How do anti-money laundering regulations in Canada work?

Find out the most important points of the anti-money laundering regulations in Canada and best practices for staying compliant
How do anti-money laundering regulations in Canada work?

With exhaustive anti-money laundering regulations, Canada is cracking down on criminal activities. Money laundering happens when money taken from illegal means is given the appearance of legitimacy. This is usually done by sending it through various channels so that it appears as though it came from legitimate business. 

It’s believed that the term came from an old mafia practice where they would use a laundromat as a front for illicit activities. Since laundromats operate on cash, this makes it easier to fabricate income. While there’s no literal washing of money, the laundromat front makes illegal income appear legitimate. 

Today, money laundering is a bit more complicated. Fortunately, with its anti-money laundering regulations, Canada has taken active steps in preventing this from happening. Here are some things you should know about Canada’s anti-money laundering regulations (AMLR). 

Anti-money laundering regulations in Canada: a brief background 

International finance has added an additional layer of complexity in money laundering. This is why with anti-money laundering regulations, Canada has taken an international approach. To start, it's a founding member of the Financial Action Task Force (FATF), of which 38 countries are members. 

The FATF has set standards which have been adapted by participating countries to minimize the chances of money laundering within and across their borders. Specifically for anti-money laundering regulations, Canada has the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). 

The PCTFA is read together with the Criminal Code, which provides for the definition of the crime of money laundering and terrorist financing. 

What is considered money laundering in Canada?  

With the previous definition of Canada’s anti-money laundering (AML), prosecutors have a hard time proving the crime. This is because prior to 2019, money-laundering happens when a person: 

  • "uses, transfers, transports, transmits, alters, disposes, or otherwise deal with any property or proceeds with the knowledge or belief that they were derived from criminal acts" 

Today, “recklessness” has been added to the definition. This means that knowledge of the illegal source of money is no longer required. Instead, the mere fact that the person was reckless makes them guilty of money-laundering.  

For legal purposes, recklessness means there is a risk that the money came from illegal means, but a person ignored those risks. 

Simply put, good faith is not a defense anymore. If red flags are present, which should cause doubt in the transaction, then persons should not transmit the money. This change makes it easier for the prosecution to prove their case. Alternatively, this also requires individuals to be more vigilant with their transactions. 

For the bigger picture, here’s a nice overview of the money laundering cycle:

Got any questions about the role of financial institutions in AML transactions? Check out our Lexpert-ranked best banking and financial institutions lawyers in Canada

How do AML regulations in Canada work?  

The scope of PCMLTFA covers accountants and accounting firms engaged in “triggering” activities. The accountant must be performing these triggering activities with a client or as part of an accounting firm. They can be either a: 

  • Chartered Accountant (CA) 
  • Certified Management Accountant (CMA) 
  • Certified General Accountant (CGA) 
  • Chartered Professional Accountant (CPA) 

Currently, anti-money laundering regulations in Canada operates with the following five basic regulations. These serve as the basis for compliance with reporting entities: 

Regulation 

What it covers 

Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations 

 

These handle most of the requirements for implementation and compliance of involved sectors. They enforce the know your client scheme, keep records, and submit reports to FINTRAC.  

Cross-border Currency and Monetary Instruments Reporting Regulations 

These deal with the movement of money across borders and the regulations governing these transactions. 

Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations 

These details the obligation of related parties to report suspicious transactions, whether successful or attempted. They also report on possible terrorist and listed properties. 

Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations 

These detail the different offenses that may be committed under the law as well as the penalties that may be imposed. 

Proceeds of Crime (Money Laundering) and Terrorist Financing Registration Regulations 

These handle the registration of businesses that deal with transactions covered by the anti-money laundering regulations in Canada 


Definition of triggering activities 

Multiple reporting entities are covered by anti-money laundering regulations of Canada. A good example would be accountants who, on behalf of their clients, deal with their assets. This is considered a “triggering activity” and requires the accountant to comply with the country's anti-money laundering regulations. 

Note that not all accountants are covered. Accountants who are doing triggering activities in their capacity as an employee are not within the scope of the law. An exception is if the accountant is an employee of an accounting firm. In this case, both the accountant and the firm are responsible if there's a violation. 

The word triggering activity can cover a wide range of transactions. If the transaction falls under any of these categories, then it is a triggering activity: 

  • receipt of funds, payment of funds, or any virtual currency 
  • buying or selling immovables or real property or businesses 
  • transferring, by any means, funds or any virtual currency 
  • giving instructions in connection to any of the above 

The word “giving instructions” is critical here because it should be separated from giving advice. Giving instructions means that an order is being issued while advice is merely a recommendation. Of the two, giving instructions places an accountant under the coverage of Canada’s anti-money laundering regulations. 

Who is the regulatory body of AML in Canada 

FINTRAC or the Financial Transactions and Reports Analysis Centre of Canada is the primary regulatory body for anti-money laundering. This is the financial intelligence unit and works by detecting and preventing money laundering. It is also concerned with the prevention of terrorist financing activities through transaction report tracking.  

Other reporting entities 

Under anti-money laundering regulations in Canada, accountants aren’t just the entities obligated to report certain transactions. The following also must make reports

  • armoured car businesses 
  • casinos 
  • financial entities such as banks, financial service cooperatives, credit unions, loan companies, trust companies, etc. 
  • life insurance companies, brokers, and agents 
  • mortgage administrators, brokers, and lenders 
  • money service businesses 
  • securities dealers 
  • real estate brokers 
  • employees of reporting entities 

These are just some of the entities under obligation to make reports under AML. Generally, lawyers aren’t required to report to FINTRAC. An exception is for public notaries and notary corporations located in British Columbia when it comes to certain activities. 

If you're based in the province and want to dig deeper into these exceptions, these leading   banking and financial institutions lawyers in British Columbia as ranked by Lexpert might be able to help.  

Best practices for compliance with anti-money laundering regulations 

Are you an accountant performing triggering activities for a client? Or maybe just one of the reporting entities mentioned under Canada’s anti-money laundering regulations? In either case, it’s important to remember these best practices to prevent possible AML violations: 

Know your client (KYC) 

Knowing your client means verifying the identity of the person you’re dealing with. This extends to organizations and the people behind them. Information taken from the client includes name, address, birthday, and nature of the business. For corporations, making copies of their registration and relevant employees would be a step in the right direction. 

Verification must happen before the transaction takes place. Note that because personal data is being taken, accountants and accounting firms must also be compliant with data privacy laws. Generally, a record of these transactions must be kept and reported to the proper authorities. Here are instances when a record is necessary: 

  • receipt of funds amounting to $3,000 or more from a person as opposed as from an organization 
  • large cash transactions amounting to $10,000 or more in a single transaction. This is subject to the 24-hour rule explained below 
  • large virtual currency transaction amounting to $10,000 or more is also subject to the 24-hour rule 
  • reporting under reasonable measures such as possible terrorist, terrorist group, or listed person 
  • recording and reporting to determine if a third-party is giving instructions, such as unknowing participants to scams 
  • other transactions deemed suspicious 

Determining business relationship 

A business relationship happens when a reporting entity provides services related to financial transactions to a client. Note though that the term has a very distinct definition. For accountants or firms, there is a business relationship when a second verification process for the same client happens within a five-year period. 

This means that a business relationship ends if five years lapse since the second verification process without any succeeding transaction. What if more than two verification processes happen? Then you count the five-year period from the last time. 

Anti-money laundering regulations in Canada recommends quick determination of a business relationship. Ideally, within 30 days of the last transaction. Quick determination lets the reporting entity categorize the client and know what rules or policies apply moving forward. 

Here’s a video talking about how these measures help with anti-money laundering efforts: 

Ongoing monitoring 

AML efforts should not be a one-time thing. Reporting entities are mandated to have a continuous system that watches out for and reports suspicious transactions. This is why part of anti-money laundering regulations in Canada include creating an internal system for compliance with PCMLTFA. 

Ongoing monitoring should be in place to make sure the following objectives are met: 

  • detect suspicious transactions for reportorial 
  • keep the client’s personal information private and updated 
  • assess and reassess the risk associated with the client and client transactions 
  • assess if the transactions are consistent with client information 

The way these objectives are approached is discretionary on the part of the reporting entity. For common solutions to comply with anti-money laundering regulations, Canada entities usually have an AML analyst in their team. Coming up with excellent KYC questions can also help with risk assessment as well as having scheduled reviews for reports.  

What is the 24-hour rule for AML 

The 24-hour rule is set up to prevent persons or entities from avoiding the $10,000 threshold. Under this rule, small transactions made within 24 hours are added together. If the total amount is $10,000 or more, this is considered a single transaction for reporting purposes. 

Looking for established firms handling anti-money laundering cases? These Lexpert-ranked top banking and financial institutions law firms in Canada are a good starting point.  

Anti-money laundering penalty in Canada 

As soon as a suspicious transaction happens, the reporting entity must report it to FINTRAC. This covers both accomplished and attempted transactions. The report itself can be done online and streamlined for reporting entities. 

Canada takes their AML regulations seriously. Failure to comply with PCMLTFA imposes fines that can be anywhere from $1,000 to $500,000. Possible changes to the law could also increase these penalties to as much as $20 million depending on the seriousness of the violation. 

Note though that penalties may also be cumulative and computed based on the gross global revenue of the offending entity. For example, failure to report is just one violation. Other violations could be: 

  • failure to verify the identity of the client 
  • failure to keep records 
  • failure to create an implement a compliance program 
  • transacting with entities considered to be high-risk 

The penalty is also subject to publication which can create a reputational risk for the reporting entities. 

Compliance with AML regulations today 

Considering the heavy penalty imposed on reporting entities, it makes sense to be proactive with AML. This means placing analysts in positions for easy detection of suspicious transactions. Having a solid risk assessment team should also keep entities safe, even from the most novel money laundering schemes. 

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