Proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act ‎regulations to include the mortgage lending sector

On February 18, 2023, the federal government released a proposal to amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCMLTFA”). Among many regulatory initiatives, the government has proposed extending the application of the PCMLTFA to non-financial institution mortgage lenders, and requiring financial entities to incorporate enhanced due diligence measures and monitor correspondent-banking relationships.

Other proposed changes include allowing Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) to recover the costs of its compliance program and related activities from the entities under FINTRAC’s supervision, requiring money service businesses (“MSB”) to submit additional information when registering with FINTRAC, and streamlining requirements for sending administrative monetary penalties (“AMP”) documents.

Extending the application of PCMLTFA to non-financial institution mortgage lenders

FINTRAC, which is Canada’s anti-money laundering and anti-terrorist financing (“AML/ATF”) regulator and financial intelligence unit, regulates money service businesses (“MSB”). MSBs are persons or entities that provide services such as foreign exchange, remitting or transmitting funds, issuing or redeeming money orders, traveller’s cheques or anything similar, as well as dealing in virtual currency, or crowdfunding platform services.

Currently, only financial institutions that issue mortgages—including banks, credit unions, and trust and loan companies—are designated as reporting entities under the PCMLTFA and are subject to AML/ATF requirements. If the amendments are implemented, non-financial institution mortgage lending entities will also be regulated under the PCMLTFA and would have to comply with various AML/ATF obligations.

The non-financial mortgage lending entities include mortgage administrators, mortgage brokers, and mortgage lenders:

• Mortgage administrator is defined as “a person or entity, other than a financial entity, that is engaged in the business of servicing mortgage agreements on real property or hypothec agreements on immovable on behalf of a lender.”
• Mortgage broker is defined as “a person or entity that is authorized under provincial legislation to act as an intermediary between a mortgage lender and a borrower.”
• Mortgage lender is defined as “a person or entity, other than a financial entity, that is engaged in providing loans secured by mortgages on real property or hypothecs on immovable.”

Under the PCMLTFA, organizations and professions regulated by the Act need to comply with anti-money laundering (“AML”) regulations. These businesses are further obliged to develop and implement compliance programs to identify, monitor, record, and report certain types of financial transactions.

The compliance programs must contain:

• a Compliance Officer, who is responsible for implementing the compliance program;
• written and up-to-date compliance policies and procedures;
• risk assessment of the business’ potential money laundering or terrorist activity financing;
• a written compliance training program for the employees, agents or mandataries, or other authorized persons;
• an ongoing compliance training program for employees and agents; and
• a plan that documents the review process of the program’s effectiveness, which must be assessed at least every two years.

The amendments were a response to concerns raised by the Cullen Commission Report 2022, which addressed risks of the mortgage lending industry’s money laundering activities, and RCMP studies that have revealed that real estate is one of the most significant sectors used for money ‎laundering purposes. In recent years, the Department of Finance found an increasing number of mortgages issued by unregulated mortgage lenders.

Requiring financial entities to incorporate enhanced due diligence measures and monitor correspondent-banking relationships

Previously, financial entities were subject to ongoing monitoring obligations only if they had correspondent-banking relationships with foreign financial institutions that had civil or criminal penalties against anti-money laundering.

To mitigate risks of misuse for money laundering and terrorist financing, the government has proposed that Canadian financial entities conduct enhanced due diligence practices prior to entering a correspondent banking relationship.

Prior to entering into a correspondent banking relationship, financial entities should periodically assess the level of risk associated with the foreign financial institution’s transactions. Accordingly, the financial entities should consider various factors, including the foreign financial institution’s reputation and its ability to supervise money laundering or terrorist financial activities. The financial entities would need to reassess the foreign financial institution based on the types of transactions and the level of risk associated.

The financial entities would need to monitor if there are any transactions that need to be reported on an on-going basis. They would be required to keep information about the foreign financial institution up-to-date and accurate.

Other proposed amendments

• The government has also introduced a cost recovery framework for FINTRAC. Once implemented, FINTRAC would be able to recover the administrative expenses it incurs in regulating compliance with the PCMLTFA from its reporting entities.
• The government has introduced an enhanced MSB registration framework. Once implemented, MSBs would need to submit additional information to FINTRAC when applying for MSB registration. To legally operate in Canada, MSBs must register with FINTRAC and renew their registration every two years. The enhanced framework would require MSBs to submit the contact information of their CEO, president, director or owners.
• The government has introduced a streamlined AMP document framework. Once implemented, AMP-related documents can be sent to reporting entities electronically, through registered mail, or by physical delivery. Currently, FINTRAC is not allowed to serve a reporting entity solely by electronic means.

What is the potential impact?

Firstly, the amendments will have a significant impact on those engaged in mortgage lending. The compliance requirements may impose increased administrative burden on non-financial institution mortgage lenders, especially those that do not have an anti-money laundering program. The Regulatory Impact Analysis Statement estimates that the regulations would come into force six months after the publication in the Canada Gazette. Mortgage participants are advised to begin the process of implementing the compliance regime in advance to be prepared before the regulations come into force.

Secondly, the amendments will impose administrative burdens on financial entities. The financial entities would be required to ensure that their correspondent banking relationship with foreign financial entities are safe from any money laundering or terrorist financing activities. The financial entities are advised to review the requirements in the amendments in detail and update their current ongoing monitoring policies accordingly.