New record keeping obligations under Canada’s changing anti-money laundering regime

record keeping requirements aml

Finance Alert

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On July 10, 2019, Canada’s Department of Finance published comprehensive amendments (the “New ‎Regulations”) to the regulations (the “Current Regulations”) made ‎‎under the Proceeds of Crime (Money ‎Laundering) and Terrorist Financing Act (the “Act”). The New Regulations are designed to strengthen ‎Canada’s anti-money laundering and anti-terrorist ‎financing regime and improve compliance with the international standards set by the ‎Financial Action ‎Task Force (the “FATF”), the 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.‎ ‎

This article, which is part of an ongoing series discussing changes to Canada’s anti-‎money laundering ‎regime, examines significant amendments to the record-keeping requirements under the New ‎Regulations‎. Previous articles provided an overview of the New Regulations as well as an analysis of ‎the new reporting entities or “REs” captured under the Act. ‎

Significant amendments to the current record-keeping requirements created by the New Regulations ‎include: ‎

  • Virtual Currency Transaction Records; ‎
  • Prepaid Product Accounts Records; and
  • a general expansion in the amount of information an RE must record.‎

Large virtual currency transaction records

A “large virtual currency transaction” is a transaction where virtual currency valued at $10,000 or more ‎is received in the same 24-hour period from a person or entity (except another financial entity or ‎public body).  Under the New Regulations, these transactions must be reported to FINTRAC within 5 ‎working days.‎

In addition, a “large virtual currency transaction record” must be kept which contains the ‎prescribed information under the New Regulations and mirrors the information requirements under the ‎Current Regulations for large cash transactions reports. ‎

The prescribed information for a large virtual currency transaction record includes:‎

‎(a) the date of the receipt;‎

‎(b) if the amount is received for deposit into an account, the name of each account ‎‎holder;‎

‎(c) the name and address of every other person or entity that is involved in the ‎‎transaction, the nature of their principal business or their occupation and, in the ‎case of ‎a person, their date of birth;‎

‎(d) the type and amount of each virtual currency involved in the receipt;‎

‎(e) the exchange rates used and their source;‎

‎(f) the number of every other account that is affected by the transaction, the type of ‎‎account and the name of each account holder;‎

‎(g) every reference number that is connected to the transaction and has a function ‎‎equivalent to that of an account number;‎

‎(h) every transaction identifier, including the sending and receiving addresses; and‎

‎(i) if the amount is received by a dealer in precious metals and precious stones for the ‎‎sale of precious metals, precious stones or jewellery;

‎(i) the type of precious metals, precious stones or jewellery;

‎(ii) the value of the precious metals, precious stones or jewellery, if different from ‎‎the amount of virtual currency received, and

‎(iii) the wholesale value of the precious metals, precious stones or jewellery.‎

REs will also be required to keep records where virtual currency is exchanged, at the request of ‎another person or entity, for funds or where funds are exchanged into virtual currency.‎

‎“Funds” is defined to mean: (a) cash and other fiat currencies, and securities, negotiable instruments ‎or ‎other financial instruments that indicate a title or right to or interest in them; ‎or (b) a private key of ‎a cryptographic system that enables a person or entity to ‎have access to a fiat currency other than ‎cash.‎ For greater certainty, it does not include virtual currency.‎

Who is Required to Keep a Large Virtual Currency Transaction Record?‎

  • A Financial Entity;‎
  • A Life Insurance Company or Life Insurance Broker or Agent;‎
  • A Securities Dealer;‎
  • A MSB;‎
  • A Foreign MSB;‎
  • An Accountant or Accounting Firm;‎
  • A Real Estate Broker;‎
  • A Real Estate Developer;‎
  • A Dealer in Precious Metals And Precious Stones;‎
  • A Casino; and
  • A Department or an Agent of Her Majesty in Right Of Canada or An Agent or Mandatary of Her ‎Majesty In Right of A Province.‎

Example in the New Regulations with respect to Financial Entities

‎A financial entity shall keep a large virtual currency transaction record in respect of every amount of ‎‎‎$10,000 or more in virtual currency that it receives from a person or entity in a single transaction, unless ‎‎the amount is received from another financial entity or a public body or from a person who is acting on ‎‎behalf of a client that is a financial entity or public body.‎

‎The definition of “financial entity” under New Regulations is:

‎(a) an entity that is referred to in any of paragraphs 5(a) [banks], (b) [credit unions] and (d) ‎‎[trust companies] to (f) [provincial loan companies] of the Act;‎

‎(b) a financial services cooperative;‎

‎(c) a life insurance company, or an entity that is a life insurance broker or agent, in ‎respect of ‎loans or prepaid payment products that it offers to the public and ‎accounts that it maintains with ‎respect to those loans or prepaid payment products, ‎other than

‎(i) loans that are made by the insurer to a policy holder if the insured person has a ‎‎terminal illness that significantly reduces their life expectancy and the loan is ‎secured by ‎the value of an insurance policy;‎

‎(ii) loans that are made by the insurer to the policy holder for the sole purpose of ‎‎funding the life insurance policy; and

‎(iii) advance payments to which the policy holder is entitled that are made to them ‎by the ‎insurer;‎

‎(d) a credit union central when it offers financial services to a person, or to an entity ‎that is not a ‎member of that credit union central; and

‎(e) a department, or an entity that is an agent of Her Majesty in right of Canada or an ‎agent or ‎mandatary of Her Majesty in right of a province, when it carries out an ‎activity referred to in ‎section 76. ‎

Prepaid Payment Account ‎

The New Regulations also bring Prepaid Payment Cards and similar general purpose “open-loop” prepaid ‎payment products, which are issued by financial entities and life insurance companies, within the scope ‎of the Act. The payment products which are affected by the New Regulations are those that permit a ‎balance of $1,000 or more, or transactions exceeding $1,000 within 24-hours. The requirements with ‎respect to these payment products under the New Regulations parallel those that apply to regular bank ‎accounts and include record-keeping, reporting ‎and client identity requirements, as well as politically ‎exposed person (PEP) determination requirements. ‎Issuers of closed-loop payment products, the use of ‎which is restricted to a particular merchant or group of merchants, such as a shopping-centre gift card, ‎are outside the scope of this new requirement, as are cards that are part of a corporate retail rebate ‎program, or that can only be funded or reloaded by a public body or a registered charity for the ‎purposes of ‎humanitarian aid relief‎.‎

The new requirements apply only to financial entities and life insurance companies that issue prepaid ‎products. However, considering how these programs function in the retail world, they will likely have a ‎ripple effect on “down-the-chain” participants who accept this type of payment method. ‎

Section 14 of the New Regulations provides that a RE will keep records in respect of every prepaid ‎payment product account that it opens and of every transaction that is using a prepaid payment ‎product that is connected to that account. ‎

Required records are substantially the same as for bank accounts and include record-keeping, client ‎identity and PEP determination requirements.‎

Prepaid Payment Product ‎is defined under the New Regulations as:

a product that is issued by a financial entity and ‎that enables a person or entity to engage in a ‎transaction by giving them ‎electronic access to funds or virtual currency paid to a prepaid payment ‎product ‎account held with the financial entity in advance of the transaction. It excludes a ‎product that

‎(a) enables a person or entity to access a credit or debit account or one that is ‎issued for use ‎only with particular merchants; or

‎(b) is issued for single use for the purposes of a retail rebate program. ‎

Prepaid Payment Product Account is defined under the New Regulations as:

an account — other than an account to ‎which only a public body or, if doing so for the purposes ‎of humanitarian aid, ‎a registered charity as defined in subsection 248(1) of the Income Tax Act, can ‎add ‎funds or virtual currency — that is connected to a prepaid payment product ‎and that permits

‎(a) funds or virtual currency that total $1,000 or more to be added to the account ‎within a 24-hour ‎period; or

‎(b) a balance of funds or virtual currency of $1,000 or more to be maintained. ‎

Expanded record keeping requirements in general

Generally speaking, the New Regulations significantly increase the amount of information reporting ‎entities must record. ‎

For example, section 36 of the New Regulations expand the record keeping requirements applicable to ‎money service businesses in terms of both the information required to be collected and the activities in ‎respect of which recordkeeping is required. See the blackline below which demonstrates the change in ‎the information that money services businesses must record where a money services business receives ‎an amount of $3,000 or more:‎

where it receivesif they receive an amount of $3,000 or more from a person or from an entity other than a financial entity inor a person who is acting on behalf of a client that is a financial entity ‎‎— as consideration offor the issuance of traveller’s cheques, money orders or other similar negotiable instruments, a record

‎(i) of the amount received, the date it was received,of the receipt,‎

‎(ii) of the person’s or entity’s name, and address and, the nature of their principal business ‎or their occupation and, in the case of a person, their date of birth,‎

‎(iii) of the person who in fact gave the amount andreceived,‎

‎(iv) indicating whether the amount received wasis in cash, cheques, traveller’s cheques, money orders or other similar negotiable instrumentsfunds or virtual currency and the type ‎and amount of each type of funds and each of the virtual currencies involved,‎

‎(v) of the number of every account that is affected by the transaction, the type of ‎account and the name of each account holder,‎

‎(vi) of every reference number that is connected to the transaction and has a function ‎equivalent to that of an account number, and

‎(vii) if the amount received is in virtual currency, of every transaction identifier, ‎including the sending and receiving addresses;‎

Reducing the regulatory burden

Other changes to be ushered in by the New Regulations will have the effect of lessening or reducing the ‎‎current or proposed requirements under the Act.‎

For example, following industry feedback, certain amendments to the Regulations which had ‎become ‎effective in 2017, and required reporting entities to keep a ‎record of ‎any “reasonable measures” ‎they had ‎taken in cases where they were ‎unsuccessful in ‎meeting certain obligations to obtain ‎information, (such ‎as making a determination as to whether a client is a Politically Exposed Person), will ‎be repealed. ‎

The New ‎Regulations also amend the provisions relating to accountants to clarify that accountants who ‎‎are ‎authorized to provide ‎bankruptcy services or act as insolvency practitioners ‎will not be captured ‎by ‎the Act’s record keeping and identity verification ‎requirements ‎when they undertake activities such as ‎receiving or paying funds and purchasing or selling ‎securities, ‎real properties or ‎business assets ‎on ‎behalf of their clients.‎

Suspicious transactions reports

The deadline for filing suspicious transaction reports (“STRs”) has been changed to “as soon as ‎practicable” ‎after the MSB has taken measures to establish reasonable grounds of suspicion, which is a ‎welcome change from the Current Regulations and is, in fact, the widely-adopted practice of many REs. ‎The timing for which REs are required to report suspicious activity will be changed from within 30 days ‎from the time that a reporting entity “first detects a fact that constitutes reasonable grounds to suspect” ‎to “as soon as practicable after they have taken measures that enable them to establish that there are ‎reasonable grounds to suspect that the transaction or attempted transaction is related to the commission ‎of a money laundering offence or a terrorist activity financing offence.”‎

Therefore, after taking certain measures (such as conducting an assessment of the transaction) to establish that there are reasonable grounds to suspect that the transaction is related to the ‎commission or attempted commission of a money laundering or terrorist activity financing offence, the ‎suspicious transaction report must be submitted to FINTRAC as soon as practicable.‎

The next article in the series will discuss electronic funds transfers (“EFTs”) and the single transaction rule. Of note, the ‎New Regulations are set to ‎change the definition of an EFT as well as the reporting responsibility for EFTs and the application of the 24-hour rules, in particular with respect to casino disbursement and receipt of virtual currency.‎

This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.