Overview and primer — ‎Financial entities and Canada’s anti-money laundering and anti-terrorist ‎financing regime‎

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) is the primary legislative source governing Canada’s anti-money laundering (AML) regime. The PCMLTFA establishes regulatory authority for Canada’s AML regime with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), Canada’s independent financial intelligence agency.

Under the PCMLTFA and associated regulations, financial entities in Canada must comply with a variety of regulatory requirements. Failure to comply with these requirements may result in administrative monetary penalties, and/or criminal penalties including imprisonment.

On June 1, 2021, regulatory amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR) came into effect. These new amendments create and change the obligations of all financial entities. In this article we provide a summary of these obligations and their day-to-day implications for financial entities in Canada.

What are financial entities?

Financial entities are one category of reporting entities under the PCMLTFA. Under the PCMLTFA, financial entities include:

• All domestic and authorized banks to which Canada’s Bank Act applies, including those that operate on a branch basis in Canada;
• Financial services cooperatives, savings and credit unions, and caisses populaires ‎that are regulated by a provincial statute;
• Credit union centrals that provide services to the general public;
• All trust and loan companies regulated by Canada’s Trust and Loan Companies Act or a Provincial/Territorial equivalent to the federal legislation;
• Unregulated trust companies;
• Life insurance companies andinsurance brokerages that offer loans or prepaid payment products to the public, subject to certain exceptions.‎

Obligations of financial entities

I. Compliance program

Financial entities are required to implement compliance programs that review and monitor their adherence with the statutory and regulatory requirements. 

Under the PCMLTFR, a compliance program ‎must satisfy the following criteria:‎

• appoint a compliance officer who:
  • has the necessary authority to access required resources and implement ‎effective compliance programs or make any necessary changes;‎
  • is knowledgeable of the financial entity’s business and structure;‎
  • is knowledgeable of the financial entity’s risks and vulnerabilities to money laundering offences and terrorist activity financing offences;
  • is knowledgeable of the trends or news related to money laundering offences and terrorist activity financing offences; and
  • understands the sector's requirements under the PCMLTFA and ‎associated regulations‎
• develop written compliance policies and procedures that are kept up-to-date and, ‎in the case of an entity, are approved by a senior officer;‎
• conduct a risk assessment of the financial entity’s business, to assess and document the risk of ‎a money laundering offence or a terrorist activity financing offence occurring ‎in the course of business activities;‎
• develop and maintain a written, ongoing compliance training program for ‎employees, agents or mandataries, or other authorized persons;‎
• establish a plan for the ongoing compliance training program and deliver the ‎training; and
• establish a plan for a review of the compliance program for the purpose of testing its effectiveness, ‎and carry out this review every two years at a minimum.‎

The requirements offer some flexibility, allowing financial entities to create a compliance program tailored to the size and scale of their business. Depending on the size of the financial entity, the compliance officer could be the owner, operator, senior manager, or other senior level employee that has direct access to the senior officers of the business.

For larger financial entities, a compliance officer can delegate certain administrative duties to other employees, but cannot delegate responsibility for implementing the compliance program.

II. Know your client

Financial entities must take steps to verify the identity of their clients, when they are requesting certain services or transactions. Client verification is required when clients request the following transactions:

• large cash transactions equal to or greater than $10,000;‎
• virtual currency transactions greater than $1,000;
• suspicious transactions;‎
• issuing or redeeming traveller's cheques, money orders, or similar negotiable ‎instruments of $3,000 or more;‎
• transmitting $1,000 or more in funds by means other than an electronic funds ‎transfer (“EFT”);‎
• foreign currency exchange transactions of $3,000 or more;‎
• remitting funds in the amount of $1,000 or more to a beneficiary, by means ‎other than an EFT;‎
• remitting funds to the beneficiary of an international EFT of $1,000 or more; and
• prepaid payment product transfers greater than $1,000.

Client verification is also required for the following clients: every person, corporation, and entity (except a corporation for which the financial entity opens an account), as well as settlors or co-trustees of a trust.

The regulations allow for ‎some flexibility with regards to verification of identity. Financial entities have the following methods to verify the identify of a client, among others:

• use of government-issued photo ID;
• use of their credit file information;
• rely on prior identification made by a local or foreign affiliate; or
• rely on prior identification made by another reporting entity regulated by the PCMLTFA.

In association with the requirement to verify client identification, financial entities are responsible for determining whether their client conducting the ‎transaction is doing so on behalf of a third party. If a third party is involved, the financial entity must identify ‎it and determine the relationship between it and the person pursuing the services. Similarly, when providing services to a business client, the financial entity must confirm the accuracy of beneficial ownership information provided.

Financial entities are required to take additional steps to verify and report the identity of Politically Exposed Persons (a Canadian or foreign person who holds or has held a leadership government position) and Heads of International Organizations (a person who holds or has held the specific position of head of an international organization).

III. Reporting

Under the PCMLTFR, financial entities must provide FINTRAC reports of all suspicious transactions, terrorist property, large cash transactions, and electronic funds transferred.

A financial entity ‎must provide FINTRAC with a suspicious transaction report when it has reasonable grounds to ‎suspect that a transaction is tainted by money laundering or terrorist financing. The reasonable ‎ground to suspect will vary depending on the facts and context surrounding the transaction. For ‎instance, relevant facts may include the date, time, location, amount or type of transaction, and ‎the client's financial history. Relevant context could include additional elements surrounding a ‎transaction like unusual client behaviour or actions. ‎These expectations apply to employees of financial entities. If an employee believes ‎that their employer has not submitted a suspicious transaction, they are expected to report the ‎transaction to FINTRAC. ‎

Furthermore, financial entities must submit to FINTRAC a terrorist property report (TPR) detailing all ‎property in their possession or control that they have reason to believe is owned, held or controlled by ‎or on behalf of a terrorist group/listed terrorist person.‎

A financial entity must also report separately each transaction where it receives an amount of ‎‎$10,000 or more in cash in the course of a single transaction. Each such transaction must be sent to ‎FINTRAC separately, in its own report.‎ Finally, a financial entity must also report situations where the aggregate of  multiple transactions with a 24-hour period, conducted by and/or on the behalf of the same person, entity, or beneficiary, is equal to or greater than $10,000.

IV. Record Keeping

Pursuant to the PCMLTFR, financial entities must comply with the record keeping requirements. ‎A financial entity is required to maintain detailed records of the following:‎

• a copy of every report sent to FINTRAC (suspicious transaction reports; ‎terrorist property reports; large cash transaction reports)‎;
• large cash transaction records;
• records of transactions of $3,000 or more;
• records of remitting and transmitting $1,000 or more in funds by means other ‎than an electronic funds transfer;
• records of electronic funds transfers of $1,000 or more; and
• foreign currency exchange transaction tickets.

A record of transactions should include the date as well as name, address, date of birth, and occupation ‎of the person making the transaction. If the transaction was made by an entity it should also ‎include its name, address, and nature of its principal business.‎

V. Travel rule

An additional requirement for financial entities is adherence to the travel rule. This rule is a requirement ‎that specific information related to an electronic fund transfer (“ETF”) or virtual currency transfer ‎be obtained. The travel rule applies when a financial entity receives or transmits an ETF.‎

The required information for ETFs includes:‎

• the name, address and account number or other reference number (if any) of ‎the person or entity who requested the ETF; ‎
• the name and address of the beneficiary and recipient of the ETF; and ‎
• the beneficiary's account number or other reference number.‎

VI. Correspondent banking relationships

Where a Canadian financial entity has a correspondent banking relation (financial arrangements or agreements) with a foreign financial institution, it must take necessary steps to verify information and records of the foreign financial institution, ensure that the foreign financial institution is not a shell bank, set out its obligations towards the foreign financial institution in writing, and take steps to determine that the foreign financial entity has not been liable for criminal or civil penalties in respect to money laundering.

VII. Foreign branches, foreign subsidiaries and affiliates

A financial entity operating in Canada on a branch basis or through its subsidiaries and affiliates, must take steps to comply with the above regulatory requirements. A financial entity must develop policies that establish requirements for its foreign branches, subsidiaries, and affiliates. These policies must be similar to its own obligations under the PCMLTFA.

The foregoing is a general summary of requirements that Canadian financial entities must consider under the PCMLTFA. Financial entities should review their compliance with these regulatory requirements to avoid administrative monetary penalties and/or criminal sanctions. If you have any specific questions on how to navigate these requirements, we invite you to ‎‎contact a member of our Financial Services team.

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.