information may and should result in IT changes and batch reporting fields at
Financial Transactions and Reports Analysis Centre (FINTRAC).
Another win for the various industries covered under the Act and regulations is amendment to clarify who can conduct KYC (know your customer) on your behalf. This would include an entity considered to be affiliated with you, under the definition, such as if one is owned by the other, if both entities share a parent company, or if the financial statements are consolidated. In this instance, a reporting entity is allowed to rely on an affiliate to ascertain identity on its behalf. Agents or mandataries can also fulfill this function, but must have a written agreement to do so.
Expanded Reporting on Politically Exposed Persons
Currently reporting entities are required to determine whether an individual opening an account is a politically exposed foreign person (PEFP). The requirement to identify PEFPs has now been expanded to include domestic PEPs (PEDPs), their families and their close associates as well as heads of international organizations. Collectively, the entire category will be called PEPs. Reporting entities are now required to periodically identify whether any PEPs hold accounts at their organization.
This could mean that reporting entities scrub their client names against PEP lists, as simply asking the question of the client is no longer acceptable. On the positive side, the time required for a reporting entity to identify, review, approve and document a PEP has been expanded from 14 days to 30 days. Documentation continues to include the approval of a senior officer to open and maintain the account, as well keeping a record of the source of funds. The transaction determination amount remains CAD $100,000.00.
The final note on PEPs: foreign PEPs remain a mandatory high-risk account requiring frequent ongoing monitoring and special measures. Domestic PEPs are afforded services on a risk-based approach to determine additional enhanced due diligence measures and ongoing monitoring and scrutiny. While foreign PEPs are considered to be a PEP forevermore, domestic PEPs only earn the title for five years after the date they no longer hold the position.
Reasonable Measures Documented
At this point, we should all be familiar, if not comfortable, with the term “reasonable measures.” Any provision in the act which requires the application of reasonable measures will now require documentation of measures taken to satisfy the requirement. As an example, a financial institution has requested a paystub to confirm source of funds. If all goes well, the account is opened and the documents are retained as part of the process. If the information can’t be obtained and the account is maintained, the financial institution now needs to document and retain any additional steps they took before the ultimate decision was concluded. Accounts remaining open where required information is not obtained should be considered high risk and monitored accordingly.
Update Your Implementation Plan
Once the compliance and/or legal department within your organization has read and understood the amendments and the impact to the organization, a detailed go-forward plan for implementation should be established. The plan should include timelines for implementation of specific requirements and approaches such as implementing on a phased approach or a “big bang” plan. Updates to: policies and procedures, training and the risk-based approach as well as front-end and back-end systems for record keeping and batch reporting must appropriately coincide with the operational implementation. Ensure all changes are implemented and new procedures acknowledged through training activities.
The current system requires reporting entities to assess risk based on four elements: products; services and delivery channels; geography; clients and business relationships, and other relevant factors. The legislative amendments require a reporting entity to include an assessment of affiliate relationships (as well as the risks of new technologies) as the fifth element in their consideration of risk and the documented risk-based approach.
Remember the regulations represent the minimum requirements to meet, not the standard to aspire to. Your organization may have determined its risks are higher due to the products, services, geography, customers and business relationships it offers and may wish to implement additional measures around identification.
The new legislation may prove to create a challenging year of strategic planning and change for many financial institutions. The changes identified in this bulletin are not exhaustive and are not intended to represent legal or specific consultative advice. Given the number and complexity of the changes, there is no substitute for careful reading and detailed consideration of how your organization will be impacted. If you are struggling to understand the language, or are unsure how to create a project plan, contact your local MNP advisor or visit mnp.ca
Jennifer Egelnick is a Manager with MNP’s Investigative & Forensic Services practice and assists clients in mitigating and managing compliance and reputational risks related to fraud, money laundering and other breaches though risk assessments and compliance reviews. In her current role Jennifer has delivered training programs, seminars and customized learning programs throughout Central Canada for reporting entity clients in various sectors. Before joining MNP, Jennifer worked as a Senior Compliance Officer for a large, global MSB. She is a graduate of Queen’s University, and is a certified Project Manager (PMP) and Certified Anti-Money Laundering Specialist (CAMS).
Related Topics:Anti-Money Laundering; Forensics; Financial Reporting; FINTRAC
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