Home Financial responsibility Bridging the Gap: Expanding the Reach of Canada’s Anti-Money Laundering Laws | Davies Ward Phillips & Vineberg LLP

Bridging the Gap: Expanding the Reach of Canada’s Anti-Money Laundering Laws | Davies Ward Phillips & Vineberg LLP

0

The Canadian federal government has delivered on its promise to extend Canada’s Anti-Money Laundering (AML) regime to cover crowdfunding platforms and certain payment service providers (PSPs) that previously operated outside the scope of application of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (RPCFAT).

Consistent with the government’s renewed focus on strengthening Canada’s anti-money laundering regime, the government has approved regulatory amendments (amending regulations) under the PCMLTFA that largely commemorate the temporary orders issued in virtue of emergency law (Emergency Orders) earlier this year. The Amending Regulations, which came into effect on April 5, 2022, made significant changes to the regulation of fintech companies operating in the Canadian payments industry.

Amending Regulation

The Amending Regulations expand the scope of the PCMLTFA to specifically include crowdfunding platform services, which are defined as “the provision and maintenance of a crowdfunding platform for use by other persons or entities to raise funds or virtual currency for themselves or for specified persons or entities”. by them.” These companies, which previously operated outside of the PCMLTFA, must now meet extensive reporting and compliance obligations and are subject to regulatory oversight by the Financial Transactions and Reports Analysis Center of the Canada (FINTRAC).

In addition, the Amending Regulations repealed the portion of the definition of “electronic funds transfer”, which had excluded certain transactions “made using a credit or debit card or prepaid payment product if the recipient has entered into an agreement with the payment service”. supplier who allows payment by this means for the supply of goods and services”. An exclusion still applies to certain financial entities and casinos, but “money services businesses” (MSBs) will now have reporting and compliance obligations regarding such credit, debit or prepaid payment card transactions.

Retraction of previous referrals

Although the Emergency Orders expressly imposed anti-money laundering obligations on crowdfunding platforms and entities that perform “payment functions” (i.e. PSPs), the Regulation amendment only explicitly added crowdfunding platform services as a prescribed service which, if performed, would establish such entities as MSBs subject to the PCMLTFA.

However, on April 27, 2022, FINTRAC also withdrew its Policy Interpretation 7670, which contained the frequently cited PCMLTFA “corollary” exemption. Under this interpretation of the policy, entities involved in the remittance or transmission of funds simply as a corollary of their actual service (eg payment processing) were not considered MSBs for PCMLTFA purposes. These entities included PSPs whose business was to provide settlements directly to merchants on behalf of merchants’ customers. The removal of these guidelines means that PSPs that maintain a place of business in Canada or that offer their services to individuals or entities in Canada and that otherwise conduct ESM activities are subject to the set of requirements in anti-money laundering matters applicable to MSBs.

Impact on crowdfunding platforms and PSPs

As a result of these changes, crowdfunding platforms and PSPs carrying out MSB activities must now

  • register with FINTRAC;
  • develop and maintain a compliance program;
  • comply with KYC (know your customer) requirements, including verifying the identity of persons and entities for certain activities and transactions;
  • retain certain records, including records related to transactions and customer identification; and
  • report certain transactions to FINTRAC.

The amending regulation also imposed additional and more specific obligations on crowdfunding platforms. These obligations include record-keeping requirements regarding the persons or entities to whom they provide their services and the purpose for which the funds or virtual currency are collected; and verify the identity of anyone to whom the entity provides crowdfunding services or who donates $1,000 or more using the platform.

Uncertainty to come

While it is clear that crowdfunding platforms and PSPs that previously relied on the interpretation of Policy 7670 are now subject to the PCMLTFA, the Amending Regulations and corresponding FINTRAC policy updates have introduces uncertainty as to the scope of the PCMLTFA in the future.

Specifically, the PCMLTFA’s ESM sections specify its application to persons and entities “in the business” of providing certain specified ESM services.1 Policy Interpretation 7670 provided insight into FINTRAC’s view of when an entity providing services otherwise covered by the PCMLTFA was not truly “in the business” of providing services to MSBs and would not be subject to the requirements of the law. It remains to be seen whether, following the recent changes, payment facilitators and other service providers in the payment chain that are not directly involved in the processing of funds will be taken over by the wider network of MSBs. Careful analysis will now be required to determine the obligations of each of the participants in a payment chain. Although FINTRAC has indicated its intention to issue updated guidance in the near future, payment businesses currently in the interpretive gray area face the unfortunate choice of waiting for guidance – and potentially being outside of it. registration requirement – or to register now, perhaps unnecessarily.

The question also arises as to how the new regulations will coexist with the future Retail Payment Business Act (RPAA), which has been enacted but is not currently in force as it awaits the drafting of regulations. The RPAA aims to introduce a regulatory oversight framework to govern the retail payments ecosystem in Canada (read our newsletter on the RPAA). Once in force, the RPAA will be overseen and administered by the Bank of Canada (BoC) and should impose certain obligations on PSPs (including registration with the BoC and implementation of operational risk management frameworks), some of which appear to overlap requirements under the PCMLTFA. Therefore, there is some uncertainty as to the extent to which the Amending Regulations reflect the government’s decision to transfer some responsibility for regulation of the retail payments ecosystem from the Bank of Canada to FINTRAC, and whether this transfer is made on a temporary or permanent basis. base.

Legal counsel and payments industry participants should await further regulatory guidance for clarity on the full scope and impact of the amending regulations and how the new requirements will be harmonized with other legislation that the government federal is being developed.

1 Under the PCMLTFA, the definition of ESM includes, among others, any entity that engages in the “business” of (i) foreign exchange transactions, (ii) remittance or transmission of funds, (iii) issue or redemption of negotiable instruments, or (iv) trade in virtual currencies.