General Information on Part 1.1 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act 

Part 1.1 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) was introduced as part of Budget 2010, and entered into force upon Royal Assent of Economic Action Plan 2014 on June 19, 2014.  Part 1.1 introduces two new authorities for the Minister of Finance:

  1. The authority to issue directives that require reporting entities to apply measures (which this document calls "countermeasures") to transactions originating from or destined to designated foreign jurisdictions and entities; and
  2. The authority to recommend that the Governor-in-Council issue regulations limiting or prohibiting reporting entities from entering into a financial transaction originating from or destined to designated foreign jurisdictions and entities.

These authorities allow the Minister of Finance to take steps to protect the integrity of Canada's financial system from foreign jurisdictions and foreign entities that are deemed to pose high risks for facilitating money laundering and terrorist financing.

General

This guidance provides an overview of the Minister's new authorities, and greater detail and certainty to reporting entities and other stakeholders as to how these powers will be used.

This guidance focuses mainly on the Minister of Finance's new authority to issue directives that require reporting entities to apply countermeasures, and identifies the type of countermeasures that the Minister may choose to include in a directive, as this information does not exist in regulation.  The list of potential countermeasures contained in this guidance document is not exhaustive, but is designed to cover the majority of circumstances that could arise when intervention through a directive is deemed necessary.

The second power, the authority to recommend that the Governor-in-Council issue regulations limiting or prohibiting transactions, is intended to be used in the most serious of cases.  The Minister of Finance must consult the Minister of Foreign Affairs before recommending the Governor-in-Council to issue these regulations.  Such regulations will be published in the Canada Gazette and are not discussed further in this document as each regulation will be prepared on a case-by-case basis.

This guidance document is provided as general information only.  It is not legal advice and is not intended to replace the Act and Regulations.

Ministerial Directive

According to subsection 11.42 of the PCMLTFA, the Minister of Finance may issue a written directive, setting out specified countermeasures that reporting entities must apply when conducting financial transactions originating from or destined to a designated jurisdiction or entity. 

The authority to issue a directive lies solely with the Minister of Finance.  According to the Act, the Minister may require Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to communicate a directive in accordance with the Minister's instructions.

The Minister may only issue a directive if:

  • an international body or organization has called on its members to take measures on the grounds that the foreign jurisdiction or entity's anti-money laundering (AML) or anti-terrorist financing (ATF) measures are ineffective or insufficient; or
  • the Minister is of the opinion that the ineffectiveness or insufficiency of the jurisdiction or entity's AML/ATF measures could cause an adverse impact or reputational risk to the integrity of Canada's financial system.

The countermeasures that reporting entities could be required to apply under a directive would be extensions and enhancements of current obligations under the PCMLTFA.  They would apply to the same range of activities to which reporting entities' legal obligations already apply.

When the Minister has taken the decision to issue a directive, the text of the directive will be communicated to reporting entities by FINTRAC, and will also be published in the Canada Gazette.  The date upon which a directive will come into force will be specified in the directive.

Directives will remain in force until officially revoked, suspended or amended.  The directives will be reviewed a minimum of once every three years from the day they took effect in order to determine whether the underlying conditions still exist.

Compliance with directives will be monitored and assessed by FINTRAC, in accordance with the PCMLTFA.  Once changes to regulations are made, the existing Administrative Monetary Penalty (AMP) regime will be extended to all directives, and failure to comply with a directive may result in an AMP.  Penalties applicable to a breach of a directive will be set out in the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations (PCMLTFR)

Moreover, every person or entity that knowingly contravenes the measures included in a directive, as well as any reporting requirements included in a directive is guilty of an offence and liable

(a) on summary conviction, to a fine of not more than $50,000 or to imprisonment for a term of not more than six months, or to both; or
(b) on conviction on indictment, to a fine of not more than $500,000 or to imprisonment for a term of not more than five years, or to both.

Scope of Countermeasures

The terms of each directive will set out in detail the measures reporting entities will be required to undertake and the circumstances in which these will become applicable. The measures will apply in addition to any existing measures applied as a result of a reporting entity's risk assessment.  For instance, a directive could state the frequency at which countermeasures would be required to be undertaken, or the threshold at which such countermeasures could apply.  These requirements may differ from reporting entities' existing practices.

Any directive issued will specify which reporting entity sectors are required to apply the countermeasures and will clearly explain to which transactions or activities these countermeasures must be applied. The directive will only require reporting entities to apply countermeasures to transactions or activities already subject to the PCMLTFA and its associated Regulations. 

For instance, the PCMLTFR does not require certain reporting entity sectors (such as accountants, dealers in precious metals and stones, and real estate brokers and developers) to report international Electronic Funds Transfers (EFT).  Consequently, a directive would not require these sectors to comply with a countermeasure setting out an enhanced EFT reporting requirement. 

Identified Countermeasures

A list of identified countermeasures the Minister could require reporting entities to take in respect of a designated foreign jurisdiction or entity is included below.  Although this list is not exhaustive, it covers the majority of countermeasures that could be included in a potential directive. 

Countermeasures will fall into any of the following four categories:

  1. exercise of Client Due Diligence, including ascertaining the source of funds of a transaction, the purpose of a transaction, or the beneficial ownership or control of any entity;
  2. verification of client identity;
  3. monitoring of financial transactions or accounts; and
  4. record keeping and retention.

The table below provides an overview of these identified countermeasures.

Table of Current Obligations and Identified Countermeasures
Obligations under PCMLTFA and Regulations Identified Countermeasures Purpose of Countermeasures
Exercise of Customer Due Diligence
According to 9.6(2) of the PCMLTFA, as part of their compliance program, every person or entity referred to in section 5 shall include the development and application of policies and procedures for the person or entity to assess, in the course of their activities, the risk of a money laundering offence or a terrorist activity financing offence. Require any person or entity who is required to perform a risk assessment in accordance with subsection 9.6(2) of the PCMLTFA to take into account as part of its risk assessment:
  1. an international body or organization's call to take measures on the grounds that a foreign jurisdiction or entity's anti-money laundering or anti-terrorist financing measures are ineffective or insufficient; or
  2. a foreign jurisdictions or entity identified by the Minister whom is of the opinion that the ineffectiveness or insufficiency of the jurisdiction or entity's AML/ATF measures could cause an adverse impact or reputational risk to the integrity of Canada's financial system.
To require every person or entity referred to in section 5 to take into account a designated entity or jurisdiction as part of their risk assessment, but does not require the person or entity to consider it as high risk.
According to 9.6(3) of the PCMLTFA, if the person or entity referred to in section 5 considers that the risk referred to in subsection 9.6(2) as high, the person or entity shall take prescribed special measures for identifying clients, keeping records and monitoring financial transactions in respect of the activities that pose the high risk. Require any person or entity who is required to establish and implement a compliance program in accordance with section 9.6(1) of the PCMLTFA to:
  1. treat transactions originating from or destined to a specified foreign entity or foreign jurisdiction, or accounts held by a specified entity or a person in a specified foreign jurisdiction as high risk for the purposes of subsection 9.6(3) of the PCMLTFA.
To require every person or entity referred to in section 5 to treat a designated jurisdiction/entity as high risk.
The requirement to take reasonable measures to determine the purpose of a transaction applies to Large Cash Transaction Reports Require any person or entity referred to in section 5 of the PCMLTFA to:
  1. take reasonable measures to determine the purpose of a transaction involving a designated entity or jurisdiction; and
  2. keep a record of the information obtained and the measures taken to obtain the information
To determine the purpose of a transaction involving a designated entity or jurisdiction and keep records on how the determination was made.
The requirement to take reasonable measures to determine the source of funds involved in transactions applies to an account held by a politically exposed foreign person. Require any person or entity referred to in section 5 of the PCMLTFA to:
  1. take reasonable measures to determine the source of funds of a specified transaction involving a designated entity or jurisdiction; and
  2. keep a record of the information obtained and the measures taken to obtain the information.
To determine the source of funds of a designated transaction and keep records on how the determination was made.

Verification of client identity

According to subsection 55.1 of the PCMLTFR, every financial entity that enters into a correspondent banking relationship shall

(a) ascertain the name and address of the foreign financial institution by examining a copy of the foreign financial institution's banking licence, banking charter, authorization or certification to operate from the relevant regulatory agency or certificate of corporate status or a copy of another similar document; and

(b) take reasonable measures to ascertain, based on publicly available information, whether there are any civil or criminal penalties that have been imposed on the foreign financial institution in respect of anti-money laundering or anti-terrorist financing requirements and, if so, to conduct, for the purpose of detecting any transactions that are required to be reported under section 7 of the Act, ongoing monitoring of all transactions in the context of the correspondent banking relationship.
Require any financial entity, as defined in the PCMLTFR, that enters into a correspondent banking relationship with any foreign financial institution located in a designated foreign jurisdiction or with a designated entity to:
  1. Conduct enhanced ongoing monitoring of all designated transactions conducted in the context of the correspondent banking relationship; or
  2. Obtain senior management approval to establish a new correspondent relationship; and
  3. keep a record of the measures taken to meet these obligations.
To enhance correspondent banking obligations identified in section 55.1 of the PCMLTFR.

"Ongoing monitoring" is defined in the Regulations.
Pursuant to subsection 65(1) of the PCMLTFR, the existence of a corporation shall be confirmed and its name and address and the names of its directors shall be ascertained as of the time referred to in subsection (2), by referring to its certificate of corporate status, a record that it is required to file annually under the applicable provincial securities legislation or any other record that ascertains its existence as a corporation. The record may be in paper form or in an electronic version that is obtained from a source that is accessible to the public.

Pursuant to subsection 66(1) of the PCMLTFR, the existence of an entity, other than a corporation, shall be confirmed as of the time referred to in subsection (2), by referring to a partnership agreement, articles of association or other similar record that ascertains its existence. The record may be in paper form or in an electronic version that is obtained from a source that is accessible to the public.
In regard to a designated entity, require any person or entity who is required to confirm the existence of a corporation or entity in accordance with sections 65 and 66 of the PCMLTFR to refer to a specified number or type of records issued within a specified time from the date of verification, that demonstrate the continued existence and active operation of the corporation or entity. To determine whether a corporation or entity is still active and is not being used as a shell.

To require that reporting entities refer to multiple documents instead of relying on only one document, such as a certificate of corporate status.

To specify the type of record that must be referred to and require that the records provided be recently issued.
For transactions where the person is physically present and which require identity verification pursuant to subsection 64(1) of the PCMLTFR, identity can be ascertained by:

(a) referring to the person's birth certificate, driver's licence, provincial health insurance card (if such use of the card is not prohibited by the applicable provincial law), passport or other similar document.
In regard to specified transactions involving a designated entity or jurisdiction, require any person or entity who is required to ascertain the identity of a person in accordance with paragraph 64(1)(a) of the PCMLTFR to refer to a specified number or type of document used to ascertain the identity. To require that face-to-face verification of identity for persons be made by referring to specific types and/or multiple identification documents (e.g. referring to two pieces of ID; or by referring to a specified type of document such as a government-issued photo ID).
In the PCMLTFR, depending on the prescribed circumstance, identity can be ascertained in person or if the person is not physically present (i.e. when the account is opened, the credit card application is submitted, the trust is established, the client information record is created or the transaction is conducted).

[See 64(1)(a), (b)]
In regard to specified transactions involving a designated entity or jurisdiction, require that any person or entity who is required to ascertain the identity of a person to do so only in accordance with paragraph 64(1)(a) of the PCMLTFR. To require any person or entity to only engage in face-to-face identity verification for designated transactions.
Every person or entity to whom section 11.1 of the PCMLTFR applies shall, at the time the existence of the entity is confirmed, obtain the following information:

(a) in the case of a corporation, the names of all directors of the corporation and the names and addresses of all persons who own or control, directly or indirectly, 25 per cent or more of the shares of the corporation;

(b) in the case of a trust, the names and addresses of all trustees and all known beneficiaries and settlors of the trust;

(c) in the case of an entity other than a corporation or trust, the names and addresses of all persons who own or control, directly or indirectly, 25 per cent or more of the entity; and

(d) in all cases, information establishing the ownership, control and structure of the entity.
When opening an account from a designated jurisdiction, require any person or entity to whom section 11.1 of the PCMLTFR applies to:
  1. obtain and take reasonable measures to ascertain the name, address and occupation of all persons who own or control, directly or indirectly,
    1. 10 per cent or more of the shares of the corporation; or
    2. 10 per cent or more of the entity other than a corporation; or
To enhance the beneficial ownership provisions of 11.1 of the PCMLTFR from 25% ownership to 10% ownership.

Note: The requirement to keep records on these activities is already required in the regulations (s. 11.1(3))
Pursuant to section 55.2 of the PCMLTFR, in respect of correspondent banking relationships, where the customer of the foreign financial institution has direct access to the services provided under the correspondent banking relationship, the financial entity shall take reasonable measures to ascertain whether
  1. the foreign financial institution has, in respect of those of its customers that have direct access to the accounts of the financial entity, met requirements that are consistent with the requirements of sections 54 and 64; and
  2. the foreign financial institution has agreed to provide relevant customer identification data upon request to the financial entity.
Require any financial entity that enters into a correspondent banking relationship with a designated entity or located within a designated jurisdiction, where the customer of the foreign financial institution has direct access to services provided under the correspondent banking relationship, to: 
  1. obtain the relevant customer identification data from the foreign financial institution; and
  2. take reasonable measures to ascertain the customer identification data for those customers of the foreign financial institution that will have direct access to its accounts; and
  3. keep a record of the measures taken to obtain or ascertain that customer information data.
To extend section 55.2 of the PCMLTFR by requiring the financial entity to receive the customer information from the foreign financial institution, ascertain their identity, and keep a record.
Monitoring of Financial Transaction or Account
Extends the requirement under paragraph 67.1(1)(c) of the PCMLTFR, enhanced ongoing monitoring for politically exposed foreign persons, to all designated transactions. Require any person or entity referred to in section 5 of the PCMLTFA to:
  1. conduct enhanced ongoing monitoring of specified transactions involving a designated entity or jurisdiction; and
  2. keep a record of the measures undertaken to conduct such ongoing monitoring. 
To require enhanced ongoing monitoring for specified transactions involving a designated entity or jurisdiction.

Note: "Enhanced ongoing monitoring" is not defined in the regulations. 
Record-Keeping
According to Part 6 of the PCMLTFA, every person or entity referred to in section 5 shall keep and retain prescribed records in accordance with the regulations. Any person or entity referred to in section 5 of the PCMLTFA shall keep a record of specified transactions involving a designated entity or originating from or destined to a designated jurisdiction.. To require reporting entities to keep a record of all designated transactions.