The Financial Action Task Force (FATF) is an inter-governmental body that develops, monitors, and evaluates countries’ compliance with 40 anti-money laundering and counter-terrorist financing (“AML/CTF”) recommendations (the “FATF Recommendations”). The FATF Recommendations act as an AML/CTF framework to evaluate a country’s response to preventing organised crime, corruption and terrorism.
Since Canada’s membership in 1990, Canada has routinely participated in mutual evaluation reports (“MERs”) whereby FATF member countries conduct peer reviews to assess levels of implementation of the FATF Recommendations. The MERs provide a ranking scheme: Compliant, Largely Compliant, Partially Compliant, and Non-Compliant.
On October 1, 2021, the FATF released a follow-up report (the “2021 Report”) on Canada’s progress addressing technical compliance deficiencies identified in the 2016 MER. For a refresher on the 2016 MER, please see our previous post here. [NTD: Link not working]
Eight FATF Recommendations were re-ranked in the 2021 Report, seven of which saw ratings increase. One FATF Recommendation pertaining to non-profit organizations saw its rating decrease from “Compliant” to “Partially Compliant”. Following the 2021 Report, Canada is no longer Non-Compliant with any FATF Recommendation.
1. Politically Exposed Persons
Recommendation 12: Politically exposed persons (“PEPs”) are senior ranking individuals categorized into three groups: foreign PEPs, domestic PEPs, and heads of international organizations (“HIOs”). With respect to foreign PEPs, financial institutions should have appropriate systems in place to determine whether the customer or beneficial owner is a PEP, obtain senior management approval for establishing such business relationships, establish the source of wealth or funds, and conduct enhanced ongoing monitoring of such business relationships. These PEP requirements should also apply to family members and close associates of PEPs.
“Non-Compliant” to “Largely Compliant”: Canada’s Non-Compliant ranking in the 2016 MER was largely due to the lack of regulatory oversight identifying and managing PEPs. Canada’s favourable re-rating in the 2021 MER stems from the implementation of amendments to regulations (“PCMLTFA Regulations”) made under the the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”). Under the PCMLTFA, reporting entities, which are those required to report certain transactions to the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”), must determine if they are dealing with a PEP or HIO and take the appropriate measures listed in the preceding paragraph. For more information on the recent changes to the PCMLTFA Regulations, please see our post here.
2. New Technologies
Recommendation 15: New products, business practices and the use of new technologies, particularly virtual assets (“VAs”), need to be assessed for money laundering and terrorist financing risks.
Methodology change since 2016 MER: The methodology for assessing this FATF Recommendation was revised in October 2019 to require identifying, assessing and understanding risks associated with VA activities of “virtual asset service providers” (“VASPs”), registering VASPs, applying AML/CTF supervision to VASPs, and adopting measures related to international cooperation to VASPs.
“Non-Compliant” to “Largely Compliant”: The amendments to the PCMLTFA Regulations established obligations for reporting entities to assess and document money laundering and terrorist financing relating to new technologies, and to consider the products, services, delivery channels, and geographic location of their activities in compliance programs. For more information on these amendments, please see our post here.
3. Travel Rule
Recommendation 16: To detect and prevent money laundering and terrorist financing, countries should have regulations in place requiring financial institutions to monitor wire transfers to detect those which lack required originator and/or beneficiary information. Countries should also ensure that financial institutions take freezing action to prohibit transactions with designated persons and entities.
“Partially Compliant” to “Largely Compliant”: In 2019 and 2020, Canada increased its rating with respect to this FATF Recommendation by implementing amendments to PCMLTFA Regulations to require intermediary and beneficiary institutions to identify and take action against cross-border electronic funds transfers that contained inadequate originator information. Safeguards have also been implemented in relation to confidentiality and information exchange. For more information on these amendments, please see our post here.
4. Reliance on Third Parties
Recommendation 17: When certain criteria are met, it is permissible for financial institutions to rely on third parties to perform elements of the customer due diligence measures, such as identifying and verifying the identity of customers and beneficial owners and obtaining information on the purpose and nature of the business relationship. However, financial institutions should ultimately be responsible for customer due diligence measures even when relying on third parties.
“Non-Compliant” to “Compliant”: Although life insurance companies and securities dealers were already considered to be reporting entities under the PCMLTFA, key AML/CTF measures were missing at the time of the 2016 MER. The recent amendments to the PCMLTFA Regulations have brought Canada into compliance with this FATF Recommendation by requiring life insurance companies and securities dealers to comply with customer due diligence and record keeping obligations, as well as to assess which countries are high risk for third party reliance.