Description

Individual credit unions and caisses populaires are currently subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the Regulations). The proposed amendments would bring Provincial Centrals under the Regulations as financial entities, although the Provincial Central located in Quebec would be subject to different requirements than those located outside of Quebec.

The vast majority of money-laundering risks lie in transactions conducted with members of the public, so Provincial Centrals located outside of Quebec would be covered under the Act for financial services offered to the public (the public being any person or entity, other than a financial entity, that is a member of that credit union central). Requirements include record keeping, prescribed transaction reporting, customer identification, due diligence (e.g. verifying customer identification), third party determination (e.g. enquiring as to whether the customer is acting on behalf of another party) and a compliance regime (i.e. appointing a compliance officer, implementing anti-money laundering policies and procedures, training employees and conducting risk assessments and reviews of policies and procedures).

The Provincial Central located in Quebec (i.e. Desjardins) would be covered by the Regulations for all of its activities, as requested in January 2008, including financial services offered to individual caisses populaires. Desjardins would be subject to the same requirements as other Provincial Centrals but would, in addition, be required to meet those obligations in relation to all of their activities, not just for transactions with the public.

Therefore, the proposed amendments would permit Desjardins to report electronic funds transfers on behalf of their member institutions to FINTRAC. This agency is Canada’s financial intelligence unit and is responsible for ensuring compliance with the anti-money laundering and anti-terrorist financing regime. The proposed amendments would also modify the reporting requirements for individual caisses populaires, which are currently responsible for sending electronic funds transfer reports to FINTRAC.

The proposed amendments would not allow Provincial Centrals located outside Quebec to report electronic funds transfers on behalf of their members to FINTRAC, since this is not an activity that is covered by the Regulations (i.e. it would not be a transaction with the “public”). The existing reporting requirements for individual credit unions would continue to apply.

The technical amendments for large disbursement reporting for casinos would provide additional clarity with respect to the requirements applicable to the casino sector. The first technical change would clarify the reporting requirements in scenarios where casinos are reporting two or more transactions with the same customer within a 24-hour period that add up to more than $10,000. The second technical change would require that a branch or transit number must also be reported, in addition to an account number, in large casino disbursement reports.

Regulatory and non-regulatory options considered

One alternative would be to maintain the status quo. Choosing this alternative would leave a gap in Canada’s anti-money laundering and anti-terrorist financing regime, making it susceptible to abuse by criminals and terrorists.

A second alternative would be to cover all Provincial Centrals for all of their activities. This alternative would also close the identified gap in the regulatory regime but would impose compliance costs on Provincial Centrals for activities and transactions conducted with member financial institutions that present a lower risk for money laundering and that are already subject to the Act as a financial entity.

A third alternative would be to cover all Provincial Centrals (including Desjardins) only when they conduct transactions with the public. This option would close the identified gap in the anti-money laundering regime and would not impose significant compliance costs on the industry. However, this option would not satisfy the request from Desjardins to be covered for all activities.

Benefits and costs

The proposed amendments would strengthen Canada’s anti-money laundering and anti-terrorist financing regime, and this would benefit all Canadians by improving public safety. In particular, the measures would enable the Provincial Centrals to know their customers better, and they would therefore be in a better position to detect suspicious transactions. This would help prevent and deter money-laundering activities in Canada.

By bringing Provincial Centrals into the anti-money laundering regime, the financial sector as a whole would be treated more equitably by the Regulations. Currently, some Provincial Centrals provide services (e.g. deposit accounts, currency exchange, loans, electronic funds transfers) directly to the public that are identical to those provided by other financial entities that are subject to the Regulations, such as banks and credit unions. Covering those institutions would close the regulatory gap in the credit union sector.

Although the Provincial Central in Quebec would face compliance costs and be required to have compliance and employee training programs, their operational costs would be reduced as a result of a more streamlined process of reporting electronic funds transfers to FINTRAC. The impact on Provincial Centrals outside Quebec is expected to be minimal since they would only be covered when they provide services directly to the public. Of the eight Provincial Centrals outside Quebec, only six would be covered under the Regulations and several of them have plans to cease providing services to the public which would relieve them of the additional obligations.

In addition, Provincial Centrals already provide support to members for compliance with the Act by providing customer screening services (i.e. checking customer names with terrorist watch lists), arranging electronic funds transfer reporting and developing anti-money laundering and staff training programs.

The amendments would only have a minimal impact on FINTRAC’s operations since there would be at most, seven new reporting entities out of a base of more than 300 000 existing reporting entities. Furthermore, the number of Provincial Centrals outside Quebec that would be subject to these provisions is expected to decrease over time as several are in the process of phasing out their public accounts. This would relieve them of the additional requirements and further reduce the number of reporting entities in the sector.

The two technical changes affecting the large disbursement reporting requirements for casinos do not introduce new reporting requirements and would therefore not have an impact on the cost of their compliance with the Regulations. The changes clarify their obligations under regulations that will come into force in September 2009 and do not impose any additional burden on casinos, or on FINTRAC’s operations.

Rationale

Bringing Provincial Centrals under the anti-money laundering regulations would strengthen Canada’s anti-money laundering regime and would level the playing-field within the financial sector.

The technical changes clarify reporting obligations for casinos which would ease the implementation of their compliance programs.

Consultation

The amendments respond to requests made by Desjardins. The Department of Finance consulted extensively with all Provincial Centrals to gain a better understanding of the industry and further consulted with all centrals on the proposed regulatory amendments. This process included a series of conference calls with each Provincial Central in April and May 2008 to discuss the financial services that they provide to the public and whether they had existing anti-money laundering and anti-terrorist financing measures in place. The policy intent and drafting instructions for the proposed amendments were shared with each Provincial Central in January 2009. Each Provincial Central participated in a follow-up conference call on this issue. No objections were raised with the policy intent or the drafting instructions. Subsequently, draft amendments were shared with each Provincial Central in February 2009 and no concerns were raised. Overall, the sector is supportive of the measures being introduced.

Implementation, enforcement and service standards

FINTRAC is responsible for ensuring compliance with the Act and its related regulations. It sends compliance questionnaires to entities that are subject to the Act to assess compliance and conducts on-site examinations. It also has the capacity to enter into information-sharing agreements with regulators in order to reduce the number of compliance examinations to which entities are subjected.

Persons and entities that do not comply with the Act and its regulations are currently subject to criminal penalties and, depending on the offence, convictions that could result in up to five years imprisonment, a fine of up to $500,000, or both. Additionally, as of December 2008, a new administrative monetary penalties scheme provides for penalties that are in proportion to the violation. Violations under that scheme are classified in one of three categories: minor, serious and very serious. The maximum penalty that can be imposed under the administrative monetary penalty scheme for violations classified as very serious is, in the case of an entity, $500,000 and in the case of a person, $100,000.

(2) Subsection 1(2) of the Regulations is amended by adding the following in alphabetical order:

“credit union central” means a central cooperative credit society, as defined in section 2 of the Cooperative Credit Associations Act, or a credit union central or a federation of credit unions or caisses populaires that is regulated by a provincial Act other than one enacted by the legislature of Quebec. (centrale de caisses de crédit)

“financial services cooperative” means a financial services cooperative that is regulated by An Act respecting Financial services cooperatives, R.S.Q., c. C-67.3, or An Act Respecting the Mouvement Desjardins, S.Q. 2000, c. 77, other than a caisse populaire. (coopérative de services financiers)

4. The Regulations are amended by adding the following before section 12:

11.2 (1) Part 1 of the Act applies to financial services cooperatives.

(2) Every credit union central is subject to Part 1 of the Act when it offers financial services to a person or entity other than a financial entity that is a member of that credit union central.

5. (1) Subclause 64(1)(b)(i)(A)(III) of the Regulations is replaced by the following:

(III) an entity that is subject to the Act and is a member of the same association as the entity ascertaining the identity of the person, and

(2) Subclause 64(1.1)(b)(i)(A)(III) of the Regulations is replaced by the following:

(III) an entity that is subject to the Act and is a member of the same association as the entity ascertaining the identity of the person, and

(3) Section 64 of the Regulations is amended by adding the following after subsection (1.2):

(1.21) For the purposes of subparagraphs (1)(b)(i) and (1.1)(b)(i),

(a) a financial services cooperative and each of its members that is a financial entity are considered to be members of the same association; and

(b) a credit union central and each of its members that is a financial entity are considered to be members of the same association.

6. Schedule 8 to the Regulations, as enacted by section 19 of the Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (2008-1), SOR/2008-21, is amended by replacing “(Subsections 42(1) and (3))” after the heading “SCHEDULE 8” with “(Subsections 42(1), (3) and (4))”.

7. Paragraph 3(b) of Part B of Schedule 8 to the Regulations, as enacted by section 19 of the Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (2008-1), SOR/2008-21, is replaced by the following:

(b) type of disbursement (cash, cheque, electronic funds transfer, deposit in account at financial institution or other form of disbursement), amount disbursed and currency of amount disbursed and, if applicable, name and account number of each person involved in the disbursement, other than a person referred to in item 2 of Part A or Part D or F, and branch or transit number of each of those accounts, and name and account number of each entity involved in the disbursement, other than an entity referred to in item 2 of Part A or Part E, and branch or transit number of each of those accounts

REGULATIONS AMENDING CERTAIN REGULATIONS MADE UNDER THE PROCEEDS OF CRIME (MONEY LAUNDERING) AND TERRORIST FINANCING ACT (2008-1)