On February 1, 2014, new regulations to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act) came into force. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) recently published revised guidelines (the Guidelines) to clarify the implications of the new regulations —most importantly, around implications of the new “business relationship” requirements.
Where entities subject to the Act have a business relationship, they must conduct ongoing monitoring of the business relationship and record the purpose and intended nature of the business relationship.
The Guidelines clarify that a business relationship arises when a client:
- opens an account with an entity; or
- within a five-year period, conducts two transactions requiring the entity to ascertain the identity of the client pursuant to the regulations (such as a foreign exchange transaction of $3,000 or more, or a suspicious transaction).
In the latter case, FINTRAC expects entities to identify that a business relationship exists as soon as reasonably practicable after the second transaction and, as a best practice, within 30 calendar days.
Ongoing monitoring is defined as the monitoring of a business relationship at a frequency based on the entity’s risk assessment, for the following purposes:
- detecting suspicious transactions;
- keeping client identification and beneficial ownership information, and the purpose and intended nature of the business relationship, up to date;
- reassessing the level of risk associated with the client’s transactions and activities; and
- determining whether transactions or activities are consistent with information obtained about the client.
Some ambiguity remains regarding clients and activities that are exempt from the Act’s record-keeping and client-identification requirements, such as pension funds, registered plan accounts and nominee accounts in the name of a securities dealer or financial entity. The "business relationship" definition in the Regulations provides that the term does not include any transaction or activity to which a record-keeping or client-identification exemption applies. It follows that such transactions and activities are outside the scope of the "ongoing monitoring requirements", but the Guidelines do not clearly confirm this, perhaps because the risk assessment and monitoring for suspicious transaction requirements still apply, and those two elements form part of "ongoing monitoring".
The purpose of keeping and updating a record of the purpose and intended nature of the business relationship is to ensure that an entity continues to understand its clients’ activities over time and can anticipate its clients’ transactions and activities. The Guidelines permit entities to use existing records of intended uses of accounts as records of the purpose and intended nature of the business relationship; when new accounts are opened, separate records of the purpose and intended nature of the business relationship must be obtained.
The Guidelines provide helpful, short, non-exhaustive examples of the purpose and intended nature of the business relationship:
- to manage household expenses and bills
- to receive directly deposited employment or pension income
- to save for retirement
- to deposit daily receipts for a business
- to make payments to employees (payroll)
- to make payments to suppliers
- Capital preservation
- Capital growth
- Income generation
- Private equity funds management
- Liquidity management
- Surplus management
The Guidelines also provide helpful examples of risk mitigation measures that can be taken when entities determine that their clients or products pose a high risk for money laundering or terrorist financing.
For more information, please see Regulations Amending the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and FINTRAC Guidelines 4 and 6.
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