Background

On July 10^th, 2019 the final amendments to Canada’s anti-money laundering (AML) regulations, were published in the Canada Gazette.  Many of the changes are based on requirements set out by the Financial Action Task Force (FATF), an inter-governmental body that sets out international standards for combating money laundering and terrorist financing, as well as from certain amendments made to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) made through the Economic Action Plan 2014 Act, No. 1 and the Budget Implementation Act, 2017, No. 1.

For those that prefer to see the updates in context, we have created unofficial red-lined versions of the regulations, which can be found here.

It is expected that all regulated entities will have to significantly revamp their AML compliance program due to the changes. There are three different “coming into force” dates that should be noted:

• June 25, 2019: a wording change from “original” to “authentic” related to identification. This is welcomed news for digital identification.
• June 1, 2020: changes related dealers in virtual currency (which do not directly apply to Credit Unions).
• June 1, 2021: all other regulatory amendments.

Updated guidance from FINTRAC is expected to be seen ahead of the coming into force dates. Given the legislative changes, there will be adjustments to various FINTRAC policy interpretations so be sure to monitor closely and save any interpretations that you may have used for due diligence purposes.

Hefty Disclaimer

This article should not be considered advice (legal, tax or otherwise). That said, any of the content shared here may be used and shared freely – you don’t need our permission. While we’d love for content that we’ve written to be attributed to us, we believe that it’s more important to get reliable information into the hands of community members (meaning that if you borrow content that we wrote and published publicly, we may think you’re a jerk but we’re not sending an army of lawyers).

What Does This Mean For Your Credit Union?

Changes to Canada’s AML regulations will have a direct impact on a Credit Union’s AML obligations, including the following:

• Reporting;
• Record keeping; and
• Member identification.

Many changes will require adjustments in your IT systems to ensure that all necessary information is available to be included in FINTRAC reports, particularly those involving online transactions. If you’re not sure where to start please feel free to contact us. From a practical standpoint, while you do have some time to update your AML program, it is best to start budgeting and planning now.  It may also be prudent to discuss changes with your board of directors as well.

FINTRAC Reporting

This round of changes to AML regulations has a much greater focus on reporting including changes to the information that will need to be included in various reports. We have summarized the applicable changes below.

Certain reports will require information that was not originally included. These changes include information such as:

• Purpose of transaction;
• Source of cash or source of funds;
• For online transactions:
  • Type of device used by person who makes request;
  • Number that identifies device;
  • Internet Protocol address used by device;
  • Person’s or entity’s user name; and
  • Date and time of when a person makes a request.

While most of these fields are mandatory, where fields are marked as optional, if an entity has the information (this may mean in the background of your IT systems), it is expected that it be included in the report. For full details on what has changed for FINTRAC report fields, we have created an unofficial redline which can be found here.

All changes related to reporting come into force on June 1, 2021.

STR Reporting

Currently, if a reporting entity has reasonable grounds to suspect that a transaction, or attempted transaction, is related to money laundering or terrorist financing, a report must be submitted to FINTRAC. The timeframe for submission was within 30 days of the date that a fact was discovered that caused the suspicion. The revised regulations amend this to “as soon as reasonably practicable after measures have been completed to establish that there are reasonable grounds to suspect that a transaction or attempted transaction is related to money laundering or terrorist financing.”

This means that a report will be due shortly after a reporting entity has conducted their analysis that established reasonable grounds for suspicion. It will be important to have detailed processes for unusual transaction investigations and this should include a step in the process that clearly identifies when a determination is made that establishes reasonable grounds to suspect the transaction is related to money laundering or terrorist financing. A defined time for what “as soon as reasonably practicable” means should be documented as well to ensure reports are completed and submitted on time. It will be interesting to see how FINTRAC looks at this obligation during examinations.

Terrorist Property Reporting

A very small change (or clarification), related to Terrorist Property Reports, has been made in the final regulations. The timing requirement for filing has changed from “without delay” to “immediately”. This means regulated entities need to report that they are in possession of terrorist property as soon as they become aware.

EFT Reporting

The definition of an EFT has changed with the amended regulations and reads as such:

An electronic funds transfer means the transmission by any electronic, magnetic or optical means of instructions for the transfer of funds, including a transmission of instructions that is initiated and finally received by the same person or entity. In the case of SWIFT messages, only SWIFT MT-103 messages and their equivalent are included. It does not include a transmission of instructions for the transfer of funds:

1. 1. that is carried out by means of a credit or debit card or a prepaid payment product if the beneficiary has an agreement with the payment service provider that permits payment by that means for the provision of goods and services;
   2. that involves the beneficiary withdrawing cash from their account;
   3. that is carried out by means of a direct deposit or a pre-authorized debit;
   4. that is carried out by cheque imaging and presentment;
   5. that is both initiated and finally received by persons or entities that are acting to clear or settle payment obligations between themselves; or
   6. that is initiated or finally received by a person or entity referred to in paragraphs 5(a) to (h.1) of the Act for the purpose of internal treasury management, including the management of their financial assets and liabilities, if one of the parties to the transaction is a subsidiary of the other or if they are subsidiaries of the same corporation.

The definition now includes instructions initiated and received by the same person or entity, which means certain internal transfer transactions may be caught.

Also related to EFT reporting, the final amendments removes the language commonly known as the “first in, last out” rule. This means that the first person/entity to ‘touch’ the funds for a transaction incoming to Canada, or the last person/entity to ‘touch’ the funds for a transaction outgoing from Canada, had the reporting obligation (as long as the prescribed information was provided to them). The update will change the reporting obligation to whoever maintains the customer relationship.

Large Virtual Currency Transaction Reporting

If you plan to conduct transactions involving virtual currencies such as bitcoin, you will be required to report the receipt or the sending of amounts of CAD 10,000 or more in a virtual currency to FINTRAC. These basically are the same as Large Cash Transaction reporting obligations, including making a determination if the person from whom the virtual currency is received is acting on behalf of a third party, and will require reporting entities to maintain a Large Virtual Currency Transaction Record.

Most of the recordkeeping requirements for virtual currency are very similar to Large Cash Transaction requirements.

The 24-Hour Rule

Multiple transactions performed by, or on behalf of, the same customer or entity, or are for the same beneficiary, within a 24-hour period are to be considered as a single transaction for reporting purposes when they total CAD 10,000 or more. This would mean that only one report would need to be submitted to capture all transactions that aggregate to CAD 10,000 or more. If you use software to automatically detect these types of transactions, you should begin discussions with your IT department or software provider to determine the time and resources that will be required to update the detection process.

For example, currently, a Large Cash Transaction Report must be submitted either for single transactions of CAD 10,000 (or more), or for multiple transactions of less than CAD 10,000 each that add up to CAD 10,000 or more in a 24-hour period. This can result in situations where two reports are filed for transactions taking place in a 24-hour period.

Cash deposit of CAD 12,000 – LCTR #1 for CAD 12,000
Cash deposits of CAD 5,000 and CAD 6,000 – LCTR #2 for CAD 11,000

Using the same example, under the new rules we would have:
Cash deposits of CAD 12,000, CAD 5,000 and CAD 6,000 – Single LCTR for CAD 23,000

We can expect to see guidance from FINTRAC ahead of the enforce date. If you have questions prior to this,  it is possible to write to FINTRAC to request a policy interpretation.

Compliance Program

In addition to the process changes, including reporting changes discussed above, there are some other changes that you will need to make to your compliance program.

Training

The amended regulations have introduced a new requirement to institute and document a plan for ongoing compliance training.  This differs from the current requirement to develop and maintain a written training program.

In practice, this means that in addition to documenting all of the training that has already been completed, you will need to clearly document future training plans. Be sure staff is receiving training on process changes that are applicable to their roles.

Risk Assessment

One of the deficiencies identified in the Financial Action Task Force (FATF) review of Canada was not having a requirement to assess new technologies before their launch. The final amendments require all reporting entities to assess the risk related to products and their delivery channels, as well as the risk associated with the use of new technologies, prior to public release.

This has been a best practice since the requirement to conduct a risk assessment came into force, but this change makes this a formal requirement. This will require strong communication and closer cooperation between compliance officers and teams involved in the development of new products or services.

Records of Reasonable Measures

The requirement to keep records related to reasonable measures to obtain certain information, has been removed with this round of changes. It is important to note that credit unions must still take reasonable measures and it is only the requirement to keep a record of the measures used that has been repealed. 

Identification

The range of identification methods that can be used will be broadened. This is good news, especially for credit unions that are using identification methods for members who are not physically present.

Prior to this round of changes, there was a requirement that when members are identified, the document and/or data that you collect must be in its “original” format. The final regulations replace the word “original” with “authentic”, and state that a document used for verification of identity must be “authentic”, valid and current. This would allow for scanned copies of documentation, and/or for software that can authenticate a person’s identification document. This change came into force on June 26, 2019.

Other changes to the identity verification requirements are as follows:

• For credit file verification (single source), the credit file information must now be derived from more than one source (i.e. cannot contain only one trade line on the credit file);
• For the dual source method, when relying on a credit report as part of a dual source, the credit file must have been in existence for at least six months. Additionally, the person or entity that is verifying the information cannot be a source (i.e. you cannot be a tradeline of the credit file).

In addition, there are provisions that allow a credit union to rely on the identification conducted previously by other reporting entities. If this method is used to identify a member, the credit union must immediately obtain the identification information from the other reporting entity, and have a written agreement in place requiring the entity doing the identification to provide the identification verification as soon as feasible.

If you have members that are publicly traded trusts, credit unions will be required to obtain names and addresses of all persons who own or control, directly or indirectly, 25% or more of the units of the trust.

Politically Exposed Persons (PEPs)

The amended regulations add some new requirements related to PEPs, which are as follows:

• You must obtain the “source of wealth” of a PEP; and
• If a PEP is a head of an international organization, the person will continue to be treated as a PEP for five years after they have held the position.

This change comes into force on June 1, 2021, and will likely result in IT system changes related to record keeping and monitoring.

Prepaid Products

If you offer Prepaid Payment Products, the amended regulations now include new obligations for prepaid cards that are issued by financial entities. The obligations are similar to those that apply to regular member accounts, and comes into force on June 1, 2021.

The regulations apply to any prepaid payment product that is tied to an account, that permits funds or virtual currency that total CAD 1,000 or more to be added to the account within a 24-hour period, or where a balance of CAD 1,000 or more will be maintained.

Records that will have to be maintained are as follows:

• a record of the name and address of each holder of a prepaid payment product account and each authorized user, the nature of their principal business or their occupation and, in the case of a person, their date of birth;
• if an account holder is a corporation, a copy of the part of its official corporate records that contains any provision relating to the power to bind the corporation in respect of the prepaid payment product account or the transaction;
• a record of every application in respect of the prepaid payment product account;
• a prepaid payment product slip in respect of every payment that is made to the prepaid payment product account;
• every debit and credit memo that it creates or receives in respect of the prepaid payment product account;
•  a copy of every account statement that it sends to a holder of the prepaid payment product account; and
• a foreign currency exchange transaction ticket in respect of every foreign currency exchange transaction that is connected to the prepaid payment product account.

There are also record keeping obligations where an international electronic funds transfer of CAD 1,000 or more has been conducted through the prepaid product. Additionally, a prepaid payment product slip, similar to a deposit slip, must be maintained.

Similar to member accounts, you will also have to keep account applications and any foreign currency transaction information related to the prepaid product. A PEP determination is to be made when the prepaid product account is opened, and when a payment of CAD 100,000 or more is made to a prepaid product account.

We’re Here To Help

If you would like assistance in updating your compliance program and/or processes, or have any questions related to the changes, you can get in touch using our online form on our website, by emailing info@outliercanada.com, or by calling us toll-free at 1-844-919-1623.