Proposed regulations extend application of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to the mortgage lending sector

On February 18, 2023, the Department of Finance released proposed amendments (the Amendments) to certain regulations to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PCMLTFA) that would extend the application of the PCMLTFA to non-financial institution mortgage lending entities¹.

What you need to know

• Mortgage lending entities will become reporting entities: The Amendments would extend various anti-money laundering/anti-terrorist financing (AML/ATF) obligations to non-financial institution entities involved in the mortgage lending process.
• Broad application: Mortgage lenders, brokers and administrators are each defined broadly in the Amendments, therefore subjecting non-financial institution entities of all sizes engaged in the mortgage lending process to the PCMLTFA.
• Consultation period: A 30-day consultation period, which is open until March 20, 2023, welcomes comments on the draft regulations.

Key amendments applicable to mortgage lenders

The Amendments broaden the scope of application of the PCMLTFA to non-financial institution entities involved in the mortgage lending process; specifically, mortgage brokers, mortgage lenders and mortgage administrators. The Amendments have been anticipated since the federal government announced its intention to extend the application of the PCMLTFA to non-financial institution mortgage lenders in the 2022 Federal Budget (Budget 2022). Amendments were further expected as a result of the June 2022 Cullen Commission report, which identified the mortgage lending industry as a key area of money laundering risk and recommended amendments to the PCMLTFA to regulate private mortgage lenders.

Although mortgages issued by financial entities designated as reporting entities under the PCMLTFA have historically been subject to AML/ATF requirements, non-financial institution mortgage lending entities have remained unregulated. The Amendments aim to address the risk of money laundering in this industry by bringing the requirements applicable to mortgage lending entities in line with existing AML/ATF requirements applicable to financial entities and real estate brokers/sales representatives and developers.

Pursuant to the Amendments:

• “Mortgage lender” is defined as “a person or entity, other than a financial entity, that is engaged in providing loans secured by mortgages on real property or hypothecs on immovables”.
• “Mortgage broker” is defined as “a person or entity that is authorized under provincial legislation to act as an intermediary between a mortgage lender and a borrower”.
• “Mortgage administrator” is defined as “a person or entity, other than a financial entity, that is engaged in the business of servicing mortgage agreements on real property or hypothec agreements on immovables on behalf of a lender”.

Given the broad scope of these definitions, the Amendments would apply broadly to non-financial institution mortgage lending entities of all sizes.

As a reporting entity under the PCMLTFA, mortgage lending entities will, once the Amendments are in force, become subject to several requirements, including:

• Development of a compliance program;
• Application of customer due diligence measures (e.g., KYC/identity verification and beneficial ownership requirements);
• Record keeping (e.g., storing client identification records);
• Transaction reporting (e.g., submitting suspicious transaction and terrorist property reports as well as other reports, such as large cash ($10,000 or more) transaction reports, to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)); and
• Following ministerial directives and transaction restrictions when funds are sent to or received from certain countries.

Corresponding administrative monetary penalties (AMPs) will also be added to the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations, subjecting mortgage lending entities to penalties for non-compliance with the PCMLTFA. The range of penalties proposed in the Amendments are in line with existing AMPs under the PCMLTFA (for a minor violation, $1 to $1,000 per violation; for a serious violation, $1 to $100,000 per violation; and for a very serious violation, $1 to $100,000 per violation for an individual and from $1 to $500,000 per violation for an entity).

Once the finalized regulations come into force, we expect that FINTRAC will update its guidance documents to include specific guidance for mortgage lending entities.

Policy objectives of the amendments

In the Regulatory Impact Analysis Statement (RIAS) respecting the Amendments, the following policy objectives were provided for extending the scope of the PCMLTFA to mortgage lending entities:

• Responding to recommendations in the June 2022 Cullen Commission report to impose more stringent regulation on the mortgage lending industry.
• Reducing the vulnerability of mortgage lending entities to exploitation for money laundering/terrorist financing, specifically through (1) receiving funds that are proceeds of crime, such as a down payment or repayment of the loan; and (2) lending potential proceeds of crime to clients.
• Addressing the increased risk of exploitation of Canada’s real estate market by criminals, which can negatively impact housing affordability across the country.
• Creating a level playing field by imposing the same requirements on mortgage lending entities as those imposed on financial institutions and real estate brokers/sales representatives and developers.
• Supporting Canada’s implementation of the international FATF Standards, which require all mortgage lending businesses to comply with AML/ATF requirements such as customer due diligence.

Implications of the amendments for mortgage lenders

The Amendments may increase administrative burden on non-financial institution mortgage lenders, particularly those smaller in size. However, stakeholder feedback discussed in the RIAS suggests that many non-financial institution mortgage lenders already voluntarily comply to some degree with AML/ATF measures. One reason for this is because a reporting entity under the PCMLTFA (such as a bank or a securities dealer) wishing to acquire a mortgage or otherwise fund mortgage lenders may require the mortgage lender to comply with the PCMLTFA, perhaps to the same extent as the reporting entity, in order for the reporting entity to minimize its own risk of being involved in money laundering. A practical implication of the Amendments may be to ease the ability of mortgage lenders to attract funding from reporting entities (such as financial entities), who will be given some assurance that the non-financial institution mortgage lender is complying with FINTRAC’s requirements as a reporting entity.