Amendments to the Canadian Know Your Customer/Anti-Money Laundering (KYC AML) regulations — the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) — were registered on June 25, 2019.
There were numerous additions, refinements and alterations, so any regulated entities (REs) doing business in Canada should take careful note of all applicable changes and revise their policies and procedures accordingly. Most amendments will come into force on June 1, 2020.
However, one major change is effective immediately, and while it involves the changing of one word, the impact is significant. The definition of acceptable documents to ascertain identification has been changed from “original, valid and current” to “authentic, valid and current.” Allowing “authentic” documents enables the use of document verification as a fully legal process to help establish identity. Previously, the use of scanned/photocopied documents was explicitly prohibited, but now this clause has been repealed.
Although Canada is a founding member of the Financial Action Task Force (FATF) and its KYC AML regime is largely consistent with the FATF’s standards, its last mutual evaluation in 2015–16 found a number of deficiencies. As a result, Canada was deemed subject to the “enhanced follow-up process” and must report annually on progress.
One of most significant deficiencies was around Customer Due Diligence (CDD), such as not having requirements for REs to check the source of wealth. Effective CDD procedures involve verifying the identity of a client, understanding the nature of the business relationship and conducting ongoing monitoring. But if an RE doesn’t know the source of wealth, it doesn’t really understand the nature of the client’s business.
This requirement is especially important as it relates to business accounts and Ultimate Beneficial Ownership (UBO), since complex ownership structures have often been used to hide money laundering activities. Previously, the regulations called for “reasonable measures” to confirm the accuracy of UBO information. The new regulations explicitly state that reporting entities must take steps to confirm the accuracy of new UBO information as it comes in or as it is updated over time.
CDD requirements have also been extended to cover other businesses. Now, money service businesses (MSBs) include those dealing in virtual currency, prepaid cards and foreign MSB businesses that direct and provide services to people located in Canada are now REs. Life insurance firms, which issue loans, also now have the same reporting requirements as other REs.
There have been numerous changes to the regulations regarding electronic fund transfers (EFTs). There’s a net new requirement for REs to verify the identity of beneficiaries of EFTs of CAD $1,000 or more. The definition of an EFT is no longer limited to cross-border coverage, as domestic transfers are now covered. Additionally, if the value of EFTs (or cash transactions) sent to one beneficiary in a 24-hour period exceed $10,000, then they must be reported.
Allowable identity verification methods
The amendments also affect identity verification requirements. Existing regulations allow both single process methods and the dual process method. To identify an individual using a single source, using either a government-issued photo ID or a credit file is allowable.
For the credit file method, the requirements now call for deriving the information from more than one source. The files must be located in Canada, have been in existence for at least three years and confirm that the name, address and date of birth match current information.
For dual source methods, the credit file must be at least six months old. Also, “the information that is referred to must not be from, or derived from, the same source and neither the person whose identity is being verified nor the person or entity that is verifying their identity can be a source.” Prepaid product account information is also allowable for a dual source method.
Another notable change is the expansion to allow REs to rely on customer identification information that has already been obtained by other REs. Previously, information collected by an agent or an affiliate for identity verification was allowable, but the expansion to third-party REs is a new development.
As the scale and complexity of money laundering activities increases, regulators around the world will continue to expand the scope of requirements. To deal with new threats and new technologies, compliance will be called upon to help close threats and loopholes. The latest PCMLTFA amendments will hopefully help Canadian KYC AML requirements overcome deficiencies, fight money laundering and offer more clarity for compliance professionals.