Canada: Designation of DLT based Businesses as Money Service Business for purpose of AML/CTF Regime

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Parliament Hill Canada

The Canada’s intention to update its AML/CTF regime can be traced back to February 11th, 2014, when the government issued the Economic Action Plan 2014 Act No 1. The Economic Plan legislative programme included amendment of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.  The intention of this amendment is aimed at, inter alia, enhance the client identification, record keeping and registration requirements for financial institutions and intermediaries, refer to online casinos, and extend the application of the Act to persons and entities that deal in virtual currencies and foreign money services businesses.

On 9th June 2018, the government issued a Regulatory Impact Analysis statement on proposed amendment of Canada’s Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) Regime which seeks to meet the recommendations contained in a report titled ‘Anti-money laundering and counter-terrorist financing measures Canada: Mutual Evaluation Report September 2016’ issued by The Financial Action Task Force (FATF) following its site visit of 3-20th November 2015.

The report’s recommendation on New Technologies, specifically recommendation number 15.2 stated that “while there is a regulatory expectation in FINTRAC’s risk-based approach guidance109 which states that REs should reassess their risk if there are changes due to new technologies or other developments, there are no explicit requirements in law or regulation that FIs undertake risk assessments prior to the launch or use of such products, practices and technologies”. These amongst other issues made the FATF to state that Canada was non-compliant with its recommendation on New Technologies.

None Compliance Risk

The risk of none compliance with FATF recommendation is well noted in the impact analysis report. The report states that none compliance with the recommendations 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 serious reputational harm to Canada’s financial sector and subject Canadian financial institutions to increased regulatory burden when dealing with foreign counterparts or when doing business overseas”.

Filling Gaps

The Impact analysis point out that the current AML/CFT regime(adopted in 2000-01) were intended for the traditionally offered financial services, and “bricks and mortar” institutions and thus required updating to provide legal framework for the financial industry which is undergoing digital revolution. This confirms FATF finding which pointed out the lack of requirement to assess new technologies before their launch and lack of coverage of businesses dealing with virtual currencies.  The proposed amendments are thus seen as required efforts to ensure the evolutionary adaptation of Canada’s AML/ATF regime to the new environment ushered in by FinTech. The amendments are framed as necessary measures that are aimed at reducing risks of increasing loopholes that could be exploited by criminals while at the same time avoiding stifling innovation in the financial sector.

Broadening of MSB definition to include Virtual Currency Exchanges

The proposed amendment seeks to include persons “dealing in virtual currency” to be deemed as financials entities or other entities deemed domestic or foreign Money Service Businesses (MSBs) as the case may be. The phrase “dealing in” includes virtual currency exchange services, and value transfer services. This designation will essentially henceforth require entities dealing in virtual currencies, as are MSBs, implement full compliance program and register with FINTRAC. Additionally, all reporting entities that receive $10,000 or more in virtual currency (e.g. deposits, any form of payment) would have record-keeping and reporting obligations. The amendments are targeted at persons or entities engaged in the business of dealing in virtual currencies, and not virtual currencies themselves.

Changes to Record keeping requirements

Subsection 1(2) of the Regulation is proposed to be amended to include requirements for virtual exchanges to keep record of virtual currency transaction over &10,000 in a virtual currency exchange transaction ticket which records details of the transaction, parties to the transaction and is to be reported to FINTRACK.

The impact of these requirements especially as regards the record keeping of transactions over $10,000 is yet to be established. It will be interesting to see how this requirement will fit with the distributed nature of Blockchain based transactions.

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The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CTF) standard.

The Asia/Pacific Group on Money Laundering (APG) is an autonomous and collaborative international organisation, whose members and observers are committed to the effective implementation and enforcement of internationally accepted standards against money laundering and the financing of terrorism, in particular the FATF Recommendations.

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is Canada’s financial intelligence unit. Its mandate is to facilitate the detection, prevention and deterrence of money laundering and the financing of terrorist activities, while ensuring the protection of personal information under its control.

Relevant AML/CTF Laws :

Ahmed Ali

Diacle