Is your government aware of the problem?

Feb 15, 2020

Canada Gazette, Part I, Volume 154, Number 7:  Regulations Amending the Regulations Amending

Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2019

Reports commissioned by the Government of British Columbia

In September 2017, the Attorney General of British Columbia, Minister David Eby, appointed Peter German to conduct an independent review of allegations of money laundering in B.C. casinos. German’s first report, Dirty Money, was released in July 2018 and found that large-scale, transnational money laundering has been occurring in B.C. casinos, highlighting the “Vancouver Model” for laundering money. German made 48 recommendations, many of which relate closely to those made by the FINA Committee for the 2018 federal parliamentary review, as described below. Minister Eby later mandated Peter German to produce a follow-up report on money laundering relating to real estate, luxury cars and horse racing to verify concerns raised in his original report about the scale and scope of organized crime and money laundering activities in those three sectors. The provincial Minister of Finance also tasked an expert panel to review the B.C. real estate sector and recommend what action can and should be taken to better tackle money laundering. The panel looked at how money was laundered through gaps in consumer protections, compliance and enforcement of existing laws, and standards in financial services regulations, among other areas. German’s second report, Dirty Money – Part 2, and the expert panel’s report were released in May 2019 and highlighted evidence of money laundering in the real estate sector. In its report, the expert panel acknowledged the difficulty in measuring money laundering, but estimated $7.4 billion in money laundering activity in British Columbia in 2018, of which $5.3 billion was laundered through B.C. real estate. The report provided 29 recommendations, many of which also related closely to those made by the FINA Committee. These proposed amendments to the Regulations herein are designed to address the recommendations by increasing the strength of the oversight approach to the casino and the real estate sectors. 2018 Parliamentary review To ensure that the AML/ATF Regime remains robust and effective, the administration and operations of the Act are reviewed by a committee of Parliament every five years. The FINA Committee launched a statutory review of the Act in February 2018 and published its report in November 2018. The report makes 32 recommendations to strengthen the Regime by addressing legislative and regulatory gaps, enhancing the exchange of information and privacy rights of Canadians, strengthening intelligence capacity and enforcement, and modernizing the Regime overall. The proposed amendments will specifically address Recommendation 8, which states that all reporting entities, including DNFBPs such as the real estate sector, that are now exempt from the obligation of identifying beneficial ownership (BO) be required to do the following:

 determine and verify the identity of the beneficial owners;

 determine if their customers are politically exposed persons, or if they are the family members or associates of politically exposed

persons;

 prohibit opening accounts or completing financial transactions until the beneficial owner has been identified and their identity verified with adequate identification.

These proposed amendments will also strengthen Canada’s compliance with the FATF standards for DNFBPs, where Canada was rated non-compliant in 2016. FATF and guidance on virtual assets Canada is a founding member of the FATF, an intergovernmental body that sets standards and promotes effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist activity financing and other related threats to the integrity of the international financial system. Although the standards set by the FATF are not legally binding, as a member, Canada is obligated to implement them and to submit to a peer evaluation of their effective implementation. Not meeting this commitment could lead to a number of sanctions, from enhanced scrutiny measures to public listing, and, in the extreme, suspension of membership from the FATF. Furthermore, non-compliance could cause reputational harm to Canada’s financial sector and subject Canadian financial institutions to increased regulatory burdens when dealing with foreign counterparties or when doing business overseas.

In 2015, the FATF published a guide for the analysis of risks related to virtual currencies and stressed the responsibility of countries to implement effective regulation and supervision, with dissuasive sanctions, of activities related to virtual currencies. In 2018, the FATF amended its Recommendation to explicitly subject virtual asset service providers to AML/ATF obligations. On June 21, 2019, the FATF finalized and adopted its analysis and guidance in the context of virtual assets to help national authorities better understand and develop the regulation and supervision of these activities. Due to the timing of its release, the last set of regulatory amendments did not fully address the FATF standards, as the scope was purposely limited so as not to overstep international standards as the FATF was finalizing its analysis and guidance. The modified FATF Recommendation requires countries to assess and mitigate the risks associated with virtual asset activities and service providers, license or register service providers and subject them to supervision or monitoring by competent national authorities, and implement sanctions and other enforcement measures when reporting entities fail to comply with their obligations. The threat of criminal and terrorist misuse of virtual assets is serious and urgent, and the FATF expects all countries to take prompt action to implement the FATF recommendations in the context of virtual asset activities and service providers. The FATF will monitor implementation of the new requirements by countries and service providers and conduct a review in June 2020. In the Canadian context, the last set of amendments to the Regulations (SOR/2019-240) introduced new virtual currency reporting and record-keeping obligations, which align with the FATF Recommendation. The regulatory amendment clarified that domestic and foreign businesses that are “dealing in virtual currency (VC)” will be considered money services businesses (MSBs). These “dealing in” activities include virtual currency exchange services and value transfer services. As required of all MSBs, persons and entities dealing in VCs will need to fulfill all AML/ATF obligations, including implementing a full compliance program and registering with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

These obligations will come into force in June 2020. In addition, any reporting entity in any sector that receives $10,000 or more in VC (e.g. receiving deposits or any form of payment) will have record-keeping, identification and reporting obligations. These obligations will come into force in June 2021. One of the outstanding issues that the proposed amendments seek to address is the “travel rule.” The FATF Recommendation requires member countries to apply the travel rule that currently exists for electronic funds transfers to VC transfers. The travel rule is a longstanding customer due diligence requirement for banks and other financial institutions to include certain client information when transferring funds between financial institutions on behalf of their customers. The proposed amendments would extend the travel rule requirements to VC transfers in alignment with the FATF Recommendation.