Intro

Last week, on Wednesday July 10th, 2019, the Financial Transaction and Reports Analysis Centre of Canada (“FINTRAC”) published the long awaited final version of amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”) in the Canada Gazette. The new regulations form part of a larger legislative initiative to strengthen Canada’s AML/ATF regime and ensure its measures are aligned with the international standards set by the intergovernmental Financial Action Task Force (“FATF”).

The amendments are wide-ranging and include both substantive and technical changes aimed at enhancing the implementation of regulatory and operational measures for combating money laundering(“ML”), terrorist financing(“TF”) and other related threats to the integrity of the Canadian and international financial system.

One of the main objectives of the reform is to reduce some of the vulnerabilities to money laundering and terrorist financing brought on by the relatively recent emergence of virtual or cryptocurrency. While decentralization unequivocally accelerated innovation to the financial industry, the lack of supervisory measures over these transactions is problematic from a compliance perspective. In particular, the unprecedented level of autonomy to freely exchange digital assets such as Bitcoin and other cryptocurrencies pseudonymously significantly increases the potential for criminal manipulation. Thus, to adequately account for the evolving nature of the financial system, the new legislation is intended to support an infrastructure of virtual currency through increased regulation of the movement of virtual currency transactions.

Consequently, the regulatory amendments have far-reaching implications for all entities that buy, sell, exchange or hold virtual currencies. The enforcement date is June 1, 2020 and compels affected businesses to put in place policies and procedures to be in compliance with the new regulations. While the scope of the reform also extends to traditional regulated entities, this post focuses on the relevant changes that will apply to businesses dealing in virtual currency by the enforcement date.

Please note that while this report outlines many of the implications associated with the updated regulations, it is not intended to constitute legal or compliance advice.

“Virtual currency” is now expressly defined as:

A digital representation of value that can be used for payment or investment purposes, that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or A private key of a cryptographic system that enables a person or entity to have access to a digital representation of value referred to in paragraph (a).

In addition, the definition of a money services business (“MSB”) has been expanded to include entities that deal in virtual currency. Under these new regulations, all operators of digital currency platforms must register with FINTRAC and are subject to the accompanying MSB obligations as required by the PCMLTFA as described below.

Compliance Program

MSBs are required to establish and implement a comprehensive and effective compliance program which consists of the following five elements:

Appointment of a senior compliance officer who is responsible for the implementation of the compliance program; Development and application of written compliance policies and procedures that are kept up-to-date, and include enhanced measures to mitigate high risks; A risk assessment of business activities and relationships; The development and maintenance of a written ongoing compliance training program for employees, agents, and others authorized to act on your behalf; and The institution and documentation of an effectiveness review of the compliance program (policies and procedures, risk assessment and training program) every two years (minimum) for the purpose of testing its overall effectiveness.

Know Your Client (“KYC”)

MSBs must verify the identity of clients for certain activities and transactions in accordance with the KYC requirements under the PCMLTFA. Adhering to KYC practices helps identify suspicious customers in relation to ML/TF activities such that these types of fraudulent transactions can be prevented.

This includes following methods to identify new clients (entities and individuals), as well as developing a risk-based approach to conduct ongoing monitoring of all existing clients.

Reporting

MSB’s must complete and submit reports about certain transactions to FINTRAC. These include:

Suspicious transactions: The person or entity shall send the report to the Centre as soon as practicable after they have taken measures that enable them to establish that there are reasonable grounds to suspect that the transaction or attempted transaction is related to the commission of a money laundering offence or a terrorist activity financing offence.

Terrorist property: a report must be submitted without delay when a property in your possession or under your control is known to be owned or controlled by a terrorist or on behalf of a terrorist or terrorist group.

Large virtual currency transactions: a report must be submitted within five working days when $10,000 CAD or more in virtual currency (including taxes or other fees) either in a single transaction or in multiple transactions is received within a 24-hour period.

Electronic funds transfers: a report must be submitted within five working days when client-initiated instructions to transfer $10,000 CAD or more internationally; either in a single transaction or in multiple transactions within a 24-hour period, is sent or received.

Record Keeping

MSBs must keep certain transaction and client identification records in alignment with the prescribed methods within the PCMLTFA. These include:

Suspicious transaction report records

Large virtual currency transaction records

Records for the following:

(a) requests that they issue or redeem money orders, traveller’s cheques or similar negotiable instruments in an amount of $3,000 or more;

(b) requests that they initiate an electronic funds transfer of $1,000 or more;

(c) requests that they exchange an amount of $3,000 or more in a foreign currency exchange transaction;

(d) requests that they transfer an amount of $1,000 or more in virtual currency;

(e) requests that they exchange an amount of $1,000 or more in a virtual currency exchange transaction; or

(f) is a beneficiary of an international electronic funds transfer of $1,000 or more, or of a transfer of an amount of $1,000 or more in virtual currency, to whom they make the remittance.

Foreign currency exchange records

Internal memorandum received or created in the normal course of business

Records about ongoing service agreements

Reasonable measures records

These records are to be kept in such a way that they can be provided to FINTRAC within

30 days if required to do so. The records must also be kept for at least 5 years after the last business transaction.

Concluding Remarks

The amendments to the PCMLTFA will increase the responsibilities for businesses dealing with virtual currencies and provide much needed regulatory clarity.

Not only is regulatory clarity important in helping these companies strategically plan for the future, but the regulations will also improve the climate for consumers by mitigating some of the vulnerabilities associated with virtual currency transactions.

As a Canadian cryptocurrency trading platform committed to providing the best, most secure experience for its customers, Bitbuy welcomes these amendments and recognizes their importance towards validating digital currencies as legitimate source of value.

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