October 3, 2018 / 5:27 PM / in 20 days

Canada's AML overhaul seeks to revamp financial intelligence flows

NEWYORK(Thomson Reuters Regulatory Intelligence) - The Department of Finance Canada is proposing an overhaul the country’s existing anti-money laundering/counter-terrorism financing regime. The amendments proposed earlier this year to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), if enacted in their current form, will introduce numerous changes.

Canadian pennies are seen at The Royal Canadian Mint in Winnipeg, May 4, 2012.

A main objective of the reform effort is to improve the quality of financial intelligence made available to law enforcement and thereby improve efforts by authorities to combat money laundering and terrorist financing. To achieve this, the proposed amendments would impose additional compliance requirements on the private sector to provide high-quality financial intelligence, effectively recruiting financial institutions to fight on the front lines.

FATF RAISES CONCERN OVER LIMITATIONS FACED BY LAW ENFORCEMENT

The international standard-setting body, the Financial Action Task Force, observed numerous weaknesses in Canada's AML/CTF regime during its most recent evaluation{here}. Main areas of concern raised by FATF include the ability of Canadian authorities to rigorously pursue money laundering offences and issues of transparency in regulation. Similar concerns have been raised by independent think tanks and non-governmental organizations.

One of FATF’s most pressing concerns is that efforts by Canadian law enforcement are not commensurate with the pertinent laundering risks. Where authorities do pursue enforcement action, asset recovery is usually low and legal persons are generally not effectively pursued and sanctioned.

In its mutual evaluation report, FATF observed that the majority of AML enforcement efforts in Canada are aimed at predicate offenses — those that are part of larger crimes — and do not focus adequately on risks emanating from financial transactions and tax evasion. A lack of resources and necessary expertise to pursue complex cases were cited by FATF as some of the challenges faced by law enforcement in pursuing money laundering offences.

FATF also examined the use of financial intelligence by law enforcement agencies in Canada. Canada’s main anti-laundering agency, the Financial Transactions and Reports Analysis Centre of Canada, or FINTRAC, provides financial intelligence to authorities that largely consists of disclosures made in response to requests by law enforcement. Where additional information on specific individuals is required, law enforcement must inquire with individual financial institutions.

This process is fairly time consuming. Large Canadian banks can take several weeks to provide basic beneficial ownership information to law enforcement agencies. Transaction records of potential proceeds of crime can take anywhere between 45-90 days for law enforcement to obtain. As a result, investigations often require a substantial investment of time and government resources. The financial intelligence that is available to law enforcement also can grow stale by the time authorities gather the necessary information to identify specific individuals and track down proceeds of crime, making it difficult to prosecute complex cases.

In the mutual evaluation report, FATF has recommended that Canada increase timely access to financial intelligence and to use financial intelligence to a greater extent to investigate money laundering and trace assets.

PRESSURE ON FINANCIAL INSTITUTIONS

FATF concluded that Canada is vulnerable to domestic and foreign money laundering, with the main sources of crime being fraud, corruption, bribery, tax evasion and drug trafficking.

FATF further observed that the main avenues for laundering illicit funds appear to be large Canadian financial institutions, placing a regulatory spotlight on the country's six largest banks. Financial products, including securities and insurance offered by banks, are inherently vulnerable to money laundering risks. Laundering illicit funds through stock manipulation, online brokerage transactions and early redemption of securities are some of the techniques that have been detected{here} by FINTRAC in recent years.

This observation has vexed the finance sector and ignited fierce debate. Canadian firms and industry groups have repeatedly said their compliance efforts are hampered by limitations in Canada’s AML/CTF regime, specifically where beneficial ownership is concerned. The absence of a national corporate registry and legal requirements to disclose beneficial ownership information is a major source of frustration in the industry.

More often than not, information gathered from provincial registries is insufficient{here} for identification verification.

Compliance professionals and Know-Your-Client personnel face challenges in identifying beneficiaries, which hampers efforts provide accurate and timely information in suspicious transaction reports, which, in turn, affects the quality of financial intelligence that FINTRAC is able to provide to law enforcement.

FOCUS ON FINANCIAL INTELLIGENCE

The Canadian government released proposed amendments{here} to the PCMLTFA in June 2018, largely in response to the critique from FATF. The government also conducted a detailed review of Canada's AML/CTF regime earlier in the year and released a discussion paper{here} containing policy proposals that are meant to compliment an overhaul of the PCMLTFA.

The proposed reforms aim to bring the Canadian regime in line with standards set by FATF, and to also address some of the shortcomings that the agency has pointed out in its peer evaluations. As a member country, Canada is obligated to bring its regulatory regime in line with FATF standards. In the proposed amendments, the Canadian government recognized that Canada is at risk of punitive action from FATF if it continues to fail to meet AML/CTF standards set by the intergovernmental agency.

One of the main objectives of the reform effort is to strengthen the ability of law enforcement agencies to combat money laundering and terrorist financing in Canada. One of the ways that the proposed revisions seek to achieve this is by placing greater onus on financial institutions, primarily, and FINTRAC, secondarily, to provide more precise financial intelligence to law enforcement agencies.

The proposed amendments to the PCMLTFA include shortening timeframes for filing suspicious transaction reports and requiring more detailed information to be disclosed these reports. While this change places a greater burden on financial institutions, it will also aid law enforcement in gaining access to more detailed financial intelligence in a timelier manner.

Aside from efforts to improve the quality of financial intelligence given to law enforcement, the Canadian government is also undertaking efforts to coordinate more efficient information sharing arrangements between the private sector, provincial agencies, federal law enforcement and financial regulators.

Presently FINTRAC is authorized to disclose information to law enforcement and intelligence agencies. The federal government has proposed expanding the types of agencies that should receive intelligence on money laundering and terrorist financing. The Competition Bureau and Revenu Québec were specifically cited as entities that would benefit from becoming disclosure recipients under the PCMLTFA, potentially setting a precedent for other regulators and provincial entities to become recipients in the future.

The federal government has also proposed to allow FINTRAC to share more information with the private sector, establishing a two-way flow of financial intelligence, including information relating to individuals or transactions potentially related to money laundering or terrorist financing. Other jurisdictions such as the United Kingdom, the United States and Australia have already established mechanisms to share financial intelligence between regulators and the private sector with favorable results{here}.

IMPLICATIONS FOR FINANCIAL INSTITUTIONS

Regulatory amendments to Canada’s AML/CTF regime will have far-reaching implications for compliance personnel and AML officers at Canadian financial institutions. First and foremost, amendments to the PCMLTFA are expected to increase compliance burdens, particularly when it comes to filing suspicious transaction reports, conducting due diligence and fulfilling recordkeeping and reporting obligations.

Financial intelligence will also be shared with more regulators, and between the public and private sectors. This may result in the need for greater interaction among financial firms, regulatory agencies and law enforcement.

FINTRAC has continually built on its suite of practice guidance for firms, including issuing policy interpretations{here} and operational alerts{here?}. AML officers should stay up-to-date on guidance issued by FINTRAC and ensure that their firm's policies reflect recommended practices.

On a supranational level, the Wolfsberg Group{here} publishes practice guidance on myriad topics pertaining to AML compliance. Firms may find publications and guides from the group useful as well.

Overall, firms will be expected to provide more information in shorter time frames with greater accuracy, a lofty expectation given the challenges AML officers face in obtaining accurate and up-to-date information on identities and beneficial ownership. Nevertheless, the private sector will be expected to go above and beyond mere compliance, firms will increasingly be expected to play an active role in supplying valuable financial intelligence to detect and prevent money laundering and terrorist financing in Canada.

(Helen Chan is a regulatory intelligence expert for Thomson Reuters Regulatory Intelligence, based in New York. Email Helen at helen.chan@thomsonreuters.com)

This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Sept 20. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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